Guest Column – Attorney David Cole: The Proper Care & Feeding Of A Bad Faith Litigation Expert

 

 

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In its unanimous opinion in Rancosky v. Washington National Insurance Company, 170 A.3d 364 (Pa. 2017), the Pennsylvania Supreme Court confirmed the elements of an insurance bad faith action under Pennsylvania’s bad faith statute. The Court stated: “we adopt the two-part test articulated by the Superior Court in Terletsky v. Prudential Property & Cas. Ins. Co., 649 A.2d 680 (Pa. Super. 1994), which provides that, in order to recover in a bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis. Additionally, we hold that proof of an insurance company’s motive of self-interest or ill-will is not a prerequisite to prevailing in a bad faith claim under Section 8371, as argued by Appellant. While such evidence is probative of the second Terletsky prong, we hold that evidence of the insurer’s knowledge or recklessness as to its lack of a reasonable basis in denying policy benefits is sufficient.” Id. at 23-24. Additionally, the Court noted that mere negligence is insufficient for a finding of bad faith under §8371. Id. at 18.

The Rancosky opinion did not change the pursuit, or the defense, of insurance bad faith claims, so much as it confirmed a body of intermediate appellate case law that had developed over the last 24 years. Most practitioners and courts had applied the Terletshy test since its publication in 1994. With Rancosky now firmly establishing what is required to prove bad faith, experts used by the parties in insurance bad faith litigation will need to tailor their reports to that standard.

Experts, of course, are not required by statute or case law in Pennsylvania insurance bad faith cases. Experts are employed by the parties at the discretion of the trial judge. Experts are to provide opinion on the reasonableness of the insurer’s conduct to assist the judge or jury in determining if the insurer acted in bad faith. Experts are to opine on the reasonableness of the insurer’s conduct, not on whether they believe the insurer acted in bad faith. That decision is reserved for the trier of fact. Most courts permit expert testimony to assist in assessing the reasonableness of the involved insurer’s conduct.

Post-Rancosky, what does an expert need to assess the reasonableness of the insurer’s conduct? In other words, what do litigators need to provide an expert in order for him or her to prepare an informed, credible report, one that will stand up to summary judgment motion and trial cross-examination? This article will address these questions. My observations are based on my 15 years and over 50 expert reports in insurance bad faith cases, mostly as an expert for the defense. A second planned article will address what counsel can expect in an insurance bad faith expert report.

What Does the Expert Need to Evaluate An Insurance Bad Faith Claim?

Let’s make the answer simple: SEND ALL NON-PRIVILEGED FILE MATERIAL TO ME and let me review them and decide what is important to my review of the insurer’s conduct. And please don’t try to influence my opinion by sending only the documents that support your client’s position, or only the “pertinent” documents that you believe are determinative of the insurer’s conduct.

Another reason to send it all to me is to avoid surprise and embarrassment at trial. I don’t want to ever have to say I have not seen a document from the file. I won’t appear surprised at trial, and I won’t have to embarrass counsel by pointing out that counsel never provided me with the document.

Finally, do not send an unredacted claim file. I don’t want to rely on documents in my report that were not produced to opposing counsel. To do so is to risk the credibility of my report, or at least result in an order from the court requiring production of the documents in question and me having to perhaps amend my report.

What Do I Expect To See In The Claim File?

What is typically contained in a claim file will depend on the type of claim involved. For example, a property damage claim will not contain medical reports and records. An auto personal injury liability claim file will not contain a fire cause and origin report. Having said that, we can generalize what most claim files should contain, as follows:

  • Insurance policy: The applicable insurance policy and declaration page for the date of loss.
  • Correspondence: All correspondence, including letters, e-mail and texts by and between anyone involved in the claim.
  • Reports: Police, doctors, witnesses, parties, experts, investigators, counsel.
  • Court related documents: Pleadings, motions, discovery and opinions from the bad faith action and pertinent documents from the underlying tort suit if there was one.
  • Log entries: Pennsylvania insurance regulations require insurers to maintain records of their claim handling activity sufficient to permit the Insurance Department to assess what was done on a given claim. Typically, this is done by insurers through a “claim log”, either manual or more likely today by computer entry. These notes are often invaluable in assessing the insurer’s conduct in a bad faith case. It is the place where claims adjusters can sort out their thinking on a claim and explain their actions, or fail to do so.
  • Claim specific records: For example, medical records in injury cases and damage assessments and insurer has allegedly failed to adhere to its own internal claims handling procedures) the insurer’s claims handling manual and “best claims practices” should be provided to me.

Not all claim files will contain all these items.

Some counsel will go in the other direction, and want to send me everything, even their “work product”, such as their summary of the case, their theory of the case, a chronology they prepared for the case, their summary of medical records in the case, etc. I do not want that information; I want to review the file on my own, prepare my own chronology, summarize the issues in my own way, and form my own understanding of the case.

I am being paid to reach my own conclusions about the insurer’s conduct, not “parrot” counsel’s view of the case. To do otherwise – that is, to provide me your work product – can make for a very uncomfortable cross-examination for me, and an effective challenge to the credibility of the defense for you.

David Cole is owner of David Cole Consulting, Inc. and he may contacted at 844-744-5600 or dcole@philadefense.org. For more information about Mr. Cole and his litigation support services, please see his website at  www.colelitigationconsulting.com 

PRESS RELEASE: Haddick Featured Guest on National AM Best Insurance Podcast

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Contact:  Greta Kelly, Assoc. Marketing Director

Dickie, McCamey & Chilcote

412-392-5311

gkelly@dmclaw.com

 

Dickie McCamey Attorney Haddick is Featured Speaker on National Podcast

February 2018 (Harrisburg, PA) –  For Immediate Release – Dickie, McCamey & Chilcote, P.C. attorney Charles E. Haddick, Jr. will be the featured speaker on A.M. Best’s monthly podcast, which airs February 28, on the Legal Talk Network. Haddick’s episode will focus on recent national trends in bad faith insurance coverage law.

Mr. Haddick is a shareholder of Dickie, McCamey & Chilcote, P.C. and is the Location Chair of the Harrisburg office. He has practiced law for almost 30 years. He concentrates his practice in the areas of insurance coverage and insurance bad faith litigation; insurance fraud, arson, fire and explosion cases; cybersecurity and cyber insurance coverage and litigation; professional liability including insurance agency errors and omissions; subrogation; and general liability defense. Haddick is the author and editor of the legal insurance blog www.badfaithadvisor.com.

Mr. Haddick received his J.D. from The Dickinson School of Law of the Pennsylvania State University. He is AV Preeminent® Peer Review Rated by Martindale-Hubbell® and he is also listed in Best Lawyers in America® for Insurance Law.

The Insurance Law Podcast examines timely insurance issues from an attorney’s point of view and is published by Best’s Directory of Recommended Insurance Attorneys. Guest speakers are prominent attorneys from across the United States who specialize in insurance defense. To listen or subscribe to the Insurance Law Podcast, click here.

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About Dickie, McCamey & Chilcote, P.C.: Dickie, McCamey & Chilcote, P.C. is a nationally recognized law firm providing comprehensive legal expertise in a multitude of practice areas. Headquartered in Pittsburgh, Pennsylvania and founded more than 100 years ago, the firm serves industry-leading clients across the country from offices throughout the mid-Atlantic region in Delaware, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina and West Virginia, the Southwestern region in California, and the Rockies in Colorado. For more information: 800-243-5412 or www.dmclaw.com.

17 Locations | 10 States | 1 Firm

How To Defend A Bad Faith Case When The Claims Rep Is A Bot, And Other Terrifying Questions…..

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I came across an extremely thought –  provoking article this morning on Artificial Intelligence (A.I.) and the law, by Dennis Anderson on Law360.com, which began with the following futuristic, bone-chilling scenario:

On the evening of Dec. 23, 2016, at seven seconds after 5:49 p.m., the holder of a renter’s policy issued by upstart insurance company Lemonade tapped “submit” on the company’s smartphone app. Just three seconds later, he received a notification that his claim for the value of a stolen parka had been approved, wire transfer instructions for the proper amount had been sent and the claim was closed. The insured was also informed that before approving the claim, Lemonade’s friendly claims-handling bot, “A.I. Jim,” cross-referenced it against the policy and ran 18 algorithms designed to detect fraud.

This piece goes on to ask a question which I have yet to stop thinking about:  how to defend an insurance company claims decision when the decision is made by an algorithm, not a human being?

Before attempting a reasonably good answer to this question, if there is  good answer to be had at all,  a quick review of history is in order:  this is not the insurance claims industry’s first foray into using artificial intelligence to process claims.   Countless bad faith claims in the past have in fact been premised on that very thing, i.e., the use of a computer program to put the value on a bodily injury claim, for example.  The very use of software to value a claim was the central theme of the bad faith complaint.  Many of those claims, however, were successfully defended by lawyers for  insurers who  argued that such computer-provided data was merely a starting point, and that claims representatives with blood pulsing through their veins then went to work to take that piece of information, along with countless other pieces of information, to value, negotiate,  and otherwise  process the claim in good faith –  the Human Element Defense, let’s call it.

Now, a stolen parka, I grant you,  is a far cry from  a soft tissue neck injury.  But it is not hard to see that in the future, algorithms can and will be developed to use A.I. to adjust property damage and homeowners’ claims, commercial coverage claims,  and , yes, let’s  be bold here, personal injury claims.

I have spent decades defending bad faith claims, and every defense begins and ends with the same thing:  what was the claims representatives thought process?  Can that process be traced, documented, demonstrated, and shown in the light of day to be a reasonable approach to a difficult problem?

Are we coming to a time now when claims logs and insurer communications will simply be replaced with massive strings of zeroes and ones?  How can you tell a story made out of zeroes and ones?

The immediate question, of course, becomes how to defend a claims algorithm in a bad faith case  to a jury of humans, or a human judge sitting in a bench trial.  There is, I’m afraid no immediate answer, except perhaps this one — it is best to continue to  include human beings, in some capacity,  in a claims process which may later have to be explained and legally justified to other human beings.

Stated another way, a purely mathematical,  algorithmic defense of a bad faith claim may not be fully successful until the time comes when judges and juries are also algorithms, and, so too, are the lawyers.

I hope I’m retired by then.

CJH

 

 

 

Professional Liability Insurer Off The Hook For Settlement After Insured Fails To Obtain Consent To Settle, Ninth Circuit Rules

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PASADENA, Jan. 19 – The Ninth Circuit Court of Appeals has ruled that a professional liability insurer had no obligation to fund a settlement agreed to by the insured, which did not obtain the insurer’s consent to the deal, as required in the policy.

In One West Bank, FSB v. Houston Casualty Co.,  Houston Casualty wrote a professional liability policy requiring the insured to seek prior written consent before resolving any covered claim by way of settlement.

The insured, One West, was sued for failure to properly administer loans it was servicing.  One West reached an agreement to settle with the plaintiff in the underlying case, but it neither sought or obtained  Houston Casualty’s written consent to the terms prior to executing the term sheet.  Applying California law, the 9th Circuit Court ruled that One West breached  prior written consent provision of the policy, thereby relieving Houston Casualty of its obligation to fund or cover the settlement.

In the ruling, while the Court recognized that an insured could be relieved of the consent obligation for  economic necessity, insurer breach, or other extraordinary circumstances, it affirmed the district court’s finding that no such circumstances existed.

Also, while One West alleged that Houston Casualty breached the insuring agreement and its common law obligation of good faith, the Court affirmed dismissal of those claims, ruling that there was no evidence that Houston Casualty withheld any benefits due under the policy, in light of the consent provision.

One West Bank, FSB v. Houston Casualty Co., 676 Fed.Appx. 664, 2017 WL 218900 (9th Cir., filed January 19, 2017).

Application Satisfies Requirement of Written Election of Lower UM/UIM Limits, Federal Court Finds

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HARRISBURG, Dec. 29 – A U.S. District Court magistrate judge has ruled that an original signed application was  a valid means of choosing UM/UIM limits lesser than bodily injury limits under Pennsylvania’s motor vehicle law, even if a separate option selection form was not compliant with the statute.

In Farmland Mut. Ins. Co. v. Sechrist, 2017 U.S. Dist. LEXIS 213618 (M.D. Pa., Dec. 29, 2017)(Arbuckle, M.J.), Plaintiff Farmland Mutual Insurance Company filed a declaratory judgment suit  against Defendants Edward Alfred Sechrist and Gary Bryant Kauffman, employees of Farmland’s insured, Clouse Trucking, seeking a  ruling that the commercial automobile insurance policy issued with a $1 million liability limit  provided $35,000 of combined single limit coverage for underinsured motorist claims arising out of an accident on April 30, 2013 in which both Sechrist and Bryant were seriously injured.

The Employees opposed Farmland Mutual, contending that the UIM limit should be equal to the policy’s bodily injury liability limit of $1 millon, on grounds that there was not a valid election of lesser UIM coverage pursuant to the Pa.M.V.F.R.L.  The employees claimed that the insurance policy should be reformed to include one million dollars of underinsured motorist coverage because the requirement of a signed writing choosing reduced UIM coverage  under 75 Pa.C.S.A. section 1734 was not met.

U.S. Magistrate Judge William I. Arbuckle first agreed with the employees that a specific UIM option selection form did not comply with section 1734 and was therefore not a valid election of lesser coverage:

Section 1734 of the MVFRL allows a named insured to elect limits of underinsured motorist coverage in an amount equal to or less than a policy’s liability limit for bodily injury. 75 Pa.C.S.A. section 1734.   Absent a signed, written election for lesser coverage, it is presumed that the underinsured motorist coverage limit is the same as the bodily injury liability coverage limit. . .

The Underinsured Motorist Coverage Selection form in this case. . .    is signed by Mr. Clouse but does not expressly designate the amount of coverage requested. Accordingly, we find that this form does not satisfy the requirements of  75 Pa.C.S.A. section 1734.

Judge Arbuckle went on to find, however, that the original insurance application prepared by an insurance agent, and signed by Mr. Clouse selecting the lesser amount of coverage, did meet the requirement of a signed writing under section 1734:

The parties dispute whether the Insurance Policy Application in this case satisfies the writing requirement of section 1734. . . Farmland contends that the Farmland Policy Application signed by Mr. Clouse is a valid written election of lower coverage under section 1734. By contrast, the Employees contend that the Farmland Policy Application does not satisfy the requirements of section 1734 because: (1) the Farmland Policy Application does not advise Clouse Trucking of Farmland’s obligation to offer underinsured Motorist coverage limits equal to the Farmland Policy’s limit for bodily injury; and (2) the Farmland Policy Application is not a clear indication of Clouse Trucking’s intent to purchase a underinsured motorist coverage below the Farmland Policy limit for bodily injury because the blanks in the Farmland Policy Application were filled in by an insurance agent.

As an initial matter, I find that Farmland is correct that the Farmland  Policy Application meets the requirements of section 1734. The Farmland Policy Application  is signed by Mr. Clouse, and does request a specific amount of underinsured motorist coverage.

In short, Judge Arbuckle found that the policy documents, including the application, constituted a valid written request for reduced UIM coverage.  He also found that whether or not an insurance agent completed the application itself  was irrelevant, provided, as here, that the insured certified via signature his review and adoption of the statements contained in the application.

Farmland Mut. Ins. Co. v. Sechrist, 2017 U.S. Dist. LEXIS 213618 (M.D. Pa., Dec. 29, 2017)(Arbuckle, M.J.)

Control Outside Legal Costs By Building Fee Caps Into Outside Representation

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It’s no secret that the biggest fear any in-house legal department has with engaging outside law firms in handling matters, especially litigation matters, is the fear that there is no way to know when the billing will end, and how high it will be when it gets there. This can commonly be referred to as The Runaway Train Syndrome.  Every in-house lawyer or general counsel reading this is nodding in agreement.  They have met the enemy, and it is outside law firms charging exclusively by the hour, with no objective or external controls ensuring proportionality between the price paid, the result delivered, and the timeliness with which the result was delivered.

The concept of fee caps, and the notion that there is always, up front, a known end in sight, is not only the perfect antidote to Runaway Train Syndrome, it is also the Swiss knife of legal fees.  Fee caps are so universally useful, in fact, that they can be put to use in billing arrangements  ranging from traditional billable hour fee arrangements, to newer, alternative fee offerings to give those who pay outside law firms the ultimate in cost-certainty.

Set an overall fee cap on top of a billable hour arrangement, for example.  Immediately, the outside law firm’s disincentive to accelerate an outcome disappears.  The incentive has aligned much better with that of the client – to deliver the requested outcome within budget, and within a reasonable time.  In this type of arrangements, the fee cap can be as simple as an overall matter total fee cap, or an annual fee cap, subject to an overall cap on the number of months or years a matter can be charged.

Fee caps can also  be used in alternative  billing arrangements to give the client some measure of clarity as to when a matter might reasonably  be concluded, and what the total project cost is going to be.  A good number of insurance clients I work with are using flat monthly fee agreements to retain me, and those fee agreements are always subject to an overall cap on the number of months for which they will be obligated to pay the flat fee.

Fee caps also do not eliminate flexibility to accommodate unforeseen circumstances as an assignment proceeds.  Both sides should remain free to re-negotiate caps upwards or downwards as case circumstances change.

If you are not already using fee caps to accelerate outcomes and reduce your outside legal expense, you should give them a try to see how much cost-control they can deliver.

CJH

 

 

What Two Roofing Companies Taught Me About Pricing Legal Services

Roofers On The Roof.

My wife and I recently downsized into a house we love, except for the roof we had to replace.  What ensued as I sought estimates from two roofing companies was a signal lesson to me about what clients want from their service providers, including law firms.  I was put in the rare position of calling the shots — I was for the purposes of this roofing job, the client.  What power.

Here’s how it went:

Company A’s estimator was a no-nonsense guy, who did a thorough tour of the roof and handed me a simple, one page estimate for X.   On the spot.

This number — X — was fairly close in my mind to what I would have to reasonably pay for a new roof.  I’d rather get the new roof for nothing, of course, but X made sense to me on a gut level.  It felt like a fair price to pay for what I was getting.

Company B’s estimator, on the other hand,  was nice also,  but a little more polished.  He handed me a glossy brochure after looking the roof over,  and said he would email me his estimate after he got back to his office and “did some satellite measurements” of the roof surface area.  A day later I got an estimate.  For 2X.

I didn’t like 2X as much as I liked X.  Company A got the job because Company A’s pricing made more sense to me.  It was lower, yes, and that certainly didn’t hurt, but a bid can become so low that it is no longer credible.  This bid was not so low.  This bid was  credible.

And thus, here is what the endeavors of laying shingles and hanging a shingle have in common, and what I learned from the experience:

  1. Some roofers (and some lawyers) will price their services based on what they think they can get away with — the highest possible number  which gives them what they perceive is a chance at the business.
  2. The more successful roofers (and lawyers) price their products and services at a level which is very close to the client’s perceived value of the result to be delivered.  The price is not directly or necessarily linked inexorably with the amount of time it  takes to produce the result, but rather the result itself.

The lesson I share here  is a mildly damning indictment  of the  billable hour to the extent that the billable hour creates disunion between price and result.  The billable hour is a wonderful tool for lawyers who want to maximize what they can get out of a client.  Value-based pricing, on the other hand, is the better tool for lawyers who are trying to price their services  to match the client’s perception of the value they are receiving.

Which pricing model do you think the clients prefer?

With the exception of the legal and consulting fields, customers largely pay for outcomes, not inputs.  This outcome-based pricing has made its way into how lawyers charge for their services.   Jim Savina, General Counsel of Kraft Heinz Co., said the following about the billable hour  in an interview earlier this week on Law360.com:

I have to think there is a better way to correlate price paid with value delivered, while aligning incentives to outcomes. I want my firms to be thorough and conscientious, but I never want them to spend five hours doing what they could do in one. The billable hour rewards them for doing so. I would rather reward firms for delivering the outcome at a rate that would be three times their billable rate. I have to think firms have access to data they could mine to develop those types of “win-win” arrangements in lots of areas.

And I would rather pay, and I did pay,  a roofing company the value of what that company did for me, as opposed to what the company thought it could get away with charging me.  That is the essence of pricing based on value,  which sophisticated clients will continue to demand.

 

A Roadmap For CGL Insurers To Disclaim Defense and Indemnity For Underlying Opioid Litigation

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In a post last  week, we discussed an appeals court opinion from California, Traveler’s Prop. Cas. Co. of Am. v. Actavis, Inc., 2017 Cal. App. LEXIS 976, which ruled that Travelers Insurance had no duty to defend or indemnify pharmaceutical company insured who was sued by various state and local government units for deceptive practices leading to the overuse and abuse of opioids.  The opinion is a signpost on a road to what is likely to come a multiplicity of opioid suits against the drug-makers by governmental health organizations now overwhelmed with the problems arising out of opioid addition and abuse.

Insurers should be ready, therefore, to stake out clear lines demarcating the limits of the CGL coverage they wrote and priced, which  did not contemplate opioid suits.  Here is a very brief review of key points for successfully disclaiming duties to defend and indemnify insurers never contemplated:

What Does Your Policy Say?

CGL policies routinely cover “occurrences” which are traditionally seen to be accidental, unintended, and unexpected.  As discussed below, the current trend in opioid litigation is the allegation of intentional, deliberate conduct on the part of pharmaceutical companies.

In addition,  CGL policies routinely come with “Products and Completed Work” and / or “Completed Operations / Your Product” exclusions.  In the California case discussed earlier this week, and in most Pharma CGL’s, there is also a “Products-Completed Operations Hazard – Medical and Biotechnology” exclusion, which was seen by the Court as directly on point in Actavis.  The definition of an “occurrence” under the policy, and exclusions like these are the first steps to defining coverage, and these provisions have routinely been held by courts across the U.S. to be clear and unambiguous.

What Is Your Insured Being Sued For?

The emerging trend in opioid litigation against the manufacturers is the allegation by state and local governmental health units that the manufacturers deliberately misrepresented the benefits and downplayed the risks of opioids to self-grow demand for the drugs, and to diminish concern in the medical community for the risks and downside of opioid products, namely addiction.    The allegations sound in intentional conduct and intentionally deceptive trade and marketing practices, and are not the  types of allegations of accident or negligence which CGL polices are intended to cover, i.e., they are generally not “occurrences” as defined in the CGL policy.

The Actavis Court went to great pains to examine the underlying complaints against the drug makers, and in the end it found that the conduct complained of was neither accidental nor fortuitous such that it would be insurable under the CGL, but rather calculated and intentional.

Avoid The “Duty to Defend” Trap

While in the Actavis case the court recognized the distinction between an insurer’s duty to defend and duty to indemnity, it also  pointed out that where there is no possibility of coverage, not even the broad duty to defend was triggered.  The Court found that all of the conduct alleged was deliberate and not accidental, and that, according to the underlying complaints, none of the damages caused by the drug makers were unexpected or unforeseen.   It held, therefore, that not even the duty to defend was triggered.

There is case law in almost every jurisdiction holding that the duty to defend is not so broad and infinite as to require an insurer to defend its insured if there is no possible way the underlying wrongful conduct comes within the terms and conditions of the policy.   Insurers should take advantage of this to avoid incurring defense costs in these kinds of opioid cases where it is almost certain to never have a duty to indemnify.

The Best Defense…..

The costs of defending opioid litigation is, and will continue to be substantial.  Therefore, in the right cases, an insurer may be wise to invest in an early, interventional, declaratory judgment suit to free itself from any question of its duty to either defend, or indemnify insureds in the type of litigation seen in the Actavis case.  So too, early, well -reasoned denial letters, and, where appropriate, reservations of rights letters, will help protect the insurer from covering a risk it may never have contemplated, and certainly never priced into the policy it sold.

As discussed above, opioid litigation of the type seen in Actavis is likely to multiply.  Insurers should take pains to make sure that the CGL policies they issued, which  cover only accidental occurrences arising out of negligence, are not converted into product liability insurance for injuries and damages caused by opioids.

 

 

Travelers Does Not Owe Pharmaceutical Company Defense, Indemnity, In Opioid Suits

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RIVERSIDE, Nov. 6 – An intermediate appeals court in California has ruled that Travelers and St. Paul Insurance companies owe no duty to defend or indemnify Watson Pharmaceutical in governmental suits against the pharmaceutical company over the deceptive marketing of opioids.

In Travelers Prop. Cas. Co. of Am. v. Actavis, Inc., et al, No. G053749, 2017 Cal. App. Lexis 976 (Nov. 6, 2017)(Fybel, J.), The Court of Appeals of California held that under CGL policies issued by Travelers and Saint Paul, the exclusion from coverage of any liability arising out of manufactured products or “completed operations” relieved the insurers of the duty to defend or indemnify.   In the Court’s opinion, Associate Justice Richard Fybel described the nature of the underlying litigation against Watson and the other Parma defendants:

“The California Complaint and the Chicago Complaint are based on allegations that Watson and the other defendants engaged in a fraudulent scheme to promote the use of opioids for long-term pain in order to increase corporate profits. Both complaints allege that Watson had by the 1990’s developed the ability to cheaply produce opioid painkillers, but the market for them was small. Defendants knew that opioids were an effective treatment for short-term postsurgical pain, trauma-related pain, and end-of-life care and knew that, except as a last resort, “opioids were too addictive and too debilitating for long-term use for chronic non-cancer pain.” Defendants knew the effectiveness of opioids decreases with prolonged use, requiring increases in dosages and “markedly increasing the risk of significant side effects and addiction.”

While acknowledging an insurer’s duty to defend was separate and broader than its duty to indemnify, the Court found no potential for coverage in the underlying suits because the conduct complained in the underlying suits was not accidental or fortuitous:

“The injuries alleged [in the underlying suits] are: (1) a nation ‘awash in opioids’;  (2) a nationwide “opioid-induced [*24]  ‘public health epidemic'”; (3) a resurgence in heroin use; and (4) increased public health care costs imposed by long-term opioid use, abuse, and addiction, such as hospitalizations for opioid overdoses, drug treatment for individuals addicted to opioids and intensive care for infants born addicted to opioids.

None of those injuries was additional, unexpected, independent, or unforeseen. The complaints allege Watson knew that opioids were unsuited to treatment of chronic long-term, nonacute pain and knew that opioids were highly addictive and subject to abuse, yet engaged in a scheme of deception in order to increase sales of their opioid products. It is not unexpected or unforeseen that a massive marketing campaign to promote the use of opioids for purposes for which they are not suited would lead to a nation “awash in opioids.” It is not unexpected or unforeseen that this marketing campaign would lead to increased opioid addiction and overdoses. Watson allegedly knew that opioids were highly addictive and prone to overdose, but trivialized or obscured those risks.”

The Court also found that the underlying complaints set forth no claims against the pharmaceutical companies potentially sounding in negligence, and that the Products and Completed Operations Exclusions were clear and  unambiguous, such that they relieved the insurers from the duty to defend or indemnify the companies.

Travelers Prop. Cas. Co. of Am. v. Actavis, Inc., et al, No. G053749, 2017 Cal. App. Lexis 976 (Nov. 6, 2017)(Fybel, J.),

New Jersey Hot Potato: Insurer Who Merely Serviced Policy Can Be Liable for Bad Faith

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NEW JERSEY, Oct. 20 – A U.S. District Judge in New Jersey has ruled that an insurer who does not issue, but merely services, a policy of insurance, may be held liable for bad faith conduct.

In Fischer v. National Surety Corp., Civ. No. 16-8220 (KM), 2017 U.S. Dist. LEXIS 174267 (D.N.J. Oct. 20, 2017) (McNulty, J.), the insured plaintiffs had a home insurance policy “issued by Fireman’s Fund, underwritten by National Surety, and serviced by ACE American.” The insureds  complained that after promptly reporting a claim they were subject to nearly two years of dealings with various insurance company representatives, but did not receive full payment for the original loss.

After filing suit against the insurers, ACE filed a motion to dismiss bad faith and breach of contract claims, pointing out that National Surety was the insurer, and it was not, and therefore it could have not bad faith exposure to a non-insured.

U.S. District Judge Kevin McNulty denied the motion to dismiss, observing that at this state of the proceedings the precise servicing arrangements between the defendants was unclear.  Judge McNulty also dismissed ACE’s argument that without an insuring agreement, there could be no bad faith claim as s matter of law.

Citing the leading bad faith case of Pickett v. Lloyds. The court ruled:

Pickett itself … seems to contemplate a bad faith cause of action against a party other than the primary insurance company. Indeed, it reasoned that because an agent owes a duty to the insured, the insurer must ‘owe[] an equal duty ..[a]gents of an insurance company are obligated to exercise good faith and reasonable skill in advising insureds…“[e]ven if the [insureds] fail to establish the existence of a contract with ACE American, their bad faith cause of action may still be viable.”

Fischer v. National Surety Corp., Civ. No. 16-8220 (KM), 2017 U.S. Dist. LEXIS 174267 (D.N.J. Oct. 20, 2017) (McNulty, J.)

Editor’s Note:  As insuring agreements, and servicing arrangements get more complex, new theories of non-contractual bad faith liability on the part of insurers and claims entities are likely to arise, and be based on the tort concept of the responsibility to act reasonably when a duty toward an insured  is undertaken.