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.

 

 

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The Best Defense: Insurer Voids Policy Ab Initio For Fraud, Alleges Reverse Bad Faith Following Claim

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PHILADELPHIA, Sept. 27 – A state court judge in Philadelphia has upheld a jury finding that a commercial property insurance policy was void ab initio based on the fraud of the insured in the application, requiring the insured to disgorge claims payments, and the insurer to refund premium dollars paid by the insured for the policy.

In Smith v. United States Liability Insurance Co .,  the  insured filed a  vandalism claim with USLIC which wrote a  commercial policy on the property.  USLIC paid  more than  $150,000.00 on the claim , but a public adjuster hired by the  insured disputed that amount, claiming the total damage was  $444,325.71.

During the claims investigation the insured sat for several  examinations under oath.   The insured ultimately sued USLIC for failure to pay the full claim.  USLIC filed an answer and counterclaim seeking, among other things, (1) declaratory relief  (2) a finding that the insured violated the Pennsylvania Insurance Fraud Statute, and committed  common law fraud; (3) a finding that the insured breached the insuring agreement and (4) committed reverse bad faith.

Following jury trial, the jury returned a verdict in favor of the insurer on all claims and counterclaims.  The Court, per Judge Ann Butchart, denied post trial motions, and entered judgment on the verdict, declaring the policy void,  and requiring the insured to pay the insurer $285,094.40 ($157,725.09 in previous claim payments under the policy and $127,369.31 for claim related expenses incurred by the insurer).  The Court further ordered USLIC to return $48,467.55 in premiums to the insured.

Judge Butchart wrote in part that the insured had lied in the insurance application about the frequency of prior claims, withholding this information from the insurer:

“where the execution of a contract of insurance has been induced by fraudulent misrepresentations of the insured, the insurer may secure its cancellation . . . the jury, as the fact finder, determined by a standard of clear and convincing evidence that the Policy was procured by fraud with the intent to deceive . . . and the Court properly declared the Policy void ab initio. . . the jury was presented with sufficient evidence to determine, under the clear and convincing standard, that [the insured] committed fraud with intent to deceive when he submitted his application for insurance.”

 

Smith v. United States Liability Insurance Co., Philadelphia Court of Common Pleas, June Term 2016 No. 2354, 2017 Phila. Ct. Com. Pl. LEXIS 292 (C.C.P. Phila. Sept. 27, 2017) (Butchart, J.)

Coverage Practice Note: Enforcing The Employers’ Liability Exclusion in CGL Policies Against Claims of Temporary Employee Status – Part I

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Part I – The Problem

The scenario is not at all uncommon:  a worker  suffers injury at a worksite, and through  the vagaries and  vicissitudes of life, and  for manifold reasons, the business owner has a CGL policy but no applicable workmen’s compensation coverage.  The injured employee was fairly new, and has now filed suit against his (assumed) employer and another company also on the worksite.

This seems straightforward enough:  The applicable CGL policy contains a well-worn, well-known Employers’ Liability Exclusion which disclaims the duty to defend or indemnify the insured business owner for any claims arising out of injuries to employees.  It commonly reads:

EXCLUSIONS

            This insurance does not apply to:

d.         Employer’s Liability

                        “Bodily injury” sustained by:

1)        Any “employee” (other than a “residence employee”) as a result of his or her employment by the insured;

            …

 This exclusion applies whether the insured may be held liable as an employer or in any other capacity and to any obligation to share damages with or repay someone else who must pay damages because of the injury.

The difficulty lies, sometimes, in the Definition of who is an “employee,” some of which commonly reads as follows:

DEFINITIONS

“Employee” includes a “leased worker”. “Employee” does not include a “temporary worker”.

 …

“Temporary worker” means a person who [i]s furnished to you to substitute for a permanent “employee” on leave or to meet seasonal or short-term work load conditions.

Rarely do the interests of injured employees and employers looking for protection converge.  But in seeking to avoid the Employers’ Liability Exclusion,  such rare common ground appears.  An injured employee wants a fund against which recovery can be made for his or her injuries.  An employer, who for one reason or another finds himself without workmens’ compensation coverage, needs protection from liability for the loss.  The CGL carrier is a convenient solution for everybody — except, of course, for  the CGL insurer, who has neither priced, nor underwritten, nor issued workmens’ compensation coverage for the insured business owner.

Square Peg, Round Hole, No Matter

Thusly, the elegant dance begins.  In examinations under oath, the insured business owner refers to the injured worker as an “employee,” and spoke of “hiring” him or her.  No mention is made of the employee being furnished by a co-employer, nor is  there any mention of the fact that the injured employee was actually brought on temporarily, or to substitute for another employer who was going on medical leave.

Several months later, however, the injured employee files suit for his injuries , and the insured business owner has received a reservation or rights letter f rom the CGL insurer, agreeing to provide a defense but reserving all rights to disclaim coverage  under the Employers’ Liability exclusion.  The landscape has changed — and the Employers’ Liability Exclusion now poses a grave problem for both the injured employee and the insured business owner.  The definition of “temporary worker” definition to the rescue…

The business owner, now represented,  now paints a murkier picture at his deposition in the coverage action compared to his recorded statement.  The injured employee did come on,  the business owner now testifies, several months before someone in the same position was to go off on medical leave.  The business owner got both  permission and a recommendation  to hire the worker from another contractor for whom the injured employee continued to do work while working for the insured business owner.

For his part, the injured employee testified in much the same manner, although he admits that neither employer controlled his hours or performance at the other employer.  He also testifies he didn’t believe the insured business owner needed permission from the injured worker’s co-employer to hire him, even though the co-employer recommended the injured worker highly.

All eyes now  turn to the CGL insurer, and the insured business owner’s counsel tenders and re-tenders the  defense and indemnity of the insured business to the CGL insurer .  What is the CGL insurer to do?

We will answer that question in Part II of this post.

 

 

 

 

NAIC Issues Draft Model Cybersecurity Law for Insurers

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WASHINGTON, March 2 – The Cybersecurity Task Force of the  National Association of Insurance Commissioners’ (NAIC) has proposed a comprehensive  Model Law designed to regulate licensed insurers’ handling of electronic data and investigation of breaches in electronic data security.  Comments on the proposed model law are due by March 23.

Written Information Security Program

The Model Law requires licensed insurers to prepare written information security programs designed to protect personal information  collected by the insurer.  The plan, the Model Law suggests, should be proportional to the characteristics of the licensed insurer including the scope of the insurer’s activities, and the sensitivity of the consumer information collected.

Insurers are required to designate employees who can perform data risk assessment, i.e., identification of  potential threats as well as the potential for damage from these threats.  The Model Law suggests that insurers develop standards and methods from the Framework for Improving Critical Infrastructure Cybersecurity developed by the National Institute of Standards and Technology (NIST).

The Model Law requires the insurers’ board of directors to monitor security programs, and to receive reports at least annually to determine the status of the insurer’s security plan and compliance with the Model Law. Recognizing the involvement of third-party service providers, the Model Law mandates that insurers “select and retain third-party service providers that are capable of maintaining appropriate safeguards for the personal information at issue.” The law also mandates that the third party providers “implement and maintain appropriate safeguards for the personal information at issue” (including those described above under “Implementation of a Written Information Security Program”) and “allow licensee or its agents to perform cybersecurity audits.”

Consumer Rights

The Model Law requires that insurers disclose to consumers the types of personal information collected and stored by the insurer, and any third-party service providers involved.  Insurers must make the policy available on its website, and furnish hard copies of the policy on consumer requests.

After a security breach, the Model Law requires insurers to notify affected consumers no later than 60 days following notice of or identification of the breach.  In what may turn out to be a murky area, notification is not required if the data in question is encrypted or the breach is not reasonably likely to cause substantial harm or inconvenience.  Insurers are also required to offer to pay affected consumers for 12 months of identity theft protection.

There are additional notification requirements.  Insurers must advise without delay law enforcement organizations, the insurance commissioner, payment card networks and for certain breaches consumer reporting agencies.  Notice to the commissioner must take place within  five calendar days of discovering a breach.  The insurer is also required to provide the commissioner with any draft written communications to consumers regarding an identified breach.

The Model Law also requires insurers to investigate and remedy breaches in data security.

Oversight by Insurance Commissioners

If the insurance commissioner has reason to believe that an insurer has violated the Model law, the commissioner has hearing and subpoena power, and can make a finding whether insurer has engaged in conduct breaching the Model Law.  The commissioner also has power to issue cease and desist rulings based upon such findings, and may also order monetary penalties.

The Model law provides for a $500 penalty per violation up to a maximum aggregate of $10,000.00.  For violation of commissioners’ cease and desist orders, the Model law calls for a penalty of $10,000 for each violation and possible suspension and revocation of the insurer’s license.  The Model Law allows for penalties of $50,000 for violations which occur with such frequency as to be determined to be a business practice.

Confidentiality

Presumably to encourage reporting under the Model Law, it provides that any information in the control or possession of a department of insurance furnished by a licensee shall be confidential and is not subject to open records  laws or subpoena, thereby protecting the confidentiality and privileged nature of consumer information.

Whether the Model Law Proceeds, and how it proceeds after the comment period, depends on whether the law receives majority support from within the NAIC following the comment period.

NAIC Cybersecurity Task Force Model Law

Badfaithadvisor.com Launches Best Claims Practices and Bad Faith Avoidance Training and Continuing Education

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Badfaithadvisor.com has launched both online and onsite continuing education services at no cost to insurers and other related businesses.  For more information on the benefits and options of this no- cost training and continuing education service, click here.

Defeating The Third Party Time Limit Settlement Demand

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It’s the most common arrow in the quiver of plainfiffs’ lawyers when it comes to dealing with insurance companies:  the time limit settlement demand.  It’s used as a multi-purpose tool  against insurers to 1.) force an early settlement of the underlying third party  claim; 2.) prevent the insurer from conducting a full investigation into the underlying claim; 3.) drive a wedge between the insurer and its insured; and 4.) set up assignment of a follow-on bad faith claim in the event of an excess verdict in the third party claim.

Here’s how insurers can successfully defend against this tactic every time:

Document Receiving The Demand, And Immediately Request An Extension To Respond

This seems a rather obvious suggestion, but in practice it is overlooked as many times as utilized,  in my experience.   The failure to document receipt of the time limit settlement demand will not be of any help, and it exposes the insurer to the allegation of sloppy claims handling and inattentiveness to the claim.   If it arrives, when it arrives, acknowledge it in writing to the Plaintiff’s lawyer.

Especially when the time limits demand arrives early in the claims investigation, a written request for extension to respond to the demand should be made in writing immediately.  And of course, any refusal by plaintiff’s counsel to agree to the extension should be documented as well.

Document The Investigation Which Must Be Done Before Responding

While not strictly necessary, it is extremely helpful to identify with as much specificity as possible  the nature and extent of investigation you would like additional time to complete.    Providing these specifics will prevent any claim that the insurer is merely requesting additional time to delay paying the claim.

Obviously, the proposed investigation steps should be followed, and the results documented in the claims file.  Requesting an extension to investigate the claim and then failing to do the investigation exposes an insurer to bad faith exposure for  unreasonable delay.

Document Any Attempts By The Plaintiff’s Lawyer To Delay or Obstruct The Investigation

It happens.  Some zealous advocates are not content with merely refusing a request for an extension; in order to manufacture insurer delay the insurer will find that it is unable to get medical authorizations promptly, or unable to schedule the claimant’s examination under oath, to name two.  It is important that the claims file document accurately document responsibility for delay, or for expiration of the time limit demand, especially if the plaintiff’s lawyer is being either not helpful or worse, obstructing the investigation.

Keep The Insured Apprised, And Document That

In order to discharge the fiduciary duty an insurer owes to its insured in defending him or her in a third partly claim, the insured must be included and involved in communications involving the claim.  This is especially true where the insurer refuses to settle the underlying claim within policy limits, theoretically exposing the insured to an excess judgment.

An insurer does not have an obligation to settle non-meritorious or questionable claims within the insured’s policy limits.  However, if the insurer decides not to respond to a time limit demand, or refuses to settle a claim,  that should be communicated to the insured in advance of the time limit demand deadline, and the specific reasons for the insurer’s course should be provided to the insured.

Dual Benefits

All of the above steps will not only be of use in defending a follow – on bad faith claim should it come down the road, but it will lead to better results, and allow for proper investigation, of the underlying third party claim.  For more information on how to effectively rebut and defend against third party time limit settlement demands, reach me at chaddick@dmclaw.com or 717-731-4800.

Prevent. Protect. Defend.

Welcome to Badfaithadvisor.com!  Our goal is to serve as an information hub for Insurers and their In-House legal teams to help them navigate current issues in insurance coverage and bad faith.  We will provide case updates, but more importantly practical advice on preventing and avoiding unnecessary exposure in the first instance, and successfully defending against such exposure in the second.

Have a question or request? Send an email to chaddick@dmclaw.com  or give me a call at 717-731-4800, and we will be happy to provide something of interest and value to you.

Best,
CJ Haddick