Bad Faith and Settlement Negotiations

Posted by Gene Killian on June 25, 2012

Here’s an interesting question recently confronted by the Ninth Circuit:  Is it bad faith for an insurance company to refuse to initiate settlement discussions in a third-party context when liability has become reasonably clear?  The carrier (Deerbrook, an Allstate company) took the position that bad faith could not exist unless the carrier failed to respond to a settlement demand.  (If you do coverage work, then you know that this is part of the dance.  In large-loss third-party cases, the carrier rarely will volunteer an offer.  The claims rep usually wants a demand on the table first.  Probably this is to set a “celling” on the negotiations.)  

The facts of the Ninth Circuit case were simple:  a car accident in which four people were injured.  The policy had a liability limit of $100,000 for each individual claim, with an aggregate maximum of $300,000 for any one accident.  The lawyer for the underlying plaintiffs submitted a global demand of $300,000.  The claims rep refused to negotiate, saying that there was insufficient information regarding the injuries sustained by three of the four plaintiffs.  Plaintiffs’ counsel then suggested that they try settle the claim of one of the plaintiffs (Yan Fang Du) separately, but did not make a specific demand.  The claims rep refused, stating that Deerbrook had to pay its $300,000 limit and settle all claims.  Later, the carrier offered to pay in its $100,000 “per person” limit with respect to Du.  Du’s counsel rejected the offer as “too little too late.”

The jury came back with over $4 million on Du’s claim.  Deerbrook paid in its $100,000 limit with respect to Du.  The underlying defendant then assigned his bad faith claim to Du in exchange for a covenant not to execute.  Coverage litigation followed, in which the “policyholder” argued that the case would have settled within policy limits had the carrier initiated earlier negotiations. 

To me, the question of whether a carrier has an affirmative duty to initiate settlement discussions is resolved by a simple review of the Unfair Claims Settlement Practices Act, which is codified in New Jersey at N.J.S.A. §17:29B-4(9).  (While the Act does not create a private right of action in New Jersey, the New Jersey Supreme Court has held that it “declare[s] state policy.”  Pickett v. Lloyd’s, 131 N.J. 457, 468 (1993)).  Like New Jersey’s version of the Act, California’s (where the accident took place) identifies as an “unfair claims settlement practice” “’[n]ot attempting in good faith to effectuate prompt, fair and reasonable settlements of claims in which liability has become reasonably clear.”  (In California, this provision appears at Insurance Code section 790.03(h)(5).)

The Ninth Circuit cited the California provision and wrote:  “[T]he conflict of interest that animates the duty to settle exists whenever there is a significant risk of a judgment in excess of policy limits and there is a reasonable opportunity to settle within those limits; this conflict obtains regardless of whether a settlement demand is made by the injured party.  If, as the general duty of good faith requires, the insurer ‘conduct[ed] itself as though it alone were liable for the entire amount of the judgment,’ a rational party should attempt to settle if there is a ‘substantial likelihood in excess of those limits,’ and there is a reasonable likelihood to settle within those limits.”  (Citations omitted.)

But take heart, you carrier types out there.  Under the specific facts of this case, the Court held that Deerbrook did not breach its duty of good faith and fair dealing.  Despite repeated requests, Deerbrook was not given sufficient information to evaluate the claimant’s injuries, and “could not base a settlement offer solely on the representations of plaintiff and plaintiff’s lawyer.”  Therefore, the carrier could not be liable for bad faith in refusing to settle earlier.      

One other interesting thing about this case.  Citing the California Supreme Court in Johansen v. Cal. State Auto. Ass’n Inter-Ins. Bureau, 123 Cal. Rptr. 288, 292-93 (1975), as well as other authority, the Court stated that “a good faith belief in noncoverage does not insulate an insurer from liability for failure to settle a claim.”  So, at least in California, unless the carrier has actually obtained a declaratory judgment of noncoverage, it remains exposed. 

Potential pitfalls in settling with insurance companies

Posted by Gene Killian on May 11, 2012

Here’s an interesting situation that recently came up.  A general contractor (Aristone) got sued in a construction defect case involving continuous water damage to a building over several policy periods, involving several insurance companies.  One of Aristone’s carriers – OneBeacon – stepped up to provide a defense.  Another – Pennsylvania Manufacturers – took a “no pay” position, but agreed to go to binding arbitration with Aristone on the coverage dispute.  Aristone won the arbitration against Pennsylvania as to coverage, and Pennsylvania then agreed to settle the insurance claim with Aristone for $150,000.  In exchange for the payment, Aristone executed a general release in Pennsylvania’s favor, encompassing “[a]ll claims that have been brought against [Pennsylvania] or could have been brought against [Pennsylvania] in  [the coverage] action brought by Aristone.”  The release stated that it applied to Aristone and “[a]nyone who succeeds to [Aristone’s] rights and responsibilities.”  

Later, OneBeacon filed suit against Pennsylvania, seeking reimbursement for Pennsylvania’s supposed allocated share of defense costs ($105,773.50, according to OneBeacon).  Interestingly, the attorney who brought the coverage suit against Pennsylvania was the lawyer who had been previously appointed by OneBeacon to defend Aristone in the underlying suit (and who had negotiated the release with Pennsylvania on Aristone’s behalf).  In response to OneBeacon’s suit, Pennsylvania naturally argued that OneBeacon’s claim was barred by Pennsylvania’s earlier settlement with Aristone.  

The New Jersey Appellate Division, citing California authority, disagreed, writing:  “Where two or more insurers independently provide primary insurance on the same risk for which they are both liable for any loss to the same insured, the insurance carrier who pays the loss or defends the lawsuit against the insured is entitled to equitable contribution from the other insurer or insurers…As a corollary to this principle, we hold that one insurer’s settlement with the insured is not a bar to a separate action against that other insurer or insurers for equitable contribution or indemnity.”     

As to the effectiveness of the release, the Court wrote: “Because OneBeacon had an independent, rather than a derivative, right to contribution, Aristone’s release of its rights, like the settlement itself, did not, by itself, extinguish OneBeacon’s right to seek contribution.” (Emphasis added.)  But the Court went on to hold that this specific release, by its terms, was ambiguous as to whether the parties actually intended to bar a future claim by OneBeacon against Pennsylvania for contribution. After criticizing the lawyers who drafted the release and who seem to have intentionally left it ambiguous, the Court ruled that the interpretation of the release would be an issue for trial.

The policyholder, Aristone, seems to have made out all right in this case – it got a full defense as well as a $150,000 payment against the claim.  (It’s not clear whether the $150,000 was for a total policy buyback, which would raise its own set of separate issues, but that’s a subject for another post).  But it seems that OneBeacon may have found itself in trouble here because of its failure to clarify the coverage picture up front as required by the New Jersey Supremes in Owens-Illinois v. United Ins. Co., 138 N.J. 437, 479 (1994).  There, the Court specifically stated:  “Insurers whose policies are triggered by an injury during a policy period must respond to any claims presented to them and, if they deny full coverage, must initiate proceedings to determine the portion allocable for defense and indemnity costs.”

Put another way, in a recent article in Claims Magazine, Ken Brownlee wrote:  “When the auditor is reviewing a claim in litigation for declaratory relief, he or she should look for evidence that the adjuster sat down and reviewed the policy with the insured, seeking advance agreement that the coverage did not apply or applied to only part of the claim.  If that is missing, the file was not well adjusted.”    

I can easily imagine situations where, because of ambiguity as to who was covering what, Aristone would not have made out as well.  What if, for example, OneBeacon had argued that it was entitled to attach the $150,000 settlement payment from Pennsylvania on equitable grounds, to contribute to the defense costs?  (That may have been difficult to do here, because OneBeacon’s own appointed defense lawyer negotiated the release on Aristone’s behalf, but just suppose.)  That’s why the idea of intentionally leaving settlement documents ambiguous makes me very nervous.  I don’t know what specific provisions were in the release relating to contribution, but I’d have wanted some sort of protective language or indemnity agreement to deal with the possibility that someone would later want to attach the settlement funds paid to the policyholder.

One last item of interest:  Insurance companies frequently disclaim coverage for construction defect claims based upon the so-called “business risk” exclusions (such as the “your work” exclusion).  Here, it seems that OneBeacon did not do so.   

The full citation for the Aristone case is Potomac Ins. Co. of Illinois v. Penn. Mfrs. Ins. Co., Docket No. A-3164-09T2 (N.J. App. Div. Apr. 13, 2012), and the full decision is here.

Triggering excess coverage through underlying settlements

Posted by Gene Killian on April 25, 2012

Here’s a fairly common circumstance in large commercial liability claims.  A policyholder settles with the carrier in Layer 1 for less than its limits, leaving a gap between Layer 1 and the next layer up.  Does the carrier in Layer 2 then have an obligation to contribute to settlement with the underlying plaintiff?  

Example:  I recently had a circumstance in which Carrier A and Carrier B each had a $7.5M quota share of a $15M excess layer.  The client settled with each carrier for $5M (total $10M).  The settlement amount of $10M with these two carriers left a $5M gap before reaching the next layer of coverage, occupied by Carrier C.  Carrier C argued that its coverage wasn’t triggered, and that it had no obligation to contribute to settlement with the underlying plaintiff, because the limits beneath its coverage hadn’t been properly exhausted.  

Carrier C’s exhaustion language read:  “The Insurer shall pay the Insured…for Loss by reason of exhaustion by payments of all applicable underlying limits by either the Underlying Insurers…or the Insured.”  (Emphasis added.)  

Under this policy language, it seems pretty clear that if the policyholder covers the gap in Layer 1, then the coverage in Layer 2 is triggered. But it’s also possible that a policyholder might not even be required to cover the gap in order to get to Layer 2.  .  (In the matter I’m talking about, the issue is currently being negotiated.  Hopefully the carrier will see the light.)  

The venerable one-page decision in Zeig v. Massachusetts Bonding, 23 F.2d 665 (2d Cir. 1928) is still good law on this issue.  The Zeig Court wrote:  “[The excess carrier] had no rational interest in whether the insured collected the full amount of the primary policies, so long as it was only called upon to pay such portion of the loss as was in excess of the limits of those policies. To require an absolute collection of the primary insurance to its full limit would in many, if not most, cases involve delay, promote litigation, and prevent an adjustment of disputes which is both convenient and commendable.”  (So, under Zeig, it wouldn’t even be necessary for the policyholder to pay the $5M gap.) 

In JP Morgan v, Indian Harbor, 2011 NY Slip Op. 51055 (N.Y. Sup. Ct. N.Y. County May 31, 2011), which was decided under Illinois law, the Court distinguished Zeig and held that there was no exhaustion unless and until the underlying carrier actually paid the full extent of its policy limits – but in that case, the policy required the underlying excess insurers to have "admitted liability" and "paid the full amount of their respective liability" before the next layer’s liability attached. 

Another recent decision, Maximus v. Twin City, No. 1:11cv1231 (LMB/TRJ), slip op. (E.D. Va. March 12, 2012), includes a very good discussion of case law on this issue.  The Court wrote:  “The Axis Policy's exhaustion provision is ambiguous in that it does not clearly require all underlying insurance carriers themselves to pay the full amounts of their policy limits in order to trigger the Axis Policy's coverage and does not clearly provide that settling for less than the policy limit, even if the insured fills the gap, fails to satisfy the exhaustion requirement.” (Emphasis added.)

As you can see from the decisions cited above, there is no standardized policy language on this issue.  But if you’re in settlement discussions that may trigger several layers of coverage, it’s critical to review the exhaustion language of all excess policies before concluding the settlement.  Otherwise, you may leave a large self-insured gap, with no ability to trigger the upper layers.

Coverage for class action settlements

Posted by Gene Killian on April 05, 2012

Here’s a fairly frequent scenario in the insurance world.  The carrier takes a “no- pay” position on a liability claim.  The policyholder settles the case and then seeks reimbursement from the carrier in a coverage suit.  What exactly does the policyholder have to prove in order to get paid?  

In Fireman’s Fund v. Security Ins. Co., 72 N.J. 63, 71 (1976), the New Jersey Supremes long ago set forth the general rule, writing:  “Where an insurer wrongfully refuses coverage and a defense to its insured, so that the insured is obliged to defend himself in an action later held to be covered by the policy, the insurer is liable for the amount of the judgment obtained against the insured or of the settlement made by him…The only qualifications to this rule are that the amount paid in settlement be reasonable, and that the payment be made in good faith.” 

A couple of weeks ago, this issue again came up, this time before the Appellate Division in GAF v. Allstate, 2012 N.J. Super. LEXIS 35.  A class of homeowners filed a class action lawsuit against GAF, alleging that GAF’s roofing shingles were defective because they began to deteriorate “only a few years after installation.”  National Union denied coverage for the suit, in part based on an “own product” exclusion, and GAF eventually settled the case on its own for $63 million.

In the subsequent coverage suit, GAF argued that the underlying claimants had alleged that there had been damage to items other than GAF’s shingles (GAF’s own product), such as other parts of the homeowners’ roofs.  GAF contended that that was enough to trigger coverage for the settlement, without GAF having to prove that, in fact, items other than the GAF shingles had been damaged.

Following 12 years of expensive litigation and a 23-day jury trial, the jury came back with a no-cause against GAF, now affirmed by the Appellate Division.

The Appellate Division wrote: “It is incumbent upon the insured to articulate to a reasonable degree of certainty what portion of its overall damages constitute a covered loss. This can be accomplished either by direct evidence of payment for third-party damages or by competent testimony demonstrating that third-party losses were a reasonably likely consequence of damages to the insured's product.”  It’s somewhat difficult to understand where this ruling leaves policyholders in complex coverage litigation involving multiple underlying claimants, such as in a class-action setting.  Assume, for example, that GAF had put up an expert to say that “third-party losses were a reasonably likely consequence of disintegration of the shingles.”  The carrier would likely have argued (A) that this testimony was impermissibly speculative and (B) that GAF had to prove third-party damage with respect to each individual class member.  In other words, the carrier will almost certainly attempt to make the bar in such a coverage dispute unreachable, and we really don’t know how a trial court will respond. 

The unreachable and ever-moving bar seems to be contrary to the New Jersey Supreme Court’s public-policy based ruling in Owens-Illinois v. United Ins. Co., 138 N.J. 437 (1994).  There, the Court stated that in complex coverage litigation, a “rough measure” was all that was needed to establish coverage, writing:         “Because the defendants refused to involve themselves in the defense of the claims as presented, they should be bound by the facts set forth in the plaintiff's own records with respect to the dates of exposure and with respect to the amounts of settlements and defense costs. Those losses for indemnity and defense costs should be allocated promptly among the companies in accordance with [a] mathematical model developed, subject to policy limits and exclusions. We stress that there can be no relitigation of those settled claims…Available data should enable the master to grasp the generality of the underlying claims and the exposures involved.”  (Emphasis added.)

We almost certainly have not heard the end of this issue.  The one seemingly certain thing is that policyholders can’t enforce coverage for underlying settlements simply because the underlying claimants alleged covered damage.  At the very least, in the class action product-liability property damage context, the Court will likely require an expert to review a statistically significant portion of the underlying claims and opine that, in the words of the GAF court, “third-party losses were a reasonably likely consequence of damages to the insured's product.”   (Isn’t insurance law fun?)

The insurance company's duty to pay for settlement following denial of coverage

Posted by Gene Killian on February 09, 2011

I’m currently preparing to try another coverage case.  This one involves the question of whether an insurance company, having denied a defense outright, can later second-guess the amount of defense costs and settlement paid by the policyholder out of its own pocket. 

In preparing the case, I came across an interesting opinion written by the sometimes-controversial Judge Richard Posner of the Seventh Circuit, Charter Oak Insurance Company v. Color Converting Industries Company, 45 F.3d 1170 (7th Cir. 1995).  (The case coincidentally involves the same insurance company as in my case.  I won’t bore you with the details, but the issues are slightly different.)   Whatever you may think of Judge Posner, the guy can write.  Here’s how he concisely defines the competing interests of the policyholder and the carrier when it comes to settlement with the underlying plaintiff:

“The principal contractual duty that an insurer's delay in coming to terms with the insured's tort victim can violate is the implied duty…to manage the defense of the liability claim in such a fashion as will minimize the risk to the insured of an excess judgment. Because insurance policies have limits, a liability insurance company might prefer to roll the dice and litigate with its insured's tort victim, knowing that its liability was capped at the policy limit and that if it was lucky and won the case it would not have to pay anything. The insured would prefer the insurance company to pay right up to the policy limit if by doing so it could eliminate the danger of a judgment above that limit, since any difference between the judgment and the policy limit would be payable out of the insured's own pocket. It is entirely reasonable to suppose that had the parties to the insurance policy thought about this conflict of interest between insurer and insured, they would have agreed that the insurance company was not to exploit it, and was instead to act as if there were no policy limit when it came to decide whether to settle or to litigate.” 

(By the way, I’m not sure that a policyholder would always want the full limits paid out.  That might not be helpful at renewal time, for example, and might also create the impression among the plaintiffs’ bar that the policyholder is an easy mark.  But I do understand the Court’s point.)

As to the ability of a carrier to deny coverage, and later to take the position that the policyholder had made “voluntary payments” and was therefore not entitled to insurance, Judge Posner wrote:

“If the insured does settle and then turns around and seeks reimbursement from the insurance company, it will have to prove that the settlement was reasonable. …[There] are cases in which an insured settled in circumstances where, because the insurance company had not conceded coverage, the insured's personal assets were at risk. They are analytically similar to cases in which the insurance company's foot-dragging  places the insured at risk of an excess judgment.”

Posner’s reasoning is similar to that of the New Jersey Supreme Court in Fireman’s Fund Ins. Co. v. Security Ins. Co. of Hartford, 72 N.J. 63, 73 (1976), where the Court wrote:  “If the insurer delays unreasonably in investigating and dealing with a claim asserted against its insured, the insured may make a good faith reasonable settlement and then recover the settlement amount from the insurer, despite the policy provision conditioning recovery against the insurer on the prior entry of a judgment or acquiescence by the insurer in the settlement.”  

Bottom line:  If the insurance company denies or delays coverage, courts say that the policyholder can settle with the underlying plaintiff and, as long as the settlement is reasonable, can successfully claim reimbursement from the insurance company.  The “voluntary payments” provision does not apply.

The insurance company's duty to negotiate in good faith

Posted by Gene Killian on December 23, 2010

Needless to say, it can be very dangerous for insurance companies to "roll the dice."  Over at the Michigan Auto Lawyers Blog, Steve Gursten tells the story of an adjuster who showed up 40 minutes late for a mediation, and then wouldn't go north of $1 million in a catastrophic truck accident case involving serious personal injury.  The carrier rep obstinately told Gursten that no jury would "ever return a verdict of more than a million dollars for pain and suffering."  Well, the guy was at least partly correct - the jury didn't come back with a million.  They came back with $3.5 million.  Ouch.   

A couple of lessons about negotiation here.  First, always treat your opponent with respect.  Showing up 40 minutes late for a meeting is really not a good idea.  To paraphrase a former law partner of mine, never give the other side something to put on their locker room bulletin board. And second, instead of making an obnoxious statement like "no jury will ever return a verdict of more than a million dollars," always resort to objective fact.  As in, "we've looked at the case carefully, and based on similar cases, we think this one should be valued at about a million."  Show your opponent some verdicts from similar cases and say something like:  "We want to do the right thing here.   Have a look at these and tell us how your case is different and why you think we're wrong."  Will this strategy always work?  No.  Sometimes your opponent will be unreasonable and you'll have to take your chances with a judge or jury.  But you'll know that you approached the situation intelligently and gave yourself the best chance to succeed.     

Insurance coverage for intellectual property lawsuits

Posted by Gene Killian on December 16, 2010

Most lawyers brag about the cases they’ve won.  I prefer to pick apart the ones I’ve lost.  It’s cathartic.

The subject of general liability insurance coverage for supposed intellectual property offenses is hotly contested.  Depending on the “personal injury” and “advertising injury” coverage forms used in a particular policy, for example, insurance may exist for claims of patent or trademark infringement.   Generally and not surprisingly, insurance companies disagree.

So, here are the facts from a recent case we handled.  Companies A and B manufactured food preservatives overseas.  Our client -  Company C - approached the two manufacturers and offered to become the U.S. distributor for the products.  The parties signed a letter of intent, which included a confidentiality agreement as to the trade secrets of Companies A and B.

A and B alleged that C later “improperly associated itself with [the products] and promoted itself as the distributor of [the products] in the U.S., manufactured using [A and B’s] patented process and promoted itself as knowledgeable in the use of [A and B’s] trade secrets.”  A and B also alleged that C “began selling its own version of [the product] to the same customers.”

Companies A and B sued for (1) patent infringement, (2) unfair competition, and (3) theft of trade secrets. 

We then went after C’s liability insurance carrier for coverage under the “personal and advertising injury” form in the general liability policy.  In relevant part, the policy defined “advertising and personal injury” as injury arising out of “[c]opying, in your ‘advertisement,’ a person’s or organization’s ‘advertising idea’ or style of ‘advertisement.’”  The policy defined “advertising idea” as “any idea for an ‘advertisement.’”  Finally, the policy defined “advertising” as “the widespread public dissemination of information or images that has the purpose of inducing the sale of goods, products or services through…(1) Radio; (2) Television; (3) Billboard; (4) Magazine; (5) Newspaper; or…[a]ny other publication that is given widespread public distribution.”

Seizing on the last phrase (“any other publication that is given widespread distribution”), we moved for summary judgment on the duty to defend.  As you know if you’re an insurance aficionado, the carrier’s duty to defend is supposed to be triggered if there’s any possibility that coverage may ultimately exist.  We figured that the allegations in the underlying complaint (for example, that C “improperly associated itself with [the products] and promoted itself as the distributor of [the products] in the U.S.”) should suffice.

The judge didn’t buy what we were selling, though, holding in part: “The policy requires ‘widespread’ public dissemination…in order to constitute an advertisement…[T]he underlying complaint provides no support for the notion that the dissemination of information at issue was widespread.”

This (in my humble opinion) is a dopey ruling.  Under the law relating to the duty to defend, the proper question is whether there existed any possibility of widespread dissemination of information.  If so, the duty to defend should have been triggered.  I personally would like to have taken this one up to the Third Circuit for review, but we’d negotiated a high/low agreement with the carrier, so we settled following the court’s decision.  (A decent result for the client, since a less-than-perfect settlement is almost always better than a protracted litigation.  But I feel like I got cut off from dinner after the shrimp cocktail.) 

 

Settling with insurance companies

Posted by Gene Killian on September 29, 2010

Over at Settlement Perspectives, they have some good advice about working with your insurance carrier to resolve disputes.  These include: "Insurers hate surprises.  Communication is key." 

I will add the following.  You must observe the rules of the ritual.  Insurance companies are huge bureaucracies, and like all bureaucracies, they have their sometimes arcane procedures for getting things done.  Veer away from the procedures at your own peril.  

Here's a war story to illustrate what I mean.  A few years back, I was involved in trying to resolve a major claim.  Shortly before going into the negotiation session, I read an article in Trial Magazine about negotiating with carriers.  The article recommended not making a demand, but instead forcing the carrier to make an offer.  The gist of the article was that this novel strategy would throw the claims representative off balance, leading to a good settlement.   Armed with this brilliant piece of advice, I confidently strode to the table…and spent the next four hours arguing about who should make the first move.  I left with no resolution, although we later were able to settle.  That was stupid. 

I've also had a couple of first-party claims go off the rails because we didn't strictly comply with the proof of loss requirements required by the carrier (even though not specified in the policy), such as by providing detailed schedules itemizing the amounts sought and tying them to specific policy coverages.  Was the carrier's behavior appropriate?  That's irrelevant.  All that matters is that by not following the (ridiculous) requirements imposed by the carrier, we gave the claims representative an excuse to delay payment.  

Don't make things harder than they need to be.