Mea culpa. I haven’t written here in a while, because I’ve been focusing my creative juices on developing a new podcast about effective negotiation and communication skills. (Shameless plug: Please check it out! It’s called Station 4 Negotiation and it’s available on all of the major podcast platforms.) But I had to return to discuss a very nice win by my good friend Barry Buchman and his colleagues at Haynes and Boone in a coverage case captioned Huntington National Bank v. AIG Specialty Insurance Company, which you can read here.

For some reason, many judges seem to be unwilling or unable to apply the rules of insurance policy construction. Under those rules, the policyholder is supposed to get the benefit of the doubt with respect to coverage; put another way, if any reasonable construction of the insurance policy language would support coverage, the policyholder is supposed to win. After all, the insurance company wrote the policy, and should bear the risk of the language being susceptible of more than one construction. Too often, in my humble opinion, judges (especially federal judges) give lip service to the rules and then simply disregard them, substituting their own views of what should and shouldn’t be covered. But as a famous meme says, that’s not how this works. That’s not how any of this works.

That problem didn’t happen in the Huntington case, though. Basically, Huntington, which is (obviously) a bank, had a depositor, Barton Watson, who was running a Ponzi scheme. Watson (who later committed suicide) had set up two shell companies to facilitate the scheme, unbeknownst to Bank officials. Watson later repaid large loans that the Bank had provided to one of Watson’s companies, which was of course a great relief to the Bank.

The two shell companies eventually went bankrupt. (To quote Margaret Thacher in another context, eventually you run out of other peoples’ money.) The bankruptcy trustees of the two companies later filed suits against Huntington, alleging that the Bank had put its desire to be repaid ahead of concerns that Watson was committing fraud and, by doing so, perpetuated the Ponzi scheme to its benefit and other lenders’ detriment.  Both complaints included allegations of fraudulent conveyances and sought to recover those transfers from Huntington. (Under the bankruptcy code, a “fraudulent conveyance” happens, for example,  when a debtor transfers property with the intent to hinder, delay or defraud its creditors.)

The Bank eventually settled the claims for $32 million, and looked to its insurance companies to recover $15 million of that amount.

There were several coverage issues involved in the case, but here I’ll focus on just one. AIG’s bankers professional liability insurance policy excluded coverage for “civil or criminal fines or penalties imposed by law, punitive or exemplary damages . . . or matters that may be deemed uninsurable under the law pursuant to which this policy shall be construed.” AIG argued that the bankruptcy trustees’ recovery of a fraudulent conveyance was tantamount to a fine or penalty and therefore not covered.

But the Sixth Circuit disagreed, writing as follows: 

“For insurance coverage to be uninsurable under the law, the damages claimed must be based on an intent to injure, malice, ill will, or other similar culpability. Huntington argues that the settlement payment to the trustee is insurable under Ohio law, contrary to the district court’s holding, because the settlement payment was not akin to punitive damages and was not intended to punish an intentional bad act. We agree. Holding otherwise, as the district court did, would wrongly expand what is uninsurable under Ohio law and contravene the well-established principle in Ohio that policymaking is for the legislative branch, not the courts.”

“Policymaking is for the legislative branch, not the courts.” I like that so much that I may have to put it in my next legal brief when an insurance company tries to convince a judge to engage in what’s euphemistically called “post-loss underwriting.”

Regular readers of this blog know that I often whine about – er, raise persuasive points about – the recent trend in the courts (especially federal courts) to erode the longstanding pro-policyholder rules of insurance policy construction.

But the situation goes beyond that. The federal court here in New Jersey is now apparently heightening the pleading standards needed to pursue a claim against an insurance company for wrongful denial of coverage.

For years, New Jersey has been a notice-pleading state, meaning that only a short statement of the basis for the policyholder’s claim was necessary to survive a motion to dismiss. In addition, all pleadings were to be liberally construed “in the interest of justice”. (I remember agonizing over the words of a draft pleading years ago. My boss said, “Gene, the only purpose of a pleading is to keep your case from getting thrown out of court. Stop obsessing.”)

That’s no longer how any of this works, said the court in Bauman v. Hanover Insurance Company, which you can read here.

Briefly, Bauman is an attorney who was sued for alleged malpractice. He tendered the claim to his errors and omissions carrier, Hanover. Hanover denied coverage because reasons, so Bauman filed suit to try to enforce his coverage. His complaint alleged that the bases for the coverage denial were wrong, stating in part as follows: “Plaintiff promptly placed the Defendant The Hanover Insurance Group and The Hanover Insurance Company on notice of the Woerner Claim through [its broker] seeking to have the Defendant insurance carrier provide Plaintiffs with a defense and indemnification in the professional malpractice proceeding initiated via the Woerner Claim…Despite repeated requests, the Defendant insurance carrier have refused to defend the Plaintiffs in the Woerner Claim.”

Presumably, Hanover knew the reasons it denied the claim, and also knew that Bauman disagreed with them. That should be enough to get the case moving, right? Wrong, said Judge Cecchi. The Judge essentially held that it’s not enough to apprise the insurance company of the basics of the dispute. You have to write more of a novella about what you intend to prove.

Specifically, the Court wrote as follows:

“Under New Jersey law, a complaint alleging breach of contract must, at a minimum, identify the contracts and provisions breached. Specifically, failure to allege the specific provisions of contracts breached is grounds for dismissal. Here, Plaintiffs’ complaint references—albeit without citing, quoting, or attaching as an exhibit—the Policy as a contract for liability insurance between the parties. However, Plaintiffs do not identify any specific language or provisions of the Policy that they allege the Hanover Defendants breached. Instead, Plaintiffs make the conclusory assertion that the Hanover Defendants have breached the contract of insurance ‘by refusing or failing to fully perform’ under it.  As a result, Plaintiffs’ breach of contract claim against the Hanover Defendants is dismissed.” [Cleaned up.]

The Court also dismissed Bauman’s claim against his insurance broker for allegedly procuring inadequate coverage, writing:

“Under New Jersey law, a negligence claim by an insured against an insurance broker requires showing that the broker either (1) failed completely to arrange for an insurance policy or (2) delivered a policy that is void, materially deficient or otherwise does not provide the coverage the broker agreed to procure. Here, the complaint only alleges that Defendant USI was negligent ‘to the extent that there is a lack of, or insufficient coverage from the Policy as to the underlying lawsuit. That in Plaintiffs’ eyes the Policy’s coverage was ‘insufficient,’ without more, does not state a plausible claim of negligence against Defendant USI. There is no debate that Defendant USI secured Plaintiffs the Policy, and Plaintiffs do not allege that the Policy was void, materially deficient, or lacking coverage Defendant USI promised to procure. Therefore, Plaintiffs’ negligence claim against Defendant USI is dismissed.” [Cleaned up.]

Notably, the policyholders’ counsel tried to clear up any issues in his brief opposing the motion to dismiss, cogently writing as follows:

“The Policy defines Wrongful Act as ‘any actual or alleged negligent act, error, omission, misstatement, misleading statement, breach of duty . . by an Insured in the rendering of or failure to render Professional Services or Non-Profit Services’… Professional Services is defined in the Policy as, among other things, ‘Services as a lawyer, mediator, arbitrator, notary public, administrator, conservator, receiver, executor, guardian, trustee, or in any similar fiduciary capacity, but only if the services rendered are those ordinarily performed by a lawyer.’

“Here, Plaintiff James Woerner asserts in his liability expert report from Ryan Cooper, Esq. that Drew Bauman committed legal malpractice by failing to provide a verbal instruction to not send funds via wire transfer in the course of him providing ‘Professional Services’ to James Woerner in the real estate transaction. The Cooper report also asserts that Drew Bauman was required to communicate with reasonable diligence and promptness to his client when he received the text message from Mr. Woerner while at the bank. These allegations by the liability expert for James Woerner clearly address a claim against Mr. Bauman under the Policy for Wrongful Acts in the rendering of or failure to render Professional Services.”

Not good enough, said the Court! Regardless of what the insurance company actually knows, or what you’ve said in the brief, the complaint is deficient!

I’m not sure how this ruling comports with the directive in Rule 1 of the Federal Rules of Civil Procedure, that the rules “should be construed, administered, and employed by the court and the parties to secure the just, speedy, and inexpensive determination of every action and proceeding,” but it is what it is.

The takeaway here is simple. As the Courts continue to become more conservative and defense-friendly, and as they try to dismiss as many cases as possible to clear their clogged dockets, policyholders can’t expect a break with respect to any technical requirements in the rules. You have to be a rules maven, you have to know the elements of your claim, and you have to follow all of the prerequisites without exception. Or, as in Bauman, the Court may tell you that professional liability insurance policies somehow don’t cover professional liability.

Mr. Trouble never hangs around,
When he hears this mighty sound,
“Here I come to save the day!”
That means that Mighty Mouse is on the way!
Yes sir, when there is a wrong to right,
Mighty Mouse will join the fight!
On the sea or on the land,

He’s got the situation well in hand!

–Theme from “Mighty Mouse” (1958)

For many years in New Jersey, insurance policyholders were blessed with pro-consumer judges who carefully scrutinized the business practices of insurance companies. Justice Stein’s opinion in Morton Intern. v. General Acc. Ins. Co., 134 N.J. 1 (1993) comes to mind, in which the Court refused to allow the insurance industry to apply the “sudden and accidental” pollution exclusion broadly. The Court held that carriers were bound by representations that the industry had made to the New Jersey Department of Insurance about the narrow meaning of the exclusion. Man, did insurance companies hate that ruling.

Times have definitely changed, especially in the Federal Court, as more and more judges with civil defense or prosecutorial backgrounds have been appointed. Now when I read insurance coverage decisions from the perspective of a policyholder lawyer, I sometimes think of the Mighty Mouse theme song (quoted above). The typical scenario goes like this:

  1. An insurance company sells a policy with broad, undefined language, leading policyholders to believe they have broad, undefined coverage.
  2. A claim happens.
  3. The carrier denies coverage.
  4. The carrier tells the Court that if coverage is found, Western democracy as we know it will crumble, and there will be crying in the streets.
  5. The Court finds a dictionary definition that supports the claim denial (and ignores any definitions that support the policyholder). In other words, the Judge essentially tells the carrier: “Here I come to save the day!”

This scenario recently played out in a Third Circuit case involving insurance coverage for COVID-19 losses, Wilson v. USI Services, LLC, which you can read here.

The facts of Wilson (which involved numerous insurance claims and policyholders) are straightforward. In 2020, the pandemic hit. People got sick and died. The CDC said that COVID-19 could be transmitted by touching an infected surface, as you can see here. Governments ordered all non-essential businesses to close. Many small businesses (like restaurants and gyms) were destroyed.

Businessowners affected by the pandemic naturally turned to their insurance policies. And just as naturally, the carriers denied coverage.

For property insurance coverage to exist for a loss, there generally must be “direct physical loss of or damage to” covered property. The problem is that insurance policies are an impenetrable thicket of cross-referenced and sometimes contradictory definitions, conditions, exclusions, and coverage limitations, and the key terms “direct physical loss” and “damage” are never defined. Businessowners whose properties were shut down by the pandemic typically argued that their properties had suffered “damage” because the properties were unable to be used due to the presence of the virus and the resulting government shutdown orders.

Now, it’s important to understand how insurance policies are supposed to work. Under the long-accepted rules of construction, the policyholder is supposed to get every benefit of the doubt. Insurance companies know that. And, if there’s a reasonable definition supporting coverage, the Court is supposed to apply it. Insurance companies know that, too.

So: Can “damage” reasonably be defined as “loss of use”?

Well, Dictionary.com broadly defines “damage” to include “injury or harm that reduces value or usefulness” and “to reduce the value or usefulness of.” The Third Circuit itself has held that “property damage” can include “loss of use,” writing: “[The] majority view [holds] that the term property damage does not require actual physical damage but can include intangible damage such as the diminution in value of tangible property.” McDowell-Wellman Eng. v. Hartford Acc. Indem, 711 F.2d 521, 526 n.7 (3d Cir. 1983).

Given the pro-policyholder rules of construction, that would seem to put the insurance industry in a serious pickle. Ah, but never fear, insurance industry, exclaimed the Third Circuit! Here we come to save the day!

In affirming the denial of coverage for COVID-19 losses, the Court wrote: “The businesses…must show that the functionalities of their properties were nearly eliminated or destroyed, that the structures were made useless or uninhabitable, or that there was an imminent risk of either of those things happening.”

Question: Do the policies themselves contain any such requirements?

Answer: No. This is what we might charitably call “judicial underwriting.”

Question: If the insurance companies had really wanted the term “damage” to be construed in such a narrow way, could they have easily inserted such a definition into their standard-form policies?

Answer: Of course. But they didn’t.

Legitimate issues with respect to these claims exist, of course. For one thing, if a loss of business income claim is involved, property policies generally measure the loss by the “period of restoration” –  usually defined as beginning when covered damage forces a business to suspend its operations, and ending when the covered damage is, or reasonably could have been, repaired. The carrier argument is, if the property doesn’t actually have to be repaired, then there’s no way to measure the loss. The counterargument is, the property should be deemed “repaired” when the government removes the shutdown order. Webster’s, after all, defines “repair” in part to include “remedy,” and the definition of “remedy” includes the term “counteract.” The cancellation of the shutdown order counteracted the original order.

There may also be issues with respect to the application of virus exclusions. That is to say, many property policies contain exclusions for loss or damage “caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” (This leads to two questions. First, isn’t the cause of loss in these cases the government shutdown order, and not the virus itself? And second, if the presence of a virus can’t be property damage, as the carriers contend, then why is the exclusion necessary at all?)

Legitimate issues aside, the mental and logical gymnastics that many judges apply to hold that “damage” cannot include “loss of use” are remarkable. It’s ironic, because back in the day, insurance companies used to complain loudly about activist judges. But not so much now, when judges invent and insert language into policies that supports a claim denial.

In tough cases like those in the COVID-19 arena, all policyholders can do is continue to hammer on how the rules of construction are supposed to work.

Some judges actually listen.

I had a brief but interesting conversation with a couple of colleagues recently. The topic was so-called “no action” clauses in liability insurance policies. “No action” clauses try to create a “get out of jail free” card for the carrier, at least temporarily. A typical one reads: “You agree not to bring any action against us until the amount of damages you are seeking has been finally determined after an actual trial or appeal…”

Read literally, this language would prevent policyholders from bringing declaratory judgment actions against their carriers to establish coverage until the underlying lawsuit is over. You can see the problem. The policyholder tenders a slip-and-fall case to its carrier, NoPay Insurance Company, and NoPay says, “Sorry. We deny coverage, and also, you have to wait until the slip-and-fall case is over before you sue us.”

But can no-action clauses like this be read literally???

The short answer is no. As one of my colleagues pointed out, Condenser Serv & Eng’g Co v. Am. Mut. Lib. Ins. Co., 45 N.J. Super 31, 41 (App Div. 1957) says: “To attribute significance to the [no-action] restriction would be to render sterile the declaratory judgments act in a substantial area of insurance contract field.”

Also, once the carrier has breached the contract, it cannot enforce the contract’s terms. “When there is a breach of a material term of an agreement, the non-breaching party is relieved of its obligations under the agreement.” Nolan v. Lee Ho, 120 N.J. 465, 472 (1990). If carrier has already breached the contract by not defending a covered claim, it cannot rely on the “no action” language.

Most carriers won’t try to pull this nonsense. But a few will. Don’t put up with it.

 

Back in the halcyon days of insurance coverage litigation (before many defense-oriented judges began to view themselves as Guardians at the Gate of the Insurance Industry), New Jersey courts would occasionally hand down landmark decisions to protect the policy-buying public from sharp practices by carriers. One of those decisions was Griggs v. Bertram, 88 N.J. 347 (1982).

In New Jersey, you’ll sometimes hear lawyers talk about a “Griggs settlement.” Let’s look at the Griggs case in a little detail to understand what that means.

Griggs involved a personal injury claim stemming from a schoolyard fistfight. Bertram, the policyholder, notified his homeowners’ carrier, Franklin Mutual, of the claim before an actual suit was filed. Over a year later, and only after suit was filed, Franklin Mutual denied coverage.

Abandoned by his carrier, Bertram defended himself and  settled the suit. The settlement provided that a judgment in the amount of $9,000 would be entered in favor of Griggs, the injured plaintiff. ($9000! Those were the days, indeed!) Griggs agreed not to enforce the judgment against Bertram, who, in turn, assigned his insurance claim against Franklin Mutual to Griggs. In other words, the plaintiff agreed to settle for the value of the insurance claim, and to pursue the carrier himself.

Needless to say, Franklin Mutual was unhappy about this. How dare a policyholder enter into a settlement without our approval! How dare they assign their rights to the plaintiff! Yes, we completely denied coverage, but so what? They unfairly deprived us of our divine right to deny it again!

The Court disagreed with Franklin Mutual, finding that once a carrier denies coverage, or delays resolution of the claim for an inordinate period of time, it loses the right to contest the amount of a settlement reached by the policyholder.  The policyholder, however, must show that the settlement was fair and reasonable under the circumstances. And assigning the policyholder’s insurance claim to the underlying plaintiff is fair game.

This sounds like a wonderful weapon in the arsenal of policyholders when they get the run-around from their insurance companies. The problem is that many judges hate it. We have a case in the office involving a Griggs settlement, for example. I won’t disclose too much, since it’s currently pending in the Appellate Division. An insurance company for the underlying defendant (I’ll call the carrier “Stonewall”) agreed to pay less than half of the defense costs associated with a claim made by our client, under a reservation of rights. That meant, of course, that the defendant was paying for more than half of the defense itself. Stonewall dragged its feet on settlement with us, irritating the trial judge who wanted the case settled. In a private session with us, the judge suggested that we settle around Stonewall, and that we take an assignment of the claim against Stonewall to get the deal done (the classic Griggs settlement). So, never missing a chance to keep a judge happy, we did that.

Unfortunately, the case was then assigned to a new judge, who at the urging of Stonewall, decided that the arrangement was unsavory, and that the settlement was void. The judge then dismissed our case. Stonewall’s argument was that, since they were paying for the defense, they had a right to control settlement negotiations. Of course, they were doing nothing to try to settle the claim, and, as I said, they were paying less than half of the defense costs. That, unfortunately, didn’t seem to matter, because, as I said, many judges hate Griggs.

But, given the right circumstances, even anti-Griggs judges sometimes will grudgingly concede that Griggs is alive and well. Take, for example, the recent (unreported) decision in Brightview Enter. Sols. v. Farm Family Cas. Ins. Co., Civil Action No. 20-7915 (SDW) (LDW) (D.N.J. Oct. 15, 2020). Brightview was a perfect storm of insurance company recalcitrance, and even then, the District Court only reluctantly allowed a Griggs claim to proceed.

Brightview involved a landscaping company that was doing work around a real estate company’s office. The landscaping company unfortunately hired a subcontractor who messed up the job, causing water to leak inside the office. An employee of the real estate company (Morciglio) slipped and fell because of the water leak, hitting her head. She suffered severe brain injuries.

I’ve been involved in enough slip-and-fall coverage claims to know that, even if a doctor declares the claimant to be brain-dead as the result of the accident, you might have payment issues with the carrier. Claims adjusters for some reason often refuse to believe that a person can be seriously injured by falling on the floor.

Here, the landscaping company was an additional insured on the subcontractor’s policy, which was sold by Farm Family. The liability limit on the policy was $1 million. Farm Family knew that the exposure exceeded the liability limit. The plaintiff offered to settle with the landscaper and the subcontractor for a total of $650,000. But, of course, Farm Family only offered $250,000. The plaintiff declined to respond. Before trial, not wanting to roll the dice on a potentially large verdict, the landscaper settled directly with the plaintiff for $350,000. The landscaper then pursued Farm Family for that amount.

This seems like a pretty clear Griggs situation: A potential seven-figure claim that was settled for $350,000. But rather than coughing up the extra $100,000, Farm Family decided to fight the issue, and moved to dismiss the coverage suit brought by the landscaper.

The District Court denied Farm Family’s motion to dismiss, writing as follows:

“Brightview alleges that, given its potential financial exposure of millions, Farm Family’s $250,000 offer does not reflect a good faith effort to consider the insureds’ interests, and instead was a self-interested calculation that trial was worth the risk, given its own exposure was limited to $1 million. Brightview additionally alleges that Farm Family’s refusal to appropriately consider settlement forced Brightview (and CBRE) to independently settle, leaving [the subcontractor], represented by Farm Family-paid and directed attorneys, the sole defendant at trial. This allegedly allowed Farm Family to use the ultimately successful strategy at trial of placing total fault on the ‘empty chairs’ of Brightview and CBRE. As evidence of Farm Family’s bad faith maneuvering, Brightview alleges that the jury verdict form, approved by [the subcontractor], omitted Brightview and CBRE from allocation of fault, despite [the subcontractor’s] trial strategy of blaming them – reflecting Farm Family’s post hoc attempt to ‘justify’ its ‘failure to engage on settlement.’”

Seems like a straightforward theory to me. But the District Court said that it was “convoluted.” Nevertheless, since she was required to give the policyholder every benefit of the doubt on a motion to dismiss, the coverage suit was allowed to proceed.

The takeaway here is that, even though Griggs is a powerful weapon when carriers engage in their specialty (doing nothing), policyholders should proceed with extreme caution in the current insurance-company-friendly Court environment. If a policyholder tries to settle directly with the claimant, there had better be a detailed and clear record supporting why the settlement was reasonable under the circumstances, and showing how the carrier’s stubbornness was unjustified.

 

 

 

 

 

Very early on, our firm decided not to get involved in the COVID-19 business interruption coverage wars. Our reasons were simple.

First, we knew that the insurance industry would treat these claims as a threat to their very existence (or at least would say that to judges in an effort to dodge coverage). Therefore, the claims would be very difficult to settle. To be successful, policyholders and their lawyers would need to commit substantial resources to the battle, probably for a long period of time. So, we advised our clients to file their claims, let others fight the coverage battles, and see how the trends developed.

Second, we knew that many judges, especially at the federal level, tend to be sympathetic to the insurance industry, and would engage in logical gymnastics to construe undefined terms in insurance policies (like “direct physical loss”) in favor of carriers, regardless of the way the rules of construction are supposed to work. (Note: Under the laws of every state, policyholders are supposed to get the benefit of the doubt.)

Third, many of the calls we received from potential clients were for claims that were in the low six figures. That is a substantial amount for normal human beings and small businesses, but in the meatgrinder known as our legal system, it usually doesn’t justify a protracted and potentially expensive litigation.

Sure enough, many judges faced with COVID-19 business interruption claims have (most helpfully for the insurance industry) defined the undefined terms in the policies in favor of the carriers. (For an excellent scorecard listing COVID-19 coverage cases around the country, click here.) Recently, though, a retired New Jersey Appellate Division Judge temporarily assigned to the Superior Court in Atlantic County essentially said, “Not so fast.” The Atlantic County decision is remarkable because of the Court’s actual adherence to, and enforcement of, the rules of construction, which many Courts cite and then basically ignore. (The official citation for the decision is AC Ocean Walk, LLC v. American Guarantee and Liability Insurance Company, et al., Docket No. ATL-L-0703-21. You can access a free copy over at the Hunton Andrews Kurth insurance recovery blog here.)

Facts: The policyholder, AC Ocean Walk, LLC, owns a casino in Atlantic City. The casino was shut down because of COVID-19. The policyholder contended that the virus had actually been present on the grounds of the casino, rendering the casino unusable and satisfying the amorphous policy requirement of “direct physical loss.” The policyholder contended that, as a result, it was entitled to enforce its business interruption coverage. The carriers naturally disagreed.

The key passage from Judge Winkelstein’s opinion denying the carriers’ motion to dismiss was as follows:

“Plaintiff submits, and for purposes of this [motion to dismiss] the court accepts as true, that the primary source of the casino’s revenue was its casino floor and guest accommodations, which were eliminated and destroyed by the presence and the imminent threat of the COVID-19 [sic], in the air space and on the surfaces, rendering those parts of the property functionally useless and not fit for their intended purpose…the insurers here did not define the term ‘physical damage.’ The language is ambiguous. It can be used to support Ocean’s, as well as the carrier’s, positions as to the meaning of the insuring agreements. If there is more than one possible interpretation of the language, courts apply the meaning that supports coverage rather than the one that limits it.” [Cleaned up; citations omitted; emphasis mine.]

The Court also held that the so-called pollution exclusion did not apply to negate coverage, because it was designed to apply to traditional industrial pollution. With respect to one of the carriers, however, the Court granted the motion to dismiss, based upon a specific biological substance exclusion.

Insurance industry commentators may say that Judge Winkelstein’s decision is wrongheaded and outcome-oriented. It isn’t. It simply follows the rules of construction that Courts are supposed to follow. In fact, the world would be a better place if insurance company claims personnel were trained that “If there is more than one possible interpretation of the language,” they should “apply the meaning that supports coverage rather than the one that limits it,” to use Judge Winkelstein’s words.  But they won’t be trained that way, for the economic reasons stated in Professor Jay Feinman’s excellent book, “Delay, Deny, Defend: Why Insurance Companies Deny Claims and What You Can Do About It,” which is available on Amazon.

The AC Ocean Walk case shows that, in any disputed claim, policyholders must repeatedly and loudly emphasize the rules of construction, which are supposed to work in their favor to even the playing field with the insurance industry. (“Playing field” is probably the wrong analogy, since for many policyholders insurance is not a game, but the only thing standing between them and financial ruin.)

This case was handled for the policyholder by Justin Lavella, Lisa Campisi, and their excellent coverage team at Blank Rome, who did a terrific job.

I seriously don’t know why so many judges have seem to have such a difficult time applying insurance law. Don’t tell anyone, or coverage lawyers like me may have to reduce our hourly rates, but the whole body of insurance law really comes down to Four Simple Rules:

  1. Coverage provisions are supposed to be given the broadest reasonable construction in favor of the policyholder.
  2. Exclusions from coverage are supposed to be given the narrowest possible construction against the insurance company.
  3. As in baseball, ties go to the runner. The policyholder is the runner. So, if there is more than one reasonable construction of a word or a phrase in a policy, the policyholder wins.
  4. If any possibility of coverage exists for a lawsuit, the insurance company is supposed to defend its policyholder.

Really, that’s it. I just saved you from having to read thousands of pages in Appleman on Insurance Law.

Flomerfelt v. Cardiello, 202 N.J. 432 (2010) reviews The Four Simple Rules in detail, and is worth reading on the subject. The case involves an insurance company’s unsuccessful effort to escape liability coverage for serious injuries caused by a drug overdose at a party. You can read it here.

Which brings us to the very recent case of Port Authority v. RLI. The Port Authority case proves that even large organizations can get burned by judges who are uncomfortable with The Four Simple Rules. You can read the Port Authority decision here.

RLI sold a liability insurance policy to a company called Techno Consult. The Port Authority was an additional insured under the policy. The Port Authority hired Techno Consult to discover and report upon any unsafe conditions at a project at the Harrison PATH Station. Unfortunately, Michael Fiume, who was an employee of a subcontractor called Halmar, was injured when he slipped on wet ground and fell at the site. Fiume presumably collected substantial workers’ compensation benefits, which prevented him from suing his own employer. So he sued Techno Consult and the Port Authority.

Although there are several troubling aspects of the Appellate Division opinion from the point of view of policyholders, I want to focus on only one. Some New Jersey courts seem to be on a mission to eviscerate insurance companies’ duty to defend their policyholders under liability insurance policies, and to defeat The Four Simple Rules. The Simple Rule relating to the duty to defend is, again, crystal clear in 49 states: If there is a potential for coverage of an underlying lawsuit, the insurance company must defend. We can see this in Flomerfelt also, where the New Jersey Supreme Court stated: “The [underlying] complaint should be laid alongside the policy and a determination made as to whether, if the allegations are sustained, the insurer will be required to pay the resulting judgment, and in reaching a conclusion, doubts should be resolved in favor of the insured.” (Emphasis mine.)

In RLI, the definition of “additional insured” in the policy included “any person or organization that you agree in a contract or agreement requiring insurance to include as an additional insured on this policy but only with respect to liability for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ caused in whole or in part by you or those acting on your behalf…” (Emphasis mine.)

Amazingly but perhaps not surprisingly, the Court found that, because the Fiume case settled and there had been no finding that Techno Consult had actually caused Fiume’s bodily injury, there was no coverage for the Port Authority. This portion of the decision turns the duty to defend on its head. Remember, if there is any possibility of coverage, the duty to defend exists. Here, there was a possibility that bodily injury had been caused by someone acting on the Port Authority’s behalf.

The RLI policy contained a “professional services” exclusion. The Court also held that, because Fiume’s injuries were allegedly caused by a company that had been retained to perform “professional services,” there was no duty to defend.  This portion of the decision is disturbing because the Court does not discuss its own ruling in S.t. Hudson Engineers, Inc. v. Pennsylvania National Mutual Casualty Co., 388 N.J. Super. 592, 607-08 (App. Div. 2006). In that case, which involved an engineering company’s failure to discover and warn about defects in a pier, the Court held:

“Allegations respecting a professional’s failure to provide adequate engineering, supervisory, inspection, or architectural services or to discover or remedy a condition for which the professional services were engaged would necessarily fall within the exclusion as dependent on the professional services provided. However, allegations encompassing the violation of a duty to provide information about a known danger resulting from either a negligent omission or commission, whether based upon the relationship of the parties or legal principle, are not dependent on the rendering of professional services. Instead, such allegations arise from the information actually possessed and not provided by a party obligated to disclose such information. Thus, for example, Robert Hudson’s alleged failure to advise the owners of the pier and nightclub that the pier was in imminent risk of collapsing, after obtaining that information from Tyson, would not be excluded simply because he had previously done engineering work. So too, any negligent misrepresentation regarding the condition of the pier would relate to the appropriate disclosure of known information, rather than the failure to provide professional services.”

The relevant question in the Port Authority case should have been: Is there any possibility that the Port Authority or Techo Consult could be held liable for failing to provide information about a known danger, irrespective of the purpose of Techno Consult’s engagement? Of course there was, and that means the Port Authority should have gotten a defense.

What are the takeaways from this? First, if you’re a plaintiff’s lawyer, you need to be very careful about how you phrase your complaints. Insurance is a word game, and as they used to say in Dragnet, anything you say can and will be used against you in a court of law. Say the wrong thing, and you may lose access to insurance coverage for your client’s injury. Second, if you’re a policyholder, you likewise must be very careful what you say when you notify your carrier of a claim. Optimally, the policy should be carefully reviewed by a coverage attorney and the notice of claim should be phrased in a way that brings the underlying lawsuit within coverage, or at least doesn’t blow coverage up. (No, that’s not a plug for business. It’s just a fact.) And third, this ruling is obviously very scary for policyholders. The Port Authority can afford not to have a defense for a personal injury suit. A mom-and-pop store cannot. Sadly, it seems as though you can’t count on insurance, which makes risk control and (legitimate) asset protection measures even more important.

If you were born and raised in New Jersey like me, you’ve heard your share of New Jersey jokes from interlopers who think the entire state looks like the Turnpike near Newark Airport. (“What exit?” How wonderfully clever.) My response to these jokes is two-fold. First, trust me on this, we don’t like you, either. Second, we have Springsteen, Sinatra, the Sopranos, the Jersey Shore, three Stanley Cups, and two New York football teams.

So, the more important issue is: Why does Delaware even exist?

I know, I know, the current President comes from Delaware. And so did George Thorogood. And Valerie Bertinelli. But really, other than that, all they have down there is a big bridge, one beach, and an army of corporate lawyers, right?

I’m kidding, of course. One other thing Delaware has is a Supreme Court with a keen understanding of insurance law. And since other states look to Delaware Courts for guidance with respect to business issues, that’s very important to those of us who represent policyholders in coverage litigation.

In the current environment, when business dealings go sour, it’s common for one side to accuse the other of fraud.  Fraud litigation can be exorbitantly expensive, and it’s not an exaggeration to say that the availability of insurance could mean the difference between bankruptcy and survival. Recently, the Delaware Supreme Court dealt with the question of whether claims alleging fraud are insurable. Insurance companies often say they’re not, and that’s what they argued before the Delaware Court. They lost.

The case, RSUI v. Murdock (which you can read here), dealt with whether a Directors’ & Officers’ excess liability policy covered shareholder litigation alleging illegal stock price manipulation by two officers of the Dole Corporation. RSUI provided insurance in the 8th layer of the coverage tower, with $10 million in insurance over $75 million in underlying limits.  There were two shareholder lawsuits. The plaintiffs won $148 million in a bench trial in one of them. RSUI disclaimed coverage for defense costs and the verdict, on the ground that insuring fraud was against public policy.

Insurance companies love to argue that business policyholders shouldn’t get the benefit of the rules of insurance policy construction, which generally favor coverage, because of their “sophistication.” (If you’ve been involved in coverage litigation long enough, this concept is funny. No matter how “sophisticated” you are, you still may need flowcharts, a dictionary, and a healthy dose of luck to figure out what most policies cover.)

Here, the Delaware Supreme Court turned the tables, and essentially found that the insurance company was “sophisticated” and shouldn’t be allowed to escape paid-for coverage based on some kind of implied morals clause. (“Your Honor, we’d love to cover this claim, but we all have to think of the greater good…”)

Specifically, the Court wrote:

The question here then is: does our State have a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom of contract? We hold that it does not. To the contrary, when the Delaware General Assembly enacted Section 145 authorizing corporations to afford their directors and officers broad indemnification and advancement rights and to purchase D&O insurance “against any liability” asserted against their directors and officers “whether or not the corporation would have the power to indemnify such person against such liability under this section,” it expressed the opposite of the policy RSUI asks us to adopt.

There are a couple of interesting lessons from this case. First, the policies under the RSUI layer paid out an astonishing $75 million in defending the securities fraud claims. While this case is an extreme example, litigation is breathtakingly expensive. Always avoid it if you can, by paying careful attention to risk management protocols. Second, don’t take the boilerplate language in insurance company denial letters as the last word. If the policyholders here had given up after RSUI’s claim denial, they would have been left with crushing liabilities. So: Get yourself a good lawyer who understands insurance law.

Here, that good lawyer was Kirk Pasich of Pasich LLP, who has been doing battle with carriers for decades. Props to Kirk on a fantastic result.

I’ve been representing policyholders in insurance coverage litigation for 35 years, and I’m convinced that I’ll never understand the logic of insurance company claim departments. They settle cases that I think they might want to fight, and they fight cases tooth-and-nail that I think they really should settle. (Maybe it’s me.)

The carrier’s claim file often doesn’t contain the type of rational, detailed analysis I would expect. (I’ve reviewed many in discovery.) Not long ago, I reviewed a claim file in which the carrier’s Vice-President and General Counsel informed the claim department (staffed solely by lawyers who were the GC’s subordinates) that he felt coverage was “doubtful” for an advertising injury claim. He hadn’t even reviewed the policies. Taking the cue from his strong suggestion, the claims lawyers composed a denial letter that included a thicket of insurance policy language not remotely relevant to the facts. And, once the coverage case got to Court, it didn’t end well for the carrier, which ended up having to pay the claim and my firm’s fees.

Here’s a tip for anyone involved in litigation: An excellent, basic way to analyze any liability claim can be found in the seminal New Jersey “bad faith failure to settle” case of Rova Farms Resort, Inc. v. Investors Insurance Co. of America, 65 N.J. 474 (1974). In Rova, the Court wrote: “While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.” Id. at 489.  I rarely see this kind of thoughtful review in the carrier’s records.

Along these lines, as I write this, the Fifth Circuit has just issued an opinion about what happens when carriers fail to make decisions based on a fair and thorough analysis. The case is Am. Guarantee & Liab. Ins. Co. v. ACE Am. Ins. Co., No. 19-20779 (5th Cir. Dec. 21, 2020), which you can read here.

This was a rough case. A 43-year-old Houston firefighter, Mark Braswell, was killed when his bike crashed into a landscaping company’s trailer that was stopped on a four-lane highway. He left behind a widow and two children. No witnesses saw the collision, but some trial testimony suggested that the landscaping truck had stopped abruptly. And, instead of turning onto a less heavily-trafficked side street, the crew decided to unload equipment in the middle of the road. (Terrible idea.) During the week-long trial, a supervisor for the landscaping company admitted that stopping in traffic was dangerous. Compounding the problem, the workers failed to put out cones, flags, or lookouts to redirect traffic.

The landscaping company (Brickman) was insured by ACE (with a primary limit of $2 million), with excess coverage by AGLIC ($10 million excess of $2 million). ACE controlled Brickman’s settlement negotiations.

Before trial, ACE’s appointed defense counsel estimated the settlement value of the case to be $1.25 to $2 million. The excess carrier valued the claim at $500,000. To prepare for trial, ACE conducted juror research from which the ACE claim handlers drew two conclusions.  First, it was important to prove at trial that the truck did not stop short. Second, it was important to prove that the truck was legally parked. (In the middle of a busy highway. Brilliant.)  ACE also fixated on the fact that Braswell’s helmet had cracked down the middle, which the claims handlers believed would prove that Braswell had his head down and was not looking where he was going. No one on the defense side thought a verdict over $2 million was likely.

The Braswells’ lawyer demanded $2 million. ACE countered at $500,000. The Braswells rejected the offer, and the case went to trial. Things quickly went sideways for Brickman. The judge excluded evidence that Brickman’s truck was legally parked; allowed Braswell’s widow, Michelle, to testify that a Brickman employee had said that the truck stopped short; and allowed Michelle to testify about her daughter Mary’s psychological trauma, self-harm, suicide attempts, and hospitalization, all caused by her father’s death. After the plaintiffs’ closing statement, AGLIC’s case manager communicated that a verdict in excess of $2 million was possible “[g]iven the adverse evidentiary . . . rulings.” (Ya think?)

At this point, in my opinion, ACE needed to forget about all its great trial strategy and awesome appeal points, get out the checkbook, and pay the $2 million. Things were not going to end well. But, in an amazing display of tone-deafness, ACE instead decided to play General Custer. First, the Braswells’ lawyer offered a high/low of “$1.9MM to $2.0MM with costs.” (This meant that the Braswells would be guaranteed $1.9 million regardless of the verdict, but would recover $2 million plus costs if the jury rendered a plaintiff’s verdict.)   ACE said no. Then the Braswells’ lawyer demanded the policy limit of $2 million. ACE again said no, because, as everyone knows, jurors tend to side with giant insurance monoliths over widows and fatherless children. (I know, I know, the insurance company wasn’t the defendant. But come on, jurors aren’t stupid.)

The jury came back with a verdict of nearly $40 million. After deducting 32% for Mark’s comparative negligence, the total award to the Braswells was $28 million, which, of course, far exceeded ACE’s primary limit.  The Braswells eventually agreed to settle for $10 million to avoid a drawn-out appeal. ACE paid its $2 million limit, and AGLIC, the excess carrier, contributed $8 million.

This made the excess carrier unhappy. AGLIC contended that, because ACE decided to roll the dice at trial it should be responsible for the excess verdict. (I love it when these guys fight.) The Court agreed, writing:

“The evidence is clearly sufficient to support the bench trial verdict [in the coverage case between ACE and AGLIC] that ‘[a] reasonable insurer would have reevaluated the settlement value of the case [and accepted the Braswells’ third offer].’ After all, by the time that offer was made, the trial had taken a demonstrable turn against Brickman. Two of the adverse rulings (disallowing evidence that the truck was legally parked and allowing the stop-short statement attributed to a Brickman employee) aggravated Brickman’s greatest known weaknesses in this case. Considering all of the trial circumstances, an ‘ordinarily prudent insurer’ in ACE’s position would have realized that the ‘likelihood and degree’ of Brickman’s ‘potential exposure to an excess judgment’ had materially worsened since the trial’s inception. When presented with the Braswells’ third offer, an ordinary, prudent insurer would have accepted it. The evidence placed before the district court is sufficient to support that ACE violated its [duty of good faith] by failing to reevaluate the settlement value of the case and accept the Braswells’ reasonable offer.”

We can draw a lot of lessons from this decision, but perhaps the main one is: Never fall in love with your own story. Hubris kills.

I hesitated to write this blog post, which is intended to be nonpolitical. We’re currently in the middle of an exceedingly nasty election season, and any topic that even remotely touches on politics is likely to lead to online mayhem. But I was intrigued by the confirmation hearings I watched yesterday for President Trump’s Supreme Court nominee, Amy Coney Barrett, especially given an insurance decision that she once wrote. She often says that when she criticizes a judicial decision, she isn’t personally criticizing the judge who wrote it. I am posting this brief article in the same spirit.

Whatever your political views, it’s fair to say that Judge Barrett is a very smart person. She is a law professor, and also (as I write this) a sitting judge on the Seventh Circuit. But the one time she dealt with insurance issues,  I feel that her logic was exceedingly wrongheaded. I guess she eventually agreed, since she withdrew the decision. The mistaken decision again shows us why insurance companies prefer litigating before conservative judges in federal courts, rather than in the state court system. Conservative judges tend to favor insurance companies. That’s not intended to be a political statement; it’s just an observation based on many years of experience. (And I respectfully decline to disclose any of my personal political views!)

The case, Emmis Communications v. Illinois National, dealt with the question of Directors’ and Officers’ liability coverage for litigation resulting from a complicated plan to take a company private. In 2010, seven separate shareholder lawsuits were filed against the policyholder, Emmis, after the go-private plan was abandoned. Emmis reported the lawsuits to its carrier, Chubb, which accepted coverage under a reservation of rights. The lawsuits were voluntarily dismissed, and no class was ever certified. Later, in 2011, a major shareholder filed a derivative action against Emmis’s Board of Directors, relating to an aspect of the collapsed deal. Chubb eventually accepted coverage for that suit as well.

Then, in 2012, five preferred shareholders brought suit against Emmis under federal securities laws, alleging some facts that were similar to those relied upon by plaintiffs in the prior cases. Chubb denied coverage on the ground that the 2012 securities case wasn’t related to the earlier cases, which contained different claims, so Chubb had no obligation to defend.

So, if the cases weren’t related, and the 2012 case was an entirely new and different matter, Illinois National (the carrier in 2012) was obligated to provide a defense, right? Right?

The beauty of insurance policies, from the carrier’s perspective, is that they’re like exploring a wonderful forest! So many arcane exclusions and limitations hiding in all the nooks and crannies!

Here, the Illinois National policy excluded claims “as reported under [the Chubb policy].” Too bad, so sad, said Illinois National. You reported the claim under the Chubb policy, so you’re out of luck. (Never mind that Chubb denied coverage. That’s a mere technicality.)

Emmis sued Illinois National to enforce coverage. In the District Court, Emmis argued that the language of the exclusion was ambiguous, and that it only applied to claims that already had been reported to Chubb at the time the Illinois National policy went into effect. The District Court took mercy on Emmis, writing as follows.

The Court disagrees with INIC that the relevant language is unambiguous. The term “as reported under [the Chubb Policy]” could be read to refer to any claim that is reported under the Chubb Policy at any time, as urged by INIC, but it also reasonably could be read to refer to any claims that had been reported under the Chubb Policy at the time the INIC Policy went into effect, October 1, 2011, as urged by Emmis.

Emmis Commc’ns Corp. v. Ill. Nat’l Ins. Co., 323 F. Supp. 3d 1012, 1023 (S.D. Ind. 2018).

Enter the Seventh Circuit, and Judge Barrett, who reversed the District Court, and, ignoring the rules of construction and the purpose of insurance (which is “to insure”), wrote:

On appeal, the parties briefed many legal issues arising from the Byzantine exclusion language. But we can resolve this case on a single issue: the meaning of “as reported.” We disagree with the district court’s opinion; Illinois National’s proposed interpretation is correct. The phrase has no discernable temporal limitations. Once Emmis or one of its agents reports a claim to Chubb, at any time, then that claim is “reported”—and so is excluded. The timing of the report is irrelevant. Emmis acknowledged in its brief that it did in fact report its claim to Chubb. That resolves our inquiry. The exclusion applies, so summary judgment should have been entered in favor of Illinois National.

Emmis Commc’ns Corp. v. Ill. Nat’l Ins. Co., No. 18-3392, at *3 (7th Cir. July 2, 2019).

One reason I find this decision interesting (apart from the general concept that a “Byzantine exclusion” is unambiguous) is that, when I listened to Judge Barrett testify, she talked about using secondary materials to discern the true intent of the framers of the Constitution. I’m not sure why interpreting a “Byzantine exclusion” should be any different. There is no reasonable way that a policyholder would buy a policy that allows for a disclaimer of coverage, leaving the policyholder to its own devices, simply because more than one carrier had been notified of the loss. If you’ve been involved in insurance coverage for a while, you know that the “as reported” language is designed to prevent coverage for “known losses” – namely, the “fortuity” argument that insurance companies often trot out. (The validity of the so-called “known loss” doctrine is a topic for another post.) The language is not designed to cause a forfeiture of coverage for a claim that’s different from a claim that was reported under a prior policy.

Emmis moved for reconsideration and, to their credit, Judge Barrett and the panel quietly reversed their prior decision and affirmed the grant of coverage, for the reasons stated in the District Court decision. The language was ambiguous, and had to be construed in the policyholder’s favor. Emmis Comm. Corp. v. Ill. Nat’l Ins. Co., 937 F.3d 836 (7th Cir. 2019).

Here are a few takeaways from this case.  First,  Emmis did the correct thing here. Do not notify carriers selectively. Notify every carrier that potentially could provide coverage. Force them to take a position. Second, if you have to litigate, be prepared to deal with judges who don’t fully understand insurance law. I’ve been practicing coverage law for 35 years, and I learn something new every day. Yet we expect judges to master every area of law, from Admiralty to Zoning, which is simply unrealistic. And finally, don’t give up too easily. As Emmis happily learned, if you refuse to take “no” for an answer, sometimes good things can happen.