We have a coverage case in the office that’s 15 years old, with no end in sight. The amazing thing is, it’s not even a particularly complicated case. I don’t want to go into too much detail or give the names of the parties, because the matter is still pending. But even if we eventually get the carriers to pay the claim, they’ve won, because they’ve already invested the premium dollars and the potential claim payment, and turned a tidy profit. (By the way, they lost a coverage trial on liability 10 years ago, and since then have been using the concept of appropriate allocation-of-loss to delay the day of reckoning. They’re truly masters at throwing molasses into the machinery.) It’s quite shameful, and very frustrating that so few judges are willing to call carriers out on it.
The situation calls to mind the words of Rutgers Professor Jay M. Feinman in his wonderful and insightful book, “Delay Deny Defend” (Delden Press 2010). Professor Feinman writes:
“The time lag between taking in premiums and paying out claims (the ‘float’) and the income earned in that time is a major source of profit; in 2007, industry investment profits totaled $58 billion. As Warren Buffett, whose Berkshire Hathaway owns GEICO and other insurance companies has said, float is the great thing about the insurance business, because ‘it is money that is not ours but which we get to invest.’”
This is the game that carriers often play on many complex commercial insurance claims in New Jersey. First, take a “no pay” position and dare the policyholder to sue. Many won’t. Then, if the policyholder sues and establishes liability, the carrier argues that it’s only responsible for a small allocated share. Meanwhile, the carrier pays its lawyers cut rates to defend the coverage claim, while investing the money it otherwise would’ve had to pay out on the policyholder’s behalf. What a deal.
This was never the way allocation was supposed to work, of course. As the late Justice O’Hern wrote in the seminal New Jersey allocation case of Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 479 (1994): “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. For failure to provide coverage, a policyholder may recover costs incurred under the provisions of Rule 4:42-9(a)(6).”
Under Owens, if a carrier denies the claim outright and doesn’t initiate the required allocation proceedings, the logical conclusion is that the carrier should be held liable for the full amount of the loss. Unfortunately, many judges are uncomfortable with that concept, so the delay, deny, defend game continues.
Another case in our office offers an interesting twist on the subject of allocation and delay. (I’m again omitting the names, because the case is still pending.) The case involved the sometimes-tricky area of advertising liability coverage. Basically, the relevant policy provided coverage for copyright infringement committed in the course of advertising activity. Our client got sued by a competitor for allegedly providing access to an infringing computer program, including on our client’s website, in an effort to attract customers. The legal fees spent defending the suit were significant. The case eventually settled, with no liability to our client. Two carriers potentially carried coverage for our client. Carrier One, apparently figuring it had better things to do with its time, paid roughly half the defense costs in exchange for a release. But Carrier Two refused to budge off its “no pay” position, so we had to sue. There were several policy interpretation issues involved, but the essential point was that Carrier Two sold a policy covering copyright infringement, and then denied the claim on the ground that copyright infringement shouldn’t be covered because it was an intentional wrong.
The Trial Court, in granting summary judgment in our client’s favor and awarding us our legal fees in the coverage case, wrote in part: “[T]he…Policy defines ‘advertising injury’ in four ways; relevant to this matter is the first definition: (1) Infringement of copyright. According to [the competitor’s] complaint…, [the policyholder] allegedly infringed on [the competitor’s] copyrights directly and contributorily. And so, by promoting its own product, [the policyholder] was engaged in advertising when it allegedly caused an advertising injury — as defined by the…Policy — to [the competitor].”
In other words, if you sell a policy covering copyright infringement in advertising activity, you may have to cover a lawsuit alleging copyright infringement in advertising activity. What a unique concept.
With respect to allocation, the Court wrote, quite simply: “ The New Jersey Supreme Court has consistently held that ‘if a complaint includes multiple or alternative causes of action, the duty to defend will attach as long as any of them would be a covered claim and it continues until all of the covered claims have been resolved.’ Here, two out of the four claims that [competitor] alleged against [policyholder] in the 2012 Action — the two copyright claims — are covered by the…Policy. Thus, to allow [carrier] to avoid its duty to defend [policyholder] would contravene New Jersey Supreme Court precedent and public policy.”
The decision has been affirmed on appeal, but the insurance company has now successfully moved for reconsideration of the appellate decision, on the ground that the rules provide for oral argument, and the Appellate Division issued its affirmance without giving counsel his time to shine. Delay, deny, defend.
The key to defeating the delay, deny, defend (“DDD”) stratagem is to impose costs on the carrier beyond the amount of the insurance claim. That can throw the whole insurance company equation out of whack. Sadly, bad faith law has largely been gutted in New Jersey, with Courts holding that unless the policyholder can succeed on summary judgment against the insurance company with respect to the coverage claim, bad faith doesn’t exist. Since defeating summary judgment only requires a single issue of fact, the bad faith standard is difficult to meet.
There are, however, other ways to threaten the insurance company with extracontractual damages and combat DDD. One is R. 4:42-9(a)(6), which allows policyholders to recover their attorneys’ fees against the insurance company if they have to sue to enforce coverage on a third-party liability claim. Of course, the insurance industry has managed to convince one Appellate Division panel that the rule should not apply to allocation proceedings, despite the express language of Owens-Illinois to the contrary, and despite the fact that “allocation” is currently a primary weapon in the carriers’ DDD arsenal. (Litigating against the insurance industry is a lot like playing Whack-A-Mole.)
Another tool for policyholders in state court (but not federal) is the Offer of Judgment rule, R. 4:58. Basically, the policyholder files a settlement demand with the Court at least 20 days before the trial date in the coverage case. The insurance company can accept the demand up to 10 days before the trial date, or 90 days after service of the demand, whichever is sooner. If the policyholder recovers at least 120% of the offer (not including allowable legal fees or interest), then, in addition to the money judgment, the policyholder is entitled to legal fees incurred, plus 8% interest from the date of the offer or the date of completion of discovery, whichever is sooner.
The last tip I’ll offer on this post is, when the insurance company agrees to accept a “share” of the loss, immediately demand to see a proposed allocation in writing. If the insurance company fails to comply, or uses suspect methodology that does not accord with the facts of the case, it may eventually support the elusive bad faith ruling. Keep in mind that, with respect to commercial property and liability policies for which the annual premium is $10,000 or less, insurance companies are required to respond to pertinent claim communications within 10 business days. N.J.A.C. §11:2-17.6.