Sadly, it’s a scenario I’ve seen far too many times in the past 30 years of doing insurance coverage work. A trusted employee in the bookkeeping or accounting department isn’t properly supervised or audited, and begins siphoning off cash to support gambling debts, a drug habit, or expensive tastes.  Sometimes, the employee starts taking cash simply because he or she feels underappreciated.  Sometimes, corporate credit cards are the tool of choice. By the time the fraud gets discovered, the amount of loss can be staggering.  And people end up going to jail.  It’s why, when my wife worked for a major financial institution on Wall Street years ago, she was required to take two consecutive weeks of vacation every year, so auditors could go through all of her books and records with a fine-toothed comb.  Trust but verify, as President Reagan said.

The recent case of Wescott Electric Company v. Cincinnati Insurance Co. (which you can read here, and can read about in this newspaper report) involved the typical scenario.  A former City Councilman in Collingdale, Pennsylvania, who aspired to become a judge, was convicted of stealing nearly $3 million from his employer over the course of 10 years, to finance a long-time gambling habit and a lifestyle that extended beyond his means.   During the last year of the scheme, he stole $700,000 of copper wire and sold it for scrap.

The thief (James Bryan) stole so much from his employer (Wescott Electric Company) that he put the future of the company in doubt. Faced with the staggering loss, Wescott turned to its insurance company, Cincinnati, for some relief and protection.

But, as you can probably guess if you’re a frequent reader of this blog, relief and protection was not forthcoming. There were four 3-year policies that provided employee theft coverage to Wescott. Cincinnati sold the policies in 2004, 2007, 2010 and 2013. All four of the policies were discovery-based policies, meaning that coverage depended on when the Wescott discovered a given loss. To compound the problem, in the third policy, Cincinnati changed the operative language. The 2004 and 2007 policies provided coverage for any loss discovered up to a year after the policy period, but the 2010 and 2013 policies required a loss to be discovered during the policy period. While Bryan had been stealing money from the company from 2003 to 2013, his thievery was not discovered until July 2013, after the end of the 2010 policy.  As a result, Wescott was only able to trigger one per occurrence limit, for $100,000.

Wescott tried various arguments to increase its recovery, including that Cincinnati had changed the language in the policy in 2010 without warning Wescott, but to no avail.  In the end, the judge – who had been a partner with a large law firm that represented insurance companies before becoming a judge – essentially ruled that Wescott should’ve read the 2010 and 2013 policies more carefully and understood how the “discovery” provisions worked.  (By the way, I don’t mean to suggest that the judge did anything improper.  But judges are people too, and their worldview is formed by their life experience.)

One interesting issue in the case involved the number of occurrences during the 2013 policy period (and therefore, the number of $100,000 “per occurrence” limits that could be triggered). The policy defined “occurrence” as “(1) an individual act, or (2) the combined total of all separate acts whether or not related; or (3) a series of acts whether or not related, committed by an employee acting alone or in collusion with other persons.”  In considering this language, remember that Bryan did not steal one giant heap of copper wire.  He committed a series of smaller thefts. (It calls to mind the old song by the great Johnny Cash, “One Piece at a Time.”)

In restricting Wescott’s recovery to only $100,000, the Court wrote: “This definition is unambiguous: Mr. Bryan’s ‘series of acts’ in stealing the copper wire qualify as a single ‘occurrence’ because they were ‘committed’ by a single employee – Mr. Bryan – both before and during the policy period.”  And, as the Court noted, Wescott appears to have conceded the point: “Even Wescott agrees that this definition ‘limits the amount of courage for all thefts during the 2013 policy to $100,000.’”

I believe that this conclusion is questionable (but 20/20 hindsight is a wonderful thing and, unfortunately, I’m not wearing a black robe). It’s at least arguable that the “series of acts” contemplated by the policy language must lead to a single theft. Here, if there were separate and distinct results (that is, separate thefts of wire), then separate per occurrence limits should apply. Suppose, for example, the employee had stolen a truck in addition to stealing copper wire. Wouldn’t the policyholder reasonably expect these to be considered separate thefts, and therefore separate occurrences? Why should the result be any different if there’s more than one theft of wire? Otherwise, the limits should apply “per employee,” not “per occurrence.”

But you can see the numerous problems. If you’re making these policy interpretation arguments to a Court, you’ve already given up control of the situation to a trier of fact who may have a background working with insurance companies.  And the judicial idea that policyholders should read hundred-page policies and comprehend every word and how those words may be applied in a variety of circumstances is an unfortunate fiction. As one (enlightened) Kentucky Court wrote years ago: “Ambiguity and incomprehensibility seem to be the favorite tools of the insurance trade in drafting policies.  Most are a virtually impenetrable thicket of incomprehensible verbosity.  It seems that insurers generally are attempting to convince the customer when selling the policy that everything is covered and convince the court when a claim is made that nothing is covered.  The miracle of it all is that the English language can be subjected to such abuse and still remain an instrument of communication.”   Universal Underwriters Ins. Co. v. Travelers Ins. Co., 451 S.W.2d 616, 622-23 (Ky. Ct. App. 1970).

The bottom line is that you can’t always rely on your insurance to protect you when things go sideways.  While insurance is a critical part of any risk management program, attention to proper controls is far more important.  Without going into great detail about preventing theft by employees, here are just a few suggestions or reminders:

  1. Be alert to changes in employee behavior. If your bookkeeper, office manager, or any employee with private access to the company’s books, products or property suddenly acquires new habits, such as coming to the office on weekends, working through vacation time or working longer hours, it’s important to take notice. Any of these red flags may be reason enough to keep a closer watch on the books and the employee.
  1. Enforce the clear separation of duties. The principle of separation (or segregation) of duties is the cornerstone of a solid internal control system. In fraud prevention, separation of duties involves dividing critical duties among two or more employees or departments. Ensure that you distribute financial duties and responsibilities among your employees. The roles must be well defined and divided; an employee who makes the bank deposits should not collect checks and cash from the clients and vice-versa. And, the person reconciling the bank statements should never be the person writing the checks.
  1. Be diligent about internal controls. One of the best ways to prevent embezzlement is to limit a bookkeeper’s access to signature stamps, blank checks and cash. Requiring a countersignature on all checks is another precaution to prevent fraudulent behavior. Conduct occasional surprise audits to detect theft earlier, or prevent it from occurring in the first place. Your accounting program (such as QuickBooks) may also contain obstacles to fraud.  Never default everyone to full administrator rights, share logins and passwords, or give account access to employees who really have no need for it.

Math has never been my strong suit. My wife, who has an M.B.A., sometimes shakes her head at my unsuccessful attempts to balance our checkbook. And I still remember sitting in my 10th Grade Algebra class with Ms. Babiak at Watchung Hills Regional High School back in the ‘70s and wishing that I could somehow transport myself to the Black Hole of Calcutta. (Sorry, Ms. Babiak, if you’re out there.)

But at least that kind of math has an objective answer that I can usually understand if I apply myself hard enough. Accounting projections that veer into gray areas, on the other hand, can be frustrating.  And I’m sure many jurors and judges feel the same way.  (In fact, I know they do, from monitoring mock jury trials.)

Business interruption claims involve projections of lost revenue, and can sometimes get a bit squirrelly.  The basic concept seems simple enough. A fire or other disaster damages your business premises, making them temporarily unusable. So, business interruption coverage reimburses you for the lost income. Your policy may also cover operating expenses, like electricity, that continue even though business activities are temporarily shut down.  And “extra expense” insurance reimburses your company for the reasonable sum of money that it spends, over and above normal operating expenses, while your property is being restored. Usually, the carrier will pay extra expenses if they help to decrease business interruption costs.

(By the way, in reviewing your coverage. make sure the policy limits are sufficient to cover your company for more than a few days. After a major disaster, it can take more time than many people anticipate to get the business back on track. And note that there’s generally a 48-hour waiting period before business interruption coverage kicks in.)

Easy peasy, right? The problem is that reasonable minds can disagree on the proper calculation of the numbers, which often involves assumptions. I’ve written several times over the years on some of the issues that can arise. (Just type “business interruption” in the search bar of this blog to find the posts.)

Here’s an interesting curveball. What if you have a business in which income can fluctuate fairly wildly from year to year?  How do you calculate projected future earnings? What if, for example, you have a law firm that operates largely on a contingency-fee model, like a plaintiffs’ personal injury firm, as opposed to on an hourly billing rate model? Since your firm doesn’t get paid unless it wins or settles, and that can be difficult to predict, how do you calculate future earnings?

In a recent New York case, a law firm, Bernstein Liebhard LLP, suffered a fire that destroyed the floor of its office that housed its mass tort law practice, including files, firm-wide computer servers, and telephone switches, knocking the practice out of business for a lengthy period. Bernstein submitted an insurance claim for $27 million, which the firm said represented lost income from several hundred mass tort clients who failed to retain the firm during the 12-month period after the fire.

The carrier, Sentinel, denied the claim, contending that the policy’s definition of “Business Income” precluded coverage. The policy defined “Business Income” as “Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no direct physical loss or physical damage had been incurred.”  Sentinel argued that the claim was too speculative, because it was impossible to determine when Bernstein would’ve “earned” fees from clients that hadn’t even retained the firm.  (The policy covered income that would’ve been “earned” in the 12 months after the fire.)

A cynic (not me, of course) might say that Sentinel was actually relying on the “too many zeroes” exclusion (in other words, too many zeroes on the end of the claim).

The Court disagreed with Sentinel, writing: “Recovery is not precluded where there is a certain loss within the applicable period, even if the loss cannot be quantified until sometime thereafter. Here, an economist or other expert could identify the relevant existing mass tort cases during the 12-month period [that the policy covered] and opine as to the present value of those cases, even though the amount of loss may not have been determinable until years after the fire.… To deny Bernstein coverage would be to punish it for its business model; that is, a mass tort business that is paid on a contingent-fee basis, as opposed to a traditional hourly basis.”

You can read the full decision here.

(Pro tip, by the way:  If you’re in the business of selling insurance policies, you probably shouldn’t argue that figuring out when they apply is impossible.  Not a good look.)

The bottom line is that large business interruption claims, like many other large insurance claims, often result in a fight.  The reason why isn’t a mystery. Warren Buffett has been pretty straightforward about how the insurance industry uses the concept of “float” to its advantage.  (You can read an article about that here.)  So, faced with a large business interruption loss, you’re going probably going to need a solid expert to calculate damages…and a lot of patience.

Few things are certain in life. Death. Taxes. The ineptitude of New York Mets management. And also, the fact that if you sue an insurance company in state court, and the carrier has a basis upon which to remove the case to federal court, they’re going to do it. Insurance companies think that federal judges tend to be more defense-oriented and carrier-friendly. Also, they think they’re more likely to get summary judgment on the coverage issues in federal court, since summary judgment has become the preferred method of adjudicating disputes by the federal bench (often without oral argument).

Of course, rules are meant to be broken, and being in federal court is no guarantee for an insurance company.

Example; A lawyer here in New Jersey with some past disciplinary issues, Karim Arzadi, recently got sued by Allstate. Allstate also sued Arzadi’s law firm.  According to Allstate, Arzadi had “engaged in a continuing fraudulent scheme” that was designed to defraud Allstate “by inducing the payment of PIP [personal injury protection] healthcare benefits . . . pursuant to an unlawful practice. . . .”

Arzadi filed a claim for defense and indemnification with his professional liability insurance carrier, Evanston Insurance Company.  Evanston said, no, we’ll pass on that, arguing that policyholders who commit fraud forfeit their coverage.  According to Allstate, fraudulent conduct did “not fall under the [p]olicy’s definition of Professional Legal Services.”

So, Arzadi sued Allstate to enforce coverage, and the case wound up in federal court.

A word or two of background here:  Liability policies generally contain “conduct” exclusions that remove coverage for harm caused by acts that are fraudulent, criminal, or are intended to cause damage.  But those exclusions don’t preclude a defense for allegations of fraud, if there’s any possibility of ultimate coverage.  So, fraud exclusions typically won’t apply until there’s been a final adjudication, on the merits, that the policyholder actually committed fraud. (There also may be “severability” provisions that protect innocent policyholders from losing their coverage rights due to the actions of their guilty co-defendants.)

In the Arzadi decision (which you can read here), Judge Susan Wigenton rejected Evanston’s arguments. As to the “professional services” argument, the Court wrote: “The Allstate suit contains allegations that Arzadi advised clients how to proceed with their personal injury claims, which falls squarely within the policy’s definition of Professional Legal Services…The acts complained of – advising his clients that they ‘had valid bodily injury claims,’ ‘encouraging them to continue to undergo [unnecessary] treatment’ or making referrals for treatment – are acts that allegedly occurred in the context of Arzadi’s representation of his clients.”

With respect to the fraud contention, the Court wrote: “Defendant argues that under Exclusion F (the Fraudulent Acts Exclusion), Plaintiffs are barred from coverage because the Allstate suit alleges that Plaintiffs ‘committed intentional, willful, dishonest and fraudulent acts.’ While it is true that the Allstate suit contains fraud allegations, Exclusion F only bars coverage for fraudulent acts if a final judgment or adjudication is entered against Plaintiffs. The Allstate suit is in the preliminary stages of litigation and the underlying allegations have not been substantiated by any court. Therefore, this court finds that Exclusion F does not bar Plaintiffs from coverage.”  (Emphasis mine.)

The fraud coverage issue also recently came up in a federal case in California, Hanover v. Zagaris, involving an alleged kickback scheme, in which a brokerage firm recommended that its customers use a specific vendor to draft their natural hazard disclosure reports, without disclosing that the brokerage took a cut of the fee for preparing the documents. The policy in that case contained two potentially relevant exclusions. The first barred coverage for litigation over an act of fraudulent conduct, but that provision could only be invoked if the policyholder lost the underlying case. The other exclusion, dealing with a fraudulent “pattern of conduct,” was broader. The trial court agreed with the broker, though, finding that fiduciary duty and constructive fraud claims in the underlying case did not require an element of deception, only negligence or omission, and therefore, a possibility of coverage existed, requiring Hanover to defend. The judge also noted his frustration with the policy’s “undue complexity and convolution.”  You can read the trial court’s decision in Hanover here.

Hanover appealed to the Ninth Circuit, and as I write this, oral argument has just been held. One of the judges on the panel asked: “How do you jive the two different exclusions? Why doesn’t that not just, looking at this contract in general, create a level of confusion about what it really means, which warrants a suggestion that the contract has to be viewed in a light most favorable to the insured?”

An excellent question.

The fine people who wrote the Federal Rules of Civil Procedure (and their state equivalents) certainly had a sense of humor. FRCP 1, for example, says: “These rules govern the procedure in all civil actions and proceedings in the United States district courts…They 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.” (Emphasis mine.)

If you’ve had the pleasure of experiencing our court system, “just,” “speedy” and “inexpensive” may not be the first three adjectives that pop into your mind.  And after reading about the recent decision by the Second Circuit in Cammeby’s v. Alliant Insurance Services, which you can access here, they really may not be.

As one of the lawyers at our firm, Ryan Milun, put it, suppose you’re driving down the New Jersey Turnpike with your six-year-old in the backseat, and he (or she) says: “Dad (or Mom), can we go to Six Flags?”  (I’m going to refer to this as the “Six Flags Question.”)

How would you interpret the Six Flags Question? Would you think your kid was asking a philosophical question, like: “Assume for the purposes of argument that I were to ask you to go to Six Flags. Would that be physically possible for us to do, as human beings, with free will, in this place and time?”

Or, would you think your kid was actually asking: “Hey, can we go to Six Flags right now?”

That’s sort of what the Cammeby’s case, spawned (like many other broker liability cases) by Superstorm Sandy, involved. Cammeby’s is a real estate investment company. It had property coverage with a flood sub-limit of $10 million. At the request of its insurance consultant, its insurance broker (Alliant) got the carrier (Affiliated FM) to increase the flood sub-limit to $30 million.

Of course, an additional $20 million in flood coverage means a large increase in premium, as Cammeby’s soon learned. That resulted in unhappiness. So, a few weeks later, the Cammeby’s insurance consultant sent an email to the broker reading: “if requested, will Affiliated cancel the $20 million of additional flood coverage at the Brooklyn locations to inception? Also, can we cancel the additional NFIP coverage and receive a pro-rata refund?”  And here, we have the Six Flags Question once again. Namely, did this mean: (1) Cancel the extra $20 million in coverage right now, or (2) Can we cancel the extra $20 million in coverage at some point in the future if we want?

I should pause here to say that I’ve worked with the people at Alliant in the past. I’ve found them to be bright, inquisitive, and service-oriented. So, they immediately selected Door No. 1. They complied with what appeared to be the client’s request, and got the additional flood coverage canceled. Affiliated FM issued an endorsement showing that the coverage sub-limit had been reduced to $10 million (although, unfortunately and confusingly, a separate endorsement, which modified the list of addresses covered by the policy, indicated that the coverage sub-limit was still $30 million). Alliant sent the new endorsement to Cammeby’s, and Cammeby’s later accepted a refund on the additional premium ($121,795). An internal email by a Cammeby’s Vice-President, sent shortly after the policy reduction in July 2011, read: “We have $10 million of flood coverage.”

But then along came Sandy, in October 2012, causing damage to Cammeby’s properties in excess of $30 million. Cammeby’s filed a claim with Affiliated FM, and Affiliated FM responded that the flood coverage was limited to only $10 million. This being America, Cammeby’s sued Alliant for malpractice, contending that no one with actual authority had authorized the reduction in limits.

Now, I can tell you from long experience that there are many judges who might have laughed this case out of Court.  But here, the judge denied summary judgment and conducted a jury trial. During the trial, Alliant argued in part that Cammeby’s had ratified the reduction in flood insurance limits, by its acceptance of the endorsement, its internal emails recognizing that the flood limit was now $10 million, and its acceptance of the reduction in premium. The jury rejected the ratification argument, though, and returned a verdict against Alliant for $20 million. Allied then argued that a new trial was necessary, because the judge had bungled the jury instructions.

The jury instruction with respect to ratification stated: “To establish its defense of ratification, Allied must prove, by a preponderance of the evidence, that even if Allied acted behind beyond the scope of its actual authority from Cammeby’s and that, as a result, the coverage was reduced to $10 million, Cammeby’s had full knowledge that Allied had taken these actions and clearly manifested its intent to approve these actions.”

The jury was confused by this instruction, because during deliberations, they sent notes out to the judge, asking what “full knowledge” and “clearly manifest” meant. (This is what happens when we speak Law Professor-ese.) But the bigger problem was that ratification can be proven by silence.  It does not require an affirmative act.

Realizing that the instructions were faulty, the judge ordered a second  jury trial  on the issue of ratification only.  Alliant objected, arguing that the entire case had to be retried, including the issue of negligence, because the negligence and ratification issues were inextricably intertwined. But the Court disagreed. As a result, a second trial was held, in which a jury was instructed that Alliant had been negligent to the tune of $20 million, and the only question was whether Cammeby’s had ratified the negligence. (If normal human beings can’t comprehend what the legal system means by “full knowledge” and “clearly manifest,” guess the confusion that results when the judge essentially says, “Hey, those guys screwed up, and your only job is to determine whether the plaintiff actually liked it.”)  Not surprisingly given the way the second trial was structured, the second jury found for Cammeby’s, also.

But this is why we have appeals courts, right?  Well, statistics show that reversal rates are between 8% and 14%.  And Alliant fell into the unhappy 86% to 92%.

A few takeaways:

  1. A less-than-favorable settlement is almost always better than a protracted litigation (except for the lawyers, I mean).
  1. In any business situation, make sure you’re dealing with a person with authority to enter into the agreement. Apparent authority may not be enough.  20/20 hindsight is a wonderful thing, but Alliant could’ve avoided a ton of trouble by asking for clarification on the Six Flags Question; namely, “Are we being requested by an officer with authority to go ahead and make the change?”
  1. Related to (2): Sloppy paperwork will kill you in litigation. The change endorsements that conflicted as to the actual limits didn’t help Alliant, for sure.


I like to think I’m pretty fair and impartial in these blog posts. I said that to a friend of mine in the defense bar who apparently reads my ramblings, though, and she laughed at me. I suppose I have a classic case of confirmation bias, where I think that insurance companies often forget what they’re supposedly in business to do, and some judges are too willing to let them forget. Along those lines, I like to quote former Chief Justice Stanley Feldman of the Arizona Supreme Court, who once eloquently wrote: “In delineating the benefits which flow from an insurance contract relationship we must recognize that in buying insurance an insured usually does not seek to realize a commercial advantage but, instead, seeks protection and security from economic catastrophe.” Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565, 570 (1986).

Even if I generally display a pro-policyholder bias, sometimes a case comes down the pike where I can’t figure out what the policyholder was trying to accomplish. I was intrigued by a recent decision of the Second Circuit in Sea Tow Services v. St. Paul Fire & Marine, in which the Court, in affirming summary judgment against the policyholder, wrote: “Establishing that an insurer acted in bad faith when settling a claim can be a tough row to hoe.”  You can read the Second Circuit decision here.) So, I decided to investigate a little further, and ended up more confused.

By way of background, if you’re not an insurance law aficionado, there are basically two types of insurance bad faith. First, an insurance company can be held liable for bad faith if it recklessly disregards facts or insurance policy provisions in reaching a coverage decision. (Good luck with proving that, since many courts hold that if you can’t get summary judgment against the insurance company on the coverage issues, there’s no bad faith.  Given the complexity of insurance policies, getting summary judgment on the duty to defend isn’t always easy, at least in New Jersey.) The second kind of insurance company bad faith happens when a carrier refuses to settle within the policy limits with an injured claimant, essentially “rolls the dice” with the policyholder’s money, and the injured claimant wins a verdict in excess of policy limits. The Sea Tow case seems to be a variant of this second kind of bad faith…I guess.

It’s important to remember that under most liability insurance policies, you give up control of your defense. As long as the insurance company represents your interests in an objectively reasonable way, there’s not a whole lot you can do. The carrier doesn’t really need to consider factors outside the potential merits of the case, such as whether the claimant is one of your business competitors and would benefit financially from a settlement.  I think the New Jersey Supreme Court put it best in Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474 (1974), when it described the factors that a liability insurance carrier must consider in determining whether or not to settle a case, as follows: “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.”

Which brings us back to Sea Tow.  The Second Circuit opinion doesn’t contain a detailed factual exposition, but the trial court decision, which appears at 211 F. Supp. 3d 528, does. Sea Tow is a marine salvage company. One of its franchisees, Triplecheck, had an employee named Juan Fernandez, who got whacked in the face by a tow hook while on the job.  He sued both Sea Tow and Triplecheck.  (There’s no discussion in the Court decision as to why workers’ comp didn’t fully compensate him.)  Sea Tow was insured by St. Paul, and Triplecheck was insured by RLI. There were two applicable RLI policies: a protection and indemnity policy with eroding limits (meaning defense costs were deducted from the limits as the underlying case progressed), and a marine general liability policy with a separate $1 million limit for defense costs.

There are a lot of twists and complications to the insurance and indemnity agreements in the case, but basically what the insurance dispute boils down to is that Sea Tow wanted to settle with Fernandez on a global basis to protect its franchisee, and St. Paul wanted to settle with Fernandez on behalf of Sea Tow only. So, St. Paul reached a settlement in principle with Fernandez for $750,000 on behalf of Sea Tow only, but before the settlement could be concluded, Sea Tow intervened and concluded a global settlement with Fernandez without St. Paul’s approval.  The total settlement was for $2.25 million. St. Paul paid in its $750,000, and RLI paid $1.475 million to settle both the direct claims against Triplecheck and vicarious liability claims against Sea Tow.

Sea Tow then sued St. Paul for bad faith, even though the case had been settled within policy limits, and Sea Tow had no damages except arguably some unreimbursed legal fees from the underlying case.  If you’re scratching your head about this, so was the judge, who wrote: “While to Court is tempted to pick apart the illogic that permeates this parade of horribles, it need not do so.” (Ouch.)   The Court concluded: “St. Paul was well within its contractual rights to settle its sole insured out of the lawsuit within policy limits, without also trying to extricate Triplecheck – a party that it did not insure and owed no legal obligation to. And St. Paul was free to do so even if [Sea Tow] would suffer significant backlash from its franchisees.  Had [Sea Tow] felt so strongly about the need for global settlement in joint franchisor-franchisee suits to preserve its ‘united front’ and to ensure that it did not abandon a franchisee, then it should have paid for an insurance policy that required its consent to settlement.”

A couple of takeaways from this “parade of horribles”:

First, you paid for your policy, and if you’re unhappy about the way your carrier is defending you, then, by all means, complain. But if you start directly interfering with defense strategy, such as by undermining settlements that the carrier wants to conclude, you’re playing with fire. Unless you have a “consent to settlement” clause in your insurance policy, the insurance company can settle with the underlying claimant on terms that it deems reasonable (as long as it can justify its reasoning objectively, by using factors such as those listed in Rova Farms). Here, Sea Tow is very lucky that St. Paul didn’t argue that coverage had been forfeited because Sea Tow tried to blow up the underlying settlement.

Second, as Clint Eastwood once said, “A man’s got to know his limitations.” Neither the legal system nor your insurance company are particularly concerned about your business interests or strategy.  All they care about is whether the insurance policy covers, or potentially covers, a claim against you.  Your carrier generally doesn’t have an obligation to make settlements that will help you achieve your business goals.

When we started our law firm 22 years ago, a colleague gave me some very sage advice (which I guess came from bad experience):  Get your accounting straight from day one, and keep it straight.  To this day, whenever a fellow professional asks me about going out on his or her own, I give the same advice. But, having handled more than my share of employment practices insurance claims, I now add the following: Get your payroll legally straight from day one, and keep it straight.

Wage-and-hour lawsuits are not fun for employers.  Statistics show that plaintiffs’ lawyers are filing federal Fair Labor Standards Act lawsuits at the rate of about 9000 per year in federal court.  Some states (like New Jersey and New York) even expand liability for wage-and-hour violations beyond the company itself, to shareholders, officers, or directors. Scary stuff.

Now let me brighten your day even further. If you think your liability insurance company will protect you from wage-and-hour suits, you may have to think again.  Talbots, the women’s clothing retailer, recently learned that the hard way in a lawsuit captioned The Talbots, Inc. v. AIG Specialty Insurance Company, Civil Action No. 17-11107-RGS (D. Mass. Sep. 29., 2017).

Here’s what happened. Two former Talbots employees sued under California Labor Law, contending, among other things, that Talbots had failed to pay proper overtime. Talbots submitted the claim to AIG, which had sold Talbots a “Management Liability for Private Policies Companies” policy. The policy included both Directors & Officers liability coverage and Employment Practices Liability coverage. AIG denied the claim, and a federal court has now upheld the denial.

The D & O coverage contained an exclusion for claims based upon employment practices.  The idea, of course, was to encourage the corporate policyholder to buy separate employment practices liability coverage for additional premium, which Talbots did.  But, unfortunately, the EPL coverage excluded claims for violations of the Fair Labor Standards Act, or “similar state law” relating to the failure to pay proper wages for overtime pay.

Talbots tried several different arguments to get around the exclusions, but none of them worked. Talbots argued, for instance, that if the claim was excluded from the D & O coverage because it was an “employment practice,” how could AIG legitimately deny the claim under the EPL coverage, because it was not an “employment practice”?

The court, in a footnote, wrote: “This argument is completely beside the point. The D & O Coverage Section contains a broad exclusion for any claims arising out of employment practices, presumably because there is a separate section of the policy (the EPL Section) which deals with employment practices violations and defines with specificity what forms of violations are covered under the policy.”  So, no coverage under the D & O section because it excludes all employment practices…but the EPL coverage only applies to some employment practices (and not wage-and-hour claims).

As the British pop singer Bat for Lashes (a/k/a Natasha Khan) asks, “What’s a girl to do?” Well, if you’re unfortunate enough to be sued under state labor law for violation of overtime rules, and you learn that your EPL policy contains a “violation of FLSA or similar state law” exclusion, all may not be lost. Read the provisions of the state law very carefully.  The carrier must prove that the specific section of the state statute under which the plaintiff is suing is “similar” to an analogous FLSA section, not simply that both laws generally address wage-and-hour issues.  Also, most EPL forms contain coverage for misrepresentations made to employees.  Check to see whether plaintiffs’ counsel has alleged (as is common) that employees were told that they were “exempt” from overtime requirements when they actually weren’t exempt.  That may be enough to trigger coverage.

Of course, an ounce of prevention is worth a pound of cure. Consult with your broker before claims happen.  You might be able to buy an endorsement that gives you at least some protection on the wage-and-hour front, for example.  My friend Rob Sobel, Senior Vice-President at the excellent insurance brokerage Cook Maran in Fair Lawn, NJ, says:  “Not all insurance companies offer wage and hour coverage. In those insurance markets that do, the limit of liability is generally $100,000. The limit can be found either memorialized in the standard policy language or can be added by endorsement.”

Clients often ask me why they bothered to buy insurance at all, since claims that they thought would be covered are swallowed up by a bewildering array of exclusions and limitations. Insurance companies (and some judges) love to say that policyholders have a duty to read their policies, but really, unless you have a lot of experience in deciphering insurance-speak, the policies might as well be written in Sanskrit. Talbots is a major, publicly-traded company, and I doubt whether it will have any trouble weathering the wage-and-hour suit discussed above, even without insurance. But for middle-market companies or smaller businesses, gaps in coverage can be catastrophic. And no, this is not where I say “You should have your entire coverage program reviewed by an experienced professional, i.e., me.” This is where I say that, when it comes to insurance, the best thing you can do is prevent claims from ever happening in the first place. With respect to employment and labor law, consult with a good employment attorney and make sure that you’re following all relevant payroll regulations, that your employment manual is up to date, and that your managers have been trained in how to prevent unnecessary employment lawsuits from happening.

I have a fair amount of experience in litigating coverage disputes under Lloyd’s of London policies. Let’s just say that, because of the labyrinthine structure of the organization (if it IS an “organization”), pursuing coverage under Lloyd’s policies can be like trying to nail Jell-O to a wall.

You can’t just sue “Lloyd’s of London,” for one thing, because Lloyd’s of London itself isn’t an insurance company; it’s an insurance “market.” It’s kind of like getting sick on food you buy from a stall at a farmer’s market. You have to sue the people who own the stall that actually sold you the bad food, not the “market,” which often isn’t a living, breathing legal entity.  Then there’s the joy of settling a claim under a Lloyd’s policy for let’s say $500,000, and having your adversary tell you that you’ll only be receiving $50,000, because 90% of the syndicates who underwrote your policy have gone belly-up. And taking testimony from people who work for the syndicates can be fairly confrontational in a charming, cockney kind of way.  I think I may hold the record for the shortest deposition of a Lloyd’s claims person ever, which I took over the phone. It was 25 years ago, but as I recall, the guy gave me a hard time about spelling his name for the transcript, and then indicated obliquely but pretty strongly what I could do with my client’s insurance claim. I told him I was in no mood to play games, so if this was the way he intended to conduct himself, he should leave and let me talk to someone who took the process seriously. He accepted my offer to have him vacate the premises, and, amazingly, the next witness was overwhelmingly cooperative. (I think defense counsel, worried about sanctions, told Witness No. 2 to behave.  But my BigLaw boss was unhappy anyway.  He thought I should’ve stuck to my script with the first guy. That’s part of the reason I’ve owned a small firm for the past 22 years.)

That brings us to the recent decision in Lincoln Adventures, LLC v. Certain Underwriters of Lloyd’s of London, 2017 U.S. Dist. LEXIS 136684 (D.N.J. Aug. 23, 2017), a class action in which a group of business policyholders contend that Lloyd’s underwriters, and the brokers who place Lloyd’s policies (including major brokers like Marsh, Aon and Willis), have been less than honest with the public, and have essentially engaged in a sort of illegal hidden kickback scheme.  I want to emphasize here that the allegations have not been proven, and the case is still ongoing. But a recent decision in the case is worth reading, simply for the extensive description of what Lloyd’s is and how it operates.

The Court wrote, for example:

“Lloyd’s of London itself is not an insurance company. Rather, it describes itself as the ‘World’s Specialist Insurance Market’ whose members – insurance companies, limited partnerships, individuals, and other entities – form syndicates, including Defendants, which underwrite insurance policies. Each syndicate maintains and staffs a physical office or stall on the premises of the Lloyd’s Market at Lloyd’s headquarters in London. Syndicates do not sell insurance directly to customers; rather, customers access the Lloyd’s Market through authorized broking firms or other intermediaries of which Lloyd’s approves… Lloyd’s represents to its customers that the Lloyd’s market is competitive. As of January 7, 2016, the Lloyd’s website stated that its syndicates ‘compete for business, thus offering choice, flexibility and continuing innovation.’”

The idea that the Lloyd’s market is “competitive” is the potential problem. According to the plaintiffs, Lloyd’s really isn’t competitive at all: “Plaintiffs contend the Lloyd’s Brokers and coverholders contribute to and conceal the anti-competitive nature of the Lloyd’s Market in exchange for commissions that they do not disclose to their clients. In the Lloyd’s Market, broker compensation can account for nearly 40% of the insurance premiums, and these costs are passed onto insureds. Indeed, according to Defendants’ data, on average, brokerage and commission payments during the relevant time frame were 22% in the Lloyd’s Market, compared to 12% in the United States property and casualty market. According to Plaintiffs, the syndicates can only pass on the costs of these commissions and fees because of the anti-competitive nature of the market.”  (A “coverholder” is an insurance intermediary authorized to enter into insurance policies to be underwritten by a particular Lloyd’s syndicate.)

Based on these fairly detailed allegations, the Court ruled that the suit can go forward, despite defendants’ efforts to have it dismissed. The stakes are high, because the plaintiffs have included a claim for violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1961 et seq., which allows for the recovery of treble damages and attorneys’ fees.

I’ve been resolving insurance claims on the policyholder side for 30 years. So, naturally, I’ve met a lot of insurance brokers and agents over the years, and a lot of them are personal friends.  (Except for the select few I’ve had to sue for messing up my clients’ coverage, but that’s another story…)  They’re in a tough spot.  On the one hand, they’re in the business of selling insurance at competitive rates, so they have to maintain their relationships with the carriers.  On the other hand, they’re expected to advocate for their policyholder-clients, both with respect to premium rates and with respect to disputed claims.  The courts tell us, in fact, that “insurance intermediaries…must act in a fiduciary capacity to the client because of the increasing complexity of the insurance industry and the specialized knowledge required to understand all of its intricacies….Brokers …hold themselves out as having more knowledge than members of the public with regard to the insurance policies and coverage they procure…A broker is not an ‘order taker’ who is responsible only for completing forms and accepting commissions.”  Aden v. Fortsh, 169 N.J. 64, 776 A.2d 792, 803 (2001).

I was also interested in the fact that, in the Lincoln Adventures case, plaintiff’s counsel cited (and the court picked up upon) statements made by Lloyd’s and the defendant brokers on their websites, about the supposedly competitive quotes available through the Lloyd’s market. Social media and websites often provide truckloads of ammunition for savvy lawyers in court. When the marketing department and the legal department aren’t on the same (web) page, look out.

It’ll be interesting to see whether the plaintiffs can prove their case, which, in any event, serves as an excellent warning to insurance professionals of the requirement of transparency in dealing with their clients.

My wife has been pestering me to get out of an unused gym membership for some time.  See, as a lawyer, I probably shouldn’t admit this, but I neglected to read the small print in the contract. It said that, unless I canceled in writing, the contract would automatically renew for one-year terms (kind of like the dreaded Lexis and Westlaw contracts), and if I wanted to cancel, I had to follow a certain procedure. Which I have done. Multiple times. But they’re not getting the message, so I will now need to waste time actually going to the health club to straighten things out. It’s on my to do list, but I don’t know when it will happen.

The pesky “fine print” in contracts can cause many problems, and sometimes those problems go beyond mere annoyance. One thing for you to be aware of, if you’re in risk management: Lately, more and more insurance policies are including “choice of forum” clauses that are extremely unfavorable to policyholders. Busy courts, looking to clear their dockets, are inclined to enforce such clauses, no matter how unfair that seems.

I thought of this recently, when I read a decision from the Western District of Pennsylvania involving Dick’s Sporting Goods.  Dick’s allegedly sold an inflatable exercise ball to an unlucky customer named Donald Royce, in Pennsylvania. According to Royce, when he attempted to use the ball, it collapsed, and he was seriously injured. (Ouch.  I’ve been eyeing my own exercise ball suspiciously after reading this case.) He brought suit against Dick’s in Philadelphia County Court.

Dick’s was an additional insured under a products liability insurance policy sold by the “People’s Insurance Company of China” (PICC). Unfortunately for Dick’s, the policy contained a forum selection clause, reading in part: “All disputes under this insurance arising between the Insured and the Company shall be settled through friendly negotiations. Where the two parties fail to reach an agreement after negotiations, such dispute shall be submitted to arbitration or to court for legal action. Unless otherwise agreed, such arbitration or legal action shall be carried out in the place where the defendant is domiciled.”  (Emphasis mine.)

I think you can see where this is going. The negotiations between Dick’s and PICC weren’t so “friendly,” and the policy was sold through a PICC branch located in Suzhou, China, west of Shanghai.  According to Trip Advisor, there are many interesting things to do in Suzhou (see link here), but Dick’s felt that litigating an insurance claim probably wasn’t one of them, and argued to the Court that the forum selection clause was unfair and shouldn’t be enforced, since all the facts relating to the claim took place in Pennsylvania, which is pretty far from mainland China.

Bon voyage to your claim, said the Court, writing: “[Dick’s] did not meet its burden of showing that the destination forum, China, is seriously inconvenient for the trial of the action. Beyond the obvious fact that China is on the other side of the globe from Western Pennsylvania, [Dick’s] did not demonstrate why litigation in China would be seriously inconvenient. The…insurance contract designated Dick’s Sporting Goods International Limited, a Hong Kong Limited Liability Company, as an ‘other insured.’ While no further information on the extent of [Dick’s] Chinese business activities is before the Court, [Dick’s] has a Chinese corporate presence via a Hong Kong business entity. Thus it is not ‘seriously inconvenient’ for [Dick’s] to bring this action in China.”

Personally, I don’t really think the Court needed to go beyond the “obvious fact.”  Most of the relevant witnesses and evidence are in Pennsylvania.  But, of course, I’m not wearing a black robe.

So what does this all mean for you?  Well, while your insurance policy may not require you to litigate coverage disputes in China, it may contain other types of nasty forum-selection or choice of law clauses. Lately, for example, we’ve been seeing more and more insurance policies that require the policyholder to arbitrate coverage disputes.  That can be costly, and it removes the threat of a jury trial from the insurance company.  To give a real world example, not long ago, we represented a manufacturing company against a major insurance company in a dispute over a retrospective rating program. The relevant agreement, unfortunately, required arbitration before a panel of three insurance executives. While we succeeded on some claims, the damages award was nowhere near what we thought was appropriate, and the cost of paying three arbitrators was extreme.

The law is full of fiction. (I was going to use a different word, but I’ll settle for “fiction.”) Included in that fiction is the idea that policyholders are responsible for reading and understanding their insurance policies. Insurance policies are often an impenetrable thicket of incomprehensible jargon, and contain many hidden loopholes. Since even experienced judges in different states often disagree on what the terms in insurance policies mean, it’s sort of ridiculous to suggest that normal policyholders are on a level playing field, and that all they need to do is read their policies to know how the contract works. But, in any contract you’re dealing with, including an insurance policy, you should always be on the lookout for “choice of forum” or arbitration clauses requiring you to litigate coverage disputes in an unfavorable place or faraway land. If you see such a provision, try to negotiate out, or try to find another carrier who will sell you similar coverage without the forum selection cause. (By the way, it’s not too hard to imagine a theory of professional liability against insurance brokers for not advising their clients of draconian forum selection clauses.)

Also keep in mind that being an “additional insured” may not offer you the level of protection you think it does.  But that’s a topic for another day.

We had a broker liability case not long ago involving a manufacturing facility on the banks of the Hudson River that got wiped out by Sandy.  The client had no flood coverage.  We argued that, under the particular circumstances of the case, the broker had an obligation to price the market for flood coverage, and to advise the client of available limits.  The case eventually settled for a significant amount. (It helps to have a good testifying expert on your side.  An “expert” is someone who wasn’t there, but for a price, will gladly tell you what happened.  Kidding, kidding.)

Our adversary in that case (a friend) has been lamenting to us the fact that we settled before the recent unreported New Jersey Appellate Division decision in C.S. Osborne v. Charter Oak Fire Ins. Co., which you can read here.  As described by our friends at the insurance defense firm White and Williams here, the C.S. Osborne Court held that “absent a special relationship, a carrier or its agents has no common law duty to advise an insured concerning the possible need for higher policy limits upon renewal of a policy.”  Under the facts of C.S. Osborne, no such “special relationship” existed.  (Chris Leise, a top-notch defense lawyer with whom I’ve spoken at insurance law seminars in the past, was lead counsel for the broker in C.S. Osborne.  You can read Chris’s bio here.)

Of course, no one knows what in the hell a “special relationship” means, including the judges who say or write it. Candlelight dinners? Long walks along the beach while holding hands? Taking Zumba classes together?

Let’s briefly consider the facts in C.S. Osborne and try to figure out why no “special relationship” existed.  C.S. Osborne is a company that makes hand tools.  The company has its headquarters and a manufacturing facility in Harrison, New Jersey, on the banks of the mighty Passaic River. They also have a facility in St. Louis.

C.S. Osborne’s insurance broker, Bollinger, placed the company’s commercial insurance program. The policy generally excluded water loss, but included $1 million of flood coverage. Bollinger’s March 2012 renewal proposal specifically stated: “Higher limits or sub-limits may be available so please advise us if you are interested in higher limits options so that we may secure quotations for your consideration.”  (I think the Court probably could have decided the case in the broker’s favor based on this statement alone, without an extended discussion of the law.)

Nobody called the broker to ask for an increase in limits, and, in October 2012, Sandy hit. There wasn’t enough flood insurance to cover the loss, and, this being America, C.S. Osborne sued the broker.

C.S. Osborne argued that the broker had a “special relationship” with C.S. Osborne, and therefore a higher level of duty, because it been handling C.S. Osborne’s account for 11 years. A broker representative had toured the Harrison facility at least twice, and there was correspondence indicating that the broker, after assessing C.S. Osborne’s risk profile, had recommended terrorism coverage and products recall coverage, as well as other types of coverage, for the company.

Also, Bollinger’s account manager often socialized with C.S. Osborne’s President at monthly board meetings of the local cemetery. (I want to party with these guys!)

Not enough, said the Court. But, in so doing, the Court completely dodged the issue of what would constitute the requisite “special relationship” that would heighten the broker’s duty, stating only: “Bollinger never told plaintiff anything that would reasonably cause plaintiff to rely on his quotes as recommendations for the proper amount of insurance coverage,” and “[a]n insurance broker is not an insurance consultant; if plaintiff wanted an insurance consultant, it could have retained one.”

That last statement, for which the Court cited no authority, is particularly puzzling. Most major brokerages tell clients that they’re in the risk management business, and help clients identify risks and place necessary coverage. Bollinger has recently been purchased by Arthur J. Gallagher Insurance Services, for example, and the AJG website reads in part: “Gallagher’s Casualty Practice team is focused on developing and delivering the unique professional and general liability solutions you need, including primary and excess insurance coverage, to help you grow your business. It is a comprehensive evaluation of your risk exposure and a snapshot of your total cost of risk.  Most brokers consider liability coverage to be part of a standard package. Gallagher’s team of professionals understands that your situation demands a tailored solution to handle any unique needs.”  (Emphasis added.)

Where does this leave us in terms of figuring out the standard of conduct that brokers must meet? Nowhere, really. If you’re on the brokerage side, though, you’d probably be better off having the client check a box stating that the client has reviewed the limits, and considers them adequate. (If you’re a broker, you should also be doing this for high-exposure risks, like flood and cyber-liability.) If you’re on the policyholder side, it’s very important to understand what your broker will and will not do, and to review your contractual relationship with the broker to make sure that you’re entirely comfortable with it. If you’re relying on the broker to be your outside risk manager (as many small and middle market companies do), the agreement should spell that out, so that if limits are inadequate or other problems occur, you may have recourse.

But really, the law aside, you know your business best, and should always take a proactive role in reviewing the basics of your insurance coverage program to make sure whether the coverage makes sense for you.

Earlier this month, I was asked by Elizabeth Lorell, an excellent defense lawyer, to speak at a CLE conference sponsored by her law firm.  (You can read Elizabeth’s bio here.) The audience consisted of other defense lawyers, and insurance company claims representatives.  In other words, I was basically a snake at a mongoose convention.

The group wanted the policyholder’s perspective on demands for policy limits in liability cases, a situation we often see when there are relatively low limits and high potential liability. The key case in New Jersey, of course, is Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474 (1974), which you can access here.

Rova is a horrible situation to read about. Back in the sixties, a 27-year-old guy (McLaughlin) took a header off a diving board at a resort and was rendered a total quad because, unbeknownst to him, the water was only about three feet deep.  That’s bad enough, but the insurance company’s response made things worse.  Rova Farms (the resort owner) had a $50,000 primary liability policy.  The carrier offered only $12,500 to settle the personal injury lawsuit (that’s amazing), and refused to move off that number.  The carrier apparently intended to argue, with no evidence whatsoever, that McLaughlin must have been imbibing heavily before his tragic dive, and that would somehow result in a defense verdict.  It didn’t.  The jury came back with $225,000 (big money back then), and the carrier was eventually held liable for the entire amount of the loss, including the amount in excess of policy limits.

Following Rova, it’s been standard practice for plaintiff’s lawyers (and coverage counsel) to send letters to carriers demanding limits payouts. Maybe I shouldn’t be saying this as an attorney who represents policyholders, but a Rova letter does not, in and of itself, create “open limits” exposure for the carrier. The key is whether the carrier has exercised good faith business judgment in deciding whether to take a case to trial, or not. That is to say, has the carrier evaluated the case as though no excess coverage existed, and as though the interests of the carrier and the policyholder were identical? The Rova Court defined a good-faith evaluation as including “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.”

In this digital age, there’s no justification for a claims department to stake out a “no pay” or low pay position without having conducted focus groups and basic jury research to determine the likelihood of an adverse verdict. And, in any coverage litigation, the lawyer for the policyholder should be actively asking for all evidence of the carrier’s assessment of liability.

There’s an interesting side issue in the Rova case, that appears in the concurring opinion of Justice Clifford. Because of allegations in the underlying complaint that the behavior of the policyholder (Rova Farms) had been wanton and reckless, the carrier advised the policyholder to obtain independent counsel, with respect to allegations in the complaint that might not be covered because they went beyond mere negligence. Once independent counsel became involved, he pressed the carrier to settle the case within limits, knowing (but not disclosing) that his client would contribute $25,000 if the carrier paid in its full limits of $50,000, and that $75,000 would settle the case. Independent counsel did not tell the carrier that he had the $25,000 commitment from the policyholder, because he was afraid that the carrier would then not pay in its limits to get the case settled. The Court held that his suspicion was well-founded, and that the lawyer’s behavior was proper and ethical. But I note the following statement from Justice Clifford: “[The carrier] chose to treat its insured’s personal attorney as an adversary and failed to initiate a cooperative and bipartisan approach to settle.”

Insurance carriers should always remember that independent counsel can be an invaluable resource. This is a fresh set of eyes looking at the case, who can give an honest of the potential for liability, which the carrier should take very seriously.  The carrier and independent counsel are in fact natural allies, trying to drive the plaintiff’s number into a reasonable range.

In any event, the lesson for policyholders is clear: If you think that the potential exists for verdict in excess of policy limits, show the carrier why, and create an objective paper trail that can later be used in coverage litigation. For carriers, the lesson is equally clear: if you’re going to gamble with your policyholder’s money, you’d better be sure that your claim file reflects an honest and thorough evaluation of the facts and potential liability.

Rova should be required reading for anyone involved in the liability insurance claims handling process.

By the way, as I was writing this, I learned that a Massachusetts appeals court recently shed some additional light on the “open limits” issue.  Caira v. Zurich American Ins. Co. (which you can read here) involved a car wreck.  David Madigan-Fried was driving a car he’d rented while working for his employer, Groom Construction Company.  Michael Caira was injured in the accident.  Caira offered to settle with Groom’s primary carrier, Zurich, for the $1 million primary limit, but said he wouldn’t release Madigan-Fried or Groom, since he intended to pursue damages over $1 million.  He’d agree, however, to go after the excess damages from Groom’s excess carriers only, and not from Madigan-Fried personally or from Groom itself.

Zurich said, nah. Release the insureds too, or no deal.  But Caira insisted his damages were over $3 million, and refused to provide the global release.  After much wrangling, the underlying case eventually settled for $900,000 – Zurich’s remaining policy limit of $770,000 plus $130,000 contributed by an excess carrier.  As part of the settlement, Caira retained his right to sue Zurich for alleged bad faith.  Caira’s theory was essentially that Zurich had a good-faith obligation to facilitate his ability to collect full damages from the excess carriers, despite contributing its policy limit.

Go away, said the appeals court, writing:  “An insurer who acts in good faith to protect the interests of its insured from additional liability will not be deemed to have committed an unfair settlement practice…. An insurer need not forsake its demand for a release in order to enable a claimant to collect additional damages, either from the insureds themselves or from an excess insurance policy.”

So, Zurich avoided excess liability (“open limits”) by placing the interests of its policyholders first and foremost.