TIME IS MONEY: Insured’s Late Notice Of An Insurance Claim Causes Forfeiture Of Coverage Even Though Insurer Suffers No Prejudice

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The failure to give timely notice continues to unnecessarily plague insureds and others seeking coverage under insurance policies. In an unsurprising move, the New Jersey Supreme Court affirmed prior holdings allowing insurers to disclaim coverage under a“claims made” policy for late notice even though the insurer suffers no prejudice as a result of the late notice. Templo Fuente De Vida Corp., et al. v. National Union Fire Insurance Co., (A-18-14) (074572) (NJ, February 11, 2016). In this case, the insured’s six month delay in providing notice under “claims made” Directors & Officers (“D&O”) Policy resulted in a complete forfeiture of coverage. While proceeding slowly and deliberately may be a virtue in some contexts, it is not advisable when notifying insurers of claims.

In reaching its holding the Court affirmed prior holdings in which it distinguished between “claims made” and “occurrence” policies. Under an “occurrence” policy, “it is the ‘occurrence’ of the peril that is insured, and so long as that peril occurred during the life of the policy, coverage attaches.” In contrast, under a “‘claims made’ policy, it is the making of the claim which is the event and peril being insured and, subject to policy language, regardless of when the occurrence took place.’” Accordingly, the Court had determined previously that while insurers must show that they were prejudiced by late notice of a claim under an “occurrence” policy, no showing of prejudice is required under a “claims made” policy.

Faced with this adverse precedent governing “claims made” policies, the plaintiffs (the insured had assigned its rights under the “claims made” policy to the underlying plaintiffs) argued that insurers were relieved of proving prejudice from late notice only where the claim was made after the expiration of the policy period. Rather than address that argument directly, the Court focused on the sophistication of the policyholder: “We have historically approached ‘claims made’ and ‘occurrence’ policies differently due in large part to the differences between the policyholders themselves.” The Court reasoned that in the “vast majority” of “occurrence” policies, the policyholders are “unsophisticated consumers unaware of all of the policy’s requirements.” In contrast, under “claims made” policies, “insurers are ‘dealing with a more sophisticated clientele, [who] are much better able to deal with the insurers on an equal footing[.]’” (quotation omitted).

Because the insured in the case before it was sophisticated, the Court held that the insured’s failure to give timely notice constituted a breach of its “claims made” D&O policy which, in turn, permitted the insurer to disclaim coverage without demonstrating prejudice: “our jurisprudence has never afforded a sophisticated insured the right to deviate from the clear terms of a ‘claims made’ policy.”

This case serves as another reminder of the importance of providing timely notice of insurance claims. Indeed, in this case time really was money. Depending on the nature of the claim, the nature of the policy and the nature of the insured, late notice may prove fatal.

Questions? Let me know.

 

Anticipation Over: Heinz Squeezed By Federal Court

Heinz DeniedUnderscoring the need for complete candor when answering insurance application questions, a federal court permitted an insurer to rescind an insurance policy.  See H.J. Heinz Co. v. Starr Surplus Lines Co., Case No. 15 cv0631 (W.D. PA, Feb 1, 2016). Starr sold Heinz an Accidental Contamination and Government Recall insurance policy (the “Recall Policy”). After Heinz sought coverage for losses incurred in connection with a product recall in China, Starr refused the claim and sought to rescind the Recall Policy. As the court explained, “rescind” means to have the insurance policy declared void as if it never existed.

Interestingly, the court employed an advisory jury to assist in the determination. The court agreed with the jury’s finding that Heinz had omitted and misrepresented certain material facts in its application for insurance. Specifically, the application asked two pertinent questions: (1) whether “any fines or penalties been assessed against the Applicant by any food or similar regulatory body over the last 3 years” and (2) whether “the Applicant experienced a withdrawal, recall or stock recovery of any products or has the Applicant been responsible for the costs incurred by a third party in recalling or withdrawing any products.” Heinz answered no to the first question and did not answer the second question.

Contrary to its application answers, the evidence presented at trial showed that Heinz was fined or undertook recalls in connection with a number of contaminated food products. Heinz’s Global Insurance Director sought to excuse certain of the less than accurate application answers by stating that the losses at issue would not have been covered by a Recall Policy. The court did not credit that testimony.

Particularly damning was the fact that Heinz’s Global Insurance Director had previously disclosed the very same contamination losses that had been withheld from the insurer to Heinz’s Senior Management. According to the court, “simply put, if this information was sufficiently important for [the Global Insurance Director] to include in a presentation memorandum to the Heinz senior management, it was sufficiently important to include on the Application, yet [he] failed to do so.” The court found further that the Global Insurance Director made the misrepresentations for one or both of the following reasons: (1) to obtain a lower SIR and/or (2) to secure a lower insurance premium.

Although instances of insurance policy rescission for fraud and misrepresentation are rare, it does occur. This case serves as a painful reminder to all policyholders and their risk managers of the importance of full and complete candor when answering insurance application questions.

Questions? Let me know.

Declaration of Independence: Court Declares That Insureds Are Entitled To Independent Counsel When A Conflict Of Interest Develops

This past week, the Nevada Supreme Court adopted the so-called “Cumis” Rule. See State Farm Mutl. Ins. Co. v. Hansen, No. 64484 (Nev., Sept. 24, 2015). That Rule derives from a California appellate court case decided over thirty years ago. San Diego Fed. Credit Union v. Cumis Ins. Society, Inc., 208 Cal. Rptr. 494, 506 (Cal. Ct. App. 1984). The Cumis Rule provides that when a conflict of interest develops between an insurer that is defending its insured against a third-party claim, the insurer must satisfy its contractual duty to defend by paying for independent defense counsel chosen by the insured.

Courts throughout the country are split on whether and when the Cumis Rule or some variant of that Rule applies. Thus, the right to independent counsel varies from state to state and policyholders must be proactive in understanding and securing their right to independent defense counsel.

Those courts that have refused to allow insureds to select independent counsel hold generally that no conflict arises because defense counsel represent and owe a duty of loyalty to to the insured only and not to the insurer. Conversely, those courts allowing insureds to select independent counsel hold that defense counsel engage in a dual representation by representing the interests of both insurers and insureds. When a conflict of interest develops in a case involving a dual representation, independent counsel selected by the insured and paid by the insurer is required.

Courts are likewise split on when an actual conflict of interest arises. Some courts hold that whenever an insurer reserves its right to deny coverage an actual conflict arises. Other courts have decided that an insurer’s reservation of the right to deny coverage does not create a per se conflict of interest. An actual conflict of interest requiring the retention of independent counsel arises in those jurisdictions only when the outcome of the coverage determination can be controlled by defense counsel. The Hansen Court opted for the latter approach, holding that “there is no conflict of interest if the reservation of rights is based on coverage issues that are only extrinsic or ancillary to the issues actually litigated in the underlying action.”

The Hansen decision underscores the reality that insurance coverage law and rights are ever developing state by state. Knowing which states acknowledge dual representation and when an actual conflict arises will make all the difference in securing independent defense counsel at the insurer’s expense.

Questions? Let me know.

Thinking Outside The Car: UBER Gets Creative With Its Insurance

Guest Blogger: Annie Kernicky, Esq.,

New and emerging technologies are leading to new and emerging insurance products. Policyholders must remain vigilant in both securing that coverage and in pursuing claims under that coverage. A recently filed case involving the technology fueled, rideshare service, Uber, drives this point home.

As more and more consumers are learning, Uber and other rideshare services like Lyft work as follows: A customer seeking a ride activates an app and sees real-time locations of nearby rideshare vehicles. After a user clicks to request a pick-up, drivers are alerted of the potential fare by visual display on their smartphone, which they must respond to. The app also allows both the driver and passenger to text and/or call each other.

As reflected in a recently filed insurance coverage action involving Uber, insured smartphone-based app rideshare services are seeking coverage in creative ways.  In that case, Evanston Insurance Company seeks a declaration that it is not required to cover Uber’s settlement with the family of a 6-year-old girl killed in a collision with an alleged Uber driver who was allegedly using the Uber app, but had not yet picked up passengers. In its complaint, Evanston argues that its excess policy covers only technology, and the underlying suit concerns an automobile accident.  Instead of seeking coverage under its Business Auto policy or perhaps in addition thereto, Uber is pursuing a claim against Evanston under a liability insurance policy designed to cover Uber’s technology operations.   Evanston contends that its insurance policy excludes taxi operations and covers only Uber’s technology aspects and operations.  Although Uber has not yet responded to Evanston’s complaint, it appears that Uber is contending that the Underlying claim arose out of its “technology operations” because the underlying injury occurred while the driver was using the Uber app, and not while the driver had passengers.

Even though the underlying claim appeared to involve an automobile liability, further consideration reveals that a new technology may be the real culprit. This case provides a prime example of an insured creatively pursuing coverage under an insurance policy that at first blush might not apply. It serves as a healthy reminder for all policyholders that successfully securing coverage sometimes requires looking for coverage in both the usual and not so usual places.

Sharing is Caring: A Proposed National Data Repository for “Cyber Incidents” to Benefit Policyholders

Guest Blogger: Emily Breslin Markos, Esq., Weisbrod Matteis & Copley PLLC

It has become commonplace for the news to be peppered with accounts of data breaches affecting a wide range of entities, from large retailers, to motion picture studios, to the federal government.  Unfortunately, the increasing frequency of the events has not yet led to an insurance industry standard for affordable, robust and effective coverage for cyber incidents. cyber security

To address the gap in insurance coverage, as well as the broad spectrum of harms arising from cyber incidents, the Department of Homeland Security (DHS) has established the Cyber Incident Data and Analysis Working Group (CIDAWG).  The CIDAWG recently published the first of a series of white papers on the possibility of establishing a national data repository where cyber incidents can be reported and collected in a uniform and central way.

Such a data repository would increase information sharing among the “Federal government, enterprise risk owners, and insurers” with the goal of enhancing risk mitigation strategies and “also improve and expand upon existing cybersecurity insurance offerings.”  One of the obstacles to establishing insurance coverage for cyber incidents is a lack of data needed to inform “actuarial calculations and related underwriting considerations by insurers.”  The repository would seek to close that information gap.  As it stands, certain industry groups have methods to share information about cyber incidents within the industry group, but there is no centralized way to share the wealth of information that companies have about hacking activity, but are understandably reticent to share.

The CIDAWG’s first white paper concludes that there is value to policyholders if the repository is structured the right way. Its next white paper will address what cyber incident “data points” should be included for evaluation.

Interestingly, though perhaps not surprisingly, the white paper notes that “[t]here are currently no plans for DHS or other Federal departments or agencies to build or manage such a repository. A resulting repository could potentially be managed by a private organization.”

If this idea continues to gain traction, it will be a positive development for policyholders as a productive step in allowing insurers to provide informed and effective cyber incident insurance protection.

Emily Breslin Markos is an associate at Weisbrod Matteis & Copley PLLC, where she focuses her practice on commercial litigation and insurance coverage counseling and litigation for policyholders. She received a B.A. from Brywn Mawr College in 2004 and graduated magna cum laude from Rutgers University School of Law – Camden in 2010. She can be reached at emarkos@wmclaw.com or 267.262.5589.

Stuff Happens: A Reflection on the Tenth Anniversary of Hurricane Katrina

I first began litigating insurance coverage cases along the Gulf Coast, in 2003 in a small Parish (St. Bernard) neighboring New Orleans. From the outset, whenever a major storm approached, locals would remind me that the area was under sea level and formed in the shape of a bowl. They cautioned that if the big one ever hit, the city and surrounding area would fill up and flood.

For the next two years, disasters were averted. Whenever a major storm rolled up the Gulf it always diverted course and bypassed New Orleans. That good fortune caused some to declare that they would never evacuate.

That all changed ten years ago when Hurricane Katrina made landfall on Monday, August 29, 2005. I had just completed an important insurance coverage trial the previous Friday. All of our trial exhibits, and those of our insurance company adversary, remained locked in the first floor of the St. Bernard courtroom. Little did we know that soon they would all be washed away along with so much else.

I remember being at the airport awaiting our flight home a couple of days before Katrina hit. We were eating beignets and watching coverage of the Hurricane on a big screen TV. There was no panic; no one spoke of evacuation. Everyone assumed that the city would be spared just as it had so many times before. We were wrong.

So much was lost; so many lives, so many homes, and so many businesses. My co-counsel lost his home, office building and vacation property. Fortunately, he and his family had the resources to make a last minute decision to evacuate. We were all reminded this week of the suffering sustained by those lacking the ability to leave.

We learned a lot from Hurricane Katrina and other catastrophes both before and after. Mostly, we learned that stuff happens. When it does, and if we are lucky enough to survive, we can and will recover – – my co-counsel rebuilt his homes and office and, working cooperatively with the insurance company’s counsel we were even able to replicate our lost trial exhibits. There is no storm that can’t be weathered with the support of our neighbors, government and yes, even our insurers.

Questions? Let me know.

Ding Dong the Witch is Dead: The California Supreme Court Overrules Henkel

ding dongIn a stunning development, the California Supreme Court recently overruled its prior decision of Henkel Corp. v. Hartford Accident & Indemnity Co., 29 Cal.4th 934 (Cal. 2003). For over a decade insurers have relied on Henkel to argue that the assignment of insurance rights without the insurer’s consent was invalid, even with respect to assignments that post-dated an insured loss. In advancing that argument, insurers rely on a standard form “consent to assignment” provision that provides as follows: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.”

With the decision in Fluor Corporation v. Hartford Accident & Indemnity Co., Case No. S205889, 2015 WL 4938295 (Cal. August 20, 2015), the wicked witch that was Henkel is now dead. In a unanimous decision, the Fluor Court ruled that Henkel is contrary to Section 520 of California’s Insurance Code. Under Section 520, after an insured loss has occurred, an insured is permitted to assign its rights under an insurance policy without its insurer’s consent. The California Supreme Court failed to consider the ramifications of Section 520 when it rendered its earlier ruling in Henkel.

In holding that Section 520 applies to third party as well as first party claims, the Fluor Court reasoned as follows:

Under [Section 520], after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer — and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement. Our contrary conclusion announced in Henkel Corp. v. Hartford Accident & Indemnity Co., supra, 29 Cal.4th 934, is overruled to the extent it conflicts with this controlling statute and this opinion’s analysis.

2015 WL 4938295, at *29.

Beyond relying on Section 520, the Fluor Court also acknowledged that “virtually all” decisions from other courts around the country were “at odds” with the key holding in Henkel and that Henkel fared no better in scholarly publications.

The Fluor decision underscores the importance of insureds remaining resolute in the face of seemingly insurmountable odds. Despite the insurer friendly decision in Henkel, the insured found a yellow brick road to coverage and, along the way, laid a wicked witch to rest.

Questions? Let me know.

Horrible Insurers: PA Judge Sends Message To Bad Faith Insurer

Cropped shot of a businessman crossing his fingers behind his back

In a scathing opinion, a Pennsylvania trial court judge urged an appellate court to uphold an award of $18 million in punitive damages and $3 million in attorneys fees against Nationwide Mutual Insurance Company. See Berg v. Nationwide Insurance Company, Civ. Action No. 98-813 (Pa. Common Pleas, Berks, Cty.). The award stemmed from Nationwide’s “scorched earth” litigation policy and bad faith conduct directed towards one of its policyholders.

The case involved a claim under an automobile insurance policy. After the insured’s car was damaged, a claim for coverage was made. Although Nationwide’s independent appraiser determined that the car was totaled, Nationwide overrode that decision and sought to repair the car. Nationwide then spent in excess of $3 million on lawyers to fight the claim.

The words of Judge Jeffrey K. Sprecher of the Berks County Court of Common Pleas cannot be improved upon and I will not try. Instead, I will simply let Judge Sprecher’s words speak for themselves.

Year after year, [the insureds] trustingly paid the premiums for insurance coverage for defendant’s provision of representation and payment of any liability if ever needed. Premiums are paid, regardless of whether or not Nationwide ever has to incur any claims and regardless of whether its expense is one hundred dollars or one hundred thousand dollars. [The insureds], as with other policyholders, pay for this peace of mind.

*           *           *           *

Was there a failure to make a timely offer of settlement? There most certainly was. [Nationwide] tries to divert the blame for this unprecedented endless and protracted litigation to plaintiffs. Of course, the only one who could settle this case was Nationwide if it had made a legitimate offer. Instead it sent a scorched earth message to litigants and the plaintiffs bar that they cannot fight Goliath, especially in small claims cases because their lives will be made miserable. Nationwide will dig in its heels and fight all the way to the end.

*          *          *          *

[Nationwide] clearly followed a litigation strategy designed to “starve out” and wear down plaintiffs and their counsel. Nationwide’s message: the wealthy and powerful corporation could wait 20 years or until the end of time, while plaintiffs’ counsel tires of waiting for compensation from his clients to pay his legal fees and expenses or if plaintiffs are able to pay their legal fees, Nationwide could wait until the end of time for plaintiffs to grow weary of spending hundreds of thousands of dollars to compete with defendant’s billions.

*          *          *          *

[Nationwide] has done everything it possibly could to stonewall the claims processing disposition for its insured. It failed, dismally, to treat the [the insureds] fairly to properly remediate the claim. It looked to its own economic considerations and has sought to limit its potential liability and operated in a fashion designed to send a message.

To the extent Nationwide “operated in a fashion designed to send a message,” Judge Sprecher reciprocated. Insurers who act in bad faith in Pennsylvania will pay a heavy price.

It’s Your Funeral: Failure to Produce Insurance Policies in Funeral Scam Case Results in Court Imposed Sanctions

its your funeral
PNC Bank was recently sanctioned by a federal court for failing to produce insurance policies in a case involving an alleged “Ponzi” scheme.  See Jo Ann Howard and Associates PC et al. v. J. Douglas Cassity et al., Case No. 4:09-cv-01252 (E.D. Mo., July 22, 2015). The “Ponzi” scheme was run by executives of National Prearranged Services (“NPS”) who pocketed proceeds from funeral services contracts rather than safeguarding them with a trust or an insurance policy. PNC was linked to scheme as the successor in interest to NPS trustee, Allegiant Bank and Trust Co., and found liable for $390 million in compensatory and punitive damages.

In resisting disclosure of its insurance policies, PNC argued that its insurers had not acknowledged coverage and, even if they had, any available insurance had already been exhausted by prior claims. In rejecting those contentions, the court relied on Federal Rule of Civil Procedure 26(a(1)(A)(iv), which requires disclosure of any insurance policy which “may” cover the claims at issue.

In addition to ordering the immediate disclosure of any applicable insurance policies, the court also agreed that an award of sanctions was warranted. To that end, the court allowed the plaintiffs to submit for the court’s consideration a specific amount of attorneys fees to be awarded as sanction.

Finally, and perhaps most problematic for PNC, the court also agreed to review any communications that PNC had with its insurers for possible disclosure to the plaintiffs. The plaintiffs argue that those communications could reveal inconsistent positions taken by PNC.

This case underscores two equally important points. First, insurance policies that may cover a claim at issue are often subject to disclosure and discovery, but are frequently overlooked. Second, failure to timely disclose and produce such insurance polices may lead to the imposition of sanctions.

Questions? Let me know.

Free At Last: PA Supreme Court Frees Policyholders From Consent To Settlement Provisions

free at last

Thanks to a recent ruling by the Pennsylvania Supreme Court, policyholders may now settle cases that are being defended by an insurer under a reservation of rights so long as the settlement is fair, reasonable and non-collusive. See Babcock & Wilcox Co. et al. v. American Nuclear Insurers, Case Number 2 WAP 2014 (Pa Sup. Ct., July 21, 2015). In order to recover, policyholders will not have to prove that their insurers acted in bad faith in refusing to settle.

In Babcock & Wilcox, the insureds sought indemnification for an $80 million settlement that was paid to underlying plaintiffs who claimed injurious exposure to radiation. The insurers, who were defending under a reservation of rights, refused to pay the settlement and argued that the insureds’ settlement without the insurers consent breached the following so-called “consent to settlement” clause that is standard in liability policies:

Assistance and cooperation of the Insured. The insured shall cooperate with the companies, and upon the companies’ request, attend hearings and trials and assist in making settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of any legal proceedings in connection with the subject matter of this insurance. The insured shall not, except at his own cost, make any payments, assume any obligations or incur any expense.

The insurers argued that the consent to settlement clause grants insurers unilateral authority to settle underlying lawsuits. They argued, therefore, that the insureds breached the insurance policy when it settled without the insurers’ consent and that the insurers should not be liable for the settlement amount absent proof that the insurers acted in bad faith in refusing to settle.

In rejecting the insurers’ argument, the Pennsylvania Supreme Court held that, “if an insurer breaches its duty to settle while defending subject to a reservation of rights and the insured accepts a reasonable settlement offer, the insured need only demonstrate that the insurer breached its duty by failing to consent to a settlement that is fair, reasonable, and non-collusive. . . .”

In so ruling, the Court left intact the standard applicable when an insurer refuses to settle and the insured is hit with a verdict that exceeds policy limits. In those cases, “if the insured establishes that the insurer breached its duty of good faith by failing to settle, the insurer is held responsible for the entire verdict, which resulted from the bad faith decision not to settle, even if it far exceeds policy limits.”

Quoting another court, the Pennsylvania Supreme Court reasoned that, “[t]he bad faith standard is simply not appropriate here, where the issue is one of contractual liability as opposed to extra-contractual liability.” Accordingly, the Supreme Court held that the court below erred “by requiring an insured to demonstrate bad faith when the insured accepts a settlement offer in a reservation of rights case.”

This is an extremely important victory for policyholders in that it will free them to wrest control of underlying cases and settle them without insurer consent. Coverage for the amounts paid in settlement will be preserved so long as the settlement is fair, reasonable and non-collusive; proof of insurer bad faith will not be required.

Questions? Let me know.

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