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Insurer's Duty to Defend: Resolving Cost Issues
Strategies for Defense Cost Reimbursement and Allocationpresents
Today's panel features:Jared M. Katz, Partner, Mullen & Henzell, Santa Barbara, Calif.
Joseph D. Jean, Counsel, Dickstein Shapiro, New YorkBenjamin C. Eggert, Partner, Wiley Rein, Washington, D.C.
Wednesday, November 11, 2009
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InsurerInsurer’’s Duty to Defend: Resolving Costs Duty to Defend: Resolving CostIssues; Strategies for Defense CostIssues; Strategies for Defense CostReimbursement and AllocationReimbursement and Allocation
Part I: Scope of Duty to DefendPart I: Scope of Duty to Defend
Jared M. KatzJared M. KatzLitigation ChairLitigation ChairMullen & Henzell L.L.P.Mullen & Henzell L.L.P.
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Liability Insurance PolicyLiability Insurance Policy
There are 2 duties owed to the insured under aThere are 2 duties owed to the insured under aliability insurance policy:liability insurance policy:
1.1. Duty to indemnify the insured forDuty to indemnify the insured forliability for covered loss arising from a thirdliability for covered loss arising from a thirdparty claim;party claim;
2.2. Duty to defend the insured for a third partyDuty to defend the insured for a third partyclaim seeking loss that potentially is coveredclaim seeking loss that potentially is coveredunder the policyunder the policy’’s insurance agreement.s insurance agreement.
Notes:Notes:
●● The policy terms dictate the coverage.The policy terms dictate the coverage.
●● Interpretative rules can vary by jurisdiction.Interpretative rules can vary by jurisdiction.
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Duty to DefendDuty to Defend
Duty to defend is broader than the duty to indemnifyDuty to defend is broader than the duty to indemnifyand includes claims that are groundless, false andand includes claims that are groundless, false andfraudulent.fraudulent.
The duty to defend is just as, if not more, importantThe duty to defend is just as, if not more, importantthan the duty to indemnify. Why?than the duty to indemnify. Why?
““The insuredThe insured’’s desire to secure the right to call ons desire to secure the right to call onthe insurerthe insurer’’s resources for the defense of third partys resources for the defense of third partyclaims is, in all likelihood, typically as significant aclaims is, in all likelihood, typically as significant amotive for the purchase of insurance as is the wishmotive for the purchase of insurance as is the wishto obtain indemnity for possible liability.to obtain indemnity for possible liability.”” MontroseMontroseChemical Corp. v. Superior Court (CanadianChemical Corp. v. Superior Court (CanadianUniversal Ins. Co., Inc.),Universal Ins. Co., Inc.), 6 Cal.46 Cal.4thth 287, 295287, 295--9696(1993).(1993).
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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3
What Does the Duty Require?What Does the Duty Require?
The insurer is obligated to furnish competent defenseThe insurer is obligated to furnish competent defensecounsel for each insured and to provide sufficient fundingcounsel for each insured and to provide sufficient fundingfor the defense.for the defense.
If there is no conflict, the insurer can appoint qualifiedIf there is no conflict, the insurer can appoint qualifiedpanel counsel.panel counsel.
If there is a conflict, the majority view is that insured isIf there is a conflict, the majority view is that insured isentitled to independent counsel.entitled to independent counsel.
Issues:Issues:
●● Is the claim fully covered?Is the claim fully covered?
●● Reservation of rights?Reservation of rights?
●● Damages in excess of policy limits?Damages in excess of policy limits?
●● Special type of claim?Special type of claim?
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Types of Issues That Might AriseTypes of Issues That Might Arise
Defining a Claim and PreDefining a Claim and Pre--Tender CostsTender Costs
Conflicts Requiring Independent CounselConflicts Requiring Independent Counsel
Reservation of Right to Seek Reimbursement ofReservation of Right to Seek Reimbursement ofDefense CostsDefense Costs
Multiple Insurers/Target TendersMultiple Insurers/Target Tenders
Termination of DutyTermination of Duty
SettlementSettlement
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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When Does the Defense Duty Arise?When Does the Defense Duty Arise?
Duty to defend arises upon tender byDuty to defend arises upon tender byinsured of a claim triggering defense dutyinsured of a claim triggering defense dutyunder the Policy.under the Policy.
How does the Policy define the defenseHow does the Policy define the defenseobligation. Sample:obligation. Sample: ““We will settle orWe will settle ordefend, as we consider appropriate, anydefend, as we consider appropriate, anyclaim or suit asking for damages coveredclaim or suit asking for damages coveredby this policy.by this policy.””
Issues:Issues:
●● IsIs the defense obligation mandatory?the defense obligation mandatory?
●● How is a claim or suit defined?How is a claim or suit defined?
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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PrePre--Tender Defense CostsTender Defense Costs
Majority view: PreMajority view: Pre--tender defense coststender defense costsare not covered. Reasons:are not covered. Reasons:
●● Insurer Not on Notice Before ThenInsurer Not on Notice Before Then
●● Voluntary Payments ClauseVoluntary Payments Clause
Practice tips:Practice tips:
●● Exceptions and CounterargumentsExceptions and Counterarguments
●● Tender LetterTender Letter
●● Seeking Cost ReimbursementSeeking Cost Reimbursement
●● Maintaining CommunicationMaintaining Communication
PostPost--tender defense costs must betender defense costs must bereasonable.reasonable.
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Independent CounselIndependent Counsel
Majority View: If there is a reservation of rights orMajority View: If there is a reservation of rights orother conflict material to the defense, the insured isother conflict material to the defense, the insured isentitled to independent counsel.entitled to independent counsel.
The independent counsel controls the defense ofThe independent counsel controls the defense ofthe case and is entitled to be paid for reasonablethe case and is entitled to be paid for reasonabledefense costs.defense costs.
California: Statute provides for insurer to pay theCalifornia: Statute provides for insurer to pay thesame rates as regular counsel in similar actions andsame rates as regular counsel in similar actions andbinding arbitration of disputesbinding arbitration of disputes
Practice TipsPractice Tips
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Reservation of Right to ReimbursementReservation of Right to Reimbursement
Majority View: Insurer is entitledMajority View: Insurer is entitledunilaterally to reserve right to seekunilaterally to reserve right to seekreimbursement for nonreimbursement for non--covered defensecovered defensecosts. Must be specially reserved orcosts. Must be specially reserved orwaived.waived.
In aIn a ““mixedmixed”” action, insurer must defendaction, insurer must defendthe entire action, including nonthe entire action, including non--coveredcoveredclaims.claims. Buss v. Superior CourtBuss v. Superior Court(Transamerica Ins. Co.)(Transamerica Ins. Co.), 16 Cal.4, 16 Cal.4thth 3535(1997)(1997)..
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Multiple Insurers/Target TendersMultiple Insurers/Target Tenders
General Rule: The duty of each insurer coGeneral Rule: The duty of each insurer co--insuringinsuringa risk is evaluated independently based on thea risk is evaluated independently based on thepolicy language. Equitable contribution betweenpolicy language. Equitable contribution betweeninsurers.insurers.
““Other InsuranceOther Insurance”” Clauses.Clauses.
Illinois Target Tender DoctrineIllinois Target Tender Doctrine
●● State Auto Prop. & Cas. Ins. Co. v. SpringfieldState Auto Prop. & Cas. Ins. Co. v. SpringfieldFire & Cas. Co.Fire & Cas. Co., 2009 Ill. App. LEXIS 994 (Ill. App., 2009 Ill. App. LEXIS 994 (Ill. App.Ct. 4Ct. 4thth Dist. Sept. 30, 2009)Dist. Sept. 30, 2009)
●● Not followed in other jurisdictionsNot followed in other jurisdictions
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Termination of Defense DutyTermination of Defense Duty
Conclusion of LitigationConclusion of Litigation
Exhaustion of Policy LimitsExhaustion of Policy Limits
●● Burning LimitsBurning Limits
●● Excess policy issuesExcess policy issues
Withdraw of DefenseWithdraw of Defense
Burning LimitsBurning Limits
Defense Duty Not Apply to CrossDefense Duty Not Apply to Cross--ComplaintsComplaints
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Settlement ConsiderationsSettlement Considerations
InsurerInsurer’’s Right to Control Defense and Settlements Right to Control Defense and Settlement
Assignment of Rights if No Defense ProvidedAssignment of Rights if No Defense Provided
Claim Release and Withdrawal of Reservation ofClaim Release and Withdrawal of Reservation ofRight to Seek ReimbursementRight to Seek Reimbursement
Deductible and SIRDeductible and SIR
Business ConsiderationsBusiness Considerations
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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Contact Mullen &Contact Mullen & HenzellHenzell L.L.P.L.L.P.
We are available for help with California matters.We are available for help with California matters.
Email:Email: [email protected]@mullenlaw.com
Website:Website: www.mullenlaw.comwww.mullenlaw.com
We are a 53 yearWe are a 53 year--old law firm with a stateold law firm with a state--widewidepractice, including insurance coverage and claimspractice, including insurance coverage and claimsanalysis, insurance and bad faith litigation,analysis, insurance and bad faith litigation,insurance defense, and complex business and civilinsurance defense, and complex business and civillitigation.litigation.
We also handle real estate litigation andWe also handle real estate litigation andtransactions, business transactions, estate planningtransactions, business transactions, estate planningand litigation, and employment and labor counselingand litigation, and employment and labor counselingand litigation.and litigation.
Mullen & Henzell L.L.P.
112 E. Victoria StreetSanta Barbara, CA 93101
Tel. (805) 966-1501Fax (805) 966-9204
www.mullenlaw.com
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© COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Allocation of Defense Costs
Joseph D. JeanDickstein Shapiro LLP
2 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Introduction
Joseph D. Jean, Esq., is Counsel in the Insurance Coverage Practice of Dickstein Shapiro’s New York office and focuses on insurance coverage matters, commercial litigation, and alternative dispute resolution in forums throughout the United States.
3 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Agenda
• Methods of Allocation.
• Allocating between Covered and Non-Covered Claims.
• Allocating Among Parties.
• Allocations Involving Uninsured Periods of Time.
4 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Methods of Allocation
• Different Jurisdictions apply different allocation methodologies.– All Sums.
– Pro Rata.
– Modified Pro Rata.
5 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Methods of Allocation: All Sums
• All-Sums:– Once a policy year is “triggered” by injury or property
damage, each of the individual insurance policies in that year must indemnify the policyholder for All Sums for which the policyholder becomes liable.
– Each triggered policy is jointly and severally liable for All Sums until the policy’s limits are exhausted and then the policies that sit above the exhausted policy are called upon in the same manner.
– Onus is on the insurer to go after other insurance companies via a contribution action.
6 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Method of Allocation: Pro Rata
• Pro Rata:– Onus is on the insured.
– Allocates risk among all triggered policy periods, with each insurance company paying only a share of the policyholder’s total damages.
– When courts adopt proration, they tend to rely upon general principles of equity, rather than policy language.
7 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Methods of Allocation
• Modified Pro Rata– Mixed time-on-the-risk and percentage of coverage.
– New Jersey and New Hampshire.
– Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312, 712 A.2d 1116 (1998); Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994); Universal-Rundle Corp. v. Commercial Union Insurance Co., 319 N.J. Super. 223, 275 A.2d 76 (N.J. Super. A.D. 1999) (defense costs).
– EnergyNorth Natural Gas, Inc. v. Certain Underwriters at Lloyd's, 156 N.H. 333, 934 A.2d 51 (N.H. 2007).
8 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Practice Pointers• Allocating under Pro Rata and Modified Pro Rata can be
complex.
• In New Jersey, courts frequently use a Special Allocation Master at the conclusion of the liability phase.
• Experts are often necessary.
• Work closely with your expert and make sure that all policies are included.
• Coverage charts can be particularly complex and some carriers might have to provide coverage if certain policies were previously exhausted.
9 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Methods of Allocation: Is There a Duty to Defend?
• Where there is a duty to defend, insurer’s duty is broad. In most states insurer must defend covered and not covered claims even if just one claim is covered. Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 310, 486 N.Y.S.2d 873, 476 N.E.2d 272 (1984); Frontier Insul. Contractors, Inc. v. Merchants Mut. Ins., 91 N.Y.2d 169, 175, 690 N.E.2d 866 (1997).
• Where there’s no duty to defend, insurers often attempt to allocate defense costs between covered and not covered claims.
10 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Methods of Allocation: New Jersey — The Exception to the Rule
• Burd v. Sussex, 56 N.J. 383 (1970). Insurers argue that where there is a mixture of covered and not covered claims the duty to defend becomes a duty to reimburse.
• An Exception to the Rule: SL Indus., Inc. v. American Motorists Ins. Co., 128 N.J. 188, 607 A.2d 1266 (N.J. 1992). The court held that when defense costs cannot be apportioned, the insurer must assume the defense costs for both covered and non-covered claims.
11 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Methods of Allocation: What Kind of Policy is at Issue?
• Claims Made PoliciesCoverage triggered when a claim is made during the policy period (or extended reporting period).
Focus is not when wrongful act was committed, but when claim first is made.
• Occurrence PoliciesCoverage triggered by an “occurrence.”
Occurrence is often equated with an "accident.” Some policies define occurrence to include "continuous or repeated exposure which results in bodily injury or property damage neither expected nor intended by the insured" and so includes events beyond happenstance accidents.
12 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Practice Pointers• Review Policy and Complaint Carefully.
• Allegations in complaint are interpreted broadly and in favor of coverage. – “An insurer is relieved of the duty to defend only if ‘there is no possible factual or
legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured] under any provision of the insurance policy.’” Allianz Ins. Co. v. Lerner, 416 F.3d 109, 115 (2d Cir. 2005) (quoting Servidone Constr. Corp. v. Sec. Ins. Co., 64 N.Y.2d 419, 424, 488 N.Y.S.2d 139, 477 N.E.2d 441 (1985)).
• Headings do not control.– Rather, the substance of the allegations do. See, e.g., NWL Holdings, Inc. v.
Discover Prop. & Cas. Ins. Co., 480 F. Supp. 2d 655 (E.D.N.Y. 2007) (finding a duty to defend where, although a complaint did not specifically denominate a cause of action as one that was covered by the policy at issue, the facts alleged therein were sufficient to put the insurer on notice that the complaint could potentially give rise to such a claim).
• Get creative. There are many situations where the defense of a covered claim is inseparable from the defense of uncovered claims and arguments can be made that the insurer should defend the whole case.
13 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Allocation of Defense Costs: Among Insurers
• Different Types of Policies Respond Differently– Primary: Generally have a duty to defend and
defense costs are in addition to limits.
– Excess & Umbrella: May or may not have a duty to defend, but defense costs can erode limits.
14 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Practice Pointer• New York law mandates, through Insurance Regulation 107, 11 N.Y.C.R.R. § 71
(“Regulation 107”), that liability policies must include defense cost coverage.– This result is required by law regardless of any issues pertaining to intent or negotiation
amongst the parties. Regulation 107 states (emphasis added):(a) No liability insurance policy, except as specified in this Part, shall be issued or renewed in this
State containing a provision that:(1) reduces the limits of liability stated in the policy by legal defense costs;(2) permits legal defense costs to be applied against the deductible, if any; or(3) otherwise limits the availability of coverage for legal defense costs.…
…(c) No liability insurance policy shall be issued or renewed in this State unless legal defense
costs are incident to a claim of legal liability covered under the policy.
• 11 N.Y.C.R.R. § 71.2 (SPA14) (emphasis added). Where an insurer issues a policy in violation of this Regulation, a court must reject the violative policy terms and enforce the policy in conformance with the requirements of the Regulation, regardless of any party’s intent:
– [A]ny policy of insurance…delivered or issued for delivery in this state in violation of any of the provisions of this chapter shall be valid and binding upon the insurer…but in all respects in which its provisions are in violation of the requirements or prohibitions of this chapter it shall be enforceable as if it conformed with such requirements or prohibitions.
– N.Y. Ins. Law § 3103(a) (SPA26) (emphasis added).
15 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Allocation of Defense Costs: Competing Policies
• Similar other insurance clauses cancel each other out and each insurer responds pro rata.
• Avoiding other insurance clauses?
16 © COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.
Best Practices
• Know the Law.
• Know Your Policies.
• Know Your Claims.
• Know What Methodology Maximizes Coverage.
• Keep Your Insurer Informed.
Benjamin C. EggertWiley Rein LLPWashington, DC
November 11, 2009
Recoupment of Defense Costs
What happens if an insurer defends
but a court later holds there
was never duty to defend
in the first place?
MAJORITY POSITION
Numerous court decisions confirm insurers’right to recoup defense costs
Leading Case is Buss v. The Superior Court of Los Angeles County, 939 P.2d 766 (Cal. 1997)
MAJORITY POSITION
Buss, 939 P.2d 766 (Cal. 1997)
• Insurer that defends suit with covered and non‐covered claims can recover defense costs
• Must show that defense costs are allocable to non‐covered claims
MAJORITY POSITION
Buss, 939 P.2d 766 (Cal. 1997)
• Reservation of rights required → insurer must advise insured of right of recoupment
• Fair to insured → insured can accept defense (subject to recoupment) or defend itself
MAJORITY POSITION
Key Considerations
• Reservation of Rights
• Quasi‐contract or implied contract
• Unjust Enrichment
MAJORITY POSITION
Reservation of rights
• Timely and express reservation
• Notice of possible reimbursement
• Insured’s acceptance of defense
MAJORITY POSITION
Quasi‐contract or implied contract
• Flowing from reservation of rights vs. insurance contract
• Separate/implied agreement
• No voluntary payment
MAJORITY POSITION
Unjust Enrichment
• An insurer has not assumed the risk to pay claims that were never covered
• Reimbursement restores parties to the place where they were when they entered the contract
MAJORITY POSITION
The Problem with Mixed Action Cases
MINORITY POSITION
Some decisions disallow recoupment
Leading case is General Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005)
MINORITY POSITION
General Agents, 828 N.E.2d 1092 (Ill. 2005)
• Court held that if an insurer believes there is no duty to defend, then deny
• Court ruled that an insured shouldn’t be put in Hobson’s choice
MINORITY POSITION
Key Considerations
• Some courts believe insurers are acting in self‐interest in offering defense –preserving indemnity rights and ensuring effective defense
MINORITY POSITION
Key Considerations
• Some courts are unconvinced by implied contract and unjust enrichment arguments
• Some courts appear to view policies as providing “litigation insurance”
MINORITY POSITION
Problems with Rationales
• No Hobson’s choice for insureds
• Self‐interest (or lack of self‐interest) is no basis to reject (or accept) legal right
• False logic of “litigation insurance” and “broad” coverage obligations
Core Points
– Developing area of the law
– Decisions go both ways
– Clear reservation of rights is important to setting the stage for subsequent assertion of right
Questions?