JURISDICTIONAL ISSUES JURISDICTIONAL ISSUES AFFECTINGAFFECTING

THE INSURER-INSURED THE INSURER-INSURED RELATIONSHIPRELATIONSHIP

Moderator: Gary Gassman, PartnerModerator: Gary Gassman, PartnerMeckler, Bulger, Tilson, Marick & PearsonMeckler, Bulger, Tilson, Marick & Pearson

Robert (“Robin”) WesterfieldRobert (“Robin”) WesterfieldPartner, Bowles & VernaPartner, Bowles & Verna

Robert Cutbirth, CounselRobert Cutbirth, CounselTucker, Ellis & WestTucker, Ellis & West

Al Chute, Senior Claims Officer Al Chute, Senior Claims Officer Chubb & SonChubb & Son

Kristine TejanoKristine TejanoClaims Counsel, XL GroupClaims Counsel, XL Group

Overview of our ProgramOverview of our ProgramThis morning we will be exploring four primary issues:This morning we will be exploring four primary issues:

• Venue, Choice Of Law, And Mandatory Arbitration Venue, Choice Of Law, And Mandatory Arbitration Clauses That Can Modify The Rights And Obligations Of Clauses That Can Modify The Rights And Obligations Of Parties To An Insurance PolicyParties To An Insurance Policy

• ““Four Corners” Vs. “All Available Facts” Jurisdictions Four Corners” Vs. “All Available Facts” Jurisdictions And Their Effect On Defense Rights And Investigation And Their Effect On Defense Rights And Investigation ObligationsObligations

• How Different Jurisdictions Approach The Legal Concept How Different Jurisdictions Approach The Legal Concept Of “Breach” Of The Duty To Defend And Its Of “Breach” Of The Duty To Defend And Its RamificationsRamifications

• How Different Jurisdictions Evaluate Available Damage How Different Jurisdictions Evaluate Available Damage Rights And RemediesRights And Remedies

ICLC 2009

The Boring Insurance Way

The CategoriesThe Categories

Oh Lord, Oh Lord, Where Do We Where Do We

Go?Go?

Good God, Good God, Now WhatNow WhatDo I Do?Do I Do?

You’re Kidding, You’re Kidding, You Want You Want

What?What?

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A liability policy is issued to a Minnesota Insured, whose broker is based in Chicago, where the policy was delivered by the New York- based insurer. Litigation against the insured was filed in New York.

The policy contains a standardized venue provision stating that all disputes under the policy are to be resolved by binding arbitration, and controlled by the law of the state where the Insured maintains its principal place of business. An endorsement then states that the law of the jurisdiction most favorable to the insured will be applied.

1. What disputes are encompassed by such a provision?2. If you are the Insurer/Insured facing a coverage dispute, does

such a clause cause you to consider early coverage litigation?

Jurisdiction and Choice of Law Clauses

In some jurisdictions, issues of rescission are not encompassed in venue/forum selection clauses. They view such clauses as only relating to claims ‘under the policy,” rather than disputes as to the actual validity of the policy.

Jurisdiction and Choice of Law Clauses

If you believe that a particular jurisdiction or forum is better suited to your concern, such a dispute may cause you to earlier file a coverage case.

The Endorsement to the Policy may, however, change this result if the Court is willing to entertain the view that it applies to “all” disputes.

Declaratory Relief – When Needed

An insured maintains its primary place of business in Illinois, with liability litigation filed it in that state. The Complaint arises from a commercial banking and trust transaction that went terribly wrong, resulting in the bank’s client asserting claims for breach of contract, breach of the covenant of good faith, breach of fiduciary duty, and interference with contractual relations. Based upon the insurer’s reading of the complaint, regardless of how the causes of action are labeled or characterized, the allegations all arise from the bank-client contractual obligations.

1. Does the Insurer need to file a Declaratory Relief Action to

analyze its duty to defend?2. What are the Insurer’s obligations, and the Insured’s rights

pending the results of the DRA?

Declaratory Relief Actions may be required in some jurisdictions, such as Illinois, where the mere issuance of a reservation of rights letter is insufficient to protect the insurer’s interests

Concerns for the Insurer: Costs, potential reflexive “bad faith” cross-complaint, potential distractions to defense/settlement efforts.

Concerns for the Insured: Costs, potential distractions to defense/settlement efforts.

Further challenges: Case may be stayed pending outcome of underlying case if the facts are intertwined and potential discovery concerns.

Declaratory Relief – When Needed

SELECTING YOUR FORUM

The insured is an interstate home builder based in Missouri. Plaintiffs are Florida residents whose children were killed when one of the insured’s trucks, carrying employees to a worksite in Texas, crossed a center line and struck their vehicle just outside of Little Rock, Arkansas. A mediator places the claim value at $3 million. The insured is on the verge of bankruptcy.The liability complaint asserts that the employees had been drinking, with the driver having a blood alcohol level twice the legal limit. The complaint adds that the employees had just been visiting the driver’s elderly mother in Hope, Arkansas. The driver tells the claims examiner that his mother’s house was along the way, that he only had one drink, and that his employer knew about the “detour.” The employer denies such knowledge, and he has fired the driver. Everyone expects coverage litigation to be filed.What are the competing interests that may cause the interested parties to “run” to the courthouse, and which courthouse would/should they pick?

SELECTING YOUR FORUM

Depending on the factual allegations, the Complaint might be viewed differently in a “four corners” jurisdiction as compared to an “all facts” jurisdiction. The case also raises a series of questions that may need to be resolved in a declaratory relief action, particularly based on the jurisdiction.

These situations are problematic because the insurer, the employer, and the employee-driver all have competing and potentially divergent interests.

The insured, particularly the employer, may have the greatest exposure because …

Four Corners Jurisdictions

The Insured is an investment advisor based in Arizona or Florida. The Insured is sued by a client alleging that it failed properly to advise the client of risks of certain recommended investments. The client has lost hundreds of thousands of dollars, and files suit for breach of contract and breach of fiduciary duty, asserting that the Insured not only “intentionally” failed to disclose the “known risks” of these investments, but that the insured “knowingly” advised the client to make “dangerous” investments solely because they provided the insured with an “undisclosed kickback.”

1. What is the obligation of the Insurer to “investigate” the

claim beyond the allegations in the complaint?2. What is the obligation of the Insurer to defend the claim?

Four Corners Jurisdictions

In a “four corners” jurisdiction, you are generally limited to evaluating the facts in the complaint. Here, the facts alleged in the complaint detailed an integrated scheme to defraud the client in order for the insured to obtain wrongful profits.

From the standpoint of the insured, you probably want or need to look for “ambiguous” wording in order to argue that there is an element of “negligence” that can be read into the “four corners” of the complaint.

One of the other problems with this type of scenario is that the insured investment advisor may be free from any wrongdoing. There is a down market, with “reasonable investment choices made, and no improper “kickbacks.” The insured may be “tarred” by public disclosures of misdeeds by others. But, in strict “four corners” jurisdictions, this may not matter.

Due to budget cuts, a School District must lay off teachers and professional staff. By law these individuals must get three-months notice. Two weeks after the notice letters are issued, four individuals targeted for layoffs allege that the principal of John Day School engaged in acts of racial and sexual discrimination. To recover compensatory damages, Plaintiffs must prove intentional discrimination, but the District’s policy states that no coverage exists for intentional acts established “in fact or by final adjudication.”

The Hispanic principal asserts that he engaged in no wrongful acts and that the suits are a “conspiracy” to avoid the layoffs. The school’s secretary, however, reveals that the principal said last week that “this is my chance to get rid of those lazy Japanese women” and “this is my chance to keep hard working Latino men here.” Secretary is married to a Japanese man.

1. Based on the foregoing facts, would the extension of a defense beproper or required?

2. Would it matter if (a) the layoff process was strictly based on seniorityand/or (b) an e-mail search finds similar statements by principal?

All Relevant Facts Jurisdictions

In “all relevant facts” jurisdictions, allegations solely framed as “intentional” misconduct may not eliminate a duty to defend. Responsive or extrinsic facts suggesting negligence or unintended consequences may trigger a duty to defend.

Yet, the policy language remains controlling. The question is whether the insurer obtains enough information to conclusively state that uninsurable discrimination “in fact” occurred. “Judgment calls” on the “interpretation” of the facts may not be supportable in front of a judge or jury.

Claim investigations must, therefore, carefully consider biases and limited perceptions/observations, as well as “unexpected” sources of claimed “facts.” Even written documents might need to be interpreted (i.e., “joking statements”). Yet, the duty to defend remains measured by the limited scope of coverage and conclusive facts can support a withdrawal of a defense.

ALL RELEVANT FACTS JURISDICTIONS

The complaint asserts that Plaintiff was injured “on various dates in 2007 and 2008” by repeated “misappropriations” of funds from its brokerage account. The brokerage company is reportedly on the verge of bankruptcy. Plaintiff believes the only chance for recovery is the triggering of insurance coverage. So, the complaint only contains causes of action captioned in terms of “negligence,” although the factual allegations speak only in terms of intentional misconduct by the involved employees. The policy incepted on January 1, 2008.1. As the insurer under an “occurrence” based policy, can you deny/

withdraw a defense if it later learns the only misappropriationsoccurred in 2007?

2. Can you deny/withdraw the defense if there is undisputeddocumentation that senior management knew of the misconductand allowed it to occur?

WHEN DO EXTRINSIC FACTS PROVIDE A BASIS TO DENY OR WITHDRAW A DEFENSE

WHEN DO EXTRINSIC FACTS PROVIDE A BASIS TO DENY OR WITHDRAW A DEFENSE

If the question of when the improper withdrawals occurred is no longer in dispute, the insurer may be able to deny or withdraw its defense. If the issue remains in dispute, regardless of external facts, the defense probably cannot be withdrawn or denied. This would fall under the concept that an insurer has a duty to defend “false or fraudulent” suits.

If the documentation is unequivocal regarding intentional misconduct, there may be a right to withdraw the defense in some jurisdictions (keeping in mind “final adjudication” or other policy provisions). You must also evaluate whether “senior management’s” knowledge is equivalent to corporate knowledge and approval. A corporate entity can obtain a defense and indemnity for the intentional acts of its insureds, unless the “senior managers” involved are effectively the “company” for purposes of evaluating the company’s obligations.

RECOUPMENT OF ADVANCED DEFENSE FEES

An insured architect designed a commercial real estate building. He also provided construction oversight services. The architect’s professional liability policy limited coverage only to design-related services. The Complaint asserts that the architect’s roof design was flawed (allowing for water intrusion), with the architect failing to properly supervise the general contractor and subcontractors regarding structural foundation work.The insurer defended under a reservation of rights. At mediation, the mediator suggests that the architect faces liability under both theories, stating that “under the circumstances it will take a combined $1 million to extricate the architect from the case.” The mediator says he cannot break down the figure any further. $500,000 in defense fees have been advanced.

1. What must the insurer consider in determining whether to seek an “advance funding” agreement or a right of recoupment?

2. What should the insured consider with respect to the insurer’s efforts

and in gauging its response?

There is a separation of factual allegations -- two different areas of the building (roof vs. foundation) and two different functions (design vs. construction oversight). There may be overlap in these areas, but they also involve separate tasks, time entries, and activities.

The mediator has not helped the situation, but this may be due to his need to get the case settled and he may know that if he steps into this allocation morass he may not get the $1 million he needs to resolve the case. Yet, you cannot apply a retroactive defense allocation based on settlement exposures and you cannot undertake a further “relative exposure” analysis without greater detail or agreement.

The insured and its counsel have their work cut out for them, which may be made more complicated if panel counsel is involved (i.e., is this a situation in which a right to independent counsel exists?).

RECOUPMENT OF ADVANCED DEFENSE FEES

California insured John Rich owns commercial office buildings. An employee of Clean Co., his janitorial contractor in Texas, is injured when he slips on marble flooring the employee claims was “too slippery.” Rich maintains the employee, who had been mopping floors, had soap on his shoes and the suit is “bogus.”

Clean Co. was supposed to name Rich as an additional insured under its CGL policy issued by Good Guys Assurance. Rich received a Certificate of Insurance stating he was was an “additional insured.” Good Guys denies coverage asserting that Rich is not an “additional insured” and that no “additional insured” request was made by Clean Co.’s broker/agent. Good Guys also concludes that there is no basis to conclude that the shoes caused the injuries.

Rich’s liability policy has a $250,000 SIR which Rich paid in defending against this lawsuit. Rich lost, the marble was slippery, and there was no soap.

1. As Rich’s attorney, how would you counsel your client?2. If you were Good Guys, what concerns would you have in this situation?

THE FINANCIAL RISKS AND BENEFITS

Rich has a variety of issues to consider:• He accepted a “certificate of insurance” – is there a “broker

issue” that is going to complicate the issue?• Rich won – there was no act/omission by Clean Co. or its

employees causing the loss? Good Guys were correct that there was no soapy involvement.

• Rich is out a lot of money, but he’s going to be really unhappyif he throws good money after bad.

Good Guys also has issues to consider:• Rich has spent money, he has resources, and depending on the

jurisdiction, he may want to file suit and increase everyone’scosts, with Good Guys also facing the payment of Rich’sattorneys’ fees.

THE FINANCIAL RISKS AND BENEFITS

A Florida insured is named in a complaint asserting breach of contract claims and damages. Coverage was properly denied. An amended complaint is filed factually and legally expanding the allegations to include “tortious interference with contract” and “breach of fiduciary duties.” The amended complaint is tendered, and the insurer reflexively reaffirms its earlier coverage denial believing the allegations were wrongfully “manipulated” in an effort to create coverage, with the complaint still based solely on excluded “contract” theories.

The insured’s counsel issues a pre-suit demand letter discussing the effect of the litigation on the insured’s health, on his finances ($75,000 in defense fees), and on his solvency now that Plaintiff has issued a “policy limit” settlement demand that, if rejected, “will never be seen again.” The value of the case seems likely to exceed the policy limit.

1. What should the insurer do?

2. If the insured wants to protect her interests, what should she do?

Managing Post-Complaint Changes in Position

Whether it is the insured or the insurer, one of the most difficult things to do is acknowledge a mistake. The situation becomes more complicated when the parties have become polarized through threats or written accusations that may arise either before or after the mistake has been made.

In jurisdictions where policy limits can be “uncapped,” or there is a right to recover extra-contractual damages, the insurer should usually seek to proactively open the lines of communication and seek alternatives. Prolonging the impasse, or failing to change a position shown to be problematic, places you at far greater risk.

From the insured’s standpoint, even in jurisdictions where you can seek “extra-contractual” relief, the insured needs to be mindful that pressing the issue too hard may backfire. A “slam dunk” case may not be a “slam dunk.”

Managing Post-Complaint Changes in Position