insurance coverage for manufacturers with consumer or...

Insurance Coverage for Manufacturers With

Consumer or Product Liability ClaimsStrategies and Practical Guidance From Insured and Insurer Perspectives

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WEDNESDAY, JUNE 5, 2019

Presenting a live 90-minute webinar with interactive Q&A

Alexander D. Hardiman, Partner, Pillsbury Winthrop Shaw Pittman, New York

Corey Worcester, Partner, Quinn Emanuel Urquhart & Sullivan, New York

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FOR LIVE EVENT ONLY

Insurance Coverage for Manufacturers With

Consumer or Product Liability Claims

A live, 90-minute CLE with interactive Q&A

June 5, 2019

Corey Worcester Alex HardimanQuinn Emanuel Urquhart & Sullivan, LLP Pillsbury Winthrop Shaw Pittman, LLP212-849-7471 [email protected] [email protected]

6

INTRODUCTION

• This presentation is divided into the following 6 sections:

– Section 1: Understanding the company’s coverage

– Section 2: Making a meaningful coverage assessment

– Section 3: Strategically using insurance coverage

– Section 4: Protecting the right to coverage

– Section 5: Balancing insurance requirements with customer relations

obligations

– Section 6: Final thoughts and practical considerations

• However, Q&A is encouraged!

7

I.

UNDERSTANDING THE COMPANY’S COVERAGE

8

EXECUTIVE SUMMARY

▪ Taking stock of all polices

• Is there insurance coverage?

• Why are historical insurance policies significant?

▪ Analyzing the coverage that each policy provides

• What kind of policy do you have?

• And what are the differences between occurrence and claims made policies?

▪ Determining what coverage is available

• How much risk is covered?

• What role do exclusions, endorsements, pro-rata allocation, "all sums" allocation, deductibles, and self-

insured retentions play?

▪ Ensuring that all policies are retained

• When to destroy . . . when to keep

• How to retain

9

TAKING STOCK OF ALL POLICIES: IS THERE INSURANCE

COVERAGE AT ALL?

▪ First question that a company has to ask when it thinks there might be a lawsuit is whether there is

insurance coverage for this particular risk?

▪ Products liability cases are routinely leading the lists that record total dollar amounts of jury verdicts.

It is no longer uncommon to see 8, 9, and 10 figure verdicts.

▪ Given that, companies must know their coverage. It is better to have someone else pay!

Lawsuits, Demands Insurance Policies

10

WHAT KIND OF POLICY DO YOU HAVE

▪ Multiple policies may provide coverage:

• Primary policies

– CGL

– D&O

– E&O

– EPL

– Cyber

– Specialty

• Excess policies

• Umbrella policies

• Indemnity agreements

11

A SIDE NOTE: WHY HISTORICAL POLICIES ARE SIGNIFICANT

▪ There are a lot of reasons historical policies are important: long-tail policies; renewals

that track earlier policies; occurrence based policies that are now very old

▪ Historical insurance policies often provide coverage even years after they were issued.

• There have been cases involving policies that were decades old and where no one who negotiated the

policy was still working for the company, the insurer, or the broker.

▪ Historical policies can be large value

• E.g. batch policies negotiated decades ago

▪ It is not uncommon for older policies to be lost, destroyed, or misplaced

• Mergers, personnel changes, office moves; cleaning out “old” file cabinets; server updates; fires; floods

– One client, ironically, lost their fire insurance policy in a fire.

• Can impact both the policy and the underwriting file

▪ The historical trend of policies is to close the barn door after the animals escape. Often,

older policies have fewer exclusions

12

ENSURING THAT ALL POLICIES ARE RETAINED

▪ Accordingly, DON’T LOSE OLD POLICIES!

• Put someone in charge of knowing where all insurance is

• Make sure it is accounted for in moves or IT updates

• Make sure that copies are backed up

▪ But what if you do lose them?

• Search

• The broker

• The insurer

• Your law firm

• Insurance “archaeologists”

▪ Secondary evidence of insurance

• Varies state to state

• Sometimes difficult to prove; but sometimes possible

13

DIFFERENCE BETWEEN CLAIMS MADE AND OCCURRENCE

POLICIES

▪ Virtually all liability policies fall into one of two principle categories, claims made or

occurrence.

▪ “Claims Made” policies:

• A “claims made” policy covers claims made against the company while the policy is in effect.

• The upside is that it tends to be cheaper than occurrence based coverage

• The down side of a claims made policy is that coverage must be continued indefinitely to make sure that

you have coverage in the future for events that occurred in the past. Once the policy has lapsed you no

longer have coverage.

• Note also that claims made policies often have a retroactive date before which there is no coverage.

▪ Claims made policies cover you for any covered claim provided:

• The policy is in effect when the claim is made; or

• You renewed the policy from the time the incident occurred until the claim is made.

14

DIFFERENCE BETWEEN CLAIMS MADE AND OCCURRENCE

POLICIES, CONT’D.

▪ “Occurrence” policies:

• Occurrence policies cover companies for alleged acts that were unknown to the insured and that occurred

while the policy was in effect.

• The big difference from a claims made policy is that it does not matter if the coverage is in effect at the

time the claim is made.

• Generally, the policy doesn't specify when the occurrence must take place. So, an occurrence may happen

before or during the policy period as long as the injury occurs during the policy period

• Most medium sized and large business use occurrence coverage, because even if the policy is cancelled,

the company will still have coverage for events that occurred while the policy was in effect.

• This makes it easier to avoid gaps in coverage.

▪ Example: Company buys a policy in 2010. Terminates the policy 2015. In 2016, a supplier sues

the company for an incident that occurred in 2012. The company is covered because it had the

policy in 2012. It does not matter that the policy was terminated by the time the lawsuit was

brought.

15

DETERMINING WHAT COVERAGE IS AVAILABLE

▪ What coverage is available

▪ How much coverage is available?

▪ There are a lot of parts to a policy that factor into whether there is coverage and how

much:

• Have you looked at the exclusions?

• Endorsements?

• Pro-rata allocation?

• “All sums" allocation?

• Deductibles?

• Self-insured retentions?

16

II.

MAKING A MEANINGFUL COVERAGE ASSESSMENT

17

ANATOMY OF A CLAIM & COVERAGE ASSESSMENT

▪ Over the course of 20 years of selling of Product X, ABC Manufacturer

has had a small stream of mostly low-value consumer bodily injury

claims which it generally resolved for less than $1000 without

involvement of its insurers. Occasional higher value claims of $25,000-

$50,000

▪ In 2017, ABC Manufacturer is the subject of a presentation at a

plaintiffs’ bar conference and soon afterwards there is an explosion of

individual suits all over the country alleging personal injuries from

Product X as well as a mass tort action with 10,000 potential claimants

▪ The claimants injuries span a seven year period through 2018, with

claims continuing to be added

▪ Defense counsel’s initial assessment of damages exposure is anywhere

from $30MM to $60MM

18

$25,000,000

$100,000,000

ABC Manufacturer

General Liability

Coverage

2008-2018

$75,000,000

$70,000,000

10

/1/2

009

10

/1/2

010

10

/1/2

011

10

/1/2

012

10

/1/2

013

10

/1/2

014

10

/1/2

015

$1,000,000

$10,000,000

$50,000,000

$45,000,000

10

/1/2

008

$20,000,000

10

/1/2

016

11

/1/2

017

Policy Limit of 25M occ/agg

RSUI


RSUI


RSUI

Policy Limit of 25Mocc/agg

RSUI


RSUI


RSUI


Endurance


Endurance


Ohio Casualty


AWAC


Federal [Chubb]


Federal [Chubb]


Federal [Chubb]


Navigators


Navigators


Zurich


Zurich


Endurance


Endurance


AWAC


AWAC


AWAC


Zurich


Endurance


Endurance


AWAC


AWAC


Zurich


Zurich


Zurich


Zurich


Zurich Policy Limit of 25Mocc/agg

Zurich


Zurich

Policy Limit of 25M

occ/agg

NationalUnion

Policy Limit of 25M

occ/agg

NationalUnion

Policy Limit of 25M

occ/agg

NationalUnion

Policy Limit of 15M

occ/agg

Peleus


Federal


Federal


Federal


Federal


XL Specialty

Policy Limit of 1M occ, 2M agg

Federal


Federal


Federal


Federal


Twin City

Fire


Twin City

Fire


Twin City

Fire


Twin City

Fire


Twin City

Fire


Twin City

Fire

19

ALL COVERAGE IS NOT CREATED EQUALLY

Primary Insurer

One YearFederal: 2011-2012

Six YearsTwin City: 2012-2018

Limits $1MM per occurrence $2M aggregate

$1MM per occurrence $2M aggregate

Retention $200K per occurrence$1MM aggregate

$350K per occurrence$2MM aggregate

Number of Occurrences for Product X Claims

One Occurrence Multiple Occurrences

Duty to Defend

Yes, at dollar one Yes, after retention

Allocation of Defense Costs

By percentage of claimants in policy period

Equal pro rata shares

Allocation of Indemnity



20

NUMBER OF OCCURRENCES

▪ Occurrence:

• “an accident, including continuous or repeated exposure to substantially

the same general harmful conditions”

▪ Are the bodily injuries or instances of property damage alleged by the

plaintiffs in each of claims caused by one overall “occurrence” or is

each of the plaintiffs’ respective injuries caused by a separate

“occurrence”?

▪ Single v. Multiple Occurrences Controls:

• Number of deductibles to be satisfied (each occurrence has a deductible)

• The amount of policy limits available (policies have a per occurrence limit,

so if multiple occurrences, then multiple limits available, subject to an

aggregate limit)

21

TRIGGER OF POLICIES

▪ Multiple policies may be triggered depending on when

bodily injury or property damage is deemed to take place –

if bodily injury or property damage is progressive and

occurs over several years, the policy limits of several

different policies may be available for coverage

▪ Courts have adopted different bodily injury and property

damage trigger theories, including injury taking place on

exposure to the injury causing event and injury taking

place at manifestation of the injury

▪ Varies widely by state, facts of the case and policy wording

22

III.

STRATEGICALLY USING INSURANCE COVERAGE

23

EXECUTIVE SUMMARY

▪ Timely notifications related to the claim

• How should counsel for a product manufacturer best approach the duty to notify

▪ Duty to cooperate

• How should counsel for a product manufacturer best approach the duty to cooperate?

▪ Deciding when to settle the claim

▪ Exerting control over litigation

• How should counsel address potential conflicts of interest between a manufacturer and its insurer?

▪ Affirmative claims?

24

RISKS OF UNTIMELY NOTICE

▪ Failing to give timely notice causes a host of expensive problems.

▪ All of them are avoidable

Out-of-Pocket Judgments

Out-of-Pocket Settlements

Out-of-PocketAttorney’s Fees

and Costs

25

PROMPT NOTICE IS THE BEST PRACTICE

▪ Notice requirements vary by policy type and by jurisdiction

▪ Insurer may claim prejudice based on late notice

▪ Late notice can be a basis for coverage to be denied

26

NOTICE AND COVERAGE UNDER CLAIMS MADE POLICIES

Retroactive period Outside policy periodPolicy in effect

Claim First Made

Covered if Insurer isNotified During the Policy Period

• Service of a lawsuit• Notice of arbitration• Counterclaims/crossclaims• Written demand?• Wells letter?• Subpoena?

Covered Wrongful ActTook Place, but Insured Was Unaware

27

NOTICE AND COVERAGE UNDER OCCURRENCE POLICIES

Outside policy periodPolicy in effect

Covered Incident Occurs Claim Made

Covered if Insurer is Notified as Soonas Practicable, No Actual Prejudice

28

DUTY TO COOPERATE

▪ Most liability policies have a provision stating that the insured has a duty to cooperate with the insurer with respect to

the investigation and/or defense of a claim.

▪ Generally, this is not an issue. Insureds are aligned with insurers and the insurer’s requests for information are not

onerous.

▪ Occasionally, however, the interests are not aligned. Problems can develop in both directions:

• Has the insured fulfilled its duty to cooperate such that the insurer must provide insurance

• Has the insurers conduct excused the insured from any further duty to cooperate. The question generally will turn on

whether the insurer had enough information to evaluate the claim.

▪ One situation where the question arises often is settlement without consent

• Were there meritorious defenses that would preclude liability? How strong?

• Did the insurance company have a full opportunity to evaluate the claim?

▪ Providing the insurer with requested information

• There is always a risk in not providing the insurance carrier with requested information

• Many policyholders react badly to information requests, particularly where a reservation of rights has been issued.

• Many policies have a “reasonableness” requirement

▪ However, many (but not all) states require the insurer to show a “plus factor” such as repeated requests, prejudice from

the failure to cooperate, or that the failure was material. So, the choice of law in the policy could be important.

29

DECIDING WHETHER TO RESOLVE A CLAIM WITHOUT THE

INSURERS PERMISSION

▪ Tricky situation: Insurer has reserved rights, but agreed to defend

• Very common in situations involving large claims

▪ State specific, so you need to be careful and talk the issue through with your lawyers

▪ Some courts have held that while coverage is in doubt, the insured has the right to protect

itself.

• But, the insurer may well be upset and even if you prevail, it could be costly to do so.

▪ N.B. for attorneys: The Model Rules of Professional Conduct place the decision about

whether to settle squarely with the client, i.e. the insured.

• Attorneys who are part of an insurance panel are often tempted to side with the insurer over their client,

the insured. The Model Rules make clear that they cannot do so.

• From the attorneys’ perspective, does the insured’s consent to the policy act as consent to let the insurer

handle settlements?

• Can the insured change its mind? What if it does not revoke the policy?

30

EXERTING CONTROL OVER CLAIMS

▪ Generally speaking, if the insurer offers an unqualified defense, they have the right to

select counsel and control the litigation.

▪ However, if the defense is qualified, then the insured has the right to select its own

counsel and seek payment for fees if there is coverage.

▪ Often, in large cases, the selection of counsel is made jointly.

▪ Keep in mind that the insurer has many control devices:

• Settlement

– Attendance at mediations (not always desirable)

• Defense

– Litigation guidelines

– Fee audits

– Staff counsel

• Selection of counsel

• Cooperation clause

31

COVERAGE FOR AFFIRMATIVE CLAIMS

▪ Argument: The affirmative complaint is part of the defense strategy and should be covered in

connection with the defense.

▪ The prosecution of the affirmative claims will be inextricably intertwined with the defense of the

action.

▪ As such, any additional cost to bring the affirmative complaint will be minimal aside from the drafting

of the complaint itself.

▪ Written and deposition discovery on the affirmative and defensive claims will be duplicative and

inextricably intertwined because the factual and legal arguments will be the same.

▪ Ultimately, bringing affirmative claims will decrease the liability and potential exposure

• Creates pressure to negotiate early and favorable settlement

32

COVERAGE OF THE AFFIRMATIVE CLAIMS

▪ The affirmative claims are reasonable and necessary to limit or defeat liability.

• The California Supreme Court in Aerojet-Gen. Corp. v. Transp. Indem. Co., 17 Cal. 4th 38 (1997), established a three-part test to

determine the fees and costs an insurer must pay in fulfilling its defense obligations, finding that a broad range of work may

be reasonably and necessarily defensive and reimbursable by the insured:

– First, the [fee or expense] must be conducted within the temporal limits of the insurer’s duty to defend, i.e., between

tender of the defense and conclusion of the action. Second, the [affirmative claims] must amount to a reasonable and

necessary effort to avoid or at least minimize liability. Third and final, the [fee or expense associated with the

affirmative claims] must be reasonable and necessary for that purpose. Id. at 61.

– The Aerojet Court held that the if the work conducted amounted to “a reasonable and necessary effort to avoid or at

least minimize liability” then it should be included as reimbursable Defense Costs under the insurance policy. Id.

▪ Even if defense costs serve a dual purpose for both the defense and prosecution of

claims, provided such fees and costs are reasonable and necessary to the insured’s

defense, then the insurer must pay them as defense expenses.

• See, e.g., State v. Pacific Indem. Co., 63 Cal. App. 4th 1535, 1548049 (1998) (defense costs included tasks

involved in prosecuting that were inextricably linked to those involved in defending counterclaims); KLA-

Tencor Corp. v. Travelers Indem. Co., 2004 U.S. Dist LEXIS 15376 *23 (N.D. Cal. August 4, 2004) (same)

• Courts have found that when affirmative claims are “defensive” in nature, meaning they are filed to limit a defendant’s

potential liability, such claims are encompassed by the duty to defend. See, e.g,, Safeguard Scientifics, Inc. v. Liberty Mutual Ins.

Co., 766 F. Supp. 324 (ED PA 1991); TIG Ins. Co. v. Nobel Learning Communities, Inc., 2002 WL 1340332 at *1 (E.D. Pa June 18,

2002).

33

IV.

PROTECTING THE RIGHT TO COVERAGE

34

EVALUATE, DOCUMENT AND RESPOND

▪ Independently evaluate coverage denials and reservations of rights

• Risk managers and brokers may be willing to accept an insurer’s position without the benefit of legal

analysis of the contract

▪ Be Proactive with Reservations of Rights

• Insist upon a prompt coverage determination

• Dispute all stated reservations on coverage

• Look for conflicts of interest that may entitle the policyholder to independent counsel

▪ Document everything that happens with respect to a claim

• Make a record of insurer delays, shifting positions and other potentially improper conduct

• Respond promptly to every insurer

▪ Comply with all reasonable insurer requests

• Comply with all information requests unless outrageous

▪ Set up agreed protocols

• Monthly status reports

• Open access to counsel

• Defense invoices provided to insurers as soon as received

35

SETTLEMENT OF THE UNDERLYING CASE

▪ Lay the groundwork months ahead of any mediation• Before mediation date is even set, prepare insurers with:

– Defense counsel liability analysis

– Third party expert damages exposure analysis

– Comparative settlement and verdict information

– Meet in person with all potentially implicated insurers as a group to iron out coverage issues and

settlement concerns

▪ Involve the insurers in the selection of the mediator and

mediation date

▪ Don’t request settlement authority the day before

▪ Engage the mediator where needed to assist with insurer

cooperation

▪ Leverage settlement demands within policy limits

▪ Prepare for a dual track mediation

36

SETTLEMENT OF THE COVERAGE CLAIM

▪ Insurers like to first negotiate the lowest possible payment

and then the broadest possible release

▪ Negotiate releases and indemnifications first so you know

what you are giving up before agreeing on a payment

amount:• Claim release?

• Occurrence or site release?

• Policy buyback?

• Indemnity clauses?

▪ How does settlement for less than policy limits with one

insurer affect the availability insurance next up in the

chain?• Exhaustion

• Settlement Contribution Strategy

37

RACE TO THE COURTHOUSE

Choice of forum can mean joyous victory or depressing defeat. A wrong selection and it’s enemy territory: a

jurisdiction where the prevailing law, available remedies, courtroom procedures, and juror attitudes are inimical to your

client. A correct choice and, as Don Corleone once said, “They will fear you.”

Gita F. Rothschild, “Forum Shopping,” 24 Litigation 40 (ABS Section of Litigation, Spring

1998).

38

EVALUATE CHOICE OF LAW AND FORUM AT THE OUTSET

▪ Analyze the importance of choice-of-law and forum at the outset of the

claim and before the claim reaches an impasse

▪ Insurance policies are interpreted under state law

▪ Many standard form provisions have been interpreted differently from

state to state, with critically different results:

• All Sums

• Pro Rata

• Policy Exclusions

• Availability of Bad Faith

▪ Be ready to file at the first indication that claim will not be resolved

▪ Say no to choice of law and forum selection clauses in your policies

39

WHAT STATE?

▪ State of incorporation of policyholder

▪ State of incorporation of insurance company

▪ Principal place of business of policyholder

▪ Principal place of business of insurance company

▪ Where the insurance policy was executed

▪ Where the underlying event took place

40

CHOICE OF STATE DETERMINES:

▪ Choice of Law Analysis Used:

• State “where the policy was made”; or

• State with the “most significant relationship” to the dispute

▪ Procedural Rules to be Applied

• Statute of limitations

• Attorneys’ fees

• Court rules

▪ What court?

• State or Federal?

• Judges

• Jury Catchment Area

41

V.

BALANCING INSURANCE REQUIREMENTS WITH CUSTOMER

RELATIONS OBLIGATIONS

42

EXECUTIVE SUMMARY

▪ Determining whether a customer complaint is a claim

▪ How can counsel help protect the manufacturer’s relationship with its customers and

suppliers?

43

DETERMINING WHETHER A CUSTOMER COMPLAINT IS A CLAIM

▪ A frequently recurring issue is when a complaint (informally, not a legal complaint) rises

to the issue of a claim about which the insurance company needs to be notified.

▪ Often, a company does not want to get cross-wise with a recurring customer over an issue

that can be resolved amicably, but does not want to lose insurance coverage if the issue

cannot be resolved.

• Ultimately, this may be a business decision, but it is a risky one.

▪ Courts apply different standards:

• Old rule (still in effect in some places): If the notice period is missed, the contract is breached and the

insurer does not need to provide coverage.

• Modern Rule A: There is a rebuttable presumption that the insurer was prejudiced by the lack of notice,

but the insured has the chance to rebut the presumption

• Modern Rule B: Multifactored test of which prejudice is just one factor.

• It is important to know the standard in the jurisdiction governing your policy

44

PROTECTING A RELATIONSHIP WITH CUSTOMERS OR SUPPLIERS

▪ Is litigation even necessary?

▪ When to settle?

▪ Tenor of the litigation (working with counsel)?

• Working against plaintiffs

• Working with/against co-defendants

• Do we need to salt the earth?

▪ How strong is the claim against the insured?

▪ Insurers could consider whether they can do more, especially when the market is

crowded and the insured has options

45

VI.

FINAL THOUGHTS AND PRACTICAL CONSIDERATIONS

46

COVERAGE COUNSEL, BROKERS & BAD FAITH

▪ Use of coverage counsel

• Early, early, early

• Consider carefully if and when coverage counsel engages directly with insurers

▪ Use of Brokers

• Brokers increasingly performing claims advocacy functions

• Carefully managed roles for broker claims advocate and coverage counsel can be effective

• Be careful of privilege and remember they may be witnesses

▪ Bad Faith

• Can be powerful leverage to achieve a favorable resolution

• Careful consideration of if and when to raise bad faith accusations

47

THANK YOU

Corey Worcester Alex Hardiman

Quinn Emanuel Urquhart & Sullivan, LLP Pillsbury Winthrop Shaw Pittman, LLP

212-849-7471 212-858-1064

[email protected] [email protected]

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