insurance defense costs: coverage and recoupment best...
TRANSCRIPT
Insurance Defense Costs:
Coverage and Recoupment Best Practices Advocating the Defense Cost Issue to Maximize Recovery or Limit Exposure
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WEDNESDAY, DECEMBER 4, 2013
Presenting a live 90-minute webinar with interactive Q&A
Queena Mewers, Counsel, Crowell & Moring, Irvine, Calif.
William T. Barker, Partner, Dentons, Chicago
Helen K. Michael, Partner, Kilpatrick Townsend & Stockton, Washington, D.C.
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Speaker Biographies
QUEENA MEWERS is a counsel in Crowell & Moring LLP’s Irvine, California office. Queena’s
insurance coverage practice focuses on representing and counseling insurance companies in
coverage disputes involving long-tail claims (including asbestos, environmental pollution, and
sexual molestation claims) and issues such as number of occurrences, trigger, allocation,
equitable contribution, choice of law, and bad faith. Queena also has experience with
representing insurers in the asbestos bankruptcy arena. Queena is the current Vice Chair of
the Insurance Law Section of the Orange County Bar Association, and she is also a Lecturer in
Law of first-year Legal Writing and Advocacy at the University of Southern California Gould
School of Law. From 2009-2012, Queena was also named a "Southern California Super Lawyer
– Rising Star.”
Speaker Biographies
WILLIAM T. BARKER is a partner in SNR Denton (U.S.), LLP; has a nationwide practice
representing insurers in complex commercial insurance litigation, including coverage, claim
practices, sales practices, risk classification and selection, agent relationships, and regulatory
matters; is a. co-author of NEW APPLEMAN INSURANCE BAD FAITH LITIGATION, SECOND EDITION
and of THE PROFESSIONAL RESPONSIBILITIES OF INSURANCE DEFENSE COUNSEL; and is an
Adviser to the American Law Institute project on Principles of the Law of Liability Insurance.
He has been described as “[t]he leading lawyer commentator” on the relationships between
insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities
of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He also serves as an expert
witness in insurance and lawyer ethics and liability matters.
Speaker Biographies
HELEN K. MICHAEL is a partner in the D.C. office of Kilpatrick Stockton & Townsend LLP.
She handles coverage disputes in a wide variety of areas including products liability, bodily
injury and environmental claims, consumer protection and unfair trade practices claims,
intellectual property claims, claims arising from hurricanes, other natural disasters and
accidents, claims against corporate officers and directors liability claims. Helen is Co-Chair of
the firm’s insurance recovery practice group. Ms. Michael has been recognized since 2011 as a
Washington, DC “Super Lawyer” in the area of Insurance Coverage by Super Lawyers
magazine, and since 2012 in The Best Lawyers in America® for Insurance Law. She also has
been recognized in the International Who’s Who of Reinsurance and Insurance Lawyers for
2013, and was named by Legal Media Group in its 2013 Guide to the World's Leading Insurance
and Reinsurance Lawyers , as well as in its 2013 Expert Guide to the World's Leading Women in
Business Law. Ms. Michael is a Member of the American College of Coverage and
Extracontractual Counsel and is Fellow of the Litigation Counsel of America. Tyechia White,
an associate in the firm’s D.C. office, assisted with this presentation.
Insurer’s Duty to Defend and Right to Control Defense
• Typically included as policy provision
• The Usual Tripartite Relationship: Insurer-hired defense counsel has two clients: (1) insurer and (2) insured
• Generally permitted because both clients have a single common interest – But see, e.g., Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133
(Wash. 1986) (insurer owes “enhanced obligation to insured,” and “only the insured is the client” of retained defense counsel)
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Insured’s Right to Independent Counsel
• When A “Conflict Of Interest” Arises Between The Insurer And The Insured – Typical Examples:
– Third-party complaint alleges alternative theories of liability, and one theory is not covered by policy (e.g., negligence vs. intentional act)
– Policy provides coverage for multiple defendant-insureds with differing interests
– Third-party complaint seeks disproportionate compensatory and punitive damages
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Insured’s Right to Independent Counsel
• Different Standards for “Conflict of Interest” Sufficient to Give Rise to Insured’s Right to Independent Counsel
– Some Bright-Line Rules
• Insurer’s ROR automatically entitles an insured to independent counsel – E.g., Moeller v. Am. Guarantee & Liab. Ins. Co., 707 So. 2d
1062 (Miss. 1996)
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Insured’s Right to Independent Counsel
• Different Standards for “Conflict of Interest” Sufficient to Give Rise to Insured’s Right to Independent Counsel – Some Bright-Line Rules (cont’d)
• Conflict of interest is per se deemed to arise under certain specific circumstances – e.g.,: – When the facts to be adjudicated in the third-party action are
the same facts upon which coverage depends » E.g., N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004)
• Conflict of interest is per se deemed not to arise under certain specific circumstances – e.g.: – Third party’s claim of punitive damages – Third party’s claim of damages exceeds policy limits
» E.g., Alaska Stat. § 21.96.100(b); Cal. Civ. Code § 2860(b)
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Insured’s Right to Independent Counsel
• Different Standards for “Conflict of Interest” Sufficient to Give Rise to Insured’s Right to Independent Counsel – Most Jurisdictions Require a Case-by-Case Analysis
• Whether outcome of coverage issue can be influenced by insurer-hired counsel
– See, e.g., Long v. Century Indem. Co., 163 Cal. App. 4th 1460 (2008)
• When insurer-hired counsel’s duty to insured would require defeating liability on any ground, and duty to insurer would require defeating liability only upon grounds which would render insurer liable
– Pub. Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392 (1981)
• Whether interest of insurer would be furthered by providing a “less-than-vigorous” defense
– See, e.g., Nandorf, Inc. v. CNA Ins. Cos., 134 Ill. App. 3d 134 (1985)
• Whether insurer’s and insured’s interests are “mutually exclusive” – See, e.g., Red Head Brass, Inc. v. Buckeye Union Ins. Co., 135 Ohio App. 3d 616
(1999)
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Insured’s Right to Independent Counsel
• Different Standards for “Conflict of Interest” Sufficient to Give Rise to Insured’s Right to Independent Counsel – Most Jurisdictions Require a Case-by-Case Analysis –
Recent California Cases • No conflict of interest where insurer’s ROR based on “late notice”
coverage defense – Bank of Am., N.A. v. Superior Ct. of Orange Cnty., 212 Cal. App. 4th
1076 (2013)
• Yes conflict of interest where insurer’s ROR and dec relief action based on policy exclusion for work performed by independent contractors, and third party action requires establishing workers’ relationship to insured as employee or independent contractor – Schaefer v. Elder, 217 Cal. App. 4th 1 (2013) (depublished, non-citable)
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Insured’s Right to Independent Counsel
• Different Standards for “Conflict of Interest” Sufficient to Give Rise to Insured’s Right to Independent Counsel – Most Jurisdictions Require a Case-by-Case Analysis – Recent
California Cases (cont’d) • No conflicts of interest where:
– Insurer provided separate counsel and separate claims adjusters for another defendant-insured also involved in underlying action
– Insurer provided separate counsel for cross-defendant named in contribution claim by insured
– Insurer’s “specific” ROR based on pollution exclusion for losses arising out of government demand to monitor and clean up, because insurer-hired counsel could not control outcome of that inquiry
– Insurers’ “specific” RORs for damages occurring outside of policy period, because insurer-hired counsel could not control facts at issue, and timing of occurrence of alleged damages not relevant to defense counsel jointly retained by multiple insurers with policies covering 20-year period
– Insurers’ “general” RORs at most created a theoretical potential conflict of interest insufficient to require independent counsel
» Fed. Ins. Co. v. MBL, Inc., 219 Cal. App. 4th 29 (2013)
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Insured’s Right to Independent Counsel
• Different Standards for “Conflict of Interest” Sufficient to Give Rise to Insured’s Right to Independent Counsel – Most Jurisdictions Require a Case-by-Case Analysis –
Recent California Cases (cont’d) • Yes conflict of interest where:
– Insurer’s “specific” ROR based on “prior publication” exclusion, because insurer-hired counsel could develop theory that defamatory statements made during policy period were substantially the same as those made before the policy period
– Insurer’s “general” ROR deemed to include specific ROR based on “expected or intended injury” exclusion, and insurer-hired counsel had incentive to pursue theory that alleged defamatory statements by insured were knowingly or intentionally made
» J.R. Marketing, L.L.C. v. Hartford Cas. Ins. Co., No. A115846, 2007 WL 4217443 (Cal. Ct. App. Nov. 30, 2007) (nonpublished, noncitable)
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Insured’s Right to Independent Counsel
• Different Standards for “Conflict of Interest” Sufficient to Give Rise to Insured’s Right to Independent Counsel
– Most Jurisdictions Require a Case-by-Case Analysis – Recent Cases from Other Jurisdictions • No conflict of interest where:
– There would be no benefit to insurer from defense strategy of shifting blame to product manufacturer, since underlying suit alleges insured-dealer failed to diagnose or correct product defect
– Insurer refused to disclaim express right to require insured to cooperate in pursuing indemnification from another party
» Heubel Materials Handling Co. v. Universal Underwriters Ins. Co., 704 F.3d 558 (8th Cir. 2013) (applying Missouri law)
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Insured’s Right to Independent Counsel
• Different Standards for “Conflict of Interest” Sufficient to Give Rise to Insured’s Right to Independent Counsel – Most Jurisdictions Require a Case-by-Case Analysis – Recent
Cases from Other Jurisdictions (cont’d) • No conflict of interest where:
– Facts to be “adjudicated” in underlying action re negligence are not same facts upon which coverage depends (e.g., applicability of exclusions for “testing,” “consulting,” “professional” or “data processing” services) . . .
– . . . even though facts relevant to coverage may be “developed” by insurer-hired counsel in underlying action, because insured adequately protected by ethical duty of counsel to defend the interests of insured
» Downhole Navigator, L.L.C. v. Nautilus Ins. Co., 686 F.3d 325 (5th Cir. 2012) (applying Texas law)
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Insured’s Right to Independent Counsel
• Who Is Entitled To Select Independent Counsel? – Most Jurisdictions: Insured Entitled To Select
• E.g., PIC Grp., Inc. v. LandCoast Insulations, Inc., 795 F. Supp. 2d 459 (S.D. Miss. 2011) (applying Mississippi law); Am. Family Mut. Ins. Co. v. W.H. McNaughton Builders, Inc., 843 N.E.2d 492 (Ill. App. Ct. 2006); Prashker v. U.S. Guarantee Co., 1 N.Y.2d 584 (1956)
• But see, e.g.: – Cent. Mich. Bd. of Trs. v. Emp’ers Reinsurance Corp., 117 F. Supp. 2d 627 (E.D.
Mich. 2000) (applying Michigan law) (“The insured has no absolute right to select the attorney himself, as long as the insurer exercises good faith in its selection and the attorney selected is truly independent”)
– Emp’ers Fire Ins. Co. v. Beals, 240 A.2d 397 (R.I. 1968) (“the engagement of an independent counsel to represent the insured should be approved by the insurer,” although “[s]uch approval . . . should not be unreasonably withheld”)
– Fla. Stat. Ann. § 627.426(2)(b)(3) (“the insurer . . . retains independent counsel which is mutually agreeable to the parties”)
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Insured’s Right to Independent Counsel
• At What Rates Should The Independent Counsel Be Paid? – Most Jurisdictions: Case-By-Case “Reasonableness”
Determination Required • E.g., Santa’s Best Craft, L.L.C. v. Zurich Am. Ins. Co., 941 N.E.2d 291 (Ill. App. Ct.
2010) (declining to hold that defense expenses submitted on behalf of insured’s independent counsel are per se reasonable, noting that court had “held a three-day hearing, considered several witnesses’ testimony, and examined volumes of documents” to conduct “a line-by-line review of the defense expenses” to determine whether fees reasonable)
• E.g., N. Sec. Ins. Co. v. RH Realty Trust, 78 Mass. App. Ct. 691 (2011) (affirming trial court’s holding that independent counsel’s $225/hour rate, as opposed to panel counsel’s $150/hour rate, was reasonable in light of expert testimony and independent counsel’s usual charge of $385/hour; also finding that insurer’s 14-month delay in paying independent counsel’s fees – not even a portion thereof calculated at $150/hour rate – constituted unfair practice in violation of Massachusetts’s G.L. c. 93A; but capping rate at which independent counsel may recover against insurer at $225/hour instead of $385/hour)
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Insured’s Right to Independent Counsel
• At What Rates Should The Independent Counsel Be Paid?
– Alaska Stat. § 21.96.100(d) and Cal. Civ. Code § 2860(c)
• Typical panel counsel rates for similar type of action in same geographical area
• Also, dispute over reasonableness of independent counsel fees subject to arbitration
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Unjust Enrichment?
• "If one party to a contract demands from the other a performance that is not in fact due by the terms of their agreement, under circumstances making it reasonable to accede to the demand rather than to insist on an immediate test of the disputed obligation, the party on whom the demand is made may render such performance under protest or with reservation of rights, preserving a claim in restitution to recover the value of the benefit conferred in excess of the recipient's contractual entitlement." [Restatement (Third) of Restitution and Unjust Enrichment, Sec. 35(1) (2011).]
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Only Applies Where No Duty To Defend
• But see Buss v. Superior Court, 16 Cal. 4th 35, 46-53 (1997) (allowing recoupment of costs for defending noncovered claims in "mixed action); compare id. at 62-66 (dissenting on this point).
• No other jurisdiction has followed CA on this point.
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Requires Reservation of Rights
• Performance must be rendered "under protest or with reservation of rights."
• Prevents insured from relying on apparent finality of payment.
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Courts Divided
• Yes: 9 states, federal court of appeals predictions for 4 states, federal district court predictions for 9 states.
• No: 10 states, federal court of appeals predictions for 4 states, federal district court predictions for 2 states.
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Unjust Enrichment Analysis
• Party who receives performance not required by contract is unjustly enriched.
• But voluntary payment cannot be recovered.
• Payment is not voluntary if paying party faces greater liability if refusal of payment found erroneous and timely judicial resolution not available.
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Analysis Applied
• If defense incorrectly denied, insured may default, defend ineptly, or settle generously on a nonrecourse basis, all magnifying cost beyond simple belated payment of defense costs.
• Except in Wisconsin, almost never possible to get duty to defend resolved before defense must be provided or refused.
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Public Policy Analysis
• Allowing recoupment encourages insurers to defend in doubtful cases.
• Insured always gets entitlement: a free defense when due.
• Insured also gets benefit of a free loan for defense costs when defense wasn't due.
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Contrary Arguments
• Existence of contract precludes unjust enrichment claim.
• If insurer wants right to recoup, should say so in the contract.
• Insurer defends for its own benefit, so insured is not unjustly enriched.
• Reservation of rights can't create new contract.
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Contrary Arguments
• Allowing recoupment is contrary to policyholder reasonable expectations.
• Duty to defend does not expire until a court determines that the claim is not covered.
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Further Reading
• Arguments on both sides are fully developed, with a full survey of decisions on both sides in William T. Barker & Ronald D. Kent, New Appleman Insurance Bad Faith Litigation, Second Edition, Sec. 2.11, adapting Sherilyn Pastor & William T. Barker, Recoupment of Defense Costs for Noncovered Claims (2012).
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Allocation of Losses in Cases Involving a Mix of Covered &
Non-covered Claims or Parties
December 4, 2013
Helen K. Michael 202.508.5866
EXAMPLES OF CASES INVOLVING “MIXED” COVERAGE SITUATIONS
• Lawsuit alleging claims involving negligence and tort committed with intent to cause injury.
• Lawsuit seeking both compensatory and punitive damages.
• Lawsuit asserting claims against an insured (e.g., the director of a corporation) and non-insured co-defendant (e.g., the corporation itself).
• Lawsuit asserting claims involving non-covered acts occurring before a retroactive coverage date and claims involving covered acts occurring after that retroactive date.
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KEY QUESTIONS
1. Allocation of Defense Costs: Is the insurer obligated to pay for all of the defense costs incurred in the lawsuit involving a mix of covered and non-covered claims or parties?
2. Allocation of Indemnity Costs: What amount of the subsequent settlement or judgment is the insurer obligated to pay?
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ALLOCATION OF DEFENSE COSTS? - Where policy language is silent, courts have
reached conflicting results:
- No Allocation: Insurer Must Pay 100% of Defense Costs. - California Variation: Insurer Must Pay 100% of Defense Costs, but
can seek recoupment if it meets the burden of showing that particular costs relate solely to the defense of non-covered claims. Buss v. Superior Court, 16 Cal. 4th 35, 48-49 (1997).
– “Reasonably Related” Rule: Insurer must pay all defense costs reasonably related to a covered claim when there is no reasonable means of pro-rating the costs. Cont'l Cas. Co. v. Bd. of Educ. of Charles Cnty., 302 Md. 516, 489 A.2d 536 (1985); Hercules Inc. v. Aetna Cas. & Sur. Co., 92C-10-105, 1998 WL 962089 (Del. Super. Sept. 30, 1998).
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MORE ON REASONABLY RELATED TEST
Common Formulation of Test: - The insurer must pay all defense costs that
benefited the defense of the covered claim even if those costs also benefitted the defense of the non-covered claim. Cont'l Cas. Co. v. Bd. of Educ. of Charles Cnty., 302 Md. 516, 489 A.2d 536 (1985).
Burden of Proof: ‒ Some courts require the insured to prove that costs
are reasonably related. ‒ Insurer may have to prove the appropriate
allocation when it has refused to defend.
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ALLOCATION OF INDEMNITY COSTS?
Where policy language is silent, courts again have reached conflicting results.
‒ “Larger Settlement” Rule: Insurer Must Cover 100% of the settlement unless the non-covered claim or party increased the cost of the settlement. E.g., Safeway Stores, Inc. v. National Union Fire Insurance Co., 64 F.3d 1282 (9th Cir. 1995).
‒ “Relative Exposure” Approach: Requires assessment of risks presented by covered and non-covered claims. E.g., PepsiCo, Inc. v. Continental Cas. Co., 640 F. Supp. 656 (S.D.N.Y. 1986).
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EXPRESS ALLOCATION PROVISIONS
Many policies now contain express allocation provisions.
Representative allocation provision: “The Insureds and the Carrier shall use their best efforts to allocate such amount between covered Loss and uncovered loss based upon the relative legal and financial exposures of the parties to covered and uncovered matters; provided however that one hundred percent (100%) of any such Defense Costs shall be allocated to covered Loss. . . .”
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TIPS FOR MINIMIZING COVERAGE DISPUTES
Evaluate applicable policy language and negotiate for most favorable terms during policy placement and renewal: – Provision that 100% of the defense costs will be allocated to covered
claim. – Provision allowing for negotiation with respect to allocation of
indemnity costs for a mixed claim.
Set up separate billing numbers for costs unrelated to defense of covered claims.
Communicate early and often about defense coverage for “mixed” claim.
Consider need to provide allocation of settlement amount in settlement agreement.
Consider need for special verdict form and jury interrogatories if case involves “mixed” claims that need to be tried.
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Compliance with Billing and Litigation Guidelines
William T. Barker 312.876.8140
Helen K. Michael 202.508.5866
INSURER LITIGATION GUIDELINES
• Guidelines may include case planning, strategy, tactics, and expenditures
• Examples: - How many lawyers can work on a matter; - Number of lawyers that may attend depositions, court hearings, etc.; - Time that may be spent on research and drafting documents; - Restrictions on expenses for travel and photocopying; - Restrictions on reimbursement for internal communications; - Pre-approval required to perform specified tasks.
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Example of Litigation Guidelines:
http://www.zurichna.com/zna/onlineservices/online_customer/customer_services/management_guidelines.htm
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• Consultation by independent counsel
• Panel counsel may defer to adjuster's desires if no substantial risk to insured. Restatement Sec. 134, cmt. f.
• Independent counsel need not defer
Consultation with Adjuster
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• Adjusters usually do not overrule counsel recommendations, but want input on expense and want to integrate defense strategy with settlement strategy
• Forces counsel to think harder about cost/benefit
• But there may be issues for defense counsel if prior approval requirement could affect insured’s defense
Litigation Guidelines & Prior Approval
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• Right to defend includes right to make budgetary decisions
• Duty of competent representation
• Independent counsel and adequate resources
• Budgetary decisions that threaten insured's interests trigger duties to insured
Budgetary Decisions
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• Tell insured at outset about adjuster role
• If adjuster rejects recommended action and insured's interests may be threatened, seek reconsideration, possibly from supervisor
• If adjuster unmoved, consult with policyholder
• If policyholder does not consent to adjuster's direction, seek leave to withdraw
ABA 01-421
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• Requirements of prior approval forbidden in Montana
• Colloquy at argument indicates that requirements of consultation permissible
In re Rules of Prof'l Conduct
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