Archive for March, 2013

Prevailing Party Fees are Not Recoverable in Cases Arising Under Admiralty Jurisdiction

Friday, March 22nd, 2013

By Charles S. Davant, Sedgwick Fort Lauderdale

Insurers with marine risks in Florida should be wary of an evolving conflict among Florida’s lower appellate courts regarding the applicability of Florida’s Offer of Judgment Statute (ch. 768.79) to claims governed by admiralty law. Compare Nicoll v. Magical Cruise Co., Ltd., No. 5D11-1039, 38 Fla. L. Weekly D624b, 2013 WL 1007679 (Fla. 5th DCA Mar. 15, 2013) with Royal Caribbean Corp. v. Modesto, 614 So. 2d 517 (Fla. 3d DCA 1992).

In Nicoll, plaintiff Fay Nicoll slipped and fell aboard a cruise ship owned by Magical Cruise Company. During the course of litigation, Magical served an Offer of Judgment in accordance with Florida Statute 768.79. The statute allows a party in a civil action to serve an offer of judgment for a specific dollar amount. If rejected or not accepted within 30 days, the serving party is entitled to recover costs and attorney’s fees from the date of service if the serving party beats their offer of judgment by more than 25 percent. For defendants, this means obtaining a judgment of no liability or one that is 25 percent less than its offer; for plaintiffs, this means recovering a judgment for more than 25 percent of its offer.

Nicoll rejected Magical’s offer. Magical subsequently prevailed on a motion for summary judgment and moved for fees according to the statute. The trial court denied Magical’s motion for attorney’s fees and Florida’s Fifth District Court of Appeal affirmed. In so holding, the Court found that entitlement to attorney’s fees under Florida’s statute is a substantive right; thus, the Court must apply federal maritime law to substantive issues arising under admiralty jurisdiction. Under federal admiralty law, a prevailing party is generally not entitled to attorney’s fees, even when a state statute establishes entitlement to such fees. Thus, the Court rejected Magical’s claim for fees.

The opinion recognized a conflict with the Third District Court of Appeal’s decision in Royal Caribbean Corp. v. Modesto, 614 So. 2d 517 (Fla. 3d DCA 1992). The Modesto Court found no conflict between Florida’s rules of law regarding offers of judgment and federal maritime law, stating the rules relating to offers of judgment are an integral part of the state’s management of its courts’ proceedings. The continued validity of Modesto was recently questioned by the Third District Court in Royal Caribbean Corp. v. Cox, No. 3D09-2712, 29 Fla. L. Weekly D2029, 2012 WL 3587008 (Fla. 3d DCA Aug. 22, 2012). However, Modesto remains good law in the Third District Court of Appeal and its conflict with the Fifth District’s decision in Nicoll remains.

 

Second Circuit Holds That Insurers May Recover Overpayments of Benefits Under ERISA

Wednesday, March 20th, 2013

By Julie Y. Kim, Sedgwick New York

On March 13, the Second Circuit issued a significant opinion interpreting key provisions of the Employee Retirement Income Security Act (“ERISA”).  In Thurber v. Aetna Life Ins. Co., Case No. 12-370-cv, 2013 WL 950704 (2d Cir. Mar. 13, 2013), the court affirmed the order of the District Court for the Western District of New York to the extent it dismissed the plaintiff’s ERISA § 502(a)(1)(B) claim, but reversed the District Court’s denial of Aetna’s counterclaim pursuant to ERISA § 502(a)(3) to recover overpayment of short-term disability (“STD”) benefits.  In reaching its decision, the court held that ERISA plan administrators are not required to provide actual notice to participants and beneficiaries of a plan’s grant of discretionary authority to an insurer or other claim fiduciary, and that Aetna’s counterclaim to recover its overpayment of STD benefits constituted equitable – not legal – relief, and was permissible under ERISA § 502(a)(3).

On appeal, the Second Circuit disagreed with the Seventh Circuit to the extent that its holding in Herzberger v. Standard Ins. Co. interpreted ERISA as requiring actual notice to plan participants of a reservation of discretionary authority, reasoning that “unless ERISA requires the SPD [summary plan description] to contain language setting the standard of review, we see no reason why a plan administrator must actually notify a participant of its reservation of discretion.  ERISA contains no such edict.”  Affirming the district court’s summary judgment in favor of Aetna on its denial of Thurber’s long-term disability benefit claim, the court agreed that Aetna did not act arbitrarily and capriciously and its determination was supported by substantial evidence.

Notably, the Second Circuit reversed the District Court’s dismissal of Aetna’s counterclaim to recover its overpayment of STD benefits based on Thurber’s receipt of other income benefits in the form of no-fault insurance payments.  Discussing Supreme Court decisions analyzing the issue, the Second Circuit held that Aetna’s counterclaim was equitable in nature because the insurer sought specific funds (overpayments resulting from Thurber’s simultaneous receipt of no-fault insurance benefits and STD benefits) in a specific amount (the total overpayment) as authorized by the plan, that had been entrusted to Thurber.  Acknowledging a Circuit split on the issue, the court determined that a different result was not warranted because either (1) Aetna sought to recover a specific portion of benefits rendered overpayments rather than the actual third-party income Thurber received, or (2) the overpayments made had since been dissipated.  The plan clearly provides Aetna the right to recover benefits rendered overpayments, giving Thurber adequate notice that she was holding the money in a constructive trust, and the funds were under her control but belonged to the insurer.

In issuing this precedential opinion, the Second Circuit specifically rejected the Ninth Circuit’s recent decision in Bilyeu v. Morgan Stanley Long Term Disability Plan, 683 F.3d 1083 (9th Cir. 2012), which denied insurers the right to pursue recovery of overpayment under ERISA.  It seems likely that there will be significant court activity regarding this issue as courts continue to struggle with interpreting what claims constitute “equitable” relief permissibly sought under ERISA § 502(a)(3).

NJ’s Bad Faith Legislation Stemming From Superstorm Sandy Needs Emergency Relief

Tuesday, March 19th, 2013

By Jeffrey M. Winn and Ryan C. Chapoteau, Sedgwick New York

In the wake of Superstorm Sandy, the New Jersey Legislature is considering the passage of A3710, which will enable policyholders to sue insurers for bad faith based on a single alleged violation of the New Jersey Insurance Trade Practices Act, NJSA § 17:29B-1, et seq.

The proposed legislation is unnecessary and will just promote more litigation, delay the resolution of first-party claims, disturb New Jersey’s current landscape of thoughtful and termperate common law remedies, and result in higher premiums for all policyholders. Although the proposed legislation may be a boon for lawyers, it likely will be a losing proposition for virtually everyone else.

Prior to Superstorm Sandy, the New Jersey Legislature and the courts had carefully crafted a comprehensive framework of rules, causes of action, and damages measures which have adequately protected the public against the bad faith claims settlement practices of insurers.  For example, in Rova Farms Resort v. Investors Ins. Co., 65 N.J. 474, 323 A.2d 495 (1974), the New Jersey Supreme Court prescribed a cause of action that protects policyholders from excess verdicts.  In Pickett v. Lloyd’s, 131 N.J. 457, 621 A.2d 445 (1993), the Supreme Court conducted a thorough national survey of insurance bad faith decisions before adopting the centrist “fairly debatable” test for New Jersey first-party bad faith claims, thereby rejecting the extreme standards that prevail in some jurisdictions.

While New Jersey already permits policyholders to recover extra-contractual damages against insurers, both the Legislature and courts have adroitly balanced the competing interests.  The Supreme Court in Pickett posited that, when the policyholder has demonstrated that the insurer has engaged in bad faith, the policyholder may recover consequential damages (including attorneys’ fees) and punitive damages.  On liability insurance disputes, prevailing policyholders are generally permitted to recover their costs and fees if they can satisfy the elements of New Jersey Civil Practice Rule 4:42-9(a)(6).  Thus, the remedies are in place and the public is adequately protected.

Policyholder attorneys dislike the Pickett standard because it requires a showing of “gross negligence” by the insurer.  This middle-of-the-road standard eschews the extreme liberal standard of simple negligence advocated by policyholder attorneys, and the extreme conservative standard of “intentional wrongdoing” favored by some insurance industry advocates.  In adopting the Pickett standard, the Supreme Court sent the strong message that bad faith claims should not be a routine add-on to the typical insurance coverage dispute, but should be reserved for sufficiently reckless conduct by the insurer.  The Supreme Court was clear that, to make out an actionable bad faith claim, “simple negligence” is not enough.

The proposed legislation will eviscerate the time-honored Pickett standard.  If enacted, the legislation will unsettle the New Jersey insurance market by equating bad faith with simple negligence, thus making bad faith claims commonplace in most first-party cases.  In the interest of maintaining a stable insurance market in New Jersey, the proposed legislation should not be adopted.

Causation is Not Elementary, My Dear

Friday, March 15th, 2013

By Chen Foley, Sedgwick Bermuda

Sherlock Holmes famously said, “when you have eliminated the impossible, whatever remains, however improbable must be the truth.”  This reasoning has been adopted by trial judges seeking to resolve questions of causation.  In Nulty & Others v Milton Keynes Borough Council [2013] EWCA Civ 15 [Here*] the English Court of Appeal found that a judge was wrong to do so.  It concluded that, where there are multiple causation scenarios, each of which is unlikely, the court is not entitled to favor the scenario that is the least unlikely.

Mr. Nulty carried out repair work at a recycling plant.  While on a break, a fire broke out in the area where he was working, causing extensive damage.  The owner blamed Mr. Nulty for the fire and sued him. His liability insurers defended the action.

The trial judge indentified three possible causes of the fire: (1) a carelessly discarded cigarette, (2) arcing from a live cable, and (3) arson.  He concluded that, although it might be unlikely that an experienced electrical engineer would discard a cigarette in a dangerous manner, the two other scenarios were even more unlikely.  Having eliminated the two most unlikely scenarios, he concluded the remaining one was the true cause of the fire.

The insurers appealed.  The Court of Appeal found that the judge’s reasoning was flawed.  The claimant must prove on the balance of probabilities the cause of its loss; and it is for the judge to examine the evidence produced by the claimant to determine if causation has been proved.  If the judge is unable to reach a decision on the evidence, he is required conclude that the claimant has not proved its case.  Where the evidence suggests a scenario is improbable, a finding by the court that it was nevertheless more likely to have occurred than another does not accord with common sense.

Trial judges have been cautioned against reaching conclusions on causation by merely seeking to eliminate implausible scenarios.  Doing so runs the risk of the judge settling on the least unlikely cause, without having regard to whether there is sufficient evidence establishing that it is, in fact, the true legal cause.

The decision is a helpful reminder to insurers engaged in defending their insureds of the evidentiary burden that must be satisfied when establishing causation.  This is particularly so where, as in Nulty, the claimant relies on circumstantial evidence alone to do so.

Florida High Court Narrows Application of Economic Loss Rule to Product Liability Actions

Tuesday, March 12th, 2013

By Robert C. Weill, Sedgwick Ft. Lauderdale

In a dramatic reversal of established precedent, the Florida Supreme Court on March 7, 2013 held in a 5-2 decision that the economic loss rule only applies to product liability actions.  Tiara Condo. Ass’n v. Marsh & McLennan Cos., No. SC10-1022, 2013 WL 828003 (Fla. Mar. 7, 2013).  The case was before the Court on a question certified by the Eleventh Circuit Court of Appeals, which asked whether the economic loss rule exception for professionals applies to insurance brokers.  Rather than answer the issue framed by the Eleventh Circuit, the Court restated the certified question to broaden the issue before it as follows:  “Does The Economic Loss Rule Bar An Insured’s Suit Against An Insurance Broker Where The Parties Are In Contractual Privity With One Another And The Damages Sought Are Solely For Economic Losses?” Slip op. at 2 (all caps omitted). The Court answered the rephrased certified question in the negative, holding that the application of the economic loss rule is limited to products liability cases.

The majority of the Court reasoned that the Court “will depart from precedent as it does here when such departure is necessary to vindicate other principles of law or to remedy continued injustice.” Slip op. at 18 (internal citations omitted). Additionally, the Court noted “[s]tare decisis will also yield when an established rule has proven unacceptable or unworkable in practice.” Id. The Court believed that the repeated creation of exceptions to the rule over time, “now demonstrates that expansion of the rule beyond its origins was unwise and unworkable in practice.”  Slip op. at 18.  The Court’s decision, therefore, “return[ed] the economic loss rule to its origin in products liability.”  Id.  Interestingly, the concurring opinion noted that the majority of the Court did not view its decision as a “departure from precedent,” but instead viewed its decision as “the culmination of the Court’s measured articulation of the economic loss rule’s original intent.”  Slip op. at 19 (Pariente, J., concurring).

Chief Justice Polston and Justice Canady dissented with opinions.  Judge Polston noted that as a result of the decision “there are tort claims and remedies available to contracting parties in addition to the contractual remedies, which, because of the economic loss rule, were previously the only remedies available.”  Slip op. at 26 (Polston, C.J., dissenting).  To state it more simply, every breach of contract claim now will be accompanied by a tort claim or claims.  See Slip op. at 35 (Canady, J., dissenting).

 

Washington Supreme Court Presumes that First-Party Insurers May Not Assert Attorney-Client Privilege or Work Product Protection in Bad Faith Actions

Tuesday, March 5th, 2013

By Robert A. Meyers, Sedgwick Seattle

In Cedell v. Farmers Ins. Co. of Washington, No. 85366-5 (Wash. February 21, 2013), a 5-4 majority of the Washington Supreme Court established a new framework for evaluating attorney-client privilege and work-product issues in bad-faith lawsuits against first-party insurers. The framework does not apply to bad-faith lawsuits involving underinsured motorist (“UIM”) coverage.

First, the Court declared that it will presume that a first-party insurer may not assert the attorney-client privilege or work-product protection in a bad faith lawsuit.

Second, the Court held that an insurer may seek to rebut that presumption by demonstrating that the insurer’s attorney “was not engaged in the quasi-fiduciary tasks of investigating and evaluating or processing the claim, but instead providing the insurer with counsel as to its own potential liability; for example, whether or not coverage exists under the law.” If the insurer can satisfy that burden, it should be entitled to an in camera review of the disputed information and the redaction of privileged and protected information.

Third, the Court held that, even if the insurer successfully rebuts the presumption, the insured may seek to pierce the attorney-client privilege by demonstrating that “a reasonable person would have a reasonable belief that an act of bad faith has occurred.” In that event, the trial court would conduct an in camera review of the privileged materials, and if the trial court determines that “there is a foundation to permit a claim of bad faith to proceed,” it will declare that the insurer has waived its attorney-client privilege.

Following the Court’s ruling, in future bad-faith lawsuits relating to first-party insurance claims one can reasonably anticipate some confusion and disagreement about whether the insurer’s attorney’s conduct constituted “counsel as to [the first-party insurer’s] liability” which would be subject to the attorney-client privilege, or a “quasi-fiduciary task” that would not be subject to the privilege. Moreover, a first-party insurer should be keenly aware that if its attorney undertakes tasks that could be construed to be quasi-fiduciary tasks such as investigating, evaluating, or processing the first-party claim, [1] the insurer’s communications with its attorney relating to those tasks might not be privileged and [2] the attorney’s work product relating to those tasks might not be protected. Because of that, if a first-party insurer’s attorney undertakes such quasi-fiduciary tasks, it might behoove the insurer and its attorney to establish separate files that relate to those tasks.

Opinion:
http://www.courts.wa.gov/opinions/?fa=opinions.disp&filename=853665MAJ

Dissent:
http://www.courts.wa.gov/opinions/?fa=opinions.disp&filename=853665Di1

 

Pendergrass: The 78 Year Reign has Ended

Monday, March 4th, 2013

By David M. Ajalat, Sedgwick San Francisco

After decades of criticism, the California Supreme Court recently overturned Bank of America etc. Assn. v. Pendergrass, 4 Cal.2d 258 (1935) (Pendergrass) which narrowed the fraud exception to the parol evidence rule.  Traditionally, the fraud exception allowed a party to present extrinsic evidence (evidence outside of the terms of a contract) to show that an integrated agreement was tainted by fraud.  Pendergrass, however, held that evidence of fraud could only be used to “establish some independent fact or representation, some fraud in the procurement of the instrument or some breach of confidence concerning its use, and not a promise directly at variance with the promise of the writing.”  Pendergrass, 4 Cal.2d 258, 263.

The California Supreme Court reconsidered Pendergrass in Riverisland Cold Storage Inc., et al. v. Fresno-Madera Production Credit Ass’n, S190581 (Riverisland).  There, Plaintiffs Lance and Pamela Workman sought a forbearance agreement from a credit association.  The forbearance agreement initially contemplated a three-month term.  However, the credit association promised to lengthen the term to two years if the Workmans pledged further collateral.  The Workmans pledged two additional parcels of land, but the agreement they signed only reflected three months of forbearance.  After three months, the credit association recorded a notice of default.  The Workmans sued for fraud.

The trial court granted the credit association’s motion for summary judgment.  Following  Pendergrass, it reasoned the parol evidence rule barred the Workmans from relying on evidence of fraud.  The Court of Appeal reversed the trial court’s decision, concluding Pendergrass only barred evidence of promissory fraud.  The California Supreme Court went further by overruling Pendergrass and its progeny, concluding that the parol evidence rule should never be used as a shield to protect misconduct.

Riverisland should increase the volume of insurers’ substantive fraud litigation.  Accordingly, insurers should familiarize themselves with the elements of fraud.  In particular, they should pay attention to the reliance element, which requires the plaintiff to establish its justifiable reliance on the defendant’s misrepresentation.  A party cannot justifiably rely on a misrepresentation if it had a “reasonable opportunity to know of the character or essential terms of the proposed contract.”  Rosenthal v. Great Western Fin. Securities Corp., 14 Cal.4th 394, 419.  Accordingly, insurers should provide prospective insureds with ample time to learn the essential terms of insurance agreements.

A Win is a Win, Even When it’s Not

Monday, March 4th, 2013

By Luke Panzar, Sedgwick San Francisco

In National Union Fire Ins. Co. of Pittsburgh v. Seagate Technology, Inc., Case No. C 04-01593, the District Court for the Northern District of California ruled that an insurer was not in violation of its duty to defend where it stopped defending its insured following a trial court’s ruling absolving it of its duty to do so, even though the victory was later overturned on appeal.  In what was an issue of first impression, the District Court’s decision gives insurers the right to halt defense payments in reliance on a final judgment while an appeal is pending, without fear of claims alleging breach of contract or bad faith.

In 2000, a lawsuit was filed against Seagate which triggered National Union’s duty to defend.  In 2004, National Union filed a declaratory action in the Northern District of California seeking a judgment that it had no obligation to defend the action brought against Seagate.  After another six years of litigation in both the underlying action and the coverage suit, the District Court held that while the insurers’ duty to defend began on November 1, 2000, it ended on July 18, 2007.  Thereafter National Union stopped paying Seagate’s defense costs.

On appeal it was held that National Union’s duty to defend did not in fact terminate in 2007.  Seagate then argued that by relying on the trial court’s ruling National Union was in breach of its contractual duty to defend it.  Seagate sought fees and prejudgment interest in excess of $20 million.

The District Court noted that the duty to defend typically terminates upon a judicial determination that the insured does not have a potentially-covered claim.  The court then acknowledged that a favorable summary judgment order is just such a determination.  While acknowledging that the losing party has a right to appeal, the court, citing Maness v. Meyers, 419 U.S. 449, 458 (1975), reasoned that, absent a stay, the losing party must comply with the order pending appeal.  Because Seagate did not seek a stay, National Union did not act wrongfully in relying on the District Court’s final judgment.  To hold National Union in breach of contract for relying on a Rule 54(b) final judgment would serve to convert that judgment into one that is merely provisional.

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