Archive for April, 2013

Construction Defect Coverage Quarterly

Monday, April 29th, 2013

In honor of Earth Day, which recently celebrated its 43rd birthday, the lead article in the current issue of our Construction Defect Coverage Quarterly addresses potential coverage issues implicated by green construction. We also continue the analysis of how various states define “occurrence” under liability policies, and highlight a recent opinion from a Washington federal court enforcing a broad EIFS exclusion.

Please click here to read the CDCQ and let us know if you are intrested in being placed on the mailing list for this quarterly newsletter.

Washington Federal Judge Presumes that Liability Insurer May Not Assert Attorney-Client Privilege or Work Product Protection in Bad-Faith Suit

Friday, April 19th, 2013

On April 12, 2013, Judge Richard Jones of the U.S. District Court for the Western District of Washington ruled that in a bad-faith lawsuit against a liability insurer, the judge would presume that the insurer has no attorney-client privilege or work-product protection. Judge Jones’ ruling thereby materially extended the holding of the Washington Supreme Court’s recent decision in Cedell v. Farmers Insurance, in which a 5-4 majority presumed that a first-party insurer may not assert the attorney-client privilege or work-product protection in a bad-faith lawsuit. 

Click here for the Insurance Law Blog’s previous coverage of Cedell.

 

Seventh Circuit Confirms Viability of Claims Made Defense in Errors and Omissions Policy Dispute

Friday, April 12th, 2013

By Scott M. Bloom and Luke W. Panzar, Sedgwick San Francisco

The Seventh Circuit confirmed that the notice requirements of “claims-made” policies entitle insurers to deny coverage where, before the policy’s inception, the insured knows of circumstances that “might reasonably be expected” to give rise to a claim.  Koransky, Bouwer & Poracky, P.C. v. The Bar Plan Mut. Ins. Co., Case No. 12-1579 (7th Cir.), _____ F. Supp. 3d_______ (“KBP”). 2013 WL 1296724.

An insured law firm, KBP, purchased consecutive malpractice policies from the same insurer for the periods 2006-2007 (“Policy 1”) and 2007-2008 (“Policy 2”).  During Policy 1 it represented a client in a series of transactions.  It misfiled a contract which resulted in the collapse of a deal.  Policy 1 expired about two months after the transaction fell through.

In the renewal application for Policy 2, KBP denied knowledge of any unreported acts or omissions that might give rise to a claim.  Sometime later it learned that its client was considering a malpractice suit in connection with the failed transaction.  It notified the insurer under Policy 2. 

The insurer disclaimed coverage on the basis that KBP had learned of the facts giving rise to the claim before inception of Policy 2.  It also took the position that, because KBP had not given notification before expiration of Policy 1, cover was precluded under that policy also. Litigation ensued.  The district court granted summary judgment in the insurer’s favor.  Its decision was upheld on appeal. 

The court reasoned that timely notice to the insurer was a “condition precedent” to coverage under a claims-made policy.  It was reasonable for KBP to have been aware of the possibility of a malpractice claim once it was known that the transaction had collapsed and the firm’s related mitigation efforts had failed.  The insured should have notified the insurer as soon as it became aware of these circumstances.  KBP did not properly report the claim during Policy 1, and there was no coverage under Policy 2 as KBP was aware of circumstances giving rise to it prior to inception. 
 
The insurer was not required to show prejudice before denying the claim.  In the court’s view, applying such a requirement would create an expansion of coverage for which no premium was paid.

Click here to view the opinion.

New York Court Rules that Professional Services Exclusion Bars Coverage for Underlying Actions Brought By FINRA and Private Investors

Thursday, April 11th, 2013

By Eryk Gettell, Sedgwick San Francisco

In David Lerner Associates, Inc. v. Philadelphia Indemnity Insurance Company, 2013 WL 1277882 (E.D.N.Y. Mar. 29, 2013), the United States District Court for the Eastern District of New York affirmed the plain meaning of the words “professional services”. 

Philadelphia Indemnity Insurance Company (“Philadelphia”) – represented by Sedgwick LLP in the coverage action – issued a D&O liability policy to the brokerage firm David Lerner Associates, Inc. (“DLA”).  The policy contained a “professional services” exclusion, however it did not define the words “professional services”.

The Financial Industry Regulatory Authority (“FINRA”) brought a disciplinary proceeding against DLA, alleging that it misrepresented the value of certain real estate investment trust (“REIT”) shares sold to investors, and failed to perform adequate due diligence in marketing those shares.  Shortly thereafter, three related class action lawsuits were brought against DLA.  DLA tendered the FINRA proceeding and the related class actions to Philadelphia for coverage.

Philadelphia denied coverage based on the “professional services” exclusion.  DLA sued for declaratory relief and breach of contract.

The court was asked to consider whether the due diligence carried out by DLA in the course of providing investment advice constituted a “professional service” for purposes of the exclusion, and concluded it did.  In rejecting DLA’s argument that the exclusion was ambiguous merely because the words “professional services” were not defined, the court reasoned that undefined terms “should be read in light of common speech and the reasonable expectations of a business person”.  

The court was not persuaded by DLA’s argument that financial advisors do not perform “professional services” because they are not considered professionals in the malpractice sense, explaining that in the context of liability insurance “professional services” encompassed a broader range of activities. 

The court also rejected the theoretical argument that DLA’s actions were only “ministerial” in nature because “performing a due diligence analysis and marketing financial products requires specialized knowledge and training, and is not a rote activity performed by a professional”. 

Discovery was unnecessary to determine whether the exclusion applied because DLA’s alleged failings fell within the scope of the exclusion on their face. 

 

Supreme Court of Washington Holds that Insurers Are Not Entitled to Reimbursement of Non-Covered Defense Costs

Thursday, April 4th, 2013

By Eryk R. Gettell, Sedgwick San Francisco

In a 5-4 decision, the Washington Supreme Court held that an insurer may not recover defense costs incurred under a reservation of rights while the insurer’s duty to defend is undetermined.  National Sur. Corp. v. Immunex Corp., No. 86535-3 (Wash. Mar. 7, 2013).  Although not addressed by the court, the ruling likely only applies to duty to defend policies, as opposed to policies that require the insurer to reimburse defense costs.  The decision is also important because the court confirmed that insureds under duty to defend policies may recover their pre-tender defense costs, unless the insured’s late tender prejudiced the insurer.

National Surety Corporation issued excess and umbrella liability insurance policies to Immunex Corporation for the period from 1998 to 2002.  In August 2001, Immunex notified National Surety that it was under government investigation concerning its wholesale drug pricing.  Beginning in 2001, Immunex was sued in more than twenty actions for claims regarding its alleged price fixing of wholesale drugs.  In October 2006, Immunex tendered its defense of the lawsuits to National Surety.

National Surety issued its reservation of rights letter to Immunex in March 2008.  National Surety advised that, while it did not believe the litigation was covered, it still needed to complete its coverage investigation.  National Surety agreed to defend Immunex until it could obtain a judicial declaration regarding whether the litigation was covered.  National Surety advised that it would reimburse Immunex’s post-tender defense costs, but also reserved the right to recoup any defense costs if it was later determined that there was no coverage, and that National Surety was entitled to reimbursement.

In March 2008, National Surety filed a declaratory judgment action against Immunex in state court.  The trial court ruled that National Surety did not have a duty to defend, but also that National Surety was still responsible for Immunex’s defense costs through the court’s coverage ruling, subject to a set-off if the insured’s late tender was prejudicial.  Both parties appealed, and the Court of Appeals affirmed the trial court’s decision.  National Surety then appealed to the Washington Supreme Court.

The court’s analysis began with a discussion of Washington’s duty to defend principles, as well as the public policy concerns that are implicated by duty to defend policies.  The majority emphasized that, because the duty to defend is broader than the duty to indemnify, an insurer must defend its insured if a reasonable interpretation of the facts or law could result in coverage.  If the insurer is uncertain as to its duty to defend, it may defend under a reservation of rights, and seek a declaratory judgment relieving the insurer of its duty to defend.  The majority stressed that by doing so, the insurer benefits because it avoids breaching its duty to defend, as well as other potential downsides such as a bad faith finding, waiver, and estoppel.

After considering how other jurisdictions have ruled on this issue, the court sided with the minority of jurisdictions, and explained that “[disallowing reimbursement is most consistent with Washington cases regarding the duty to defend, which have squarely placed the defense decision on the insurer’s shoulders.”  The court held that an insurer cannot receive protection from bad faith claims or breach of contract without any responsibility for defense costs if there is a later determination of no duty to defend because, “[t]his ‘all reward, no risk’ proposition renders the defense portion of the reservation of rights defense illusory,” and the insured would “receive no greater benefit than if its insurer had refused to defend out right.”

The court also addressed two related issues: (1) whether National Surety was required to reimburse Immunex’s pre-tender defense costs; and (2) whether Immunex’s late tender prejudiced National Surety, such that it was relieved of any responsibility for defense costs.  With respect to the pre-tender defense costs issue, the court held that an insured under a duty to defend policy is entitled to recover its pre-tender defense costs, except where the late tender has prejudiced the insurer.  However, the court ruled that summary judgment on the issue of prejudice was inappropriate because there were disputed facts as to this issue.

The dissent criticized the majority’s sweeping determination that insurers may never recover defense costs under a reservation of rights.  The dissent argued that the court should follow the approach used by the majority of jurisdictions which looks to whether the insurer’s payment of the insured’s defense costs would unjustly enrich the insured.  The dissent also disagreed with the majority’s view that the unjust enrichment issue was “simply irrelevant,” because National Surety did not receive any “benefit” simply by complying with its duties under the law.

The Immunex decision is a significant departure from the majority of jurisdictions which allow insurers to recoup their defense costs based on equitable considerations when there is a finding of no coverage.  It is important to note, however, that the court’s decision was largely influenced by Washington’s rules concerning duty defend to defend policies.  If the policy at issue had a duty to reimburse defense costs (in which the insured controls its own defense), the court likely would have permitted the insurer to recoup its defense costs incurred under the reservation of rights.

This case is just one of a few recent Washington decisions that the Insurance Law Blog has reported on. Please click here to see posts about other recent Washington decisions impacting insurers.

An American Export: Contingency Fees Adopted in the UK

Thursday, April 4th, 2013

By Mark Chudleigh, Sedgwick Bermuda

It has taken nearly 20 years for the United Kingdom to move from a time when it was unlawful (or champertous) for a lawyer to share in the fruits of litigation, to the introduction of U.S.-style contingency fee arrangements.  Although the legislators have shied away from using the expression “contingency fee” – instead naming them “Damages-Based Agreements” or “DBAs” – they are in all respects a contingency fee arrangement whereby lawyers can retain a percentage of the damages of up to 25% in personal injury cases, 35% in employment cases, and 50% in most other cases. These arrangements are now lawful in the U.K. with effect from April 1, 2013.

The impact on litigation and on insurers is likely to be significant, as a U.S.-style plaintiff bar develops and seeks to make                U.S.-style returns from litigation.  This will be fueled by the growth of the litigation funding industry, which includes the use of bespoke “after-the-event” insurance solutions to protect plaintiffs from the risk of adverse costs exposure in the event litigation is unsuccessful.

Where the U.K. leads, other countries may follow.  Several countries – Australia, New Zealand, Hong Kong and Bermuda for example – have legal systems based on English law and may look to enact similar legislation.  Insurers and reinsurers with exposure to these countries should watch developments closely, as will we, and will provide updates on any developments.

Sedgwick Attorneys
Sedgwick’s insurance attorneys regularly present to clients and other industry professionals on a wide range of topics. For a complete list of our attorneys, click here.
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