Archive for October, 2013

Gotham Insurance Company Finds Dark Knight

Monday, October 28th, 2013

The United States District Court for the Middle District of Florida recently entered summary judgment in favor of Gotham Insurance Company (“Gotham”), finding no coverage for a substantial default judgment entered against its insured on the basis that the claim was not made and reported during the effective dates of the professional liability policy at issue. Lake Buena Vista Vacation Resort, L.C. v. Gotham Ins. Co., 2013 WL 5532677 (M.D. Fla. October 7, 2013).

A default judgment was entered against Coastal Title Services Inc. (“Coastal”) on claims that Coastal misappropriated deposits made by prospective purchasers of a condominium project that Coastal was developing in collaboration with Lake Buena Vista Vacation Resort L.C. (“Buena Vista”).  Two prospective purchasers filed suit against Coastal, one of its principals, Ira Hatch, and Buena Vista.  Buena Vista cross-claimed against Coastal for intentional and fraudulent conversion of the deposits.  A default judgment awarded Buena Vista $15.6 million in damages and $5.2 million in pre-judgment interest, as well as all of Coastal’s property, including any rights Coastal might have to recover under a professional liability insurance policy issued by Gotham to Coastal.

Buena Vista filed suit against Gotham to recover under the professional liability policy for the judgment it obtained against Coastal; Gotham removed the action to federal court.  The Policy provided claims made and reported coverage to Coastal for certain professional errors and omissions.  In entering summary judgment for Gotham, the district court held that the policy did not provide coverage for the $20.8 million judgment because the claim was not reported during the effective dates of the policy.  The court concluded that the notice of the claim fell “woefully short” of what was required under the policy: the notice advised only of a “possible claim”; it did not identify Buena Vista, the underlying plaintiffs, or anyone who might have or make a claim against Coastal; it did not identify the name of the project or the amount of money at issue; and, it noted nothing about the cross-claim brought by Buena Vista which gave rise to the judgment.  In addition, despite Buena Vista’s characterization of Coastal’s liability as arising out of Coastal’s failure to supervise, as opposed to the thefts of the deposits, the district court held that coverage was precluded because the “theft of the escrow funds was the core of the allegations set forth in the cross-claim.”

California: Right to Independent Counsel Evaporates After Insurer Withdraws Reservation of Rights

Saturday, October 12th, 2013

A California appellate court recently held that insurers are not obligated to provide an insured with independent counsel after the insurer withdraws the reservation of rights which generated the right to independent counsel.  In a unanimous opinion, California’s Second Appellate District held that the withdrawal of a reservation of rights letter extinguished the conflict of interest requiring an insurer to provide independent counsel.  Swanson v. State Farm General Insurance Company¸ Cal.Ct.App.__________ (September 23, 2013).

California Civil Code section 2860 (the “Cumis” statute) requires the appointment of independent counsel when an insurer reserves its rights on a given issue, and defense counsel appointed by the insurer can determine the outcome of that coverage issue.  In Swanson, the insured was named as a cross-defendant in a matter involving premises liability and negligence.  The insurer reserved the right to disclaim coverage on several bases, including whether the insurer owed a duty to defend the cross-complaint.  The insured’s counsel sought an appointment as independent counsel based on the reservation of rights letter, and the insurer agreed.

The insurer subsequently withdrew the reservation of rights and appointed its own counsel. The insurer declined to continue paying independent counsel because the conflict of interest no longer existed.  The insured filed an action for breach of contract alleging that, after the insurer appointed independent counsel, it waived its right to stop paying Cumis counsel.  The trial court granted summary judgment for the insurer, and the Court of Appeal affirmed.

The court held that “the duty to provide and pay for Cumis counsel arises only where a disqualifying conflict of interest exists.”  When that conflict concludes, in this case by withdrawal of the reservation of rights, “the insurer has no duty to provide and pay for Cumis counsel.”  The insurer had not breached the contract by refusing to pay Cumis counsel fees after the reservation of rights was withdrawn.

The insured contended that the insurer had failed to reserve its right to resume control of the defense, which effectively constituted a waiver of the right to assume control of the defense after the reservation was withdrawn.  The court held that the insurer had not waived any of its rights by providing a defense, and Civil Code section 2860 did not obligate the insurer to expressly reserve the right to assume control of the defense after the conflict of interest ceased to exist.

California Appellate Court: No Liability for Bad Faith Failure to Settle Where Claimant Fails to Make a Settlement Demand on Insurer

Friday, October 11th, 2013

In Reid v. Mercury Insurance Co., __ Cal. Rptr. 3d ___, 2013 WL 5517979 (Cal. Ct. App. Oct. 7, 2013), the California Court of Appeals held that an insurer cannot be found liable for bad faith failure to settle within the policy limits absent a settlement demand from the claimant, or some other indication that the claimant desires to settle the claim for the policy limits.  In Reid, Mercury issued to its policyholder (“Huang”) an automobile insurance policy providing limits of $100,000 per person and $300,000 per accident.  In June 2007, Huang caused a multi-car accident in which the claimant sustained catastrophic injuries.  After the accident, the claimant’s son (“Reid”) and his attorney made inquiries with Mercury as to the policy limits, although Mercury initially responded by stating that it needed to consult with its policyholder before it could disclose the limits.  Mercury also requested from Reid an interview of the injured party, as well as authorizations to obtain medical records.  However, during these conversations, Reid never made a policy limits settlement demand on Mercury, nor did Reid or his attorney ever convey that they wanted to settle the mother’s claim for the policy limits.  Reid ultimately filed suit against Huang and obtained a $5.9 million verdict against her.  After obtaining Huang’s rights against Mercury, Reid filed suit against Mercury alleging bad faith failure to settle.  The trial court granted summary judgment to Mercury, finding that even for claims that are clearly in excess of the policy limits, an insurer has no duty to settle where it has not received a settlement offer from the claimant.

On appeal, the California Appellate Court affirmed, holding that an insurer’s duty to settle or initiate settlement discussions does not arise simply because there is the likelihood of an excess judgment against the insured.  The Appellate Court agreed with the trial court that neither Reid nor his attorney ever conveyed to Mercury that they would accept the policy limits to settle the claim.  Likewise, the court found that Mercury never took any actions during its interactions with Reid which would have foreclosed the possibility of settlement.  Interestingly, the court found that a bare request to know the policy limits does not constitute an “opportunity to settle.”  After reviewing the case law, the court found that California law does not require an insurer to initiate settlement discussions without first receiving an indication that the injured party is prepared to settle within the policy limits.  As such, because Mercury never received a settlement demand or clear indication of an intent to settle from the claimant, it did not act in bad faith.

The California Appellate Court’s decision demonstrates that an insurer will not be held liable for bad faith failure to settle a claim within the policy limits absent a settlement offer from the insured, or some other clear indication that the claimant desires to settle the matter for the policy limits.  However, if a claimant conveys to an insurer that it wants to settle the claim for the policy limits, even in the absence of a formal settlement offer, an insurer may want to initiate settlement discussions to protect its interests.

The Insurance Law Blog previously covered the issue of an insurer’s duty to settle.  In June 2012, we reported on  the Ninth Circuit’s holding in Du v. Allstate Ins. Co., 681 F.3d 1118 (9th Cir. 2012), amended and superseded,  697 F.3d 753 (9th Cir. 2012).

Despite Limited Jurisdiction, Texas Federal Court Keeps the Class in Class Action

Friday, October 4th, 2013

The forum selection battle between insurance carriers and policyholders over whether litigation should be conducted in state or federal courts remains as contentious as ever. Litigants on both sides know forum shopping affects the rules of civil procedure, the choice of law analysis, remedies, and the potential judge and jury pool. Insurance carriers often believe that federal courts can provide a more equal playing field to address coverage disputes when compared to the home court advantage policyholders are perceived to have in local state courts. Because federal courts are of specific and limited jurisdiction, an insurance carrier removing a case to federal court can face significant hurdles in maintaining that cause of action.

This issue recently was addressed in the context of a class action in Magnum Minerals, L.L.C. v. Homeland Ins. Co., No. 2:13-CV-103 (N.D. Tex., Sept. 5, 2013), where plaintiffs sought class certification in state court of all Texas residents who had been insured by a surplus lines insurance carrier (Homeland) from January 2005 to the present. The plaintiffs alleged that Homeland had violated Chapters 101 and 981 of the Texas Insurance Code, which allows a policyholder to procure insurance from surplus lines carriers through authorized agents, but only if the policyholder has failed to obtain non-surplus lines insurance after a diligent search.  Plaintiffs alleged defendant insurance agents placed their surplus lines coverage with Homeland without first searching for non-surplus lines coverage. Accordingly, plaintiffs sought injunctive relief that, in part, prohibited Homeland from enforcing any contractual rights or exclusions to insurance coverage against them and the putative class.

In response, Homeland removed the plaintiffs’ suit to federal court pursuant to the Class Action Fairness Act (CAFA). CAFA grants federal jurisdiction for diversity class actions involving more than 100 class members if at least one member of the class is diverse from at least one defendant, and if more than $5 million in damages is in controversy exclusive of interests and costs. While conceding diversity, plaintiffs argued there was no federal jurisdiction under CAFA as the amount in controversy did not exceed $5 million.  In the alternative, plaintiffs argued the “local controversy exception” and “small class exception” to CAFA defeated federal jurisdiction.

As the removing party, Homeland had the burden to show that CAFA’s prima facie elements were met to maintain federal jurisdiction. The court held that, because the validity of the putative class members’ insurance contracts was at issue, the proper measure to determine the amount in controversy would be based on the policy limits for each distinct class member. Homeland presented evidence showing that there were 117 insureds on 73 Homeland policies, with each policy containing a per-insured limit of liability of at least $1 million. Accordingly, the court held the amount in controversy easily exceeded the $5 million threshold.

In contrast, the plaintiffs could not show by a preponderance of the evidence that the local controversy and small class exceptions to CAFA should apply. Although the local controversy exception has four requirements, the only requirement in dispute was whether the plaintiffs sought “significant relief” from at least one of the Texas defendants, which were insurance agents and individuals involved in placing coverage with Homeland. Looking to the pleadings, the court determined that plaintiffs did not seek injunctive relief against of those defendants.  Moreover, the plaintiffs’ remaining allegations against the Texas defendants fell within exceptions to relief sought under the Texas Insurance Code. Accordingly, the court held that the plaintiffs were only seeking significant relief against Homeland, which was a New York corporation. The court also disagreed with the plaintiffs’ argument that the small class exception applied.  Although the plaintiffs asserted only the 73 customers that purchased policies should be considered class members, the court concluded that each of the 117 named insureds were distinct class members.

Because plaintiffs failed to show that either exception to CAFA applied, Homeland was allowed to proceed with its action in a federal court.


U.S. District Court Denies Motion to Dismiss Insurer’s Claims of Overpayment Resulting From Provider’s Waiver of Out-of-Pocket Expenses

Tuesday, October 1st, 2013

In Connecticut General Life Insurance Co. v. Roseland Ambulatory Ctr., LLC, No. 2:12-cv-05941, (D.N.J. Sept. 23, 2013), the United States District Court denied a healthcare provider’s motion to dismiss a claim of overpayments due to the provider’s routine waiver of the patient’s cost-sharing obligations.  The insurance company alleged that the defendant, an out-of-network ambulatory center, submitted 990 claims for services as an assignee of the patients’ healthcare benefits over a three-year period during which the provider received over five million dollars from the insurance company.  The insurer also alleged that the provider waived the cost-sharing obligations that the patients were required to pay.  These allegations demonstrated that the provider was willing to accept the amount that the insurance company paid for the claim.  As a result, the insurance company had overpaid by the amount of applicable deductibles and co-insurance which should have been paid by the patients.  The District Court found that the insurance company sufficiently pled a claim for fraudulent misstatements of its billed charges.

Interestingly, the insurance company also alleged a claim for relief under ERISA, 29 U.S.C. §1132(a)(3), seeking to recoup its overpayments.  The insurance company alleged that an equitable lien by agreement existed for the return of the overpayments to the provider.  The provider sought to dismiss this claim on the grounds that ERISA does not provide for this type of relief.  The District Court rejected the provider’s argument relying on Funk v. CIGNA Group Insurance, 648 F.3d 182 (3d Cir. 2011), wherein the insurer was able to recoup an overpayment of long-term disability benefits from a participant.

The District Court’s decision demonstrates the burgeoning relief available under ERISA based on equitable liens by agreement.  Although claims for fraudulent overpayments are not preempted by ERISA, the District Court’s recognition of the ability to enforce equitable liens by agreement as an available remedy makes concerns of ERISA preemption less likely in these disputes.

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