Archive for the ‘Casualty Coverage’ Category

Florida High Court Clarifies When an Insured Is Entitled to Attorneys’ Fees When an Insurer Initially Denies a Sinkhole Claim

Monday, April 3rd, 2017

In Johnson v. Omega Insurance Co., 200 So. 3d 1207 (Fla. 2016), the Florida Supreme Court held that an insured was entitled to an award of attorneys’ fees under section 627.428, Florida Statutes and the confession of judgment doctrine based on an insurer’s post-suit tender of policy benefits for a sinkhole claim after the insurer initially denied the claim. To view the Court’s slip opinion click here; to view the Court’s docket click here.

Omega Insurance Co. issued to Kathy Johnson a homeowner’s policy that included coverage for sinkhole damage. When Johnson noticed structural damage to her home, she filed an insurance claim with Omega, asserting that the damage was caused by sinkhole activity on her property. Omega investigated the claim pursuant to chapter 627 by retaining a professional engineering and geology firm to conduct testing. The firm’s report concluded that, while the property was damaged, there was no sinkhole activity on the property. Based on the report, which is presumed correct by statute, Omega denied Johnson’s claim. In turn, Johnson, at her expense, retained a civil engineering firm to evaluate the cause of the damage to her home. Johnson’s firm found that sinkhole activity did cause the structural damage.

Johnson then filed suit against Omega for failing to pay her sinkhole benefits. Upon motion by Omega, the trial court stayed the litigation to allow a neutral evaluation to take place. The neutral evaluation agreed with the report issued by Johnson’s firm. Upon receipt of the report, Omega paid the policy benefits. Johnson then moved for an award of attorneys’ fees under § 627.428 which provides that “[u]pon the rendition of a judgment or decree…against an insurer and in favor of any named…insured …under a policy or contract executed by the insurer, the trial court…shall” award the insured its reasonable attorneys’ fees. Based upon the confession of judgment doctrine, which equates an insurer’s tender of policy benefits or a settlement agreement with a “judgment” under § 627.428, the trial court granted the motion.

Omega appealed to the Fifth District which reversed, finding that Omega’s initial denial was not wrongful or unreasonable. The district court equated “wrongful” with an insurer’s bad faith denial of a claim. The Court’s conclusion was buttressed by several facts: (1) Omega complied with its statutory obligations under chapter 627 by retaining an engineer to identify the cause of loss and issue a report; (2) The report, which is presumed correct by statute, found that sinkhole activity was not the cause of the damage; (3) Before filing suit, Johnson failed to present her countervailing report to Omega, failed to at least notify Omega that she disagreed with its report or failed to further attempt to discuss her claim with Omega.

The Florida Supreme Court quashed the Fifth District’s decision, finding that it misapplied both the statutory presumption of correctness found in the sinkhole statutes and § 627.428. The Court addressed two main issues: (1) whether the statutory presumption of correctness for an insurer’s internal report during the investigation process in the sinkhole statutes extends to later proceedings; and (2) whether an insured’s recovery of attorneys’ fees under § 627.428 requires an insurer’s bad faith in denying a valid claim, or simply an incorrect denial of benefits.

The Court—based on prior precedent—concluded that the statutory presumption of correctness in the sinkhole statutes only applies to the sinkhole “initial claims process” and not to litigation instituted by an insured to recover policy benefits. Johnson therefore did not have the burden of separately rebutting that initial presumption to recover attorneys’ fees under § 627.428.

The Court also concluded that “in the context of section 627.428, a denial of benefits simply means an incorrect denial.” An insured does not need to prove that the insurer engaged in bad faith or malicious conduct in denying a claim. Instead, if there is dispute between the insurer and the insured over policy benefits and there is a judgment in favor of the insured or the insurer pays without a judgment, then the insured is entitled to fees under § 627.428.

In its opinion, the Court rejected the insurer’s reliance on State Farm Florida Insurance Co. v. Colella, 95 So. 3d 891 (Fla. 2d DCA 2012), because it found the case to be distinguishable. The Court’s discussion of the case, however, demonstrates that in determining whether an insured is entitled to fees under § 627.428 the insured’s conduct may also be considered. In Colella, the Second District found that there was no breach of contract by an insurer—and hence no entitlement to fees under § 627.428—when the insured litigated “in bad faith to profit from a technicality” and engaged in “manipulation and foul play.”

The upshot of this decision is that once an insurer denies benefits and the insured files suit to dispute the denial, the insurer cannot then abandon its position “without repercussion.” In other words, an insurer cannot “backtrack after the legal action has been filed” by paying the claim to avoid an insured’s fee entitlement under § 627.428. In short, insurers should be absolutely positive of their denial of benefits before informing the insured. If an insured files suit and the denial is proven “incorrect,” then an insured is entitled to fees. Most importantly, it is irrelevant to the insured’s fee entitlement whether the insured fails to challenge the insurer’s denial before filing suit.

Insurer May Seek Recovery of Excessive, Unreasonable and Unnecessary Fees Directly From Cumis Counsel

Tuesday, August 11th, 2015

By Jason Chorley, Sedgwick San Francisco

On August 10, 2015, the California Supreme Court held that where an insurer (1) declines to defend its insured, (2) is compelled by court order to permit the insured to be represented by Cumis counsel, (3) is ordered to pay reasonable and necessary defense expenses while reserving the right to recover payments for unreasonable and unnecessary expenses, and (4) alleges that Cumis counsel charged fees that were excessive, unreasonable, and unnecessary, the insurer may seek reimbursement directly from Cumis counsel:

If Cumis counsel, operating under a court order that expressly provided that the insurer would be able to recover payments of excessive fees, sought and received from the insurer payment for time and costs that were fraudulent, or were otherwise manifestly and objectively useless and wasteful when incurred, Cumis counsel have been unjustly enriched at the insurer’s expense. Cumis counsel provide no convincing reason why they should be absolutely immune from liability for enriching themselves in this fashion. Alternatively, Cumis counsel fail to persuade that any financial responsibility for their excessive billing should fall first on their own clients — insureds who paid to receive a defense of potentially covered claims, not to face additional rounds of litigation and possible monetary exposure for the acts of their lawyers.


Hartford Casualty Insurance Company issued one commercial general liability insurance policy to Noble Locks Enterprises, Inc. and a second policy to J.R. Marketing, LLC. In September 2005, a lawsuit was filed against Noble Locks and J.R. Marketing and several of their employees in Marin County, California. Later actions were filed against the same parties in Nevada and Virginia.

The Marin County action was tendered to Hartford, which disclaimed a duty to defend. The insureds, represented by Squire Sanders, immediately commenced a coverage action against Hartford. Hartford subsequently agreed to defend its insureds subject to a reservation of rights, but declined to provide independent counsel. The court in the coverage action ordered on summary judgment that Hartford had a duty to defend the Marin County action as of the date of tender and must pay for Cumis counsel for its insureds. The insureds retained Squire Sanders as their Cumis counsel as well. The court in the coverage action also entered an enforcement order, prepared by Squire Sanders, ordering Hartford to pay all past and future defense invoices, declaring that Squire Sanders’ invoices still needed to be reasonable and necessary, and that if Hartford wanted to challenge fees, it may do so through a reimbursement action after the Marin County action concluded, and that, as a breaching insurer, Hartford forfeited the benefit of Civil Code section 2860’s limitations on rates.

After the Marin County action concluded, Hartford filed a cross-complaint against Squire Sanders and various persons for whom it paid defense expenses in the Marin County action. Hartford sought to recover a significant portion of the $15 million in defense fees, including some $13.5 million paid to Squire Sanders, for services rendered to non-insureds, rendered prior to the tender of the Marin County action, for any services in the Nevada or Virginia actions, and for “abusive, excessive, unreasonable, or unnecessary” fees. The trial court in the coverage action sustained the cross-defendants’ demurrer to the reimbursement and rescission causes of action in Hartford’s first amended cross-complaint. The trial court held that Hartford’s right of reimbursement was from its insureds, not directly from Cumis counsel. Hartford appealed.

The Court of Appeal affirmed the trial court decision concluding that allowing Hartford to seek reimbursement directly from Cumis counsel would frustrate the policies underlying Civil Code section 2860. The Court of Appeal further held that, where an insurer breaches its duty to defend and loses all right to control the defense, it is likewise barred from maintaining a reimbursement action against independent counsel where it considers those fees unreasonable or unnecessary. Hartford appealed.

California Supreme Court Discussion

In a majority opinion of Chief Justice Cantil-Sakauye, and Justices Werdegar, Chin, Corrigan, and Kruger, the California Supreme Court reversed the Court of Appeal decision insofar as the dismissal of Squire Sanders was upheld.

The Supreme Court noted the distinction between its finding of a right of restitution against the insured in Buss with its finding in the present case. In Buss, the Supreme Court held that, where an insurer defends a mixed action, it is entitled to reimbursement for those fees and costs attributable solely to defending claims not covered by the policy because the insured would be unjustly enriched at the insurer’s expense – the assumption being that those non-covered fees and expenses were still reasonable and necessary to the insured’s defense against those non-covered claims. Here, however, the question presented is whether independent counsel is unjustly enriched if its fees were excessive, unreasonable and unnecessary for the insureds’ defense to any claim, and not incurred for the benefit of the insured. The Supreme Court found in the affirmative, but limited to the facts of this case.

The Supreme Court rejected the argument that Squire Sanders was merely an incidental beneficiary of Hartford’s promise to pay the costs of defending potentially covered third party claims against its insureds. The Supreme Court reasoned that Hartford’s defense obligation was not unlimited, but rather restricted to reasonable and necessary defense expenses, not Squire Sanders’ alleged overcharges: “Hartford did not accept a bargain binding it to absorb whatever defense fees and expenses the insureds’ independent counsel might choose to bill, no matter how excessive.”

The Supreme Court also rejected Squire Sanders’ argument that Cumis counsel’s independence, zeal, and undivided loyalty to its client would be compromised if it had to defend an insurer’s lawsuit challenging the reasonableness of its efforts in hindsight. The Supreme Court reasoned that attorneys in numerous settings know they will later have to justify their fees to a third party, and in fact, Civil Code section 2860 addresses the possibility of Cumis fee disputes potentially involving Cumis counsel itself, not just the insured. There is no threat to Cumis counsel’s independence by allowing reimbursement under principles of restitution, rather than only permitting the procedures of Civil Code section 2860. The Supreme Court also rejected Squire Sanders’ argument that 2860 provides for a contemporaneous resolution of fee disputes, reasoning that while 2860 does not foreclose contemporaneous resolution, it also does not require it. Further, the trial court’s order specifically provided that Hartford could seek reimbursement after the Marin County case concluded.

Squire Sanders’ argument that the insureds have the sole responsibility and authority to monitor counsel’s expenditure was rejected by the Supreme Court as creating a circuitous, complex, and expensive procedure. The Supreme Court refused to hold that “any direct liability to Hartford for bill padding by Squire Sanders must fall solely on the insureds.” The Supreme Court also rejected Squire Sanders’ due process argument based on attorney-client privilege, finding that an objective review of the underlying case is unlikely to involve an examination of attorney-client communications, which could be redacted in any event.

The Supreme Court’s decision was guided by the trial court’s order, drafted by Squire Sanders, requiring Hartford to pay for independent counsel and permitting a reimbursement action after the Marin County action concluded. The Supreme Court did not decide whether Hartford as a breaching insurer can pursue anyone for reimbursement of fees because that issue was addressed in the trial court’s order and not before the Supreme Court. The Supreme Court noted that Squire Sanders’ own conduct supports the ruling, as it drafted the initial order. The Supreme Court concluded that allowing Hartford to pursue a narrow claim for reimbursement against Squire Sanders under the terms of the 2006 enforcement order neither rewards an undeserving insurer nor penalizes unsuspecting Cumis counsel.

Concurring Opinion

In a concurring opinion, Justice Liu observed that none of the parties appeared blameless, including Hartford’s insured, J.R. Marketing, which was not “a helpless bystander.” Because the majority opinion relies on dual assumptions that (1) Squire Sanders’ billings were objectively unreasonable and unnecessary and (2) were not incurred for the benefit of the insured, Justice Liu reasoned that the majority opinion leaves open the possibility that some portion of the Squire Sanders fees were incurred for the benefit of J.R. Marketing. On remand, Justice Liu posited that Hartford bears the burden to show that Squire Sanders’ fees were objectively unreasonable and were not for the benefit of J.R. Marketing. To the extent the fees were unreasonable, but incurred for the benefit of J.R. Marketing, Hartford’s reimbursement action should lie against J.R. Marketing. Justice Lui concluded that Hartford should have to overcome a presumption that the fees were incurred for the benefit of J.R. Marketing because J.R. Marketing controlled the defense.

Hawaii and Massachusetts Governors Sign Legislation Extending Statute of Limitations for Abuse Claims

Tuesday, July 1st, 2014

By Cathy Sugayan, Sedgwick Chicago

There has been legislation considered for claims arising out of childhood sexual abuse that would extend the limitations periods or allow pursuit of claims that were otherwise time-barred. For example, on June 23, 2014, Hawaii’s governor signed legislation into law extending a “window” allowing previously time-barred claims to be brought until April 24, 2016.  On June 26, 2014, Massachusetts’ governor signed legislation into law extending the limitations period.  Also, this past year, the following other states have considered legislation to extend the limitations periods for childhood sexual abuse: California, Georgia, Iowa, Missouri, New York, Pennsylvania, and Wisconsin; some of these efforts have already failed to pass into law and a couple may bring sweeping changes.

For our readers who are involved in insuring public and private entities against sexual abuse claims, these are important developments that could impact the defense of and coverage for these types of claims.  The Sedgwick white paper provides a survey of the current law and legislation regarding the statute of limitations for claims arising from childhood sexual abuse.



It’s All in the Delivery – Proper Renewal Saves Millions

Friday, February 14th, 2014

By Carol Gerner, Sedgwick Chicago

In Windmill Nursing Pavilion Ltd. v. Cincinnati Ins. Co., (No. 1-12-2431), the Illinois Court of Appeals concluded that under Ohio law, Cincinnati Insurance Company (“Cincinnati”) provided sufficient notice to its insured, Unitherm, Inc. (“Unitherm”), of renewal terms that added an exclusion for alleged violations of the Telephone Consumer Protection Act of 1991 (“TCPA”). Accordingly, the court affirmed the trial court’s decision granting partial summary judgment in favor of Cincinnati on the validity of the TCPA exclusion. As a result, Cincinnati did not have to pay $4 million out of a $7 million consent judgment.

Windmill Nursing Pavilion, Ltd. (“Windmill”) filed a class action complaint alleging that Unitherm violated the TCPA by sending unsolicited fax advertisements to it in November 2005 and in late April 2006. At the time Unitherm sent the faxes, it carried commercial general liability and umbrella liability coverage through Cincinnati. The original policy expired before the April 2006 faxes were sent. The renewal policy contained a modification that excluded coverage for “bodily injury,” “property damage,” or “personal and advertising injury” arising out of “any act or omission” that violated the TCPA.

Windmill, Unitherm, and Cincinnati entered into a settlement agreement resolving the class action. The parties agreed to a $7 million consent judgment against Unitherm, which was collectible from Cincinnati under the insurance policies. Cincinnati agreed to provide an initial settlement fund of $3 million, which represented the combined general aggregate and umbrella limits under the original policy. The settlement agreement also provided that Cincinnati’s obligation to pay any further portion of the judgment balance would depend on the outcome of two “carved-out” issues. One of those issues was whether Cincinnati’s notice of reduction in coverage to Unitherm regarding the TCPA exclusion (added to the renewal policy) was sufficient.

The appellate court agreed with the trial court’s ruling that Ohio law applied in the case, and Cincinnati’s notice of a coverage exclusion complied with that state’s insurance law, defeating Windmill’s request to have Cincinnati pay the remaining $4 million of the settlement.

The decision is instructive on several levels. First, when issues of coverage are involved at the time of settlement of the underlying litigation, a settlement may be negotiated which reserves the right to address certain “carved-out” issues as was done in this case. In Windmill, the court found that the release did not preclude the parties from litigating the “carved-out” issues. Second, insurers should be mindful of any differences in statutory requirements for “renewal” as compared to “nonrenewal” situations. In this case, the court held that the notice provided with the renewal policy complied with Ohio law: it was on a separate page, attached to the policy, and was clearly worded regarding the change in coverage. In addition, because the underlying and umbrella policies were “bound together and share[d] the same policy number, the notice was sufficient for both.”

Windmill serves as a reminder that, when limiting coverage on renewal, an insurer should confirm which state’s law will apply to policy interpretation and ensure that it is complying with those specific statutory renewal requirements. As the decision demonstrates, doing the right thing can result in significant savings.

Washington Insurance Law: 2013 Year in Review

Tuesday, January 21st, 2014

2013 was a particularly eventful year in Washington insurance law. This paper, authored by Sedgwick Seattle’s Robert Meyers, summarizes the holdings of several notable Washington insurance decisions that were filed in 2013.  Download a copy of the paper here. 

In June 2013, Bob gave a webinar on The State of Bad Faith in Washington.   The WA program, and the others in our bad faith series, are are available for on demand viewing.  Please click here to request a link.

Webinar Series: The State of Bad Faith

Wednesday, December 4th, 2013

Sedgwick’s 2013 webinar series explored the current state of insurance bad faith law and practical issues impacting the defense of bad faith cases in Washington, California, Florida, New York, New Jersey, Texas and Illinois.

The Washington program was presented by Sedgwick Seattle’s Bob Meyers on  June 12, 2013.

The California program was presented by Alex Potente (Sedgwick San Francisco) and on July 10, 2013.

The New York/New Jersey program was presented by Sedgwick New York’s on August 21, 2013.

The Florida program was presented by Ramón Abadin (Sedgwick Miami) and Al Warrington (Sedgwick Miami) on September 25, 2013.

The Texas program was presented by Sedgwick Dallas’ Lisa Henderson on October 30, 2013.

The Illinois program was presented by Sedgwick Chicago’s and on November 13, 2013.


California Supreme Court Holds that Insurers May Be Held Liable for Violations of California’s Unfair Competition Law

Thursday, August 1st, 2013

In Zhang v. Superior Court, __ Cal.3d __ (2013), the California Supreme Court held that Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 does not preclude insureds from maintaining a claim for violations of California’s Unfair Competition Law (UCL) against insurers. In Moradi-Shalal, the court held that, when the Legislature enacted California Insurance Code 790.03(h) (UIPA), it did not intend to create a private cause of action for commission of the various unfair insurance practices set forth in the UIPA. Thereafter, a split of authority developed in the California Courts of Appeal concerning whether an insurer could be subject to liability for UCL violations based upon conduct that was also a violation of the UIPA. The court has resolved the disagreement finding that an insurer may be held liable for violations of the UCL even when the insurer’s conduct also violates the UIPA.  The court issued its decision today.

In Zhang, the plaintiff alleged causes of action for false advertising under the UCL and insurance bad faith based upon the insurer’s alleged misleading advertising, which included false promises that the insurer would timely pay proper coverage in the event the insured suffered a loss. The insurer demurred based upon the grounds that plaintiff’s false advertising claim was barred by Moradi-Shalal, and the trial court sustained the demurrer. The Court of Appeal disagreed with the trial court, and the California Supreme Court affirmed the Court of Appeal’s decision.

As a result of the decision, insurers may now be subjected to claims for violations of the UCL.  Insureds may recover under the UCL if they can show that they were likely to be deceived, and that they suffered economic injury as a result of that deception. The court also held that insurers may be liable under the UCL for conduct which also supports a bad faith claim, such as unreasonable claims handling practices, withholding of policy benefits, etc.

If an insured prevails on its UCL claim, it may be entitled to restitution (i.e., return of premiums) and injunctive relief. Damages are not available under the UCL. Although there is no provision for attorney’s fees under the UCL, the court noted that a prevailing plaintiff may seek attorneys’ fees as a private attorney general under Code of Civil Procedure section 1021.5. Additionally, insurers may now be subjected to class actions for violations of the UCL. Insurers should also expect insureds to use the decision to attempt to expand the scope of discovery.

Click here to review the decision issued today.

California Court of Appeal Holds No “Advertising Injury” Coverage for Product That Is Neither Mentioned Nor Disparaged in Advertisement

Friday, November 9th, 2012

In Hartford Casualty Ins. Co. v. Swift Distribution, Inc., __ Cal.Rptr.3rd __, 2012 WL 5306248 (Cal. Ct. App. Oct. 29, 2012), the California Court of Appeal held that the “advertising injury” coverage in a CGL policy does not apply when the insured’s advertisement neither mentions nor disparages the claimant’s product.  The claimant, Dahl, manufactured and sold a product known as the “Multi-Cart.”  Dahl sued Ultimate for patent infringement, unfair competition, dilution of a famous mark, and misleading advertising arising from Ultimate’s sale of a similar product, the “Ulti-Cart.”  Ultimate’s advertisement did not expressly refer to Dahl’s Multi-Cart, nor did it disparage Dahl’s product or business.

Hartford Casualty Insurance Company insured Ultimate under a CGL policy that covered advertising injury, defined to include “injury … arising out of … [o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services… .”  Hartford denied coverage for the underlying action and sought a declaratory judgment that it had no obligation to defend or indemnify Ultimate.  On cross-motions for summary judgment, the Los Angeles Superior Court granted Hartford’s motion and denied Ultimate’s motion, finding that the Dahl action was not potentially covered under the policy.

The Court of Appeal affirmed.  The court observed that the underlying action alleged that Ultimate engaged in advertising with the intent to mislead the public:  (1) as to the origin and ownership of Dahl’s mark; and (2) into believing that Ultimate’s products were the same as Dahl’s or were authorized by or related to Dahl.  The court held that disparagement, or injurious falsehood, must specifically refer to the derogated product either expressly or by reasonable implication.  The court found that even though the advertisement could have caused the public to confuse Ultimate’s Ulti-Cart with Dahl’s Multi-Cart, the advertisement did not refer to or disparage the Multi-Cart.  The court criticized the recent decision in Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969 (2012), for improperly expanding the scope of potential coverage for disparagement to include disparagement by implication and held that Dahl’s allegations could not show a potential for coverage under such a theory of disparagement.

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