New York’s Highest Court Affirms Zoning Ordinances Banning Hydrofracking

July 2nd, 2014

By Martin L. Eide, Sedgwick New York

The Insurance Law Blog has been following decisions related to hydraulic fracturing for potential impacts on insurance coverage issues. As we previously reported in May 2013, the New York Supreme Court, Appellate Division, upheld two zoning ordinances passed in 2011 by the Towns of Dryden and Middlefield, New York, which prohibited the exploration and production of natural gas and petroleum – including hydraulic fracturing, or hydrofracking. On June 30, 2014, the New York Court of Appeals affirmed the Appellate Division’s ruling finding that the New York Oil, Gas and Solution Mining Law’s (“OGSML”) supersession clause does not preempt “home rule” authority vested in the Towns to regulate land use. 

In Matter of Mark Wallach, as Chapter 7 Trustee for Norse Energy Corp. USA, v. Town of Dryden, et al., and Cooperstown Holstein Corp., v. Town of Middlefield, – N.Y.3d –, (June 30, 2014), the New York Court of Appeals affirmed the Appellate Divisions’ May 2013 decision upholding summary judgment in favor of Dryden and Middlefield which passed zoning ordinances banning natural gas and petroleum production operations.  The ordinances were established in 2011, and subsequently challenged by natural gas exploration companies alleging that the ordinances were preempted by the OGSML which, among other things, regulates the production and storage of oil and natural gas.  The trial courts disagreed with the production companies’ preemption arguments, and granted cross-motions for summary judgment in favor of the Towns because the zoning ordinances in question only limit the use of land and do not attempt to regulate the manner in which oil and gas is extracted under the OGSML.  The Third Department affirmed in May 2013, finding that the OGSML does not expressly preempt the local zoning regulations which did not limit the methods and means of mining proscribed by the OGSML, but merely limited where mining could occur.  Thus, the local zoning ordinances at issue were reasonable uses of the Towns’ home rule powers established pursuant to Article 9 of the New York Constitution.

In its opinion, the Court of Appeals affirmed finding that the OGSML’s supersession clause does not preempt the Town’s home rule power to regulate industrial land use, preserve a communities’ characteristics, and protect the health, safety and welfare of the community as a whole.  In particular, the Court of Appeals rejected the appellants’ arguments based on a three-pronged test previously discussed in Matter of Frew Run Gravel Prods. v. Town of Carroll, 71 N.Y. 2d 126 (1987).  In Frew Run, the Court of Appeals found that the Town of Carroll’s ordinance which restricted mining operations from a certain portion of the Town did not conflict with the Mined Land Reclamation Law (MLRL).  The Court of Appeals analyzed the plain language of the MLRL’s supersession clause, the statutory scheme of the MLRL as whole, and the MLRL’s legislative history to determine if the ordinance interfered with the MLRL.  The Court of Appeals found that the MLRL did not preempt a town’s ability to regulate land use because the New York Legislature passed the MLRL to regulate only the means and methods of extractive mining operations, and not where those operations could occur.

Here, the Court of Appeals applied the test in Frew Run and found that the plain language of the OGSML’s supersession clause, the statutory scheme as a whole, and the legislative history only focus on regulating the means and methods of gas, oil, and mining operations and not the location of where such operations could occur.  Therefore, the OGSML does not preempt the Towns’ home rule power to regulate land use and exclude gas and oil production operations.

The Court of Appeals also rejected the appellants’ secondary argument.  In this regard, the appellants argued that land use ordinances may only limit hydrofracking operations from certain portions of the Towns (i.e., residential areas) because a complete ban would run afoul of the OGSML and essentially, regulate the oil and gas industry.  The Court of Appeals disagreed, relying on Matter of Gernatt Asphalt Prods. v. Town of Sardinia, 87 N.Y.2d 668 (2006), a decision that follows Frew Run.  In Gernatt Asphalt, the Town of Sardinia amended its zoning ordinance to prohibit all mining operations following the New York State Legislature’s revision of the MLRL in accordance with Frew Run.  As a result of the Town’s amendment, a mining operator challenged the prohibition based on the MLRL’s supersession clause.  The Court of Appeals rejected the mining company’s challenge, finding that nothing in Frew Run or the MLRL obligates a town to permit mining just because minerals are available to be mined as a natural resource.

The Court of Appeals found that the restrictions at issue here are no different in substance to the ordinances passed by the Town of Sardinia and upheld in Gernatt Asphalt.  In addition, Dryden and Middlefield acted reasonably because they each studied the potential negative effects that hydrofracking may have on the character of their respective communities prior to enacting the ordinances.

Sedgwick tracks local and national developments in hydraulic fracturing in its newsletter, Hydraulic Fracturing Digest. Prior issues can be found here.

 

 

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

July 1st, 2014

By Cathy Sugayan and Serena Lee, 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.

 

 

New York Court of Appeals Upholds Ban on Hydraulic Fracturing

June 30th, 2014

For readers following the developments in hydraulic fracturing and the potential insurance coverage implications, we have been tracking litigation in New York involving zoning ordinances passed by the Town of Dryden and the Town of Middlefield, and most recently reported on the litigation in our Hydraulic Fracturing Digest in January 2014.  Readers may recall that an appellate court decision issued on May 3, 2013, had upheld the zoning ordinances prohibiting the exploration and production of natural gas and petroleum.  Today, the New York Court of Appeals, the state’s highest court, affirmed the decisions.  We are reviewing the court’s decision and will provide further analysis in the Hydraulic Fracturing Digest.

Avoiding Sticker Shock: A Look Into What Are Considered “Reasonable and Customary” Charges Under 28 CCR §1300.71(a)(3)(B)

June 25th, 2014

By Rynicia Wilson, Sedgwick Los Angeles

In the case Children’s Hospital Central Cal. v. Blue Cross of Cal. (Cal. Ct. App. 2014) ___Cal.App.4th ___ (No. F065603),
The Children’s Hospital Central California (“Hospital”) and Blue Cross of California (“Blue Cross”) disputed the reasonable value of medical services the Hospital provided to Medi-Cal beneficiaries enrolled in Blue Cross’s Medi-Cal managed care plan. The Court of Appeals held that the trial court incorrectly concluded that Code of Regulations, Title 28, Section 1300.71(a)(3)(B) provided the exclusive standard for determining the reasonable and customary value of medical services, because the factors enumerated in 1300.71 are not exhaustive as to what is considered when determining the “reasonable and customary” value for medical services, nor are the providers’ billed charges dispositive.    

The Hospital provided emergency services to Blue Cross Medi-Cal beneficiaries for ten months without any contract in place. During this time, Blue Cross paid the Hospital $4.2 million based on the Medi-Cal rates paid by the government. However, the Hospital demanded its full billed charges of $10.8 million for the services provided. When Blue Cross refused to pay, the Hospital sued.  The trial court made discovery and evidentiary rulings before trial, including agreeing with the Hospital that Section 1300.71 provided the exclusive standard for determining the reasonable and customary value of the medical services in this action.  Thus, the trial court refused to allow Blue Cross to introduce any evidence that the rates accepted by other payors are reasonable and customary, and refused to allow any other evidence of “reasonable and customary” that did not fit within the six factors enumerated in Section 1300.71.  The case was tried and the jury found that there was an implied-in-fact contract between the Hospital and Blue Cross.  The jury awarded the Hospital $6.6 million.  

Blue Cross appealed and argued that the trial court erred in various discovery and evidentiary rulings, including the ruling that Section 1300.71 provided the exclusive standards for violating the reasonable and customary value of medical services. The Hospital contended that its billed charges were the “reasonable and customary” value. The Court of Appeals discussed the elements of Section 1300.71, that for non-contracted providers, reimbursement of a claim means: “the payment of the reasonable and customary value for the health care services rendered based upon statistically credible information that is updated at least annually and takes into consideration: (i) the provider’s training…; (ii) the nature of the services provided; (iii) the fees usually charged by the provider; (iv) prevailing provider rates charged…; (v) other aspects of the economics of the medical provider’s practice that are relevant; and (vi) any unusual circumstances in the case.” The Court of Appeals reversed the trial court’s judgment and remanded it for a new trial. The Court found that the trial court abused its discretion and prejudiced Blue Cross when it improperly limited the evidence of “reasonable and customary value” to the factors set out by Section 1300 .71. The Court held that Section 1300.71 does not provide the exclusive standard, and reasoned that “the facts and circumstances of the particular case dictate what evidence is relevant to show the reasonable market value of the services at issue, i.e., the price that would be agreed upon by a willing buyer and a willing seller negotiating at arm’s length [and that] [s]pecific criteria might or might not be appropriate for a given set of facts.”

 

D&O Insurers Take Note: U.S. Supreme Court Modifies the “Basic” Game

June 23rd, 2014

By Matthew M. Ferguson and Katelin O’Rourke Gorman, Sedgwick New York

Today, the U.S. Supreme Court issued a unanimous¹ decision in the securities fraud case, Halliburton Co. v. Erica P. John Fund, which was highly anticipated by many who follow the federal securities laws, including D&O insurers.  573 U. S. ____ (June 23, 2014). Although Halliburton expressly upheld Basic’s “fraud-on-the-market” presumption in order to satisfy the reliance requirement for a class of investors, Halliburton also held that defendants will be able to rebut this presumption earlier – at the class certification stage – with evidence that the misrepresentation did not, in fact, affect stock price.  Thus, while Halliburton does not scrap the fraud-on-the-market theory and its ability to satisfy reliance, as announced in Basic Inc. v. Levinson, 485 U. S. 224 (1988), Halliburton certainly changes the landscape as there likely will be additional costs incurred in connection with a defendant’s efforts to rebut the presumption of reliance at an earlier stage of the case; however, some classes may not be certified following those efforts.  Both of these issues may have implications for D&O insurers.

In its decision, the Supreme Court addressed whether to continue to apply the Basic holding, which permits securities fraud plaintiffs to establish a presumption of class-wide reliance for alleged misrepresentations based on the fraud-on-the-market theory. Under this approach, plaintiffs are not required to demonstrate each class member’s individual reliance on the alleged misstatements, based on the theory that securities markets operate efficiently, and thus the price of publically traded securities accurately reflects all publically available information about the traded company – including the impact of the “public material misrepresentations.”  Basic, therefore, enabled class plaintiffs to establish collective reliance on the misstatement(s) based on the market price of the security, and avoid individualized issues that could defeat class certification.  Prior to Halliburton, defendants were allowed to rebut the presumption at trial, but not at the class certification stage.

Petitioner Halliburton, the defendant in the underlying securities action, challenged the economic assumptions of the efficient market theory, which it believes have been “widely rejected” by economists since the Basic decision.  In its brief, Halliburton argued that Basic “was wrong when decided, and time has only made things worse.”  Halliburton argued that a securities plaintiff should be required to demonstrate that the “alleged misrepresentations actually affected the stock price” in order for a presumption of reliance to apply or, at the very least, that defendants should be allowed to rebut the presumption at the class certification stage with evidence establishing that “the misrepresentation did not distort the market price[.]”

The respondents argued that Basic is “well-settled[,]” has been cited repeatedly and favorably in recent Supreme Court securities decisions, and is essential to maintain and supplement the enforcement of the federal securities laws.  Respondents also contended that Congress considered, but flatly rejected, calls to overrule Basic when it enacted the PSLRA in 1995, and argued against an additional evidentiary step at the class certification stage, claiming that it would improperly and prematurely insert a merits inquiry into an otherwise preliminary stage of the litigation.  Respondents characterized such a move as incompatible with federal class certification rules, and other Supreme Court decisions on class issues.

Ultimately, the Supreme Court took a measured approach in rejecting the defendant’s outright calls to overturn Basic’s presumption of reliance, finding that there has not been a “fundamental shift in economic theory” to overrule a signature doctrine in securities-fraud laws.  However, the Halliburton Court seemingly agreed with Basic that the presumption was not conclusive, but rather rebuttable, in expressly empowering defendants with the ability to rebut plaintiff’s presumption of reliance at or before class certification.  (Halliburton at 22.) (“[Price impact] thus has everything to do with the issue of pre­dominance at the class certification stage.  That is why, if reliance is to be shown through the Basic presumption, the publicity and market efficiency prerequisites must be proved before class certification.  Without proof of those prerequisites, the fraud-on-the-market theory underlying the presumption completely collapses, rendering class certification inappropriate.”).  As a result, when plaintiffs seek to rely on the presumption, defendants will seek to rebut the presumption earlier. We expect the class certification stage to be even more contentious, with increased briefing, evidentiary submissions, and expert testimony/analysis to the trial court on the issue of price impact.

Clearly, Halliburton’s continued affirmance of Basic’s fraud-on-the-market presumption of reliance, while somewhat unsurprising based on the line of questioning during oral arguments that were heard in March, is nonetheless disappointing for directors, officers, and entity defendants (and their insurers), because it makes it easier for a plaintiff to claim class-wide reliance based on alleged misrepresentations.  The silver lining for defendants, however, is that they may now challenge the application of this presumption earlier, at the class certification stage.  While this presents an opportunity for defendants potentially to avoid class-wide liability, and may cause some cases not to be certified (a benefit to D&O insurers), it also may increase the cost of defending such matters earlier in the process.  Thus, Halliburton may create additional cost pressures for D&O insurers as there will be, among other things, additional expert and evidentiary efforts at the class certification stage to review the misrepresentations and any actual price impact.  Along with the potential long-term implications of the decision, insurers should also be aware that a number of securities cases stayed, pending a decision in Halliburton, will recommence in the short-term.
_____________________________________

¹ Roberts, delivered the opinion of the Court, in which Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan joined. Ginsburg, filed a concurring opinion, in which Breyer and Sotomayor, joined. Thomas, filed an opinion concurring in the judgment, in which Scalia and Alito, joined.

Not Feeling It: Court Nixes Claim for Feng Shui Fees and Finds No Bad Faith

June 17th, 2014

By Timothy Kevane, Sedgwick New York

In Patel v. American Economy Ins. Co., — F. Supp. 2d. —, 2014 WL 1862211 (N.D. Cal. May 8, 2014), the U.S. District Court for the Northern District of California granted the insurer’s motion for partial summary judgment, finding no coverage for the fees of a feng shui consultant, rejecting business losses outside the specified period, and concluding there was no bad faith.

The insured dental office suffered smoke damage due to a fire in the basement of premises it occupied.  Among other expenses submitted to its property insurer was a bill for $50,000 from its feng shui consultant who provided advice with respect to crystal replacements, energy balance restoration, furniture placement, and the alignment of Qi forces.  The court held that such expenses did not constitute a “direct physical loss” covered by the policy as they did not involve damage to tangible, material objects.  Furthermore, there was no evidence these expenses were incurred to minimize the suspension of the business and to continue operations (as a covered “extra expense”).  The court held that the extra expense provision was not rendered vague simply because it did not specifically exclude feng shui costs from coverage.

The court also rejected the insured’s supplemental claim for lost business income when it had to shutter its business in 2014 due to additional repairs to the building relating to the original fire, which occurred five years earlier.  The insured argued that the policy covered twelve months’ worth of lost income, and because it initially claimed only one month of lost income immediately after the fire, it remained eligible for another eleven months of coverage.  The court rejected this argument as the business income coverage was limited to the defined “period of restoration,” subject to the requirement that lost income must be sustained within twelve consecutive months from the date of loss.  The court found that it made no difference that restoration work may have resumed outside this limiting period.

Lastly, the court rejected the claim that the insurer disregarded in bad faith the insured’s need to relocate in 2014, citing the absence of any underlying contractual obligation to cover the 2014 lost income.

 

Second Circuit Vacates Judge Rakoff’s Rejection of SEC Settlement: Consent Decree “Fair and Reasonable” Even Without Admission of Wrongdoing

June 13th, 2014

By Katelin O’Rourke Gorman, Sedgwick New York

D&O insurers should be mindful of a recent development in the Second Circuit that could have implications for D&O insurers.  The developments stem from a key decision in the Southern District of New York in 2011.  On November 28, 2011, in a surprising and much-publicized decision, Judge Jed S. Rakoff refused to approve a consent decree jointly proposed by the SEC and Citigroup Global Markets.  See SEC v. Citigroup Global Markets Inc., 827 F. Supp. 2d 328 (S.D.N.Y. Nov. 28, 2011).  The consent decree required Citigroup to pay $285 million and refrain from future Securities Act violations after allegedly misrepresenting the company’s structuring and marketing of a billion dollar fund largely collateralized by subprime securities.  During the settlement hearing, Judge Rakoff asked, among other things, why the court should approve a consent judgment in which Citigroup neither admitted nor denied any of the “serious securities fraud violations” alleged by the SEC.  Apparently unpersuaded by the parties’ response, Judge Rakoff concluded that the proposed settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest … because it does not provide the court with a sufficient evidentiary basis to know whether the requested relief is justified[.]”   According to Judge Rakoff, “when a public agency asks a court to become its partner in enforcement … the court, and the public, need some knowledge of what the underlying facts are[.]” Unsurprisingly, the SEC and Citigroup appealed.

 Last week, applying an “abuse of discretion” standard, the Second Circuit vacated and remanded Judge Rakoff’s decision.  SEC v. Citigroup Global Markets Inc., ___ F.3d ___, 2014 WL 2486793 (2d Cir. June 4, 2014).  Among other things, the Second Circuit concluded that it was “an abuse of discretion to require … that the SEC establish the truth of the allegations against a settling party as a condition for approving the consent decrees.”  As the court explained, “[t]rials are primarily about the truth.  Consent decrees are primarily about pragmatism. … It is not within the district court’s purview to demand cold, hard, solid facts, established either by admissions or by trials as to the truth of the allegations in the complaint as a condition for approving a consent decree.” 
 
Although the Second Circuit noted that other cases may require more of a showing (such as where a district court suspects a consent decree has been entered into as a result of improper collusion between the SEC and the settling party), such circumstances did not appear to be present here.  Indeed, the Second Circuit noted that Judge Rakoff, “with the benefit of copious submissions by the parties, likely had a sufficient record before it on which to determine if the proposed decree was fair and reasonable.”  Of course, if Judge Rakoff “deem[ed] it necessary” on remand, the Second Circuit noted he could ask the SEC and Citigroup to provide “additional information sufficient to allay any concerns … regarding improper collusion between the parties.” 
 
If Judge Rakoff’s decision had been affirmed, meaning that SEC consent decrees likely would need to include party admissions to the wrongful acts alleged, then the “personal profit” and/or “fraud” exclusions typically present in D&O policies would be triggered, as “final adjudication” language often incorporated into those exclusions would be satisfied.  D&O insurers’ exposure, therefore, would be significantly limited in such matters, with defense costs likely presenting the only exposure.  Thus, the Second Circuit’s reversal significantly blunts, if not outright kills, the immediate trigger of the personal profit and/or fraud exclusion(s) which could have been available to insurers had Judge Rakoff’s decision been affirmed. 

Despite potentially disarming the “personal profit” and “fraud” exclusions, the Second Circuit’s decision does not affect a typical D&O policy’s “loss” definition.  The amounts due from the insured in the usual consent decree, which include mostly fines, penalties, and disgorgement, arguably fall outside the typical “loss” definition.  As a result, while the Second Circuit’s decision may be disappointing to D&O insurers, other strong coverage defenses such as the definition of “loss” continue to be viable with respect to both consent decrees and any parallel civil actions that exist.

 

 

New York High Court Finds that New York Insurance Law §3420(d)(2)’s Prompt Notice Requirement Does Not Extend to Claims Limited to Environmental Damage

June 11th, 2014

By Martin L. Eide, Sedgwick New York

In KeySpan Gas East Corp. v. Munich Reinsurance America, Inc., et al., — N.Y.3d –, (N.Y. June 10, 2014), a case involving two environmental damage claims, the New York Court of Appeals reversed an appellate decision which found that three excess insurance carriers had waived their right to disclaim insurance coverage for failure to timely raise late notice as an affirmative defense, citing N.Y. Insurance Law § 3420(d)(2).

KeySpan arises out of the clean-up and remediation of two former manufactured gas plants (“MGP”) located in Bay Shore and Hempstead, New York which were operated by the Long Island Lighting Company (“LILCO”).  LILCO initially notified its excess insurance carriers of potential environmental liabilities in connection with the two MGPs and sought indemnification for environmental damages.  In response, the carriers issued broadly worded reservation of rights letters to LILCO, including the right to disclaim coverage based on late notice, and requested additional information regarding the MGP sites.  LILCO provided additional information to the carriers in compliance with their request for information, but the carriers did not issue supplemental coverage position letters. 

Later, LILCO filed a declaratory judgment action in New York state court seeking indemnity for damages arising out of the cleanup and remediation of the MGPs.  Each carrier answered the complaint and asserted late notice as an affirmative defense – this defense had not previously been asserted as basis for a coverage disclaimer.  On cross motions for summary judgment, the trial court found that the carriers had no duty to indemnify LILCO for the Bay Shore site because of LILCO’s late notice of an occurrence.  But, as to the Hempstead site, the court denied the carriers’ motion because the reasonableness of LILCO’s notice was a disputed issue of fact.  Further, the trial court rejected LILCO’s claim that the carriers’ late notice defense, as asserted for the first time in the answers to the complaint, was untimely.  Following this decision, KeySpan received an assignment from LILCO to pursue the MGP claims and was added as a party to the litigation.

On appeal, the Appellate Division, Second Department, modified the trial court’s order by vacating the declaration in favor of no coverage for the Bay Shore site, but otherwise affirmed the order.  In this regard, the Appellate Division noted that issues of fact existed regarding the carriers’ coverage investigation, including whether coverage disclaimers should have been issued to LILCO as soon as reasonably possible after LILCO provided additional information to the carriers as requested in their reservation of rights letters.         

The carriers appealed to the New York Court of Appeals regarding whether the Appellate Division incorrectly applied the timeliness standard under section 3420(d)(2) when considering whether defendants had waived their rights to disclaim based on LILCO’s late notice of the MGP claims. 

The Court of Appeals analyzed the plain language of section 3420(d)(2), its legislative history, and controlling New York case law interpreting the law, and held that the statute does not extend to environmental damage claims.  The court noted that “[t]he environmental contamination claims at issue in this case do not fall within the scope of Insurance Law § 3420 (d)(2), which the Legislature chose to limit to accidental death and bodily injury claims, and it is not for the courts to extend the statute’s prompt disclaimer requirement beyond its intended bounds.”  The court also mentioned, in a footnote, that certain cases that may have extended section 3420(d)(2) to apply to claims that were not based on death or bodily injury “were wrongly decided and should not be followed.”  See Estee Lauder Inc. v. OneBeacon Insurance Group, LLC, 62 A.D.3d 33 (1st Dep’t 2009); Hotel des Artistes, Inc. v Gen. Accident Ins. Co. of Am., 9 AD3d 181, 193 (1st Dep’t 2004), leave dismissed 4 N.Y.3d 739 (2004); Malca Amit N.Y. v Excess Ins. Co., 258 A.D.2d 282,282 (1st Dep’t 1999).

 

Illinois “Blasts” Non-TCPA Causes of Action Out of Coverage

June 10th, 2014

By Stephanie Sauvé, Sedgwick Chicago

In G.M. Sign, Inc. v. State Farm Fire & Cas. Co., 2014 IL App (2d) 130593 (May 2, 2014), the Illinois appellate court enforced a policy’s Violation of Statutes Exclusion endorsement to preclude coverage for a settlement arising out of an underlying blast-fax lawsuit that alleged various causes of action.

The underlying lawsuit was a class action in which G.M. Sign sued Michael Schane (“Schane”) and Academy Engraving Company for sending unsolicited fax advertisements. G.M. Sign asserted three causes of action in its amended complaint:  violation of the federal Telephone Consumer Privacy Act of 1991 (“TCPA”), conversion, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.  The latter two counts made no express reference to the TCPA, but each count was based on the sending of unsolicited fax advertisements to G.M. Sign and others.  Schane later entered into a settlement agreement in which he stipulated to the entry of judgment against him for $4.9 million, to be satisfied with insurance proceeds.

Schane tendered the suit to his insurer, State Farm.  His insurance policy contained a Violation of Statutes Exclusion endorsement precluding coverage for property damage or advertising injury “arising directly or indirectly” out of any action or omission that violates or is alleged to violate the TCPA or any other statute that prohibits or limits the sending, transmitting, communicating, or distribution of material or information.  Citing this exclusion, the insurer denied coverage because the amended complaint alleged violations of the TCPA.

Thereafter, G.M. Sign filed a declaratory judgment action against State Farm claiming coverage under Schane’s policy.  On cross-motions for summary judgment, the trial court found that the insurer had a duty to defend and indemnify Schane, but the appellate court reversed.  The appellate court determined that the insurer had no duty to defend in connection with the amended complaint because the exclusion applied to all counts in the amended complaint.  The court reasoned that the proper analysis of the “arising out of” language in the Violation of Statutes exclusion is a “but for” analysis — if the alleged injury would not have occurred “but for” a violation of the TCPA, then the exclusion barred coverage for the alternative causes of action which arose from the same conduct underlying the alleged TCPA violation.

Look here for more Sedgwick articles related to insurance coverage for violations of the TCPA.

Washington’s Insurance Fair Conduct Act Does Not Apply to Liability Insurance Claims

June 7th, 2014

By Robert Meyers, Sedgwick Seattle

 On May 16, 2014, Judge Marsha Pechman of the U.S. District Court for the Western District of Washington dismissed an insured’s cause of action against his liability insurer under Washington State’s Insurance Fair Conduct Act (“IFCA”), declaring that an insured under a liability insurance policy does not have a right of action under IFCA.  Cox v. Continental Cas. Co., 2014 WL 2011238 *5 (W.D. Wash. May 16, 2014). The Court reasoned that only a “first party claimant” has a right of action against IFCA, and observed that a liability insurance policy is a “third-party” insurance policy, and the Washington Supreme Court consistently has recognized that there are material differences between first-party insurance and third-party insurance. It thus declared that an insured under a third-party liability policy does not have a right of action under IFCA.

This decision is notable, as it is the first decision in which a Washington judge has dismissed a cause of action against a liability insurer under IFCA on that basis.  In certain cases involving first-party insurance, Washington judges have opined that IFCA applies only to cases involving first-party insurance. However, in other cases involving third-party liability insurance, certain judges have summarily applied IFCA to those cases, without analysis and presumably without any briefing on the issue.

Although the decision is not binding precedent, it is well reasoned and should serve as highly persuasive precedent in future Washington suits. In turn, the decision should help to mitigate liability insurers’ exposure to an award of uncapped treble damages and reasonable attorneys’ fees under IFCA.

 The decision also may noteworthy consequences in insurance-related discovery disputes. In 2013, the Washington Supreme Court declared that it will presume that an insurer “in [a] first party insurance claim” may not assert the attorney-client privilege or work product protection in a bad faith lawsuit. Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 700, 295 P.3d 239 (2013).  Without analysis, and presumably without briefing on the issue, certain federal judges have applied the presumption in Cedell to bad-faith suits relating to third-party liability insurance.  That said, the distinction between first-party insurance and third-party insurance which Judge Pechman recognized in Cox for purposes of IFCA would seem to apply equally to a discovery dispute under Cedell.  Therefore, as a result of Judge Pechman’s decision, it is possible that Washington judges will be disinclined to apply Cedell in discovery disputes in bad-faith suits relating to third-party liability insurance.

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