The Ever Changing Duty to Defend and. How It s Currently Leading to Bad faith

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1 ACI s Insurance Coverage & Extra-Contractual Disputes The Ever Changing Duty to Defend and November 30-December 1, 2016 How It s Currently Leading to Bad faith Benjamin A. Blume Member Carroll McNulty & Kull LLC Robert W. DiUbaldo Shareholder Carlton Fields Jorden Burt, PA Alexander E. Potente Partner Sedgwick LLP Tweeting about this conference?

2 The Duty to Defend, Generally What establishes the duty to defend? The Policy s defense agreement Insurer has the right and duty to defend.

3 The Duty to Defend, Generally How to determine if a defense is owed? 4 corners/8 corners rule (4 corners of complaint, & 4 corners of the policy). Duty to defend is triggered when the allegations of a complaint, liberally construed, suggest a reasonable possibility of coverage.

4 Duty to Defend: Extrinsic Evidence Extrinsic evidence allowed to establish coverage only:

5 Duty to Defend: Extrinsic Evidence Extrinsic evidence allowed to establish or negate coverage:

6 Duty to Defend: Extrinsic Evidence Extrinsic evidence not allowed:

7 Recent Attempts by Courts and Legislature to Broaden Duty to Defend W. Hills Dev. Co. v. Chartis Claims, Inc., 273 Or. App. 155 (2015), review allowed, 359 Or. 166 (2016) General contractor hired subcontractor; subcontractor obtained additional insured endorsement on its policy. Underlying construction defect suit filed against general contractor. Underlying action did not (1) name subcontractor; (2) allege defects to the subcontractor s work; nor (3) allege that damage occurred during the subcontractor s duration on the project. General contractor brings declaratory relief action against subcontractor s insurer for judgment that insurer owes general contractor a defense.

8 W. Hills Dev. Co. v. Chartis Claims, Inc., cont. Oregon generally abides by the eight-corners rule. Limited exception: Oregon permits extrinsic evidence to be considered for insured to prove its status as an insured under the policy. Holding: Permitted tender letter as evidence of additional insured status, and found a duty to defend because there was a possibility from the complaint that general contractor could be liable for subcontractor s work. Rationale: The complaint alleged defects resulted from the general contractor s negligent supervision of its subcontractors. Although vague, if proven, those facts could subject general contractor to liability for work by a subcontractor.

9 W. Hills Dev. Co. v. Chartis Claims, Inc., cont. Review by Oregon Supreme Court granted on April 21, 2016.

10 Oregon: Senate Bill 1590 (February 2016) Legislative attempt to expand bad faith in OR Rewriting Duty to Defend: Insured s interests placed above insurer s interests Estoppel: Any breach of the duty to defend would have (1) precluded insurer in participating in the defense of the suit while still being forced to pay defense fees; (2) resulted in the insurer s liability for any judgment or settlement agreed to by insured and claimant

11 Oregon: Senate Bill 1590, cont. The fiduciary duty standard imposed in the bill appeared (1) to require an insurer to put its insured s interests higher than its own; and (2) create a tort claim and allow for tort damages for alleged insurer breaches while the insurer is defending an insured. The bill had no clear guidelines for what policyholders or insurers should do if SB 1590 was violated.

12 Oregon: Senate Bill 1590, cont. Independent counsel Required if defending under a reservation of rights or if there is potential for excess exposure. Regulatory estoppel Permitted statements by an insurer to a regulatory body to be used to interpret contract provisions, rather than relying on the plain language of the contract. Assignment of insurance claims Permitted a claimant to assign claims even if the policy had an anti-assignment provision.

13 California Hartford Fire Ins. Co. v. Tempur-Sealy Int'l, Inc., 158 F. Supp. 3d 877 (N.D. Cal. 2016), order clarified, 2016 WL (N.D. Cal. May 16, 2016) Consumer class action against for failure to inform consumers of serious adverse reactions to pillows and mattresses. Hartford agreed to defend, but then filed declaratory relief action. Hartford argued that because the consumers were not seeking recovery for any damages for physical injury, there was no coverage.

14 Hartford Fire Ins. Co. v. Tempur-Sealy Int'l, Inc., Cont. Holding: allegations of detailed factual allegations of bodily injuries and property damages caused by the mattresses demonstrated the potential for liability under the policies. Rationale: The purported disavowal of bodily injury claims in the complaint was not dispositive because such a statement does not establish as a matter of law that such claims do not exist. Allegations were sufficient to put the insurer on notice that an amendment to the complaint could create the potential for coverage under the policy s terms, creating a duty to defend.

15 Great American Insurance Company, v. Sequoia Insurance Company Underlying personal injury action filed against insured condominium complex and property manager. Sequoia, as primary general liability insurer, denied coverage for property manager under professional services exclusions. Other primary and excess carrier provide defense and settle underlying action. Declaratory relief action filed against Sequoia for reimbursement of defense and indemnity payments.

16 Great American Insurance Company, v. Sequoia Insurance Company HOLDING: Sequoia owed a duty to defend property manager. Other insurers entitled to equitable contribution in defense and indemnity; pre-judgment interest. Failure or refusal to provide a defense or to participate in settlement, shifted burden to Sequoia to establish the absence of coverage, which it was unable to do. On appeal to the Ninth Circuit.

17 Washington King County v. Travelers Indemnity Co., No. C , W.D. Wash.; 2016 U.S. Dist. LEXIS King County named as PRP for Superfund sites Sought coverage from Travelers Indemnity Co., Hartford Accident and Indemnity Co. and other insurers for the Superfund suits. After dispute, King County filed action against Travelers. Travelers filed a third-party complaint naming 13 additional insurers, including Hartford. Hartford had issued King County an excess policy.

18 Washington Hartford filed a motion for summary judgment on the bad faith claims alleged against it. Hartford claimed that it did not act in bad faith in denying coverage because it owes no coverage pursuant to the policy s other insurance provision. Judge Pechman denied Hartford s motion on the basis that the other insurance provision applies only to the insurer s duty to indemnify, not the insurer s duty to defend. Rationale: Hartford had other options than refusing to defend. If Hartford believed that the claim was not covered, it could have defended under a reservation of rights and sought a judicial determination of its obligation without leaving the County to fend for itself.

19 Excess Insurer Duty to Defend The Wisconsin Supreme Court held that an excess insurer can have a duty to defend where the underlying insurer wrongfully declines to defend. Johnson Controls, Inc. v. London Mkt., 2010 WI 52, 325 Wis. 2d 176, 784 N.W.2d 579 (2010) Court found that London policy followed form to a duty to defend Underlying Travelers umbrella policy contained an other insurance clause providing that insurer had a duty to defend where the other insurer denies primary liability

20 Johnson Controls (cont.) Because Travelers declined to defend, London had a duty to defend Found London breached its duty to defend Not a bad faith case But it could be with the right facts Insureds are likely to argue that excess insurers are in bad faith if they do not step in where underlying insurers have refused to defend

21 Wisconsin Bad Faith Law Difficult to establish bad faith in Wisconsin Must show: (1) the absence of a reasonable basis for denying benefits of the policy; and (2) the insurer s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim. Anderson v. Continental, 85 Wis.2d 675, 271 N.W.2d 368 (Wis. 1978)

22 Wisconsin Bad Faith Law (cont.) First component is objective Is claim fairly debatable? Second component is subjective Insurer knows it has no reasonable basis to deny Implicit third component is that there must be coverage To get punitive damages, insurer must have acted maliciously

23 Breach of Duty to Defend Results In Liability for Excess Judgment Illinois Delatorre v. Safeway Ins. Co., 2013 IL App (1 st ) , 989 N.E.2d 268 (2013) Missouri Columbia Cas. Co. v. Hiar Holding, 411 S.W.3d 258 (Mo. 2013) Louisiana RSUI Indem. Co. v. Am. States, 768 F.3d 374 (5 th Cir. 2014) Nevada Nalder v. United Auto. Ins. Co. May be decided by Nevada Supreme Court

24 Prompt Payment Statutes Texas Prompt Payment Statute Tex. Ins. Code Applies to First Party Claims This includes claims under liability insurance, Lamar Homes v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007)

25 Tex. Prompt Payment Statute Texas Statute imposes procedures and deadlines for handling claims: 15 days to: (1) acknowledge receipt of claim; (2) begin investigation; and (3) request all necessary materials from policyholder. Tex. Ins. Code Notify insured in writing of acceptance or rejection of claim within 15 days of receipt of all necessary documents Pay the claim within 5 days of notifying insured that insurer will pay the claim Statutory penalties if claim is not paid within 60 days of receiving all necessary information Breach of the duty to defend will result in 18% interest Statute does not require bad faith

26 Illinois Estoppel for Breach of Duty to Defend If an insurer breaches its duty to defend, it is estopped from asserting it coverage defenses Employers Ins. Of Wausau v. Ehlco Liq. Trust, 186 Ill. 2d 127 (1999) Insurer must defend under RoR, or file a declaratory judgment action Declaratory judgment action must be timely Does not require bad faith No prejudice required

27 Illinois Estoppel (cont.) Estopped from doing what? Estoppel cannot create coverage may not be entirely true Insurers have been precluded from asserting defenses based on insuring agreement Few cases flesh out exactly estoppel means File a DJ!

28 Estoppel and Bad Faith Statutory bad faith, 215 ILCS 5/155 Statutory penalty 60% of claim up to $60,000 Attorneys fees Ehlco also found insurer liable under 155 Estoppel does not necessarily mean 155 liability

29 Majority of courts say no Some exceptions Affirmative Duty to Settle Absent Demand Welford v. Liberty Ins. Corp., 2016 WL (N.D. Fla. June 2, 2016) (on appeal) Bad faith may be inferred from a delay in settlement negotiations which is willful and without reasonable cause Where liability is clear, and injuries so serious that judgment excess of policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations

30 Affirmative Duty to Settle Absent Demand Kelly v. State Farm Fire & Cas. Co., 169 So.3d 328 (La. 2015) LA Supreme Court held an insurer can be found liable for a bad faith failure to settle claim under LA s version of the Unfair Claim Settlement Practices Act, even though insurer never received a firm settlement offer within limits. Relied on language in statute providing that an insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. LA statute is based on the NAIC Unfair Claims Settlement Practices Act, which most states have adopted in some form, though the NAIC Act does not have affirmative duty language.

31 Bad Faith Set Up: Holt Demands Camacho v. Nationwide Mut. Ins. Co., 2016 WL (N.D. Ga. May 25, 2016) (on appeal) Offer to settle for $100k policy limits with limited liability release and acceptance by delivery of payment within 10 days (with other conditions) Currently on certification to the GA Supreme Court is the question whether settlement can demand acceptance in the form of payment (Grange Mut. Cas. Co. v. Woodard, 826 F.3d 1289 [11 th Cir. June 23, 2016]) Claimant's attorneys fees (O.C.G.A (b)(2))

32 Consideration of Punitive Damages in Assessing Settlement Demand Wolfe v. Allstate Prop. & Cas. Ins. Co., 790 F.3d 487 (3d Cir. June 12, 2015) Insurer has no duty to consider potential for jury to return verdict for punitive damages when it is negotiating a settlement of the case To impose that duty would be tantamount to making the insurer responsible for those damages (which in PA are against public policy)

33 When Does the Statute of Limitations Begin to Run on Bad Faith Claim? Majority rule: SOL accrues only after judgment for an amount exceeding policy limits becomes final and non-appealable Connelly v. State Farm Mut. Auto Ins. Co., 135 A.3d 1271 (DE Mar. 4, 2016) Case of first impression for D.E., joined majority: Reduces possibility of conflict of interest between insurer and insured Protects insurers from bad faith claims for failing to settle even the most frivolous claims (if claimant willing to settle within limits) Saves insured litigation costs that may be unnecessary if court does not order an excess judgment

34 Punitive Damages Against Insurer Because of Bad Faith Rancosky v. Washington Nat l. Ins. Co., No WDA 2014 (Pa. Super. Ct., Dec. 16, 2015) (on appeal) Loosened standard for punitive bad faith penalties by holding insurer s motive of self-interest or ill will is merely one factor that can be taken into consideration, rather than a mandatory prerequisite

35 Contact Information Benjamin A. Blume Member Carroll McNulty & Kull Chicago, IL

36 Contact Information

37 Contact Information Alexander E. Potente Partner Sedgwick LLP San Francisco, CA