Insurer's Duty to Defend: Resolving Cost Issues Strategies for Defense Cost Reimbursement and Allocation

presents Insurer's Duty to Defend: Resolving Cost Issues Strategies for Defense Cost Reimbursement and Allocation A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Jared M. Katz, Partner, Mullen & Henzell, Santa Barbara, Calif. Joseph D. Jean, Counsel, Dickstein Shapiro, New York Benjamin C. Eggert, Partner, Wiley Rein, Washington, D.C. Wednesday, November 11, 2009 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific Please refer to the dial-in/log-in instructions emailed to registrants to access the audio portion of the conference. CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. If no column is present: click Bookmarks or Pages on the left side of the window. If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages. If you need assistance or to register for the audio portion, please call Strafford customer service at 800-926-7926 ext. 10

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Mullen & Henzell L.L.P. mh Insurer s s Duty to Defend: Resolving Cost Issues; Strategies for Defense Cost Reimbursement and Allocation Part I: Scope of Duty to Defend Jared M. Katz Litigation Chair Mullen & Henzell L.L.P. 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com

Mullen & Henzell L.L.P. Liability Insurance Policy mh There are 2 duties owed to the insured under a liability insurance policy: 1. Duty to indemnify the insured for liability for covered loss arising from a third party claim; 2. Duty to defend the insured for a third party claim seeking loss that potentially is covered under the policy s s insurance agreement. 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com Notes: The policy terms dictate the coverage. Interpretative rules can vary by jurisdiction. 2

Mullen & Henzell L.L.P. Duty to Defend mh Duty to defend is broader than the duty to indemnify and includes claims that are groundless, false and fraudulent. The duty to defend is just as, if not more, important than the duty to indemnify. Why? 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com The insured s s desire to secure the right to call on the insurer s s resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability. Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co., Inc.), 6 Cal.4 th 287, 295-96 96 (1993). 3

Mullen & Henzell L.L.P. What Does the Duty Require? mh The insurer is obligated to furnish competent defense counsel for each insured and to provide sufficient funding for the defense. If there is no conflict, the insurer can appoint qualified panel counsel. If there is a conflict, the majority view is that insured is entitled to independent counsel. 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com Issues: Is the claim fully covered? Reservation of rights? Damages in excess of policy limits? Special type of claim? 4

Mullen & Henzell L.L.P. Types of Issues That Might Arise mh Defining a Claim and Pre-Tender Costs Conflicts Requiring Independent Counsel Reservation of Right to Seek Reimbursement of Defense Costs Multiple Insurers/Target Tenders Termination of Duty 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com Settlement 5

Mullen & Henzell L.L.P. When Does the Defense Duty Arise? mh Duty to defend arises upon tender by insured of a claim triggering defense duty under the Policy. How does the Policy define the defense obligation. Sample: We will settle or defend, as we consider appropriate, any claim or suit asking for damages covered by this policy. 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com Issues: Is the defense obligation mandatory? How is a claim or suit defined? 6

Mullen & Henzell L.L.P. Pre-Tender Defense Costs mh Majority view: Pre-tender defense costs are not covered. Reasons: Insurer Not on Notice Before Then Voluntary Payments Clause 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com Practice tips: Exceptions and Counterarguments Tender Letter Seeking Cost Reimbursement Maintaining Communication Post-tender tender defense costs must be reasonable. 7

Mullen & Henzell L.L.P. Independent Counsel mh Majority View: If there is a reservation of rights or other conflict material to the defense, the insured is entitled to independent counsel. The independent counsel controls the defense of the case and is entitled to be paid for reasonable defense costs. California: Statute provides for insurer to pay the same rates as regular counsel in similar actions and binding arbitration of disputes 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com Practice Tips 8

Mullen & Henzell L.L.P. Reservation of Right to Reimbursement mh Majority View: Insurer is entitled unilaterally to reserve right to seek reimbursement for non-covered defense costs. Must be specially reserved or waived. 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com In a mixed action, insurer must defend the entire action, including non-covered claims. Buss v. Superior Court (Transamerica Ins. Co.),, 16 Cal.4 th 35 (1997). 9

Mullen & Henzell L.L.P. Multiple Insurers/Target Tenders mh General Rule: The duty of each insurer co-insuring a risk is evaluated independently based on the policy language. Equitable contribution between insurers. Other Insurance Clauses. Illinois Target Tender Doctrine State Auto Prop. & Cas. Ins. Co. v. Springfield Fire & Cas. Co.,, 2009 Ill. App. LEXIS 994 (Ill. App. Ct. 4 th Dist. Sept. 30, 2009) Not followed in other jurisdictions 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com 10

Mullen & Henzell L.L.P. Termination of Defense Duty mh Conclusion of Litigation Exhaustion of Policy Limits Burning Limits Excess policy issues Withdraw of Defense Burning Limits Defense Duty Not Apply to Cross-Complaints Complaints 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com 11

Mullen & Henzell L.L.P. Settlement Considerations mh Insurer s s Right to Control Defense and Settlement Assignment of Rights if No Defense Provided Claim Release and Withdrawal of Reservation of Right to Seek Reimbursement Deductible and SIR Business Considerations 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com 12

Mullen & Henzell L.L.P. Contact Mullen & Henzell L.L.P. mh We are available for help with California matters. Email: jkatz@mullenlaw.com Website: www.mullenlaw.com We are a 53 year-old law firm with a state-wide practice, including insurance coverage and claims analysis, insurance and bad faith litigation, insurance defense, and complex business and civil litigation. 112 E. Victoria Street Santa Barbara, CA 93101 Tel. (805) 966-1501 Fax (805) 966-9204 www.mullenlaw.com We also handle real estate litigation and transactions, business transactions, estate planning and litigation, and employment and labor counseling and litigation. 13

Introduction Joseph D. Jean, Esq., is Counsel in the Insurance Coverage Practice of Dickstein Shapiro s New York office and focuses on insurance coverage matters, commercial litigation, and alternative dispute resolution in forums throughout the United States. 2 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Agenda Methods of Allocation. Allocating between Covered and Non-Covered Claims. Allocating Among Parties. Allocations Involving Uninsured Periods of Time. 3 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Methods of Allocation: All Sums All-Sums: Once a policy year is triggered by injury or property damage, each of the individual insurance policies in that year must indemnify the policyholder for All Sums for which the policyholder becomes liable. Each triggered policy is jointly and severally liable for All Sums until the policy s limits are exhausted and then the policies that sit above the exhausted policy are called upon in the same manner. Onus is on the insurer to go after other insurance companies via a contribution action. 5 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Method of Allocation: Pro Rata Pro Rata: Onus is on the insured. Allocates risk among all triggered policy periods, with each insurance company paying only a share of the policyholder s total damages. When courts adopt proration, they tend to rely upon general principles of equity, rather than policy language. 6 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Methods of Allocation Modified Pro Rata Mixed time-on-the-risk and percentage of coverage. New Jersey and New Hampshire. Carter-Wallace, Inc. v. Admiral Ins. Co., 154 N.J. 312, 712 A.2d 1116 (1998); Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 650 A.2d 974 (1994); Universal-Rundle Corp. v. Commercial Union Insurance Co., 319 N.J. Super. 223, 275 A.2d 76 (N.J. Super. A.D. 1999) (defense costs). EnergyNorth Natural Gas, Inc. v. Certain Underwriters at Lloyd's, 156 N.H. 333, 934 A.2d 51 (N.H. 2007). 7 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Practice Pointers Allocating under Pro Rata and Modified Pro Rata can be complex. In New Jersey, courts frequently use a Special Allocation Master at the conclusion of the liability phase. Experts are often necessary. Work closely with your expert and make sure that all policies are included. Coverage charts can be particularly complex and some carriers might have to provide coverage if certain policies were previously exhausted. 8 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Methods of Allocation: Is There a Duty to Defend? Where there is a duty to defend, insurer s duty is broad. In most states insurer must defend covered and not covered claims even if just one claim is covered. Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 310, 486 N.Y.S.2d 873, 476 N.E.2d 272 (1984); Frontier Insul. Contractors, Inc. v. Merchants Mut. Ins., 91 N.Y.2d 169, 175, 690 N.E.2d 866 (1997). Where there s no duty to defend, insurers often attempt to allocate defense costs between covered and not covered claims. 9 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Methods of Allocation: New Jersey The Exception to the Rule Burd v. Sussex, 56 N.J. 383 (1970). Insurers argue that where there is a mixture of covered and not covered claims the duty to defend becomes a duty to reimburse. An Exception to the Rule: SL Indus., Inc. v. American Motorists Ins. Co., 128 N.J. 188, 607 A.2d 1266 (N.J. 1992). The court held that when defense costs cannot be apportioned, the insurer must assume the defense costs for both covered and non-covered claims. 10 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Methods of Allocation: What Kind of Policy is at Issue? Claims Made Policies Coverage triggered when a claim is made during the policy period (or extended reporting period). Focus is not when wrongful act was committed, but when claim first is made. Occurrence Policies Coverage triggered by an occurrence. Occurrence is often equated with an "accident. Some policies define occurrence to include "continuous or repeated exposure which results in bodily injury or property damage neither expected nor intended by the insured" and so includes events beyond happenstance accidents. 11 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Practice Pointers Review Policy and Complaint Carefully. Allegations in complaint are interpreted broadly and in favor of coverage. An insurer is relieved of the duty to defend only if there is no possible factual or legal basis on which [the insurer] might eventually be held to be obligated to indemnify [the insured] under any provision of the insurance policy. Allianz Ins. Co. v. Lerner, 416 F.3d 109, 115 (2d Cir. 2005) (quoting Servidone Constr. Corp. v. Sec. Ins. Co., 64 N.Y.2d 419, 424, 488 N.Y.S.2d 139, 477 N.E.2d 441 (1985)). Headings do not control. Rather, the substance of the allegations do. See, e.g., NWL Holdings, Inc. v. Discover Prop. & Cas. Ins. Co., 480 F. Supp. 2d 655 (E.D.N.Y. 2007) (finding a duty to defend where, although a complaint did not specifically denominate a cause of action as one that was covered by the policy at issue, the facts alleged therein were sufficient to put the insurer on notice that the complaint could potentially give rise to such a claim). Get creative. There are many situations where the defense of a covered claim is inseparable from the defense of uncovered claims and arguments can be made that the insurer should defend the whole case. 12 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Allocation of Defense Costs: Among Insurers Different Types of Policies Respond Differently Primary: Generally have a duty to defend and defense costs are in addition to limits. Excess & Umbrella: May or may not have a duty to defend, but defense costs can erode limits. 13 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Practice Pointer New York law mandates, through Insurance Regulation 107, 11 N.Y.C.R.R. 71 ( Regulation 107 ), that liability policies must include defense cost coverage. This result is required by law regardless of any issues pertaining to intent or negotiation amongst the parties. Regulation 107 states (emphasis added): (a) No liability insurance policy, except as specified in this Part, shall be issued or renewed in this State containing a provision that: (1) reduces the limits of liability stated in the policy by legal defense costs; (2) permits legal defense costs to be applied against the deductible, if any; or (3) otherwise limits the availability of coverage for legal defense costs. (c) No liability insurance policy shall be issued or renewed in this State unless legal defense costs are incident to a claim of legal liability covered under the policy. 11 N.Y.C.R.R. 71.2 (SPA14) (emphasis added). Where an insurer issues a policy in violation of this Regulation, a court must reject the violative policy terms and enforce the policy in conformance with the requirements of the Regulation, regardless of any party s intent: [A]ny policy of insurance delivered or issued for delivery in this state in violation of any of the provisions of this chapter shall be valid and binding upon the insurer but in all respects in which its provisions are in violation of the requirements or prohibitions of this chapter it shall be enforceable as if it conformed with such requirements or prohibitions. N.Y. Ins. Law 3103(a) (SPA26) (emphasis added). 14 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Allocation of Defense Costs: Competing Policies Similar other insurance clauses cancel each other out and each insurer responds pro rata. Avoiding other insurance clauses? 15 COPYRIGHT 2009. DICKSTEIN SHAPIRO LLP. ALL RIGHTS RESERVED.

Recoupment of Defense Costs Benjamin C. Eggert Wiley Rein LLP Washington, DC beggert@wileyrein.com November 11, 2009

What happens if an insurer defends but a court later holds there was never duty to defend in the first place?

MAJORITY POSITION Numerous court decisions confirm insurers right to recoup defense costs Leading Case is Buss v. The Superior Court of Los Angeles County, 939 P.2d 766 (Cal. 1997)

MAJORITY POSITION Buss, 939 P.2d 766 (Cal. 1997) Insurer that defends suit with covered and non covered claims can recover defense costs Must show that defense costs are allocable to non covered claims

MAJORITY POSITION Buss, 939 P.2d 766 (Cal. 1997) Reservation of rights required insurer must advise insured of right of recoupment Fair to insured insured can accept defense (subject to recoupment) or defend itself

MAJORITY POSITION Key Considerations Reservation of Rights Quasi contract or implied contract Unjust Enrichment

MAJORITY POSITION Reservation of rights Timely and express reservation Notice of possible reimbursement Insured s acceptance of defense

MAJORITY POSITION Quasi contract or implied contract Flowing from reservation of rights vs. insurance contract Separate/implied agreement No voluntary payment

MAJORITY POSITION Unjust Enrichment An insurer has not assumed the risk to pay claims that were never covered Reimbursement restores parties to the place where they were when they entered the contract

MAJORITY POSITION The Problem with Mixed Action Cases

MINORITY POSITION Some decisions disallow recoupment Leading case is General Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005)

MINORITY POSITION General Agents, 828 N.E.2d 1092 (Ill. 2005) Court held that if an insurer believes there is no duty to defend, then deny Court ruled that an insured shouldn t be put in Hobson s choice

MINORITY POSITION Key Considerations Some courts believe insurers are acting in self interest in offering defense preserving indemnity rights and ensuring effective defense

MINORITY POSITION Key Considerations Some courts are unconvinced by implied contract and unjust enrichment arguments Some courts appear to view policies as providing litigation insurance

MINORITY POSITION Problems with Rationales No Hobson s choice for insureds Self interest (or lack of self interest) is no basis to reject (or accept) legal right False logic of litigation insurance and broad coverage obligations

Core Points Developing area of the law Decisions go both ways Clear reservation of rights is important to setting the stage for subsequent assertion of right

Questions?