2015 fall conference & training seminar coverage disputes: how ugly can they get? september 16,...

2015 FALL CONFERENCE & TRAINING SEMINAR

Coverage Disputes: How Ugly Can They Get?

September 16, 201511:00 a.m. – 12:15 p.m.

Important Considerations

• Ensure the coverage and exclusions represent what the members want

• Acknowledge the conflict of interest • Balance sympathy with guidelines• Consider all interests (reinsurers, pools, individual

members)


Legal Framework

• Dearth of JPA-specific cases• Paradox of applying insurance law principles to JPAs• Lack of understanding that an MOC is NOT a

contract of adhesion


Preventing Disputes

• Pre-existing relationships with the members• Importance of partnership • Coverage letter advisability/content• Communication– Before a coverage letter is sent– Importance of conversation

• Crystal ball2015 FALL CONFERENCE & TRAINING SEMINAR

What to look for…Governing Documents• Resolution Process

– Arbitration– Courts– Internal process

• Types of damages that may be recovered

• Jurisdiction

Other documents• Individual member

underlying insurance policies


Who should represent the JPA?• JPA counsel vs. outside coverage counsel

• Considerations– Has the person handled coverage disputes?– Is there a conflict of interest?• Was JPA counsel involved from the start?


Dispute expense issues• Governing documents must be clear regarding cost

allocation of coverage disputes– Allocation of losses involving multiple members– How are expenses for claims which include covered v.

non-covered issues handled/allocated?

• Financial statements• Claim loss runs


Need for changeBefore dispute…• Educate Boards,

committees, members• Ensure the dispute

resolution process is effective and efficient

• Review the policy with the reinsurers, coverage committees, Board

After dispute…• Review the dispute

resolution process• Propose revisions to

governing documents if necessary

• Educate Boards, committees, members


Case Study #1A - Background

• State building freeway• City wanted a section to be below grade to allow

enhanced views. • County agreed to undertake the management of a

drainage construction to reroute water flows.


Case Study #1A - Background

• The result funneled the water to a drain which would empty onto contractor’s property, being developed for housing.

• County believed that 60-year old easements enabled them to use the property for this purpose.


Case Study #1A - Issues• Is there an occurrence? If so, how many

occurrences? Water was funneled where it was directed, and no subsequent PD occurred.

• Does the inverse condemnation exclusion apply? If so, does the exception to the exclusion apply?

• Several members of the BOS allegedly accepted bribes to vote for the settlement of the litigation. Does that invalidate the agreement?


Case Study #1A - Issues

• A ROR was issued. The County proceeded with the litigation and settlement without express approval.– Does this invalidate coverage?– The pool did not participate in any settlement meetings

despite being invited. Did this constitute waiver?


Case Study #1A – Lessons Learned

• Arbitration with judges does not necessarily result in full education of the JPA process, difference with insurance

• Rules of evidence differ – can be good and/or bad• What is the purpose of a confidentiality agreement?– Allegations can be different in different proceedings.

Again, confidentiality agreement may interfere.


Case Study #1A – Lessons Learned

• Clarify whether different levels of coverage have same or different policy terms, definitions. Clarify scope of hearing.

• MOC: Occurrence and inverse condemnation definitions were reviewed and revised


Case Study #1B - Background• Private developer sued Flood Control District.• Developer’s case essentially was for inverse

condemnation and did not specifically allege “property damage.”

• District eventually settled and sued City for indemnity for amounts it had paid in settlement.

• Settlement agreement defined the types of damages sought against the City.


Case Study #1B - Background

• City tendered to JPA, and coverage was denied.• City appealed to Board of JPA, and denial was

upheld.• City then sued in Superior Court for declaratory

relief and “bad faith.”


Case Study #1B - Issues

• Leave in court or enforce MOC arbitration clause? • Who represents JPA? – considerations.• Arbitrator selection process – considerations.• Fighting coverage issues – when to “hold ‘em and

when to fold ‘em.”


Case Study #1B - Issues

• Can the “extrinsic” evidence of the settlement agreement be considered?

• The challenge of convincing arbitrator that this is not an insurance case.

• Does the “any potential” insurance standard apply to considering the duty to defend under an MOC?

• What recovery is available against a JPA?


Case Study #1B – Lessons Learned• Choose your battles – is this coverage dispute going

to cause more harm than benefit to JPA?• Advantages to court process over arbitration

process• Reconsider arbitration provision in MOC• Consider clearer duty to defend language in MOC• Consider MOC language limiting remedies and

recovery in coverage dispute


Case Study #2 - Background• City installed a sewer pipeline in an area with new

condo construction. • There was an omission in the construction which

allowed gases to seep upwards through the system, causing noxious odors and eroding the upstream pipes.

• After investigation, it was determined that a pollution policy seemed to cover this.

• The pollution policy had a timely reporting requirement, and had New York law as applying to contractual disputes.


Case Study #2 - Issues

• Was there late notice? • What constituted late?• If so, was there prejudice? • Did it matter (New York law, at the time, did not use

prejudice as a determination of whether the late reporting condition would apply)?


Case Study #2 – Lessons Learned

• Insurance documents for Members with only California exposure must have California jurisdiction for coverage disputes.– Need understanding of the coverage issues– Need court of jurisdiction to understand and apply

California laws


Case Study #3 - Background

• School uncovered a teacher had been molesting students over a two-year period, five students in all.



• How many occurrences does this constitute? • Reinsurance coverage changed between the two

periods. Which reinsurer applies?• Reinsurance policy had exclusion for molestations if

officials of the district were aware of the issue. The principal was advised, but investigated and felt there was no substance. Does this exclusion apply?


Case Study #3 - Issues• District had a $1 million SIR, and purchased an

underlying policy to cover $750,000 above $250,000. – That policy did not have similar occurrence language

and, in fact, has language which indicates each molestation claimant is a separate application of coverage.


Case Study #3 - Issues• District had a $1 million SIR, and purchased an

underlying policy to cover $750,000 above $250,000. – How many policy limits may apply for underlying

insurer? How many SIRs for District? For any monies from underlying carrier, how does the amount above the $1 million SIR get allocated between pool and Reinsurer?



• Consider the MOC “Other Coverage” clause.– Worked against the pool and in favor of reinsurer

• Specify in reinsurance agreement who is responsible for coverage interpretation– Reinsurer kept raising coverage issues that pool had

dismissed



• City experiences a sinkhole on July 3, after a MOC renewal July 1. The new MOC had a $5 million SIR. The prior MOC had a $2 million SIR. There are allegations of property damage, diminution of value for non-damaged homes, and emotional distress.



• There are also allegations there had been some minimal movement prior to the MOC inception, resulting in some cracking in some homes. The subsidence exclusion only applies to property damage.


Case Study #4 - Issues• In which period(s) does coverage apply (for the

emotional distress claims)? Which SIR(s)?• The Damages indicated are significantly greater for

property damage than for BI. – The matter was bifurcated as to liability before dealing

with damages. City won the liability case. – Defense costs totaled $7 million. How much, if any, is

reimbursable (how do you allocate defense costs between covered and uncovered damages)?



• Need language as to how to pro rate defense costs between covered and non-covered damages claims.

• Get involved early to oversee the defense cost incurrence– Opportunity to compromise case?



• City and RDA sued by private developer for breach of contract, promissory estoppel, intentional interference with contract.

• Coverage denied – all arises out of contract and/or acts alleged were intended to cause damage.

• City disputed denial, appealed to Board, denial upheld.



• City argued intentional interference with contract was a tort and did not itself arise out of a contract to which the City was a party, since the contract was with the RDA.

• City insisted it did not intend any damage – but never explained why even through appeal process and into arbitration.


Case Study #5 – Background

• As revealed only through depositions in the arbitration process, the City knew that the developer was withdrawing from the project before the City sent its termination letter, and that the plaintiffs were fraudulently representing themselves as authorized to act for the developer.

• None of this was communicated to JPA.


Case Study #5 – Background

• After a settlement was reached in mediation, City insisted that the settlement payment was not payment of a “claim,” and therefore should not count as part of the City’s loss history for purposes of assessments.



• Duty of member to convey pertinent information to JPA.

• What is the nature of a payment made in settlement of a coverage dispute?



• Coverage disputes between a member and the JPA should be kept as non-adversarial as possible.

• Consider MOC language on duty to share all relevant information at all stages.

• Consider MOC language on character or nature of payments made to settle coverage disputes.


Questions?

Thank you!


Speakers• Jack Blyskal, President– JB Consulting & Training– (916) 704-2467– [email protected]

• Luther Lewis, Shareholder– Johnson Schachter & Lewis, A PLC– (916) 921-5800– [email protected]


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