navigating insurance bad faith claims involving additional...
TRANSCRIPT
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Presenting a live 90-minute webinar with interactive Q&A
Navigating Insurance Bad Faith Claims
Involving Additional Insureds and
Defense-Within-Limits Policies Insurer and Insured Perspectives on Bad Faith Risks and Pitfalls With AIs and Exhaustion of Policy Limits
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
TUESDAY, DECEMBER 6, 2016
Laura A. Foggan, Partner, Wiley Rein, Washington, D.C.
Anthony L. (Tony) Martin, Shareholder, Sandberg Phoenix & von Gontard, St. Louis
Meghan C. Moore, Shareholder, Ver Ploeg & Lumpkin, Miami
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Examining the Theory of Bad Faith In the Absence of Coverage: The Third-Party Context
Laura A. Foggan
Wiley Rein LLP
202-719-3382
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
With no breach of contractual obligations, how can an
insurer be liable for bad faith?
Most courts articulate bad faith as an insurer’s willful
breach of the insurance contract, but bad faith in the
absence of coverage dispenses with the need for any
breach of a duty to defend, settle or indemnify.
This is a stretch. The fiduciary relationship, and a duty
of good faith and fair dealing, traditionally has been
centered on the existence of the insurance contract and
duties assumed under that contract.
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
Policyholder advocates increasingly are advocating
third-party bad faith claims in the absence of any
contractual duty owed by the insurer.
Most commonly, these are “procedural” bad faith
claims, which are brought based on alleged violations of
standards for claim handling.
Policyholder advocates may rely on statutory provisions
or, in other instances, attempt to develop common law
theories for bad faith liability in the absence of
coverage.
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
What are the elements of a claim for bad faith in the
absence of coverage? Liability – Causation – Damages.
No breach of contract requirement. What is the basis for
liability or fault of the insurer (source for a duty or
standard of care allegedly being breached)?
Causation element. What nexus must be shown between
the source of the insurer’s liability and the alleged
harm?
Damages. What is the policyholder’s burden in proving
damages? Presumption of harm? Coverage by estoppel?
And, what is the measure of damages?
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
What about public policy implications of
recognizing a cause of action for bad faith in the
absence of coverage?
Is it a distortion of the parties’ insurance
relationship?
Are there negative effects of extra-contractual
awards on the insurance system?
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
Typical cases have sought to establish a cause of action
based, e.g., on a third-party insurer’s alleged delay in
responding to a policyholder, even though that insurer
owed no contractual duties to that policyholder.
Recognizing a cause of action in these circumstances
would create a perverse incentive to tender any potential
claim to an insurer – regardless of how frivolous and how
far afield of the actual policy coverage – in the hope that an
insurer would fail to respond in a manner satisfactory to the
policyholder.
This would potentially open the door to a flood of lawsuits
charging insurers with a myriad of “procedural”
irregularities. 10
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
Where there is no duty to defend or settle at issue, an
insurer has no opportunity to affect the underlying claim
to the policyholder’s disadvantage (or to its own
advantage).
The third-party insurer’s actions – whether performed in
good faith or bad faith – could have no impact on the
outcome of the underlying claim against the
policyholder.
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
In a typical claim for third-party bad faith without
coverage, the insurer correctly determined that the
policy did not cover the underlying claim against the
policyholder but allegedly failed in some other fashion,
e.g., to issue its denial promptly, communicate fully
with the policyholder, or properly investigate the claim.
If the insurer had responded properly, however, the
result would be no different: the policyholder, not
entitled to coverage, would be responsible for its own
defense and any liabilities.
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
No guesswork is required to determine how
events might have played out differently in the
underlying case because the insurer’s alleged bad
faith conduct could not have affected the outcome
of the underlying claim.
Thus, no presumption of harm is warranted. If
any cause of action is recognized at all, then
normal contract damages rules should apply to
determining the burden of proof, and the quantum
and nature of damages allegedly sustained.
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
Grounds for Possible Claims
Examples of Cases
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DEFENSE WITHIN LIMITS POLICIES
Is there a heightened duty of good faith on the part of
an insurance company when handling claims with
Defense Within Limits provisions?
Presented by: Anthony L. Martin
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“Burn Baby Burn”
Ian Corzine, Esq. “Burn, Baby, Burn”: The Role of “Defense Within
Limits” Liability Policies in Construction Defect Litigation, West &
Miyamoto (2014).
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Defense Within Limits (DWL)
DWL - The cost to defend reduces the policy’s liability limit.
Every dollar spent for defense reduces the dollars available for
indemnity.
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Defense Within Limits (DWL), AKA:
1. Eroding Limits
2. Burning Limits
3. Declining Limits
4. Diminishing Limits
5. Cannibalizing Limits (West Coast)
6. Pac-Man Limits
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Agape Senior Primary Care, Inc. v. Evanston
Ins. Co., 2016 WL 4804066 (D.S.C.)
EIC sold a medical professional liability policy to Agape with
eroding limits
Agape sued EIC for breach of contract/bad faith for its
handling of prior claims
Agape stated bad faith claims for improperly terminating
former counsel and reassigning prior claims to new counsel
resulting in “unnecessary and unjustifiable wasting” of the
policy limits
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Agape Senior Primary Care, cont’d
Agape also stated a claim for bad faith alleging it was injured
“by failed mediations and years of wasted time and increased
expenses which eroded [Policy] benefits.”
EIC had NOT breached its contract, but the way it exercised
its contract rights could have in bad faith eroded the
remaining liability limits.
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
A Special Case: Eroding Limits?
• Are there viable bad faith claims against a third-party
liability insurer with an eroding limits policy where
there has been no breach of a duty to defend, settle or
pay?
• When there is protracted litigation, significant
defense costs can greatly reduce or even eliminate the
policy limits available to pay any settlement or
judgment.
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
With an eroding limits policy, is there:
A duty to inform of defense costs incurred and the extent
to which the limits have been depleted (and the risk of
excess liability increased)?
A cause of action if the insurer incurs defense costs that
were not reasonable and necessary?
Liability for failure to settle to avoid unnecessary defense
costs which will deplete limits (e.g., was a failure to
affirmatively seek or agree to settlement unreasonable
under the circumstances)?
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
Pueblo Country Club v. AXA Corp. Solutions Ins. Co.,
2007 WL 951790 (D. Colo. March 28, 2007).
D&O insurer denied summary judgment on bad faith
failure to settle allegations that it “was aware that
attorneys’ fees and costs were reducing the available
policy limits and that PCC was exposed to a judgment
in excess of the available limits, and nevertheless acted
unreasonably with regard to settlement of the case.”
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
NIC Insurance Co v. PJP Consulting, LLC, No. 09-0877,
2010 WL 4181767 (ED Pa. 22 October 2010).
A federal district court judge declining jurisdiction over a
declaratory judgment action in favor of a competing suit
in state court commented on the issues created by
defense-within-limits provisions, noting that some
regulators and legislators have limited or barred them
because of the conundrum faced by the policyholder that
might lose protection against a judgment or settlement
due to the costs of defense being applied against the
policy coverage.
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
Policyholders challenging insurers’ erosion of coverage
through defense expenses may point to statutory and
regulatory restrictions on the use of defense-within-limits
provisions, for example, in Minnesota, Minn. Stat. Ann. §
60A.08 subdiv. 13; New York, NY Comp. Codes R. and
Regs. Tit. XI § 71.3; and Oregon, Or. Rev. Stat. §
742.063(1).
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
These new bad faith claims seek to alter settled law in
which courts have applied defense-within-limits
provisions in a straightforward manner, even when they
eliminate an obligation to pay for settlement or
judgment.
For years, the majority of courts have enforced the
contract language of eroding limits policies, despite
policyholder claims of ambiguity or confusion. See,
e.g., National Union Fire Insurance Company of
Pittsburgh, PA v. West Lake Academy, 548 F.3d 8 (1st
Cir. 2008).
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DWL Policies Beneficial
Westport Ins. Corp. v. Mylonas, 2015 WL
4273311 (E.D. Penn.)
DJ count seeking declaration – “eroding
policies for legal professionals are against
public policy”--dismissed with prejudice
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DWL Policies Beneficial
cont’d
“Eroding policies or [DWL] provisions are not
illusory, as the insured does receive a benefit
in exchange for premiums.”
Court distinguished NIC Insurance
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Third-Party Bad Faith Without Any Wrongful Failure to Defend or Indemnify
Given policyholder advocates’ claims under
eroding limits policies, insurers may wish to give
special consideration to issues such as the
selection of counsel (e.g., unique benefits of
independent counsel, risks in use of staff
counsel), control of defense, and settlement.
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Lindemann v. Western Healthcare, LLC
,et al., St. Clair Co., IL - August 2015
1 Policy - 2 Insureds with Conflicting Interests:
o ER Doc - Add’l Insured/Target Defendant
o ER Doc’s Employer - Named Insured - Western HC
Adj. told Def. Counsel - $1M Liability Limits, but failed to
disclose a DWL Policy
Discovery answers did NOT Disclose a DWL Policy
Shared Limits Eroded to $600K
DWL first disclosed 6 weeks before trial
Plaintiff ’s Counsel filed Emergency Sanctions Motion alleging
Discovery Fraud
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Western Healthcare, LLC v. National Fire
& Marine, 2016 WL 4098753 (N.D. Tex.)
Western filed suit in TX against insurer, broker HLS & others
for violations of TX Ins. Code/TX Deceptive Practices
Act/other theories
Court “inferred” that HLS represented the policy issued met
Western’s needs
Court “inferred” the eroding limits policy didn’t meet
Western’s needs/caused Western’s damages
Western stated a claim against HLS for violating TX Ins.
Code/TX Deceptive Practices Act
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Strafford Webinar
Meghan C. Moore
Shareholder
Ver Ploeg & Lumpkin, P.A.
(305) 577-3996
Additional Insured Coverage: Navigating AI Rights, Insurer Duties, & Bad Faith
Pitfalls
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• These can arise in the DWL context – where the Named Insureds and Additional Insureds have competing claims to be settled out of insufficient policy limits
• Countryman v. Seymour R-11 School Dist., 823 S.W.2d 515 (Mo. Ct. App. 1992)
• Country Mut. Ins. Co. v. Anderson, 628 N.E.2d 499 (Ill. App. 1993)
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• Scope of Coverage
• Duties Owed
• Illustrations of Bad Faith Exposure with Respect to AI Claims
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All provisions of an insurance policy that apply to the named insured also apply to the additional insured. See Oakland Stadium v. Underwriters at Lloyds, London, 313 P.2d 602 (Cal Ct. App. 1957).
Whether the additional insured should be covered for its own acts of negligence or should be limited to coverage for its vicarious liability for the acts of the named insured is, however, disputed among the courts.
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Expansive Duty to Defend Additional Insureds
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“Arising out of” is broadly construed to require only that the PD or BI “originate from”, “grow out of”, or have a “substantial nexus with” the Named Insured’s ongoing operations. See Westchester Fire Ins. Co. v. Continental Ins. Cos., 126 N.J. Super. 29 (App. Div. 1973).
There is coverage under an AI endorsement even if the AI was 100% negligent, so long as BI or PD arose out of the Named Insured’s operations. See Mid-Continent Cas. Co. v. Swift Energy Co., 206 F.3d 487 (5th Cir. Tex. 2000) (“Mid-Continent could have expressly stated in the Policy that liability not resulting from the AI’s sole negligence was not covered by the additional insured endorsement. It did not do so). 37
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A causal connection is required.
McIntosh v. Scottsdale Ins. Co., 992 F.2d
251 (10th Cir. 1993).
“But for”causation is sufficient.
Shell Oil Co. v. AC&S, Inc., 649 N.E.2d
946 (Ill. App. Ct. 1995).
Maryland Casualty Co. v. Chicago and
North Western Transp. Co., 466 N.E.2d
1091, 1094 (Ill. App. Ct. 1984).
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“Coverage limited to AI’s vicarious
liability for acts or omissions of NI.
Schafer v. Paragano Custom Bldg., Inc., A-
2512-08T3, 2010 N.J. Super. Unpub. LEXIS
356, at *6 (App Div. Feb. 24, 2010).
Coverage extends to AI’s own
negligence, so long as the NI’s acts or
omissions (even if not negligently)
caused, in whole or in part, the BI or PD.
Burlington Ins. Co. v. NYC Tr. Auth., 132 A.D.
3d 127, 129 (1st Dep’t 2015).
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In Florida, courts have adopted the more modern view that absent policy language to the contrary, additional insured coverage is intended to cover AIs for their own negligence.
See Container Corp. of Am. v. Maryland Cas. Co., 707 So. 2d 733 (Fla. 1998) (interpreting additional insured endorsement to insure additional insured for its own negligence in the absence of limiting language in the policy).
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Some AI endorsements “link” the scope of coverage with the scope of the parties’ indemnity agreement, and limit the scope of the coverage by reference to state law on contractual indemnity.
More recent editions of standard AI endorsements
preclude coverage for an AI’s sole negligence.
This language does not necessary preclude
coverage if the NI was also partially at fault.
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• When does Additional Insured status end?
• Exclusions barring coverage for BI/PD occurring after: • All work (other than service, maintenance, or repair) to be
performed by or on behalf of AI has been completed
• The portion of Named Insured’s work out of which injury arises has been put to its intended use
• Note: Whether operations are completed is typically a fact-sensitive inquiry.
• Note: Some states find that work performed under service or maintenance contracts to be ongoing, even if the specific operation alleged to have caused the accident or injury was completed.
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Some courts interpret endorsement to
require contractual privity between NI
and AI. See AB Green Gansevoort,
LLC v Peter Scalamandre & Sons,
Inc., 102 AD 3d 425 (1st Dept 2013).
Others deny AI status where putative
AI did not have a direct contract with
NI, even though NI’s contract with
other party purported to incorporate
contract between AI and the other
party, which required AI coverage for
putative AI.
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A POTENTIAL or POSSIBILITY for
coverage.
Four Corners of Complaint Rule
Underlying facts outside complaint
known or made known to insurer
that create a potential for coverage
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“Even where there exist extrinsic facts suggesting that
the claim may ultimately prove meritless or outside the
policy's coverage, the insurer cannot avoid its
commitment to provide a defense, since ‘[a] complaint
subject to defeat because of debatable theories must
[nevertheless] be defended by the insured.’”
Fitzpatrick v. Am. Honda Motor Co., Inc., 78 N.Y.2d 61, 66, 575
N.E.2d 90, 92 (N.Y. 1991).
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Conduct a full, fair, and prompt investigation.
Evaluate the potential for coverage, liability, and
an excess verdict.
Inform the Additional Insured.
Take affirmative steps to protect the additional
insured’s interests.
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Defend the ENTIRE action, even if only SOME of
the claims arise from potentially covered events.
Use the same degree of care and diligence as a
person of ordinary care and prudence would
exercise in the management of his own business.
Settle cases when warranted, and give fair
consideration to settlement offers that are not
unreasonable under the facts.
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Breaching the duty to defend may result in waiver of defenses to coverage for indemnification purposes in some states.
This varies by state law.
Examples…
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The refusal to defend supports a claim for bad faith.
See e.g., “Campbell v. Superior Court, 44 Cal. App. 4th 1308 (Cal. Ct. App. 1996).
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=
Exposure to
Bad Faith
Damages
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