“A Whim and a Prayer” The Seventh Circuit Considers CGL Coverage For Economic Losses In Medmarc v. Avent, And Gets It Right

Posted by Joseph Sano July 20th, 2010 in Consider The Risks.

This post considers the 7th Circuit’s July 15, 2010 decision in Medmarc Casualty Insurance Company v. Avent America, Inc., which can be found here. But first a word or two about the title. The phrase “A Whim and a Prayer” is actually a mangled version of “A Wing and a Prayer” which is from a popular 1943 song about a shot-up pilot that limps back to base, according to Professor Paul Brian’s entertaining and insightful Common Errors in English Usage, a link to which appears here. As Professor Brian correctly notes, “whim” and “prayer” don’t belong together. And indeed that is one of the messages of the Court’s opinion in Medmarc.

Illinois, whose law was being applied by the 7th Circuit in Medmarc, had developed a rule that the duty to defend should not depend on the “whim” of the plaintiff’s counsel in crafting the complaint, and that a court, in considering the duty to defend, should look beyond the specific words used in the underlying complaint to determine whether coverage existed. See Int’l Ins. Co. v. Rollprint Packaging Prods., Inc., 728 N.E.2d 680, 688 (Ill. App. Ct. 2000). The court refused to apply the “whim” rule and rejected defense coverage under a CGL policy applicable to “damages ‘because of bodily injury’” regarding a class action claim against Avent, whose “prayer” for relief was limited economic losses to parents who purchased but did not use plastic baby bottles because they were found to contain BPA, a substance alleged to have health risks.

The court noted:

Although Illinois courts have recognized that a duty to defend should not be at the mercy of the drafting whims of plaintiffs’ attorneys, these omissions were not mere whims. In the underlying cases, the plaintiffs’ attorneys have limited their claims solely to economic damages that resulted from the plaintiffs purchasing a product from which they cannot receive a full benefit because they were falsely led to believe that it was safe. This is not a drafting whim (or mistake) on the part of the plaintiffs’ attorneys, but rather a serious strategic decision to pursue only this limited claim. The strategic intention behind this decision is clear from the plaintiffs’ concession in the underlying suit that they are seeking only economic damages and do not claim any bodily injury.

Medmarc Slip Op. at 16 (citations omitted).

In reaching its decision, the 7th Circuit considered and rejected the insured’s argument that coverage was warranted because its CGL coverage included the broader “damages because of bodily injury” language instead of “damages for bodily injury” found in other forms. The court recognized the distinction and noted that “because of” is more broadly construed:

Avent is correct that courts do interpret these phrases differently and courts generally interpret the phrase “because of bodily injury” more broadly. The logic of this difference in interpretation can be illustrated by considering the following example: an individual has automobile insurance; the insured individual caused an accident in which another individual became paralyzed; the paralyzed individual sues the insured driver only for the cost of making his house wheelchair accessible, not for his physical injuries. If the insured driver had a policy that only covered damages “for bodily injury” it would be reasonable to conclude that the damages sought in the example do not fall within the insurer’s duty. However, if the insurance contract provides for damages “because of bodily injury” then the insurer would have a duty to defend and indemnify in this situation.

Medmarc Slip Op. at 19 (citations omitted).

Nevertheless, the court focused on the relief claimed in rejecting coverage notwithstanding the references in the complaint to the allegedly harmful nature of products containing BPA:

Even considering the broader duty to defend created by the phrase “because of bodily injury,” the complaints in the underlying suits do not reach the level of asserting claims “because of bodily injury.” Implicit in Avent’s argument is that the damages claimed are somehow, at least tangentially, tied to a bodily injury caused by BPA. As discussed above, that simply is not the case here. The theory of relief in the underlying complaint is that the plaintiffs would not have purchased the products had Avent made certain information known to the consumers and therefore the plaintiffs have been economically injured. The theory of the relief is not that a bodily injury occurred and the damages sought flow from that bodily injury.

Id. at 19-20.

Thus, while duty to defend coverage should not be determined by the “whim” of the pleadings in the underlying claim, insureds don’t have a “prayer” if the prayer for relief doesn’t seek damages “because of bodily injury.” While the court’s analysis never mentions “reasonable expectations” and does not address the business risk exclusions, the decision reflects a common sense consideration of which risks ought to be the subject of liability insurance (bodily injury and property damages resulting from the insured’s products) , and which risks are inherently uninsurable business risks (economic losses resulting from the non-utility of the insured’s products).

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West Virginia’s “Discriminatingly” Decided New CGL Decision: Mylan Laboratories, Inc v. American Motorists Ins. Co.

Posted by Joseph Sano June 24th, 2010 in Consider The Risks.

In insurance law, as in many other areas, context is (or should be) important, so lets start by adding some context to the title of this post. On June 18, 2010 the Supreme Court of Appeals of West Virginia filed its decision in favor of CGL and Umbrella insurers in Mylan Laboratories, Inc v. American Motorists Ins. Co., a case involving coverage for underlying complaints alleging antitrust violations and fraud in the marketing of generic pharmaceuticals. A link to the decision appears here.

Use of the adverb “Discriminatingly” next to the verb “Decided” in the title of this post is both an homage to the old school context of “discriminatingly” i.e. with good judgment or judiciously, and a foreshadowing of the decision itself, in which the court considered and rejected Mylan’s argument that alleged “price discrimination” was covered under Personal and Advertising Injury Coverage which expressly included the undefined term “discrimination.” In other words, the court considered the context of the coverage in which the word “discrimination” appeared, which included “false arrest,” “malicious prosecution,” “slander” etc. and found that in the context of Personal Injury coverage, “discrimination” was not ambiguous and was limited. The court noted:

[T]he term “personal injury” in the Federal policies is defined by offenses against the liberty, emotional well-being, reputation, or peaceful possession of property of the plaintiff as opposed to economic injury. These offenses include false arrest; malicious prosecution; wrongful eviction from, entry into, or invasion of the right of occupancy of one’s property; slander and libel; and violation of the right of privacy. In this context, the term “discrimination” ordinarily would be understood to mean the type of discrimination based on personal characteristics….

In making this common sense distinction, the court expressly rejected the reasoning of the Seventh Circuit in Federal Ins. Co. v. Strohs Brewing Co., 127 F.3d 563 (7th Cir. 1997) which found coverage under similar language for underlying claims of price discrimination in the wholesale beer market. The Seventh Circuit in Strohs adopted a strained iteration of the common sense “reasonable expectations” doctrine. It reasoned:

Because the term “discrimination” is not defined in the policy and because price discrimination suits such as [the instant one] are common in the beer industry, it is not objectively unreasonable for Heileman to have believed that it was purchasing coverage for just such a suit [as the instant one].

The suggestion in Stroh, that insureds (and presumably insurers) would believe that frequent suits among market participants for unfair competition are commercially insurable, is either naïve or disingenuous, and seems strained when the entirety of the CGL policy with its several “business risk exclusions” is considered.

The Supreme Court of West Virginia’s application of “reasonable expectations” puts the doctrine in its proper context:

Finally, we believe that it is significant that the term “discrimination” appears in the “personal injury” section of the Federal policy. Given this fact, it is difficult for this Court to believe that Mylan reasonably believed when it purchased the Federal policies that it was purchasing coverage for injuries arising from the marketing of a fraudulent pricing scheme.

No doubt, there was a time when “the insurer loses” was the principal rule of construction in many jurisdictions. Increasingly, however, courts are examining the context of the insureds business, the uninsurable nature of certain risks and the nature of the conduct for which the insured seeks recovery in determining the parties reasonable expectations.

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Unprecedented, Unique, Unforeseeable?— Really…? Its Time To Get Real About Emerging Risks

Posted by Joseph Sano June 14th, 2010 in Consider The Risks.

It happens after nearly every tragedy. Initially, some spokesperson, or government official, or pundit says the event was “unprecedented,” “unforeseeable,” or “could not have been anticipated.” Some time later, society adopts protective measures that, in a word, are “obvious.” At times, we seem to be completely reactive, unable to identify and avoid non-routine risks, until calamity strikes, and then we implement common sense protective measures. Must we suffer every disaster at least once? From a risk management perspective the answer should be a resounding no. All too often, however, enterprises limit their assessment of risks to the known or obvious risks, without a dedicated effort to look beyond. We can and should do better.

For starters, lets challenge every explanation that an event was an unforeseeable calamity. And by challenge, I don’t mean adopting conspiracy theory as a belief system. Instead, we should ask ourselves whether the claim of unforeseeability is consistent with our own knowledge of the world.

Let’s think about one such event from this perspective. In the immediate aftermath of 9-11, the attacks were described as unforeseeable, but does that statement hold up? Using planes as weapons in coordinated suicide attacks goes back at least to World War II (kamikazes). Jihadists had already tried to take down the World Trade Center, so the target could hardly be described as new. So what was new and unknowable about that tragedy- the use of commercial airliners as weapons of mass destruction? While that point is debatable, the debatability of a risk is not an excuse for failure to anticipate the risk and adopt reasonable avoidance measures.

Ask yourself this question about all such “unforeseen” events: If it was my life’s work to think about possible risks in this area, in this instance, risks associated with air travel, should I have foreseen this risk, and recommended common sense measures against it, e.g., fortifying cockpit doors. Maybe this is just a case of hindsight being 20/20, but then again, maybe not. I tend to think that the risk that an airline hijacker would do something other than simply ask to be flown to a destination, and would instead try to use the plane as a weapon to make a political statement, indeed, flying the plane into an iconic building, was readily foreseeable, at least if any smart person was charged with thinking about such risks.

Run this same analysis for any number of reportedly unanticipated events, (the uncontrolled release of oil from a deep ocean well in the Gulf of Mexico, the Challenger explosion, etc., etc.) and in most instances the results would be the same, in hindsight, the events seem entirely knowable from the perspective of someone specifically charged with anticipating risks.

Given the consequences of major catastrophes, why don’t we, at the enterprise level, pay more people to creatively anticipate the unknown? There are several reasons for this. For public companies, the drive to meet or beat short term (quarterly or annual) expectations certainly works against maintaining a dedicated cost center charged with thinking about and avoiding (usually by incurring more costs) calamitous events to the enterprise. Given the American penchant for eternal optimism, the role of Chief Risk Officer, (a/k/a Chief Naysayer) is not likely to be a popular one, and will clash with other officers who may see themselves in the role of Cheerleader in Chief.

What we need is a culture shift, in which the timely identification and prudent avoidance of risk is valued and rewarded, at least as much as fortitude in crisis response. Fortunately, there are some inklings of change. According to a recent press release,here, one of the ratings agencies has highlighted the identification of “emerging risks” as an integral part of its “enterprise risk management” (ERM) reviews which are incorporated into overall credit opinions for the property and casualty insurers it rates:

The assessment of emerging risks is a critical and forward-looking
component of our ERM and credit analysis for property/casualty insurers. …Our
world is increasingly dynamic, and to the extent an insurer can demonstrate a
meaningful degree of preparedness in handling emerging risks, the more likely, in our view, it will be able to maintain its creditworthiness when a risk emerges.

Indeed, while the press release describes the benefits of controlling emerging risks (“risks that so far have not resulted in significant losses for … but have the potential to cause problems”) for insurers, the point could be applied more universally to all enterprises. Those companies that actively try to anticipate and reasonably avoid catastrophe, should be recognized and rewarded for their effort.

To be fair, there will always be something beyond our ken, and mistakes will be made, but we should view these facts as motivation for planned forethought and action, not as an excuse to be uttered from the ruins of a preventable disaster.

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Florida Insurer Bad Faith Update, An Important Limitation Or A Drafting Issue?

Posted by Joseph Sano May 11th, 2010 in Consider The Risks.

The Supreme Court of Florida just issued an important decision (Perera v. USF&G, which can be found here ) which provides a comprehensive overview of insurer bad faith/failure to settle law in the state and imposes an important limit on bad faith recoveries to circumstances where the insured/claimant can demonstrate a causal link between the bad faith conduct and its damages. While the clarification and limitation are welcome, there are unanswered questions, and the practical reach of the decision may be overcome by better settlement drafting between the claimant, the insured and/or the settling insurers.

The case which reached the court based on certified questions from the 11th Circuit Court of Appeals, involves a wrongful death plaintiff whose husband was killed on the job and three liability insurers who insured either the employer or its employees, USF&G, a primary general liability insurer, CIGNA an excess workers compensation employer’s liability policy, and Chubb an excess liability. The policies were all indemnity type, without a duty to defend, and the first two insurers had limits of $1 million a piece, while the Chubb excess policy had limits of $25 million.

Following Perera’s suit against the insured and its employees, USF&G denied coverage. Plaintiff demanded $12 million prior to mediation. At the mediation Plaintiff’s demand was $8 million, while CIGNA offered $500,000 (its $1 million limits less the insureds $500k deductible) and Chubb offered $1.25 million.

After the unsuccessful mediation Chubb took an active role in the settlement negotiations, and at one point offered $3.5 million. Thereafter, plaintiff’s demand was $7 million and Chubb offered $4.25 million. Shortly thereafter plaintiff and the employer and employees entered a “Stipulation to Settle” for $10 million. The defendants would settle and waive the worker’s comp lien. Payment would be made by the insured, $750k, CIGNA, $500,000 and Chubb, $3.75 million with the remaining $5 million to come from a lawsuit against USF&G which would either be brought by the employer, or by the plaintiff pursuant to an assignment. The settlement would be reduced to a judgment but the judgment was not to be executed until the resolution of the suit against USF&G, and a satisfaction would thereafter be issued without regard to whether the suit was successful. The settlement was presented to the trial court which found it to be in good faith and reasonable in amount and thereafter the $10 million judgment was entered against the employer and its employees. The other insurers paid their agreed amounts and the plaintiff executed a release of claims against Chubb.

The employer assigned its rights against USF&G to the plaintiff who brought suit ins state court for the remaining $5 million asserting two causes of action, breach of contract for USF&G’s $1 million limit, and for bad faith for the remaining $4 million of the unpaid judgment. Following removal to Federal Court by USF&G, the District Court entered summary judgment in favor of the insurer because the judgment was within the total limits of insurance available to the insurer and that in the absence of an excess judgment, there can be no cause of action for bad faith. On appeal, the Eleventh Circuit held that whether USF&G had acted in bad faith was a threshold issue that could moot the case, and it remanded the case for determination of that issue. On remand, a jury trial, instructed that damages if any would be determined at a later date, found that USF&G had acted in bad faith. On a appeal back at the Eleventh Circuit, the court agreed with the original decision of the District Court, that in the absence of an excess judgment, there could be no bad faith claim, and that the employer was never exposed to excess of limits liability, however, finding that Florida law was unclear on whether an excess judgment was a necessary element of a bad faith claim, the Eleventh Circuit certified questions to the Supreme Court of Florida.

In its opinion, the Court recast the certified questions as follows:

May a cause of action for third-party bad faith against an indemnity insurer be maintained when the insurer’s actions were not a cause of the damages to the insured or when the insurer’s actions never resulted in exposure to liability in excess of the policy limits of the insured’s policies?

As recast, the court answered the question in the negative, thus, in the absence of damage to the insured or the insured’s exposure to excess of limits liability as a result of the insurer’s conduct, there is no cause of action for bad faith in such circumstances.

In reaching this conclusion the court detailed each of several recognized bases for bad faith liability under Florida law. The court began by noting that liability insurers in Florida have a “duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of its own business.” This duty includes a duty to settle “where a reasonably prudent person, face with the prospect of paying the total recovery, would do so.” The court noted further that under Florida law, these duties apply without regard to whether the policies include a duty to defend.

The first basis for such liability was described by the Court as the “classic bad-faith situation” where the breach of the duty of good faith results in an excess of limits judgment entered against the insured. The second involved so called “Cunningham agreements” (See Cunningham v. Standard Guar. Ins. Co., 630 So. 2d 179, 182 (Fla. 1994).) where the insurer and a third party claimant enter into a settlement agreement through which they agree to try bad-faith issues first, and to limit the settlement to policy limits if there is no finding of bad faith. The theory for allowing such agreements as a predicate to a bad faith claim is that stipulated judgment protects the insured from an excess of limits judgment while avoiding the costs and judicial resources attendant with a full trial of the underlying claim. The third basis is where the insured and the claimant reach an agreement having been “left to their own devices” by a recalcitrant insurer, described as a “Coblentz agreement” (See Coblentz v. Am. Surety Co. of N.Y., 416 F.2d 1059, 1063 (5th Cir. 1969).) The court noted that such agreements usually involve a breach of a defense obligation by the insurer, and that no Florida court had determined whether and to what extent a Coblentz agreement is valid and enforceable in the absence of the policy at issue containing a duty to defend. The fourth circumstance involved a claim of an excess carrier (which is assignable) for a primary carrier’s breach of its good faith settlement obligations which result in loss to the excess insurer.

According to the court, although each circumstance is different, the harmonizing principle among the various bad faith claims, and the minimum requirement for all such claims is that the bad faith conduct cause the claimed damages.

Applying these circumstances to the facts, the court found no “classic” bad faith because it was never exposed to an excess of limits judgment since the $10 million settlement (and all prior demands) were within the available limits. Moreover, there was no “Cunningham agreement” since there was no agreement to try bad faith issues first and stipulate to an amount of damages involving USF&G, and Chubb’s agreement to pay was not contingent on a finding of bad faith. While Coblentz agreements typically involve breaches of the duty to defend, the Court did not reject application of Coblentz agreements to indemnity policies. While the plaintiff could have entered into a settlement agreement that assigns plaintiffs rights against the insurer in exchange for a release from personal liability, where it is left to its own devices, that was not the case here because CIGNA and Chubb were willing to pay even without USF&G’s participation. Earlier in the opinion, the Court noted that the amount paid by the insured was within its deductible or SIR under both the USF&G and CIGNA policies. In addition, there was no equitable subrogation type claim because there was no assignment between Chubb and the plaintiff. Because there was no “near certainty of a large judgment against it exceeding all available coverage” and because of the excess insurer’s participation, there was no evidence that the insured was exposed to excess limits liability, and because there was no evidence that the insured had to pay moneys which should have been paid by CIGNA, the plaintiff was merely an assignee seeking recovery of an unpaid consent judgment as damages.

So where does this result leave us? On the one hand, the court has confirmed a substantive limitation under Florida’s otherwise expansive view of bad faith law on third party bad faith claims against insurers in the settlement context. On the other hand, with a slightly different agreement, such as an assignment of rights between Chubb and the plaintiff of Chubb’s rights to pursue CIGNA for equitable subrogation, or the payment by the employer of some amount in excess of its deductible and SIR under the policies, the plaintiff may well have perfected its bad faith claims against USF&G. Thus, whether the limitation is a substantive or can be overridden by clever drafting remains to be seen.

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Georgia On My Mind - Reservations Required - Prejudice Presumed

Posted by Joseph Sano May 6th, 2010 in Consider The Risks.

On May 3, 2010, the Georgia Supreme court in World Harvest Church, Inc. v. GuideOne Mutual Insurance Company here held that an insurer who defends an insured in the absence of an express and specific reservation of rights to deny coverage is effectively estopped from later denying coverage, even where the absence of coverage for the underlying claim is beyond dispute. The principal rationale for the decision is the “conclusive presumption of prejudice” resulting from the insured’s inability to completely control its own defense in the face of a potential denial of coverage. Id. p. 2. As harsh as this result seems, it is consistent with Georgia’s pro-insurer rejection of the late-notice prejudice rule adopted by common law or statute in many other jurisdictions. Nevertheless, for insurers doing business in Georgia, an express and specific reservation of rights, prior to any meaningful assumption of the insured’s defense, is now an imperative.

The underlying facts involved a “Ponzi scheme” and alleged contributions by the schemers to World Harvest Church, followed by two suits by an SEC appointed receiver against the church to recover the contributions. The first suit was the subject of a written reservation of rights and subsequent denial, by a sister company of GuideOne. That suit was later dismissed for lack of personal jurisdiction. When a second suit was filed, GuideOne told the church it was assigning two adjusters, one of whom was to address coverage. The coverage adjuster stated “We didn’t see coverage but we would have to evaluate what we have currently to see if there would be coverage issues.” No written reservation regarding the second suit was ever issued and after assuming the defense and defending for 10 months, GuideOne informed the Church that it would stop defending in 30 days because there was no coverage. Thereafter, the insured assumed its own defense. Following the receiver’s successful summary judgment motion, the court awarded damages against the church in the amount of $1.8 million. A few months later, the church sued GuideOne in the district court for breach of the duty to defend and indemnify it from the receiver’s suit. After a lower court ruling in GuideOne’s favor, the case was appealed to the 11th Circuit which certified three questions:

(1) Does an insurer effectively reserve its right to deny coverage if it informs the insured that it does “not see coverage,” after the insured had received a written reservation of rights from the insurer’s sister company in a similar lawsuit in another jurisdiction, or is a written or more unequivocal reservation of rights required?

(2) When an insurer assumes and conducts an initial defense without notifying the insured that it is doing so with a reservation of rights, is the insurer estopped from asserting the defense of noncoverage only if the insured can show prejudice, or is prejudice conclusively presumed?

(3) If the insured must show prejudice, do the facts and circumstances of this case show it?

See World Harvest Church v. GuideOne Mut. Ins. Co., 586 F3d 950, 961 (11th Cir. 2009).

The Georgia Supreme Court, in responding to the first question noted that a reservation of rights need not be written to be effective, however, the notice must reflect a present (not future) intent to avoid coverage (disclaim liability) on specified grounds and state that the insurer does not waive the defenses available to it against the insured. Id. at 5. The oral statements of GuideOne’s adjuster did not meet this standard, and the prior reservation by GuideOne’s sister company to a different (if similar) suit did not cure the defect and thus there was no adequate reservation.

On the second question, the Georgia Supreme Court found that the insurer, by failing to issue an adequate reservation was estopped to later deny coverage, even if the insured had actual knowledge of the likelihood that the insurer would ultimately deny coverage, and even if there was no affirmative showing of prejudice by the insured. According to the court, in this context-where the insurer assumes and actively conducts the defense, prejudice is conclusively presumed. The court distinquished its decision in Prescott’s Altama Datsun v. Monarch Ins. Co. of Ohio, 253 Ga. 317, 318, 319 SE2d 445 (1984), which precluded an automatic estoppel where the insurer merely filed an appearance but then immediately abandoned the defense. According to the court, the rationale for the estoppell is the insureds “surrende[r of] innumerable right associated with the control of the defense.” Id. p. 13.

Having found an estoppel as a matter of law, there was no need to respond to the third certified question regarding the existence of prejudice under the circumstances.

A rule which purports to apply a “conclusive presumption of prejudice” is one which, using the gloss of a purported evidentiary issue, is in fact a foregone conclusion. Why not just call it an anti-insurer estoppel, and leave it at that? Well, one reason may be that the rule in this context is really the necessary converse of Georgia’s pro-insurer rule of law, that an insurer who receives late notice may disclaim coverage even in the absence of prejudice. See Granite State Ins. Co. v. Nord Bitumi U.S., Inc., 262 Ga. 502, 504, 422 S.E.2d 191, 194 (1992) (”breach [of notice provision] relieved [insurer] of its obligation to defend [,] and of … liability for any judgment[.]”) This is contrary to the late notice/prejudice rule applied by common law or statute in many jurisdictions. In both cases, prejudice is presumed when the party at risk is denied the control of that risk which a defense right necessarily entails. All the more reason to “Consider the Risk.”

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It Depends On What Your Definition of “Indemnity” Is?

Posted by Joseph Sano April 12th, 2010 in Consider The Risks.

Last week, the Massachusetts Supreme Judicial Court (SJC) held that a provision in a commercial lease requiring the tenant to procure liability insurance protecting the landlord from claims arising out of the condition of the leased premises, including common areas, did not violate a Massachusetts statute whose acknowledged purpose was “to preclude a landlord from shifting responsibility for its own negligence to its tenants.” The case, Norfolk & Dedham Mutual Fire Ins. Co. v. Morrison (SJC-10513) which may be accessed here, presents an interesting example of linguistic juggling to arrive at the desired result, allowing risk transfer for landlord negligence, when the transferee is an insurer, even though the tenant is saddled with the cost of the transfer.

The lease in question required the tenant to procure insurance as follows:

LESSEE shall secure and carry at its own expense a commercial general liability policy insuring …OWNER against any claims based on bodily injury (including death) or property damage arising out of the condition of the leased premises (including any common areas as described above) …, such policy to insure … OWNER against any claim up to $1,000,000 for each occurrence involving bodily injury (including death), and $1,000,000 for each occurrence involving damage to property. This insurance shall be primary to and not contributory with any insurance carried by LESSOR, whose insurance shall be considered excess. LESSOR and OWNER shall be included in each such policy as additional insureds … and each such policy shall be written by or with a company or companies satisfactory to LESSOR[.]

Nofolk & Dedham, Slip-op, p. 2-3.

The statute, G.L. c. 186, § 15, is broadly worded and precludes and declares “void” and “against public policy:”

Any provision of a lease … whereby a …tenant enters into a covenant, agreement or contract, by the use of any words whatsoever, the effect of which is to indemnify the …landlord …from any or all liability …for any injury, loss, damage or liability arising from any omission, fault, negligence or other misconduct of the …landlord[.]

Notwithstanding the broad scope of the statutory provision, and the acknowledged legislative intent to preclude risk shifting between the landlord and the tenant, the SJC was able to distinguish between a prohibited indemnity agreement and a non-prohibited insurance contract:

An “indemnity clause” is a “contractual provision in which one party agrees to answer for any specified or unspecified liability or harm that the other party might incur.” Black’s Law Dictionary 837-838 (9th ed.2009).

The effect of an indemnity agreement is that A assumes the responsibility for B’s negligence, regardless whether A itself bears any responsibility for the negligence. The extent of the obligation is determined by reference to the indemnity agreement. If, however, A agrees to purchase insurance for B’s benefit, A will not personally bear any responsibility for B’s negligence. Instead, A’s insurer will bear the costs of B’s negligence, provided that it is covered under the policy. The scope of an insurer’s obligation is determined by an interpretation of the insurance policy.

Norfolk & Dedham, supra. p. 5-6.

Although the court cited decisions from other jurisdictions which made similar distinctions, it is difficult to reconcile the decision with the plain meaning of the statute or the acknowledged legislative intent. Since the tenant is saddled with the cost of the risk transfer vehicle (the insurance policy) the tenant is in fact assuming at least some responsibility for the landlord’s negligence, a condition which seems to be expressly prohibited by the statute: “Any provision of a lease … whereby a …tenant enters into a covenant, agreement or contract, by the use of any words whatsoever, the effect of which is to indemnify the …landlord.”

The result here does not shock the conscious, and will not likely rock the insurance industry. Contractual risk transfer via agreements to provide liability insurance are common place, and insurers have easily handled requests for “additional insured” status, although there are certainly other issues regarding such coverage, for example see the discussion here. What the decision does represent, however, is a results oriented determination, which may itself lead to unintended consequences as it creates what some may think of as an artificial distinction among risk transfer or “indemnity” vehicles.

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Patent Infringement As An Advertising Injury Under CGL Coverage

Posted by Joseph Sano April 9th, 2010 in Consider The Risks.

On April 5, 2010, the 9th Circuit, in what is likely to be a significant decision, reversed and remanded the district court’s ruling, finding that, under California law, National Union is liable for defense costs in connection with an underlying patent infringement suit against Hyundai Motors regarding its use of a “build your own” car feature on its website in HYUNDAI MOTOR v. NATIONAL UNION FIRE INS. After National Union denied coverage, Hyundai defended itself and apparently was found liable for the infringement. Notably, Hyundai did not seek recovery for the underlying judgment.

The case is significant because it represents the first time that a court applying California law has found coverage for a patent infringement under the advertising injury coverage under a CGL policy. Specifically, the court found that the complaint by the software patent holder which alleging that “methods practiced on [Hyundai’s] various websites … making and using supply chain methods, sales methods, sales systems,marketing methods, marketing systems and inventory systems covered by one or more [of plaintiff’s patents]” injured the patent holder satisfied the three required elements of advertising injury coverage under California law:

(1) that Hyundai “was engaged in “advertising” during the policy period when the alleged “advertising injury” occurred; (2) that the underlying allegations “created a potential for liability under one of the covered offenses (i.e., misappropriation of advertising ideas); and (3) that a causal connection existed between the alleged injury and the “advertising.”

Id. citing Hameid v. Nat’l Fire Ins. of Hartford, 71 P.3d 761, 764-765 (Cal. 2003).

The appeals court rejected the insurer’s argument that the activity was non-covered “solicitation” and found that the alleged use of the patented program on Hyundai’s website was broad-based “advertising,” notwithstanding that the purpose of the system was to tailor the car maker’s offering based on specific inputs by each prospective customer. Given the availability of the build-your-own program to all site visitors, this finding by the court is not surprising. The court’s rulings on the other two prongs-that the alleged patent infringement was a misappropriation of an advertising ideas, and that there was a causal connection between the advertisement and the injury, however, are far more noteworthy.

According to the court, no prior decision based on California law had found a patent infringement claim to constitute an advertising injury offense. Indeed, it is difficult to see a patent as an advertising idea, rather than as an idea which simply happens to be related to advertising. Hyundai makes cars, not user customization products. While user customization of cars on Hyundai’s website may constitute “an advertising idea,” the misappropriation or infringement alleged against Hyundai was not of the customization of a car, but the misappropriation of a patented method of allowing products to be customized based on user input. Nevertheless, the court made exactly that connection based on its use of a “context approach” and dicta in California and Federal cases applying California law which under their facts found the element not to have been satisfied:

In Mez Industries, Inc. v. Pacific National Insurance Co., 90 Cal. Rptr. 2d 721, 733 (Ct. App. 1999), the California Court of Appeals explained that a “contextual reasonableness” analysis applies to that question. We must determine, in the context of the case and in light of common sense, whether a lay person reasonably would read the phrase “misappropriation of advertising ideas” to include the patent infringement claim at issue. Id. More precisely, the proper test is whether the patents at issue “involve any process or invention which could reasonably be considered an ‘advertising idea.’ ”

Id. The court also considered Amazon.com International, Inc. v. American Dynasty Surplus Lines Insurance Co., 85 P.3d 974 (Wash. Ct. App. 2004) (applying Washington law) as persuasive authority. In that case, the court found “advertising injury” in a claim by a patent holder against Amazon for its use of music preview technology.

As for the final element, a causal connection between the advertisement and the alleged injury, the court noted prior California decisions which rejected coverage for patent infringement claims where the advertisement was of an infringing product, or where the advertisement merely alerted the patent holder of the infringement. In contrast, the Hyundai Court held:

[T]here is a direct causal connection between the advertisement (i.e., the use of the BYO feature on the website) and the advertising injury (i.e., the patent infringement). Because the use of the patented method was itself an advertisement that caused the injuries alleged in the third-party complaint, Hyundai has established the requisite causal connection.

Id.

While the court could tie allegations regarding Hyundai’s web site’s use of the patented “build your own” method to the underlying claimants injury, it is certainly debatable whether this construction meets the court’s acknowledged common sense context approach. Clearly, to the extent that the operation of Hyundai’s website was itself infringing activity, that activity began well before the website went live and constituted an “advertisement,” and the decision to incorporate the patented method was essence of the infringement.

While the impact of the decision will not doubt be substantial on the parties, and on other carriers with similar policy provisions under California law, it would seem that amendments to the CGL Personal and Advertising Injury Coverage which some insurers adopted beginning in 2001 should preclude this result. That amendment involved an express exclusion of patent infringement from Personal and Advertising Injury coverage.

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What’s New? Not much for Insurers and Reinsurers, Lots for Lawyers

Posted by Joseph Sano April 8th, 2010 in Consider The Risks.

In many respects it has been a slow news time for commercial insurers and reinsurers. For example, Advisen reports more of the same for 2010-soft market,excess capacity. Apart from recent developments involving Chinese Drywall that could have substantial impact for the insurance/reinsurance industry, there have been few major developments. For lawyers, however, including those who provide litigation and arbitration services to insurers and reinsurers, its more like a slow burn than slow news.

Although the general economy seems to be improving, employment in the legal sector continues to suffer, albeit at a slower rate than last year, as reported this month by the Bureau of Labor Statistics. This is consistent with anecdotal reports, including comments at a recent insurance coverage conference, by a representative of a large U.S. reinsurer, that it had only a handful of open reinsurance arbitrations, and most of those were being resolved “on the papers” and without evidentiary hearings. While there may be a thousand data points of light that illuminate this phenomena, one that caught this writer’s attention was a recent report by a prominent association of reinsurance arbitrators of a 32% decline in enrollment for the golf tournament associated with its spring meeting, and an 8% decline in overall enrollment for the meeting. In addition, colleagues in other firms report continued sluggishness in the demand for legal services in litigation and arbitration.

This suggests the continuation of a major trend widely reported last year, away from big litigation and big arbitration cases run on both sides of the “v.” by lawyers working for “big law.” Corporations, including insurers and reinsurers, have intensely focused on controlling costs. This has been accomplished in a variety of ways, including bringing case management and litigation document management in house, finding lower cost legal service providers, and exploring alternative fee arrangements. In the continuing big-law shakeout, it is likely that cost conscious insurers and reinsurers are willing to reconsider the “nobody ever got fired by hiring the biggest (and most expensive) provider” syndrome. Instead, those insurers and reinsurers who are focused on value are beginning to understand that there are many creative and cost conscious lawyers at mid and small sized firms who can leverage technology and experience to deliver the same or better results at a fraction of the cost. If this means a more level field of battle, for this writer, then let the battle begin.

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Life After CADSI and Zurich — AG Equipment Company v AIG Life

Posted by Mitchell King July 2nd, 2009 in Consider The Risks.

In the 2004 CADSI case, followed by the 2005 Zurich case, two separate federal appeals courts held that where a stop loss policy incorporated a benefit Plan Document by reference, the stop loss insurer’s inquiry into the propriety of the claim for purposes of determining its obligations under the stop loss coverage was limited to the question of whether the Plan Administrator had abused its discretion.[1] Plan Administrators’ discretion can be extremely broad and stop loss insurers undoubtedly viewed the rulings as both startling and chilling. The obvious question in the wake of CADSI and Zurich was whether and how a viable challenge to coverage could be mounted under similar circumstances. That question was addressed this year in the case of AG Equipment Company v AIG Life[2], which was tried to a conclusion in the US District Court for the Northern District of Oklahoma.

AG Equipment Company (“AG”) purchased stop loss coverage from AIG for its self-funded Plan covering its full-time employees. The stop loss policy was effective May 1, 2003 through April 30, 2004, and it was renewed in May 2004, May 2005 and May 2006. Under the Plan, “[a]n employee [was] considered to be full-time if he or she normally work[ed] at least 30 hours per week and [was] on the regular payroll of the employer.” AG was the Plan Administrator.

During the May 2006-7 Plan Year, AG made a substantial claim under the stop loss related to expenses incurred on behalf of the ex-wife of the owner of AG, who was on the payroll as a salaried employee. Shortly thereafter, an AG employee informed the TPA that the ex-wife did not work as a full-time employee of AG and he provided written documents to support his allegation.  AIG investigated the allegation and requested that AG provide testimony and documentation to support AG’s claim. It refused and litigation followed.

Both parties filed claims and counter-claims, including a bad faith claim by AG against AIG. Following discovery, the parties filed summary judgment motions on their claims. Shortly before trial, the Court granted summary judgment to AIG, denying AG’s bad faith claim, but ruled that the remaining issues were appropriate for trial. Following a full trial, the jury returned a defense verdict in favor of AIG, finding not only that AIG was not required to reimburse AG for medical expenses because the employee did not satisfy the Plan’s full-time employee requirement, but also that AG had committed a fraud entitling AIG to a reimbursement of almost $280,000 in previously paid funds for the ex-wife’s treatment. The jury also awarded AIG damages on its own breach of contract counter-claim, awarding actual and compensatory damages of just under $160,000 to AIG.

The Oklahoma Court’s rulings on the pre-trial summary judgment motions are a good indication of both the reach and the limits of the Zurich rule. [3] At summary judgment AIG had argued that its case was distinguishable from Zurich in two ways. First, it argued that “[t]he AIG… Policy… beginning in the 2005-2006 Policy year specifically reserved to AIG… ‘the right to interpret the terms and condition [sic] of the Plan as it applies to the Policy.’” The new policy wording quoted by AIG appears to have been an express effort to limit the complete deference conferred to the Plan Administrator’s decisions under the CADSI and Zurich cases. Second, it argued that “The AG… Plan Administrator… made no reasoned determination with regard to the Plan’s language and the Policy,” going on to relate various shifting and inconsistent arguments regarding its interpretation of the 30-hour per week requirement for full-time employment.

The Court did not comment on the first argument regarding the revised wording and instead, acknowledged that the Zurich rule was applicable and that the Plan Administrator had been granted maximum discretion under the Plan Document. Nonetheless, the Court went on to hold that “there [was] nothing in the record to suggest that the Plan language was interpreted and a determination was made with respect to [the ex-wife’s] employment and eligibility.” As the Court went on to note:

In short, there is no indication that AG ever exercised its discretion to interpret the Plan language. While Zurich is directly on point, without more evidence, this Court cannot rely on Zurich to grant summary judgment. Accordingly, AG is not entitled to summary judgment on the grounds that AIG’s failure to defer to AG’s interpretation of the Plan constituted a breach of contract.”

In applying the rule from Zurich, the AG v AIG Court has helped define the limits of the rule. The evidence at trial showed that the determination that the ex-wife was “full-time” and thus covered under the Plan was by edict of the company owner, not by application of standard Plan processes and procedures. Under those circumstances, the legal rule found in Zurich granting deference to the Plan Administrator’s decisions simply did not apply. It should be noted that in this case the evidence showing the AG owner’s manipulation of his ex-wife’s employment status was fairly extreme, but the case was not without risks or exposure to AIG. The practical lesson here is that although insurers are often loath to bring cases to trial based upon the concern that juries are biased against them, juries are not stupid; they can follow a complex case and don’t like fraud.

[1] Computer Aided Design Systems, Inc. v. SAFECO Life Ins. Co., 358 F.3d 1011 (8th Cir. 2004), affirming, 235 F.Supp. 2d 1052 (S.D. Iowa. 2002); and Zurich North America v. Matrix Service, Inc., 426 F.3d 1281 (10th Cir. 2005).

[2] AG Equipment Company v AIG Life Insurance Company Inc., Case No. 07-CV-0556-CVE-PJC, USDC for the Northern District of Oklahoma (January 28, 2009).

[3] Oklahoma is located in the 10th Circuit and thus the Federal District Court was bound by the Zurich decision.

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Ingenix and Ingenix Redux

Posted by Mitchell King July 1st, 2009 in Consider The Risks.

In 2007 and 2008 the New York Office of the Attorney General (OAG) investigated complaints by consumers regarding how certain health insurers set reimbursement rates for out-of-network services. The investigation focused on large databases gathered from various insurers and other entities by Ingenix, a wholly-owned subsidiary of UnitedHealth Group, to create schedules widely used by the country’s largest insurers, including UnitedHealth, Aetna, CIGNA and Wellpoint, as the benchmark for determining “usual and customary” charges for out-of-network medical services.

Following its investigation, the OAG made a number of findings, including that Ingenix had a conflict of interest in creating schedules used as a basis for reimbursing United Healthcare. The OAG also determined that health insures have an incentive to manipulate data submitted to Ingenix so as to depress reimbursement rates; there was no incentive for Ingenix to audit the data it received and pooled; and Ingenix databases intentionally skewed usual and customary rates downward through faulty data collection, poor pooling procedures and lack of audits. OAG stated that the industry had engaged in a “scheme to defraud consumers” by systematically underpaying for out-of-network services by hundreds of millions of dollars over the last decade, with rates understated by up to 28%. The results were underpayments to physicians and unpaid balances billed to consumers.

In a January 2009 settlement with the OAG, Ingenix agreed to pay $50 Million to set up an independent not-for-profit database to be run by a university which would be used as a tool for rate reimbursement and academic research. The database will be transparent and available to the public via a consumer website. In a series of additional settlements that followed, Aetna agreed to pay $20 Million, Cigna agreed to pay $10 million and Wellpoint agreed to pay $10 million, with all agreeing to participate in the new database. Up to a dozen other New York State healthcare plans and insurers have subsequently settled with the OAG, bringing the total settlements with the OAG from health plans and insurers to $94.6 million.

In related litigation, United Health Group agreed to pay $350 Million to settle a class-action lawsuit on behalf of physicians and patients alleging the company’s health plans used flawed Ingenix data to justify low reimbursements for out-of-network care. Similar American Medical Association Class-Actions were filed against Cigna and Aetna in February 2009 and against Wellpoint in March 2009.

In even more recent developments, on June 24, 2009, the Senate Committee on Commerce, Science and Transportation, chaired by Senator Jay Rockefeller, published a report essentially confirming the OAG’s conclusions that the practices and harm from those practices were pervasive throughout the healthcare industry, not just among the largest national insurers involved in the New York settlement. The Committee reports that 17 of the 18 insurance companies to which the Committee had sent inquiries had responded that they or their affiliates used Ingenix data to play claims for out-of-network services. The Committee indicates that these responses “suggest that the number of American consumers who were harmed by the under-reimbursements based on the Ingenix data may be substantially higher than previously estimated.”

Significant additional litigation by attorneys general in various states and through private class-actions is likely to follow. The Ingenix story is far from over.

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