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Vol. 6, Iss. 2
February 13, 2017

This Is Some Very Impressive Claims Handling

Back in the November 14, 2012 issue of Coverage Opinions – just the 3rd issue when there were few subscribers – I addressed the California Court of Appeal decision in State Farm v. Wier. My conclusion: “Credit to State Farm for having a very real understanding that handling a claim, that involves providing a defense under a reservation of rights, does not end when the letter is issued. The moral of the story for insurers defending under reservations of rights is simple.”

The case is back. And once again the decision demonstrates how well the claim at issue was handled by State Farm.

In State Farm v. Pyorre, No. A147302 (Cal. Ct. App. Jan. 10, 2017), John Wier and Richard Pyorre, former State Farm agents, were sued by State Farm for allegedly taking trade secret customer information and using it to solicit customers after they joined a competitor. The agents happened to be insureds under State Farm policies and they tendered their defense to State Farm under a CGL policy. [Defending the people that you are suing – now that’s a good neighbor.]

State Farm defended the agents under a reservation of rights pursuant to the “advertising injury” provision. Then the California Supreme Court granted review in Hameid v. National Fire Insurance of Hartford. At issue in Hameid was whether an insured’s use of a competitor’s customer list to solicit the customers gave rise to a duty to defend under the “advertising injury” provision of a CGL policy. Two lower courts had said yes. But Hameid was now poised to possibly change the law.

Based on the possible decision in Hameid, State Farm sent the agents a supplemental reservation of rights letter, in which (based on Buss) the company reserved the right to seek recovery of defense costs if the Supreme Court changed the existing law, resulting in there being no duty to defend.

Lo, and behold, the California Supreme Court did eventually change the law, holding in Hameid that using a competitor’s customer list to solicit those customers did not give rise to a duty to defend as “advertising injury.” The high court held that the term “advertising injury,” in the CGL policy, required “widespread promotion to the public,” rather than individual solicitation.

Based on that decision, State Farm stopped providing a defense and brought suit against the agents for recoupment of defense costs expended after the date of the supplemental reservation of rights letter. The California Court of Appeal held, based on the Supreme Court’s decision in Hameid, that State Farm did not have a duty to defend the agents in the trade secrets case. Further, the appeals court held that State Farm was entitled to recoupment of defense costs.

After this the case gets into the weeds concerning the timing of when State Farm’s right to recoupment began. That aspect of the court’s decision, related to the ins and outs of California recoupment law, is not important here.

Instead, the point to be made here is that State Farm undertook its insureds’ defense under a reservation of rights. But it did not just issue the letter and leave it at that. To the contrary, State Farm became aware that the California Supreme Court granted review in Hameid. It was also aware that, if the Hameid decision went a certain way, State Farm would have no duty to defend. Then, under Buss, this would give rise to a right to reimbursement of defense costs -- if State Farm issued an appropriate follow-up reservation of rights letter. So it did. As a result, when the law did in fact change, State Farm achieved a significant benefit in the way of recoupment of certain defense costs (assuming it can actually recover them; a whole other story). But this possibility could not have been achieved if State Farm only had the benefit of the initial reservation of rights letter – no matter how well it had been prepared. Again, as I said over fours ago, the moral of the story is simple.

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