In the last issue of Coverage Opinions I addressed the fact that literary classics were not my thing in school nor afterwards.  But I said that it would have been different if our greatest authors had been coverage lawyers or other professionals.  In that case, there are several literary classics that would surely be on my shelf. 

For example, as I discussed in the last issue of CO, if Nathaniel Hawthorne had been a coverage lawyer, he would have written The Scarlet ROR Letter, the story of Hester Prynne, a claims adjuster, who wrote a 74-page reservation of rights letter, that included 73 pages of verbatim policy language, including provisions from policies that the insured didn’t even have.  The letter was challenged by the insured.  The court held that the reservation of rights letter, despite its length, did not meet the “fairly inform” standard.  However, the court did not estop the insurer from asserting any coverage defenses.  Instead, Prynne was required to wear an R on her shirt until the claim settled.  

Last month my wife, Lisa, and I had a friendly argument over the legality of a parking spot.  We were headed to dinner near our home in Ardmore, Pennsylvania and I pulled into the Lower Merion township municipal lot on Lancaster Avenue.  The conversation then went like this:

Lisa:  There you go.  Pull into there.  [Lisa pointing to an open spot.]

Randy:  I can’t.  It says it’s reserved for the fire chief.

Lisa: But it’s after 4 P.M.  The whole lot is open to the public after 4.

Randy: Yeah, but that doesn’t include the fire chief’s spot.

Lisa: Sure it does.  The fire chief’s spot is no different from any other spot.       

Randy:  No.  The blue sign provides general provisions.  The fire chief’s sign is specific.  The specific applies over the general.  The lot is open to the public after 4, but the fire chief’s spot is an exception.

Lisa: You are so wrong.  And, my mother was right.  I should have married Marvin Greenbaum.  [She didn’t say that last part.  But she probably thought it.]    

***

In the end, we did not park in the fire chief’s spot.   We had a lovely dinner – discussing the fire chief’s spot for an hour.   

So, I am asking you, dear Coverage Opinions readers, to decide who is right.  Can you park in the fire chief’s spot after 4 P.M.?  Please reply with your vote – Yes or No.
 
Contest: Feel free to add something funny to your reply.  Best response will get a copy of Insurance Key Issues. 

It has long been the rule in New Jersey that, if an insurer retains counsel, and defends its insured under a reservation of rights, the insured must consent to such an arrangement.  This rule dates back to the New Jersey Supreme Court’s landmark 1962 decision in Merchants Insurance Co. v. Eggleston.   

New Jersey courts have imposed a simple sanction on insurers that fail to obtain their insured’s consent to being defended under a reservation of rights – loss of the insurer’s ability to assert an otherwise applicable defense to coverage.  Despite its significance, and the fact that the rule has been around for so long, it is not usual to see ROR letters, in New Jersey cases, that identify the name of counsel that the insurer has retained, period.  In other words, they do not request the insured’s consent to be defended by him or her, in light of the reservation of rights being asserted.

This is what happened in RLI Ins. Co. v. AST Engineering Corp., No. 19-1649 (S.D.N.Y. Dec. 20, 2019).  And the consequence for the insurer was as predictable as a stale airport bagel.

At issue was coverage for AST Engineering Corp., under a professional liability policy issued to it by RLI Insurance, for its alleged negligence in the design of a concrete form for a construction project.  Things didn’t go right and suit was brought by the owner of an adjacent building for damages caused to its building.  AST gave notice of the suit to RLI and asked to be represented by a certain lawyer.  Despite this request, RLI retained its own counsel to represent AST.

Almost three years later, RLI sent a reservation of rights letter to AST.  RLI then filed an action seeking a declaration that it had no duty to defend or indemnify AST.  Here’s where things didn’t go well for RLI.

First, the court in the Southern District of New York held that New Jersey law controlled the coverage issues.  The hows and whys of the choice of law decision are not important for purposes here.

Then the court turned to the reservation of rights issues. 

In general, RLI’s defenses were that the alleged “wrongful acts” took place prior to the Retroactive Date or AST had knowledge of the claims prior to its application for coverage. 

First, as you may expect, the court was troubled by the fact that RLI waited three years before issuing a reservation of rights, despite being aware of the grounds for doing so: “Since at least October 2013, RLI knew or should have known that the alleged ‘Wrongful Act’ occurred prior to the Policy’s March 22, 2013 retroactive date.  RLI received a copy of JVC’s third-party complaint in the Coral Crystal Action on October 28, 2013. That complaint asserts multiple claims against AST arising from an AST design for concrete placement dated October 28, 2012. . . . Notwithstanding its awareness of grounds for questioning coverage, RLI failed to issue any reservation of rights until September 21, 2016, which was almost three years later. That reservation of rights raised only one of the two bases for denying coverage that are asserted here -- whether the ‘Wrongful Act’ occurred prior to the retroactive date.  RLI’s nearly three-year delay in reserving its right to disclaim coverage is unreasonable and presumptively prejudicial.”

A three year delay, in issuing a reservation of rights, may be troubling to courts addressing more than just New Jersey law.  While it may not result in an estoppel to assert coverage issues, based on a lack of prejudice to the insured, insurers should not be surprised if they have to fight this fight.  

On the New Jersey-specific issue, the court addressed the fact that RLI’s reservation of rights did not give AST the right to reject counsel retained by the insurer.  Indeed, AST asked for certain counsel and RLI rejected the request.  Here, not surprisingly, the court addressed the New Jersey Supreme Court’s decision in Merchants Insurance Co. v. Eggleston and cases that have followed it:

“Under New Jersey law, it is well established that ‘[c]ontrol of [an insured’s] defense is vitally connected with the obligation to pay the judgment.’  Merchants, 37 N.J. at 127. ‘[J]ust as a carrier would hardly agree to pay a judgment after defense by the insured, so it cannot expect the insured to pay for a judgment when it controlled the litigation.’ Nazario v. Lobster House, 2009 N.J. Super. Unpub. LEXIS 1069, 2009 WL 1181620, at *4 (N.J. App. Div. May 5, 2009) (citation omitted). Accordingly, ‘[i]f an insurer wishes to control the defense and simultaneously reserve a right to dispute liability, it can do so only with the consent of the insured.’ 2009 N.J. Super. Unpub. LEXIS 1069, [WL] at *5 (citation omitted). An insurer may obtain the insured’s consent only if it timely ‘reserve[s] the issue of its liability by appropriate measures.’  Merchants, 37 N.J. at 126. . . . In the absence of a nonwaiver agreement, ‘[a]greements may be inferred from an insured’s failure to reject an offer to defend upon those terms, but to spell out acquiescence by silence, the letter must fairly inform the insured that the offer may be accepted or rejected.’”  
  
The lessons from the case are clear.

When an insurance company is evaluating whether to file a declaratory judgment action or defend one filed against it, the principal issues under consideration are likely to be its chance of success and the amount of attorney’s fees that it will incur to achieve the desired result.  But there is another factor that should also be included in the risk evaluation: possibly having to pay the policyholder’s attorney’s fees.  I sometimes (a lot of times, in fact) see this consideration overlooked, or not given enough weight, in the  coverage litigation decision calculus.  After all, it is a potential factor in 45 states.  In my experience this is the most overlooked coverage issue.  

Despite our legal system’s bedrock principle, that the losing party is not obligated to pay the prevailing party’s attorney’s fees, insurance coverage litigation is often an exception.  In the vast majority of states -- almost all in fact -- the possibility exists, in some way, shape or form, that the insurer may be obligated to pay some, or all, of a successful policyholder’s attorney’s fees in addition to the coverage owed.  

One commonly cited rationale for this exception is that, if the insured must bear the expense of obtaining coverage from its insurer, it may be no better off financially than if it did not have the insurance policy in the first place.  The specific approaches to this insurance exception vary widely by state and can have a significant impact on the likelihood of the insurer in fact incurring an obligation for its insured’s attorney’s fees. 

Some states have enacted statutes that provide for a prevailing insured’s recovery of attorney’s fees in an action to secure coverage.  Other states achieve similar results, but do so through common law.  But whichever approach applies, the most important factor is the same: whether the prevailing insured’s right to recover attorney’s fees is automatic or must the insured prove that the insurer’s conduct was unreasonable or egregious in some way.

For example, a Hawaii statute mandates an award of attorney’s fees without regard to the insurer’s conduct in denying the claim.  In other words, it imposes strict liability for attorney’s fees on an insurer that is ordered to pay a claim.  Maryland also takes a strict liability approach, but it is the result of a decision from its highest court. 

A Virginia statute departs from strict liability and permits an award of attorney’s fees, but only if there was a finding that the insurer’s denial of coverage was not in good faith.  Connecticut also rejects a strict liability rule, but it was established judicially and not legislatively. 

A handful of states use a combination of legislative and judicial avenues to address whether attorney’s fees are to be awarded to a prevailing insured.  Under this hybrid approach, consideration is first given to the state’s general statute that allows for an award of attorney’s fees in an action on a contract. The court then interprets this statute, covering contracts in general, to include an insurance contract dispute.  And some states address the issue by applying their general statutes permitting an award of attorney’s fees against a party that engages in frivolous or vexatious litigation.

While the mechanisms vary, in almost all cases where an insurer is unsuccessful in coverage litigation will either be automatically obligated to pay for its insured’s attorney’s fees or may be litigating post-trial whether such obligation exists. Whichever the case, the potential for being saddled with the attorney’s fees incurred by its prevailing insured in a declaratory judgment action is a consideration that insurers will usually not be able to avoid.

This was the issue before the Wisconsin Supreme Court in Steadfast Insurance Company v. Greenwich Insurance Company, No. 2016AP1631 (Wis. Jan. 25, 2019).  But if this issue has been so widely addressed, why is this coverage case included as one of the ten most significant of the year?  Because the court addressed the issue in a context not widely seen – an insurer seeking to recover its DJ fees from another insurer.  It is a unique take on an otherwise common issue.

This insurer vs. insurer case is lengthy and the hows and whys of the coverage dispute are not critical to addressing the DJ fee issue that ultimately arose.  In general, they had to do with $1.55 million in defense costs that Steadfast Insurance paid, to defend Milwaukee Metropolitan Sewerage District, against claims for sewage back-ups into homes on account of negligence in the repair, maintenance and operation of the sewerage system before and during heavy rains.

Greenwich Insurance declined to defend.  Steadfast sued Greenwich.  For reasons not important here, the trial court held that Greenwich in fact was liable for all of the defense costs, as well as awarded Steadfast $325,000 in attorney’s fees that it incurred in bringing the suit against Greenwich.  The court of appeals affirmed and the case made its way to the Wisconsin Supreme Court.

The Wisconsin high court affirmed the bulk of the lower court’s decision but concluded that the defense costs should be allocated between the two insurers by using a pro-rata by policy limits approach.  Doing so resulted in Steadfast now being entitled to recover $620,000 in defense costs from Greenwich. 

The Supreme Court next turned to whether Steadfast was entitled to recover its attorney’s fees incurred in pursuing its defense costs from Greenwich.  The answer was Yes: “As we have explained above, Steadfast had rights of contractual subrogation based on its payment to MMSD.  Therefore, Steadfast asserted rights that MMSD had against Greenwich for failing to defend.  Stated otherwise, if MMSD were to sue Greenwich to recover defense costs, it would have been entitled to the attorney fees and costs incurred in such litigation.  Here, by virtue of its express subrogation rights, Steadfast stands in MMSD’s shoes and seeks attorney fees incurred in obtaining a judgment against Greenwich for payment of defense costs just as MMSD could have recovered were it to have brought this lawsuit.”

While Wisconsin has a statute that opens the door to an insured’s right to recover its attorney’s fees in establishing coverage, the court’s decision, finding guidance from the Supreme Court of California and Florida, was tied to an insured’s transfer, via subrogation, of its rights to its insurer: “We conclude that a contractual subrogee’s right to recovery may include an award of attorney fees the subrogor would have been entitled to receive had it brought the lawsuit.  We have long recognized that contractual subrogation ‘entitl[es] the paying party to rights, remedies, or securities that would otherwise belong to the debtor.’ (citation omitted).  We decline to create an exception to this longstanding rule by excluding attorney fees from the bundle of contractual subrogation rights that arise from a specific subrogation clause upon payment by the subrogee.”

It is not difficult to see another court finding Steadfast v. Greenwich, and its subrogation rationale persuasive, when confronted with a claim for attorney’s fees incurred by one insurer to establish coverage from another. 

States vary in their consequences for an insurer that is found to have breached the duty to defend. When it comes to states that apply a severe sanction, Montana is certainly at or near the top of the list.  While Montana’s handling, of the breach of the duty to defend, played a part in Abbey/Land v. Glacier Construction Partners, LLC, No. DA17-0705 (Mont. Jan. 29, 2019), it was selected for the annual “Top 10” because of its potential impact nationally.  I have not seen too many cases that address the issue at hand.  Abbey/Land, from a state high court, gives insurers a very sharp tool in their fight against consent judgments.        

The Montana high court’s decision in Abbey/Land is long.  In addition, the case is very complex, both procedurally and factually.  I can skip all of that to get to the points here.

In general, Abby/Land was the developer of a project.  Glacier Construction was the general contractor.  Abby/Land and Glacier had common ownership.  There were construction defects.  Glacier sought coverage from its insurer, James River.  James River denied coverage.    

Abby/Land and Glacier entered into a settlement for $12,000,000, assignment of rights, mutual release and covenant not to execute.  James River challenged that judgment as unreasonable.  The trial court agreed that it was unreasonable and the product of collusion and reduced it to $2.4 million plus 6.75% interest.  The case went to the Montana Supreme Court.

Right off the bat the Supreme Court set out the consequences for an insurer that breaches the duty to defend: “When an insurer wrongfully refuses to defend its insured, the insured is justified in taking steps to limit his or her personal liability, including entering into a stipulated judgment with a covenant not to execute and an assignment of rights.  The insurer becomes liable to the insured for the resulting defense costs, judgments, or settlements.  A stipulated judgment is presumptively enforceable as the measure of damages. [W]e have recognized[, however,] the opportunity for mischief in settlement negotiations where the insurer has declined involvement—which may be checked by judicial review of whether the settlement amount stipulated to is reasonable. Thus, the insurer will be bound by its insured’s settlement and any resulting judgment so long as the settlement is reasonable and not the product of collusion.  The court cannot . . . surrender its duty to see that the judgment to be entered is a just one nor is the court to act as a mere puppet in the matter.” (citations and internal quotes omitted). The breaching insurer also cannot assert its policy limits, as the court observed elsewhere.

Following a lengthy review of the dealings between Abbey/Land and Glacier, the Supreme Court agreed that the settlement was collusive:  “Considering these findings—all of which have substantial grounding in the record—we affirm the District Court’s conclusion that the stipulated judgment between Abbey/Land and Glacier was the product of collusion.  The $12 million settlement was contrived to inflate Abbey’s recovery to the detriment of James River beyond what should have been a reasonable liability exposure for its insured, and the District Court did not err in concluding that it was not the product of a good-faith, arms-length transaction.”

But here is where the decision gets the most interesting.  The District Court had reduced the judgment to $2.4 million.  But the Supreme Court went much further.  It reversed the District Court and dismissed the case with prejudice.  Translation – Abby/Land took nothing.    

In general, the court concluded that the collusion was “so egregious” that dismissal was the only proper remedy. 
Essentially, there were two bases for this decision.  The insurer has suffered enough for breaching the duty to defend and fundamental justice: “The insurer has already suffered the consequence of its failure to defend by having lost the right to invoke insurance contract defenses as well as the right to assert its policy limits.  Whether to dismiss after finding that a confessed judgment is the product of collusion instead should focus on the collusive actions themselves.  Dismissal should occur not for the benefit of the insurer, but to protect the interests of justice and the integrity of the courts. District courts should consider whether allowing colluding parties to recover under the circumstances would contravene public policy or whether withholding relief would offend our system of justice to a greater extent than would allowing relief.”

The lesson here for parties that are entering into a settlement and assignment of rights against the insurer could not be clearer.  Even in a state that is harsh on insurers that breach the duty to defend, there are limits.  Collusion and an exaggerated settlement amount could result in a party nothing.

When insureds get sued for things such as advertising injury or defamation, the allegations in the complaint are usually pretty severe.  One usually doesn’t accuse someone of defaming them, or ripping off their intellectual property, using niceties.  It is often alleged that the offenses were committed intentionally or knowingly or maliciously or willfully or some combination of these.  

This is why, when reviewing whether a defense is owed to an insured, for one of these “personal and advertising injury” offenses, it may seem reasonable for an insurer to conclude that no defense is owed, on account of the exclusion for “‘Personal and advertising injury’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’”     

However, some courts have concluded that, despite what may appear appropriate, based on a comparison between the allegations in the complaint and policy, the “Knowing Violation of Rights of Another” exclusion does not serve as a basis for an insurer to disclaim a defense.  A disclaimer for a duty to indemnify at some point down the road?  Perhaps.  But a duty to defend now?  No can do. 

This is the story of the Supreme Court of Wisconsin’s decision in West Bend Mutual Ins. Co. v. Ixthus Medical Supply, Inc., No. 2017AP909 (Wis. Feb. 28, 2019).  While Ixthus Medical is not  the first court to demonstrate this point, I included it here, as a top 10 coverage case of 2019, as there aren’t many in this category from state high courts.  In addition, Wisconsin is a strict “four corners” state for purposes of the duty to defend.  If any state was going to go in this direction, one would think that it would be a state that uses an extrinsic evidence test for purposes of duty to defend.

At issue was coverage for Ixthus Medical Supply, for a suit brought against it, and dozens of other companies, by Abbott Laboratories, alleging that Ixthus imported, advertised and distributed boxes of Abbott’s blood glucose test strips, intended for international markets, in the United States.  The test strips are sold in the international markets at much lower prices than the U.S.       

Abbott asserted claims for (1) Federal Trademark Infringement under Section 32 of the Lanham Act; 15 U.S.C. § 1114(1); (2) Federal Unfair Competition under Section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a)(i)(A); (3) Common Law Unfair Competition (New York law); (4) Federal Trademark Dilution under Section 43(c) of the Lanham Act, 15 U.S.C. § 1125(c); (5) State Law (New York) Trademark Dilution; (6) State Law (New York) Deceptive Business Practices; (7) Unjust Enrichment; (8) Violation of Federal RICO, 18 U.S.C. § 1962(c); (9) Conspiracy to Violate Federal RICO, 18 U.S.C. § 1962(d); (10) Importation of Goods Bearing Infringing Marks under 15 U.S.C. § 1124; (11) Fraud and Fraudulent Inducement; (12) Aiding and Abetting Fraud; and (13) Contributory Trademark Infringement.

Ixthus sought coverage for the Abbott suit from West Bend Mutual under a commercial general liability policy.  West Bend denied a defense and filed an action against Ixthus seeking a determination that it had no duty to defend or indemnify.  At issue was the potential applicability of the “Knowing Violation of Rights of Another” exclusion.  The trial court granted West Bend’s motion for summary judgment and the appeals court reversed.   

The case landed in the Wisconsin Supreme Court, which affirmed the decision of the court of appeals. 

At the outset, the Supreme Court did not have any trouble concluding that the initial hurdles for coverage were cleared.  Rejecting the insurer’s argument that Ixthus was sued as a “distributing” defendant, and not an “advertising” defendant, the court held that “[t]he complaint says the ‘Defendants’ (including Ixthus) engaged in advertising activity that caused a variety of injuries to Abbott.  The complaint alleges the defendants used Abbott’s trademarks and trade dress in advertising to consumers and the marketplace through websites, emails, facsimiles, point-of-sale displays and other media.  The complaint alleges the defendants caused a variety of serious injuries to Abbott including loss of millions of dollars in rebates, great damage to Abbott’s goodwill and valuable trademarks, and consumer confusion, mistake, and disappointment.”

The principal issue before the court was the applicability of the exclusion for “‘Personal and advertising injury’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury.’”     

West Bend argued that “the knowing violation exclusion applies to preclude its duty to defend because the complaint alleges Ixthus acted intentionally and with knowledge that it was defrauding Abbott by buying international test strips at the lower price and selling them domestically to increase profit.  West Bend points to the repeated allegations in the complaint that the defendants knew what they were doing and that Ixthus had done this before.”

This is a common argument, made by insurers, why it has no duty to defend a claim for advertising injury.  The insurer points to the complaint allegations stating, not-surprisingly, that the insured committed an intentional and knowing advertising injury, then points to the “Knowing Violation of Rights of Another” exclusion, and concludes that a comparison between them can lead to just one conclusion.  It has no duty to defend.

While this argument seemingly makes sense, especially in a state that has a strict “four corners” test for purposes of duty to defend, the Wisconsin high court rejected it.

In simple terms, the court examined the causes of action at issue in the complaint and concluded that, for certain of them, it was not necessary for Abbott to establish that Ixthus acted knowingly or intentionally.  For example, the court stated: “Abbott’s claim for trademark dilution under Section 43(c) of the Lanham Act, 15 U.S.C. § 1125(c)(1)—a strict liability statute—does not require proof that Ixthus acted knowingly or intentionally. . . . Likewise, Abbott’s claim for trademark dilution under New York General Business Law § 360-l does not require Abbott to prove Ixthus acted knowingly or intentionally.”  Therefore, “despite Abbott’s general allegations of knowing violations, Abbott could prevail on several covered advertising injury claims without establishing that Ixthus knowingly violated Abbott’s rights. It is this possible coverage that triggers West Bend’s duty to defend.”

So, notwithstanding that Wisconsin is a “four corners” state, and a strict one at that, the court’s duty to defend decision seems to have included an examination of information outside the complaint, namely, the law books that list the elements of the causes of action alleged. 

Based on West Bend Mutual Ins. Co. v. Ixthus Medical Supply, Inc., an insurer may have a difficult time disclaiming a duty to defend a complaint, alleging an advertising injury, based on the “Knowing Violation of Rights of Another” exclusion, despite lots of allegations that the insured knew what it was doing and that it was impermissible.  At least one of the various state or federal causes of action, that involves this type of advertising injury, may not require the plaintiff to establish that the insured knew that its acts would violate the rights of another.

This rationale, for concluding that a defense is owed, may also apply to other “personal and advertising injury” offenses, if, despite the intentional and knowing allegations in the complaint – and a “four corners” standard controlling -- the court can look to the elements of the tort.  In doing so, it may conclude that a defense is owed, based on the possibility, as a matter of law, that liability can be established on grounds that do not require the insured’s intentional or knowing conduct. 

For example, a complaint may allege, as you might expect, that an insured’s defamation of the plaintiff was committed intentionally.  However, using the Ixthus Medical rationale, a court may conclude that a defense is owed, despite the “Knowing Violation of Rights of Another” exclusion, if defamation can be committed negligently.  See Axiom Ins. Managers, LLC v. Capitol Specialty Ins. Corp., 876 F.Supp.2d 1005 (N.D. Ill. 2012) (“Even though the Texas Suit alleges intentional and knowing conduct, the exclusions do not negate the duty to defend since plaintiffs could have been held liable for defamation without proof of intent and knowledge.”) (addressing exclusion for “‘personal  and advertising injury’ arising out of oral or written publication, in any manner, of material, if done by or at the direction of the insured with knowledge of its falsity”).

As I noted above, while Ixthus Medical is not the first court to conclude that a duty to defend is owed, for a complaint that alleges an intentional or knowing “personal and advertising injury,” despite the Knowing Violation of Rights of Another” exclusion, there aren’t many in this category from state high courts.  In addition, Wisconsin, being a strict “four corners” state for purposes of duty to defend, adds to the significance of the decision, given that the court seemingly had a way to rule otherwise.  

Policyholders have certain advantages when seeking coverage.  The duty to defend is usually quite broad.  Some courts will find a duty to defend based on the slenderest of potential coverage.  That’s one.  Another is that a policyholder sometimes does not need to prove that its interpretation of policy language is actually correct.  Rather, if it can establish that the policy language has two reasonable interpretations, that may be enough to secure coverage.

These are advantages that exist when coverage is in dispute.  Policyholders also have a card they can play when coverage is not in dispute – calling on their insurer to settle a claim when there is a settlement demand that is within the limits of liability of the policy.   

When such a demand is made, the insurer is confronted with whether to accept it.  It does so based on its assessment of its insured’s potential liability and damages that could be awarded, in conjunction with the relevant state’s standard that dictates the considerations in the decision making process.

Of course, the risk of rejecting the demand can be significant.  If it is determined that the insurer should have accepted the demand, the insurer may be liable for the entirety of a later jury award, even any amount above – way above -- the limits of liability.

While the net result of this is sufficient coverage for the insured, often the real beneficiary is the underlying plaintiff, especially when he or she has serious injuries and the tort-feasor insured has insufficient coverage.  Think of a serious motor vehicle injury and the at-fault driver has a minimum or low limits policy, such as $15,000 or $25,000.  If the plaintiff makes a demand to settle within limits, and the insurer declines, and such declination is determined to have been erroneous, the plaintiff’s problem, of insufficient coverage, may have been solved. 

Indeed, for some plaintiffs, the last thing they want to happen, after making a demand to settle within limits, is for the insurer to accept it.  Sometimes the plaintiff’s attorney prefers that the insurer declines to settle.  If so, the tort-feasor may have gone from having a low limits policy to a no limits policy.

Coverage for an excess verdict was at issue before the Georgia Supreme Court in First Acceptance Insurance Company v. Hughes, No. S18G0517 (Ga. Mar. 11, 2019).  The underlying claim involved a motor vehicle accident with serious injuries.  The tort-feasor’s policy had a $25,000 per person liability limit. The case went to trial and the plaintiff was awarded $5.3 million.  The principal question, as described by the Georgia high court, was whether “an insurer’s duty to settle arises only when the injured party presents a valid offer to settle within the insured’s policy limits or whether, even absent such an offer, a duty arises when the insurer knows or reasonably should know that settlement within the insured’s policy limits is possible.”

As to the legal issue, the court held that “an insurer’s duty to settle arises only when the injured party presents a valid offer to settle within the insured’s policy limits.”

Having concluded that the injured party must present a valid offer to settle, within the insured’s policy limits, the court addressed whether such a valid offer to settle had been made.  The court concluded that it had not: “[T]hrough the June 2 Letters, An and Hong offered to settle their claims within the insured’s available policy limits and to release the insured from further liability, except to the extent other insurance coverage was available, but that the offer did not include a 30-day deadline for acceptance.  If an instrument containing an offer is silent as to the time given for acceptance, the offer will be construed to remain open for a reasonable time.”

This part of the opinion is very fact specific and there is no benefit to discussing the ins and outs of it here.  Rather, Hughes, a supreme court decision, and where there are not many addressing the need for a valid settlement offer to trigger a demand within limits, was selected as one of 2019’s ten most significant for its take-aways.

First, the court closely studied the correspondence between the plaintiff’s attorney, defense counsel and insurer to figure out if a valid offer to settle, within the insured’s policy limits, had been made.  Such scrutiny should benefit insurers that are confronted with a so-called bad faith set-up.  Remember, the plaintiff’s attorney may not want the insurer to accept the demand – so it makes it less than clear if it has made a demand to settle within limits.  Then, if there is an excess verdict, the plaintiff’s attorney turns around and says that it had made a demand to settle within limits and the insurer did not accept it.  Translation – the insurer is liable for the excess verdict.  Such situations deserve close scrutiny.   

To me, any case that involves guidance on the treatment of allocation, between covered and uncovered damages, has the potential to be significant.  There can be reasons for an insurer to arrange for such allocation before a case goes to trial.  But, for various reasons, it doesn’t always happen.  Perhaps the insurer did not take the steps. Or, maybe it did, and the court said no-go.  As a result, the verdict that comes down against the insured is unallocated.  It’s just one number and does not include an explanation of which damages it represents, despite that it could represent more than one type.   

The insured will likely seek coverage for the entirety of this “general verdict,” despite the possibility (strong possibility) that it includes uncovered damages.  The insurer will likely be disinclined to pay damages that include some, or maybe a lot, that are uncovered.  However, the insured will likely maintain that the entirety of the verdict should be covered, since the insurer did not take steps to achieve a pre-trial allocation.  Or, at least the insurer has the burden to prove which damages are uncovered.  Despite the importance of this issue, it wants for case law. 

For this reason, and that the issue arises in a unique setting, I included RSUI Indemnity Co. v. New Horizon Kids Quest, Inc., No. 17-3567 (8th Cir. Aug. 12, 2019) here.  The court addressed the allocation issue in the context of excess polices.  The cases in this area – all that I’ve seen at least -- involve primary policies.  And, as the decision shows, that makes a difference.

I am going to quote liberally from the New Horizon opinion.  That’s easier for me.  And you don’t pay for this fine publication.  So you can’t complain if I take an easier way out.     

New Horizon Kids Quest, Inc. operates a childcare facility at the Grand Casino Mille Lacs in Onamia, Minnesota.  New Horizon was sued for negligent supervision and training on account of J.K., then age three, suffering physical and sexual assaults at the hands of N.B., then age nine.

Travelers provided New Horizon with $3,000,000 of liability coverage and RSUI provided excess liability coverage of up to $8,000,000 per occurrence.  This is important – the RSUI policy included a Sexual Abuse or Molestation Exclusion. 

Travelers defended New Horizon in J.K.’s suit.  “Following a second trial [motion for new trial was granted after a $13 million award] at which New Horizon again conceded liability but contested J.K.’s claims of injuries and damages, the jury awarded total damages of $6,032,585, segregating its award into four damage categories but not finding whether J.K. suffered sexual as well as physical abuse and not allocating its award between those two claims.  Travelers paid its policy limits, plus interest.  New Horizon paid the remaining $3,224,888.59 and demanded indemnity from RSUI under its excess liability policy. RSUI then brought this action seeking a declaratory judgment that the policy’s ‘Sexual Abuse or Molestation’ exclusion barred coverage for that part of the award above Travelers’ policy limits.”

“The district court granted New Horizon summary judgment because, without an allocated award or jury interrogatory, RSUI is unable to prove ‘that the jury determined sexual abuse had occurred or that one cent of the award was based on such a determination.’”

RSUI appealed and the Eight Circuit reversed: “We conclude that RSUI, an excess liability insurer that did not control the defense of its insured in the underlying suit, must be afforded an opportunity to prove in a subsequent coverage action that the jury award included damages for uncovered as well as covered claims.  If the insurer sustains that burden, the district court must then allocate the award between covered and uncovered claims.”

While the court concluded that RSUI had the burden to prove that the jury award included an uncovered sexual assault claim, there is also the critical issue of which party would then have the burden to allocate the unallocated jury award.  The Eight Circuit (happy to do so, it seemed) handed that issue back to the District Court.

The New Horizon court’s decision was tied to, or at least influenced by, the fact that RSUI was an excess insurer.  And that’s what I believe makes it significant.  When a primary insurer fails to take steps to achieve a pre-trial allocation, between covered and uncovered claims, and then seeks to do it post-trial, the insured is able to respond that the insurer had its chance and did not take it.  Thus, the argument will likely be that the insurer is now obligated for the entirety of the general verdict, despite that it may include uncovered damages.  Or, at a minimum, the burden is on the insurer to prove which damages are not covered. 

But it can be a different story for an excess insurer.  The excess insurer is likely not involved in the day-to-day aspects of the underlying action, and, in fact, as noted by the New Horizon court, has no defense obligation.   New Horizon provides excess insurers with an opportunity to argue that, because they are in a different position than primary insurers, any adverse consequences for primary insurers, for the primaries’ failure to address allocation between covered and uncovered claims pre-trial, do not apply to them. 

Most of the cases from the annual top ten “Best in Show” are from state high courts and federal courts of appeal.  But sometimes I include a trial court decision because there is something very unique about it.  Or it sends a strong message or offers a very important lesson.  This is why I included the California district court’s decision in Seneca Specialty Ins. Co. v. DB Ins. Co., No. 18-1163 (C.D. Calif. Sept. 9, 2019).

I read a lot of coverage decisions.  And I can’t recall seeing one where one insurer sues another insurer for bad faith.  Sure there are situations where an excess insurer sues a primary insurer for bad faith failure to settle.  And there are lots of insurer vs. insurer suits for contribution, when one insurer believes that another insurer owes coverage and skated.  But to include bad faith counts is unusual.  However, that’s what one insurer did in Seneca Specialty.  There must have been some bad blood between these guys.

This decision demonstrates an important lesson for insurers – be careful what you wish for.  I included DB Ins. in Coverage Opinions when it came out.  Lots of reader feedback left no doubt that it struck a chord with insurers.  Based on that, the decision’s uniqueness and the lesson that it teaches, it was selected for inclusion here.   

The facts that gave rise to this clash amongst insurers are as follows:  CW Piedmont, LLC owned and operated an apartment building in Palmdale, California.  On May 1, 2017, 38 current and former tenants sued Piedmont alleging that the building was kept in an uninhabitable condition.

DB Insurance Co. was Piedmont’s liability insurer from May 6, 2014 through May 6, 2017 (three consecutive one-year policies).  Seneca Insurance insured Piedmont from May 6, 2017 through May 6, 2018.

Seneca defended Piedmont, but noted, rightly so, that its policy only applied to damages sustained by tenants after the Seneca policy became effective.  However, DB refused to defend Piedmont, stating that, to the extent the tenants alleged “bodily injury” or “property damage,” their claims weren’t caused by an “occurrence.”  No doubt Seneca could have said the same but it didn’t. 

Both Seneca and Piedmont tried to get DB to participate in Piedmont’s defense.  No go. The action was eventually settled at mediation for $218,050.  DB participated in the mediation via telephone and paid nothing.  Seneca obtained an assignment of any and all claims Piedmont might have against DB regarding the action.

Seneca filed suit against DB, asserting the following claims against DB, both on its own behalf and on behalf of Piedmont: “(1) equitable contribution for the defense and indemnity of the Current Tenants; (2) breach of contract; (3) equitable subrogation for defense and indemnity of the Departed Tenants; (4) alternatively, equitable contribution for defense and indemnity of the Departed Tenants; (5) bad faith refusal to defend and indemnify claims by the Current Tenants; and (6) bad faith refusal to defend and indemnify claims by the Departed Tenants.”

The contribution and subrogation claims are what you would expect to see in a case like this, when one insurer pays a claim and another says n-o.  But Secena raised the stakes and included claims for bad faith.  Insurer vs. insurer is the Cain and Abel of coverage cases.
  
DB moved for summary judgment.  On the bad faith claims – which are the only ones I’ll address here -- DB argued that, even if its initial coverage position was erroneous, it was not in bad faith, as it was based on a genuine dispute regarding coverage.

On one hand, the court agreed with DB, noting that, “under California law, a bad faith claim can be dismissed on summary judgment if the defendant can show that there was a genuine dispute as to coverage[.]  Stated differently, [t]he mistaken [or erroneous] withholding of policy benefits, if reasonable or if based on a legitimate dispute as to the insurer’s liability under California law, does not expose the insurer to bad faith liability.”

However, the court was not willing to make a decision by simply concluding that there was no genuine dispute as to coverage.

Recall that DB refused to defend Piedmont on the basis that, to the extent the tenants alleged “bodily injury” or “property damage,” their claims weren’t caused by an “occurrence.” 

The court was none too pleased with DB’s decision, based solely on the complaint, that there was no “occurrence.”  The court had these harsh words for DB:

“Regardless of the reasonableness of DB’s coverage decision, DB can’t escape bad faith liability on this basis. Why? Because DB didn’t undertake a reasonable investigation into whether the claims truly stemmed from nonaccidental conduct.  And where a reasonable investigation would have disclosed facts showing the claim was covered, . . . [t]he insurer cannot claim a genuine dispute regarding coverage. . . . Just so here. Based on the vague and broad allegations in the Piedmont Action, including allegations that Piedmont negligently failed to remedy various habitability issues, DB couldn’t reasonably conclude no ‘occurrence’ existed without further investigation. Indeed, under California law, the negligent failure to repair can constitute an ‘occurrence’ when an unexpected or unforeseeable consequence results. . . .  But here, DB didn’t even bother asking Piedmont whether the tenants’ damages were unexpected or unintended, and thus potentially an ‘occurrence’ under the DB policies.  Rather, based solely on the allegations in the Piedmont Action, DB cursorily concluded no ‘occurrence’ existed without any further investigation into the salient facts. And for that reason, the Court can’t find DB’s decision to deny coverage for lack of an ‘occurrence’ was based on a genuine dispute.”

So Seneca got what it wanted.  DB may have acted in bad faith. And now Seneca may have to investigate the facts surrounding “no occurrence” complaints when addressing its duty to defend. This includes asking its insureds if damages were unexpected or unintended. I wonder what the answer is going to be.  Insurers – be careful what you wish for.

It is not unusual for a policyholder, denied coverage, to argue that it never had a chance as the policy is illusory.  This usually happens when the claim at issue involves a risk that is fundamental to the insured’s business.  As the insured sees it, if the policy does not provide coverage for something at the heart of why the insured needs the policy, then it provides no coverage at all.  Hence, it is illusory.  However, these arguments are routinely rejected by courts on the basis that, while the policy may not provide coverage for an important risk, it provides coverage for other potential hazards.  So, since it provides some coverage, it is not illusory.

This was the very outcome not long ago in AIX Specialty Ins. Co. v. Members Only Management, No. 19-12110 (11th Cir. Dec. 11, 2019).  After its claim for coverage, for a dram shop action, was denied, on account of an Absolute Liquor Liability exclusion in its general liability policy, the insured-club argued that its policy was illusory.  As Members Only saw it, since it is a club that permits patrons to bring in alcohol, “any claim for bodily injury could theoretically bear connection to alcohol, and thus be barred under the Absolute Liquor Liability Exclusion.”  But the court rejected the illusory coverage argument for the same reason other courts have – others risks could still be covered: “The exclusion here would not swallow every claim for bodily injury. Imagine, for instance, that a sober patron tripped in a dimly lit corridor and sued for negligence. That claim has nothing to do with alcohol. Or say a light fixture falls from the ceiling and hits a sober patron. That claim bears no connection to alcohol either. No doubt, the Absolute Liquor Liability Exclusion is a significant exclusion given Members Only’s business. But it does not swallow its coverage whole.”

But in Crum & Forster Specialty Ins. Co. v. DVO, Inc., No. 18-2571 (7th Cir. Sept. 23, 2019) the court saw it differently.  As a Seventh Circuit decision, going against the grain on this issue, and in the context of a common policy provision – a breach of contract exclusion in a professional liability policy – DVO made the annual Top 10 coveragepalooza.  

At issue was coverage for DVO, which had entered into a contract with WTE, to design and build an anaerobic digester for WTE.  Don’t know what that is?  Silly you.  It is used to generate electricity, from cow manure, which would then be sold to the electric power utility.  “WTE sued DVO for breach of contract, alleging that DVO failed to fulfill its design duties, responsibilities, and obligations under the contract in that it did not properly design substantial portions of the structural, mechanical, and operational systems of the anaerobic digester, resulting in substantial damages to WTE. It sought over $2 million in damages and fees.”  The case made it trial.  The court found in favor of WTE and ordered DVO to pay over $65,000 in damages and $198,000 in attorney’s fees. 

The issue before the court was the availability of coverage, for DVO, under a professional liability policy issued by Crum & Forster.  All agreed that the insuring agreement – the wrongful act and professional services requirements -- had been satisfied. 

The dispute was over the applicability of the breach of contract exclusion:

This Policy does not apply to “damages”, “defense expenses”, “cleanup costs”, or any loss, cost or expense, or any “claim” or “suit”:

Based upon or arising out of:

a. breach of contract, whether express or oral, nor any “claim” for breach of an implied in law or an implied in fact contracts [sic], regardless of whether “bodily injury”, “property damage”, “personal and advertising injury” or a “wrongful act” is alleged.

All agreed that the exclusion applied on its face.  But was it so broad as to make the policy illusory?  This was the issue before the Seventh Circuit.  If so, the court’s task is to reform the policy to meet the insured’s reasonable expectations.

The trial court said that the policy was not illusory since, despite the contract exclusion, the policy still provided coverage for other risks: “[A]lthough coverage for professional malpractice would effectively fall within that exclusion as to claims alleged by the party to the contract, third parties could still bring tort claims against DVO that would not fall within the exclusion and would trigger the duty to defend in the E&O provision of the policy. The district court reasoned that as a contractor, designer, engineer and builder, DVO has a duty to use reasonable care in carrying out its contractual obligation so as to avoid injury or damage to the person or property of third parties, even though they have no contractual relationship with DVO.”

But the Seventh Circuit saw it much differently, given that the contract exclusion was broad enough to include even any third-party claims: “[T]hat analysis [the district court’s] cannot support the court’s conclusion. If more narrow language was used, the district court’s determination that third-party liability would still be covered might have merit. But the language in the exclusion at issue here is extremely broad. It includes claims ‘based upon or arising out of’ the contract, thus including a class of claims more expansive than those based upon the contract. Wisconsin courts have made clear that the ‘arising out of’ language is broadly construed.”

The court held that, based on the breach of contract exclusion, the C&F policy was illusory and the remedy is as follows: “[W]hen a policy’s purported coverage is illusory, the policy may be reformed to meet an insured’s reasonable expectation of coverage.  Therefore, the focus now is not on the hypothetical third-party actions, but on the reasonable expectation of coverage of the insured in securing the policy. There is, after all, no reason to believe that DVO in purchasing Errors and Omissions coverage to provide insurance against professional malpractice claims had a reasonable expectation that it was obtaining insurance only for claims of professional malpractice brought by third parties.”

The trial court’s task was to reform it: “But we need not determine precisely what reformation is appropriate here. DVO did not file a cross-motion for summary judgment. The district court on remand may consider DVO’s reasonable expectations in securing the coverage, and can reform the contract so as to give effect to that expectation. The focus, however, must be on that reasonable expectation, which was upended by the breach of contract exclusion that rendered it illusory. The availability of third-party claims is irrelevant unless it is determined to be a part of DVO’s reasonable expectation of coverage.”

In Keodalah v. Allstate Insurance Company, No. 95867-0 (Wash. Oct. 3, 2019) the Washington Supreme Court held that an insurer-employee claims adjuster could not be sued for bad faith under Washington’s Consumer Protection Act.

This bad faith against an adjuster issue has arisen in a few states. But the Washington appeals court’s decision, which had permitted an adjuster to be sued for bad faith, raised its profile and brought it to the forefront.  If the Washington Supreme Court had let the appeals court decision stand, it would have armed policyholder counsel with a tool to seek to expand it to other states.

Even if the Washington high court had allowed a bad faith claim to go forward, I do not believe that there would have been a tidal wave of states that followed Keodalah.  However, the issue would have likely become part of some claims conversations.  And even if a bad faith claim against the adjuster is entirely baseless, might an adjuster, facing the threat of it, and all that would flow from such a suit being filed against him or her, have a change of heart in the handing of the claim?  Policyholder counsel would be able to use this as leverage in pursuing coverage.  But, with the Washington high court not allowing a bad faith claim to be brought, I believe that the air has come out of this balloon.  So I chose Keodalah, as one of the year’s ten most significant coverage decisions, not for opening the door on an issue, but, rather, closing it.  

For a discussion of the Washington Supreme Court’s decision in Keodalah v. Allstate Insurance Company, and its interesting dissent, which seems to suggest, not so fast, the door may not be shut, I turn it over to guest author, Tim Carroll, Associate, White and Williams.

Keodalah v. Allstate Insurance Company

By: Tim Carroll
White and Williams, LLP

On October 3, 2019, the Washington Supreme Court handed down its highly anticipated decision about whether an insurance company-employed claims adjuster can be sued for bad faith under RCW 48.01.030 — a statute imposing a duty of good faith on “all persons” in the “business of insurance” — and for claims brought under Washington’s Consumer Protection Act (CPA).  In a wafer thin 5-4 decision, the court held that adjusters “are not subject to personal liability for insurance bad faith or per se claims under the CPA.”  A dissenting opinion raises questions about whether the majority’s decision forecloses a common law bad faith claim against adjusters — “an issue the majority fail[ed] to address,” according to the dissent — and certain other per se claims under the CPA. 

Background

In Keodalah, an insured sued his insurer and the insurer’s employee — an adjuster assigned to handle the insured’s claim — for bad faith and violations of the CPA and Insurance Fair Conduct Act (IFCA), RCW 48.01.030, arising out of a claim the insured made for underinsured motorist coverage.  The insured, who was operating his truck, and a motorcyclist collided after the insured stopped at a stop sign to cross the street.  The collision killed the motorcyclist, who was uninsured, and injured the insured who, as a result, submitted a claim for the $25,000 limit of his UIM coverage.

The Seattle Police Department determined that the motorcyclist was traveling at least 70 mph in a 30 mph zone.  Also, the insurer’s investigation revealed that “the motorcyclist had been traveling faster than the speed limit, had proceeded between cars in both lanes, and had ‘cheated’ at the intersection.”  Further, the insurer’s accident reconstructionist concluded that the insured stopped at the stop sign, the motorcyclist was traveling at least 60 mph, and “the motorcyclist’s ‘excessive speed’ caused the collision.”  After this investigation, Allstate offered $1,600 to settle the insured’s policy-limits claim.  The insured rejected the offer and sued the insurer, asserting a UIM claim. 

At trial on the UIM claim, the jury determined that the motorcyclist was 100% at fault and awarded the insured over $100,000 in damages.  Following the award, the insured filed a second lawsuit against the insurer and, this time, the adjuster assigned to the claim, seeking damages for bad faith and CPA/IFCA violations.  The trial court dismissed the insured’s claims against the adjuster, leading to the appeal whether an adjuster may be liable for bad faith and CPA/IFCA violations under Washington law. 

The Washington Court of Appeals reversed the trial court’s dismissal, holding that the statutory duty of good faith imposed under the IFCA (RCW 48.01.030) applied to individual insurance claims adjusters.  The Court of Appeals also held that violation of that statutory duty may serve as a basis for bad faith and CPA claims against adjusters.  The adjuster in Keodalah appealed, and the Washington Supreme Court reversed the Court of Appeals, holding that RCW 48.01.030 does not serve as a basis for bad faith and CPA claims against individual adjusters.  The Court also held that the insured’s other CPA claims, based on alleged violations of “unfair claims settlement practices, as defined in the Washington Administrative Code” (WAC), can only be brought against insurers — not individual claim adjusters. 

Washington Supreme Court Decision

The Washington Supreme Court addressed the insured’s claims one by one, knocking each one out as it toured statutory language, legislative history, and Washington’s case law. 

First, the Supreme Court determined that the duty of good faith imposed under RCW 48.01.030 does not create a private cause of action against an insurance company-employed claim adjuster.  The “plain language” of RCW 48.01.030, the Supreme Court observed, indicates that “the statute is intended to benefit the general public” and not insureds seeking to recover from adjusters.  “If we were to read the statute to imply a cause of action,” the Supreme Court added, “such implied cause of action would apply against insureds as well,” which would allow insurers to sue their insureds for bad faith.  Such a result would “not be consistent with the legislature’s purpose in enacting [RCW 48.01.030],” the Court concluded. 

Next, the Supreme Court examined the insured’s CPA claims against the adjuster — but rejected them all.  The insured based his CPA claims against the adjuster on “unfair settlement practices,” as defined in the WAC, and on “bad faith conduct” in violation of IFCA (RCW 48.01.030). 

As for the CPA claims based on alleged violations of the WAC, the Supreme Court concluded that only “the insurer” — not an adjuster — can be held liable for “unfair settlement practices” under the WAC.  The court explained:  “Smith did not owe Keodalah a duty under that regulation because that regulation defines only unfair acts or practices of the insurer,” and “[b]ecause Smith is not the insurer, Keodalah cannot seek to enforce the regulation against Smith.” 

The Supreme Court then turned to, and ultimately rejected, the insured’s CPA claim based on a violation of the duty of good faith under RCW 48.01.030.  Reiterating its prior conclusion that RCW 48.01.030 “does not itself provide an actionable duty,” the court held that a “breach of duty of good faith under the CPA” may be brought only against the insurer — not an adjuster employed by an insurer.  Thus, the Court concluded, “[b]ecause Keodalah claims a breach of the duty of good faith by someone outside the quasi-fiduciary relationship,” i.e., an adjuster, “his CPA claim based on RCW 48.01.030 was properly dismissed” by the trial court. 

The Washington Supreme Court’s majority opinion was joined by four justices.  The dissenting opinion was joined by three justices. 

The Dissent

Five-to-four splits in high courts tend to leave fissures — some long-lasting — and the Keodalah has its share.  The dissenting opinion raises questions about whether an adjuster (or other insurance company agent) can be held liable for common law bad faith and certain other per se claims under the CPA. 

The dissent stated that they “would hold that Keodalah’s complaint states a viable cause of action for common law insurance bad faith against Smith [the adjuster], an issue the majority fails to address.”  The dissent discussed the procedural history of the case, including in its view that the insured’s common law bad faith claim was never addressed by the Court of Appeals, and should have been addressed by the Supreme Court, or in the trial court on remand.  The dissent also advocated for formal recognition of a common law bad faith claim against adjusters, relying for support on several jurisdictions (Alaska, Colorado, Mississippi, Montana, New Hampshire, Oklahoma, Rhode Island) which, in the dissent’s view, recognize some form of claim against adjusters or other company agents.  But the dissent also turned to Washington’s own case law, which does not tie the duty of good faith to a contractual relationship, as well as to “policy, common sense, logic, and justice,” as additional bases for creating a bad faith claim against adjusters. 

The lingering questions raised by the dissenting opinion in Keodalah beget another, more practical question.  A trend emerged after the Washington Court of Appeals’ decision temporarily enabled a bad faith claim against adjusters.  State court bad-faith suits began naming as defendants both the out-of-state insurance company and the Washington-domiciled adjuster, for the seeming purpose of destroying diversity of citizenship and blocking removal to federal court.  Once removed, Washington federal courts ruled that the adjusters were properly joined as defendants because the claims against the adjusters were viable.  Without diversity of citizenship, therefore, Washington federal courts relinquished jurisdiction and remanded the suits back to state court.  The Keodalah decision suggests that trend should reverse itself.  However, in light of the dissenting opinion, will Washington federal courts go back to remanding cases to state court, for lack of diversity, based on common law bad faith claims against a Washington-domiciled adjuster being viable? 

There are two things that I can say about the Washington Supreme Court’s decision in T-Mobile USA Inc. v. Selective Insurance Company, No. 96500-5 (Wash. Oct. 10, 2019), which addresses the availability of coverage for a putative additional insured.  First, I believe that the case was wrongly decided.  But the case itself is too fact specific to warrant discussion here.

Second, the decision, if followed by other states, has the potential to cause a significant increase in the extent of litigation over the availability of coverage for putative additional insureds.  In addition, it could require insurers to significantly alter the manner in which they deal with agents and brokers and cause litigation between them.  These are the reasons why T-Mobile was selected as one of the year’s ten most significant coverage cases.

At issue in the case was the availability of additional insured coverage, for T-Mobile USA Inc., under a policy issued by Selective Insurance.  The underlying case had to do with the construction of a cell phone tower, by the named insured, on a rooftop in New York City.  The details of this are not important for purposes here.  

T-Mobile USA Inc. did not have a contract with the named insured.  Thus, it did not qualify as an additional insured on the basis of the blanket additional insured endorsement contained in the Selective policy, i.e., it was not a party that the named insured agreed, by contract, to add as an additional insured. 

However, T-Mobile USA Inc. argued that it was an additional insured on the basis of a Certificate of Insurance that named it as such.  The Certificate of Insurance was signed by the agent as Selective’s “Authorized Representative.”

Putting aside how the coverage litigation got there, the Ninth Circuit held that T-Mobile USA Inc. was an additional insured on the basis that the agent acted with apparent authority in issuing the COI.  However, as you would expect, and as well all know, the COI had all manner of disclaimers specifically saying that it does not confer additional insured coverage on any party.  Selective argued that, for these reasons, T-Mobile USA Inc. was not an additional insured.  The Ninth Circuit certified the dispute to the Washington Supreme Court.

The Washington Supreme Court set out the various disclaimers that appeared on the COI: “It stated in bold capital letters that the certificate ‘is issued as a matter of information only and confers no rights upon the certificate holder,’ ‘does not affirmatively or negatively amend, extend or alter the coverage afforded by the’ insurance policy, and ‘does not constitute a contract between the issuing insurer(s), authorized representative or producer, and the certificate holder.’  It also stated in bold, ‘If the certificate holder is an ADDITIONAL INSURED, the policy(ies) must be endorsed. … A statement on this certificate does not confer rights to the certificate holder in lieu of such endorsement(s).’”

It is hard to imagine clearer or more conspicuous language about a party’s rights – lack thereof, actually – as an additional insured.  However, the court concluded that “the preprinted disclaimers are general in nature. They purport to disclaim virtually every bit of information provided by the certificate.  By contrast, the additional insured statement that the agent wrote in specifically refers to certain areas of policy coverage and makes a discrete representation that ‘T‑Mobile USA Inc., its Subsidiaries[,] and Affiliates’ ‘is included as an additional insured.’  This specific written-in additional insured statement thus prevails over the preprinted general disclaimers.’”

A dissenting opinion saw it differently and would have followed what it characterized as the majority rule – certificates of insurance do not confer coverage -- which is found in the policy -- they do not create a contractual relationship between the insurer and the additional insured, they are tools of the trade, for informational purposes only and contain all manner of disclaimers stating that they confer no rights upon the certificate holder.       

If followed, T-Mobile has the potential to cause a significant increase in the extent of litigation over the availability of coverage for putative additional insureds.  Despite the fact that certificates of insurance state six ways from Sunday that they confer no additional insured rights upon the certificate holder, agents and brokers routinely issue them with statements that the  certificate holder is an additional insured.

If, as the T-Mobile court stated, specific written-in additional insured statements prevail over the preprinted general disclaimers, the stage is set for litigation between insurers and certificate holders over their rights as additional insureds.  Even if the agent or broker has no authority to state that the certificate holder is an additional insured, the certificate holder likely does not know that, and, in fact, likely believes the opposite, especially if they are an unsophisticated insured.  This is often the case with general contractors and subcontractors who so frequently use COIs.  Thus, the certificate holder will argue that the broker or agent acted with apparent authority in issuing the COI. 

Cases involving D&O policies do not usually appear on the annual top 10 list. They do not arise as frequently as those involving commercial general liability and professional liability policies. In addition, unlike a CGL policy's frequent use of standard terms and conditions, D&O policy wording can vary. Thus, a case addressing a D&O issue, despite its importance to the parties involved, may not be influential on future disputes. Thus, such cases lack the factor that is critical in the selection process.

But the Delaware Supreme Court's decision in In re: Verizon Insurance Coverage Appeals, No. 558 (Del. Oct. 31, 2019) does not suffer this shortcoming. The high court of the first state narrowed entity-based defense and indemnity coverage that is often added to D&O policies for "securities claims" involving both insured directors and the companies they run.

Specifically, in a unanimous panel decision, the court held that the term "securities claims" was unambiguous and reached only laws and regulations typically understood to apply to the purchase and sale of securities (e.g., the 1934 Act; Rule 13A; and state equivalents) and applied only to laws, regulations or rules that had the primary purpose of regulating securities.

As a decision that defines a term that goes to the heart of a specific category of D&O coverage, it made the cut here. In addition, with minimal law on the issue, and given Delaware's importance in all things corporate law, its likelihood of being influential on other courts is enhanced. Verizon is likely to speak loudly to other courts around the country addressing this issue. Can you hear me now?

Hanging on the court's decision in the Verizon case was $48 million in defense costs for which Verizon was seeking recovery. Verizon had been sued by a bankruptcy trustee, on behalf of creditors of a bankrupt public company, that had been a Verizon spin-off. It was alleged that Verizon saddled the spun-off company with excessive debt.

For Verizon to be covered for its defense costs, under certain Executive and Organizational Liability policies, the trustee's claim needed to be a "securities claim," defined under the policies as a "Claim" against an "Insured Person" "[a]lleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including, but not limited to, the purchase or sale or offer or solicitation of an offer to purchase or sell securities)."

The court described the parties' competing positions as follows:

"The Insurers claim that the trustee in the U.S. Bank complaint did not raise a violation of any 'regulation, rule or statute regulating securities' because the words 'regulating securities' limits coverage to specific securities activities, as opposed to matters of general applicability. . . . As the Insurers argue, under the Superior Court's interpretation, 'regulations, rules or statutes' would encompass a variety of non-security related claims."

"Verizon argues that the plain language of the Securities Claim definition includes claims alleging a violation of 'any . . . regulation, rule or statute regulating securities (including but not limited to, the purchase or sale . . . [of] securities.' According to Verizon, the use of the word 'any' shows the parties did not intend to exclude common law 'rules' or claims that do not 'specifically' or 'principally' regulate securities."

The court concluded that "regulations, rules, or statutes," as used in the definition of "securities claim" "must be directed specifically towards securities laws for 'regulating securities' to have meaning."

With this decision made, the court turned to the matter at hand, examined each claim made against Verizon, and concluded that the claims for violation of fiduciary duties, unlawful distribution of dividends, fraudulent transfer under the Texas Uniform Fraudulent Transfer Act and unjust enrichment do not involve securities regulation, and, hence, are not "securities claims" as defined under the policies.

Verizon will be fine. $48 million is what my monthly wireless bill from them feels like.