Randy Maniloff White and Williams LLP CoverageOpinionsinfo ManiloffrWhiteandWilliamscom Granddaddy of Coverage Issues Hardest Issue and Insurers Greatest Risk Extrinsic e vidence is vast majority rule ID: 759199
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Duty to Defend: Advanced, Challenging and Unique IssuesRandy ManiloffWhite and Williams, LLPCoverageOpinions.infoManiloffr@WhiteandWilliams.com
Slide2Granddaddy of Coverage IssuesHardest Issue and Insurers’ Greatest Risk Extrinsic evidence is vast majority ruleFour Corners v. Four Corners “But” Choice of law considerationsRates for independent counselTerminating the duty to defendConsequences for breach of duty to defendALI Restatment
Topics
Slide3The Granddaddy Of Coverage Issues
Is the Insurer obligated to defend?Arises in every liability claim – regardless of policy typeConsequences for insurer breach – significant to monumentalOpens the door to insurer incurring defenses expenses, i.e., possible settlement
Slide4Duty to Defend Equation:Disputed substantive coverage issue (w/ contra proferentem) + Broad duty to defend standard (one word needed) + Decision time sensitive + Unpredictable and non-precise procedural rules + overarching rule that duty to defend designed to protect insureds + need to get the ROR right + breach cases are fact specific + drastic consequences for breach = Insurers’ Greatest RiskFollowing review of about 10,000 cases -- Insurer is a 7 point underdog in duty to defend cases.Goal Here: Recognize the multitude of rulesRules may differ from those typically appliedChange thinking about duty to defend -- It’s not only about the substantive issuesHow to proceed in light of the lack of precision
Insurers’ Hardest Issue and Greatest Risk
Slide5Water Well Solutions Service Group v. Consolidated Insurance Company, No. 2014AP2484 (Wis. June 20, 2016)31 states allow for the consideration of extrinsic evidence for purposes of determining an insurer’s duty to defend and in four states the law is unclearBut the number is much higher…How frequently are you considering extrinsic evidence in your duty to defend analysis?
The Two Tests: “Four Corners” or Extrinsic Evidence
Slide6The Two Tests: “Four Corners” or Extrinsic Evidence
Is there a third test?Fire Ins. Exch. v. Estate of Therkelsen, 27 P.3d 555, 561 (Utah 2001)“If the parties make the duty to defend dependent on the allegations against the insured, extrinsic evidence is irrelevant to a determination of whether a duty to defend exists. However, if, for example, the parties make the duty to defend dependent on whether there is actually a ‘covered claim or suit,’ extrinsic evidence would be relevant to a determination of whether a duty to defend exists.” (emphasis added).
Slide7When “Four Corners” Is “Four Corners, But”
Liberty Ins. Corp. v. Korn, No. 15-332-LPS (D. Del. Sept. 27, 2016) Four corners but it “does not restrict a court from referring to the record when doing so would be useful to its analysis.” (emphasis added). Ramara, Inc. v. Westfield Ins. Co., 814 F.3d 660 (3d Cir. 2016) (applying Pa. law)“The four corners rule—even under Pennsylvania’s strict construction—does not permit an insurer to make its coverage decision with blinders on, disclaiming any knowledge of coverage-triggering facts.”Four Corners, but not if the Workers’ Compensation Act is relevant to a coverage determination.
Slide8When “Four Corners” Is “Four Corners, But”
Peerless Ins. Co. v. Viegas, 667 A.2d 785 (R.I. 1995)Four corners, but if the policy contains an intentional act exclusion, an insurer is not obligated to defend an insured that sexually abuses a minor, even if the allegations in the complaint are described in terms of negligence. Allegations that belie “negligence” is likely the biggest exception to the “Four Corners” rule
Slide9When “Four Corners” Is “Four Corners, But”
Copp v. Nationwide Mut. Ins. Co., 692 S.E.2d 220 (Va. 2010) Four corners, but there’s an exception when there is an “expected or intended” exclusion and the insured alleges that he or she acted in self-defense.
Slide10Extrinsic Evidence - Easier Said Than Done
In general, one way street: Extrinsic evidence only permitted to find a duty to defendTalen, 703 N.W.2d at 406 (Iowa 2005) (“The scope of inquiry [for the duty to defend] . . . [includes] the pleadings of the injured party and any other admissible and relevant facts in the record.”)Am. Bumper & Mfg. Co. v. Hartford Fire Ins. Co., 550 N.W.2d 475 (Mich. 1996) (“The insurer has the duty to look behind the third party’s allegations to analyze whether coverage is possible.”)Garvis v. Employers Mut. Cas. Co., 497 N.W.2d 254 (Minn. 1993) (determination of the duty to defend includes consideration of facts of which the insurer is “aware”)
Slide11Extrinsic Evidence - Easier Said Than Done
Farmland Mut. Ins. Co. v. Scruggs, 886 So. 2d 714 (Miss. 2004) (in determining whether an insurer has a duty to defend an insurer may consider those “true facts [that] are inconsistent with the complaint,” the insured brought to the insurer’s attention)Peterson v. Ohio Cas. Group, 724 N.W.2d 765 (Neb. 2006) (duty to defend exists where the “actual facts” reveal such a duty exists)Am. Gen. Fire & Cas. Co. v. Progressive Cas. Co., 799 P.2d 1113 (N.M. 1990) (“The duty of an insurer to defend arises from the allegations on the face of the complaint or from the known but unpleaded factual basis of the claim.”
Slide12Choice of Law for Duty to Defend
Insured’s address in state A and underlying suit in state BGeneral Rule: Lex Loci Contractus or Restatement’s Substantial Relationship Test = Choice of Law for a coverage dispute is the Insured’s address
Slide13Choice of Law for Duty to Defend
Insured’s address in state A and underlying suit in state BIs there a different choice of law rule for duty to defend, i.e., does state B’s law apply.Does the location of the underlying suit – because it’s so tied to the defense -- control choice of law, even if all other issues are determined by insured’s location? Impact: Four Corners v. Extrinsic Evidence; Right to Independent Counsel; Application of an unusual state rule (i.e., New Jersey) Apply the more pro-insured rule [unpredictability issue]
Slide14Choice of Law: Duty to Defend for an Additional Insured
If address of the insured controls choice of law, is it now address of the additional insured?Construction Defect applicability because of “occurrence” issueCincinnati Ins. Co. v. Dawes Rigging & Crane Rental, 321 F. Supp. 2d 975 (C.D. Ill. 2004) (blanket additional insured endorsement and location of named insured controlled choice of law)Gabe’s Construction Co. v. United Capitol Ins. Co., 539 N.W. 2d 144 (Iowa 1995) (specific additional insured endorsement and location of project controlled choice of law for the AI) (separation of insureds clause noted)
Slide15Rates to Pay Insured’s Counsel
Rate for Independent Counsel -- But also….Rates for insured’s defense costs following a breach of the duty to defendFleet and Farm of Green Bay, Inc. v. United Fire and Casualty Co., 13-1013 (E.D. Wis. Oct. 7, 2015) (“Having refused to provide a duty to defend, the insurer also gave up its right to control the defense, as well as the ‘reasonableness’ of its attendant costs.”)Rates for insured’s costs to pursue coverage Schnitzer Steel Industries v. Continental Casualty Company, No. 10-1174 (D. Or. Nov. 12, 2014) (ORS § 20.075; 16 factors the court must consider in determining the amount of an award of attorney fees) (complexity of the case, the rates charged in the locality for similar legal services, the time limitations imposed by the client or the case, and the experience, reputation, and ability of the attorney performing the services)
Slide16Rates to Pay Independent Counsel
And the issue is getting worseCalifornia: Cumis Statute: Panel Rates PhotoMedex, Inc. v. St. Paul Fire & Marine Ins. Co., No. 07–0025, 2008 U.S. Dist. LEXIS 8526 (E.D. Pa. Feb. 6, 2008) (“The determination of a reasonable fee is a fact-intensive inquiry, requiring competent evidence.”) (scheduling a trial to determine whether the insured’s counsel’s fees were reasonable) (rate disparity of $685 and $360 per hour for insured’s counsel versus $175 per hour for insurer’s selected counsel)
Slide17Rates to Pay Independent Counsel
HK Systems, Inc. v. Admiral Ins. Co., No. 03 C 0795, 2005U.S. Dist. LEXIS 39939 (D. Wis. June 27, 2005) (simply because the insured was paying its counsel’s rates does not establish that it would have done so if there were no hope of recovering such payments) (rate disparity of $495 per hour for insured’s counsel versus $105 to $145 per hour for insurer’s selected counsel) Northern Sec. Ins. Co. v. R.H. Realty Trust, 2009 Mass. Super. LEXIS 32 (Mass. Super. Ct. March 5, 2009) (“It is clear that in Massachusetts an insurer cannot insist on the hourly rates it customarily pays to its own panel of attorneys”)
Slide18Rates to Pay Independent Counsel
Watts Water Techs. v. Fireman’s Fund Ins. Co., No. 05–2604-BLS2, 2007 Mass. Super. LEXIS 266 (Mass. Super. Ct. July 11, 2007) (noting that there are many factors for determining the reasonableness of legal fees incurred by the insured, one of which is “‘the usual price charged for similar services by other attorneys in the same area,’ not the usual price paid by insurance companies to other attorneys for similar services in the same area”) (emphasis added)Unpredictability and case by case issueSolution in some cases: Defend without a reservation of rights[example of change in thinking]
Slide19When was Thanksgiving Declared a national holiday?
A) 1943
B) 1843
C) 1863
Slide20When was Thanksgiving Declared a national holiday?
C) 1863 – by
President
Lincoln.
It has been celebrated as a federal holiday every year since 1863, when, during the American Civil War, President Abraham Lincoln proclaimed a national day of "Thanksgiving and Praise to our beneficent Father who
dwelleth
in the Heavens," to be celebrated on the last Thursday in November.
Slide21The first president to pardon a turkey was:
A) Abraham Lincoln
B) George W. Bush
C) Harry Truman
Slide22The first president to pardon a turkey was:
B) George W. Bush – while many presidents made jokes about pardoning turkeys, Bush actually used the
phrase “He’s granted a presidential pardon as of right now.”
Slide23Who would you rather have a beer with?
A) Flo
B) The Gecko
C) Mayhem Man
D) That Farmers Guy
Slide24Who would you rather have a beer with?
No right or wrong answer, I truly want
to know!
Slide25Terminating the Duty to Defend
The “Easy” (and less frequent) Cases: ISO Form CG 00 01: “Our right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments or settlements…” SocietyI ns. v. Bodart, 2012 WI App 75 (Wis. Ct. App. June 7, 2012) (“An insurer’s duty to defend ends after all at least arguably covered claims are settled and dismissed.”)Am. Econ. Ins. Co. v. Aspen Way Enters., 2015 U.S. Dist. LEXIS 129274 (D. Mont. Sept. 25, 2015) (“If the covered claims have been dismissed in the underlying action, an insurer’s duty to defend is generally terminated.”) (citation omitted) .
Slide26Terminating the Duty to Defend
Harder Cases:Meadowbrook, Inc. v. Tower Ins. Co., 559 N.W.2d 411 (Minn. 1997) (“[A]n insurer cannot withdraw from a defense until its duty to defend all arguably covered claims has been completely extinguished--in other words, when no further rights to appeal those arguably covered claims exist.”)
Slide27Terminating the Duty to Defend
Hardest Cases:Can discovery information serve as a basis to terminate an insurer’s duty to defend? St. Paul Fire & Marine Ins. Co. v. Appalachian Ins. Co., 1988 U.S. Dist. LEXIS 12939 (E.D. Pa. Nov. 18, 1988)(“[I]f an insurer can produce an admission from the plaintiff in the underlying action which narrows the scope of the complaint to the point where the insurer no longer could be liable to indemnify the insured, then the insurer may terminate its defense. It may be that something less than an admission would justify terminating its defense. Certainly, however, an inconclusive answer to an interrogatory such as Appalachian has produced will not suffice.”) (emphasis added)
Slide28Snyder Heating Co. v. Pennsylvania Mfrs.' Ass'n Ins. Co., 715 A.2d 483 (Pa. Super 1998)“PMA has a duty to defend because the damages were potentially with the scope of coverage, and, only after the possibility of coverage was excluded through discovery and/or a request for more specific pleading, could PMA withdraw from the defense. Stidham v. Millvale Sportsmen's Club, 618 A.2d 945, 421 Pa. Super. 548 (1992).” (emphasis added).
Terminating the Duty to Defend
Slide29Terminating the Duty to Defend
Can discovery information serve as a basis to terminate an insurer’s duty to defend? Stidham v. Millvale Sportsmen’s Club, 618 A.2d 945 (Pa. Super. Ct. 1992) (“Until the issue of McLaughlin’s intent was resolved, however, Aetna had a duty to provide a defense for its insured. In addition, a declaratory judgment action would have provided a forum for all persons asserting claims on the issue of coverage between the insured and his insurance carrier. The criminal proceedings wherein McLaughlin pled guilty to third degree murder cannot substitute for a declaratory judgment action because all indispensable parties were not involved in that proceeding.”)
Slide30Terminating the Duty to Defend
Overarching Insurer Risks for Using Discovery to Withdraw Defense : Accusation of “abandonment of its insured” – especially closer to trialUp against Black Letter Law: Duty to defend is tied to the complaintUp against Black Letter Law : Inconsistent w/ one way street for use of extrinsic evidence May be relying on facts that are in dispute in the Underlying Action Court response: Could have filed a declaratory judgment action Drastic consequences for breach (risk – reward)
Slide31Consequences For Breach of the Duty to Defend
Lack of Unpredictability:“[E]quity requires that the consequences of an insurer’s breach of its duty to defend must be considered on a case by case basis.”Sentinel Ins. Co. v. First Ins. Co., 875 P.2d 894 (Haw. 1994)Key Issues 3d Observation
Slide32Consequences For Breach of the Duty to Defend
Insurer declines to defend at its own “peril”Risk of Coverage for Settlement over Limits
Slide33Consequences For Breach of the Duty to Defend
Tidyman's Management Services Inc. v. Davis, 330 P.3d 1139 (Mont. 2014)Waiver of any coverage defenses Liability for the amount of a stipulated judgment -- even the portion in excess of policy limitsProbably the right (but with the burden) to prove that the stipulated judgment was unreasonable;Probably not the right to prove that the settlement was the result of collusion.
Slide34Consequences For Breach of the Duty to Defend
Two divergent views…“[A] fair number of jurisdictions . . . hold that an insurer in breach of its duty to defend is precluded from taking the position that the judgment or settlement did not involve a covered risk. . . . This rule has sometimes been referred to as the ‘Illinois rule,’ named after its most steadfast proponent. On the other hand, many other jurisdictions arduously adhere to the distinction between the duty to defend and the duty to indemnify and allow the insurer the opportunity to raise policy defenses post-breach of the duty to defend.”Sentinel, id.
Slide35Consequences For Breach of the Duty to Defend
Sentinel solution: [Somewhere in the Middle]“[W]here the insured seeks indemnification after the insurer has breached its duty to defend, (1) coverage is rebuttably presumed, (2) the insurer bears the burden of proof to negate coverage, and (3) where relevant, the insurer carries its traditional burden of proof that an exclusionary clause applies.”
Slide36Consequences For Breach of the Duty to Defend
Possible Defacto WaiverHarlor v. Amica Mutual Ins. Co., No. Kno-15-282 (Maine Nov. 3, 2016)Insurer assumes the burden of proving non-coverage. As the court observed: “[I]t is not uncommon for a lawsuit against an insured to assert some claims that are covered by the insurance policy and others that are not.”
Slide37ALI Restatement and Duty to Defend
Four Corners or Extrinsic Evidence? Complaint AND “Any additional allegation, not contained in the complaint . . . , that a reasonable insurer would regard as an actual or potential basis for all or part of the action.” Exceptions: Defendant not an insured; not a covered vehicle; late notice under “claims made and reported” policy Independent Counsel Rates “The insurer is obligated to pay the reasonable fees of the defense counsel and related service providers on an ongoing basis in a timely manner.”
Slide38ALI Restatement and Duty to Defend
Terminating the Duty to Defend 8 scenarios -- including: “undisputed facts not at issue or potentially at issue in the legal action” re: a duty to defend four corners exception” No exception of information learned in discovery Consequences for Breach of the Duty to Defend Loss of right to control defense and settlement Waiver of coverage defenses IF breach without a “reasonable basis”
Slide39Sobering for InsurersNot necessarily -- Requires a Re-thinking of the issue
Take-Away
Slide40www.CoverageOpinions.infoDecember 14th Issue: 16th Annual “Ten Most Significant Coverage Decisions of the Year”