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Archive for the ‘Insurance Coverage and Extra-Contractual Liability’ Category

Insurer Side Beware: Litigation Privilege for Pre-Suit Communications Extends Only To The Party Contemplating Filing Of Litigation

Posted on: January 14th, 2019

By: Tim Kenna & Kristin Ingulsrud

Strawn v. Morris, Polich & Purdy—filed Jan. 4, 2019, Court of Appeal of California, First District, Division Two 2019 Cal.App. LEXIS 9*—makes explicit that the application of the litigation privilege to pre-suit claims communications where the policyholder disputes its contemplation of litigation only applies to policy side interests if the insurer is contemplating litigation in good faith.

The litigation privilege makes inadmissible any communication made in judicial or quasi-judicial proceedings. California Civil Code § 47(b)(2). This privilege extends to pre-litigation statements relating to litigation contemplated in good faith and under serious consideration. Action Apartment Assn., Inc v. City of Santa Monica (2007) 41 Cal.4th 1232, 1251.

In Strawn, the insureds brought a cause of action for invasion of privacy against State Farm’s counsel based on the alleged wrongful transmittal of the insureds’ tax returns to State Farm in connection with a coverage investigation involving potential arson. The MPP argued that the transmittal was protected by the litigation privilege because it was in anticipation of the civil action the insureds “would surely and did in fact” file. The trial court agreed and sustained the demurrer based on the litigation privilege.

The California Court of Appeal reversed. In order for the insurer to apply the privilege to its own communications, the Court held, the insurer would need to establish that it was contemplating litigation in good faith when it received the tax returns.

There have been cases in which the courts have held that routine claims communications relate to the business of insurance and are not protected speech. See, e.g. People ex. Rel. Fire Insurance Exchange v. Anapol (2012) 211 Cal.App.4th 809. Other cases have attempted to discern whether the communications themselves establish a good faith consideration of litigation. Blanchard v. DIRECTV, Inc. (2004) 123 Cal.App.4th 903.  Strawn seems to go one step further in requiring the movant to establish that IT was contemplating the filing of litigation in good faith. Strawn appears to hold that at least in a case of disputed intent of the policyholder, the insurer side’s good faith subjective or objectively reasonable belief that the policyholder was contemplating litigation is irrelevant. Thus, where claimants’ counsel threatens suit, there was no protection to the insurer side no matter how unlikely settlement.

Strawn’s effects may be felt by litigants who attempt to utilize the litigation privilege in furtherance of dispositive pre-trial motions, including anti-SLAPP and motions for summary judgment.  First, Strawn emphasizes that good faith is a question of fact that must be determined before the litigation privilege can apply. Second, it severely limits the application of the litigation privilege in favor of any party who is responding to a perceived threat of litigation, even if that perceived threat is objectively reasonable.

If you have any questions or would like more information, please contact Tim Kenna at [email protected] or Kristin Ingulsrud at [email protected].

The Effects of the California Wildfires Continue

Posted on: January 7th, 2019

By: Matthew Jones

The California Insurance Commissioner recently issued a press release regarding the extensive insured losses from the numerous California wildfires. Those losses total over $9 billion, and are even expected to rise. The losses span across various lines of insurance coverage, including commercial, residential, personal and commercial vehicles, and agricultural, to name a few. In light of the substantial losses and long process toward recovery, the Commissioner issued a notice to all insurers asking them to expedite claims and issuing checks immediately for four months of out-of-pocket costs. This notice also requested that the insurers help out the policyholders as much as possible in being lenient regarding document production, which will likely be difficult for policyholders given the damages sustained. The Commissioner also issued a “declaration of emergency” to allow insurers to obtain help from out-of-state claims adjusters in order to deal with the high volume of claims. However, these out-of-state adjusters must be educated and versed in California consumer protection laws, which are much more stringent than other states.

So in a time of heartbreak and sorrow, the Commissioner is coming to the rescue to help ease the insurance claim process and help the thousands of victims get back on their feet. However, despite these efforts, extensive litigation is likely to come from these tragic events as homeowners try to make themselves whole again.

If you have any questions or would like more information, please contact Matthew Jones at [email protected].

Limitations On Directors & Officers’ Liability Coverage

Posted on: December 20th, 2018

By: David Molinari

Directors and Officers (D&O) Liability Insurance is insurance coverage intended to protect individuals from personal losses if they are sued as a result of serving as a Director or Officer of a business or other type of organization. Directors and Officers policies may also cover legal fees and other costs the organization may incur as a result of such a lawsuit. Directors and Officers Liability Insurance applies to anyone who serves as a Director or Officer of a for-profit business or a non-profit organization. D&O policies can take on different forms depending on the nature of the organization and the risk organizations face. D&O Insurance is a specialized form of coverage for claims based on acts committed in corporate capacities; and the corporation obligation to indemnify its Directors and Officers for such claims.

The availability of such insurance is an important factor recruiting or attracting persons to serve as Directors and Officers of corporations. So important that such insurance is provided by statute.  In California, California Corporation Code Section 317 allows for a corporation to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in their official capacity; or arising out of the agent’s status, whether or not the corporation would have the power to indemnify the agent against the liability. However, the existence of Directors and Officers coverage has limits. California Corporation Code permits a corporation to purchase Directors and Officers Insurance, it does not require an entity to do so.  The Corporation Code does not authorize an insurance company to cover a risk that it could not or does not lawfully cover. A Directors and Officers Liability policy is not an incentive for leaders of a business to increase risky behavior or an incentive to adopt aggressive negotiation strategies, policies or interpretations or their contracts and arrangements in the belief that if their actions are rejected by the courts, the insurance company will pick up the tab.

One distinction where coverage is unavailable; yet individuals in positions of management, decision and control mistakenly believe they are covered, is in situations where the loss arises from nothing more than a breach of contract the corporation entered. Directors and Officers liability policies are seen as safety nets affording management the ability to shift risk for unsuccessful business decisions and deals to an insurance carrier.

Directors and Officers policies typically exclude coverage for breach of contract. The policies generally limit coverage to liability that arises from errors committed in the officers’ or directors’ official capacity.  This limitation effectively excludes contract liability because an officer acting in their official capacity cannot be held individually liable for breach of a corporate contract. The limitation protects against making an insurer an unwitting investor in a corporation’s dealings.

Often directors or officers seek coverage of claims by focusing upon broad language in policies that define a “loss” but ignore the conditions on how that loss arose. Under Directors and Officers policies, the issue is whether the loss resulted from a wrongful act. Policies only cover losses resulting from wrongful acts, whether actually committed or merely alleged. Suffering a loss does not include judicial enforcement of contractual obligations. An officer or directors’ decision to refuse to make payments under a contract because of a dispute with the contracting party does not give rise to a loss caused by a wrongful act. Even though an officer or director’s actions in precipitating the breach may have been careless, such a loss is not covered by a policy. If that were the case, any default arising from a mistaken assumption regarding a company’s contractual liability could transform a contract debt into an insured event. Refusing to pay a debt, even in reliance upon erroneous advice of counsel, would convert a contractual obligation into damage arising from a negligent omission. That result would make the insurance company a defacto party to a corporate contract and potentially require a carrier to pay a full contract price, with interest while letting the corporation completely off the hook for its voluntarily assumed obligations.

No insurer reasonably expects the benefits of a professional liability policy are available to cover a contract price for a business deal gone wrong.  Such expectations would expand the scope of an insurer’s liability enormously and unpredictably, creating a moral hazard problem by encouraging corporations to risk breaching their contractual obligations believing in the event of a suit, the D&O carrier would ultimately be responsible for paying the debt.

Recruiting qualified individuals into directors and officers positions in for-profit and non-profit organizations often requires additional benefits to entice acceptance of added responsibilities in corporate governance and decision making. In the non-profit realm, often individuals are volunteers, so additional benefits are often thought to be needed to recruit and fill these positions.  Directors and Officers Liability policies offer enticement and protection for assuming increased responsibilities. Yet, the existence of director and officer liability policies and the protections they afford should not encourage the opportunity to take greater risks in negotiations or contracting. Adopting a risky business strategy should not be undertaken in the misbelief that if the business deal goes wrong, insurance benefits are available to protect against the loss.

If you have any questions or would like more information, please contact David Molinari at [email protected].

Notice Prejudice Rule Alive and Well in California

Posted on: December 6th, 2018

By: Zach Moura

California’s Second District Court of Appeal said October 16th (Marty Lat v. Farmers New World Life Insurance Co., No. B282008, Calif. App., 2nd Dist., Div. 1, 2018 Cal. App. LEXIS 932) that under the notice prejudice rule, an insurance company may not deny an insured’s claim under an occurrence policy for lack of timely notice or proof of claim, unless it can show actual prejudice from the delay. The court further held that the insurer has the burden of establishing that it was prejudiced.

The insured, Maria Carada, had purchased an occurrence life insurance policy from Farmers New World Life Insurance Co. and named her sons as beneficiaries. The policy included a rider under which Farmers agreed to waive the cost of the insurance while the insured was disabled if Carada provided Farmers with notice and proof of her disability.

Carada was diagnosed with cancer and became disabled as a result, after which she stopped making payments on the policy. Two months after ceasing payments, Carada contacted the insurance agent who had sold her the policy, told the agent of her illness and disability, and asked if the policy could be reinstated. Farmers refused to reinstate the policy. Carada died the following month.

After the beneficiaries made a claim for benefits under the policy, Farmers denied the claim on the ground that the policy had lapsed before Carada died. Carada’s beneficiaries filed suit.

The Court reversed the trial court’s ruling granting an MSJ in favor of Farmers, determining that California’s “notice prejudice rule” applied to the Farmers’ policy rider regarding notice of a disability.

Finding that there was “no dispute” that Carada was totally disabled while the policy was in force and that she would have been entitled to the deduction waiver benefit if she had given Farmers timely notice of her disability, the Court held “Farmers could not deny Carada the benefit of the deduction waiver unless Farmers suffered actual prejudice from the delayed notice.” Because the Court determined that Farmers made no such showing, it held Carada was entitled to the deduction waiver benefit.

For any questions about this decision, or coverage questions generally, please contact Zach Moura at [email protected].

Court Rules No Coverage For Pa. Law Firm’s Malpractice Suit

Posted on: November 26th, 2018

By: Barry Brownstein

An insurer does not have to cover a Pennsylvania law firm in a professional malpractice suit that a client filed after the firm allegedly used privileged information to benefit its attorneys’ side business in a real estate development.

The United States District Court for the Western District of Pennsylvania granted Westport Insurance Corp.’s motion for summary judgment in its case against Hippo Fleming & Pertile Law Offices (“HFP”) and attorney Charles Wayne Hippo Jr., agreeing with the insurer that the dispute over a shopping center development was exempted from coverage by the outside businesses exclusion in the firm’s professional liability policy.

Gregory Morris and Morris Development, one of HFP’s longtime clients, alleged that HFP had used information disclosed to the firm under attorney-client privilege to benefit a project by its side businesses, Templar Development and Templar Elmerton. Westport’s insurance policy contained a clear and unambiguous exclusion for lawsuits stemming from any of the policyholders’ outside businesses, and Hippo had not disclosed his involvement in the Templar companies when applying for the policy.

HFP argued that since the underlying lawsuit’s first two allegations of legal malpractice and breach of contract stemmed from the firm’s attorney-client relationship to Morris, Westport had a duty to defend them under the professional liability policy. The court, however, said it was Hippo’s dual role that gave rise to the claims against him.

The court emphasized that the plain language of the complaint in the underlying suit entirely discredits defendants’ argument that counts I and II are based solely on HFP’s role as Morris’s attorney. Counts I and II of the complaint allege that Hippo committed legal malpractice and breach of contract by simultaneously acting as Morris’s attorney and a competing real-estate developer. Therefore, the court held that Westport has no duty to defend because each claim in the underlying suit falls unambiguously within the policy’s outside business exclusion.

If you have any questions or would like more information, please contact Barry Brownstein at [email protected].