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

The Bad Faith Trap: Evidentiary Concerns In Defending “Failure To Settle” Claims

Posted on: October 19th, 2018

By: Phil Savrin

It is commonly known in our industry that even an insurer that has accepted coverage for a liability claim can nevertheless be exposed to liability beyond the limits of the policy if it fails to settle the claim. The reason for this rule is that an insurer’s contractual agreement to protect the insured’s financial interest extends to safeguarding the insured from a judgment outside the monetary coverages of the policies. Many courts hold that the insurer cannot “gamble” with the insured’s money, which it could be doing in circumstances where the liability exposure exceeds the limits of the policy. As with many such aspirations, however, the devil is in the details in terms of how the rule is applied.

The easy case is where the insured is clearly liable for the claim asserted and the damages clearly exceed the limits of the policy. In that circumstance, it is only a matter of time before a judgment is entered in excess of the limits of the policy. At the other end of the spectrum, where it is clear that the insured is not liable – or that the damages are clearly within the limits of the policy – the insurer is “gambling” with its own funds and should not be exposed to an extra-contractual claim. The challenging case falls between these two extremes, where a jury is not expected to find liability, or award damages exceeding the policy limits, but might do so.

However the insurer may have gotten there, if it is facing an extra-contractual claim then it is likely that the unanticipated has occurred. For this reason, clever (some might say crafty) attorneys may try to make the offer difficult to accept or may not provide full and complete information, with the goal of setting up the insurer for a bad faith claim down the road or gaining leverage during settlement discussions. This tactic may be employed particularly where the limits are woefully insufficient such that there is no other means of a financial recovery.

To counter these efforts, any demand for policy limits should be regarded as the time bomb that it is. If the decision is made not to accept the demand, an explanation should be provided as to why liability or damages are uncertain as well as coverage concerns that may need to be taken into consideration. If applicable, the response to a demand can include requests for evidence or witnesses to be produced for examination and leave open the possibility of further settlement discussions as the investigation proceeds. The letter should be prepared as though it is being presented to a jury, for that may be precisely its purpose; because hindsight is 20-20, being able to clearly reconstruct the “lay of the land” is critical to defending the reasonableness of the decision at the time it was made in these challenging situations.

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

The Sixth Circuit Finds Coverage For Fraudulent Wire Transfer Under Crime Policy

Posted on: September 12th, 2018

By: Allen Sattler

Business email compromise (“BEC”) claims consist of incidents where cyber criminals access or use a company’s email system to commit a crime, usually for financial gain and often including the use of trickery to convince an employee to wire transfer corporate funds to the criminal’s account.  According to statistics reported by the FBI,  BEC claims are on the rise, especially in the last three years.  In 2016, there was a 2,370% increase in email account compromise attacks, involving losses of nearly $346 million, and the frequency of BEC claims continues to rise.

Several insurers offer coverage for BEC claims, including for losses sustained as the result of fraudulent wire transfer.  In American Tooling Center, Inc. v. Travelers Casualty and Surety Co. of Am., 5:16-cv-12108 (6th Cir 2018), the Sixth Circuit became the latest federal appeals court to interpret an insurance policy that included coverage for fraudulent wire transfers.  In a decision dated July 13, 2018, the Sixth Circuit ruled that the crime policy provides coverage for the loss incurred by the insured.

American Tooling Center (“ATC”), a Michigan manufacturer in the automobile industry, hired a Chinese company to manufacture stamp dies.  To receive payment for its work, the Chinese company would send invoices to ATC, and ATC would route payment to its vendor via wire transfer.  In 2015, a person outside the company intercepted an email from ATC to its vendor.  That person impersonated an employee of the vendor and told ATC that because of an audit, ATC should wire transfer payment on its outstanding invoices to a different bank account.  ATC complied with the instructions and wired over $800,000 to the thief’s bank account.  The thief was never identified, and the money was not recovered.

ATC made a claim to its insurer pursuant to a “Computer Fraud” provision of its crime policy to recover the money lost.  The insurer denied coverage, arguing that ATC did not suffer a loss until it eventually paid the outstanding invoices to the Chinese vendors, and that ATC therefore did not suffer a “direct loss” as required by the policy wording.  The insurer also argued that the acts by ATC in changing the bank account information without verification constituted intervening acts that break the chain of causation.  The Sixth Circuit disagreed, holding that ATC immediately lost the money when it wired the money to the thief, and that the thief’s instructions to ATC directly caused the loss.  The Court also rejected an argument by the insurer that the policy required that the thief first gain access to ATC’s computer systems prior to triggering coverage, and that here, the thief did not hack into the email system to commit the fraud.  The Court ruled that the policy language was not so limited.

The insurer sought reconsideration of the ruling, which the Sixth Circuit recently denied.

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

Don’t Get Bitten… Are You In Compliance With DOL’s COBRA Continuation Coverage Election Notice?

Posted on: August 21st, 2018

By: Pamela Everett

The United States District Court for the Middle District of Florida has certified a class action suit against Marriott International, Inc. for allegations that it failed to provide required notices of eligible terminated employees’ right to continued health care coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).  The law suit was filed by Alina Vazquez, individually and on behalf of all others similarly situated, who alleges violations of the Employee Retirement Income Security Act of 1974 (ERISA), as amended by COBRA.  The Plaintiff asserted that after her termination as a covered employee and participant in Marriott’s health plan she was not provided with adequate notice of her rights to continued coverage under COBRA thus causing her to fail to enroll and incur excessive medical bills.

Marriott’s  plan provided medical benefits to employees and their beneficiaries, and is an employee welfare benefit plan within the meaning of 29 U.S.C. § 1002(1) and a group health plan within the meaning of 29 U.S.C. § 1167(1).  COBRA requires the plan sponsor of each group health plan normally employing more than 20 employees on a typical business day during the preceding year to provide each qualified beneficiary who would lose coverage under the plan as a result of a qualifying event to elect, within the election period, continuation coverage under the plan.  This notice must be in accordance with the regulations prescribed by the Secretary of Labor. To facilitate compliance with these notice obligations, the Department of Labor (“DOL”) has issued a Model COBRA Continuation Coverage Election Notice which is included in the Appendix to 29 C.F.R. § 2590.606-4.

Plaintiff alleged that, “Marriott authored and disseminated a notice that was not appropriately completed, deviating from the model form in violation of COBRA’s requirements, which failed to provide Plaintiff notice of all required coverage information and hindered Plaintiff’s ability to obtain continuation coverage”.  The  Model Notice also requires that notice shall be written in a manner calculated to be understood by the average plan participant.   Specifically, in her suit the Plaintiff asserted that Marriott’s Notice violated the following requirements:

a. The Notice violates 29 C.F.R. § 2590.606-4(b)(4)(i) because it fails to provide the name, address and telephone number of the party responsible under the plan for the administration of continuation coverage benefits. Nowhere in the notice provided to Plaintiff is any party or entity clearly and unambiguously identified as the Plan Administrator.

b. The Notice violates 29 C.F.R. § 2590.606-4(b)(4)(iv) because it fails to provide all required explanatory information. There is no explanation that a legal guardian may elect continuation coverage on behalf of a minor child, or a minor child who may later become a qualified beneficiary.

c. The Notice violates 29 C.F.R. § 2590.606-4(b)(4)(vi) because it fails to provide an explanation of the consequences of failing to elect or waiving continuation coverage, including an explanation that a qualified beneficiary’s decision whether to elect continuation coverage will affect the future rights of qualified beneficiaries to portability of group health coverage, guaranteed access to individual health coverage, and special enrollment under part 7 of title I of the Act, with a reference to where a qualified beneficiary may obtain additional information about such rights; and a description of the plan’s procedures for revoking a waiver of the right to continuation coverage before the date by which the election must be made.”

In her certification of the class, U.S. District Judge Mary S. Scriven also rejected Marriott’s argument that Vazquez’s claims were not typical because Vazquez could not understand English, could not  have understood the notice once it had been translated and could not afford COBRA continuation coverage.  Currently there is no requirement that the Notice be provided in any language other than English.  Perhaps this suit will change that requirement in a manner similar to some of the provisions in the Affordable Care Act.

Most importantly, this case highlights the importance of ensuring that your company complies with DOL regulations, and to the extent practicable, utilizes the forms provided.

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

Following in the Footsteps of Lebron James? Ohio Parts Ways with the Restatement of Liability Insurance

Posted on: August 17th, 2018

By: Matthew Weiss

Last week Ohio Governor John Kasich signed into law legislation that rejected the American Law Institute’s (ALI) Restatement of the Law of Liability Insurance, claiming that it “does not constitute the public policy of Ohio.”  According to ALI, the legislation marks the first time a state has rejected a Restatement in its entirety.

The Restatement of the Law of Liability Insurance was approved by the ALI in May but has received a decidedly mixed public reaction.  Insurance attorneys have criticized numerous provisions within the Restatement.

In one example, lawyers have disagreed with the Restatement’s adoption of a “plain meaning presumption” in the interpretation of insurance contracts in the Comment to Section 3, rather than the “plain meaning rule” used in a majority of states.  This means that the Restatement advocates a “contextual approach” when interpreting provisions that requires the utilization of custom, practice, or usage.  In effect, this would lead courts to interpret insurance policies in light of the circumstances surrounding the drafting, negotiation, and performance of the policy.  By contrast, the plain meaning rule states that when a provision is “unambiguous” when applied to a claim in the context of the entire policy, courts must interpret the provision according to its plain meaning.

Another controversial provision is Section 8, which uses the word “substantiality” with respect to misrepresentation of material facts.  Experts claim that the word is unnecessarily vague and at odds with existing statutory and common law governing misrepresentation and rescission.  Similarly, Section 13 of the Restatement deviates from the majority of states by creating a duty to defend not only based on the allegations of a complaint, but also based on extrinsic evidence known to the insurer.  Finally, Section 11 provides that an insurer does not have a right to receive any information of the insured that is protected by attorney-client privilege, work-product immunity, or a lawyer’s duty of confidentiality under the rules of professional conduct if that information could be used to benefit the insurer at the expense of the insured.

The actual impact of the Restatement’s deviations from established case law in the field of liability insurance is subject to debate.  While the Restatement may have an impact in areas where limited case law exists nationally on a particular issue, where state law is silent on an issue, or where case law exists within a jurisdiction but no clear rule has been established, the Restatement will not overcome a rule in a state where clear precedent exists on a topic.

The impact of the Restatement of Liability Insurance remains to be seen, but the Ohio legislation is more likely to be the beginning, rather than the end, of a debate concerning its relevance and practicality.

For more information about the Restatement, or other insurance coverage issues, please contact Matthew Weiss of the Law Firm Freeman Mathis & Gary LLP at (678) 399-6356 or [email protected].

Is Georgia Game for Growing Bad Faith Liability?

Posted on: July 17th, 2018

By: Jessica Samford

As discussed in my last blog on bad faith, seeking bifurcation can be a proactive means to distinguish the issue of coverage from the issue of bad faith and appropriately manage the all too often unwieldy discovery process before it’s too late.  A recent case in Georgia is an interesting illustration of an insurer’s attempt to bifurcate issues after the discovery stage in a bad faith failure to settle claim in particular and is yet another cautionary example for insurers to carefully consider the increasing potential for extracontractual liability in Georgia.  Whiteside v. GEICO Indem. Co., 2018 U.S. Dist. LEXIS 87868, *3-*4 (M.D. Ga. May 25, 2018).

In that case, the trial court declined to bifurcate the issues of liability and proximate cause of damages at the trial stage as requested by Geico, which sought to have a jury determine whether or not Geico could be held liable for bad faith failure to settle before being presented with evidence of the default judgment entered against Geico’s insured of almost $3 million and causation of same.  Separation of liability and damages issues was not warranted according to the trial court because facts relating to Geico’s claim handling were relevant to both, and Geico’s concerns could be handled through proper jury instructions, special interrogatories, and the verdict form.  See also Whiteside v. GEICO Indem. Co., 2018 U.S. Dist. LEXIS 52761 (M.D. Ga. Mar. 29, 2018).  The trial court did, however, bifurcate the claim for punitive damages from the rest of the jury trial.

The result was a jury verdict of $2 million against Geico for failing to settle in response to a bicyclist’s demand for the $30,000 policy limit based on medical bills of almost $10,000 following a motor vehicle accident.  Previously, Geico had argued there was no coverage due to the insured’s failure to notify Geico of the subsequent lawsuit she was served.  Whiteside v. GEICO Indem. Co., 2017 U.S. Dist. LEXIS 203617, *6, 2017 WL 6347174 (M.D. Ga. Dec. 12, 2017).  Notwithstanding such a flagrant breach of the policy’s notice conditions, the trial court did not see coverage as being an issue since that coverage defense did not exist at the time Geico responded to the demand by offering to settle for about half the limits instead.

These unusual circumstances are certainly noteworthy, and extracontractual damages such as these are becoming less uncommon in Georgia bad faith cases.  FMG’s Insurance Coverage and Bad Faith BlogLine has already geared up to cover the Georgia Supreme Court’s upcoming rulings after granting cert on the scope of what triggers failure to settle liability in Georgia, not to mention the proposed changes to the Restatement of the Law of Liability Insurance and their impact.  Whatever is in the cards for extracontractual liability in Georgia, the risks presented by settlement demands should be evaluated in light of these current trends.

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