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Archive for May, 2019

The Enforceable Unwritten Exclusions and their Business Risks

Posted on: May 31st, 2019

By: Rob Cutbirth

Claim experience on a local or national basis, or generalized soft or hard insurance market conditions, can affect an insurer’s decision on pricing and offered coverage terms. Premiums and underwriting guidelines may change to address market or loss experience concerns. Coverage benefits may be expanded or contracted to address competition or fiscal concerns. One often forgotten constant that continues to impact insurer/insured and insurer/broker relationships, however, are public policy coverage limitations imposed by statute or court-defined public policies.

“Implied” coverage exclusions are commonly triggered in D&O, E&O, and EPL claims, where covered forms of conduct can implicate “intentional” or “self-dealing” acts, or restitutionary, remedial or punitive damages, “excluded” as a matter of public policy not identified in a policy or its endorsements. Definitions of “loss” or “damage” may state no coverage exists for amounts deemed uninsurable under the law governing the application of the policy to a given claim, even experienced brokers and insureds are often unaware of such limitations, let alone how they impact an insurer’s right to assign counsel, manage the claim, and/or limit its settlement or judgment contributions. This can be particularly confusing given the fact insurers often address these issues differently, even when confronted with similar claims in the same jurisdiction.

As claims and coverage counsel, we often advise clients to take the following steps to avoid harm to important business relationships, and improve the efficient handling of claims:

  • Identify and raise with the insured and its broker any applicable public policy limitations at the earliest possible date, recognizing that educated brokers can be a positive resource (or at least an informational resource) for insureds who may be “surprised” about the existence of coverage limitations outside of the four corners of the policy. Because public policy limitations are almost never raised during the underwriting process, but they can override express policy terms in a given jurisdiction (i.e., California Insurance Code Section 533 overrides standard policy form language on indemnifiable conduct and damages), early and clear communications may be needed to avoid and argument of waiver or estoppel, where the insured maintains that it “relied” on the policy’s coverage provisions in its participation in the claim and its defense.
  • Raise relevant and applicable public policy limitations with recognizing that doing so does not necessarily create a right to “independent counsel.” In many jurisdictions, implied public policy limitations relate only to indemnifiable damages (not defense considerations) that do not implicate or create a right to separate counsel. These issues should be carefully evaluated and addressed, however, to ensure that conflict of interest issues are properly evaluated and addressed with the insured in order to avoid ongoing conflicts on representation that can impair efficient claim management.
  • In advance of mediations or settlement conferences, particularly given inconsistencies in how insurers are addressing public policy limitations in those pre-judgment settings, expectations on contributions and/or allocation of settlement amounts should be addressed in writing in advance of such proceedings with the insured in order to help avoid “surprises” and disputes that can derail productive settlement opportunities.  Insurers should also consider filing “coverage briefs” or having pre-conference separate discussions with a mediator/settlement conference judge to help ensure that they understand the factual and legal basis for any allocation or contribution demands that might be made or rejected by the parties.

The “unwritten” exclusions that can limit coverage rights present challenges to all concerned. They cannot be overlooked in terms of their financial and relational impact for both insurers and insureds, with the use of skilled claims and/or coverage professional important to successfully navigating their impact on challenging claims.

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

Avoiding Legal Malpractice Tip: Do Stuff Early

Posted on: May 31st, 2019

By: Greg Fayard

Missing deadlines is a common source of lawyer malpractice. A blown statute of limitations can be most problematic, as the malpractice case focuses on the value of the underlying case (damages). A missed deadline usually is caused by one of three reasons: 1) simply not knowing the deadline; 2) a calendaring failure; or 3) believing you know when something is due, but you’re wrong. Some deadlines are well-known, but many are not. Well-known deadlines under California law, where I practice, include the five-year timeframe to bring a case to trial, or two years to bring a negligence claim. Other deadlines are less well-known, like the ten-year statute of repose to bring a claim for a latent construction defect, or whether transferring a case from Small Claims Court to the Superior Court is permissible after the limitations period for the Superior Court case has elapsed. (In California, it is not permissible. (Jellinek v. Superior Court (1991) 228 Cal.App.3d 652, 654).)

While waiting to the last minute to do something is of course better than forgetting a deadline, allowing the deadline to dictate when you do something puts the focus on the deadline as opposed to what may or may not be in the client’s best interests. So my legal malpractice avoidance tip is:  try to act before deadlines, not on them. That is—do stuff early.

 If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

HOAs and COAs increasingly confront owner challenges to regulation of short-term rental

Posted on: May 28th, 2019

By: Justin Boron

By now, it’s clear that short-term rentals are neither a passing fad nor the high-minded pretense that underpinned their growth—laid-back homeowners who connect through an online platform with other like-minded individuals just looking for a place to crash for a few nights.

Instead, the short-term rental market is a full-fledged, real-estate business disrupter that is highly profitable and attractive to condo owners in areas with vacation appeal.  For condominium and homeowner associations, the word ‘disrupter’ is all too true.

Take your pick of the “disruptions” that short-term rentals can cause HOAs and COAs.  Safety, noise and pollution, insurance issues, inability to obtain mortgage financing, short-term rental taxes, violation of condo rules and destruction of property by the transient renter.

In response, HOAs and COAs have tried to push back on short-term rentals by attempting to enforce existing restrictions in their governing documents or by adopting new restrictions on short-term leases.  But unit owners eager to take advantage of the income-potential in the short-term rental market aren’t going away quietly and have gotten ever-more creative in avoiding HOA and COA restrictions.

The battle-lines have been drawn, and many of the disputes are making their way to court.  Below are some of the more interesting cases involving short-term rentals and potential solutions to the problems they present.

Can A Condo Association Ban Short-Term Rentals?

Putting aside the question of whether it should, whether a COA or HOA can ban short-term rentals outright, of course, depends on the authority granted to the association and the board in the governing documents.

Many associations have some sort of restriction on leasing of units within the association, whether it is durational (e.g., no less than six-month rental terms), a ban on commercial use of a unit, or an owner-occupied requirement.  But on the other side, there are individual property rights that courts must balance.  HOAs and COAs have met court challenges when attempting to ban short-term rentals using these types of restrictions, which in almost every case, were not drafted with the short-term rental market in mind.

For example, several condo owners successfully argued that a condo association’s ban on short-term rentals was beyond its power because its founding documents did not grant the association the right to restrict leases by duration.  See Wilkinson v. Chiwawa Cmtys. Ass’n, 327 P.3d 614, 621 (Wash. 2014).

Condo owners waged a similar challenge based on an association’s attempt to rely on its covenants against commercial use to ban short-term rentals.  See Houston v. Wilson Mesa Ranch Homeowners Ass’n, 360 P.3d 255, 261 (Colo. App. Ct. 2015).  The court agreed that short-term rentals used for sleeping and eating did not fit within the definition of a business use.

In instances where a HOA or COA lacks authority to ban short-term rentals in its governing documents, its next best option is likely to amend its governing documents according to the procedures supplied in them—typically a supermajority vote of the unit owners—to specifically ban short-term rentals.

Flouting An Owner Occupied-Requirement

HOAs and COAs might take comfort in condo documents that affirmatively require any units to be “owner-occupied.”  But an enterprising owner developed an interesting work-around for the owner-occupied requirement.  He placed his unit in an LLC, and then he sold small percentage shares of the LLC to would-be short-term renters that the LLC documents required the purchaser to sell back to the LLC at the end of their stay.  It allowed the short-term renter to say: “I’m not a tenant.  I’m a co-owner.”[1]

The COA could argue that the owner’s arrangement is essentially a time-share, which many COA and HOA documents prohibit.  But in omitting a particular block of time that a member of the LLC owns, it lacks one of the essential qualities of a timeshare.  A COA would likely be more successful in arguing that the substance of the arrangement should be considered over the form.  None of the “owners” of the LLC could say with a straight face that they believed they were investing in a real estate venture.

The Absent Owner Renting Short-Term Under The Radar

The most ubiquitous problem related to short-term rentals likely arises when an HOA or COA has effectively banned short-term rentals.  Despite a clear prohibition, there is often an absent owner who flouts COA rules and rents short-term.  To the extent his or her violations are detected, boards can likely be effective in enforcing rules with notice and fines.  If the measures are ignored, most states’ legislation for HOAs and COAs permit the association to obtain an injunction to end a unit owners’ violation.

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

[1] Marshal Granor, Emerging Trends and Hot Topics in Condominiums and Homeowners Association, Ch. 2 Short-Term Rentals (2019).

Avoiding Legal Malpractice Tip: Document, Document, Document

Posted on: May 24th, 2019

By: Greg Fayard

“Boy, I wish that was in writing!”

Having defended scores of attorneys over the years, more often than not, I wish my lawyer-client had either better documented his or her file, or memorialized a key conversation. It certainly helps defending legal malpractice claims when a pivotal issue is in writing as opposed to merely being oral.

While it is not possible to document every detail in a legal matter, having the mindset of documenting interactions with clients can reduce legal consequences should a client sue. A simple e-mail confirming a conversation, or a time entry stating the substance of a conversation can help in defending a legal malpractice claim. Letters work too, of course, but are more time-consuming. For a key strategy decision in a case, a quick “memo to file” in e-mail form works as well as something more formal. A lawyer’ mindset should be: something in writing is better than nothing in writing.

But writings are not only helpful in “defending” a claim. A contemporaneous writing on a key point or issue in a matter may be enough to dissuade the client from suing in the first place.

In sum: the lawyer who chooses to document a file, over not documenting, no matter how informal, will be in a better position in the event the client is later dissatisfied with the lawyer’s services.

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

A Dishonorable Discharge – Debt Collection, Contempt, and Efforts to Loosen the Bankruptcy Discharge

Posted on: May 23rd, 2019

By: Matthew Weiss

On April 24, 2019, the United States Supreme Court held oral argument in Taggart v. Lorenzen (In re Taggart), 888 F.3d 438 (9th Cir. 2018), cert. granted, 139 S. Ct. 782 (2019), a case addressing the standard for contempt where a creditor attempts to collect against a debtor whose pre-petition bankruptcy debts have been discharged. At issue is whether a creditor who violates a bankruptcy discharge injunction can avoid contempt where it had a good faith belief that the discharge was inapplicable to it. While the facts in that case are narrow, the Supreme Court’s decision in Taggart could have far-reaching implications for creditors who attempt to collect on debts following a bankruptcy.

The case began when real estate developer Bradley Taggart transferred his 25% interest in Sherwood Park Business Center, LLC (SPBC) to his attorney John Berman. Terry Emmert and Keith Jehnke, who also owned 25% of SPBC, filed suit against Taggart and Berman in Oregon state court asserting that the transfer breached SPBC’s operating agreement because Taggart failed to provide the required notice to Emmert and Jehnke so that they could exercise their right of first refusal. The lawsuit sought attorneys’ fees as permitted under the operating agreement.

Taggart subsequently filed a chapter 7 bankruptcy petition, staying the state court action. Following Taggart’s discharge, the state court action proceeded during which time Taggart was deposed.  The state court ultimately entered a judgment against Taggart and Berman and unwound the transfer of Taggert’s interest. Emmert and Jehnke then filed an application for attorneys’ fees against both Berman and Taggart, specifically seeking fees from Taggart arising after the date of Taggart’s bankruptcy discharge. In response, Taggart moved for the bankruptcy court to reopen his case and then filed a motion seeking to hold Jehnke, Emmert, and SPBC (collectively “Taggart’s creditors”) in contempt.

The bankruptcy court held Taggert’s creditors in contempt after finding that they had knowingly violated the discharge injunction by seeking attorneys’ fees even though they had a subjective good faith belief that the injunction did not apply to them. On appeal, the Ninth Circuit reversed the decision of the bankruptcy court, noting that “the creditor’s good faith belief that the discharge injunction does not apply to the creditor’s claim,” because Taggert had “returned to the fray,” precluded a finding of contempt “even if the creditor’s belief is unreasonable.”  Therefore, the bankruptcy court abused its discretion when it found that Taggart’s creditors knowingly violated the discharge injunction. Taggert’s petition for writ of certiorari with the United States Supreme Court was granted in January, and oral argument was held last month.

Taggart is significant because, if the Supreme Court affirms the Ninth Circuit, creditors will have significantly more leeway to pursue debts following a bankruptcy discharge without fear of being held in contempt so long as they have a “good faith” belief that the injunction does not apply to them, even when their sincerely held belief is unreasonable. While watering down the protections of the Bankruptcy Code’s discharge injunction may provide relief to creditors, it will surely create headaches for discharged bankruptcy debtors who may see increased efforts at collection activity.

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