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Posts Tagged ‘#policyholder’

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 Restatement of The Law of Liability Insurance Is Coming~ Ready Or Not!

Posted on: May 21st, 2018

By: Gretchen Carner

On May 22, 2018, at the annual meeting of the American Law Institute (ALI ) in Washington, D.C., its members are set to vote on final approval of the Restatement of the Law of Liability Insurance (RLLI). The American Law Institute’s RLLI aims, as former Director Lance Liebman said, to seek “the efficient and fair rules that should govern the insurer/insured relationship.” The RLLI has taken eight years to write and has been the subject of much lively debate.

Many of the issues discussed in the Restatement have been hotly contested by insurers.  The RLLI, for the most part, states the majority rule on the vast majority of issues covered. Sometimes, however, the Restatement sets forth what the ALI considers to be the “better rule,” which is a practical approach taking into consideration the law and incentives underlying insurance and claims-handling.

It is anticipated that courts considering coverage issues of first impression, or where the law is not clear, may now turn to the RLLI for guidance.  Because Restatements are developed by learned individuals in their area of expertise at the ALI, and are only approved after a long and painstaking process, it would be reasonable for a court to look at what the RLLI has to say about an unsettled issue. If the Final Draft of the Restatement is approved this month, some of the following hot topics should be high on an insurer’s radar.

Policy InterpretationSection 3 adopts a presumption in favor of the plain meaning rule for interpretation of “standard-form” policy terms, stating: “an insurance-policy term is interpreted according to its plain meaning, if any, unless extrinsic evidence shows that a reasonable person in the policyholder’s position would give the term a different meaning. That different meaning must be more reasonable than the plain meaning in light of the extrinsic evidence, and it must be a meaning to which the language of the term is reasonably susceptible.”

The “extrinsic evidence exception” in Section 3(2) is a modification of the majority rule that extrinsic evidence is only relevant after the term is found ambiguous (i.e., has another reasonable interpretation).  Under Section 3, consideration of extrinsic evidence is relevant to determine whether there is another more reasonable interpretation of the term.

Insurers’ Duty to DefendSection 13 defines the applicable duty to defend standard as the traditional “potential for coverage” standard included in the “four corner/eight corners” rule adopted in most jurisdictions. Once the duty to defend applies, “[t]he insurer must defend until its duty to defend is terminated under § 18 by declaratory judgment or otherwise,” unless facts as to which there is no genuine dispute establish that:

(a) The defendant in the action is not an insured under the insurance policy pursuant to which the duty to defend is asserted;

(b) The vehicle involved in the accident is not a covered vehicle under the automobile liability policy pursuant to which the duty to defend is asserted and the defendant is not otherwise entitled to a defense;

(c) The claim was reported late under a claims-made-and-reported policy such that the insurer’s performance is excluded under the rule stated in § 36(s); or

(d) There is no duty to defend because the insurance policy has been properly cancelled.

The comments to this Section explain that the reasons behind it are based on public-policy concerns with allowing insurers to consider “an all-the-facts-and-circumstances approach” that extends well beyond the exceptions stated in Section 13 or elimination of the common rule that the insurer must pursue a declaratory-judgment action before rejecting its duty to defend. The comments also warn insurers against trying to include a contractual provision terminating the duty to defend in situations other than those listed in this Section unless it also contains a mechanism protecting the insured’s right to a defense.

Insurer’s Right to RecoupmentSection 25 (2) provides that an insurer defending under a reservation of rights is not relieved of the duty to make reasonable settlement decisions.  If the insurer decides to settle uncovered claims to cap its potential liability down the road, it cannot recoup any portion of the settlement payment unless that is allowed under the terms of the insurance contract.  The comments under this Section make clear that the no-recoupment rule is a default rule, which means that a contrary term in the insurance contract would prevail.

It will be interesting to see how this Section is applied in California where recoupment of uncovered settlement payments is allowed if the insurer complies with the strict requirements set forth in Blue Ridge Ins. Co. v. Jacobsen (2001) 25 Cal.4th 489, 502, and not any specific policy language.  Blue Ridge satisfied the prerequisites for seeking reimbursement for noncovered claims included in a reasonable settlement payment by asserting: (1) a timely and express reservation of rights; (2) an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer; and (3) an express offer to the insureds that they may assume their own defense when  the insurer and insureds disagree whether to accept the proposed settlement.

The take-away here is that when there is no in-state law on an issue, a court’s resort to the RLLI, in conjunction with other sources, seems likely.  On the other hand, when there is precedent available, it seems unlikely that a court would opt to adopt the RLLI rule if it conflicts with well settled law. Time will tell what the impact and role of the RLLI will be on the cases in jurisdictions where the law is sparse on the topic or ripe for change.

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

Court Ruling Highlights Importance of Policy Language

Posted on: April 11th, 2018

By: America Vidana

In Mt. Hawley Insurance Co. v. Tactic Security Enforcement, Inc., No. 6:16-cv-01425 (M.D. FL. 2018), U.S. District Judge Paul Byron of the Middle District of Florida recently denied an insurance company’s motion for summary judgment, in which it relied on an exclusion to deny coverage to its policyholder. The policyholder and restaurant establishment, Que Rico La Casa Del Mofongo, had two negligence lawsuits filed against it for allegedly failing to prevent violent incidences from occurring on its premises.

The insurer denied coverage per an exclusion included in the policy prohibiting “operations involving bars, taverns, lounges, gentlemen’s clubs and nightclubs.” The Court, however, found that the insurer failed to clearly define the terms cited in the exclusion. It noted that the policyholder’s establishment was interchangeably referred to as a “restaurant,” and at other times as a “lounge.” Consequently, because the terms “bars, “taverns,” “lounges,” and “gentlemen’s clubs” were undefined, it deemed the entire exclusion as imprecise and inapplicable—unilaterally denying the insurer’s summary judgment.

The Court’s decision in Mt. Hawley significantly reinforces the principle that precise policy language is required before an insurer can deny coverage based on an exclusion. It also highlights the importance for a policyholder to read the entire policy to ensure there are no broad exclusions that could potentially bar coverage.

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

Issuing a Reservation of Rights? You May Lose Control Over Settlement

Posted on: February 5th, 2016

By: Jonathan Romvary

By reserving the right to deny coverage, insurers may be relinquishing the power to force the policyholder to forego reasonable settlement opportunities for covered claims that do not align with the goals of the insurer.  In Babcock & Wilcox Co., et al. v. American Nuclear Insurers, et al., 2015 WL 4430352 (Pa. July 21, 2015), the Pennsylvania Supreme Court announced a rule similar to the rule set forth by the Arizona Supreme Court in United States Auto Ass’n. v. Morris, 741 P.2d 246 (Ariz. 1987), allowing policyholders to settle claims without their insurer’s consent when the insurer is providing a defense under a reservation of rights.  This “Pennsylvania Approach” applies only after the insurer breaches its obligation of fair dealing with the policyholder by unreasonably objecting to settlement that is in the best interest of the policyholder. 

The consent-to-settle clause in liability policies generally allows the insurer to retain control of the defense and any settlement opportunities over claims when coverage is certain.  This clause provides that a policyholder is not allowed to enter into a settlement that would otherwise bind the insurer without the insurer’s consent.  However, when an insurer is defending under a reservation of rights, coverage is uncertain, and often the goals of the insurer and policyholder are conflicting.  A strict application of the consent-to-settle clause may require policyholders to pass up reasonable settlement offers while also requiring them to pay the full judgment if the insurer ultimately determines that the claim is not covered.  The Pennsylvania Approach (1) permits policyholders to enter into a reasonable settlement rather than risk a substantial and adverse verdict at trial and (2) allows insurers to contest coverage for a settlement that is unreasonable or one that is not covered under the terms of the policy.  Determination of whether a settlement is reasonable necessarily entails consideration of the terms of the settlement, the strength of the insured’s defense against the asserted claims, and any potential fraud or collusion by the insured.

Note that this ruling does not allow policyholders full control of their litigation when a reservation of rights has been issued.  Cooperation clauses still require the insured to communicate any settlements to the insurer and seek consent.  However, now in Pennsylvania, after a reservation of rights is issued, the insurer needs to carefully consider all reasonable settlements whether or not it believes that the claim is covered.

This Pennsylvania Approach is consistent with the current draft of the Restatement of the Law of Liability Insurance being prepared by the American Law Institute.  Therefore, we can expect more states to adopt this approach in the future.