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Posts Tagged ‘public policy’

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].

Cal. Supreme Court Says Attorneys May Not Get Paid If They Have A Flawed “Blanket” Conflict of Interest Waiver

Posted on: September 13th, 2018

By: Greg Fayard

The California Supreme Court has weighed in on the vital importance of conflict of interest waivers. A flawed one could deprive attorneys of their fees.

On August 30, 2018, the Supreme Court analyzed the validity of a conflict of interest waiver in a law firm’s retainer agreement for a high stakes case.  In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 2018 Cal. LEXIS 6399, J-M Manufacturing Company, Inc. (J-M) retained California law firm Sheppard Mullin to represent it in a large federal lawsuit where J-M was sued for over $1 billion in damages. Sheppard Mullin’s agreement had a general conflict waiver, where J-M waived any and all conflicts of interest. It turns out, however, that Sheppard Mullin had, and was, representing one of J-M’s adversaries in the federal case—specifically the South Lake Tahoe Public Utility District (South Tahoe), but in unrelated employment matters. That prior and concurrent representation was not specified in the conflict waiver that J-M agreed to.

South Tahoe learned of the conflict, and successfully moved to disqualify Sheppard Mullin. Unfortunately, Sheppard Mullin had already billed 10,000 hours in the huge federal action, to the tune of some $3 million in fees, with over $1 million unpaid by J-M. Sheppard Mullin then sued J-M for its unpaid fees. J-M cross-complained, seeking to disgorge its fees it paid to Sheppard Mullin and to not have to pay the additional fees owed. The law firm’s retainer agreement had an arbitration clause, which Sheppard Mullin successfully invoked. The arbitrators ruled in favor of Sheppard Mullin, allowing the law firm to keep its earned fees, but also requiring J-M to pay Sheppard Mullin the over $1 million it still owed. The arbitrators described Sheppard Mullin’s flawed conflict waiver as a minor and it did not warrant disgorgement of all the fees J-M had paid. J-M claimed the flawed conflict waiver was an ethical breach by Sheppard Mullin that rendered the whole contract illegal and unenforceable, in violation of public policy (to protect the public from unethical attorney conduct). The trial court disagreed and affirmed the arbitrators’ ruling. J-M appealed. The Court of Appeal reversed, holding the entire agreement was illegal, and Sheppard Mullin was not entitled to any of its $3 million in fees, including the millions J-M already paid the firm. Sheppard Mullin petitioned the Supreme Court, which granted review and issued a 41-page opinion and dissent.

The Supreme Court held that the whole Sheppard Mullin-J-M contract was unenforceable because the flawed conflict waiver violated public policy. The Supreme Court held that at the time it represented J-M, Sheppard Mullin represented an adverse party in that case, which the firm knew about but did not tell J-M. Hence, the general conflict waiver J-M agreed to was not “informed.” Sheppard Mullin’s representation of J-M’s adversary (South Tahoe), was a “present reality” and not a “future possibility” and should have been specifically disclosed. Hence, the Supreme Court vacated Sheppard Mullin’s attorneys’ fee award. Sheppard Mullin was therefore not entitled to the over $1 million in unpaid fees.

But what about the millions of dollars J-M already paid Sheppard Mullin? Should those fees be disgorged? Could Sheppard Mullin keep those fees based on a quantum meruit theory? The Supreme Court held that quantum meruit was not before the court, as it did not have a robust-enough factual record on the fees J-M already paid, and remanded to the trial court. The Supreme Court provided guidance to the trial court on the quantum meruit analysis. Attorneys may be entitled to quantum meruit fees even under the cloud of an unwaived or improperly waived conflict of interest, which is a case-specific inquiry that focuses on whether the flawed conflict waiver was willful, whether any value had been provided to the client, and the amount of harm to the client. The Court held that there is no categorical rule barring quantum meruit fees when an unwaived or improperly waived conflict of interest exists. It depends on the circumstances.

Specifically: “When a law firm seeks fees in quantum meruit that it is unable to recover under the contract because it has breached an ethical duty to its client, the burden of proof on these or other factors lies with the firm. To be entitled to a measure of recovery, the firm must show that the violation was neither willful nor egregious, and it must show that its conduct was not so potentially damaging to the client as to warrant a complete denial of compensation. And before the trial court may award compensation, it must be satisfied that the award does not undermine incentives for compliance with the Rules of Professional Conduct. For this reason, at least absent exceptional circumstances, the contractual fee will not serve as an appropriate measure of quantum meruit recovery. . .  Although the law firm may be entitled to some compensation for its work, its ethical breach will ordinarily require it to relinquish some or all of the profits for which it negotiated.” (Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 2018 Cal. LEXIS 6399, *56.)

The trial court, therefore, should decide if such legal fees should be completely or partially forfeited.

The lesson here is straightforward and applies to all jurisdictions, not just California: conflict of interest waivers are very important. They should be as clear and specific as possible so that the client knows exactly what it is waiving. Blanket, general, waivers can be insufficient, creating the risk of attorneys losing millions of dollars in legal fees.

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