In This Issue:

• Payment of Costs Doesn’t Preclude Unfair Trade Practices Claim Against Insurer
• Policy Doesn’t Contain Shared Limits, so Insurer Must Pay Additional $3M
• Insurer Sues to Avoid Coverage for P.F. Chang’s Data Breach
• Insurer’s Communications With Its Reinsurers Not Protected From Discovery

Payment of Costs Doesn’t Preclude Unfair Trade Practices Claim Against Insurer

Why it matters
In a significant victory for policyholders, Massachusetts’ highest court ruled that an insured had a valid unfair trade practices claim against an insurer for breaching its duty to defend – even though the insurer subsequently reimbursed the insured for its defense costs. Facing claims for cleanup of contamination from a state environmental regulator, the insured tendered the claims to its insurer for defense. The insurer denied the claims, and the policyholder sued, alleging breach of contract and violation of the state’s unfair trade practices statute. The trial court found the insurer had breached its duty to defend. The insurer thereafter reimbursed the insured for costs it had incurred in defending the claims. The insurer then argued that its payment mooted the insured’s unfair trade practices claim. The state’s highest court disagreed, holding that the unfair trade practices statute was intended to be a deterrent. Allowing insurers to engage in improper conduct knowing they could avoid statutory liability as long as they ultimately reimbursed policyholders for expenses, the court opined, would be contrary to the statute’s intent.

Detailed Discussion
Auto Flat Car Crushers operates a Massachusetts-based vehicle crushing service. In February 2004, Auto Flat was hired to remove 600 vehicles from a salvage yard, a process that included detaching the cars’ fuel tanks and emptying the contents into drums.

Later that year, Auto Flat received a letter from the state’s Department of Environmental Protection (DEP) informing Auto Flat that a release of hazardous materials had occurred during the job. The letter required Auto Flat to take remedial actions.

Auto Flat maintained a garage insurance policy with Hanover Insurance Company, and sought defense and indemnification for DEP’s claims. Hanover denied coverage based on a pollution exclusion and other asserted defenses. Auto Flat then sued, seeking a declaration that Hanover had a duty to defend and indemnify and had breached its duties. Auto Flat later amended its complaint to add a claim under Massachusetts G.L. c. 93A, Section 11, the state’s unfair trade practices statute, based on Hanover’s refusal to defend the DEP claims.

The trial court granted partial summary judgment on Auto Flat’s duty to defend claim. Thereafter, Hanover sent the insured a check for expenses plus accrued interest (six years after the initial request for coverage). Auto Flat accepted the payment without prejudice to pursue its Section 11 claim.

The trial court then granted summary judgment to Hanover on the breach of contract and indemnification claims, finding that Auto Flat had been made whole by Hanover’s payment. However, the court did allow Auto Flat’s Section 11 claim to move forward. Hanover appealed, arguing that, by paying Auto Flat’s damages, interest, and legal expenses, Auto Flat had no actual damages, which are required for recovery under Section 11.

The Massachusetts Supreme Judicial Court first looked to the statute itself. “To be successful, a plaintiff bringing a claim under Section 11 must establish (1) that the defendant engaged in an unfair method of competition or committed an unfair or deceptive act or practice, as defined by [the statute or regulations]; (2) a loss of money or property suffered as a result; and (3) a causal connection between the loss suffered and the defendant’s unfair or deceptive method, act, or practice.”

Focusing on the only disputed element – the second requirement – the court determined that the statute does not require a showing of uncompensated loss. A concrete monetary or property loss is necessary to support a Section 11 claim, the court wrote, but “the plain language of Section 11 and cases interpreting it, as well as the policy underlying [the statute], make clear that a plaintiff who can establish that it has sustained such concrete monetary or property loss will have satisfied the actual damages element of Section 11, without having to prove that the loss remains uncompensated.”

Acceptance of payment may affect the continued viability of a plaintiff’s contract claims, the court acknowledged, but “[e]ven if the amount tendered represents the full amount recoverable as actual damages under [the statute], as Auto Flat concedes is the case here, that alone does not preclude a claim under the statute.”

“Where a plaintiff can demonstrate that it has suffered actual damages, i.e., a concrete loss of money or property, Section 11 does not impose a further requirement that the plaintiff establish outstanding uncompensated loss,” the court concluded. The compensation already paid by Hanover can be treated as an offset against any additional damages awarded rather than as a bar to recovery, the court added, citing to similar decisions from California and Illinois.

The court emphasized the policy behind the statute, which was “intended to deter misconduct while providing a remedy for those who have suffered a specific harm as a result of a defendant’s prohibited conduct.” Barring claims because of reimbursement would undercut the deterrent purpose of the statute, the court opined. “Under Hanover’s interpretation, Section 11 would lose its force; insurers would be free to engage in dilatory conduct, arguably in violation of the [statute], with the knowledge that, so long as they ultimately reimbursed claimants for their resulting expenses, statutory liability could be avoided.”

The court also rejected Hanover’s contention that Section 11 requires an actual judgment to establish the amount of damages incurred. The statutory language provides that, in certain circumstances, a judgment may constitute an appropriate basis for multiplication of damages as a penalty, the court explained, but the absence of a judgment does not preclude recovery under the statute.

To read the opinion in Auto Flat Car Crushers, Inc. v. Hanover Insurance Co., click here.

Policy Doesn’t Contain Shared Limits, so Insurer Must Pay Additional $3M

Why it matters
The West Virginia Supreme Court recently determined that a malpractice insurer must pay an additional $3 million toward pelvic mesh implants claims where the policy at issue did not provide that limits available to the insured surgeon must be shared with his former medical practice. In so holding, the court relied on policy language indicating that the limits available to the surgeon applied only to the surgeon, and that the medical practice had separate limits available under the policy. As demonstrated by this case, policyholders would be well-advised to review their policy language carefully (even the boilerplate) to ensure that it provides for the coverage they think they are purchasing.

Detailed Discussion
Twenty-three former patients sued Dr. Mitchell E. Nutt, a surgeon who implanted transvaginal mesh devices in the plaintiffs in 2006 and 2007. They also asserted vicarious liability claims against United Health Professionals (UHP), the medical corporation where Dr. Nutt worked at the time the surgeries were performed.

The parties reached a global settlement in 2011 under which UHP’s insurer, West Virginia Mutual Insurance Company, paid $3 million pursuant to “tail” coverage in an extended reporting endorsement that UHP purchased when Dr. Nutt left UHP in 2008. The endorsement provided for $1 million per covered medical incident, with a $3 million annual aggregate limit.

Not resolved in the global settlement was plaintiffs’ assertion that separate coverage was available under the West Virginia Mutual policy for the claims against UHP. Plaintiffs filed a declaratory judgment action against West Virginia Mutual seeking additional proceeds under the policy. In defense, West Virginia Mutual asserted that UHP and Dr. Nutt shared the $3 million aggregate limit under the policy. And if the court found otherwise, West Virginia Mutual asserted, then a mutual mistake had occurred in the underwriting process that warranted an equitable reformation of the policy.

The West Virginia Supreme Court rejected both of West Virginia Mutual’s arguments. As to the single-limit argument, the court looked to “plain and unambiguous” policy language providing that “[t]he limit of insurance specified in the policy declarations for each insured as the ‘annual aggregate’ is the total limit of the Company’s liability for damages for that insured resulting from all covered medical incident(s) during the policy period” (emphasis added). Moreover, the court noted, UHP had requested “separate” policy limits in the amount of “$1,000,000/$3,000,000.” Thus, the court opined, “there is nothing in Dr. Nutt’s tail coverage to indicate that UHP would share in his separate limits of coverage.”

In addition, the court recognized, “Dr. Nutt’s extended reporting endorsement provides that he will be covered for ‘any medical incident which occurred on or after the retroactive date’ and during his employment with UHP. . . . The extended reporting endorsement further reflects that Dr. Nutt is the sole insured thereunder, providing as follows: ‘Name: Mitchell E. Nutt, MD; Retroactive Date: 10/28/2002; Each Medical Incident: $1,000,000; Aggregate: $3,000,000.’”

“Indisputably, no other insured is listed on this extended reporting endorsement as sharing in Dr. Nutt’s limits, or otherwise,” the court opined, noting that prior policies issued by West Virginia Mutual for UHP included both separate limits and shared limits for various insureds. “Critically, there is no such sharing designation in Dr. Nutt’s tail coverage and no sharing designation for UHP in the 2010 Policy.”

As to the claim for reformation, the court held that if mistakes were made in the underwriting process, they were attributable to West Virginia Mutual, not UHP. Because clear policy language must be enforced as written, and because West Virginia Mutual clearly was a “sophisticated party” as to insurance matters, there was no legitimate basis for rewriting the policy.

Thus, the court held, the policy was subject to two separate $3 million aggregate limits – one for Dr. Nutt and another for UHP.

To read the opinion in West Virginia Mutual Insurance Co. v. Adkins, click here.

Insurer Sues to Avoid Coverage for P.F. Chang’s Data Breach

Why it matters
Demonstrating the challenges facing policyholders seeking coverage for losses arising from data breaches under commercial general liability (CGL) policies, Travelers, the CGL insurer for P.F. Chang’s China Bistro, recently filed an action in Connecticut federal court seeking a declaratory judgment that it owes no coverage to the national restaurant chain for tort claims arising from a recent data breach. Over a 10-month period, hackers were able to access point-of-sale payment systems at 33 of P.F. Chang’s restaurant locations. After P.F. Chang’s disclosed the breach in June, plaintiffs in several states filed putative class actions. Travelers’ complaint asserts that the underlying lawsuits do not trigger coverage under its policies and, in any event, coverage is expressly precluded pursuant to a specific exclusion for violations of “consumer financial protection law.” Travelers’ response to P.F. Chang’s data breach serves as a reminder to policyholders that coverage available for data breaches may be limited under CGL policies, and that they would be prudent to explore their options for obtaining specialized cyber risk coverage.

Detailed Discussion
On June 13, 2014, P.F. Chang’s confirmed that it had suffered a major data breach dating back approximately 10 months. First tipped off to the breach by the U.S. Secret Service, the restaurant chain said its point-of-sale systems were hacked, allowing access to customers’ credit and debit card data. Three different class actions were filed not long after, alleging that P.F. Chang’s violated its obligations to abide by best practices and industry standards to protect customers’ personal information, even in light of other high-profile data breaches.

P.F. Chang’s provided notice of the lawsuits to Travelers Indemnity Company, its CGL insurer. Travelers responded with its own lawsuit, seeking a declaration that it is not obligated to defend or indemnify P.F. Chang’s under its 2013 and 2014 CGL policies.

Travelers asserts that the lawsuits do not trigger coverage under its policies because covered “property damage” does not include loss or damage to “electronic media and records.” Likewise, no covered “bodily injury” or “personal and advertising injury” were alleged in the underlying complaints. In sum, Travelers asserts, “[t]he Lawsuits fail to trigger coverage under the Policies because they do not allege ‘bodily injury’ or ‘property damage’ caused by an ‘occurrence,’ nor do they allege ‘advertising injury’ or ‘personal injury’ as the Policies expressly and unambiguously define those terms.”

Alternatively, Travelers asserts that, even if coverage was triggered, an exclusion in its policies applicable to violation of consumer financial protection laws applies. According to Travelers, its policies define “consumer financial protection laws” to include the Fair Credit Reporting Act and any of its amendments, including the Fair and Accurate Credit Transactions Act, California’s Song-Beverly Credit Card Act, and “[a]ny other law or regulation that restricts or prohibits the collection, dissemination, transmissions, distribution or use of ‘consumer financial identity information.’”

“Consumer financial identity information” encompasses “any of the following information for a person that is used or collected for the purpose of serving as a factor in establishing such person’s eligibility for personal credit, insurance or employment, or for the purpose of conducting a business transaction: (a) Part or all of the account number, the expiration date or the balance of any credit, debit, bank or other financial account.”

Finally, Travelers asserts that its policies are subject to a self-insured retention of $250,000 that P.F. Chang’s has yet to exhaust.

To read the complaint in The Travelers Indemnity Co. of Connecticut v. P.F. Chang’s China Bistro, Inc., click here.

Insurer’s Communications With Its Reinsurers Not Protected From Discovery

Why it matters
Insurers regularly assert blanket protections over discovery of communications with their reinsurers. In an important development for policyholders, a federal court in Iowa recently held that such communications either were not protected or that the protections had been waived. Specifically, an insurer asserted that case updates, strategy reports, and similar documents it provided to its reinsurers in connection with underlying litigation were protected, in whole or in part, by the attorney work product doctrine and the attorney-client privilege. The court disagreed. As to the attorney work product doctrine, the court held that the communications were not protected because they were created in the ordinary course of business, not in anticipation of litigation. As to the attorney-client privilege, the court held that the insurer waived privilege when it disclosed the communications to its reinsurers. Moreover, there was no common interest between the insurer and its reinsurers that might otherwise preclude waiver, the court held, because a business relationship between those parties, without more, does not trigger the common interest doctrine. For the reasons cited by this court, policyholders litigating against their insurers should consider seeking discovery of communications with reinsurers. They also should consider applicable state law to determine the likelihood of successfully challenging their insurers’ inevitable privilege assertions.

Detailed Discussion
When Vantus Bank in Sioux City, Iowa failed, the Federal Deposit Insurance Corporation (FDIC) took over as receiver and filed a lawsuit against the bank’s former directors and officers alleging negligence, gross negligence, and breach of fiduciary duty. Progressive Casualty Insurance, the bank’s directors and officers liability insurer, denied coverage for losses arising from the failure and then filed a declaratory judgment action seeking to avoid its coverage obligations.

During the course of discovery, the FDIC sought certain communications between Progressive and its reinsurers, including regular case updates provided pursuant to reinsurance agreements and additional communications requested by the reinsurers relating to case history and posture, coverage and liability assessments, amounts paid and reserved, and plans for future case handling. The magistrate judge assigned to the case ordered Progressive to produce the communications, but allowed it to redact certain information based on the attorney work product doctrine and attorney-client privilege. The FDIC objected, arguing that the communications either never were protected, or that Progressive had waived the protections by having shared them with its reinsurers (and its reinsurance broker, as conduit to its reinsurers).

The court agreed with the FDIC. With respect to work product, the court rejected Progressive’s contention that its communications with its reinsurers were prepared in anticipation of litigation. “Where the business of Progressive is insurance against risks, and the business of reinsurers is reinsurance of risk policies . . . the purported work-product documents, involving communications between Progressive and its reinsurers, were ‘prepared in the ordinary course of business,’ not ‘in anticipation of litigation,’” the court opined. “[T]he documents at issue were in the nature of business planning documents; neither Progressive nor the reinsurers were involved in giving legal advice or in mapping litigation strategy in any individual case.”

The court further declined to apply piecemeal work product protection, noting Progressive’s concession that the portions of the communications arguably containing attorney mental impressions would have been prepared in any event pursuant to the reinsurance agreements and/or in response to specific requests from the reinsurers.

As to attorney-client privilege, the court rejected Progressive’s argument that it shared a “common interest” with its reinsurers that precluded waiver because the requisite identity of legal interests between Progressive and its reinsurers did not exist. Progressive “and its reinsurers do not have a common legal interest merely because the reinsurers have an obligation to pay Progressive’s losses,” the court noted. “[R]ather the relationship between Progressive and its reinsurers and reinsurance broker is commercial and financial.”

The court further rejected Progressive’s argument that an authorization in the reinsurance agreement for its reinsurers to participate in the underlying litigation with Progressive established “a cooperative and common enterprise towards an identical legal strategy.” Indeed, the court opined, “Progressive failed to establish that any exchange of the documents in question was in furtherance of a common legal interest, or was a matter of legal necessity, rather than in furtherance of Progressive’s commercial or financial relationship with its reinsurers, even if some of the documents were purportedly prepared by [the reinsurer’s] claims attorneys.”

Overruling all of Progressive’s objections, the court ordered Progressive to provide unredacted versions of its communications with its reinsurers to the FDIC.

To read the opinion in Progressive Casualty Insurance Co. v. Federal Deposit Insurance Corporation, click here.