Insurance Recovery Law -- Oct 29, 2013

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In This Issue:

California Insurance Dreamin’

Why it matters: The Swanson decision establishes a clear boundary line for an insurer’s Cumis obligations. Just because a conflict existed at one point in the litigation and the insurer paid for independent counsel does not foreclose the possibility that an insurer can withdraw its reservation of rights, thereby eliminating the conflict, and thereby end its obligation to pay for Cumis counsel. The decision, however, can create problems for policyholders, who may find their choice of counsel supplanted midstream in litigation.

Detailed Discussion
Courts in California have been busy recently in the area of insurance recovery, with all four cases discussed in this edition of the newsletter decided in the Golden State.

From the limitations on an insurer’s obligations to provide Cumis counsel to the issue of whether insurers have a duty to settle a suit that will likely top the policy range, both state and federal courts tackled important issues discussed in more detail below.

Cumis Obligation Ends With Insurer’s Withdrawal of Reservation of Rights

Why it matters: Cumis counsel is intended to protect insureds in situations where the insurer creates a conflict of interest by reserving its rights to deny indemnification on specific coverage issues. When the ethical bar to dual representation no longer exists, neither does the insurer’s duty to provide and pay for Cumis counsel, the court concluded. “We are not aware of any authority, and Swanson cites none, holding that once an insurer provides and pays for Cumis counsel, the insurer cannot take over control of the litigation and cease paying Cumis counsel if the disqualifying conflict ceases to exist later in the litigation,” the panel wrote.

Detailed Discussion
The California Court of Appeal held that an insurer does not have to continue to pay for the policyholder’s independent counsel where it withdraws the reservation of rights that created the conflict in the first instance.

Terry Ann Swanson’s neighbors sued for property damage caused when her retaining wall allegedly failed. Swanson retained her personal attorney to defend her in the suit.

Swanson requested coverage from State Farm under a homeowner’s policy under which the insurer promised to “provide a defense at our expense by counsel of our choice.” State Farm agreed to defend the suit and accepted Swanson’s choice of Cumis counsel under a reservation of rights, including the right to withdraw any policy defenses.

About six months later State Farm amended its original reservation of rights and withdrew certain policy defenses, resulting in the elimination of the Cumis-triggering conflict between the insurer and Swanson. State Farm then informed Swanson it had chosen and retained a new attorney to “take over the defense” of the lawsuit, noting that it was no longer obligated to pay for independent counsel. Swanson, however, did not end her engagement with independent counsel; instead, State Farm’s counsel was added as co-counsel to her defense.

Swanson later sued State Farm for breach of contract, seeking the attorneys’ fees she incurred following State Farm’s withdrawal of its reservation of rights. She argued that when the parties reached an agreement about payment of her independent counsel’s hourly rates, they effectively created a modified insurance agreement. She conceded, however, that State Farm’s withdrawal of the Cumis-triggering reservation of rights ended any potential conflict between the parties.

Affirming summary judgment for State Farm and rejecting Swanson’s argument that the insurance contract had been modified by an agreement on rates, the court said the insurer had the right to take control of the litigation with an attorney of its choosing and to cease paying Blasco after it withdrew its reservation of rights.

An insurer has a duty to provide Cumis counsel to its insured only while the insurer maintains a Cumis-triggering reservation of rights, the panel explained. “Thus, when State Farm withdrew its Cumis-triggering reservation of rights, it no longer had an obligation to allow Swanson to control the litigation or an obligation to pay the attorneys’ fees of Swanson’s Cumis counsel.”

To read the decision in Swanson v. State Farm General Ins. Co., click here.

Limited Self-Insured Retention Leads to Broader Defense Obligation for Carrier, But to Woes for Policyholder

Why it matters: This case holds something of a mixed blessing. On the one hand, the Court of Appeal rendered a decision that, on its face, appears to be a win for policyholders. Specifically, the court [missing word(s)] that where, as here, the policyholder’s self-insured retention (“SIR”) was limited to covered “damages,” it did not apply to limit the insurer’s duty to defend. In other words, a liability carrier with this particular SIR was found to have a primary defense obligation. Good news, right? Generally, yes.

Detailed Discussion
But not so fast. Here the policyholder (a developer) was also an additional insured on another policy issued to one of its subcontractors, and that carrier – having picked up the insured’s defense costs – turned around and sued the policyholder’s carrier to share in the cost of defense. The appellate court held that the developer’s carrier was obligated to share in the costs of defense, no doubt defeating the entire purpose of naming the developer as an additional insured on the subcontractor’s policy in the first instance (a point the court did not discuss).

Developer D.R. Horton hired Ebensteiner Company to grade a tract of land as part of a residential construction project. Ebensteiner agreed to indemnify Horton against liability. The grading resulted in multiple landslides and tension cracks in the land as well as physical damage to existing homes in the area, and led to multiple suits against Horton and Ebensteiner, among others, for property damage.

D.R. Horton was insured by Admiral Insurance Co. and was also an additional insured under Ebensteiner’s policy issued by American Safety Indemnity Co. (“ASIC”). D.R. Horton tendered its defense claims to ASIC, which, in order to end D.R. Horton’s bad faith lawsuit, ultimately agreed to pay defense costs. ASIC then sued Admiral for subrogation, indemnity and contribution for the costs of defending D.R. Horton and related entities. Following a bench trial, ASIC was awarded $1.9 million, and Admiral appealed.

Admiral argued that the SIR in the D.R. Horton policy applied and therefore it had no defense obligation and no duty to share the cost of defense with ASIC, but the California Court of Appeal disagreed. Reading the policy as a whole, the court noted that the Admiral policy identified it as providing primary coverage to insureds. “To require the exhaustion of a self-insured retention before an insurer will have a duty to defend would not ensure that the defense obligation rests on the insurer receiving premiums for that risk, but instead would result in no insurer providing a defense prior to exhaustion.”

The Admiral policy “does not expressly and unambiguously make its duty to defend the Horton entities subject to the SIR. Rather, the SIR endorsements expressly provided to the contrary: “‘Retained Limit is the amount shown below, which you are obligated to pay, and only includes damages otherwise payable under this policy.’” Further, the exhaustion of a SIR would “be contrary to the reasonable expectations of the insured to be provided an immediate defense in connection with its primary coverage,” the panel added.

Accordingly, the Court of Appeal affirmed the judgment in favor of ASIC.

To read the opinion in American Safety Indemnity Co. v. Admiral Ins. Co., click here.

Coverage Battle Over Claims for Invasion of Privacy Continues; Policyholders Prevail

Why it matters: This decision is particularly relevant for those insureds who routinely handle confidential consumer data, which in this instance is medical records. As exposure for breach of confidentiality and invasion of privacy grows, carriers are increasingly looking for ways to avoid covering their insureds. In this instance, however, the carrier’s exclusion did not carry the day.

Detailed Discussion
Stanford Hospital and Clinics and Corcino & Associates were sued in two putative class actions. According to the complaints, Stanford provided Corcino with medical information from 20,000 patients to give to a job applicant, who was supposed to use the data to perform tasks as a test of “employment suitability.” Instead, the applicant posted all of the information – patient names, medical records, hospital account numbers, admission/discharge dates, diagnosis codes, and billing charges – on a tutorial website and requested help in converting the format of the data.

After the data breach was discovered, two class actions were filed by patients. One of the complaints alleged violations of the constitutional right of privacy and common-law privacy rights as well as violations of the Confidentiality of Medical Information Act, or CMIA. The second suit also asserted claims under the CMIA, as well as a second statutory injury.

Stanford sought defense coverage from its insurer, Hartford Casualty Insurance Co., under a comprehensive general liability policy. Hartford accepted defense but reserved its rights and filed a declaratory relief action. Hartford relied on an exclusion that precluded coverage for personal and advertising injury “[a]rising out of the violation of a person’s right to privacy created by any state or federal act.” The exclusion contained a give-back, however, for “liability for damages that the insured would have in absence of such state or federal act.”

The court held the exclusion did not apply. The CMIA, the court held, merely codified a long-existing right in which “medical records have been considered private and confidential for well over 100 years at common law.” “Since at least 1931, California has recognized both a constitutional privacy right and a common law tort cause of action for violations of the right to privacy,” the court said. The constitutional right to privacy that had been previously found to impliedly exist was made express in 1972, when voters approved a ballot initiative to amend the Constitution to expressly include an “inalienable” right of privacy. The CMIA specifically was “intended not to create new privacy rights, but rather to codify existing rights and create effective remedies that would encourage affected individuals to enforce them,” with the potential for statutory damages in addition to the traditional tort damages available for privacy breaches.

Hartford was also on the hook for indemnification of the penalties, the court held. The CMIA permits injured individuals to recover damages for breach of an established privacy right, and those damages fell squarely within Hartford’s coverage. “If Hartford had intended to include a specific distinction in its exclusion, it could have done so when drafting its policy.”

To read the decision in Hartford Casualty Ins. Co. v. Corcino & Associates, click here.

California Insurers Have No Duty to Settle Cases in Excess of Policy Limits, Appellate Court Holds

Why it matters: If you represent a policyholder or the plaintiff in an underlying action, make sure that a policy-limits demand is made in order to trigger the insurer’s duty to accept reasonable settlement offers and settle within limits. In this case that was not done, and the appellate court concluded that an insurer had no duty to initiate settlement discussions. Further, because the injured plaintiff had neither attempted to open such discussions nor made a policy-limits demand, there was no bad faith exposure either.

Detailed Discussion
The underlying case arose out of an automobile accident caused by the insured, who ran a red light. Within days liability was clear, and Mercury Insurance Company, which insured the at-fault driver, contacted the injured parties to accept liability and caution that a limits issue might be in play. One of the injured parties filed suit and instructed his lawyer that he wanted to settle the case as quickly as possible.

Mercury offered the policy limits ($100,000) almost one year after the accident. Reid, one of the injured parties, rejected the offer, went to trial, and was awarded a $5.9 million verdict. Seeking to recover the multimillion-dollar verdict, Reid – pursuant to an assignment of rights from the insured – sued Mercury alleging breach of the covenant of good faith and fair dealing and breach of contract for failure to make a good faith effort to settle the case.

Mercury moved for summary judgment, which the trial court granted. The Court of Appeal affirmed, holding that (1) an insurer’s duty to settle is “not precipitated solely by the likelihood of an excess judgment” and (2) absent a settlement demand or other “manifestation the injured party is interested in settlement,” there is no bad faith exposure.

The Court of Appeal first addressed the specific facts of the case and held that Reid failed to make a settlement demand and presented no evidence for a reasonable fact finder to infer that Mercury knew or should have known he was interested in a settlement. “For bad faith liability to attach to an insurer’s failure to pursue settlement discussions, in a case where the insured is exposed to a judgment beyond policy limits, there must be, at a minimum, some evidence either that the injured party has communicated to the insurer an interest in settlement, or some other circumstance demonstrating the insurer knew that settlement within policy limits could feasibly be negotiated,” the panel wrote. “In the absence of such evidence, or evidence the insurer by its conduct has actively foreclosed the possibility of settlement, there is no ‘opportunity to settle’ that an insurer may be taxed with ignoring.”

The court then turned to Insurance Code §790.03(h)(5), which defines certain practices as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance, including “[n]ot attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear.” But the Insurance Code does not define the circumstances that give rise to a breach of the provision, the court noted, “and nothing in the statute requires or suggests the conclusion that an insurer’s failure to initiate settlement negotiations, in the absence of any expression of interest in settlement from the claimant, may give rise to a bad faith claim.”

The court affirmed the trial court’s grant of summary judgment in Mercury’s favor.

To read the decision in Reid v. Mercury Insurance Co., click here.

Topics:  Duty to Defend, Duty to Settle, Recovery Laws, Reservation of Rights, Withdrawal

Published In: Civil Procedure Updates, General Business Updates, Insurance Updates, Privacy Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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