Insurance Recovery Law - April 2015

by Manatt, Phelps & Phillips, LLP
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In This Issue:

  • Legal Issues Not Proper Expert Testimony
  • California Appellate Panel Holds Exclusion Bars Coverage For Buckyballs IP Dispute
  • Indemnification Required Because Settlement Payment Not a “Penalty”
  • Pennsylvania Court Rules Asbestos Exclusion Ambiguous And Unenforceable

Legal Issues Not Proper Expert Testimony

Why it matters: As a good reminder concerning the boundaries for admissibility of expert opinions, a federal court in Texas recently granted a policyholder’s motion to strike an insurer’s proposed expert report. The insurer had designated as an expert an attorney with substantial insurance coverage experience, but no claims handling experience. The insurer’s primary coverage defenses were based on the policy’s “claims made” requirement and prior knowledge exclusion and the attorney purported to opine on custom and practice in the industry. In the report, the lawyer testified to insurance company practice with regard to notice, the legal standard for denying coverage in bad faith, application of the “eight corners” rule to the terms of the policy, and the relevance of extrinsic evidence. The court excluded the testimony based on the fact that the lawyer was merely an advocate, never having been employed as claims adjustor testifying about his actual experience. Thus, his opinions were based on legal analysis rather than from experiences in the insurance industry. The court concluded that the report improperly invaded the province of the jury and the court.

Detailed discussion: In 2012, Atrium Medical Center was sued in Texas state court by a married couple asserting that the husband suffered injuries and faces a terminal illness due to the failure to advise him of the results of a CT scan performed at Atrium.

Atrium notified its insurer Homeland Insurance Company (HIC) of the lawsuit and requested coverage. HIC denied coverage, arguing that it was not first made against Atrium during the relevant policy period and was excluded by the policy’s prior knowledge provision. Atrium then sued HIC in a declaratory action seeking an order that coverage was owed, and that the insurer’s denial of coverage constituted bad faith.

HIC designated Michael W. Huddleston, an experienced insurance coverage attorney as an expert witness in the case.

After his expert report was filed, Atrium moved to strike the report. Atrium contended that Huddleston’s report was full of inadmissible conclusions of law thereby usurping the roles of both the court and the jury.

HIC countered that Huddleston was an attorney with 30 years of experience in the insurance industry and that his opinions went solely to the issue of whether HIC’s decision to deny Atrium’s claim for coverage was reasonable, addressing mixed questions of fact and law.

Sitting in the role of gatekeeper, as instructed by the U.S. Supreme Court in Daubert v. Merrell Dow Pharmaceuticals (509 U.S. 579 (1993)), the court agreed with the policyholder.

“After considering the report of Huddleston, the Court finds that his report invades on the province of both the Court, in instructing the jury on the applicable law, and the jury in determining the facts to be applied to the law,” the court ruled. “To the extent Huddleston purports to offer expert testimony regarding customs and practices in the insurance industry, the Court finds that his expert report does not do that. Huddleston is an experienced insurance coverage attorney and advocate, and is not a claims adjustor or former claims adjustor. His report is clearly legally-based, and his opinions are not formed from his experiences in the insurance industry, but are formed from a legal analysis of his opinion of the applicable law.”

After striking the portions of the expert report as inadmissible “there is nothing remaining in Huddleston’s report that would assist the finder of fact in understanding the evidence or determining an issue of fact,” the court concluded, ordering the report struck in its entirety.

To read the order in Corinth Investor Holdings, LLC v. Evanston Insurance Co., click here.

California Appellate Panel Holds Exclusion Bars Coverage For Buckyballs IP Dispute

Why it matters: An appeal court in California let an insurer off the hook in a highly publicized intellectual property dispute over Buckyballs. The court held that the policy’s intellectual property exclusion applied broadly to include unfair competition claims arising from the alleged unauthorized use of a name or likeness, a violation of the right of publicity, the Lanham Act and California’s Unfair Competition Law. The estate of Buckminster Fuller—a designer and inventor known for creating the geodesic dome—sued the company behind “Buckyballs,” touted as the world’s most popular desk toy, “inspired and named after” Fuller. The product’s insurer declined to provide a defense based on an intellectual property exclusion in the applicable policy. Affirming a trial court, the appellate panel found the exclusion to be “conspicuous, plain, and clear,” and declined to adopt the argument that the policy did not apply to right of publicity claims even though it did not explicitly delineate all the types of intellectual property rights excluded in the clause. The court effectively ruled that a title to an exclusion or policy provision did not limit the otherwise clear import of the exclusion itself.

Detailed discussion: In 2012, the Estate of Buckminster Fuller sued Maxfield & Overton Holdings, LLC for unfair competition under both California’s Unfair Competition Law and the federal Lanham Act, invasion of privacy (appropriation of name and likeness), and unauthorized use of name and likeness based on Maxfield’s manufacture and distribution of products under various trademarks that capitalized on Fuller’s name and works, including the trademark “Buckyball.”

Maxfield tendered defense of the action to its insurer, Alterra Excess and Surplus Insurance Company. Alterra thereafter filed suit against both Maxfield and the Estate, seeking a declaration that its policy did not provide coverage for the underlying claims.

The Estate argued that the intellectual property exclusion must be construed against Alterra because it is “ambiguous and does not address Lanham Act/unfair competition claims.”

The trial court rendered judgment in favor of Alterra, finding it had no obligation to defend or indemnify Maxfield in the underlying action. The Estate appealed.

The court of appeal affirmed, holding that the policy’s intellectual property exclusion precluded coverage.

The policy provided coverage for “personal and advertising injury” but contained an exclusion for “Infringement of Copyright, Patent, Trademark or Trade Secret,” which stated: “‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your ‘advertisement.’ However, this exclusion does not apply to infringement, in your ‘advertisement,’ of copyright, trade dress or slogan.”

The court of appeal held that the exclusion met all necessary tests to satisfy the requirements of being plain, clear, and conspicuous. The exclusion appeared under the bold-faced heading “Exclusions,” with each separate exclusion given its own “bold-faced title,” the court noted, positioned in a place and printed in a form that would attract the reader’s attention.

The title of the exclusion did not limit the scope of its application, the court held—just because the title of the exclusion read “Infringement of Copyright, Patent, Trademark or Trade Secret” it could still reasonably be understood to apply generally to “intellectual property rights.” That the exclusion did not specifically address Lanham Act/unfair competition claims was not determinative, the court found.

The court quoted extensively from Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest (2011) 198 Cal.App.4th 781, a lawsuit brought by a model for unauthorized use of her image and likeness: “The right of publicity, like copyright, protects a form of intellectual property that society deems to have some social utility. Thus, the right of publicity is an intellectual property right, and right of publicity claims would be excluded from coverage under the intellectual property rights exclusion…. Aroa contends the intellectual property rights exclusion does not apply to right of publicity claims because the right of publicity is not specifically listed in the exclusion. We disagree. The exclusion applies when the injury arises out of ‘any violation of any intellectual property rights.’ Even if this language is interpreted narrowly against the insurer, it clearly applies to bar claims based on the right of publicity, as that right has been held to be an intellectual property right.”

The Alterra court found that reasoning dispositive, and dismissed an objection to the casual use of “intellectual property exclusion” or “IP exclusion” in referring to the exclusion. As a result, the court held that the “intellectual property exclusion” applied to bar coverage, and affirmed summary judgment for the insurer.

To read the opinion in Alterra Excess and Surplus Insurance Co. v. Estate of Buckminster Fuller, click here.

Indemnification Required Because Settlement Payment Not a “Penalty”

Why it matters: According to a divided Delaware Supreme Court, an insured’s payment of $9 million to settle underlying litigation was not a “penalty” and therefore required indemnification from the insurer. The insured settled two class action lawsuits brought for violations of a Louisiana statute and sought coverage from its insurer. The insurer refused, arguing that the settlement agreement fell under a policy exclusion for “fines, penalties or taxes,” which eliminated coverage. A trial court agreed but a majority of Delaware’s highest court reversed. The court ruled the underlying litigation was based on a Louisiana law that provided for statutory damages, not penalties: “Quite simply, in Louisiana, if the statute does not characterize the damage award entered as a ‘penalty,’ then it is not a ‘penalty’ under Louisiana law,” the court held, citing a Louisiana appeals court decision for support. The dissent took issue with the majority’s deference to the Louisiana court’s interpretation, contending that the trial court’s decision was properly based on a contract interpretation of the policy at issue.

Detailed discussion: CorVel Corporation owns and operates a preferred provider organization (PPO) network throughout the United States. Pursuant to Louisiana statute, CorVel received approval to operate its network in the state but was required to provide notice to medical providers when a discount rate on medical services was applied.

Companies that fail to comply with the notice requirement incur financial consequences. Specifically, La.R.S. Section 40:2203.1(G) states: “Failure to comply with the [notice provisions] of this Section shall subject a group purchaser to damages payable to the provider of double the fair market value of the medical services provided, but in no event less than the greater of fifty dollars per day of noncompliance or two thousand dollars, together with attorney fees to be determined by the court.”

Medical providers brought two class actions against CorVel in Louisiana state court based on violations of the statute. CorVel agreed to settle the litigation for $9 million, and assigned to the plaintiffs its rights under two policies issued by Homeland Insurance Company of New York and Executive Risk Specialty Insurance Company.

Homeland then filed an action against CorVel in Delaware court seeking declaratory relief, claiming that because of an exclusion for “penalties” the settlement was not a covered loss under the policy. The exclusion provided: “Loss shall not include: (1) fines, penalties or taxes; provided that (A) punitive damages shall not be deemed to constitute fines, penalties or taxes for any purpose herein….”

A trial court agreed with the insurer and CorVel appealed. The appellate court reversed.

While the case was pending before the state’s highest court, an important development emerged in the pretrial Louisiana case. Executive Risk had similarly objected to providing coverage based on a “penalty” exclusion and a trial court held that damages under La.R.S. Section 40:2203.1(G) are statutory damages, not penalties.

According to a Louisiana trial court, the insurance policy issued by Executive Risk to CorVel covered the settlement agreement and therefore, the insurer was responsible for the settlement payment. When an appellate panel in the state affirmed the ruling, Executive Risk settled the case.

Before the Delaware Supreme Court, CorVel pointed out that Louisiana courts, interpreting their own state statute, had determined the law did not constitute a penalty but awarded statutory damages. Homeland argued that the Delaware trial court’s opinion was soundly based in contract interpretation and how the policy at issue applied to the Louisiana statute.

Emphasizing the importance of comity, the court reversed summary judgment for the insurer and followed the lead of the Louisiana courts. “Where a foreign statute has been interpreted by courts of the state of its origin, such interpretation should be followed in other states where the statute is applied,” the majority wrote. “Pursuant to the doctrine of comity, the courts of a sister state should adopt the decision of the highest tribunal of the enacting state concerning construction of the statute.”

The Louisiana appellate court “considered the same Louisiana statute and analyzed almost identical insurance policy language as that involved in this case,” the court explained, adopting “its reasonable interpretation as our own. We find that La.R.S. Section 40.2203.1(G) provides for statutory damages, not penalties. Thus, we find that the amount CorVel paid to settle the Louisiana Litigation, including attorneys’ fees, is not excluded from the definition of ‘Loss’ by the insurance policy provision that excludes ‘penalties.’”

Louisiana law governed how the settlement should be characterized, the court added, and the trial court erred when it applied common law principles rather than Louisiana’s civil law. “Quite simply, in Louisiana, if the statute does not characterize the damage award entered as a ‘penalty,’ then it is not a ‘penalty’ under Louisiana law,” the majority wrote.

A dissenting opinion, while sharing the majority’s “desire to respect principles of comity” took the position that because insurance law is contractual in nature, the trial court had no need to look to Louisiana state law. Instead, the court properly considered how the statute should be categorized under the language of the policy itself, the dissent argued.

To read the opinion in CorVel Corporation v. Homeland Insurance Company of New York, click here.

Pennsylvania Court Rules Asbestos Exclusion Ambiguous And Unenforceable

Why it matters: In a victory for policyholders, a Pennsylvania federal court ruled that an asbestos exclusion was ambiguous as applied to the maker and supplier of asbestos-containing refractory products and therefore unenforceable. The insured was sued in several asbestos-related lawsuits and sought coverage from its insurers. All but one of the insurers settled with the insured. The one hold-out insurer asserted that the asbestos exclusion in its policies barred coverage. The court disagreed and ruled in favor of coverage. The exclusion, barring coverage for excess net loss “arising out of asbestos,” was held to be ambiguous as to whether the term “asbestos” meant only the raw mineral, or whether it encompassed asbestos-containing products as well. The court did not decide which party proffered the more reasonable interpretation. Rather, because the exclusion’s terms were capable of being understood in more than one sense, the exclusion was ambiguous and therefore construed against the insurer, the drafter of the exclusion and in favor of coverage.

Detailed discussion: A manufacturer and supplier of refractory products, General Refractories Company (GRC) sued its carriers seeking a declaration of coverage for a host of asbestos-related lawsuits.

GRC’s insurers all settled, with one exception: Travelers Casualty and Surety Company. Travelers maintained that an Asbestos Exclusion in a 1985 policy eliminated coverage. The Exclusion provided: “It is agreed that this policy does not apply to the Excess Net Loss arising out of asbestos, including but not limited to bodily injury arising out of asbestosis or related diseases or to property damage.”

The issue before the court was, what does “arising out of asbestos” mean? GRC argued that the exclusion referred to asbestos in its pure mineral form, in contrast to asbestos contained in products such as those GRC sold. On the other hand, Travelers argued that the exclusion should be read broadly to exclude asbestos-related claims, period, regardless of whether the claims are based on exposure to asbestos as a raw mineral or asbestos-containing products.

The court, applying Pennsylvania law, ruled that the exclusion is ambiguous and thus construed it against Travelers, the drafter of the exclusion, and in favor of coverage. The court noted that dictionaries define “asbestos” in its mineral form.

In addition, the court was persuaded by evidence that other insurers from the late 1970s to 1985 used exclusions that distinguished between asbestos and asbestos-containing products or materials. Indeed, at that time Travelers itself was issuing policies to other policyholders containing asbestos exclusions that expressly mentioned “asbestos . . . contained in a product.”

Finally, the court was persuaded by other extrinsic evidence that, during the same time period, the insurance industry used the terms “asbestos” and “asbestos-containing products” with distinct, specialized meanings. The court observed: “Travelers chose not to define ‘asbestos’ in the policies sold to GRC. Also, more precise, broader exclusionary language could have been but was not used. On these facts, it is fair to interpret ‘asbestos’ in favor of coverage for the policyholder, GRC.”

At the one-day bench trial held on the applicability of the Exclusion, Travelers contended that it broadly covered any and all types of asbestos-related injuries, from those arising out of mining, milling, or manufacturing raw asbestos, or from exposure to other finished products that contained only some of the mineral. “It’s all the same stuff because the harm is the fiber,” Travelers told the court.

Refuting Travelers’ position that the Exclusion was subject to only one reasonable interpretation, GRC countered that from the late 1970s to 1985, the phrase “arising out of asbestos” did not mean the same thing as “arising out of asbestos-containing products.”

GRC asserted that the word “asbestos” simply meant the mineral form. GRC did not make raw mineral asbestos products, the company added, so the policy provided coverage for the underlying lawsuits that were for bodily injuries allegedly resulting from exposure to asbestos-containing products—not the mineral itself.

To support its argument distinguishing “arising out of asbestos” from “arising out of asbestos-containing products,” GRC presented evidence of policies with comparable exclusions and testimony about industry practices during the relevant time period.

The court agreed with the insured, concluding that the Asbestos Exclusion was ambiguous and must therefore be construed in favor of GRC.

Pennsylvania law requires that exclusions be strictly and narrowly interpreted to favor coverage for the insured, the court ruled, and viewed through such a lens, “asbestos” and “arising out of asbestos” are “used, respectively, as a noun and a verbal noun-phrase modifying ‘Excess Net Loss.’ In this use, ‘asbestos’ is commonly defined to mean a physical substance, a mineral.”

The court also stated that “As between Travelers and GRC, which proffers the more reasonable interpretation of the Asbestos Exclusion is not decided here. It is ruled only that GRC’s interpretation of ‘arising out of asbestos’ is consistent with the plain meaning of the written policy terms and common English usage. That is, GRC’s interpretation is objectively reasonable. Travelers has not met its burden of showing that GRC’s interpretation is not reasonable. Because the exclusionary terms are reasonably capable of being understood in more than one sense, the Exclusion is ambiguous.”

Travelers chose not to define “asbestos” in the GRC policies, the court added. “Also, more precise, broader exclusionary language could have been but was not used. On these facts, it is fair to interpret ‘asbestos’ in favor of coverage for the policyholder, GRC.”

To read the opinion in General Refractories Company v. First State Insurance Co., click here.

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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JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

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  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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