Insurance Recovery Law -- May 16, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

Prepare For A Storm of Lawsuits

As a result of Superstorm Sandy last October, businesses were shuttered and entire segments of the local economies in New York, New Jersey and Connecticut ground to a halt. Some businesses were forced to relocate temporarily to maintain what they could of their revenue. In all, between property damage and lost income, businesses lost billions.

In the wake of the storm, policyholders turned to their insurers for coverage for property damage, business interruption losses and more. Insurance policies provide for a period of claims adjustment – claims are made and investigated. That process generally is running its course, and in many instances insurers now are refusing to pay the full extent of an insured’s losses or even denying coverage altogether. As a result, we are at the crest of a wave of Sandy-related insurance coverage lawsuits.

Most litigation likely will focus on the application of policy exclusions, both as a factual and legal matter, and proof of loss. For example, if flood insurance was not purchased, insurers may argue that there is no coverage, even though certain coverage may well apply. Also, proof of lost income can be difficult and disputed, because the issue is to some extent inherently speculative: what income would have been received but for Sandy. Both policy interpretation and proof of loss challenges can be addressed, but strategy must be carefully evaluated in the pre-litigation period in view of each insured’s particular facts and policy language.

Policyholders also need to be keenly aware of the time limitations imposed by their policy, including by when a lawsuit must be filed. These time limits generally are substantially less than the statute of limitations for a breach of contract action, which varies from state to state. If an insurer offers to extend the policy’s time periods, the policyholder must get the promise clearly and in writing. Time limitation clauses can be challenged, but that issue can be won or lost – better to comply with the limits in the first instance and focus the litigation on the core issues.

Why it matters: How a policyholder handles its coverage claim and what it says to its insurer during the adjustment process can have a substantial impact on the recovery. Communications should be written to the extent possible, and oral communications should be witnessed. As claims make their way to courts, insurers will look for technical arguments to avoid coverage, based both on policy language and the facts, including a policyholder’s statements during the claim adjustment process. If litigation proves necessary, the policyholder then will be in the best possible position.

To Ensure Coverage, Read Policy Carefully

In an otherwise seemingly successful insurance coverage action, UnitedHealth Group was denied liability coverage under one excess insurance policy based on the failure to deliver a notice of claim to the precise address specified in the insurance policy.

UnitedHealth faced substantial claims concerning, among other things, allegedly inadequate health insurance reimbursements, which it settled for $350 million. UnitedHealth sought coverage from ten primary and excess insurers. The coverage case has been litigated for years and involves many issues, but one aspect of this most recent decision carries a cautionary tale for policyholders. One of UnitedHealth’s excess insurers, National Union Fire Insurance Co., successfully moved for summary judgment based on the fact that UnitedHealth did not provide notice of its claim to the correct address within National Union.

Adequacy of notice is a frequent issue in insurance coverage litigation. The vast majority of such cases involve the timeliness of notice. Some involve the adequacy of the notice’s content. This case, however, involved UnitedHealth’s failure to give notice to National Union at an address specified in the insurance policy.

The U.S. District Court for the District of Minnesota held that literal compliance was not required, only substantial compliance, but that UnitedHealth failed to meet that standard: “substantial compliance requires compliance that is substantial,” and providing notice to a National Union representative does not constitute substantial compliance with the policy’s requirement that notice be provided to the Claims Department at a specific address.

To read the order in UnitedHealth Group Inc. v. Columbia Casualty Co., click here.

Why it matters: UnitedHealth learned a hard lesson: insureds should make every effort to comply with an insurance policy’s notice provisions. The failure to do so may be defensible in a given circumstance, but as UnitedHealth learned, it may not. And, as always, read the entire policy; a notice (or other) provision in the main portion of the policy may be modified by endorsement.

Ticketmaster Wins Reversal, Possible Coverage For Class Action Over Ticket Fees

Reversing a federal district court decision, the U.S. Court of Appeals for the Ninth Circuit ruled that Illinois Union Insurance Company may be on the hook to defend a putative class action alleging, among other things, that Ticketmaster LLC falsely represented the order-processing fees for event tickets.

Ticketmaster’s errors and omissions insurance policy provided coverage for the performance or failure to perform professional services, subject to 28 exclusionary provisions. One of those, Exclusion E, excluded coverage for claims “based on or arising out of … any dispute involving fees, expenses or costs paid to or charged by the Insured.”

When Ticketmaster looked to Illinois Union for a defense, the insurer refused, relying on Exclusion E. The district court agreed with Illinois Union and dismissed Ticketmaster’s insurance coverage action.

The Ninth Circuit reversed, holding that the lower court erred “by failing to subject Exclusion E to the ‘closest possible scrutiny.” The court found that Exclusion E is susceptible to at least two meanings and thus is ambiguous. It could be a narrow reference “to a dispute regarding the monetary amount paid to or charged by Ticketmaster for uncontested services” or, as Illinois Union contends, a more general reference to a dispute regarding a fee or charge for professional services – including a dispute regarding the relationship between services provided and the fees charged.

“There are at least some allegations in the [class action complaint] that do not involve the amount charged for uncontested services,” the court said. Some allegations, for example, “do[] not dispute the amount charged, but the relationship between any fee at all and the services provided.”

The panel therefore reversed the district court’s grant of judgment on the pleadings and remanded so that extrinsic evidence could be considered and Ticketmaster could pursue both its breach of contract and bad faith claims.

To read the decision in Ticketmaster v. Illinois Union Insurance Co., click here.

Why it matters: The Ninth Circuit’s decision is a reminder of the principle that exclusions in an insurance policy should be narrowly construed and that the burden is on an insurer to draft clear exclusions. Policyholders nevertheless should carefully review proposed policies before purchase to make sure that they are willing to accept the risks the insurer proposes to exclude. If it does not want to keep proposed excluded risks, the policyholder should seek broader coverage, whether from that or another insurer. You don’t know what coverage is available until you shop for it.

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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