There sure are a lot of strange organic foods out there these days. You can get organic tortilla chips, organic mustard and, get this, organic Capri Sun juice boxes. But organic officially jumped the shark when I saw organic Swedish fish on the counter of my local coffee shop. You gotta be kidding me. Even healthy Swedish people don’t eat organic Swedish fish.

With so many organic foods for sale, as well as all the efforts underway to go green, it seems only a matter of time before ISO introduces an organic and green version of its commercial general liability form. Those guys are always coming up with insurance products to keep pace with society’s comings and goings.

Here are ten ideas for ISO to consider for its new healthy and environmentally friendly CGL policy:

Mold Exclusion is eliminated. After all, living organisms should be cherished.

The Auto Exclusion now contains an exception for electric cars. Except Teslas. Those people can afford auto insurance.

The Voluntary Payments provision has been amended and now reads as follows: “No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid or to save a whale.”

The Pollution Exclusion now contains an exception for manure as it’s useful as fertilizer. Take that Wilson Mut. Ins. Co. v. Falk, 857 N.W.2d 156 (Wis. 2014) and Wakefield Pork, Inc. v. RAM Mut. Ins. Co., 731 N.W.2d 154 (Minn. Ct. App. 2007) and Dolsen Cos. v. Bedivere Ins. Co., No. 16-3141, 2017 U.S. Dist. LEXIS 151057 (E.D. Wash. Sept. 11, 2017).

The “Your Work” Exclusion does not apply to an insured’s work involving Eco treated wood.

The Liquor Liability Exclusion contains an exception for furnishing alcohol to someone, over 100 years old, who attributes their longevity to drinking one glass of red wine per day.

The self-defense exception, to the Expected or Intended Exclusion, has been amended and now reads as follows: “‘Bodily injury’ or ‘property damage’ expected or intended from the standpoint of the insured. This exclusion does not apply to ‘bodily injury’ resulting from the use of reasonable force to protect persons from eating vegetables sprayed with pesticides.”

The Who is an Insured section is expanded to include the following: 1. If you are designated in the Declarations as: f. A food cooperative, you are an insured. Your members are also insureds, but only with respect to the conduct of your business and while wearing Birkenstocks.

Late notice is excused if the reason for the delay is that someone prevented any carbon emissions by walking to hand-deliver the claim to the insurer.

“Other Insurance” clause is now simpler: “If there’s other insurance we’ll all just get together at Whole Foods, have some kale, and figure out how to share it fairly.

In the past month or so there have been all sorts of things with a connection to Coverage Opinions that have made the news. All of these happening at once is really odd.

Ben Brafman Reps Harvey Weinstein
The September 13, 2017 issue of Coverage Opinions featured an interview with renowned criminal defense lawyer Ben Brafman. In early November, it was reported that Brafman was retained to represent Harvey Weinstein against possible sexual assault charges in New York.

The “Bee Girl” Gets Married
The October 11, 2017 issue of Coverage Opinions featured an interview with Rogers Stevens, guitarist for Blind Melon, the band that rose to stardom in 1992 after the video for its song “No Rain,” featuring a young girl in a bee costume, exploded on the MTV airways. It was reported that the “bee girl” – Heather Deloach, now 34 – was married in late October in San Diego. The flower arrangements were adorned with tiny golden bees and the flower girls wore antennae similar to what Deloach wore for the video.

The Tom Petty Coincidence
The October 11, 2017 issue of Coverage Opinions featured an interview with Judge Jonathan Goodman, of the Southern District of Florida, on the judge’s Tom Petty fandom and several-times use of Tom Petty song lyrics in his opinions. In early November newspapers published a cartoon, from Bizarro, featuring a judge on the bench, with eyes closed and headphones in his ears. A lawyer is standing before the bench and saying to the judge: “Excuse me, Your Honor. We all miss Tom Petty, but…we can hear you singing.”

Sluggerrr Gets Inducted Into The Mascot Hall Of Fame
My favorite Coverage Opinions case is the one involving the Kansas City Royals mascot Sluggerr, an adorable furry lion, who tossed a hotdog into the stands, hit a fan in the eye and caused serious injuries. It produced a litigation saga that went all the way to the Missouri Supreme Court on the issue of whether the fan assumed the risk and how getting hit by a flying hotdog compares to get hit by a foul ball. In early November Sluggerrr was inducted into the Mascot Hall of Fame in Whiting, Indiana. He is only the fourth Major League Baseball mascot to enter those hallowed halls (Phillie Phanatic, Mr. Met and the Cleveland Indians’ Slider).

At long, long last, work on the 4th Edition of General Liability Insurance Coverage - Key Issues in Every State is just about finished. We are optimistic that it will be available for sale in March. The number of new cases addressed, since 2014, is staggering. Thank you for all of the nice notes that I have received from readers asking when the book will be available for sale. Knowing that so many people are looking forward to it makes all of the effort to do the update worthwhile.

My dog Barney has pet insurance. Reasonable minds can differ on whether that’s a good financial deal or not. I guess it was the year he tried to eat the drainage pipe for the gutters. Other years I’m not as sure.

But I don’t think anyone can disagree that the diagnosis on his last claim summary probably didn’t come from Black’s Veterinary Dictionary. [I know. Me neither. I had no idea that Black’s also had a veterinary dictionary]. I’m pretty sure there is no World Health Organization International Classification of Diseases Code for this:

Frank’s piece is lengthy and I do not want to do it a disservice by trying to summarize all of it here. The crux of it, with substantial supporting case law, is this. Two of the leading cases addressing when a duty to defend ends (or not) are Commerce & Industry Insurance Co. v. Bank of Hawaii (Haw. 1992) and Meadowbrook, Inc. v. Tower Insurance Co. (Minn. 1997). In both cases, involving multiple claims, all of the arguably covered claims had been dismissed. However, these two state supreme courts held that the insurer’s duty to defend could not be terminated until there were no further rights to appeal. Thus, the insurers were required to continue to defend uncovered claims, since the covered claims, although dismissed, still had appellate rights attached to them. Other courts have reached the same conclusion -- some based on Bank of Hawaii and Meadowbrook and some based on other reasons.

Frank notes that “[t]he interesting and somewhat perplexing approach in these cases [Bank of Hawaii and Meadowbrook and others] is that the courts based the insurers’ continued duty to defend on the finality of a claim. They did not delve into discussing whether the language within the policy supported such liberal interpretation. In fact, in coming to their conclusions, the courts added language to the policies where none existed.”

The take-away of Frank’s piece is that, without specifically addressing, in their policies, when a duty to defend ceases, insurers are placing themselves at risk for courts subjecting them to an obligation to continue to defend suits that certainly appear to no longer contain any potentially covered claims. Frank counsels that insurers should consider addressing, in their policies, when they may properly withdraw defense counsel.

I recommend that you check out Frank Malpigli’s article, “An Insurer’s Continued Duty to Defend After All Covered Claims Are Dismissed,” in the October issue of DRI’s “For the Defense” magazine.

We all know that, when it comes to insurance policies, language is king. Coverage can turn on fine point distinctions in the meaning of words or seemingly minutiae-like differences between the choice of one term over another – even “an” versus “the” can be the difference between millions of dollars in coverage. In Lee v. Mercury Insurance, No. A17A0624 (Ga. Ct. App. Nov. 3, 2017) the Court of Appeals of Georgia took the rule, that policy language is king, to another level – coverage turned on the existence of a semicolon.

At issue was coverage for a residence destroyed by fire. I’ll try to simply the facts. Ronald Lee traveled frequently for work. To help a childhood friend, in financial distress, Lee purchased his home in Riverdale, Georgia, and allowed him and his family to continue to live in it free of charge. As part of the arrangement, Lee could stay there when he was flying through Atlanta. When Lee first took out the mortgage on the home he stayed there so many nights each week that the mortgage company considered it his primary residence. Later, he stayed there “maybe one night a week, every other week, or something.”

The home was destroyed by fire, killing Lee’s friend. Lee sought coverage for the loss from his homeowner’s insurer, Mercury Insurance. Mercury disclaimed coverage. Lee filed suit against Mercury alleging various theories of recovery. The trial court granted Mercury’s motion for summary judgment, that no coverage was owed, based on Lee’s failure to reside at the house as required by the terms of the policy. The case went to the Georgia appeals court on various issues.

For purposes here, the policy provided coverage as follows:

The “COVERAGE A — DWELLING” “We cover: the dwelling on the residence premises shown in the Declarations used principally as a private residence, including structures attached to the dwelling; materials and supplies located on the residence premises used to construct, alter or repair the dwelling or other structures on the residence premises.”

The policy defined “residence premises” as: “the one, two, three or four family dwelling, condominium or rental unit, other than structures and grounds, used principally as a private residence; where you reside and which is shown in the Declarations.” (semicolon not giant in the original).

The court didn’t have much problem concluding that coverage was owed, even though the house at issue was not where Lee resided. The court stated: “Based upon the placement of the semicolon in the definition of ‘residence premises,’ a layperson could reasonably understand the defined term to mean ‘the one, two, three or four family dwelling condominium or rental unit, other than structures and grounds, used principally as a private residence’ or ‘where you reside and which is shown in the Declarations.’” (emphasis added).

Since the home at issue was a family dwelling used principally as a private residence, one of the two independent definitions of “residence premises” was satisfied. So it did not matter that the other one – “where you reside and which is shown in the Declarations” was not.

The court noted that, for the dissent to reach its conclusion, it was required to rewrite the policy by removing the semicolon. This the court was not willing to do.

The court was also influenced by the fact that Mercury used the same definition of “residence premises” in its policies covering secondary residences. Thus, under Mercury’s interpretation,
“a secondary residence, such as a beach or mountain home, would be not be covered under the policy form, even though it is undisputed that Mercury used the same policy form to insure secondary residences.” But, under the court’s interpretation of “residence premises,” the policy would be prevented from being illusory for secondary residences. That’s a compelling argument

In any event, you don’t need to be Aesop to see the moral here -- when it comes to insurance policies, language – all of it -- is king.

Cosgrove Returns: I’ve Never Seen This Before In A Coverage Case
This summer an Arizona federal district court issued Cosgrove v. National Fire & Marine Insurance Company. The court held that insurer-appointed defense counsel, in a reservation of rights-defended case, used the attorney-client relationship to learn that his client did not use subcontractors on a project. When defense counsel did so, he knew, or had reason to know, that his client’s policy contained a Subcontractors Exclusion and that the insurer may attempt to deny coverage based on the exclusion. Thus, the court held that the insurer was estopped from asserting the Subcontractor Exclusion as a coverage defense. The court reached this decision despite the existence, or not, of subcontractors being a pretty routine, and obvious, and not secret, fact in a construction dispute.

Needless to say, this was a very troubling decision for insurers (and appointed defense counsel). Very shortly after the court’s decision the parties settled. As part of the settlement, the court agreed that it would vacate and seal the summary judgment decision. Sure enough, you can’t get the decision on Pacer and the insurer arranged for the decision to be removed from Lexis and Westlaw. I have a copy of the decision, which is now a collector’s item and I keep it with my Joe Montana rookie card.

Get ready – On November 3, United Policyholders filed a Motion to Intervene to unseal and reinstate the decision. UP says in its brief that what the insurer did is an “impermissible tactic” – one “commonly employed by insurers in an attempt to reshape case law in their favor after an adverse ruling.” UP says that the insurer, faced with an adverse decision, is “seek[ing] to hide the court’s opinion.” The insurer filed a response, providing many reasons for denial of intervention – UP has no standing; the case is over; the judge agreed to vacate and seal the decision as a condition of settlement; the various requirements of the Intervention rule have not been satisfied…. Briefing on what is a seemingly unusual issue is ongoing.

Court Provides Primer On The “War Risk” Exclusion
Cases involving the “war risk” exclusion are few and far between. And that’s a good thing. So, on one hand, when one comes along, it’s worth looking at it. It’s like a coverage case eclipse, but no special glasses are needed to read it. On the other hand, since the war risk exclusion arises so infrequently – probably never for almost all coverage lawyers – there is a temptation to brush the decision aside as unimportant.

For those of you in the not brush it aside category I highly recommend that you check out Universal Cable Productions v. Atlantic Specialty Ins. Co., No. 16-4435 (C.D. Cal. Oct. 6, 2017), where the court provided a detailed analysis of the “war risk” exclusion in the context of a claim for losses sustained in 2014, by the producers of the television series Dig, on account of the need to move production of the show out of Israel, following hostilities between Israel and Hamas. [My wife watched Dig and enjoyed it. I watched the first two episodes but couldn’t get into it.]

The opinion is lengthy, addressing the hostilities at issue, the history and nature of Hamas, definitions of war and case law addressing the “war risk” exclusion. The court concluded that the conflict between Israel and Hamas, in 2014, constituted war. Thus, the “war risk” exclusion precluded coverage for the losses sustained by the show’s producers. It is well beyond the scope of a “Tapas” article to address the opinion in detail. In the event of future war risk coverage litigation I would expect to see courts look to Universal Cable Productions for guidance, given how detailed the opinion is.

When an insurance company is evaluating whether to file a declaratory judgment action or defend one filed against it, the principal issues under consideration are likely to be its chance of success and the amount of attorney’s fees that it will incur to achieve the desired result. But there is another factor that should also be included in the risk evaluation: possibly having to pay the policyholder’s attorney’s fees. I sometimes (a lot of times, in fact) see this consideration overlooked, or not given enough weight, in the calculus. After all, it is a potential factor in 45 states. In my experience this is the most overlooked coverage issue.

A recent decision from the Oregon Supreme Court involves a dramatic broadening of the scenarios under which an insurer may have to pay the policyholder’s attorney’s fees. Essentially, the policyholder does not have to be a prevailing party, as that term is usually understood to mean.

Despite our legal system’s bedrock principle, that the losing party is not obligated to pay the prevailing party’s attorney’s fees, insurance coverage litigation is an exception. In the vast majority of states -- almost all in fact -- the possibility exists, in some way, shape or form, that the insurer may be obligated to pay some, or all, of a successful policyholder’s attorney’s fees in addition to the amount of the claim.

One commonly cited rationale for this exception is that, if the insured must bear the expense of obtaining coverage from its insurer, it may be no better off financially than if it did not have the insurance policy in the first place. The specific approaches to this insurance exception vary widely by state and can have a significant impact on the likelihood of the insurer in fact incurring an obligation for its insured’s attorney’s fees.

Some states have enacted statutes that provide for a prevailing insured’s recovery of attorney’s fees in an action to secure coverage. Other states achieve similar results, but do so through common law. But whichever approach applies, the most important factor is the same: whether the prevailing insured’s right to recover attorney’s fees is automatic or must the insured prove that the insurer’s conduct was unreasonable or egregious in some way.

For example, a Hawaii statute mandates an award of attorney’s fees without regard to the insurer’s conduct in denying the claim. In other words, it imposes strict liability for attorney’s fees on an insurer that is ordered to pay a claim. Maryland also takes a strict liability approach, but it is the result of a decision from its highest court. A Virginia statute departs from strict liability and permits an award of attorney’s fees, but only if there was a finding that the insurer’s denial of coverage was not in good faith. Connecticut also rejects a strict liability rule, but it was established judicially and not legislatively. A handful of states use a combination of legislative and judicial avenues to address whether attorney’s fees are to be awarded to a prevailing insured. Under this hybrid approach, consideration is first given to the state’s general statute that allows for an award of attorney’s fees in an action on a contract. The court then interprets this statute, covering contracts in general, to include an insurance contract dispute. And some states address the issue by applying their general statutes permitting an award of attorney’s fees against a party that engages in frivolous or vexatious litigation.

While the mechanisms vary, in almost all cases an insurer that is unsuccessful in coverage litigation will either be automatically obligated to pay for its insured’s attorney’s fees or may be litigating post-trial whether such obligation exists. Whichever the case, the potential for being saddled with the attorney’s fees incurred by its prevailing insured in a declaratory judgment action is a consideration that insurers will usually not be able to avoid.

A recent decision from the Oregon Supreme Court demonstrates in stark terms how significant the attorney’s fees issue can be for an insurer that is unsuccessful in coverage litigation. The obligation can arise even if there’s no decision in the coverage case. While the case involves an Oregon statute, and there is no shortage of case law nationally addressing the ins and outs of prevailing party attorney’s fees, I still believe that the case has the ability to influence courts nationally. Thus, I included it as a top ten case of 2017.

In Long v. Farmers Ins. Co., the Oregon Supreme Court addressed the state’s statute -- ORS 742.061(1) -- that creates the potential for an insured to recovery its attorney’s fees in coverage litigation. The statute provides as follows: “Except as otherwise provided in subsections (2) and (3) of this section, if settlement is not made within six months from the date proof of loss is filed with an insurer and an action is brought in any court of this state upon any policy of insurance of any kind or nature, and the plaintiff's recovery exceeds the amount of any tender made by the defendant in such action, a reasonable amount to be fixed by the court as attorney fees shall be taxed as part of the costs of the action and any appeal thereon.” (emphasis added by court)

The case is lengthy and I want to keep this short and simple.

The insured argued that, if you file an action on an insurance policy, and you later obtain more from the insurer – even if through the insurer simply voluntarily paying you more -- than the insurer tendered in the first six months after proof of loss, then you are entitled to recover attorney’s fees. In other words, the insured argued that “recovery” “refers to any kind of restoration of a loss, including a voluntary payment of a claim made after an action on an insurance policy has been filed.”

We are Farmers, bum ba dum bum bum bum bum, argued that “recovery,” as used in the statute, means a “money judgment in the action in which attorney fees are sought. Under that interpretation, attorney fees may be had for an insured’s action on a policy only if the insured obtains a money judgment that exceeds any tender made by the insurer within the first six months after the insured offers proof of loss.”

The court found for the insured, holding that “when an insured files an action against an insurer to recover sums owing on an insurance policy and the insurer subsequently pays the insured more than the amount of any tender made within six months from the insured’s proof of loss, the insured obtains a ‘recovery’ that entitles the insured to an award of reasonable attorney fees.” (my emphasis added).

In other words, as the court put it: “A declaration of coverage is not sufficient to make ORS 742.061 applicable; an insured must obtain a monetary recovery after filing an action, although that recovery need not be memorialized in a judgment.” (emphasis added by court).

Putting aside the court’s lengthy analysis, and numerous arguments back and forth between the parties, the court rested its decision on the purpose of the statute: “The purpose of ORS 742.061 is to discourage expensive and lengthy litigation. Requiring the insurer to pay the insured’s attorney fees if and only if the insured obtains more in the litigation than was timely tendered advances that purpose insofar as it encourages insurers to make reasonable and timely offers of settlement and also encourages insureds to accept reasonable offers and forego litigation. But the statute also serves a compensatory purpose. The statute ensures that, when insureds file suit to obtain what is due to them under their policies, they do not win the battle but lose the war by expending much or all of what they obtained in the litigation on attorney fees. . . . The function that a ‘recovery’ plays in that overall framework is to establish that the insured indeed obtained something in the action—payment of benefits due under the insurance policy that exceeded any amount that the insurer timely tendered. . . . It was [in the examples provided] the insurer’s payment, not the form of payment, that entitled the insured to attorney fees.”

On one hand, as Long v. Farmers addresses an Oregon statute, you could write the decision off as being limited to Oregon. However, I believe that the decision has the potential for wider reach. Given that the decision was tied to the general rationale for allowing an insured to recover attorney’s fees – prevent the insured from winning the battle and losing the war; which is the same rationale used by many states -- other states may consider allowing an insured to do so, even if coverage was not obtained through judicial decree.

I also do not believe that, because the claim at issue involved first-party property, the Long decision is necessarily so limited. First, case law demonstrates that the Oregon statute is not limited to first-party property policies. Second, again, the Long decision was tied to the overarching rationale for allowing an insured to recover attorney’s fees. And that rationale is cited by courts in both property and liability cases.

Walsh Construction Company v. Zurich American Ins. Co. finds a place on this list for two reasons. First, the case involves an issue that has the potential to arise with some frequency, but has not been the subject of much case law. Second, the decision provides a lesson in policy drafting for insurers (as well as risk management for general contractors – any who actually read this).

At issue in Walsh is whether a self-insured retention, and a large one at that, applies to an additional insured. The Court of Appeals of Indiana characterized the decision as one of first impression in the state, as well as noting that the four foreign cases cited by the parties were not on all fours. Thus, clearly, the issue has not been the subject of much judicial review. Yet, it certainly has the potential to arise with some frequency when you consider how common additional insured issues are in general.

Walsh grows out of a common claim scenario. Walsh, a general contractor, hired Roadsafe Holdings, to be Walsh’s subcontractor on a traffic project. Walsh’s contract required Roadsafe to procure a commercial general liability insurance policy and name Walsh as an additional insured on a primary and noncontributory basis. Roadsafe obtained a CGL policy from Zurich. An endorsement named, as additional insureds, “any person and organization where required by written contract.” However, Roadsafe’s policy with Zurich contained a $500,000-per-occurrence self-insured retention.

Boguslaw Maczuga was injured while operating his motor vehicle through the work zone’s traffic pattern. Maczuga sued Walsh. Walsh notified Zurich and sought a defense from the insurer on the basis of being an additional insured. Zurich denied Walsh’s tender and Walsh filed a complaint for declaratory judgment.

Among other things, Zurich asserted that, based on the SIR endorsement, Walsh was required to pay the first $500,000 of costs. [I suspect that Walsh was unaware that Roadsafe’s CGL policy contained an SIR, especially such a significant one. If that’s the case, Walsh certainly could have found that out before it got in this situation.]

The trial court found for Zurich. On appeal, Walsh and Roadsafe argued that the SIR endorsement amended only Zurich’s relationship to Roadsafe and did not amend Zurich’s obligations with respect to Walsh.

The appellate court also found for Zurich. The court based its decision on the following language from the policy:

“Self-insured retention” means: the amount or amounts which you or any insured must pay for all compensatory damages and “pro rata defense costs” which you or any insured shall become legally obligated to pay because of damages arising from any coverage included in the policy.

The “self-insured retention” amounts stated . . . apply as follows: 1. If a Per Occurrence Self Insured Retention Amount is shown in this endorsement, you shall be responsible for payment of all damages and “pro rata defense costs” for each “occurrence”[] until you have paid damages equal to the Per Occurrence amount .

With “you” meaning the named insured – Roadsafe – the court concluded that “[t]he SIR endorsement shifts the initial cost burden from Zurich to Roadsafe, the named insured, not just for Roadsafe’s damages and defense costs but also for any additional insured’s damages and defense costs. As such, the SIR endorsement amends Zurich's obligation under the CGL policy to defend Walsh by placing the first $500,000 of that burden on Roadsafe.”

Thus, not only did the court conclude that the SIR could not be avoided for Walsh as an additional insured, but that Roadside was obligated to pay it.

In addition to this “plain reading of the SIR endorsement,” the court found support in other provisions of the policy, such as “the SIR endorsement unambiguously conditions Roadsafe’s compliance with its provisions as a ‘condition precedent to coverage’ from Zurich. And there is no rational basis to apply the SIR endorsement as a condition precedent to Zurich’s coverage of the named insured but not to Zurich’s coverage of additional insureds.” The court also noted that the SIR enabled Roadsafe to obtain the CGL policy from Zurich at a reduced premium.

Held: “Taken together, those provisions unambiguously manifest the intent of the parties to the contracts, Zurich and Roadsafe, for the SIR endorsement to control their relationship such that Roadsafe assumed all costs and liability for the first $500,000 of any claim that might be made under the CGL policy, regardless of whether that claim was against Roadsafe or an additional insured.”

The decision is very much tied to the policy language. And policies can vary widely in how they address SIR obligations. But that does not diminish the potential significance of the decision. As it is still just one of few in the area, it simply means that parties will address whether their language is sufficiently similar to that at issue in Roadsafe or distinguishable, such that a different result is warranted. Of significance, while the court noted that the SIR enabled Roadsafe to obtain the policy from Zurich at a reduced premium, that alone would not have likely made a difference in the face of policy language that did not support Zurich’s position.

Because the decision turns on policy language it is also a cautionary tale for insurers to address their SIR terms to ensure that a policy, priced for an SIR, does not become “dollar one” for an additional insured.

Insurers that rely on exclusions in their policies, to eliminate coverage for their insureds’ projects that are covered under wrap-up policies, have much to take away from the Connecticut District Court’s decision in Thompson v. National Union Fire Insurance Company (applying Georgia law). The court held that a wrap-up exclusion, contained in a commercial umbrella policy, was ambiguous, and, hence, did not apply to a $13.5 million exposure. The case is brief. But when it comes to judicial opinions – size does not matter.

While Thompson is a federal district court decision, and claims involving the possible applicability of a wrap-up exclusion do not arise every day, I selected the case for inclusion here for two reasons. First, the decision – the only one I know of like it -- is an invitation for policyholders, in every case involving a wrap-up exclusion, to attempt to argue that the exclusion is ambiguous. Second, any insurers that rely on wrap-up exclusions, to eliminate coverage under their “practice policies,” need to take a hard look at such exclusions and decide whether to make any changes, to avoid potentially paying $13.5 million for a claim that was clearly not intended to be covered.

Thompson involves coverage for a contractor, Bluewater Energy Systems, that was sued following a power plant explosion. Individuals and estates that were harmed by the blast obtained a judgment for $13.5 million and brought an action against Bluewater’s umbrella insurer.

The insurer maintained that no coverage was owed on account of the policy’s “wrap-up” exclusion, which provided: “This insurance does not apply to . . . any liability arising out of any project insured under a wrap-up or similar rating plan.”

The insurer’s position was that no coverage was owed because the power plant project was insured under a contractor controlled insurance program, which the insurer contended is a type of “wrap-up” program.

The plaintiffs -- those affected by the explosion -- argued what you would expect: there are lots of reasonable interpretations of the wrap-up exclusion, and, because it was drafted by the insurer, the operative language must be read strictly against the insurer and in favor of providing coverage. The court agreed that the wrap-up exclusion was ambiguous.

A couple of the plaintiffs’ arguments, that led to this finding of ambiguity, are specific to the case. Those certainly offer lessons. But one of the plaintiffs’ arguments was very general. And that one should cause insurers, that rely on wrap-up exclusions, to sit up and take notice.

As for the issues specific to the case, the plaintiffs argued that the project had only a partial contractor controlled insurance program and it did not provide coverage to all of the project’s participants and did not provide property damage or “builders risk” coverage. “If defendant wanted to exclude coverage for any project that ‘involves’ a wrap-up or is ‘in any way’ affiliated with a consolidated insurance program, it should have explicitly included such limitations and defined the term ‘wrap-up.’” Second, because the contractor controlled insurance program at issue has been exhausted, no coverage remains. Hence, the plaintiffs’ remaining claims are not “insured under” the program.

But the court’s reason for finding the wrap-up exclusion ambiguous, that should cause insurers the most concern, is this: “Plaintiffs contend that defendant has failed to show that ‘wrap-up’ has one peculiar meaning and cannot legitimately argue that ‘wrap-up’ has one, unambiguous meaning when its own policies and witnesses define the term in a number of distinct ways.”

It’s one thing not to define a term in a policy. Not every term in any insurance policy can be defined (despite what some policyholders and courts sometimes say). But if in fact an insurer’s own policies and witnesses define a term in a number of distinct ways, the court’ job -- especially when it’s reading a policy strictly against the insurer -- is being made easy.

Postscript: For an excellent article addressing numerous coverage issues, under wrap-up policies, see “Wrap-Up Insurance Coverage,” by Margaret Glass, of Gieger, Laborde & Laperouse, LLC, in the October 2017 issue of DRI’s “For the Defense” magazine.

The possibility that an insurer will have to pay its policyholder’s attorney’s fees, in a coverage action, is one that exists – in one form or another – in 45 states. For more about this see the discussion above in Long v. Farmers.

Once it is determined that an insurer is obligated to pay its policyholder’s attorney’s fees, another question usually arises -- How much must be paid, i.e., are the fees reasonable? There is a substantial amount of case law nationally that has addressed this issue. One consideration in that calculus can be the amount of the insurer’s attorney’s fees. In other words, if an insurer is going to allege that the policyholder’s fees are excessive, the policyholder may then decide to serve discovery on the insurer, seeking to learn the amount of its fees. The policyholder’s argument being – how can you, insurer, say our fees are excessive, when you spent just as much in the case, or more? Of course, the risk of backfire for a policyholder, in seeking such information, is obvious.

Whether a policyholder in a coverage dispute was entitled to obtain the insurer’s counsel’s billing records was at issue before the Supreme Court of Texas in In Re National Lloyds Insurance Company. This is not the first case to address this issue. However, it may be the longest and most detailed decision. That, and coming from such an important supreme court, especially on coverage issues, is why I selected it for the 2017 Top Ten list.

The policyholder’s attorney’s fee claim arose out of coverage litigation for claims for hail damage under homeowner’s policies. The policyholders sought their fees as part of their statutory, contractual and extra-contractual claims. While no determination had been made that the policyholders’ fees were recoverable, they sought discovery of a host of insurer attorney-billing information.

The insurer objected on the basis that “the requested discovery is overly broad and seeks information that is both irrelevant and protected by the attorney-client and work-product privileges.” As for relevance, the insurer relied on a “stipulation that it ‘will not use its own billing invoices received from its attorneys; payment logs, ledgers, or payment summaries showing payments to its attorneys; or the hourly fees or flat rates being paid to its attorneys; audits of the billing and invoices of its attorneys to contest the reasonableness of [the homeowners’] attorney's fees.’”

The court ordered the insurer to respond to the discovery requests. The court of appeals denied the insurer’s petition for mandamus relief. While the court of appeals acknowledged that an opposing party’s attorney-billing information may be irrelevant in a given case, the discovery order was, for various reasons described, not an abuse of discretion.

The insurer’s petition for mandamus made it to Austin. The Texas Supreme Court, in a 6-3 opinion, held that the attorney-billing information was not discoverable. The opinion and dissent are lengthy. I set out, verbatim, several of the court’s conclusions below. This is the best way to provide a sense of both the issues discussed and how they were resolved.

Work Product Privilege

The court held that the work product privilege prevented the attorney-billing information from being discovered: “[B]illing records reveal when and where attorneys strategically deploy a client’s resources; which issues were addressed by experienced lawyers as compared to less experienced counsel; the subject-matter expertise of an attorney working on a particular aspect of the case; and who was hired as consultants—including consulting experts and jury consultants—and when. This information provides detailed information regarding a party’s litigation decisions and also illuminates the relative significance of or concern about particular matters. Especially when a party is a repeat litigant, as the insurer is here, decisions revealed through billing records represent strategic choices and are pieces of ‘an overall legal strategy for all the cases in which it is involved,’ which a party must be allowed to develop without intrusion. Discovery of billing records in their entirety would provide a roadmap of how the insurer plans to litigate not only this particular case but also other MDL cases.”

The court rejected the policyholders’ argument that all could be solved through the use of redaction of billing entries: “We also conclude that redacting privileged information—such as the specific topics researched or the descriptions of the subject of phone calls—would be insufficient as a matter of law to mask the attorney's thought processes and strategies. The chronological nature of billing records reveals when, how, and what resources were deployed. With this knowledge, a party in the same proceeding could deduce litigation strategy as to specific or global matters.”

The court made a couple of other important points on the issue of work privilege:

“Our holding does not prevent a more narrowly tailored request for information relevant to an issue in a pending case that does not invade the attorney’s strategic decisions or thought processes. Nor does our holding preclude a party from seeking noncore work product ‘upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party’s case and that the party is unable without undue hardship to obtain the substantial equivalent of the material by other means.’ But, here, the record bears no evidence of either.”

“We acknowledge that an opposing party may waive its work-product privilege through offensive use—perhaps by relying on its billing records to contest the reasonableness of opposing counsel's attorney fees or to recover its own attorney fees. But in this case, the insurer has stipulated it will not use its own billing records to contest the homeowners' attorney fees. Nor is the insurer seeking to recover its own attorney fees from the homeowners.”

Relevance

The court noted that, “[t]hough the parties disagree about whether the requested factual information is privileged, even unprivileged information is not discoverable unless the information is relevant.”

So the court turned to relevance of the attorney-billing information and held that it was not relevant because “(1) the opposing party may freely choose to spend more or less time or money than would be ‘reasonable’ in comparison to the requesting party; (2) comparisons between the hourly rates and fee expenditures of opposing parties are inapt, as differing motivations of plaintiffs and defendants impact the time and labor spent, hourly rate charged, and skill required; (3) the tasks and roles of counsel on opposite sides of a case vary fundamentally, so even in the same case, the legal services rendered to opposing parties are not fairly characterized as ‘similar’; and (4) a single law firm’s fees and hourly rates do not determine the ‘customary’ range of fees in a given locality for similar services. However, when a party uses its ‘own hours and rates as yardsticks by which to assess the reasonableness of those sought by [the requesting party]’ or seeks to shift responsibility for those expenditures, the party places its own attorney-billing information at issue, making the information discoverable.”

The court also made these interesting observations on the issue:

“[A] party subject to repeat litigation, such as an insurer or corporate defendant, may view the precedential value of a case more significantly than an opposing party who might not anticipate ever being involved in similar litigation again. Likewise, one side may have more at risk in a case. Such considerations could reasonably justify greater expenditures in time, labor, and money than might be considered ‘reasonable’ from the other party’s perspective. As the expression goes, one side of the litigation may have more skin in the game than the other.”

“[T]he nature of the attorney-client relationship may differ in ways that affect the rates charged and the demands on counsel’s time. In that vein, ongoing attorney-client relationships often exist between corporate and governmental parties and their counsel and frequently involve negotiated rates that take into consideration future litigation work. And ‘[l]arger organizations, often armed with more resources to expend on litigation than individuals, are frequently more demanding on their counsel in requesting constant updates on the litigation and detailed summaries on recent rulings, thereby requiring more time by their attorneys.’ These considerations are especially pertinent in multi-party litigation, like the MDL proceedings here.”

“Even when working on the same tasks, attorneys litigating the same case do not approach those tasks in a sufficiently comparable manner to be genuinely probative of the degree of effort or skill required by one another. Indeed, while counsel for both sides may attend the same deposition, the attorney taking the deposition would reasonably be expected to expend more time and expense in preparing for the deposition than the attorney defending the deponent. In like manner, the contrast between responding to discovery requests and reviewing and analyzing information produced creates significant variations in time and money spent. Suffice it to say that counsel in the same case are not actually or even effectively performing ‘similar legal services’ for the litigation.”

As you can see, the SCOTX discussion of whether a policyholder in a coverage dispute, seeking its attorney’s fees, was entitled to obtain the insurer’s counsel’s billing records, was extremely lengthy and detailed (and there’s lots more here that I didn’t mention). It is easy to image a court in the future, addressing this issue, looking to the Supreme Court of Texas’s thorough decision in In Re National Lloyds Insurance Company for guidance.

In March 2015 a Massachusetts federal district court addressed the knotty issue of an insurer, defending an insured, and the insured believes that it has a counterclaim against the plaintiff. Defense counsel files the counterclaim or the insured hires separate counsel, to work with the insurer-appointed counsel, to file the counterclaim. However, the insurer does not wish to pay the legal fees associated with the counterclaim. After all, the counterclaim is not a suit filed against the insured. And a claim filed against the insured is what the duty to defend is all about. It often gets worked out. Sometimes the insured agrees to pay for the prosecution of the counterclaim. Sometimes the insurer pays it because it ultimately benefits the defense of the insured, i.e., a good offense is part of the defense. But it does not always get worked out. In Mount Vernon Fire Insurance Co. v. VisionAid the parties could not see eye to eye so they marched off to court.

VisionAid, a manufacturer of eye wash, terminated an employee for alleged misappropriation of funds. The employee filed suit against VisionAid alleging wrongful termination. Mt. Vernon undertook VisionAide’s defense under an employment practices policy. VisionAid sought to file a counterclaim against the employee for misappropriation of funds. Mt. Vernon withdrew its reservation of rights and informed VisionAid that it would not fund the counterclaim. VisionAid’s answer was filed by appointed counsel, who worked with VisionAid’s personal counsel, who filed the counterclaim.

That Massachusetts federal court, following a lengthy analysis, held that Mt. Vernon was not obligated to fund VisionAid’s counterclaim. VisionAid was the most detailed opinion I’d ever seen that addressed whether an insurer was obligated to fund an insured’s counterclaim. For that reason, VisionAid was an easy pick, even as a federal district court opinion, for inclusion in the 2015 Ten Most Significant Coverage Decisions of the Year article. But, alas, it was appealed to the First Circuit. So that took it out of consideration for the 2015 Top 10. So it would have to wait until 2016.

Then, the First Circuit – with retired Supreme Court Justice Souter on the panel, sitting by designation – pulled a judicial go-ask-your-mother and certified the issue to the Massachusetts Supreme Judicial Court. [Come on. You gotta be kidding me. Justice Souter – How hard can this be compared to the stuff that you saw on the Supreme Court?] So that took VisionAid out of consideration for the 2016 Top 10. But with the Massachusetts high court being the last stop on the train, 2017 had to be the year. And it is.

The First Circuit certified the following questions to the Massachusetts SJC (and conveniently did so in a way that outlined the arguments of the parties):

(1) Whether, and under what circumstances, an insurer (through its appointed panel counsel) may owe a duty to its insured—whether under the insurance contract or the Massachusetts “in for one, in for all” rule—to prosecute the insured’s counterclaim(s) for damages, where the insurance contract provides that the insurer has a “duty to defend any Claim,” i.e., “any proceeding initiated against [the insured]”?

(2) Whether, and under what circumstances, an insurer (through its appointed panel counsel) may owe a duty to its insured to fund the prosecution of the insured’s counterclaim(s) for damages, where the insurance contract requires the insurer to cover “Defense Costs,” or the “reasonable and necessary legal fees and expenses incurred by [the insurer], or by any attorney designated by [the insurer] to defend [the insured], resulting from the investigation, adjustment, defense, and appeal of a Claim”?

(3) Assuming the existence of a duty to prosecute the insured’s counterclaim(s), in the event it is determined that an insurer has an interest in devaluing or otherwise impairing such counterclaim(s), does a conflict of interest arise that entitles the insured to control and/or appoint independent counsel to control the entire proceeding, including both the defense of any covered claims and the prosecution of the subject counterclaim(s)?

The Massachusetts SJC answered “no” to questions one and two. The court provided various reasons for its decision. For purposes here, how they got there is not as important as the fact that they did. I’ll be brief and simply set out a couple of the court’s rationales for its decision that the duty to defend does not include the duty of an insurer to pay to prosecute the insured’s counterclaim:

“Visionaid maintains that the duty to ‘defend’ under its insurance policy may be understood as meaning anything a reasonable defense attorney would do to reduce the liability of the insured. . . . The plain language here, however, does not, by itself, permit the interpretation that Visionaid propounds. To adopt this interpretation would require us to read in a number of provisions that the parties did not include in the policy and, as the dissent puts it, place an additional duty on the insurer ‘[w]here the insured's defense is intertwined with a compulsory counterclaim, where any reasonable attorney defending that proceeding would bring such a counterclaim, and where the insured agrees that any damages awarded to the insured on that counterclaim will offset any award of damages against the insured that the insurer is required to indemnify.’ Not only is this proposition found nowhere in the language of the contract, it would result in extensive preliminary litigation to determine what claims are sufficiently intertwined, litigation that would be brought by ‘any reasonable attorney.’”

“Visionaid argues that because the ‘in for one, in for all’ rule expands the duties of an insurer beyond those explicitly set forth in the contract, the policy also expands the insurer’s duty to include the obligation to prosecute an affirmative counterclaim. While the ‘in for one, in for all’ rule did expand the class of actions that an insurer is obligated to defend, it did not change the meaning of the word ‘defend.’ Expanding the ‘in for one, in for all’ rule in the manner that Visionaid urges misaligns the interests of the party who stands to benefit from the counterclaim (the insured) and the party who bears the cost of prosecuting the counterclaim (the insurer). As a result, allowance of such a rule would increase the total number of counterclaims brought by insured parties. It also, in effect, would result in additional litigation in virtually every case involving insurance on whether a ‘reasonable’ attorney hired separately by (and paid by) the insured would file the counterclaim in the given circumstances. Such an expansion of the ‘in for one, in for all’ rule also would lead to increased litigation between insurers and insured parties on the question whether a successful counterclaim would result in reduced liability on the underlying claim. An increase in litigation between insurer and insured is precisely what ‘in for one, in for all’ seeks to avoid.”

As for question two, the court stated that, “[b]ecause the duty to pay defense costs is coextensive with the duty to defend, we apply the same analysis to question two that we applied to question one, and conclude that the duty to pay defense costs does not require an insurer to fund the prosecution of any counterclaim on behalf of the insured.”

[As a result of the SJC’s decisions on questions one and two, it had no reason to reach question three. But last month the First Circuit did and ruled against VisionAid: “Tasked with settling a dispute about Massachusetts law the way the SJC would settle it, our best assessment is: Given the particulars of the current controversy, we believe the SJC would agree that the presence of the embezzlement counterclaim — which Mount Vernon neither has to prosecute nor pay for — does not generate a conflict of interest entitling VisionAid to separate counsel to defend against Sullivan’s suit at Mount Vernon's expense.”]

VisionAid is an important decision because there are so few addressing the duty to defend-counterclaim issue, not to mention that it is from a state high court. While the issue arises with some frequency, I suspect there are few cases addressing it because it often gets worked out. As noted above, sometimes the insured agrees to pay for the prosecution of the counterclaim, without a fuss, because it ultimately benefits the defense of the insured and/or the defense and counterclaim are so intertwined that there are no additional defense costs to prosecute the counterclaim. The importance of VisionAid is that now, when a defending insurer, for whatever reason, does not desire to also fund an insured’s counterclaim, it has a high court decision, at its disposal, to assist with resolving any dispute – pre- or post-filing of litigation over it.

Heritage Communities is the loudest, longest and clearest decisions that I have seen holding that a reservation of rights letter – despite being many pages -- can be ineffective because it failed to adequately inform the insured of the reasons why the insurer may not be obligated to provide coverage. Such a strong decision, from a supreme court, not to mention on the heels of others, sets the stage for the possibility of Heritage Communities being followed by courts on a national basis.

In addition, decisions addressing the manner of reservation of rights letters -- because they are relevant to every type of liability policy, and without regard to the claim facts -- have the potential for the widest impact of all coverage cases. For this reason, Heritage Communities was an easy one to make the annual Top 10. The decision generated lots of buzz in coverage circles after it was issued. While the ten cases are not listed in order of importance, Heritage Communities would be at the top if they were.

I have lost track of the number of times that I’ve addressed in Coverage Opinions and this annual Top Ten cases of the year article and client seminars and webinars and to the guy next to me in line at Trader Joes, that for a reservation if rights letter to be effective it must fairly inform the insured of the reasons why the insurer, despite that it is providing a defense to the insured, may not be obligated to provide coverage for certain claims or damages in a suit. The only other reminder I’ve given more often is to my ten year old daughter – that she not talk to strangers.

We have all seen reservation of rights letters that set forth a brief factual summary of the claim, followed by several pages of policy language – some completely irrelevant – and then a concluding statement that, viola, the insurer reserves its rights.

But drafting a reservation of rights letter takes more than simply addressing the facts [in detail, hopefully] and citing policy provisions [and not numerous irrelevant ones, hopefully]. The important step is to then tie these two aspects together. In other words, if a policy provision is being cited in the reservation of rights letter, because it may preclude coverage, it should be accompanied by the allegations in the complaint that support this potential coverage defense. A letter may not be a reservation of rights letter simply because it calls itself one. Nor because it says, sometimes multiple times throughout, that the insurer is reserving its rights to deny coverage.

Lots of courts have concluded that reservation of rights letters, lacking specificity in why coverage may not be owed, do not make the grade, no matter how many times they may use the words reservation of rights. As such, the reservation of rights letter is ineffective. Translation – the insurer does not have the coverage defenses that it thought it did. The loudest cases of late to make this point have been Hoover v. Maxum Indem. Co., 730 S.E.2d 413 (Ga. 2012) (Top Ten Case of 2012) and Advantage Builders & Exteriors, Inc. v. Mid-Continent Casualty Co., 449 S.W.3d 16 (Mo. Ct. App. 2014) (Top Ten Case of 2014).

In Hoover, the court stated: “In order to inform an insured of the insurer’s position regarding its defenses, a reservation of rights must be unambiguous. If it is ambiguous, the purported reservation of rights must be construed strictly against the insurer and liberally in favor of the insured. A reservation of rights is not valid if it does not fairly inform the insured of the insurer’s position.” (internal quotes and citations omitted). Hoover at 417.

In Advantage Builders, a Missouri trial court found that an insurer, after undertaking its insured’s defense, owed no coverage. But that decision went by the wayside at the appeals court because the reservation of rights letters – despite containing a lot of pages, setting out the facts at issue, voluminous policy language and a statement that the insurer was reserving its rights – were found to be not effective. The court put it like this: “The letters generally discussed the nature of the underlying lawsuit and set forth various provisions of Advantage’s general liability policy. Neither letter clearly and unambiguously explained how those provisions were relevant to Advantage’s position or how they potentially created coverage issues.” Advantage Builders at 23.

In Harleysville Group Insurance v. Heritage Communities, the Supreme Court of South Carolina held that an insurer’s “reservations of rights” letter, despite setting out many pages of policy provisions, and other information usually contained in a reservation of rights letter, was ineffective because it failed to adequately inform the insured of the reasons why the insurer may not be obligated to provide coverage. [The Heritage Communities decision was first issued by the court on January 11, 2017. But then, for procedural reasons (that I didn’t try to figure out), that decision was vacated and replaced with a decision issued on July 26, 2017.]

Specifically, the court held: “At the hearing before the Special Referee, Harleysville produced letters it sent to former Heritage principals and counsel between December 2003 and February 2004. These letters explained that Harleysville would provide a defense in the underlying suits and listed the name and contact information for the defense attorney Harleysville had selected to represent Heritage in each matter. These letters identify the particular insured entity and lawsuit at issue, summarize the allegations in the complaint, and identify the policy numbers and policy periods for policies that potentially provided coverage. Additionally, each of these letters (through a cut-and paste approach) incorporated a nine- or ten-page excerpt of various policy terms, including the provisions relating to the insuring agreement, Harleysville's duty to defend, and numerous policy exclusions and definitions. Despite these policy references, the letters included no discussion of Harleysville’s position as to the various provisions or explanation of its reasons for relying thereon. With the exception of the claim for punitive damages, the letters failed to specify the particular grounds upon which Harleysville did, or might thereafter, dispute coverage.”

The court further criticized the reservation of rights letter: “[I]t is axiomatic that an insured must be provided sufficient information to understand the reasons the insurer believes the policy may not provide coverage. We agree with the Special Referee that generic denials of coverage coupled with furnishing the insured with a copy of all or most of the policy provisions (through a cut-and-paste method) is not sufficient. That is precisely what happened here, with the exception of the coverage dispute concerning punitive damages.”

As an aside, but an important one, Heritage Communities involved coverage for construction defects. The jury in underlying litigation awarded damages to homeowners’ associations against the developers of their condominium complexes. The awards were in the manner of general verdicts. However, under South Carolina law, the cost of repairing faulty workmanship is not covered; but resulting property damage, beyond the defective work itself, is covered. In addition to the court’s pronouncement, that the reservation of rights letters were ineffective, the court also took the insurer to task for not advising the insured of the need for allocation between covered and uncovered damages. As a result, “the Special Referee found coverage under the policies was triggered because the juries’ general verdicts included some covered damages. Although the Special Referee found that the costs to remove and replace the faulty workmanship were not covered under the policies, the Special Referee concluded that it would be improper and purely speculative to attempt to allocate the juries’ general verdicts between covered and non-covered damages. Accordingly, the Special Referee ordered the full amount of the actual damages in the construction-defect suits would be subject to Harleysville’s duty to indemnify in proportion with its time on the risk.” This approach was affirmed by the Supreme Court.

This is no small point. Even though the insurer’s liability was limited to its time on the risk – an issue that the court spent considerable effort addressing – the fact remains that, on account of the general verdicts, the insurer’s time on the risk share included uncovered “faulty workmanship” damages. Paying for uncovered damages was the insurer’s consequence for not addressing, in the reservation of rights letter, the need for allocation between covered and uncovered damages.

“What’s in a name? That which we call a rose by any other name would smell as sweet.” William Shakespeare, “Romeo and Juliet,” Act II, Scene 2. But the same cannot be said of reservation of rights letters. In fact, just the opposite. A letter that is called a reservation of rights may be nothing of the sort.

The issue of an insurer talking action, pre-trial, to have the trier of fact answer questions that may allow for an allocation, between covered and uncovered clams, is one that sometimes confronts courts. In other words, this is the situation of an insurer, seeking to have the judge or jury make factual determinations, so that a so-called “general verdict” does not result. If a general verdict does happen, the insured may argue that, since there is no way to tell which aspect of the verdict is for covered claims and which is for uncovered claims, the entirety of the verdict must be covered. Or, alternatively, the insured may argue that the insurer bears the burden (and, perhaps, a difficult one at that) to prove which part of the general verdict constitutes uncovered claims. Case law on this issue, while not abundant, goes in various directions.

An insurer taking pre-trial actions, to address covered and uncovered claims, is one type of allocation. The other, its close cousin, is allocation of a settlement between covered and uncovered claims. When you consider that the vast majority of lawsuits settle, this second type of allocation is, at least statistically speaking, more important. But despite the importance of the issue, there is not an overwhelming amount of case law addressing it.

The allocation issue was before the Eight Circuit in UnitedHealth Group v. Executive Risk Specialty Ins. Co. and the court provided an extensive analysis in the context of an agreement to resolve certain lawsuits for a staggering $350 million. And while UnitedHealth involved E&O claims, the court relied on cases addressing CGL policies in reaching its decision. So UnitedHealth’s applicability can be argued to extend beyond the world of E&O (and D&O). Given the extensive nature of the allocation analysis, and less than abundant case law, it is hard to imagine that UnitedHealth will not be the go-to case for courts nationally addressing the issue.

UnitedHealth is a complex case with a protracted history. That’s not surprising for a claim this size. There aren’t too many $350 million settlements that involve slips on wayward banana peels. The court, thankfully, does a good job of keeping it simple.

UnitedHealth settled two lawsuits for a single lump-sum payment of $350 million. In the so-called AMA suit, several group health plans insured or administered by UnitedHealth sued the company, alleging that it conspired with other insurers to reduce payment for out-of-network benefit claims. The plaintiffs brought claims under ERISA, RICO, the Sherman Act and state law. The district court dismissed most of the ERISA and RICO claims and the Sherman antitrust claims proceeded until the case settled. In lawsuit number two, the so-called Malchow suit, a group of plaintiffs sued Oxford Health, a UnitedHealth entity, alleging claims under ERISA and violations of a state regulation, arising from breaches of contract and claims regarding Oxford’s billings and payments. [There was a third suit at issue, but it is not necessary to discuss it here to make the points. KISS.]

Here’s the bottom line -- There was no potential coverage for the Malchow suit (ERISA) but the AMA suit (antitrust) was covered. However, UnitedHealth’s $350 million settlement did not allocate the settlement amount between the two suits. Litigation ensued between UnitedHealth and its excess insurers. After several years, and no doubt a volume of documents that would impress a Redwood, the case, involving Minnesota law, ended up in the Eighth Circuit on the allocation issue. The appeal was from the District Court’s grant of summary judgment that UnitedHealth failed to meet its burden to support an allocation between the potentially covered AMA claims and the non-covered Malchow claims.

After determining that neither policy language, nor case law, supported UnitedHealth’s argument that the entire settlement was covered, so long as any part of it was covered, the appeals court turned to the allocation issue, after having determined that UnitedHealth bore that burden.

So how is that to be done? The court put it in these simple terms: “To prove allocation, parties can present testimony from attorneys involved in the underlying lawsuits, evidence from those lawsuits, expert testimony evaluating the lawsuits, a review of the underlying transcripts, or other admissible evidence. To survive summary judgment, an insured need not prove allocation with precision, but it must present a non-speculative basis to allocate a settlement between covered and non-covered claims.”

Perhaps the best way to explain how to achieve allocation is by how not to do so – which is how the court described UnitedHealth’s efforts. I’ll borrow from the court’s opinion (headings are mine):

What Did UnitedHealth Know And When Did It Know It?

“UnitedHealth complains that the district court excluded evidence that would have supported an allocation of the settlement. The company argues that the district court erroneously excluded both Judge McKenna's rulings and expert testimony in the underlying lawsuits that occurred after the settlement agreement was signed on January 14, 2009. The allocation inquiry examines how a reasonable party in UnitedHealth's position would have valued the covered and non-covered claims. In evaluating the claims, we look to what the parties knew at the time of settlement.” (emphasis added). … “The process that occurred after the settlement on January 14, 2009—including Judge McKenna’s rulings and expert testimony and a report admitted at the settlement hearings—was inadmissible for purposes of allocating the $350 million settlement, because it did not address information that was available to the settling parties in January 2009. A reasonable settling party could not have relied on Judge McKenna’s post-January rulings to inform its allocation of the $350 million settlement in January. a reasonable person would have allocated the settlement at the time it was reached.”

Choosing The Right Expert

“Halverson is an expert on antitrust law, and the district court allowed him to testify about the value of the antitrust claims asserted in the AMA suit. But Halverson admitted that he is not an expert on ERISA, and he testified in his deposition that he did not analyze the Malchow lawsuit. Without analyzing the Malchow suit, Halverson could not provide an expert opinion about its value. And without knowing the value of the Malchow suit, Halverson could not testify as to the relative value of the AMA suit compared to the Malchow suit. Thus, the district court did not abuse its discretion in determining that Halverson was not qualified to testify about the settlement value of the ERISA claims or how the $350 million settlement should be allocated between the AMA and Malchow claims.” (emphasis in original).

The Complaint Is Not Proof of Value

“At oral argument, UnitedHealth suggested that because the Malchow complaint alleged only $160,000 in damages, a jury reasonably could calculate the value of Malchow as no more than $160,000 and allocate the rest of the $350 million settlement to the AMA suit. But UnitedHealth did not present this argument to the district court, and it is forfeited. The amount of damages cited in the complaint, moreover, does not by itself support a finding on how a reasonable party in UnitedHealth’s position would have valued the Malchow suit when it settled the cases. The Malchow suit was a putative class action; the damages enumerated were attributable only to the named individual plaintiffs. The exposure to the defendants in damages, costs of litigation, injury to reputation, and other categories could have been much greater.”

Providing Valuation Information

Lastly, while it is unclear to me what impact this may have had, the court noted that “UnitedHealth made strategic decisions to invoke attorney-client privilege and work-product protection to avoid presenting evidence from its own representatives about contemporaneous valuations of the settlement.”

Based on all this, the court concluded: “It is well settled that a jury may not base its damages award on speculation. The evidence presented by UnitedHealth fails to give a jury more than a speculative basis on which to allocate the $350 million settlement between the AMA and Malchow suits.”

Postscript: For an excellent article on the settlement-allocation issue see “Settlement of Covered and Non-Covered Claims: Assigning and Meeting the Burden of Proof of Allocation,” by Bonnie Hoffman, of Philadelphia’s Hangley Aronchick Segal Pudlin & Schiller, and Jacqueline Robinson (Dungee) (formerly of the Hangley firm) which appeared in Issue 5 (2017) of DRI’s “Covered Events.” The authors – co-counsel for Executive Risk in UnitedHealth – address which party has the burden to prove how much of a settlement was or should be allocated to covered versus non-covered claims.

After citing cases on both sides, the authors conclude that, “[p]ractically speaking, the burden to allocate should fairly lie with the party with control over the settlement and access to the relevant information concerning any potential allocation.” (emphasis in original).

But, more than just an article that tells you how various courts treated the allocation issue, the authors also provide some sage advice for insures to prepare for the impending allocation issue: “One way to persuade the court that the burden should be placed on the insured is to develop a record — early and often. Upon learning of a settlement, when requesting liability and damages analyses, expert reports, mediation briefs and the like, ask for the insured’s allocation analysis too. Ask the insured whether and the extent to which it has allocated the settlement between covered and non-covered claims and/or between the various causes of action in the complaint To the extent the insured does not respond or otherwise refuses to provide this information, make a record. Continue asking and do so in writing.”

Essentially, the authors’ message is that insurers that are proactive in addressing allocation between covered and uncovered claims take away an insured’s ability to argue that the insurer should be penalized for, well, not being proactive in addressing allocation. Early and often – good advice from Ms. Robinson and Ms. Hoffman.

As we all know, policyholders, when being defended under a reservation of rights, sometimes seek to reject the so-called panel counsel provided by their insurers and demand so-called independent counsel. Policyholders generally argue that, on account of the reservation of rights, panel counsel may defend the case in a manner that prejudices the insured’s interests. You know, it’s the old “steering argument.” As the old saw goes, panel counsel, in hopes of getting lots of new cases from the insurer, may steer the defense such that any liability is based on the uncovered claims. The reasons why this is an outrageous proposition are legion. But, nonetheless, many states have adopted the rule that, if an insured can establish that a reservation of rights creates a conflict, the insured is entitled to be defended by counsel of its choice, at the insurer’s expense. [Then, welcome to the dispute over the rates to be paid to the insured’s counsel of choice. That’s for another day.]

But while many states permit independent counsel if an insured can establish that a reservation of rights creates a conflict, that’s often a big IF. Only a handful of states automatically allow independent counsel when an insured is being defended under a reservation of rights. For the rest, it must be established that the reservation of rights creates a conflict. And that is no simple task. It can often be a highly factually intensive inquiry and require making all sorts of predictions about how the case, based on what’s alleged at the outset, my play out down the road.

I selected the Washington Supreme Court’s decision in Arden v. Forsberg & Umlauf for inclusion here as the court addressed the possibility of an insurer owing independent counsel for a different reason. And, most importantly, a simpler one. One that is not tied to the complex analysis of whether the facts and grounds for reservation of rights create a conflict.

The case has some unusual facts and aspects that are unique to Washington. Even the decision itself, and four justice concurrence, is unusual. But despite all this, the case provides an overarching take-away: it may have handed policyholders a new argument in support of independent counsel, when being defended under a reservation of rights, even if the ROR did not otherwise create a conflict to justify independent counsel. That there were four amicus parties before the Supreme Court demonstrates that this was no nothing burger.

I’ll let the court provide the facts: “Roff and Bobbi Arden had homeowners insurance with Property and Casualty Insurance Company of Hartford (Hartford). In December 2011, Roff Arden, allegedly suffering a posttraumatic stress disorder attack, shot and killed a six-month-old Labrador puppy owned by his neighbors Wade and Ann Duffy. In June 2012, the Duffys sued the Ardens, alleging willful conversion, malicious injury, intentional infliction of emotional distress, and gross negligence. The Ardens sought liability coverage with their insurer, Hartford. Initially, Hartford denied a defense and coverage based on the policy’s intentional act exclusion. The Ardens thereafter retained private counsel, Jon Cushman, to seek coverage and to assert counterclaims against the Duffys. In November 2012, after communications from Cushman, Hartford agreed to defend and provide representation to the Ardens. Hartford appointed attorneys John Hayes and William “Chris” Gibson of the firm Forsberg & Umlauf PS to defend against the Duffys’ claims. It was made clear that the appointed attorneys would not represent the Ardens in the counterclaims. Cushman remained as counsel in the lawsuit for those purposes.”

Of note, the court stated: “Although no evidence exists nor do the Ardens claim in the record that Hayes, Gibson, or the Forsberg firm simultaneously represented the Ardens and Hartford, deposition testimony shows that both Hayes and Gibson (hereinafter referred to collectively along with Forsberg & Umlauf PS as “Forsberg”) had a ‘long-standing relationship’ with Hartford. Forsberg had an established relationship with Hartford that included representing Hartford on coverage matters as well as representing Hartford’s insureds. The record indicates Forsberg did not disclose its relationship with Hartford to the Ardens.”

Lots of settlement negotiations took place between the Ardens and Duffys. While Hartford issued a reservation of rights letter, the court made much of the fact that Hartford engaged in settlement negotiations without requiring any contribution from the Ardens. Hartford ultimately settled the case.

However, the Ardens continued to pursue claims “based on the assertions that Forsberg breached its fiduciary duties of disclosure and loyalty by failing to disclose its relationship with Hartford, and by failing to communicate and seek consent from the Ardens during settlement negotiations.” The trial court granted Forsberg’s motions, holding that there was no disqualifying conflict of interest and therefore no breach of fiduciary duty. The Court of Appeals affirmed.

The case made its way to the Washington Supreme Court. At the outset, because Hartford was not seeking for the Ardens to contribute to any settlement, the court was not convinced that Hartford’s defense was provided under a reservation of rights. If it had been, then Forsberg was required to comply with Washington’s “Tank” requirements. Tank v. State Farm Fire & Cas. Co., 715 P.2d 1133 (Wash. 1986) sets out certain duties that insurer-retained defense counsel must comply with.

The court left no doubt that, if the Tank requirements applied, Forsberg complied: “To the extent that Tank informs this case and defense counsel’s duty of good faith, the record shows that like State Farm in Tank, Forsberg fully investigated the incident, informed the Ardens that it represented only the Ardens, and fully informed the Ardens of all settlement activity. We find no evidence to suggest that Forsberg engaged in actions that demonstrated greater concern for Hartford’s interests than for the Ardens.”

But that wasn’t the end of the story. The court went on to address Rule 1.7 of the Rules of Professional Conduct, which “prohibits an attorney from representing two different clients if there is a ‘significant risk’ that the lawyer’s responsibilities to one of the clients will materially limit the lawyer’s responsibilities to the other client.” [Rule 1.7 here is likely the same in most states.] But the court noted that a lawyer may still represent both clients if four conditions are met: “the lawyer reasonably believes that it will be possible to represent both clients competently and diligently, the representation is not prohibited by law, the clients are not directly adverse to one another, and the clients give informed consent after adequate disclosure of the relationships.”

The Ardens were arguing that Forsberg was disqualified from representing them based on Forsberg’s past involvement with Hartford – being the firm’s representation of Hartford in unrelated coverage matters. And since the Ardens did not consent to such representation, as required under Rule 1.7, they claimed an entitlement to damages.

While the court “reject[ed] the suggestion advanced that wherever a previous relationship between the insurer and retained counsel exists, a per se disqualification rule is supported,” it had “no concerns recognizing the rule requiring disclosure of conflicts, potential or actual, in the context of attorneys hired by insurance companies to represent insureds’ interests in civil litigation, whether such representation is provided under an ROR or not. These same responsibilities exist in the context of dual representation.”

The Ardens and Forsberg presented conflicting expert testimony on whether Forsberg’s failure to disclose its relationship with Hartford satisfied the appropriate standard of care for a lawyer. The court noted that such “conflicting expert opinions will generally give rise to a genuine issue of material fact, precluding summary judgment on the question of breach.” However, the court still found in favor of Forsberg on the basis that the Ardens did not suffer any legally recoverable damages.

Four Justices concurred in the result but were not pleased with the majority’s conclusion that it was not a reservation of rights situation. These four justices were of the opinion that the Tank requirements had been triggered. As a result, they felt that the majority introduced “confusing dicta” that they could not endorse and would have simply affirmed based on the Ardens’ failure to establish damages.

Whether the defense was provided under a reservation of rights, the Tank requirements were triggered, the majority opinion had confusing dicta and whatever the concurring opinion adds, is all to do with the case itself.

The real take-away from Arden is this. Insurers often have significant relationships with their panel firms – both for coverage and defense work. Has the Washington Supreme Court handed policyholders the argument that, based on this relationship, in a reservation of rights-defended case, the policyholder must consent to being defended by panel counsel, even if the ROR did not otherwise create a conflict to justify independent counsel.

On paper, when you consider the selection criteria for this Top 10 list, it is hard to imagine a case less deserving than the New York Court of Appeals’s in Carlson v. American International Group. As I stated above when describing such criteria, the most important consideration for choosing a case, as one of the year’s ten most significant, is its potential ability to influence other courts nationally. That being said, the most common reason why many unquestionably important decisions are not selected is because other states do not need guidance on the particular issue, or the decision is tied to something unique about the particular state.

Carlson v. American International Group involves New York Insurance Law Section 3420(d). You know. That’s that New York statute that can invalidate a disclaimer letter, for a bodily injury or wrongful death claim, that was not sent timely, even though it seems like it was sent in very short order after the claim came in. It is also the statute that can invalidate such a disclaimer letter where a copy of it was not sent to the claimant.

Section 3420(d) is a hugely important statute when it comes to New York coverage law. But it has no applicability outside the Empire State. So why would a case involving section 3420(d), even a very important one, be chosen as one of the top ten of the year? Because in Carlson v. AIG the New York high court expanded the potential reach – and widely so -- of section 3420(d). It’s still a New York statute – but thanks to Carlson, more claims will be in a New York state of mind.

Guest Author: Dan Kohane, Hurwitz & Fine, Buffalo

I am thrilled to have Dan Kohane, a Senior Member of the New York law firm of Hurwitz & Fine, P.C., and chair of the firm’s Insurance Coverage and Extracontractual practice groups, serve as a guest author to address Carlson. Dan is an adjunct professor of Insurance Law at the University of Buffalo Law School and a nationally recognized insurance coverage counselor. He serves as an expert witness and conducts extensive training, consultation and in-house seminars on this highly specialized practice. Dan is a founding member of the American College of Coverage and Extracontractual Counsel, a member of the American Law Institute, past president of the Federation of Defense & Corporate Counsel and serves on the Board of Directors of the National Foundation for Judicial Excellence. He is known in the industry for his comprehensive newsletter, Coverage Pointers, a bi-weekly publication now in its 19th year, summarizing important insurance coverage decisions.

Dan is a dean of the coverage bar. It is hard to imagine too many people as well-qualified as Dan to discuss Carlson v. AIG and its potential significance on the coverage landscape.

On November 20, 2017, New York’s highest court dramatically expanded the breadth of New York Insurance Law §3420. That section establishes the minimum requirements for liability insurance policies in the State. For liability policies that do not include required provisions, at least as favorable to insureds and injured parties, the statute deems provisions into the policies. The Court of Appeals held that it not only applied to policies that were issued to New York insureds or by New York insurers but also to insureds that have a presence in New York and create risks in New York.

Out-of-state insurers must take heed. If they issue policies to companies (and perhaps individuals) who have a presence in New York (operate a business, for example), New York disclaimer requirements will apply to that policy and that insurer, even if the policy were issued by an out-of-state insurer to an insured whose home office was located outside of New York.

The Carlson decision sends a sobering message to insurers that issue policies to insureds that have a presence in New York even if the policies are sent from a non-New York office to a non-New York insured location. Section 3420 applies to policies that cover both insureds and risks located in New York.

Many insurers regularly issue reservation of rights letters when responding to notices of New York accidents or claims. Often carriers that have issued policies in other states protecting against multi-state risks have not followed the New York Insurance Law §3420 mandates, i.e. to disclaim (rather than reserve their rights) within 30 days and send copies of disclaimer letters to the injured party and other claimants. These insurers will learn that it is critical to quickly determine whether their insureds have a presence in New York State and have created a risk in New York State. If the carriers fail to do so, they may find that their reservation of rights letters may be ineffective. The same is the case for their exclusion-based or breach-based disclaimers if not copied to injured persons and other claimants or not sent within 30 days after they received notice. The penalty is a significant one: the loss of a right to rely upon policy exclusions and breaches of policy conditions.

Carlson, individually and as Administrator of his deceased wife’s estate (as an assignee of Porter) commenced a New York “Direct Action” against National Union Insurance Company (“National”) and American Alternative Insurance Company (“AAIC”) seeking to secure insurance proceeds from policies issued to MVP Delivery (“MVP”) and Porter, under NY Insurance Law 3420(a)(2). That section permits an action against an insurer to recover liability insurance coverage if a plaintiff (turned judgment creditor) obtains a judgment against an insured defendant (turned judgment debtor) and the judgment creditor believes the insurer’s policy covers the judgment but the insurer refuses to pay it.

That statute – which contains a variety of significant provisions that govern New York liability insurance, and Draconian rules on disclaimers, only applies to policies “issued or delivered in New York.”

The New York Court of Appeals held that the term “issued or delivered” in New York applied not only to policies issued to insureds that had offices in New York and not only to insureds who received the policies in New York, but encompassed situations where both insureds and risks were located in New York State.

Claudia Carlson was killed when a truck with a DHL logo, owned by MVP and driven by Porter, crossed the double-yellow line and hit her head on. The jury awarded her Estate $20 million, which was eventually reduced to $7.3 million. MVP’s insurer paid the Estate $1.1 million and assigned to Carlson, Porter’s right to other coverages. There was an issue of DHL’s responsibility for the accident, but if it were responsible, National Union provided a $3 million dollar primary policy, followed by a $2 million excess policy with AAIC and then a $23 million umbrella policy with National Union.

AAIC moved to dismiss the lawsuit arguing that its policy was not “issued or delivered” in New York. It had been issued to DHL’s predecessor, Airborne, Inc., headquartered in Washington and later assumed by DHL, headquartered in Florida. AAIC was in New Jersey when the policy was issued.

Insurance Law Section 3420 is a “deeming statute”, requiring carriers whose policies are bound by its terms, to permit direct actions, disclaim coverage promptly, accept notice of claim from injured persons in addition to insureds and disclaim promptly in bodily injury and wrongful death cases, generally within 30 days. Because of the statute’s disclaimer requirements, reservation of rights letters issued in such cases are usually ineffective to preserve an insurer’s right to rely upon policy exclusions and breaches of policy condition. Accordingly, broadening the scope of policies impacted by this statute exposes insurers to significant and additional risks in New York.

In 2008, the Court of Appeals considered the same question in a case where a New Jersey insurer issued a policy to a New Jersey insured, East Coast Stucco, which covered New York risks. The language of the statute was slightly different at that time, applying to policies “delivered or issued for delivery in this state:”

It is undisputed that the policy was actually delivered in New Jersey by a New Jersey insurer to a New Jersey insured. Was the policy nonetheless “issued for delivery” in New York? We answer in the negative.

A policy is “issued for delivery” in New York if it covers both insureds and risks located in this state (citations omitted). By including New York as an “Item 3.C.” state, the policy covers risks located in New York. East Coast Stucco is a New Jersey company, with its only offices located in that state, so it cannot be said that the insured is located in New York. Because the policy was neither actually “delivered” nor “issued for delivery” in New York, Preserver is not required [to comply with the statute].
Preserver Ins. Co. v Ryba, 10 NY3d 635, 642 [2008].

However, in Carlson, the same court held that: “DHL is located in New York because it has a substantial business presence and creates risks in New York. It is even clearer that DHL purchased liability insurance covering vehicle-related risks arising from vehicles when delivering its packages in New York, because its insurance agreements say so.”

Again, note that East Coast Stucco, the insured in the Preserver case, also purchased liability insurance coverage to protect New York risk, because its insurance agreements say so.

The Court of Appeals held that the change in statutory language, from “issued for delivery” to “issued or delivered” broadened its application. Applying the language to policies issued “by an insurer located in New York or by an out-of-state insurer who mails a policy to a New York address would undermine the legislative intent” of the statute.

The court specifically rejected a strong three-judge dissent holding that the dissent’s approach would wrongly exclude “an insurance policy issued by a national insurer located in Connecticut to a retailer operating in all fifty states, if the policy was delivered to the retailer’s headquarters in Arkansas – even if the policy was specifically written to cover risks in New York created by the insured’s extensive operations in this state.”

The dissenting judges noted, properly, that the majority’s “misinterpretation” of Insurance Law 3420 “enacts sweeping changes across the Insurance Law, generating substantial implications, both known and unknown”. It pointed out that the term “issued for delivery” – the phrase used in Preserver is not the phrase used in 3420 now, which is “issued or delivered”.

The dissent’s language is instructive and suggests frightening consequences:
"[I]t is hardly plausible that the legislature intended to require every automobile insurer throughout the country—regardless of where the policy was issued or delivered—to comply with New York insurance statutes on the chance that the insured vehicle may be driven into New York."

The majority opinion claims that its holdings are limited to policies that cover “both insureds and risks” located in New York. The dissent wonders whether it will be applicable when an out-of-state resident drives into New York and it owns property or vacations in New York.

What are the counseling points? When an insurer is placed on notice about a New York bodily injury or wrongful death accident, it must act quickly and respond properly:

• It must determine whether its insured is “located in New York”. The Court of Appeals found that DHL was “located in” New York “because it has a substantial business presence”. How much business must an insured be doing to create a “substantial business presence” is unclear.

• It needs to examine its policy to see if New York risks are covered, by policy terms.

• If the answer to both questions is “yes” or, most importantly, if the answer to both questions “might be yes”, the insurer should err on the side of compliance with Insurance Law §3420(d)(2).

• It must send out a coverage position letter within 30 days, which avoids reservation of rights language, uses, if necessary, complete or “partial” disclaimer language and is copied to the injured party (or his/her counsel) and any other person, entity or party who might interpose a cross-claim against the insured.

Failure to do so, when required, may well result in the loss of the insurer’s ability to rely upon otherwise valid and applicable policy exclusions or the insured’s breach of policy conditions.

The dissent suggests, understandably so, that with respect to auto policies i.e., the New York legislature did not intend for Insurance Law §3420 to require “every automobile insurer throughout the country…to comply with New York insurance statutes on the chance that the insured vehicle may be driven into New York.” Consider:

• Jane Roe from New Jersey commutes to New York City for work. While driving down Fifth Avenue, she runs over Max Factor, who is injured. Jane seeks coverage under her homeowners policy issued in Connecticut and mailed to her home in New Jersey. The policy contains an auto exclusion. Jane derives all of her income from her job in New York. Does Jane have a “substantial business presence” in New York? If the Connecticut homeowners carrier does not comply with the disclaimer requirements of Insurance Law §3420, will it lose its right to rely upon the auto exclusion? Is there a carve-out for nature persons? Does the “substantial business presence” requirement only apply to business corporations?

• What about employer liability lawsuits where bodily injury is alleged? ABC, a national corporation, runs a national chain of department stores. ABC has a policy issued in CA delivered to headquarters in TX. Employee, who works at NY branch, commences action for workplace harassment and emotional distress is claimed, which in New York, constitutes “bodily injury”. If the carrier merely reserves it rights on policy exclusions, will it be precluded from relying upon them as a basis for disclaimer?

We shall see. We can anticipate “choice of law” questions being raised in future controversies surrounding these issues. In the meantime, we recommend a careful review of all New York claims.

The annual Top 10 coverage cases involves the most significant coverage decisions. By this, they are almost always the kind made by judges. But there can be other kinds of decisions that affect coverage. And ISO’s decision, to file for a standard form Professional Liability policy, is one of the year’s ten most significant. While its impact on claims is a long ways away, the first step down that road had to be taken at some time. [Truth be told, I’m not certain when the ISO filing was actually made. But I believe that the policy was intended to be effective in 2017. So I included it here. If I’m wrong I’ll send you back your subscription price.]

One of the hallmarks of commercial general liability insurance is that it is provided by insurers with relatively consistent terms. Whether insurers use ISO’s stalwart CG 00 01 form, or something similar, you can be pretty certain that the potential for coverage is based on “bodily injury” or “property damage,” that takes place during the policy period, and was caused by an “occurrence,” defined as an accident (you know the rest). You can also be confident when it comes to a CGL policy that the duty to defend will only attached to a “suit,” defense costs will be supplemental to limits, there will be relatively predictable exclusions, coverage is provided on a primary basis, subject to certain exceptions, and notice of a claim must be provided as soon as practicable.

Of course there are sometimes exceptions to all of these and each CGL policy likely has loads of endorsements that are much less predictable than the terms and conditions. But, despite all this, I’ll stick with my first line -- one of the hallmarks of commercial general liability insurance is that it is provided by insurers with relatively consistent terms.

While CGL policies have enjoyed this similarity in terms, the same cannot be said about professional liability policies. These policies are not subject to a stand form, ala CG 00 01. As a result, professional liability policies have always resembled a box of chocolates. And some of what you get inside can vary widely. Professional liability policies can differ in their all-important “claims made and reporting” terms, as well as key definitions, such as “claim,” “damages” and “wrongful act.” And exclusions in professional liability policies can resemble the largest of all Whitman’s Samplers.

Because of the consistency in CGL terms, it is often an apples to apples comparison when using case law as guidance to address coverage. However, the lack of consistency is professional liability terms can make resort to case law less effective and more challenging. The need to distinguish policy terms – between what’s in the cases and what’s before you -- is often in play.

But the table has now been set for professional liability policies to offer the same consistency in terms that CGL policies have long enjoyed. ISO has filed a Miscellaneous Professional Liability Policy, along with a boatload of endorsements, including some that are tailored to specific professional services, including life coaching, photography, salons, translators and travel agents.

Given the comfort that so many insurers have with using ISO’s CGL form, it is not unreasonable that there would also be wide-spread take-up by insurers of ISO’s professional liability form. If this happens, analyzing case law regarding professional liability policies would resemble the process that exists for CGL Policies. All of this is a long ways away from happening, as the ISO form would need to achieve wide-spread use, and then time would be required for case law to develop in bulk. But thanks to ISO’s filing, this possibility at least exists.

Some of the provisions in ISO’s Miscellaneous Professional Liability Policy will likely be difficult for insurers to accept. Likewise, insureds and brokers, who are in the know, may not be willing to purchase a policy that contains some of the ISO provisions. Here is a look at a few of the key provisions of ISO’s Miscellaneous Professional Liability Policy:

Reporting: The policy is “claims made and reported.” Thus, the claim must be first made during the policy period and reported to the insurer within the policy period, as soon as practicable, but in no event later than 60 days after the end of the policy period. The extra 60 days to report offers an edge to insureds. But the “as soon as practicable” requirement can benefit insurers, in the event of delayed notice that is still within the required term, assuming the provision is not interpreted to require prejudice. This is where a battle-ground is likely to lie.

However, despite this notice of “claim” provision, the policy also mandates that notice of circumstances, potentially involving a wrongful act, that could reasonably be expected to give rise to a claim, be given to the insurer as soon as practicable. If done, any subsequent related claim will be deemed to have been made at the time of the notice of the potential claim.

However, establishing “notice of circumstances” can be very fact-based and often requires getting into the insured’s head, i.e., whether the insured knew that a circumstance could reasonably be expected to give rise to a claim. By making “notice of circumstances” mandatory, and not optional, it seems that there is a high probability of notice disputes, especially since a formal “claim” does not usually come out of the blue, without the insured having had some sense of it. Did that sense trigger the insured’s notice of circumstances obligation? Courts will be kept busy.

Duty to Defend: The duty to defend applies to “claims” and not just suits. The definition of “claim” includes a demand for monetary or nonmonetary relief, including injunctive relief. Translation: the insurer has a duty to defend “demand letters” (as well as suits seeking nonmonetary relief). Hiring lawyers at the demand letter stage may be an obligation that some insurers are just not willing to take on.

Consent to Settle: The insurer will not enter into a settlement without the insured’s consent. While this is not uncommon in some types of professional liability policies, especially medical malpractice, it is unusual to see it in a policy that covers all professionals. If consent to settle is not provided, then a hammer clause – with an unusual aspect -- kicks in. The insurer is only liable for the amount it could have settled for, defense costs up to the date of the insured’s refusal, 50% of defense costs after the date of refusal to settle and 50% of damages in excess of the refused settlement.

Wrongful Act: The Policy’s definition of “wrongful act” is an actual or alleged act, error, misstatement, misleading statement, omission, neglect or breach of duty. By not limiting wrongful acts to “negligent acts,” the policy is more likely to apply to intentional conduct. This is especially so since the exclusion titled “Fraudulent, Criminal, Malicious, Dishonest or Intentional Acts” does not in fact include “intentional acts” in its text. This exclusion also does not apply to the duty to defend until there has been a final, non-appealable judgment or adjudication that establishes such conduct. All in all, based on these provisions, insurers will likely find themselves defending some bad conduct.

Choice of Counsel: The Policy gives the insured the right to select counsel. [I believe that an insurer would have a difficult time enforcing this provision, in a state where case law would afford the insured the right to independent counsel.]

Defense Costs: The limit of liability is reduced by defense costs.

Coverage Enhancements: The policy includes sub-limits for defense of disciplinary and licensing proceedings and subpoena assistance.

Punitive Damages: The policy’s definition of “damages” excludes amounts that are uninsurable under applicable law.

Exclusions: Some of the Policy’s exclusions are: abuse or molestation; breach of contract; bodily injury (including emotional injury), property damage and the CGL personal injury offenses; insured versus insured; intellectual property; and disclosure of confidential information (data breach).

Other Insurance: The policy is written on an excess basis.

There is a lot more to ISO’s Miscellaneous Professional Liability Policy. But these are some of the highlights.

Given ISO’s strong reputation, my money is on the organization’s Professional Liability form to achieve wide-spread use. But because it’s a significant decision for insurers, it will likely take time for this to happen. It is inherent in any terms and conditions form that some provisions will benefit insurers more than insureds and vice-versa. It would not surprising to see some insurers adopt the ISO form and then use endorsements, both to limit their exposure and, for competitive reasons, expand it.

Analyzing case law, addressing professional liability policies, has always been challenging because of the apples to oranges situation created by the lack of consistency in policy terms. I applaud ISO for taking the first step in addressing this situation.