C L A I M D E N I E D April 2005 A publication of the Lowenstein - - PDF document

C L A I M

D E N I E D

April 2005

A publication of the Lowenstein Sandler Insurance Law Practice Group

I

n recent years, the profile of insurance brokers has risen substantially because of headline- making events like the “occurrence” dispute associated with the World Trade Center tragedy and Attorney General Elliot Spitzer’s investigation into broker compensation and “bid- rigging” issues. However, these events are not the only reason for the notable increase in lawsuits being filed against

• brokers. A significant source of broker

liability derives from the broker’s role as claims manager for the policyholder. Many brokers have been forced to take

• n this responsibility to remain

competitive in today’s complex insurance market by offering “full service” to their clientele. Unfortunately, not all brokers appreciate the pitfalls associated with navigating the claims process. This article highlights five common claims handling mistakes that expose brokers to professional liability.

• 1. FAILURE TO NOTIFY THE

CORRECT INSURER. At the most basic level, a broker must know to send timely notice of a claim to the right insurer during the correct policy period. Many new policies are written on a claims made basis with broad definitions of “claim” and strict notice requirements. Brokers must recognize, for example, that a demand letter from a customer and/or its attorneys may constitute a claim under the policy. Likewise, an “invitation” to attend a “non-binding” mediation session with the EEOC will likely trigger a notice obligation. Because courts nationally have interpreted the notice provisions of claims made policies strictly, an error in notice may forfeit coverage for an

• therwise valid claim. Brokers must be

particularly careful in giving notice of a claim when a change in insurers has been made on consecutive claims made policies. Far too frequently, the broker decides to place the “wrong” insurer on notice of the claim and by the time the error is discovered, notice can no longer be given to the “right” insurer. Moreover, even in the case of

• ccurrence-based coverage, many

brokers overlook the scope of coverage

This document is published by Lowenstein Sandler PC to keep clients informed about current issues. It is intended to provide general information only.

A L D

Five Frequent Claims Handling Mistakes That Brokers and Policyholders Must Avoid By Lynda A. Bennett, Esq.

Inside

Untimely Notice By a Matter of Hours Results in Forfeiture of Coverage Under a Claims Made Policy Punitive Damages Are Available When Insurers Employ Bad Faith Claims Handling Practices Directors and Officers Denied Coverage Based

• n Pollution Exclusion

implicated by a particular claim. For instance, when a policyholder is sued for property damage resulting from a defective product that was sold five years ago, all of the policyholder’s commercial general liability insurers from the date of sale to the date of the lawsuit should be placed on notice of the claim. Many times, however, the broker places only the “current” insurer on notice. The negative implications of this decision are

• twofold. First, in jurisdictions that

apply a “no prejudice” standard to a late notice defense, the broker may have forfeited coverage under the earlier, applicable policies. Second, in all jurisdictions, the broker has jeopardized the ability to obtain full recovery for defense costs incurred prior to notifying the relevant insurers. Indeed, insurers routinely deny coverage for “pre-tender” costs that are incurred without their knowledge

• r consent.
• 2. FAILURE TO

COMMUNICATE IN WRITING. The single biggest mistake made by brokers today is providing oral notice

• f a claim. As discussed above, timely

notice is the touchstone to coverage under all claims made policies and under

• ccurrence-based

policies subject to a “no prejudice” standard. Memories fade and personnel turnover is routine. Far too often, coverage hangs in the balance of a “he said, she said” determination. Rather than invite a lawsuit, brokers should always document their communications with insurers about a claim. An ancillary issue to this mistake is the broker’s failure to provide written advice regarding tail coverage for claims made policies. Most policyholders do not give much consideration to the availability and/or need for a “tail” until the period to purchase that coverage has lapsed, because they are relying on the broker to advise them on these issues. However, once coverage is lost because the tail was not placed, policyholders and their coverage counsel typically evaluate whether the broker failed to fulfill their obligation to fully and adequately explain the coverage to the

• policyholder. Brokers should employ

the “best practice” of providing a written explanation of the extended reporting period, including the cost associated with purchasing the additional coverage and highlighting the time frames within which decisions about the coverage must be made.

• 3. FAILURE TO PAY

ATTENTION TO DETAILS IN WRITTEN COMMUNICATIONS. Brokers often tend to overlook the legal implications that their claims handling activities may have. For example, brokers routinely identify a “date of loss” in their notice letter that is based on a cursory review of the initial package of papers that the policyholder has provided. Again, because of the strict reporting requirements contained in many claims made policies, the “date of loss” assigned by the broker may turn into a fatal “admission” regarding when the policyholder received first notice of a

• claim. Similarly, some brokers seek to

streamline the claims process by characterizing the facts of the case and/or the nature of the claim without giving consideration to how the insurer may use those characterizations to avoid coverage. In this regard, the adage “less is more” should be adopted as a best practice. The broker should provide the insurer with the demand letter and/or the pleading received from the policyholder and allow the insurer to draw its own conclusions and opinions. Thereafter, the insurer’s claims handler will frame the coverage issues, if any, and identify any additional information that is needed to make a coverage determination.

One of the most important lessons that should be learned from the World Trade Center coverage dispute is the importance

• f defining the broker’s

role vis-à-vis pursuing coverage in concert with the policyholder’s coverage counsel.

• 4. FAILURE TO MAINTAIN

PRIVILEGES One of the most important lessons that should be learned from the World Trade Center coverage dispute is the importance of defining the broker’s role vis-à-vis pursuing coverage in concert with the policyholder’s coverage counsel. While it is important to work cooperatively, brokers and policyholders alike must be sensitive to the possibility that privileges may be jeopardized when confidential information is freely shared between the parties. In two separate opinions issued in the World Trade Center dispute, the court

• rdered the release of documents and

permitted other discovery to be taken from the brokers that had met with Silverstein and his attorneys in the days following 9/11. The court rejected claims of privilege asserted by both Silverstein and his brokers because the court believed: (a) there was not a sufficient agency relationship between Silverstein and his brokers; and (b) their legal interests in the coverage dispute were not exactly the same. A related example where privilege may be jeopardized involves a broker’s activities in responding to the all too familiar reservation of rights/request for information letter from an insurer. In an effort to keep the claims process moving, the broker may provide any and all documents that the policyholder has concerning the claim, without considering whether any of those documents are subject to privilege vis-à-vis the insurance company and/or the underlying

• claimant. Once the broker has

released the information, the policyholder may face an uphill battle to re-secure the cloak of privilege.

• 5. FAILURE TO ADHERE TO

KEY DATES When brokers assume the role of claims manager, they concomitantly assume responsibility for complying with all deadlines to secure coverage. For instance, when a property loss

• ccurs, the broker must take the steps

necessary to file a proof of loss (or

• btain an extension) within the

timeframe proscribed in the policy. Similarly, most property policies contain a “limitation of suit” provision that requires the policyholder to file a coverage action within a year after the loss is incurred. The broker must also be cognizant of coverage denials in relation to applicable statutes of limitations, which is not always a self- evident proposition given the complex choice of law analysis that must be undertaken with respect to any insurance coverage dispute. In some cases, the broker may be best served to direct the policyholder to coverage counsel to assess when and where suit must be filed after a denial is received. Brokers also must carefully evaluate the impact of insurer insolvencies, and particularly the establishment of “bar dates.” The insurance industry has seen a recent wave of insolvency and rumors persist about the financial stability of many other insurance

• companies. T
• preserve any right to

coverage, the broker must submit a proof of claim to the appropriate

• liquidator. Indeed, failure to submit a

notice of claim in the context of the liquidation may jeopardize coverage entirely since most state guaranty funds preclude coverage for claims submitted after the bar date. As a best practice, brokers should carefully monitor financially instable insurers and promptly file notices of claim with both the liquidator and the appropriate guaranty fund(s) immediately after an insurer are declared insolvent. CONCLUSION Brokers must take great care to fully protect their policyholders and themselves against the many pitfalls associated with navigating the claims handling process. Employing the following “best practices” will go a long way toward ensuring that brokers secure the insurance coverage that their policyholder-clients have purchased: (a) provide notice early and broadly; (b) use clear written communications; (c) give careful consideration to privilege issues; and (d) stay on top of deadlines.

UNTIMELY NOTICE BY A MATTER OF HOURS RESULTS IN FORFEITURE OF COVERAGE UNDER A CLAIMS MADE POLICY

By Cindy R. Tzvi, Esq. In Catholic Medical Center v. Executive Risk Indemnity, Inc., 2005 N.H. Lexis 14 (Feb. 4, 2005), the Supreme Court of New Hampshire held that a claim was barred because it was received by the insurer nine hours after the policy period expired. Catholic Medical Center (“CMC”) and its doctors filed a declaratory judgment action under a claims made policy which covered claims and potential claims submitted to the insurer, Executive Risk Indemnity, Inc. (“Executive Risk”) during the policy period of 12:01 a.m., August 1, 2001, to 12:01 a.m., August 1, 2002. On July 31, 2002, CMC’s risk manager forwarded notices of seven potential claims to Executive Risk’s claims manager by Federal Express Priority Overnight delivery. The notices were delivered on August 1, 2002, at 9:03 a.m., just nine hours after expiration of the policy period. Executive Risk denied coverage for the potential claims. The parties filed cross-motions for summary judgment on the notice issue in the District Court of New Hampshire where the declaratory judgment action was pending. The district court then certified two questions to the Supreme Court of New Hampshire: (1) Does an insured comply with a provision in a claims-made liability insurance policy if the insured sends notice during the policy period but it is received after the policy expires?; and (2) If the answer to the first question is no, is the insured nevertheless entitled to coverage if the insured substantially complies with the notice requirement and the insurer does not suffer prejudice as a result of the late notice? The state court answered both questions in the negative. The court reasoned that the requirement in the insurance policy that the insured “give notice” within the policy period unambiguously connotes the receipt of information by the insurer and not merely the mailing of notice by the

• insured. The court refused to rewrite

the policy to avoid the forfeiture of coverage, stating that notice of a claim, or potential claim defines coverage under a claims made policy, and therefore, the notice provision of that policy should be strictly

• construed. Thus, the court held,

unlike occurrence policies, where an insurer must show prejudice in order to deny coverage based upon late notice, the nature of a claims made policy results in a forfeiture of coverage as a matter of law when notice is untimely. The court rejected the concept of “substantial compliance” with a notice requirement as contrary to the strict construction mandated by a claims made policy. This decision emphasizes the strict notice requirements that apply to claims made coverage such as directors and officers, errors and omissions and

• ther professional liability policies.

Insureds must provide timely notice of a claim or they will lose the coverage for which substantial premiums were

• paid. The decision also highlights the

importance of reading an insurance policy before it is purchased. Most claims made policies contain an “extended reporting period” provision (sometimes known as the “tail”) that would have avoided the coverage dispute that arose here. An extended reporting period affords the insured additional time to provide notice of claims that are received after the policy period has expired. In many policies, an automatic extended reporting period of 30 days applies. In

• ther policies, the extended reporting

period may be purchased for a pre- determined premium whereby notice

Insureds must provide timely notice of a claim or they will lose the coverage for which substantial premiums were paid.

may be given as much as two years after the policy period has expired. If CMC had negotiated for an extended reporting period in its insurance policy, it would not have summarily lost coverage based on a late notice

• defense. Now, CMC’s only avenue for

recovery may be against its broker for failure to advise CMC of, and/or secure, the extended reporting period.

PUNITIVE DAMAGES ARE AVAILABLE WHEN INSURERS EMPLOY BAD FAITH CLAIMS HANDLING PRACTICES

By Phillip M. Kaczor, Esq. Recently, the Third Circuit upheld a $150,000 punitive damage award for bad faith against an insurer that failed to pay $2,000 for costs incurred to prepare a sworn proof of loss. The Third Circuit agreed with the policyholder that there was no “fairly debatable” reason to withhold payment and that the insurer’s dilatory conduct was designed to frustrate and discourage the policyholder’s efforts to secure the available coverage. To penalize this conduct and to deter future bad faith claims handling conduct, the court not only awarded $150,000 in punitive damages, it also awarded attorney fees of $128,075 and costs of $7,372. The case, Willow Inn, Inc. v. Public

• Serv. Mut. Ins. Co., No. 03-2837 (3d
• Cir. filed February 14, 2005)(applying

Pennsylvania law), arose from a tornado wind damage claim that was submitted under a first party property

• policy. Immediately following the

loss, the policyholder and the insurer retained separate adjusting firms to value the claim. The insurer’s adjuster returned an initial estimate

• f $90,000, while the insured’s

adjuster initially valued the claim at $216,000. The policyholder, thereafter, requested and received a $75,000 advance, while the respective adjusters negotiated the

• claim. The negotiations resulted in

an agreed claim amount of $126,810, which the insurer’s adjuster recommended to the insurer. Despite its

• wn

adjuster’s recommendation, the insurer did not respond for over a month and the recommendation was then resubmitted. Meanwhile, the policyholder submitted a sworn proof

• f

loss (“POL ”) that echoed the recommended sum. The policyholder also sought $2,000 for the preparation costs of the POL, as expressly permitted by the policy. The insurer rejected the POL and did not address the preparation costs that the insured sought. Instead, the insurer retained another adjuster to evaluate the

• claim. This new adjuster’s estimate
• f $91,312 was offered in settlement

to the policyholder, less the advance that had already been paid. The policyholder rejected this offer, withdrew its agreement with the $126,810 claim valuation, and requested an appraisal pursuant to the terms of the policy. The insurer refused this request, claiming, despite the policyholder’s earlier submission, that it did not have a sworn proof of loss and that there was no longer a dispute. Following repeated requests, the insurer finally complied with the appraisal request eight months later. The appraisal fixed the loss at $117,000 and the carrier paid that sum to the policyholder, less the $75,000 initial payment, more than two years after the tornado giving rise to the loss took place. The policyholder, thereafter, brought suit under Pennsylvania’s bad faith statute, 42 Pa. Const. § 8371. In the bench trial that followed, the district court held that the policy unambiguously required the insurer to pay the $2,000 incurred to prepare the POL. The court further held that the insurer conduct amounted to bad faith under § 8371, noting, that the “unreasonable delays in the processing of the [policyholder’s] claims were extraordinarily unwarranted such that there can be no conclusion except that [the insurer] knowingly or recklessly

disregarded the absence

• f

a reasonable basis for its conduct.” In addition, there was an abundance of evidence “pointing out the dramatic contrast between the [policyholder] conscientious efforts and [the insurers] reckless and obstructive actions.” The insurer appealed the district court’s findings, claiming the punitive damages award was constitutionally excessive. The Third Circuit summarily affirmed the trial court’s findings. In so doing, the Third Circuit held that a punitive damage award would violate the Constitution only if it was “grossly disproportionate” to the defendant’s conduct, which was not the case

• here. Indeed, the court held that the

insurer’s conduct was particularly reprehensible given the policyholder’s financial vulnerability (“a modest family-run business”), the insurer’s pattern of delay, and the fact that the insurer’s “conduct in settling and paying [the policyholder] claim was a mix of purposefully indifferent inaction and intentionally dilatory action.” Moreover, the court held, the total of attorneys fees and costs awarded, $135,000, was nearly in a 1:1 ratio with the $150,000 punitive damages award, “which is indicative

• f constitutionality.” Finally, the

court rejected outright the insurer’s argument that the punitive damage award should be proportionate to the $2,000 POL preparation cost because that was “in no way indicative of the sum of the [insurer’s] culpability.” Willow Inn represents a significant victory for policyholders and is a reminder that diligence is often the best method by which to combat insurer bad faith. Indeed, the Third Circuit noted that “valid claimants who were less diligent than Willow Inn in pressing their claims, when confronted with similar behavior by [the insurer], would have abandoned their claims in frustration.” The prospect of bad faith punitive damages, however, should act as a motivation for policyholder persistence, as well as a disincentive for the perpetuation of bad faith claims handling practices.

DIRECTORS AND OFFICERS DENIED COVERAGE BASED ON POLLUTION EXCLUSION

By Lynda A. Bennett, Esq. and Veronica Castro, Esq. Another court has denied coverage to directors and officers of a company for a business dispute that arose from alleged environmental liabilities, because the policy contained a broadly worded pollution

• exclusion. The Ohio Court of

Appeals’ decision in Danis v. Great American Ins. Co., underscores the importance of understanding the scope of coverage provided by your policy before a claim is filed and utilizing the services of a broker that will secure coverage that fully protects you and your company against the risks faced by the company. In Danis, the policyholder was involved in the waste disposal

• industry. In 1983, Danis sold certain
• f its assets to Waste Management
• Inc. and Waste Management of Ohio

(collectively, “WM”) and agreed to indemnify WM for certain liabilities, including claims arising out of the

• wnership of landfills that Danis

previously owned. Several years later, the Ohio Environmental Protection Agency notified WM and Danis that they were liable as potentially responsible parties (“PRPs”) for response costs associated with a landfill known as Valleycrest. Pursuant to the indemnification agreement, Danis agreed to reimburse WM for the costs incurred to remediate the landfill. Shortly before entering this agreement, however, Danis underwent a major corporate restructuring. After the restructuring and Danis’ agreement to indemnify WM with respect to the Valleycrest cleanup, a lawsuit was filed on behalf of several individuals

Willow Inn reinforced that diligence is often the best method by which to combat insurer bad faith.

who alleged that they had suffered bodily injury as a result of discharges from the landfill. Eventually, Danis sought to avoid its indemnity liability to WM, claiming that it did not have enough resources to satisfy its obligations for the personal injury lawsuit and the response costs. As a result, WM filed suit against Danis for alleged misrepresentation and fraud claiming that Danis, and certain of its directors and officers, reorganized the business with the purpose of leaving insufficient assets to satisfy the existing indemnification obligations. Danis tendered the claim to its D&O insurer, Great American. Great American denied coverage based on the policy’s pollution exclusion, which barred coverage for any claim based upon, arising out of, relating to, directly or indirectly resulting from, in consequence of, or in any way involving actual or alleged seepage, pollution, radiation, emission or contamination of any

• kind. The Ohio Court of Appeals

upheld the denial because WM’s business tort claim was founded on the indemnity agreement for pollution claims. In other words, but for Danis’ agreement to provide indemnity protection against future pollution liabilities, WM would not have any basis upon which to attack Danis’ corporate restructurings. There are two important lessons to draw from Danis. First, all corporate policyholders should carefully evaluate their policies to determine whether the pollution exclusion is broadly written to bar coverage for any and all claims that are based upon, arise from, or are otherwise connected to pollution. Policyholders should not accept this wording, especially if their “core” business is inextricably bound to pollution liability exposures e.g., hauling and disposing of hazardous

• waste. Insurance companies can,

and will, limit the scope of the pollution exclusion in D&O policies to bar coverage only for claims that are asserted against the company and its directors and officers for pollution itself, not business tort claims that arise from a pollution liability exposure. Second, corporate policyholders must retain the services of a knowledgeable broker that is capable

• f securing this favorable wording

and advising you about the best and broadest coverage available in the D&O market today. Because of the wave of corporate scandals, the ebb and flow of the hard market in recent years, and the current scrutiny under which many brokers and insurers find themselves, there is a heightened sense of competition for business and therefore a high degree of variation among the D&O policy forms that are available.

... All corporate policyholders should carefully evaluate their policies to determine whether the pollution exclusion is broadly written to bar coverage for any and all claims that are based upon, arise from, or are otherwise connected to pollution.

www.insurance-lowenstein.com

Publications

• “Coverage for Additional

Insureds Remains in Flux,” New Jersey Law Journal, Lynda A. Bennett, Esq., March 7, 2005.

• “Can You Transfer the

Insurance Asset in a Corporate Transaction?,” The Metropolitan Corporate Counsel, Lynda A. Bennett,

• Esq. and Cindy R. Tzvi, Esq.,

March 2005.

• “Having the Right Insurance,”

ICFAI Journal of Insurance Law, Robert D. Chesler, Esq., January 2005. Upcoming Events

• RIMS Northeast Conference,

April 17 - 21, 2005, Philadelphia, P .A. Recent Outpost Legal Highlights

• Vermont Supreme Court

Holds that Environmental Investigation Costs are Damages Under CGL Policies

• U.S. Underwriters Ins. Co. v.

City Club Hotel, LLC

• Statute of Limitations Tolled

for Policyholder ‘Lulled’ Into Complacency

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