When the Insurer Can Extinguish the Duty Advocating the Defense - - PowerPoint PPT Presentation

Terminating the Duty to Defend: Evaluating When the Insurer Can Extinguish the Duty

Advocating the Defense Obligation from Insurer and Policyholder Perspectives

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Presenting a live 90-minute webinar with interactive Q&A Duana J. Grage, Partner, Hinshaw & Culbertson, Minneapolis Eric Jesse, Esq., Lowenstein Sandler, New York Suzanne L. Jones, Esq., Hinshaw & Culbertson, Minneapolis Christopher C. Loeber, Partner, Lowenstein Sandler, New York

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Terminating the Duty to Defend: Evaluating When the Insurer Can Extinguish the Duty

Christopher C. Loeber Eric Jesse LOWENSTEIN SANDLER LLP Duana J. Grage Suzanne L. Jones HINSHAW & CULBERTSON LLP

The Duty to Defend, Generally

• What establishes the duty to defend?
• Policy defense agreement – Insurer has the right and duty to

defend.

• Applies to groundless, false, or fraudulent claims.
• Duty to defend broader than duty to indemnify. First

Bank of Turley v. Fidelity and Deposit Ins. Co., 928 P.2d 298 (Okla. 1996).

• What does this mean?

Page 6

The Duty to Defend, Generally

• How to determine if a defense is owed?
• 4 corners/8 corners rule (4 corners of complaint, and 4 corners of

the policy). See, e.g., Guideone Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2011).

• If complaint against insured alleges facts within or potentially

within the scope of the policy coverage, a defense is owed. City

• f College Station, Tex. v. Star Ins. Co., 735 F.3d 332 (5th Cir.

2013)

• Duty to defend is triggered when the allegations of a complaint,

liberally construed, suggest a reasonable possibility of coverage.

Page 7

The Duty to Defend, Generally

• What about facts outside the complaint?

 Who may rely on extrinsic evidence – insurer or insured?

• Later use of extrinsic evidence to terminate the duty to defend. Polarome

Int’l, Inc. v. Greenwich Ins. Co., 961 A.2d 29 (N.J. App. Div. 2008)

 Insurers’ duty to discover reasonably attainable facts vs. Insureds’

responsibility to inform the Insurer of relevant facts.

 The insurer has actual knowledge of facts establishing a reasonable

possibility of coverage. Bruckner Realty, LLC v. County Oil Co., Inc., 838 N.Y.S.2d 87 (2d Dep’t 2007); SL Indus. v. Am. Motorists Ins. Co., 607 A.2d 1266 (N.J. 1992); Boston Symphony Orchestra Inc. v. Commercial Union Ins. Co., 545 N.E.2d 1156 (Mass. 1989).

 Facts reasonably apparent to the insurer. Esicorp, Inc. v. Liberty Mut.

• Ins. Co., 193 F.3d 966 (8th Cir. 1999).

Page 8

The Duty to Defend, Generally

• When is the duty to defend not triggered?
• Where the insurer establishes as a matter of law that there is no

possible factual or legal basis upon which it might ultimately be

• bligated to indemnify under any policy provision, the insurer is

relieved of such duty. Great Northern Ins. Co. v. Kobrand Corp., 837 N.Y.S.2d 41 (1st Dep’t 2007).

Page 9

The Duty to Defend, Generally

• If the underlying factual basis of the complaint, even if

true, would not result in coverage under the policy, then no duty to defend.

• Look at the factual allegations alleged, or the causes of

action?

• Example, facts relating to defamation contained in the complaint,

but no cause of action for defamation.

• Intentional conduct cannot be done negligently. Erie Ins.

Exchange v. Fidler, 808 A.2d 587 (Pa. 2002).

• Intentional pollution over time is not sudden and accidental.

Guaranty Nat. Ins. Co. v. Vic Mfg. Co., 143 F.3d 192 (5th Cir. 1998).

Page 10

The Duty to Defend, Generally

• Whether the claimant is seeking damages based on a

reason covered by the policy, not whether the claimant could have sought damages based on a reason covered by the policy.

• Duty to defend cannot be based on speculation as to claims that

could have been brought. Storek v. Fidelity & Guar. Ins. Underwriters, Inc., 504 F. Supp. 2d 803 (N.D. Cal. 2007).

• But when the coverage question cannot be decided from the face
• f the complaint, the insurer must provide a defense until all

potentially covered claims are resolved. See Flomerfelt v. Cardiello, 997 A.2d 991 (N.J. 2010).

Page 11

The Duty to Defend: Mixed Claims

• Insurer efforts to limit the duty to defend when a claim

includes covered and uncovered components.

• Duty to defend all claims when only one is potentially covered, or
• nly the covered claims?
• Allocation / Recoupment of defense costs for uncovered claims.

 Insured can recover defense costs that simultaneously benefit

covered and uncovered claims; insurer can only withhold defense costs solely relating to uncovered portion of the claim. See Buss v. Superior Court, 16 Cal. 4th 35, 50 (1997).

 Insurer has no right to recoupment of defense costs for uncovered

claims in the absence of express agreement. See Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510 (Wyo. 2000).

Page 12

The Duty to Defend: Mixed Claims

• Conflict of interest between the Policyholder and Insurer.
• Theory: insurer’s defense of a complaint with covered and

uncovered claims divides the loyalty of counsel selected and paid for by the insurer, creating concern that defense counsel would skew the defense in favor of the insurer. See Nowacki v. Federated Realty Group, 36 F. Supp. 2d 1099, 1109 (E.D. Wis. 1999).

• Duty to defend transformed into a duty to pay defense costs.
• Insurer loses the right to select defense counsel and control the

policyholder’s defense.

• For whose benefit is defense counsel appointed?

Page 13

The Duty to Defend: Mixed Claims

• Delaying the Duty to Defend – An Outlier.
• When an insurer asserts a defense to coverage that depends on

facts that will not be decided in the underlying case, the duty to defend is transformed into a duty to reimburse. See Burd v. Sussex Mut. Ins. Co., 267 A.2d 7 (N.J. 1970)

• But that rule was recently eroded in Flomerfelt v. Cardiello, 997

A.2d 991 (N.J. 2010): “[I]n circumstances in which the underlying coverage question cannot be decided from the face of the complaint, the insurer is obligated to provide a defense until all potentially covered claims are resolved” in the underlying action

• r a DJ action between insured and insurer.

Page 14

The Duty to Defend: Are there Sufficient Protections for the Insured?

• Burden of proof.
• Policy wording ambiguities.
• Any doubt as to what is alleged.
• Covered and uncovered claims.
• Frivolous claims.

Page 15

Breach of the Duty to Defend

• What happens if the insurer breaches the duty to

defend?

• Extra-contractual (bad faith) damages?
• Attorney’s Fees? Brown v. State Auto. and Cas. Underwriters,

293 N.W.2d 822 (Minn. 1980)

• Waive other provisions of the policy?

Page 16

Exhaustion of limits – withdrawing from the defense

• Defense is a separate contractual right from

indemnity

• Withdrawing from the defense is an issue only

where defense is supplementary to an insurer's indemnity obligation

• Notice that the insurer may withdraw from the

defense should be given to the insured in a reservation of rights

Page 17

Exhaustion of limits – withdrawing from the defense

• Policy language controls
• Pre-1966 – No language in policies regarding

withdrawing from the defense

• Post-1966 – Language added to policies allowing

insurers to withdraw from the defense if their limit of liability has exhausted by payment of settlements or judgments

• Policy language differs greatly from policy to policy

Page 18

Exhaustion of limits – withdrawing from the defense

• Examples
• Once our limit of liability applicable to the claim is exhausted, we

will no longer pay legal expenses for that claim.

• Page 19

Exhaustion of limits – withdrawing from the defense

• Withdrawal allowed
• "Exhausted" – American States Ins. Co. of Tex. v.

Arnold, 930 S.W.2d 196 (Tex. App. 1996)

• "Offering, tendering or paying" – Thompson v. Arbella
• Mut. Ins. Co., 1999 WL 1325975 (Mass. Super. Ct.

1999)

• "Limit of liability has been offered or paid" – Novak v.
• Am. Fam. Mut. Ins. Co., 515 N.W.2d 504 (Wis. Ct.
• App. 1994)

Page 20

Exhaustion of limits – withdrawing from the defense

• Withdrawal not allowed
• Meaning of "paid" – Am. Standard Ins. Co. v.

Basbagill, 775 N.E.2d 255 (Ill. Ct. App. 2002)

• Interplead remaining policy limits after excess verdict

– Jenkins v. Ins. Co. of N. Am., 220 Cal. App. 3d 1481 (Cal. App. Ct. 1990)

• Interplead limits before insured's liability has been

determined by judgment – Exchange Mut. Ins. Co. v. Geiser, 498 N.Y.S.2d 291 (NY. Sup. Ct. 1986)

Page 21

Exhaustion of limits – withdrawing from the defense

• Loy release
• When excess insurance applies, primary settles in exchange for

covenant not to hold insured liable for primary amounts to force excess to assume the defense. Loy v. Bunderson, 320 N.W.2d 175 (Wis. 1982); Teigen v. Jelco of Wisc. Inc., 367 N.W.2d 806 (Wis. 1985)

• Drake v. Ryan
• Primary settled for below its limit and plaintiff agreed to be

responsible for the gap. Drake v. Ryan, 514 N.W. 2d 785 (Minn. 1994)

Page 22

Covered claims resolved – withdrawing from the defense

• Meadowbrook Inc. v. Tower Ins. Co., 559

N.W.2d 411 (Minn. 1997) (insurer has right to settle covered claims directly with plaintiff and withdraw from defense when those claims have been dismissed with finality)

• Cagle v. Home Ins. Co., 483 P.2d 592 (Ariz. Ct.
• App. 1971)
• Allstate Ins. Co. v. Mende, 575 N.Y.S.2d 520

(N.Y. App. Div. 1991)

Page 23

Covered claims resolved – withdrawing from the defense

• Finality
• Don't prejudice the insured
• Act in good faith

Page 24

Too many claimants, not enough limits

• No national bright-line rule
• 3 general approaches
• First-come, first-served
• Pro-rata
• Interpleader

Page 25

Too many claimants, not enough limits

• First-come, first-served
• In re Sept. 11 Litig., 723 F.Supp.2d 534, 542 (S.D.N.Y. 2010)

(insurer has discretion to settle multiple claims on a first-come, first-served basis as long as it acts in good faith)

• U.S. Fire Ins. Co. v. Worcester Ins. Co., 821 N.E.2d 91, 94

(Mass. App. Ct. 2005) (an insurer may settle with less than all claimants even if it results in an exhaustion of the policy proceeds)

• Aetna Cas. & Sur. Co. v. Sullivan, 597 N.E.2d 62, 64 (Mass. App.
• Ct. 1992) (insurer is discharged from any further duty to defend if

it pays policy limits – either to settle a claim against the insured,

• r in total or partial satisfaction of a judgment against the insured

– upon conclusion of the litigation)

Page 26

Too many claimants, not enough limits

• Pro-rata
• Christleib v. Luten, 633 S.W.2d 139 (Mo. Ct. App. 1982) (pro-rata

approach is warranted)

• Underwriters for Lloyds of London v. Jones, 261 S.W.2d 686 (Ky.

1953) (insurance proceeds distributed on a pro-rata basis following adjudication of multiple claims)

• Farinas v. Florida Farm Bureau General Ins. Co., 850 So.2d 555,

560-561 (Fla. Dist. Ct. App. 2003) (where multiple claims arise

• ut of one accident, insurer may exercise discretion in how to

settle claims and may choose to settle certain claims to the exclusion of others provided that the decision is reasonable and "in keeping with its good faith duty." )

Page 27

Too many claimants, not enough limits

• Interpleader
• Boris v. Flaherty, 672 N.Y.S.2d 177, 180 (N.Y. Sup. Ct. 1998)

("[i]nterpleader actions, while not required in situations such as this, are to be encouraged as part of the duty of good faith of an insurer.")

• Club Exch. Corp. v. Searing, 567 P.2d 1353, 1356 (Kan. 1977) (insurer

can take three alternative courses of action when faced with competing claims in excess of policy limits)

• McReynolds v. Am. Commerce Ins. Co., 235 P.3d 278, 282 (Ariz. Ct.
• App. 2010) (where available coverage is not adequate to resolve all

claims, insurer can find a "safe harbor")

• Even if an insurer files an interpleader and deposits its limits into court, the

insurer should not withdraw the defense unless it has clear policy language which would permit a withdrawal.

Page 28

Too many insureds, not enough limits

• Strauss v. Farmers Ins. Exchange, 31 Cal. Rptr.

2d 811 (Cal. App. Ct. 1994) (insurer not

• bligated to pay demand for policy limits if it

does not resolve liability for all its insureds)

• Pride Transp. V. Continental Cas. Co., 804

F.Supp.2d 520 (N.D. Tex. 2011) (insurer allowed to accept claimant's demand for policy limits to the exclusion of other insureds)

Page 29

What Does It All Mean?

• Should an insurer be penalized for breaching the duty to

defend, and how?

• Current repercussions:
• Bad faith/extra-contractual damages.
• Attorney’s fees in coverage action.
• Limited ability to contest settlement.
• Waiver of policy provisions.

Page 30

Practice Pointers

• Check your policy language and your jurisdiction before withdrawing

from the defense.

• Explain the problem of potential excess exposure to the insured

early on and in writing.

• Identify claimants and potential claimants.
• Conduct meaningful investigations and evaluations of various

claims.

• Keep the insured advised as claims are settled and limits are

exhausted.

• Notify all excess insurers and keep them apprised of the

investigation and settlement efforts.

Page 31

Practice Pointers

• Consider immediately filing an interpleader action if the jurisdiction

allows it. Deposit the money into court and continue defending until those funds are disbursed to claimants. In some states, an insurer must file an interpleader to avoid a claim for bad faith. Other courts do not allow an interpleader action in these circumstances.

• Develop and attempt to implement a strategy to resolve all the

claims.

• Never artificially inflate the value of any claims, particularly the first

claims that are made. Do not overpay a claim with the intention of exhausting the limit as soon as possible to justify withdrawing from the defense.

Page 32

Practice Pointers

• Pay the limits to claimants to resolve claims and obtain

releases of liability for the insured; do not pay the limits to the insured in an attempt to "buy out" the coverage or the defense obligation.

Page 33

Practice Pointers

• Don’t waive coverage (timely notice, etc.).
• Even if defense is rejected, keep insurer apprised of the

litigation.

• Advise insurer of settlement possibility, and ask that it

contribute.

• Be mindful of costs of defense – reasonableness and

relatedness issues.

• Enlist coverage counsel.

Page 34

Questions?

Page 35

Christopher C. Loeber cloeber@lowenstein.com Eric Jesse ejesse@lowenstein.com LOWENSTEIN SANDLER LLP Duana J. Grage dgrage@hinshawlaw.com Suzanne L. Jones sjones@hinshawlaw.com HINSHAW & CULBERTSON LLP