Reinsurers on the Hook for Settlement that Arguably Included Bad Faith Claims

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United States Fidelity & Guar. Co. v. American Re-Insurance Co.
N.Y. App. Div. 1st Dep’t, Jan. 24, 2012

The case arose out of litigation concerning the underlying asbestos claims spanning several decades. The Appellate Court reviewed and affirmed the lower courts Order granting the reinsured summary judgment and denying the reinsurer’s motion for summary judgment.   The reinsurance treaty involved was an excess of loss treaty with a $100,000 retention and a maximum $4.9 million payable by the reinsurers for any one loss subject to a $3 million limit for personal injury or property damage liability. The reinsurer’s refused to pay the reinsured’s claim for several reasons including the basis that the settlement included an amount for the settlement of bad faith claims which were not covered by the treaty.

The reinsurers’ argued that the lower court erred in applying the “follow the fortunes” doctrine. After a brief statement setting forth the purpose of the doctrine, the Appellate Court affirmed its applicability finding that it precluded the court’s review of the reinsured’s allocation of the loss, including any alleged bad faith claims. The court stated that the parties involved in negotiating the settlement confirmed that the settlement amount did not include costs for bad faith. Additionally, the court stated that the issue of payment for the bad faith claims was never “actually litigated” despite statements in the bankruptcy court record that the insured had “colorable claims for bad faith” and that “some portion of the $2 billion contribution to the trust was attributable to those bad faith claims.”  

The opinion drew a one judge dissent with the view that a triable issue of fact existed with regard to whether a portion of the $987.3 million was attributable to the bad faith claims not covered under the reinsurance treaty. The dissenting opinion notes the reinsured’s reliance on Peerless Ins. v. Inland Mut. Ins. for the proposition that bad faith damages are covered under the reinsurance treaty but distinguishes the cases based on the fact that the reinsurers here did not participate or acquiesce in the reinsured’s defense of the underlying action. Regardless, the dissent cites the New York Court of Appeals case, Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd’s of London for the proposition that a follow the fortunes clause does not serve to alter the terms of the contract or create coverage where none exists. The dissent points to language in the bankruptcy court opinion that clearly suggests that the court would not have approved the bankruptcy plan if it had believed that there was no payment for bad faith claims included in the settlement.

For a copy of the decision click here

Jeffrey Kingsley and Patrick Omilian

COUNTRYWIDE FINANCIAL CORP. APPEALS RULING THAT MORTGAGE INSURERS DO NOT NEED TO ESTABLISH DAMAGES TO RECOVER

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In the fall out of the sub-prime mortgage meltdown, numerous mortgage insurers have sued lenders claiming that they were induced to underwrite mortgage risks based on inaccurate, misleading and fraudulent information. In other words, the mortgage insurers are claiming that the mortgages did not meet the underwriting criteria for insurance, but that the mortgage lenders provided incorrect information which caused the policies to be written. In two actions, Syncora Guarantee, Inc. v. Countrywide Home Loans, and MBIA Insurance Corporation v. Countrywide Home Loans, the insurers are seeking to recover for amounts paid out on policies that were underwritten based on misrepresentations, as well as force Countrywide to repurchase the risk for the allegedly defective mortgage loans.

The insurers sought a declaration that they were entitled to recover: (1) for damages on a fraudulent inducement claim upon proof that there was a fraudulent inducement, without regard to whether the inducement caused damages; (2) for damages on a breach of contract claim, upon proof that demonstrates material misrepresentation, not that damages resulted from the misrepresentation; and (3) on its claim to have Countrywide repurchase defective mortgage loans, upon proof that the loach breached a representation or warranty in a way that increased the risk profile of the insurance, without demonstrating the increased risk lend to a loss. Countrywide argued that the insurers must demonstrate losses caused by the alleged breaches to recover.

In a January 3, 2012 decision, Hon. Eileen Bransten, Supreme Court, New York County granted the insurers’ motion in part, seemingly lowering the bar to establish recovery for fraudulent inducement by eliminating a requirement establishing damages from the breach. It held that the insurers could recover “rescissory damages” upon proof of material representation (without regard to causation), but denied other relief. Both parties have now appealed, with Countrywide contesting the insurer’s ability to recover damages without showing causation. In the Pre-Argument Statements filed by Countrywide on January 27, 2012, which can be found here, Countrywide argues that damages cannot be awarded without causation and that the judge’s decision should be reversed in its entirety on that basis alone.

For a copy of Countrtwide's papers click here

Sarah Delaney

 

 

 

 

Ninth Circuit Weighs in on Excess Insurer’s Duty to Defend

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National Union Fire Insurance Company of Pittsburgh, PA v. Seagate Technology, Inc.,  (9th Cir., January 20, 2012, No. 10-17194)

 In today’s insurance litigation environment, United States Courts of Appeals are rarely required to weigh in on such fundamental insurance coverage issues as the duty to defend.  In a rare exception, the Ninth Circuit clarified an excess insurer’s obligations in that regard.

In the underlying case, the insured was sued in connection with its “silent” hard drive.  The complaint alleged misappropriation of trade secrets and patent infringement.  The underlying complaint alleged that the insured “falsely claims that its technology is equivalent to [plaintiff’s] technology.”  Initially, the insured’s primary carriers refused to defend, asserting the complaint did not allege a covered cause of action.  The district court called the case “close” regarding whether the primary insurers had a duty to defend.  At first, it held the insurers did not have a duty to defend, but later reversed that holding based upon the possible disparagement claim.  It then terminated the duty to defend based upon “facts alleged to have happened after the complaint was filed.”  

The insured claimed that because the primary insurer’s duty to defend was terminated, its excess carrier’s duty was triggered.  The district court accepted that argument, but the Ninth Circuit reversed.  Since the primary insurer’s policies were not exhausted, even though the claim exceeded the underlying policy limits and the primary carrier refused to defend, the excess carrier’s defense obligation is not triggered. 

Further, the court held that while the underlying plaintiff’s statements prevented the primary insurers from intervening in the underlying action and defending, the complaint still potentially contained a disparagement claim that had not been resolved.  Thus, the primary insurers had a duty to defend. 

For a copy of this decision click here

Sarah Delaney and Richard Cohen

New York’s First Department Rejects Well-Established Precedent on Coverage Notices

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George Campbell Painting v. National Union Fire Ins. Co. of Pittsburgh, PA  (N.Y. App. Div. January 17, 2012)

Following settlement of a personal injury lawsuit brought by a subcontractor’s employee against the general contractor and owner, Plaintiffs, the general contractor and owner, sued the subcontractor’s excess insurer (“Insurer”), seeking a declaration that Insurer’s disclaimer of coverage was untimely under former Insurance Law § 3420(d) (current version at § 3420(d)(2)), and seeking recovery, as additional insureds, of Insurer’s alleged pro rata share of the employee’s personal injury settlement. On appeal, the First Department determined that Plaintiffs did not provide Insurer with notice of the employee’s personal injury suit against them until two years after it was filed and over a year after they learned that the employee’s claim, if successful, would far exceed the subcontractor’s primary insurance.

According to the court, pursuant to § 3420(d) of the Insurance Law, once Insurer had all the information it needed to determine that Plaintiffs had failed to give it timely notice of the claim as required by the policy, it had no right to delay disclaiming on the ground of late notice while it continued to investigate whether Plaintiffs were in fact additional insureds. In coming to its decision, the court overruled the case of DiGuglielmo v. Travelers Prop. Cas., which had held that under § 3420(d), an insurer was not required to disclaim on timeliness grounds before conducting a prompt, reasonable investigation into other possible grounds for disclaimer.

The court reasoned that the DiGuglielmo rule was inconsistent with the text of § 3420(d), which requires that a disclaimer be issued “as soon as is reasonably possible.”  To follow the DiGuglielmo rule would permit an insurer to delay deciding whether to disclaim on grounds known to it while pursuing an investigation of other potential grounds for disclaiming liability or denying coverage. The court noted that the Court of Appeals specifically rejected an insurer’s argument that § 3420(d) should be read to require speed in giving notice once the decision to disclaim has been made, but to permit delay in making the decision. According to the Court of Appeals, the literal language of the statutory provision requires prompt notice of disclaimer after decision to do so, and obligates the insurer to reach the decision to disclaim liability or deny coverage within a reasonable time.

Furthermore, the Court of Appeals has also made it clear that the determination of whether the disclaimer was issued as soon as was reasonably possible is made with reference to the time when the insurer first acquired knowledge of the ground upon which it disclaimed. The timeliness of an insurer’s disclaimer is measured from the point in time when the insurer first learns of the grounds for disclaimer of liability or denial of coverage. When the basis for denying coverage was or should have been readily apparent before the onset of the delay of disclaimer, the insurer has no excuse for its delay.

In the opinion of the court, adhering to the DiGuglielmo rule would be tantamount to deliberately setting aside the rule promulgated by the Court of Appeals and flowing naturally from the language of the statute.  Additionally, the court concluded that the policy behind § 3420(d) is best served by applying the rule articulated by the Court of Appeals rather than the DiGuglielmo rule.  Delay on the part of the insurer to disclaim may detrimentally delay the policyholder’s own search for alternative coverage.  Thus, the court held that § 3420(d) precludes an insurer from delaying issuance of a disclaimer on a ground that the insurer knows to be valid while investigating other possible grounds for disclaiming.

For a copy of the decision click here

Matthew Cabral and Jeffrey Kingsley

Sixth Circuit Dismisses Agent’s Fraud Claims against Nationwide

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Nemier v. Nationwide Mutual Insurance Company (United States Court of Appeals for the Sixth Circuit, January 13, 2012)

The plaintiff, an agent of defendant Nationwide, brought an action against Nationwide for fraud and breach of contract based on Nationwide’s issuance of a loan to the plaintiff to open an office under a new initiative which Nationwide allegedly promised would be successful. The District court granted summary judgment in favor of Nationwide because Nationwide did not intend to break promises or deceive the plaintiff. The Sixth Circuit upheld the ruling.

The plaintiff was a long time owner of a Nationwide insurance agency in Michigan when Nationwide started a new national initiative to be more competitive which encouraged agents to open satellite offices. The plaintiff expressed interest in opening a satellite office and a Nationwide business consultant prepared a business plan in a new area for her. The consultant  predicted that the office would have positive cash flow, while another Nationwide employee warned the plaintiff that there had been problems rolling out the new initiative.

The plaintiff took out a loan from Nationwide to open the new office, allegedly relying on the consultant’s studies and her past success. The loan would not have to be repaid if the plaintiff met certain sales targets. The plaintiff opened the new office and later learned that Nationwide was selling insurance directly to residents in the area where the plaintiff opened the office and that a Nationwide subsidiary was selling similar insurance at a lower price. Moreover, the new Nationwide initiative was unsuccessful and made its rates less competitive than before. The plaintiff closed her satellite office and missed her sales targets, and later resigned from Nationwide.

The plaintiff alleged three theories of fraud, all of which the court denied. First she claimed Nationwide fraudulently induced her to borrow money by promising more competitive rates in the area. The court found that the statements made by Nationwide were not promises and were not intended to be broken by Nationwide at the outset.

The plaintiff also claimed that Nationwide’s projections for the plan in the area were dishonest. The court found that this was not fraudulent because Nationwide did not know that the projections would be wrong.

Last she alleged that Nationwide acted fraudulently because it did not tell her that Nationwide was going to sell insurance directly or that other agents were unable to meet loan-waiver targets. The court also found this argument unconvincing as Nationwide had no obligation to share such information because this does not constitute knowledge that the plaintiff would naturally rely upon and because both parties were sophisticated business people. Moreover, the court noted that the plaintiff knew that Nationwide could make business decisions adverse to her interests.

The court denied the plaintiff’s breach of contract claim because it should have been aimed at a Nationwide subsidiary and not Nationwide itself.  

For a copy of the decision click here

Jonathan Kuller and Anthony Golowski

Professional Liability Monthly – January Edition is Now Available

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For a free copy of this month's edition of Professional Liability Monthly, click here.

To be added to our circulation list whereby you receive this publication for free each month via email, please contact Brian Biggie at bbiggie@goldbergsegalla.com.

Cases for Professional Liability Monthly – January 2012 Edition

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Cases provided courtesy of LexisNexis.

John J. Rivers v. Wachovia Corp.,

Upper Deck Co. v. Endurance American Specialty Ins. Co.,

Don Katz v. China Century Dragon Media, Inc.,

Fallon v. Hahnemann Hosp

Toney v. Chester County Hospital

Jeffrey v. Methodist Hospital

Swain v. Alterman

Javaid v. Weiss

Olszewski v. Jordan,

Jackson v. Truly Green Landscape and Maintenance, Inc.,

Barrick v. Holy Spirit Hosp. of the Sisters of Christian Charity

Bancroft Life & Cas. ICC, Ltd. v. Intercontinental Management Ltd.,

BancInsure, Inc. v. U.K. Bancorporation Inc.United Kentucky

Download Fireman v. Travelers Cas. & Sur. Co. of America

Pollution Exclusion Does Not Bar Carbon Monoxide Claim

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Scottsdale Ins. Co. v. Pursley (11th Cir. (Ga.) Jan. 10, 2012)

The Eleventh Circuit recently held that the pollution exclusion in a CGL policy did not bar coverage for a wrongful death claim arising from carbon monoxide poisoning.

The decedent retained the insured to make repairs on his boat. When making the repairs, the insured neglected to cover the exhausts for the starboard engine. While the repairs were ongoing, the decedent stayed overnight on the boat and used a generator to power the air conditioner. The next morning, the decedent was found dead next to his bed. It was later found that uncovered exhaust vents emitted carbon monoxide into the cabin via the air conditioner.

The decedent’s widow and his estate sued the insured for wrongful death and property damage. The insured’s CGL carrier denied coverage on the ground that the policy’s pollution exclusion applied. The district court agreed and found that the pollution exclusion precluded coverage.

On appeal, the Eleventh Circuit noted that the carrier’s reliance on the Georgia Supreme Court’s holding in Reed v. Auto-Owners Ins. Co., 677 S.E. 2d 90 (Ga. 2008) was misplaced. In Reed, the Georgia Supreme Court found that a pollution exclusion in a landlord’s insurance policy precluded coverage for a claim arising from carbon monoxide poisoning. The Eleventh Circuit noted that in Reed, the insured owned the premises, whereas in the case before it, the insured did not. The distinction was an important one insofar as the exclusion at hand barred coverage only if a pollutant leaks “at or from any premises, site or location which is or was at anytime owned or occupied by or rented or loaned to any insured.” The Eleventh Circuit held that the pollution exclusion did not apply because the insured did not own the boat where the decedent died.

For a copy of the decision, click here

Carrie Appler and Jeffrey Kingsley

 

Insurer RICO Class Action Suit Filed against Walgreen, Par for Overcharging on Generics

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United Food & Comm. Workers Unions v. Walgreen Co. U.S. Dist. Ct., N.D. Ill, Filed Jan. 11, 2012

Insurance companies, self-insured employers, and union health and welfare plans filed the class action in Illinois Federal Court alleging several RICO violations against Walgreen Co. and Par Pharmaceutical Co. for engaging in a scheme to overcharge for generic versions of Zantac and Prozac.

Walgreen and Par entered into a “health resource partnership” under which Par manufactured and marketed generic versions of the drugs Zantac and Prozac in dosage forms that were not currently subject to strict reimbursement limitations. The scheme boosted Walgreen’s profits by allegedly systematically and unlawfully filling customer’s prescriptions with the more expensive Par products instead of the inexpensive dosages that had been prescribed. Under the alleged scheme, Walgreen could bring in $80 million per year instead of the $5 million that the originally prescribed tablets would have netted it costing the third-party payers two to four times more.

The complaint alleges that “even though a pharmacy cannot legally change a prescription without a physician’s express authorization, Walgreens filled prescriptions written for low-priced 150-mg ranitidine tablets with much more expensive 150-mg ranitidine capsules manufactured by Par.” Further, Walgreens allegedly made the Par capsules the only form of generics readily available to its retail customers, despite the fact that it was dispensing a drug that was not legally substitutable for tablets. “Walgreens did not have a system to obtain physician or patient authorization for the drug switching, or even a system to notify the physician or patient that a different drug had been dispensed.”

This class action comes months after a similar whistleblower suit was unsealed in July 2011, thereby publicly revealing the details of the alleged schemes. Plaintiff insurers have reproduced documents from that suit in support of its complaint. Back in June 2008, Walgreen settled RICO allegations with the federal government, 42 states and Puerto Rico, by paying $35 million regarding allegations it had overcharged state Medicaid programs by filling prescriptions with the more expensive dosage forms.

The four count complaint seeks to represent thousands of third-party payers who paid for prescriptions from 2001 to 2006. The plaintiff’s seek compensatory damages, treble damages, prejudgment interest and attorney’s fees.

For a copy of the decision click here

Tom Segalla

Federal Court Refuses to Dismiss Bad Faith Claims Against Insurer for Failure to Indemnify Pipeline Manufacturer

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Gulf Prod. Co. v. Hoover Oilfield Supply, Inc. (U.S. Dist. E.D.LA, January 11, 2012)

A Louisiana federal court denied an insurer’s motion to dismiss bad faith claims brought in an insurance coverage dispute involving the manufacturer of a pipeline.  The manufacturer itself is no longer a party to the action, having settled with the underlying gas company plaintiffs.  The plaintiffs are seeking compensation from the insurer for bad faith due to the insurer’s alleged arbitrary and capricious decision not to offer a settlement and a dispute over attorneys’ fees sought by the manufacturer.

The gas companies had sued the pipeline manufacturer for $2 million for allegedly misrepresenting the quality of its pipe.  The companies were involved in a 2008 gas extraction project in Louisiana, which they alleged was significantly hampered by the manufacturer’s allegedly shoddy pipelines.  According to the suit, the pipes allegedly failed at much lower pressures than the pipes were supposed to withstand.  The gas company plaintiffs claimed that the pipeline manufacturer made false representations when selling the pipes and said the ThermoFlex pipe could withstand pressures of up to 1,200 psi, but actually failed at levels well below that threshold.  Indeed, the plaintiffs assert that the pipeline failed during a hydrostatic test at 756 psi, rupturing in several places and causing the pipeline to twist and coil over the marsh, damaging wetlands and bottom water.

In its motion for summary judgment, the insurer argued that it had provided an adequate defense to the manufacturer and the dispute was limited to the fees paid to the manufacturer’s attorneys.  It argued that it is not possible for the insurance company to be in bad faith when it is providing a defense to its insured and the failure to pay sums demanded by the manufacturer for attorneys’ fees does not warrant bad faith penalties unless arbitrary, capricious or without probable cause.  The plaintiffs contended in opposition to the motion that the bad faith claims are over more than attorneys’ fees and now include the refusal to offer a settlement, which the plaintiffs say was arbitrary and capricious.

The federal court held in its order that the insurer’s motion failed to overcome substantial issues of fact concerning the extent of insurance coverage and what providing coverage requires the insurer to do.  The court held that this is ultimately a factual determination that must be submitted to the trial court.  Trial is scheduled to begin later this month.

For a copy of the decision click here

Joanna Roberto and Bryan Richmond

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