Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

Insurers achieved three favorable rulings in cases which to date remain unpublished.

Chimera Investment Co. v. State Farm Fire & Cas. Co., No. 06-4268, 2008 WL 681701 (10th Cir. (Utah) March 11, 2008)

The first addresses coverage for disparagement. It found that an insured could not obtain coverage under the “personal injury” offense of “oral or written publication of material that disparages a goods products or services of another for slandering it own services”. The insured, a real estate management company which allegedly slandered a home owners association services in speaking to a condominium unit owner. The court found that the injuries for which the claimant sought to recover in a state court lawsuit where no reported injuries to the homeowners association arose did not trigger a defense. The connection between the “offense” of slander of the association’s services to the injuries sustained by the claimant did not come within “advertising injury” coverage in the courts view where the suit was for unlawful entry, trespassing and wrongful eviction from a condominium unit. It found that the policy’s “arising out of” language did not make a difference.

The two remaining cases addressing “invasion of privacy” as forms of “personal injury” coverage

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I. INTRODUCTION

What one judge may categorize as “speculation,” another judge may find falls within the scope of “potentiality.” Potentiality requires a focus on any set of facts consistent with the claims pled that would not trigger exclusion but would still have the coverage provisions implicated. It matters not if the allegations are frivolous, groundless or false or would bar coverage if proven as alleged. The dividing line depends upon what facts may be reviewed in evaluating whether a defense is due.

Depending upon the forum, this may include the facts alleged in the current complaint, the four corners rule (the law in Florida and Texas); facts known to the insurer (the law in Illinois and New York); or facts available to the insurer, implicating a duty to investigate (the law in California and Massachusetts) (where facts “knowable” to the insurer are pertinent).

II. IN ASSESSING POTENTIAL COVERAGE IN “FACTS AVAILABLE” FORUMS, THE FOCUS IS ON THE PERTINENT FACTS THAT EVIDENCE HOW LIABILITY WILL ATTACH IN THE UNDERLYING ACTION

A. A Claimant’s Poor Draftsman Skills Cannot Avoid a Finding of Potential Coverage

An insurer is excused from defending only where “the basis for claiming potential liability under the policy is . . . tenuous and farfetched.” Giddings v. Industrial Indem. Co., 169 Cal. Rptr. 278, 282 (Ct. App. 1980). Insurers who urge a narrow construction of the potentiality doctrine misapprehend its import in light of this case law as a number of courts have found.

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I. INTRODUCTION

A growing number of insurers, following the lead of AIG (through its subsidiary AIG Mergers & Acquisitions Insurance Group) and Hartford (through its Nutmeg Insurance and Hartford Financial Products, Transactional Risk Group), offer insurance coverage for “representations and warranties” in connection with a merger and acquisition. Although typically issued to buyers, seller’s coverage is also available. As yet, no litigation has arisen over its terms and conditions. Nevertheless, negotiating these policies presents a number of challenges.

II. DOCUMENTS TYPICALLY REQUIRED FOR “REPRESENTATION AND WARRANTY” INSURANCE

A. List of Documents

The following checklist from AIG’s exploration of its policy application highlights that information which underwriters will require to evaluate the “representation and warranty” risk:

1. Draft acquisition agreement and related disclosure schedules;
2. Financial statements of the seller and the acquired company or business;
3. Any offering memorandum or other informational material prepared in connection with the transactions contemplated by the acquisition agreement;
4. Any proxy statement or information statement prepared in connection with the transactions contemplated by the acquisition agreement;
5. Buyer’s due diligence request list and responses thereto, if in writing;
6. Data room index or other due diligence document index prepared in connection with the transactions contemplated by the acquisition agreement;
7. Third party reports, studies or opinions;
8. Working group lists; and
9. Transaction time line.

B. Identifying and Supervising the Delivery of Only Necessary Documents to Underwriting

Typically a warranty and representations insuring agreement will provide, “The Insurer shall indemnify the Insureds for, or pay on their behalf, any Loss in excess of the Retention that is reported by the Named Insured to the Insurer during the Policy Period in accordance with Section 5 of this Policy.” The pertinent coverage is for a breach of a representation warranty. This can occur where there is either an inaccurate statement or a false or misleading one. Thus, AIG defines the breach as an “inaccuracy in the representation.”

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(CALIFORNIA/OHIO/TEXAS)

CALIFORNIA

New case law makes the applicability of California coverage law more likely in a number of circumstances.

First, California will rarely recognize the conflict of interests unless the policy issues behind the distinct rule would necessarily create a different result.

Western Int’l Syndication Corp. v. Gulf Ins. Co., 222 Fed.Appx. 589, 594, (9th Cir. (Cal.) 2007).

Second, California coverage law will apply if a conflict of law arises where the underlying suit is in California, as this is the place of performance.

Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436, 1461 (Cal. Ct. App. (2d Dist.) 2007)

Third, recent case authority clarifies the right to independent counsel in California. In typical scenarios encountered by litigants in intellectual property disputes, an insurer that asserts an “expected and intended” conduct and knowledge of falsity the “first publication exclusion” creates a conflict entitling the insured to retain independent counsel at the insurer’s expense.

J.R. Marketing, LLC v. Hartford Casualty Ins. Co., 2007 WL 4217443 at *8 (Cal. Ct. App. (1 Dist.) November 30, 2007)

Fourth, recovery of defense fees precipitated by pursuit of intellectual property lawsuits may elicit counterclaims, which are themselves covered, thereby funding the cost of affirmative litigation.

Aurafin-OroAmerica, LLC v. Federal Ins. Co., 2006 WL 1880088 (9th Cir. (Cal.) June 26, 2006)

Adobe Systems, Inc. v. St. Paul Fire & Marine Ins. Co., No. C 07-00385 JSW, 2007 WL 3256492, *9 (N.D. Cal. Nov. 5, 2007)

Fifth, California recently expanded the “genuine dispute doctrine” to permit an award of bad faith damages for reasonable attorney’s fees expended in proving coverage only where insurers withheld benefits.

Wilson v. 21st Century Ins. Co., 42 Cal.4th 713 (Cal. 2007) (“In the insurance bad faith context, a coverage dispute is not ‘legitimate’ unless it is founded on a basis that is reasonable under all the circumstances.”)

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Procuring an early neutral evaluation can offer parties a reality check on the viability of their legal positions. In an era of increased litigation expense, where one party believes it is more likely to prevail than the other, selecting an early neutral evaluator is a sign of strength. It requires the other party to submit its position to dispassionate neutral analysis and be prepared to explain any shortcomings of its case to its client before it makes the investment to go forward to trial or continue expensive litigation.

For more information regarding ENE, see John S. Blackman’s article, Neutral Evaluation – An Adr Technique Whose Time Has Come, http://library.findlaw.com/1999/Sep/1/128447.html.

The Benefits of Early Neutral Evaluation of Insurance Coverage Disputes of Complex Business Litigation Matters

I have had occasion to serve as an expert witness and consultant in a number of coverage actions where the underlying lawsuits arose out of intellectual property or antitrust/business tort disputes. Knowledge of both the underlying tort and its intersection with insurance coverage generally offers a number of pertinent insights beyond the experience of many courts who do not routinely address such coverage issues...

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I. INTRODUCTION

The international insurance market is grappling with the challenge of creating a policy that adequately addresses the number of risks posed by new technologies and Internet activities in particular. Currently, there is no industry standard policy form. A recent panel of brokers and insurance coverage counsel seeking to evaluate policies offered in the marketplace failed to identify a single best policy form given the wide variance in the coverage that applies. The group recommended that each business examine its particular needs and determine which companies’ products best address such needs.

There is another solution, however: craft a “best practices” policy form from which the majority of businesses may benefit. The concept is much like that which inspired the creation of the Commercial General Liability policy, which was itself a response to the number of variant policy forms issued by carriers – some broker-influenced, others not.

II. “BEST PRACTICES” INSURANCE COVERAGE

ACE: ACE DigiTech Digital Technology & Professional Liability Insurance Policy; ACE Digital DNA Network Risk Insurance Program for Business Interruption Coverage

ACE net Advantage Complete: Internet Media Liability, Internet Professional Services Liability, Cyber Extortion, Information Asset, Business Interruption, Criminal Reward Fund, Crisis Expense

Chubb: Information and Network Technology Errors or Omissions and Endorsements Reputation Injury and Communications Liability Coverage (separate part of GL coverage)

Travelers CyberTech: Technology Errors and Omissions Liability Communications and Media Liability Network and Information Security Liability (CyberTech & General Provisions)

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In a “hard market” many brokers and risk managers suggest that policyholders would be better off not giving notice to their insurers of claims, even if they are potentially covered, so as to avoid higher renewal costs. There are a number of problems with this approach. Five concerns are addressed hereafter.

First, if the policy has a “voluntary payments” provision, the failure to provide notice will bar recovery of pre-notice attorneys’ fees and may preclude a right to recover any policy benefits if the notice is delayed until trial is imminent This result may attend even in the majority of jurisdictions that require an insurer to prove prejudice to avoid policy benefits. If the policy is “claims made” (i.e., E&O/D&O) as opposed to “occurrence” based (i.e., CGL/Umbrella), the failure to provide notice of ongoing litigation during the policy period could impact the ability to obtain any coverage.

Second, in the event that the suit leads to a damages award or a sizeable settlement, and these exposures are not covered by insurance because no proper or timely notice was given, such a corporate loss could create a basis for a shareholders’ derivative action against the corporation for “waste” of the insurance policy asset.

Third, many insurers learn about ongoing litigation because it is reported on 10Q or 10K forms filed by the corporation as public records or because all outstanding litigation is reported in D&O renewal applications. Many insurers will already have taken these claims into account and adjusted insurance premiums accordingly. Thus, policyholders will suffer the consequences of reported litigation without obtaining any of the policy benefits which prompt notice would have secured.

Fourth, insurers typically assert that they want notice of all litigation against the company to better assess its risk profile. Brokers and risk managers who suggest that notice to the carrier will raise rates are often speculating. A loss, not a mere claim, is the event typically tracked by most insurers in fixing higher premiums. A risk manager would be hard pressed in a “waste” action to explain why it believed premiums would be higher where there is no tangible evidence that such would be the case. Reliance on a broker’s oral statements to that effect, where that broker did not investigate to see precisely what premium increases would have arisen if notice were provided, is not competent evidence. Even favorable testimony from the broker as to its reasonable expectation that higher premiums would result may provide little comfort to such a corporate policyholder, especially where more diligent inquiry would have revealed even broader replacement insurance coverage at an equivalent or even more favorable price point.

Fifth, in virtually every case, the recoupment of significant fees incurred in intellectual property/antitrust/unfair competition actions significantly outweighs the premium costs that may arise from procuring insurance to cover future claims.

For these and other reasons, unless the policyholder has only one insurance market where it can procure, on an “occurrence” basis, acceptable insurance coverage, there are rarely circumstances where the failure to give notice makes economic sense.

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I. INTRODUCTION

Policyholder counsel may be on the verge of a new gold rush in California. Case law in three significant areas has taken a recently favorable turn for policyholders in California, making it both a more attractive jurisdiction for pursuit of coverage claims as well as one in which greater benefits may arise for policyholders. These developments arise in three distinct areas: First, new case law makes the applicability of California coverage more likely. Second, it clarifies that in a number of business tort cases, the right to independent counsel in California has been expanded from previously perceived limits. Third, the California Supreme Court has clarified the “genuine dispute doctrine” so that an insurer’s disagreement with the insured over the application of coverage law is not sufficient in and of itself to avoid bad faith exposure unless its position is reasonable in light of applicable law.

II. THE APPLICABILITY OF CALIFORNIA COVERAGE LAW UNDER CALIFORNIA CHOICE OF LAW RULES

California will rarely recognize a conflict of interest unless the policy issues behind the distinct rule would necessarily create a different result. Western Int’l Syndication Corp. v. Gulf Ins. Co., 222 Fed. Appx. 589, 594 (9th Cir. (Cal.) 2007) highlights California’s preference for application of its own law. Therein, the court conceded that the late notice rule in New York – the other possible forum – made late notice a condition precedent to limit recovery under the policy, where as California applied the “notice prejudice rule.” The issue was not simply whether the law of the other forum is distinct from that of California, but whether, under the facts applicable in the case, the policy reasons behind the law applied by a distant forum were implicated so as to create a conflict. Thus, the Ninth Circuit reasoned:

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I. INTRODUCTION

Most Directors & Officers policies include a number of new exclusions. The most troublesome is the “severance” clause which precludes innocent directors and officers from procuring policy benefits where other directors and officers are found liable for wrongful acts in shareholder derivative lawsuits or governmental lawsuits.

Directors and officers, however, need not put their own personal assets at risk. New forms of insurance, like that offered by ACE through its CODA program, offer individual directors independent insurance opportunities that are far more comprehensive in coverage than that offered through the corporation.

These policies should be procured by directors and officers as part of their compensation for taking on the risks associated with serving as an officer or director of public corporations in the new hostile environment. This is especially the case where the Sarbanes-Oxley provisions make procedural compliance critical and where directors, even those highly informed about the company’s operations, may not be able to assure proper procedures are followed in each and every situation. Protection against exposure from these risks is essential, especially for directors who sit on audit committees.

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