Insurance Recovery Law

Courts Hold that Involvement of Lawyers Insufficient Basis to Withhold Routine Insurer Fact Investigations Materials

Why it matters
These cases confirm that insurers cannot hide claims-handling and similar documents and information from production by using lawyers in an attempt to recharacterize normal business functions as legal functions. In one case, a Wisconsin federal district court rejected several insurers’ blanket assertion of privilege and/or work product over their factual investigations when acting as a subrogation plaintiff. The insurers asserted that their factual investigations of claims in fact was conducted in anticipation of subrogation litigation, but Manatt partners Robert Shulman and David Killalea successfully argued that such investigations are a central part of an insurer’s claims-adjustment process. Involving lawyers or renaming claims investigators “subrogation adjusters” does not shield that basic business function from discovery.

Similarly, a New York appellate court held that documents “prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so ‘merely because [the] investigation was conducted by an attorney.’”

Detailed Discussion
In the Wisconsin federal district court case, Manatt partners Robert Shulman and David Killalea successfully argued that insurance companies are required to produce documents that are prepared in the ordinary course of the insurers’ investigation of their insured’s claims, notwithstanding the insurers’ efforts to involve lawyers and self-classify the information as having been prepared “in anticipation of litigation.” Specifically, several insurers brought subrogation claims against an appliance manufacturer arising from fires allegedly caused by defectively designed appliances. The manufacturer has successfully defended past cases by proving, among other things, that the fires had different causes, such as improper installation and user neglect (as well as by showing that the products were not defectively designed). Consequently, the manufacturer sought discovery of the insurers’ investigation into the origin and cause of each fire.

The insurers refused to produce documents generated in the investigation of their insureds’ claims, arguing that such information is protected work product. The insurers went so far as to argue that they were already anticipating litigation against the appliance manufacturer as early as the same day the fire was reported, before the insurers had investigated the origin and cause of the fire. The insurers in some instances attempted to buttress this argument by denominating their fact investigators as “subrogation adjusters” and by involving lawyers. The insurers also asserted that if the documents were created with a “dual purpose” – claims adjustment and subrogation litigation – they were protected from discovery.

The court rejected the insurers’ position that documents generated during the investigation of the claim are, as a matter of course, covered by the attorney-client privilege or work product doctrine. The court concluded that such factual investigations are a standard part of evaluating and paying claims. As such, even assuming that the documents were generated with a dual purpose when the insurers anticipated subrogation litigation against the manufacturer, the documents were discoverable and must be produced. The court further admonished that “just putting an attorney into the email string is not enough” to justify a claim of work product or attorney-client privilege. The court agreed to review documents in camera in the event there were particular instances of a legitimate claim of privilege or work product, but warned that if the insurers were relying on a blanket assertion, “there will be consequences.”

To read the decision in American Family Mutual Insurance Company et al. v. Electrolux Home Products, Inc., click here.

In the case before the New York appellate court, the insured, TransCanada, maintained a steam turbine power-generating facility in Queens, New York. A cracked generator had to be shut down for several months, leading TransCanada to file claims for repair costs and business-interruption losses with four of its property insurers.

Working together, the insurers hired experts – including attorneys and adjustors – to investigate the claim and determine the extent of coverage. All of the insurers ultimately denied coverage and jointly filed a declaratory judgment coverage action against TransCanada.

As part of discovery, TransCanada sought to obtain reports and related materials prepared by the insurers prior to the insurers’ denial of coverage. The insurers refused, arguing that the documents were protected by the attorney work product doctrine, the attorney-client privilege, and the common-interest privilege.

A special referee conducted an in camera review and ruled that the reports should be produced. A trial court judge upheld the decision last August.

The insurers appealed, and the appellate court again agreed with TransCanada, finding that the documents were business documents relating to a normal insurer business function.

The court relied on the general rule that “[d]ocuments prepared in the ordinary course of an insurer’s investigation of whether to pay or deny a claim are not privileged, and do not become so ‘merely because [the] investigation was conducted by an attorney.’”

The appellate panel also rejected the insurers’ common-interest argument. Because “there was no pending or reasonably anticipated litigation in which the insurance companies had a common legal interest,” the common-interest doctrine did not apply.

To read the decision in National Union Fire Insurance Co. v. TransCanada Energy, click here

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NY’s Highest Court Rehears and Reverses Itself on Pro-Policyholder Ruling

Why it matters
Last June New York’s highest court held that a liability insurer that breached its duty to defend is barred from later relying on policy exclusions to deny coverage. The court thereafter agreed to rehear argument in the case based on the insurer’s contention that the original decision failed to take account of prior New York precedent. On rehearing, the court found that its two decisions were irreconcilable and, based on the doctrine of stare decisis, reversed itself. The court thus held that when an insurer breaches the duty to defend, it is not barred from invoking policy exclusions to avoid the duty to indemnify, provided the application of the exclusion does not depend on disputing facts established in the underlying litigation. This rule is consistent with the rule adopted in Hawaii and Massachusetts, but stands in contrast to the rule adopted in Connecticut and Illinois. On that basis, the court determined there was an insufficient basis to reject stare decisis and the prior decision.

Detailed Discussion
Two LLCs made a total of $2.83 million in loans secured by mortgages to a third LLC, which failed to repay the loans. Jeffrey Daniels, a lawyer for the mortgagee, failed to record the mortgages. When the loans went unpaid, one of the companies – K2 Investment Group – filed a malpractice action against Daniels.

Daniels turned to his insurer, American Guaranty and Liability Insurance Company, which refused to provide either defense or indemnity coverage. K2 eventually settled with Daniels for $450,000. He assigned his rights against the insurer to K2, which filed suit against American Guaranty.

The insurer again refused to pay, relying on two policy exclusions concerning “insured’s status” and “business enterprise.” In K2-I, the court had found that because American Guaranty’s refusal to defend was wrongful, the insurer was barred from relying on policy exclusions to avoid indemnifying the policyholder.

American Guaranty moved for rehearing, arguing that the New York high court had already decided the same issue in a 1985 decision, Servidone Const. Corp. v. Security Ins. Co. of Hartford. Specifically, the court framed the issue as “Where an insurer breaches a contractual duty to defend its insured in a personal injury action, and the insured thereafter concludes a reasonable settlement with the injured party, is the insurer liable to indemnify the insured even if coverage is disputed?”

In Servidone, the court answered in the negative. The issue in K2 was the same: whether a legal malpractice insurer that wrongfully breached its duty to defend nevertheless was free to dispute coverage.

“The Servidone and K2-I holdings cannot be reconciled,” the K2-II court concluded.

“[T]o decide this case we must either overrule Servidone or follow it.” In a 4-2 decision, the court elected to follow Servidone. Even though “[t]here is much to be said for the rule of K2-I,” the court found “no justification for overruling Servidone. Plaintiffs have not presented any indication that the Servidone rule has proved unworkable, or caused significant injustice or hardship, since it was adopted in 1985. When our court decides a question of insurance law, insurers and insureds alike should ordinarily be entitled to assume that the decision will remain unchanged unless or until the legislature decides otherwise.”

In the process of rendering its decision, the Court of Appeals reaffirmed the settled principle under New York law that when an insurer has breached its duty to defend, it cannot relitigate or second-guess the resolution of the underlying case. Nevertheless, the court remanded for purposes of determining the applicability, as a matter of fact, of the two exclusions.

To read the decision in K2 Investment Group v. American Guaranty & Liability Co., click here.

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Malpractice Exclusion in D&O Policy Inapplicable to False Advertising Suit, Court Rules

Why it matters
In a recent decision from a Rhode Island federal court, a law firm and two of its lawyers won defense coverage from an insurer for an underlying complaint alleging false advertising. The insurer asserted a policy exclusion for the rendering of professional services, arguing that the false advertising claims arose out of and were inextricably intertwined with the lawyers’ legal services. But the court’s decision turned on the language of the underlying complaint, which alleged false advertising, not the provision of legal services. Although a trial court dismissed the deceptive trade practices count of the suit, the federal court said the insurer was still required to defend the suit because the false advertising injury alleged was within the coverage of the policy. Further, the court emphasized that a contrary holding would exclude almost all conduct on the part of the law firm, as its entire business is related to the rendering of professional services – leaving the D&O policy essentially meaningless.

This decision shows that exclusions must be read in context to avoid rendering coverage illusory. Here a malpractice (E&O) policy was in place to cover alleged wrongdoing in the rendering of professional services. The separate D&O policy therefore excluded coverage for claims concerning the rendering of professional services, but provided coverage for other alleged wrongful acts. The insurer’s position – that anything a law firm does necessarily “arises out of” and “relates to” the rendering of professional services – was rejected because it would have rendered the coverage the insurer sold illusory.

Detailed Discussion
Robert Levine and Benjamin Pushner made up the Rhode Island-based law firm of Levine & Associates. The firm advertised on television and the Internet with the tag line “Call A Heavy Hitter Today!”

Two former clients of the firm filed suit in state court alleging, in their third count, that the lawyers violated Rhode Island’s deceptive trade practices statute. According to the plaintiffs, “[t]he Defendants deceptively advertise[] in all media in Rhode Island” and “[t]he Defendants gave the false impression to Plaintiffs and presently give the false impression to future clients that [they] have special expertise in personal injury cases and disability cases and will recover more money than other Rhode Island lawyers.”

Levine and Pushner requested a defense pursuant to a directors and officers liability policy issued by Travelers Casualty and Surety Company of America. Travelers denied coverage, citing an exclusion for legal services: “Loss for any Claim based upon or arising out of any Wrongful Act related to the rendering of, or failure to render, professional services.”

The law firm sued Travelers. The parties agreed to limit the issues before the court on summary judgment to whether the law firm is entitled to a defense in connection with the deceptive practices claim in view of the legal services exclusion.

Travelers argued that the alleged false and deceptive advertisements were “inextricably intertwined” with the law firm’s rendering of professional services, and that the phrases “arising out of” and “professional services” should both be interpreted broadly.

The law firm argued that the issue is controlled by the language used in the complaint. Count three focused on the firm’s advertising, not on the legal services the firm rendered.

On cross-motions for summary judgment, the court sided with the policyholder.

“The plain meaning of the word ‘render’ is ‘to do; perform; to render a service’; ‘to do (a service) for another,’” U.S. District Court Judge John J. McConnell, Jr., wrote. “The plain and ordinary language in the legal services exclusion therefore eliminates from coverage only conduct that relates to Levine & Associates providing legal services.”

Count three was limited to advertising and not the rendering of legal services, the judge said, as “the advertisements were made to the general public before legal services are performed to market services,” and allegedly gave a false impression not only to the plaintiffs but other future clients as well.

The court further held that Travelers’ argument would render the coverage it sold illusory. “Applying the legal practices exclusion to this alleged deceptive advertising would ignore the meaning of the word ‘rendering,’” the court explained. “If the court were to adopt the expansive reading of the legal practices exclusion advocated by Travelers, then any conduct by Levine & Associates would be excluded from coverage since Levine & Associates’ business is ‘related to the rendering of . . . professional services.’ If this were the case, then the D&O policy would be meaningless and provide no coverage. The court will not construe the contract to create such an absurd result.”

To read the order in Levine & Associates v. Travelers Casualty and Surety Company of America, click here.

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Shooter Entitled to Coverage Despite Late Notice, Dispute Over Intentional Act

Why it matters
An 18-year-old who drunkenly shot a man overcame two arguments from an insurer to receive defense coverage for a complaint filed by his victim – including late notice. Not until the shooter was deposed did he learn that he might be covered by his parents’ homeowners policy. The insurer based its denial of coverage on two issues: first, the young man failed to meet the notice requirements under the policy and, second, the shooting was an intentional act not included in the scope of the policy. The Pennsylvania federal court disagreed, ruling that the insurer suffered no prejudice as a result of the late notice, which was reasonable given the shooter’s unawareness of the policy. The court further ruled that the insurer’s contention that the shooting was intentional failed in view of the fact that the victim’s complaint listed 16 different negligent acts by the shooter. Because the complaint sounded in negligence, the shooter was entitled to a defense.

Detailed Discussion
In January 2010, Gerald Ung assaulted and shot Edward DiDonato in downtown Philadelphia. DiDonato, who suffered serious injuries requiring extensive medical treatment, sued Ung in Pennsylvania state court.

When Ung was deposed by DiDonato’s counsel in January 2013, he was asked whether his parents, located in Virginia, had a homeowners policy and was told that the carrier could be required to defend him. Ung replied that he had “no reason to believe” that as an adult residing in another state the policy would cover claims against him, but he contacted his parents. His mother then notified insurer Citizens Insurance Company of America about the lawsuit.

Citizens took over the defense of Ung’s suit with a full reservation of rights and filed a declaratory judgment coverage action in Pennsylvania federal court. The insurer made two arguments against providing a defense: first, that Ung breached the notice provisions of the policy and, second, that the shooting was an intentional act, not negligence as required by the policy.

U.S. District Court Judge Luis Felipe Restrepo disagreed with both of Citizens’ arguments.

The Citizens policy required the insured to give notice to the insurer of an occurrence or accident triggering coverage “as soon as is practical.” Even if the notice was late, to constitute a breach the failure also needed to be substantial and material, the court explained.

Given the circumstances, Ung’s notice was both reasonable and not material, Judge Restrepo said, and therefore did not relieve Citizens of its duty to defend. “In particular, with regard to the underlying incident involving a student in Philadelphia shooting another individual multiple times in Center City Philadelphia, it was objectively reasonable for it not to have appeared to a person in the Ungs’ situation that the policy may be implicated until the time when the Ungs actually gave notice,” he wrote.

Ung’s counsel apparently did not realize the homeowners policy might be in play and Citizens itself made the argument that the incident did not implicate the policy, the court noted.

In addition, the court found that the insurer failed to plead prejudice or materiality with regard to the delay in notice and did not demonstrate any prejudice. For example, Citizens elected to retain the same counsel who had been representing Ung in the state court litigation. “Not only does Citizens not argue that Ung’s counsel somehow failed to conduct a thorough defense of Ung, but Citizens fails to argue, let alone demonstrate, that it would have elected a different counsel if it had been notified earlier, or that it would have made a difference,” the court said.

Citizens’ second argument was similarly unavailing. Although the insurer argued that the shooting was an intentional act, the complaint itself listed 16 different negligent acts committed by Ung, from “Carrying a firearm while intoxicated” to “Shooting plaintiff with several bullets.”

Because the duty to defend is triggered by an underlying complaint that “potentially or arguably” alleges liability covered by the policy, Judge Restrepo concluded that Citizens had a duty to defend Ung in the state court proceeding.

However, the court declined to rule on the insurer’s duty to indemnify, finding the issue premature pending a final determination of Ung’s liability.

To read the decision in Citizens Insurance Company of America v. Ung, click here.

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