Insurance Recovery Law

FEMA Clarifies Time Extension for Victims of Sandy

Why it matters: Given the unprecedented meteorological event known colloquially as “Superstorm Sandy,” the Federal Emergency Management Agency granted multiple extensions for National Flood Insurance Program policyholders to file a Proof of Loss. However, the question then arose: Did that extension impact the one-year statute of limitations contained in the flood policies for an insured to bring a lawsuit? In a new memorandum, James A. Sadler, director of claims for the NFIP, said “no.” Because the statute of limitations was established by an act of Congress (and then incorporated into the policies), FEMA does not have the power to grant an extension on the deadline to file suit.

Detailed Discussion
Superstorm Sandy hit the Eastern Seaboard on October 29, 2012, resulting in injuries, power outages, deaths, and billions of dollars in property damage. On November 12, 2013, FEMA granted a limited waiver of the Proof of Loss requirement for those affected by the storm. Pursuant to the waiver, policyholders could receive payment of an undisputed amount based solely on an adjustor’s report and insurer’s approval without the Standard Flood Insurance Policy (SFIP) Proof of Loss.

The agency also waived the usual 60-day deadline to submit the SFIP Proof of Loss and granted a one-year extension from the date of loss to send the insurer the Proof of Loss for additional losses.

On October 1, 2013, FEMA granted an additional extension of the Proof of Loss deadline for another six months – stretching the time period from the usual 60 days to 18 months after Sandy, or to April 28, 2014. “This is an unprecedented action by FEMA that reflects FEMA’s commitment to facilitating the ability of individuals insured by the NFIP to seek payment,” according to the memorandum.

Discussing the interplay between the Proof of Loss deadline and the statute of limitations to bring suit, the memorandum explained that FEMA established the 60-day Proof of Loss deadline in its regulations for the SFIP, and therefore the agency has the authority to grant waivers and extend the deadlines.

However, when it enacted the National Flood Insurance Act of 1968, Congress established the one-year statute of limitations for an NFIP policyholder to bring a lawsuit after denial or disallowance or the partial denial or disallowance of a claim, under 42 U.S.C. § 4072. The statute of limitations was then incorporated into the SFIP by FEMA in its regulations.

“Unlike the SFIP Proof of Loss deadline, which is a regulation created by FEMA, FEMA cannot extend the time limit for NFIP-insureds to bring a lawsuit,” Sadler wrote. “This statute of limitations has never been extended.”

Although a benefit to policyholders, at the same time policyholders must be aware of the separate one-year statute of limitations for bringing suit, which is one year from the date a denial letter is issued. Regardless of other limitations, the one-year statute must be complied with or the policyholder will be left without recourse. “This situation will typically arise when the insurer has determined that the insured has not suffered a ‘direct physical loss by or from flood’ and there is no coverage under the SFIP,” such as if an insurer determines flood waters did not reach the insured building, according to the memorandum.

“The limited waiver and extension of the Proof of Loss deadline recognizes the difficulties insureds damaged by Sandy experienced evaluating damage and supporting their flood insurance claim,” Sadler wrote. “The typical dispute arises after an insured has received payment based on an adjuster’s report and the insurer’s approval and later believes there is additional uncompensated damage. The one year to sue typically will not be triggered until the required Proof of Loss for the additional amount sought is submitted and there is a complete or partial disallowance/denial of the amount sought.”

Emphasizing that FEMA “does the most it can to assist NFIP insureds,” the memorandum reiterated that it “cannot and does not waive or extend the applicable statute of limitations.” However, the “extended time to file the Proof of Loss is an effective mechanism that allows insureds to fully present their claims.”

To read the memo from FEMA, click here

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Insurer Can’t Recoup $10M Settlement Payment Due to Failure to Timely Reserve Rights and Bring Declaratory Judgment Action

Why it matters: A legal malpractice insurer forfeited its right to recoup a $10 million malpractice settlement by waiting three years after the malpractice claim was filed to reserve its right to recoup, an Atlanta federal district court determined. The law firm asserted that Twin City Fire Insurance had failed to properly reserve its right to deny coverage and to claim recoupment before paying the settlement amount. The court found that Twin City failed to take the necessary and “proper and safe course of action” by providing proper notice of its reservation of rights, taking appropriate measures in the underlying litigation to protect the insured from prejudice, and seeking immediate declaratory relief, including a stay of the underlying case pending final resolution of the declaratory judgment coverage action. Twin City, however, waited three years, until the last day of a 30-day settlement window in the underlying case, to attempt to reserve its rights and file a declaratory action. Too little, too late, the court said, leaving the insurer unable to seek recoupment of the $10 million settlement paid.

Detailed Discussion
In the fall of 2009, a bank hired Hartman Simons & Wood LLP to draft a guaranty release agreement as part of a real estate transaction. The guaranty release was to release the bank’s interest in a single property, but the? counter party and other entities argued that the release extended to a broad array of obligations to the bank.

A state court subsequently entered judgment against the bank on the scope of the release. The bank filed a malpractice claim against the law firm and demanded indemnification for its losses, which it estimated exceeded $60 million.

Three years into the litigation, the bank offered to settle the malpractice suit for $10 million, the amount of the law firm’s malpractice policy limits with Twin City – but only if payment was made within 30 days. The law firm asked Twin City to fund the settlement.

Twin City responded by disputing that it had any coverage obligations and informed the law firm that it intended to accept the bank’s demand, and asked the law firm to contribute to the settlement or execute a nonwaiver agreement that would allow Twin City to pursue recoupment against the law firm. The firm declined to accept the nonwaiver agreement. Twin City proceeded to fund the settlement under a full reservation of rights and on the same day filed a declaratory and recoupment action against Hartman Simons.

In its lawsuit against the law firm, Twin City requested recoupment of the $10 million settlement payment or, in the alternative, an order allocating the costs based on the presence of covered and noncovered claims and/or covered and noncovered defendants.

The Georgia federal court held that Twin City had forfeited its right to recoup or allocate. Although Hartman Simons notified Twin City within weeks of the bank’s malpractice lawsuit, the insurer waited almost three years to reserve its rights regarding coverage.

Under Georgia law, insurers may not give policyholders unilateral notice of a reservation of rights and proceed with a complete defense of the claim absent the express or implied consent of the insured. If an insurer is put on notice of grounds for coverage and the insured refuses to consent to a defense under a reservation of rights, the court spelled out exactly what the insurer must do to reserve its rights: the insurer must give the insured “proper, unilateral notice of [the insurer’s] reservation of rights,” take the “necessary steps to prevent the main case from going into default or to prevent the insured from being otherwise prejudiced,” and “seek immediate declaratory relief including a stay of the main case pending final resolution of the declaratory judgment action.”

Twin City failed to take the required steps. “Instead, Twin City waited nearly three years, until after the bank had submitted a settlement demand with a 30-day time limit. Then, on the very day the settlement demand was to expire, and after it had already decided to pay the demand, Twin City for the first time sought to reserve its claimed right to seek allocation and recoupment,” the court said.

This “last minute, unilateral reservation of rights after its insured had declined to contribute to a settlement” did not follow the “proper and safe course of action,” the court explained.

“The insurer’s options did not include settling the case, regardless of whether the settlement occurred before or after filing a declaratory judgment action,” he said. “By proceeding to settle the underlying claim before obtaining a final judgment determining its obligations, Twin City…short circuited the process and thereby waived any right to seek reimbursement from its insureds.”

To read the decision in Twin City Fire Insurance v. Hartman Simons & Wood LLP, click here.

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Common Law “Innocent Insured” Doctrine Protects One Law Partner From Policy Rescission Due to Other Partner’s Misrepresentation

Why it matters: The “innocent insured doctrine” protected one law partner where another made a material misrepresentation during the formation of the policy, according to the Illinois Appellate Court. Facing the possible rescission of his malpractice insurance, a law partner argued that his partner’s bad act – failing to disclose during policy renewal a possible malpractice claim – should not be held against the partner that had no knowledge of the potential claim. The court found that the “innocent insured” provision of the policy – which addresses failure to give timely notice – was not implicated, but that the policy could not be rescinded as to the innocent partner under the common law “innocent insured” doctrine.

Detailed Discussion
Sam Tuzzolino and Will Terpinas were partners in the Law Office of Tuzzolino and Terpinas. Tuzzolino represented a client named Antonio Colletta for a number of years until Colletta, believing that the lawyer had mishandled litigation relating to a business venture, filed a malpractice suit against him.

Tuzzolino convinced Colletta to drop the suit and to sue another person instead. But Tuzzolino failed to file the complaint within the statute of limitations and then lied to Colletta for more than a year about the status of the litigation. When Colletta learned the truth, Tuzzolino offered him $670,000 to settle any claims against him.

Not long after, Tuzzolino received the firm’s malpractice insurance renewal quote and paperwork from the Illinois State Bar Association Mutual Insurance Company. Certifying that he was not aware of any circumstances “which may give rise to a claim that has not been reported,” Tuzzolino returned the form.

Weeks later, Terpinas learned of the Colletta situation. He notified the firm’s insurer, which responded with a lawsuit seeking rescission of the entire insurance policy.

Terpinas filed a counterclaim, seeking a declaratory judgment that the policy covered him with respect to Colletta’s malpractice suit. He argued that the “innocent insured” provision in the policy meant he was owed coverage and that a separate severability clause allowed the court to rescind the policy as to Tuzzolino while leaving it in force for Terpinas. A trial court judge disagreed.

The “innocent insured” provision stated that “whenever coverage under this policy will be excluded or lost because of the insured’s failure to provide timely notice, the company agrees that such insurance as would otherwise be afforded under this policy, should be applicable with respect to any insured who do not personally fail to give timely notice after having knowledge of the conduct that forms the basis of the claim.”

Because the provision addresses notice, the court held that it did not apply to the insurer’s rescission claim. Terpinas’ “argument ignores the distinction between the nondisclosure of a malpractice claim under an existing insurance policy and the nondisclosure of a malpractice claim on the renewal application for a new policy,” the court wrote. “If this case merely involved the former, Terpinas would remain covered; the record indicates Terpinas provided notice as soon as he became cognizant of his partner’s malfeasance and plaintiff does not assert that Terpinas is not covered under the language of the agreement. This case, however, involves the latter.”

Nevertheless, rescission was improper as to Terpinas under the common law “innocent insured” doctrine, the court held, reversing the trial court’s decision.

“The common law innocent insured doctrine applies in a situation where two or more insureds have an insurance policy and one of the insureds commits an act that would normally void the insurer’s contractual obligations,” the court explained. In Illinois, case law on the doctrine was typically found “in the situation where one property owner sets fire to mutually owned property without the co-owner’s knowledge,” and courts have allowed the innocent property owner to collect his or her portion of the insurance proceeds.

The insurer objected that the common law doctrine should not protect Terpinas, because the insurer was the truly innocent party; because of Tuzzolino’s misrepresentation during the formation of the policy, the policy was void ab initio. Therefore, it never existed and Terpinas could not rely upon it.

But the appellate court disagreed. The court noted that “while insurers and insureds may argue over who is the truly ‘innocent’ party for the purposes of equities, such a focus misses the impact on the underlying malpractice litigation.”

The real focus – and truly innocent party – is the victim of malpractice, the court said. Illinois policy therefore favors coverage whenever the facts justify it, and the state’s highest court has generally interpreted the Insurance Code to favor innocent insureds, in part due to public policy in the context of legal malpractice insurance.

Voiding the policy with respect to Terpinas would leave him without coverage for any actions in unrelated matters, including simple malpractice, and would be contrary to the public interest, the panel said. “[A] denial of coverage does not only negatively affect the potential insured. Without coverage, many defendants become unable to pay out the settlements or judgment awards, in effect harming the initially wronged party (in this case, Colletta).”

“[G]iven the existing case law regarding the innocent insured doctrine, Illinois courts’ overall inclination to protect the insured, and the persuasive authority from other jurisdictions, we find that the innocent insured doctrine preserves coverage for Terpinas under these facts,” the panel concluded. The court also ruled that the severability provision could operate to partially rescind the policy as to Tuzzolino.

To read the decision in Illinois State Bar Association Mutual Insurance Co. v. Law Office of Tuzzolino and Terpinas, click here.

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David Killalea and Steve Raptis to Host Bloomberg BNA Webinar on Insurance Coverage for Pollution Claims

On December 12, 2013, Manatt partners David Killalea and Steve Raptis will lead a webinar on “Insurance Coverage for Pollution Claims: New Strategies for Dealing With an Old Problem”. The webinar will be held at 1 p.m. EST and is hosted by Bloomberg BNA.

U.S. environmental laws typically impose cleanup liability on the polluter and the related costs can be devastating to a company’s bottom line. Nearly every company that has industrial operations--or that has acquired legacy industrial operations from another entity--has exposure to environmental pollution claims. Understanding insurance policy options for pollution claims is critical to the risk mitigation strategy of any company with exposure to such claims. David and Steve’s presentation will assist attendees in:

  • Understanding the basic insurance issues applicable to pollution claims
  • Identifying the types of insurance policies that may provide coverage for pollution claims and the types of claims that may be covered by each
  • Analyzing the legal framework that will shape potential recovery for pollution claims
  • Exploring the strategies for maximizing coverage for pollution claims
  • Maximizing premium value when purchasing pollution

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