Friday, September 27, 2013

NY Court Applies Old Late Notice Rule to A Post-January 17, 2009 Policy

In its recent decision in Indian Harbor Ins. Co. v. The City of San Diego, 2013 U.S. Dist. LEXIS 137873 (S.D.N.Y. Sept. 25, 2013), the United States District Court for the Southern District of New York had occasion to consider whether New York’s “notice prejudice” rule set forth in New York Insurance Law §3420(a) applies to a policy not “issued or delivered” in New York, but which is otherwise governed by New York law.

For decades, the law in New York had been that timely notice of occurrence or suit was a condition precedent to an insured’s right to coverage under an insurance policy.  As such, New York courts long recognized that an insured’s failure to provide prompt notice of a triggering event (i.e., occurrence, suit, claim, etc.) operated as a forfeiture of the insured's right to coverage, regardless of whether the insurer was prejudiced as a result.  See, Great Canal Realty Corp. v. Seneca Ins. Co., Inc., 800 N.Y.S.2d 521(N.Y. 2005); Security Mut. Ins. Co. v. Acker-Fitzsimons Corp., 340 N.Y.S.2d 902 (N.Y. 1973).

This law changed, in part, with the New York Legislature’s implementation of amendments to New York Insurance Law §3420(a) that went into effect on January 17, 2009.  This revised rule states, in pertinent part, that:

(a)  No policy or contract insuring against liability for injury to person, except as provided in subsection (g) of this section, or against liability for injury to, or destruction of, property shall be issued or delivered in this state, unless it contains in substance the following provisions…
                                    *     *     *

(5) A provision that failure to give any notice required to be given by such policy within the time prescribed therein shall not invalidate any claim made by the insured, injured person or any other claimant, unless the failure to provide timely notice has prejudiced the insurer … (Emphasis supplied.)

Thus, for policies “issued or delivered” in New York on or after January 17, 2009, a disclaimer of coverage based on late notice will only be upheld when the insurer has been prejudiced.  New York courts, however, continue to apply the “no prejudice” rule to policies issued or delivered prior to this date.   See, Charter Oak Fire Ins. Co. v. Fleet Bldg. Maint., Inc., 707 F. Supp. 2d 329, (E.D.N.Y. 2009); Rockland Exposition, Inc. v. Great Am. Assur. Co., 2010 U.S. Dist. LEXIS 103267 (S.D.N.Y. Sept. 29, 2010).

The recent decision in City of San Diego addresses whether the prejudice rule established in §3420(a) applies to policies issued after January 17, 2009, that are governed by New York law, but not actually issued or delivered within the state.  The policy before the court was a pollution liability policy issued by Indian Harbor (on XL Specialty paper) to the California State Association of Counties.  The policy was a claims made and reported policy in effect for the three year period from July 1, 2009 to July 1, 2012, but nevertheless required the insured to give Indian Harbor notice of claims “as soon as practicable.”  Notably, while the policy was issued to a California insured to provide pollution liability coverage for California entities, the policy contained a New York choice of law and a New York forum selection provision.

The City of San Diego – an insured under the policy – sought coverage for three underlying pollution claims, each of which was first made and ultimately reported to Indian Harbor while the policy was in effect.  In each instance, however, the City’s notice to Indian Harbor was significantly delayed.  For one claim, the City waited some thirty-one months to give first notice.  For another, the City waited more than twelve months.  For the third claim, the City waited almost two months before giving notice. Indian Harbor denied coverage to the City for each of the claims on the basis of late notice.

In a subsequent declaratory judgment action, Indian Harbor argued that it had no coverage obligation with respect to the underlying claims as a result of the City’s failure to have provided timely notice of same.  In support of this, Indian Harbor cited to the long line of New York cases standing for the proposition that even small delays in giving notice to an insurer – even as little as twenty-one days – can result in a forfeiture of coverage, regardless of prejudice.  The court agreed that in each instance, the City’s first notice to Indian Harbor was not given as soon as practicable under this line of cases, and that in each instance, the City failed to offer a reasonable explanation that would excuse its delay.  Among other things, the City argued that its delays should be excused since in each case, it still complied with the requirement that the claim be reported during the policy period.  The court rejected this argument, explaining that the policy’s notice provision enables the insurer to commence a timely investigation, which serves a different purpose than the claims reported provision, which provides certainty to the insurer as to when it is "off the risk."  The court further explained that the City’s argument, taken to its logical extreme, would improperly “read out the requirement that notice be given as soon as practicable and require only that notice be provided during the policy period.”

More notably, the City asserted that the policy should not be governed by the “no prejudice” line of New York cases because the policy was issued after January 17, 2009, i.e., when the changes to §3420(a) went into effect.  In support of this position, the City argued the policy was either expressly governed §3420(a) in light of the policy’s New York choice of law provision, or in the alternative, the changes to §3420(a) signified a shift in New York common law that now requires a showing of prejudice even in instances where the statute does not apply.  The court rejected both arguments. 

In terms of whether the statute governed the policy, the court noted that by its express terms, §3420(a) only applies to policies “issued or delivered” in New York.  The court found that the policy was delivered in California, and that it was not issued in New York but instead was issued in Exton, Pennsylvania, which is where the policy was prepared and signed by Indian Harbor.   Thus, while the court agreed that the policy was governed by New York law as a result of its express choice of law provision, it nevertheless concluded that the policy was not governed by §3420(a) since the policy was neither issued nor delivered in the state. 

The court further rejected the City’s argument that §3420(a) “creates a new public policy for New York that changes the historic no-prejudice rule.”  The court observed that numerous New York courts have continued to apply the “no prejudice” rule to policies issued prior to January 17, 2009, and that if New York public policy truly had changed, then these courts would be reaching a different result.  The court also noted that in the Second Circuit decision in Marino v. New York Tel. Co., 944 F.2d 109 (2d Cir. 1991), the court declined to apply a different aspect of §3420 to a policy issued and delivered outside the state, but which was nevertheless governed by New York law.  From this holding, the court concluded that “Section 3420(a)(5) applies to policies issued or delivered in New York and has not changed the common law of New York.”  In other words, the “no prejudice” common law rule continues to apply to policies governed by New York law that are not otherwise subject to §3420(a).

In passing, the court rejected the City’s argument that the New York choice of law provision was unconstitutional.  The City offered no meaningful case law support for this contention, nor could it otherwise demonstrate that the provision was the result of fraud or overreaching.  Instead, explained the court, the parties freely contracted to include the provision, and Indian Harbor had sufficient contacts in New York (including the office of its CEO-chairman, general counsel and numerous corporate directors).  As such, the court agreed that “there is nothing unfair about enforcing the parties’ choice-of-law clause.”

Tuesday, September 24, 2013

Michigan Court Holds Notice of Potential Claim Insufficient

In its recent decision in Lemons v. Mikocem, LLC, 2013 U.S. Dist. LEXIS 133976 (E.D. Mich. Sept. 19, 2013), the United States District Court for the Eastern District of Michigan had occasion to consider the issue of whether an insured’s notice of circumstances that could give rise to a claim was sufficient to preserve coverage for a future claim. 

Federal Insurance Company insured Indian Nation and its subsidiaries, including Mikocem, under a directors and officers policy with an employment practices liability coverage part.  Indian Nation and Mikocem operated funeral homes in Michigan and Tennessee.  The policy provided claims made and reported coverage for the period April 20, 2005 through April 20, 2006, but was extended through October 20, 2006.  Federal decided not to renew the policy upon its expiration.  On October 19, 2006, Federal received a letter from Indian Nation accusing Federal not to renewing the policy because of information it had learned in an Internet search; specifically, articles regarding Indian Nation’s alleged investment fraud.  The letter stated that:

Since [Federal] has chosen to non renew [sic] our account please let this serve as notice of an "incident" or "claim" to protect our rights under the policy. At this time no formal demands have been made against the company, however if there are any formal demands they will promptly be forwarded to [Federal] when they are received.

At issue in the Lemons case was coverage for a wrongful termination suit filed in April 2007 by John Lemons against Mikocem.  Lemons obtained a judgment against Mikocem and then sought to enforce that judgment, as a garnishee, against Federal.  On motion for summary judgment, Federal argued that it had no indemnity obligation with respect to Lemons’ judgment against Mikocem because Lemons’ suit was not a claim first made during the policy period.  Lemons argued in response that Indian Nation’s October 19, 2006 letter to Federal was sufficient notice under the policy’s reporting provision, which states:

If during the Policy Period, or any applicable Extended Reporting Period, an Insured becomes aware of a Potential Employment Claim or Potential Third Party Claim which could give rise to any Employment Claim or Third Party Claim (as such terms are defined in the Employment Practices Liability Coverage Section) or becomes aware of circumstances which could give rise to any Claim, other than an Employment Claim or a Third Party Claim (as such terms are defined in the Employment Practices Liability Coverage Section), and gives written notice of such Potential Employment Claim, Potential Third Party Claim or circumstances to the Company as soon as practicable thereafter but before the expiration or cancelation [sic] of this Policy, then any Claim subsequently arising from such Potential Employment Claim, Potential Third Party Claim  or circumstances shall be considered to have been made against the Insured during the Policy Year in which the Potential Employment Claim, Potential Third Party Claim or circumstances were first reported to the Company.

Notably, the policy defined “Potential Employment Claim” as a complaint or allegation of a wrongful act lodged with the insured’s human resources department or functional equivalent thereof. 

Lemons did not contend that Indian Nation’s letter of October 19, 2006 qualified as notice of a Potential Employment Claim.  He nevertheless contended that the policy’s reporting clause permitted notice of three different events: Potential Employment Claims, Potential Third Party Claims, or “circumstances which could give rise to any claim.”  He argued that circumstances reporting serves the purpose of “protect[ing] the insured when the insured is aware of facts (“circumstances”) and their potential affect [sic], but lacks enough detail to draw a legal conclusion as to a particular claim.”  In other words, Lemons argued that the notice provision allowed for reporting of specific types of potential claims (i.e., Potential Employment Claims and Potential Third Party Claims) but that the policy also had a “catch-all” reporting provision that allowed for generic reporting of circumstances that could result in any type of covered claim.

The court rejected Lemons’ reading of the notice provision since it ignored the clause immediately preceding the “notice of circumstances” language that expressly carved out Employment Claims and Third Party Claims (i.e., the clause stating “…other than an Employment Claim or a Third Party Claim.”)  This qualifying clause, explained the court, made clear that the policy only allowed reporting of circumstances for claims other than Employment Claims and Third Party Claims.  As such, concluded the court, notice of circumstances alone was insufficient to preserve coverage for employment claims first made subsequent to the policy’s expiration.  As such, and because the October 19th letter did not give sufficient details of a Potential Employment Claim, the court agreed that Lemons’ wrongful termination claim could not be considered one first made during the policy period for which coverage was available.

Friday, September 20, 2013

Maryland Court Considers Prejudice in Claims Made and Reported Policy

In its recent decision in McDowell Bldg. v. Zurich Am. Ins. Co., 2013 U.S. Dist. LEXIS 133166 (D. Md. Sept. 17, 2013), the United States District Court for the District of Maryland had occasion to consider Section 19-110 of the Insurance Article of the Maryland Code, and in particular whether this provision imposes a prejudice requirement in claims made and reported policies.

Zurich insured Brasher Design under a series of claims made and reported architects and engineers professional liability policy.  Brasher had been hired by McDowell, a real estate developer, to prepare and file various applications for tax credits for the construction of a building.  Upon learning that Brasher failed to file the applications in a timely fashion, McDowell filed against various entities, including Brasher.  Although suit was filed against Brasher in June 2006, Brasher did not give notice of the matter to Zurich until November 2009.  Zurich subsequently denied coverage under each of its prior policies on the basis that the claim was not first made and reported within the same one year policy period.  McDowell later settled with Brasher and took an assignment of Brasher’s rights under the Zurich policies.  It then filed a declaratory judgment action against Zurich, arguing that Zurich’s denial of coverage was improper since it failed to demonstrate that it was prejudiced as a result of Brasher’s failure to report the claim during the relevant policy period. 

At issue in the McDowell decision was the application of § 19-110 of the Maryland Code, which states:

An insurer may disclaim coverage on a liability insurance policy on the ground that the insured or a person claiming the benefits of the policy through the insured has breached the policy by failing to cooperate with the insurer or by not giving the insurer required notice only if the insurer establishes by a preponderance of the evidence that the lack of cooperation or notice has resulted in actual prejudice to the insurer.  (Emphasis supplied.)

Zurich argued on motion to dismiss that § 19-110 does not apply to policies under which notice is a condition precedent to coverage, such as claims made and reported policies.   

In considering the issue, the district court examined the history of the statute and the case law it generated, most significantly, the decision by the Maryland Court of Appeals (Maryland’s highest court) in Sherwood Brands, Inc. v. Great American Insurance Co., 13 A.3d 1268 (2011).   The court observed that intention of the statute is to prevent an insured’s forfeiture of coverage based on a technicality, but to also preserve the insurer’s right to void coverage “where the insured's failure to provide notice has undercut the carrier's opportunity to limit its liability.” 

The Sherwood Brands decision, explained the court, considered this rule in the context of a claims-made policy requiring notice as soon as practicable but no later than ninety (90) days after the policy’s expiration.  The Sherwood Brands court held that the statute did, in fact, apply to such a policy, and in doing so, articulated the following rule:

… we hold that § 19-110 does apply, as is the case at present, to claims-made policies in which the act triggering coverage occurs during the policy period, but the insured does not comply strictly with the policy's notice provisions. In the latter situation, § 19-110 mandates that notice provisions be treated as covenants, such that failure to abide by them constitutes a breach of the policy sufficient for the statute to require the disclaiming insurer to prove prejudice.

The McDowell court observed case law from the U.S. District Court of Maryland and from the Fourth Circuit calling into question the application of Sherwood Brands in the context of a true claims made and reported policy. Minnesota Lawyers Mut. Ins. Co. v. Baylor & Jackson, PLLC, 852 F.Supp. 2d 647 (D. Md. 2012); Financial Industry Regulatory Authority, Inc. v. Axis Ins. Co., 2013 U.S. Dist. LEXIS 82343 (D. Md. June 12, 2013).  The McDowell court questioned these subsequent decisions in light of the fact that the Sherwood Brands decision expressly applied its holding to any policy in which notice is a condition precedent to coverage, including claims made and reported policies.  As such, the court agreed that while Zurich demonstrated that Brasher’s notice was late, this alone was not sufficient to merit dismissal of McDowell’s lawsuit. The court therefore denied Zurich’s motion so that the issue of prejudice could be further developed.

Tuesday, September 17, 2013

New Jersey Supreme Court Addresses Inter-Insurer Contribution Rights

In a case of first impression, the Supreme Court of New Jersey, in its recent decision in Potomac Ins. Co. of Illinois v. Pennsylvania Manufacturer’s Association Ins. Co., 2013 N.J. LEXIS 847 (N.J. Sept. 16, 2013), had occasion to consider the novel issue of whether an “insurer with an obligation to indemnify and defend an insured has a direct claim for contribution against its co-insurer for defense costs arising from continuous property damage litigation.”

The Potomac decision arose out of an underlying construction defect case brought against Roland Aristone, Inc. (“Aristone”).  Aristone had been hired in 1991 by the Township of Evesham to serve as the general contractor with respect to the construction of a new middle school.  In December 2001, Evasham brought suit against Aristone for alleged construction defects, primarily relating to the school’s roof.  Aristone was insured by five different primary layer general liability insurers during the relevant ten year triggered period: Pennsylvania Manufacturers’ Insurance Company (“PMA”) for two years, Newark Insurance Company (“Newark”) for one year, Royal Insurance Company (“Royal”) for one year, OneBeacon Insurance Company (“OneBeacon”) for one year and Selective Way Insurance Company (“Selective”) for five years.  Selective and OneBeacon agreed from the outset to provide Aristone with a defense in the underlying lawsuit, whereas PMA and Royal/Newark (apparently related companies) denied coverage, thereby prompting Aristone to file suit against those insurers.  PMA eventually settled with Aristone for $150,000 to be used toward Aristone’s settlement of the underlying suit.  In return, Aristone agreed to release PMA from all claims associated with the underlying action.  Days later, the underlying suit was settled for $700,000, with OneBeacon paying $150,000, Selective paying $260,000 and Royal paying $140,000.

Unresolved by the settlement with Evesham was allocation of defense costs.  OneBeacon and Selective paid a combined $528,868 in legal fees and expenses in defending Aristone through resolution of the case.  OneBeacon subsequently demanded that PMA and Royal contribute their proper share of defense costs.  Specifically, OneBeacon argued that under New Jersey law regarding allocation of defense costs for matters involving a continuous trigger, as set forth in cases such as Owens-Illinois Inc. v. United Insurance Co., 138 N.J. 437 (1994), and Carter-Wallace, Inc. v. Admiral Insurance Co., 154 N.J. 312 (1998), the proper allocation of costs, based on the number of years that each insurer was on the risk, was that 50% of total defense costs should be allocated to Selective, 10% should be allocated to OneBeacon, 20% should be allocated to PMA and the remaining 20% should be allocated to Royal/Newark.  While Royal/Newark ultimately settled with OneBeacon, PMA rejected OneBeacon’s demand, arguing among other things, that its release with Aristone precluded OneBeacon’s right to contribution for defense costs.  The matter later was the subject of a three day bench trial that eventually concluded in OneBeacon’s favor.  The trial court agreed that PMA’s settlement with Aristone did not preclude OneBeacon’s contribution claim for defense costs, and thus assigned PMA an allocated share of costs consistent with the approach outlined in Carter-Wallace.  On appeal, the New Jersey Appellate Division acknowledged the lack of New Jersey case law addressing OneBeacon’s right to recover defense costs from PMA.  The court nevertheless relied on California case law, in particular the decision in Fireman's Fund Insurance Co. v. Maryland Casualty Co., 77 Cal. Rptr. 2d 296 (Ct. App. 1998), for the proposition that a coinsurer has a direct right of action against another for defense costs arising out of the same risk. 

On appeal to the Supreme Court of New Jersey, PMA argued that the Appellate Division created a novel cause of action by permitting an insurance company that had already settled with its insured to be sued for a share of defense costs by a co-insurer.  OneBeacon, on the other hand, argued that the decision by the Appellate Division was consistent with decades of New Jersey case law concerning allocation of costs in matters involving a continuous trigger. 

In considering the issue, which it acknowledged was novel, the Supreme Court revisited its decision in Owens-Illinois wherein it adopted a continuous trigger theory for cases involving progressive or individual injury, and wherein it established a pro rata methodology for allocating loss among multiple insurers during the triggered period based on policy limits and years on the risk.  The court noted that its decision in Owens-Illinois “envisioned the litigation of direct claims between co-insurers to ensure that the policyholder's losses would be equitably allocated among its carriers.”  While Owens-Illinois and its progeny concerned allocation of indemnity amounts among insurers and their respective insured, the court reasoned that it should also apply in the context of claims for reimbursement of defense costs:

We concur with the Appellate Division that recognizing an insurer's cause of action for contribution against a co-insurer for allocation of defense costs comports with Owens-Illinois and its progeny. Although the Court in Owens-Illinois considered an issue not raised by this case -- co-insurers' obligations to indemnify their common insured -- it envisioned a judicial determination of "the portion allocable [to each carrier] for defense and indemnity costs." …  The Court recognized in Owens-Illinois that the insurer's obligation to indemnify the policyholder may engender contribution claims between insurers that share the same insured, independent of any right of subrogation to the claims of the insured. …  Like the obligation to indemnify the insured addressed in Owens-Illinois and Carter-Wallace, the obligation of successive insurers to pay the policyholder's defense costs can be readily determined by equitable allocation. Absent a right of contribution, a carrier that pays defense costs as they are incurred might alone bear a burden that should be shared. An inequitable allocation of the cost of defense, like an unfair allocation of the obligation to indemnify, may justify a judicial remedy.

The court found several justifications for its holding.  Allowing such a contribution claim, explained the court, fosters a “strong incentive for prompt and proactive involvement of all responsible carriers.”  The court also reasoned that the right to contribution may promote early settlement and create an incentive for insureds to purchase sufficient coverage in every year.  Perhaps just as important to the court is that permitting a contribution claim under the circumstances “serves the principle of fairness recognized in Owens-Illinois.”  In this connection, the court noted that:

… an insurer that refuses to share the burden of a policyholder's defense is rewarded for its recalcitrance, at its co-insurer's expense, unless the insurer who pays more than its share of the costs has an effective remedy. Recognition of an insurer's contribution claim against its co-insurer serves "the demands of simple justice." … In short, an insurer's direct claim for allocation, asserted by an insurer that pays a disproportionate amount of the defense costs against other insurers of the same policyholder, promotes the principles underlying this Court's decisions in Owens-Illinois and Carter-Wallace.

Tuesday, September 10, 2013

Illinois Court Addresses Distinction Between Claim and Potential Claim

In its recent decision in Lexington Ins. Co. v. Horace Mann Ins. Co., 2013 U.S. Dist. LEXIS 127544 (N.D. Ill. Sept. 4, 2013), the United States District Court for the Northern District of Illinois had occasion to consider the issue of what constitutes a claim for the purpose of triggering coverage under a professional liability policy.

Lexington insured Horace Mann under an insurance company errors and omissions policy, providing claims made and reported coverage for the period September 28, 2010 to September 28, 2010.  The policy insured Horace Mann for claims arising out of any act, error or omission in its rendering of or failure to render services in connection with its business as an insurer.  Notably, the Lexington policy defined “claim” as “1. a written demand for monetary damages; or 2. a judicial, administrative, arbitration, or other alternative dispute proceeding in which monetary damages are sought.”  The Lexington policy further clarified that “the Corporate Risk Manager, General Counsel's Office, Claims Legal Department of [Horace Mann] shall notify [Lexington] of the setting of a trial, arbitration or mediation date within 60 days of becoming aware of the date.”

The dispute between Horace Mann and Lexington pertained to Horace Mann’s handling of a loss on a non-commercial auto policy it had issued to a Florida insured.  The auto accident happened in May 2008.  In June 2008, counsel for the injured party issued a time limits policy demand to Horace Mann, offering to settle its claim for the policy’s $25,000 limit of liability, but only if Horace Mann accepted the demand within twenty days.  Horace Mann wrote back immediately to advise that it would take the demand under consideration but that it first needed to review the claimant’s medical records.  The claimant thereafter withdrew its demand and filed suit against Horace Mann’s insured in August 2008.  Horace Mann engaged in subsequent efforts to settle the matter, and in 2009 it retained outside counsel to analyze its own potential bad faith exposure.  In a December 2009 email, counsel advised Horace Mann that if settlement were not reached, Horace Mann likely would lose a bad faith case.

In August 2010, the court in the underlying case scheduled a mediation.  In anticipation of the mediation, counsel for the claimant wrote defense counsel in September 14, 2010 – two weeks prior to the inception of the Lexington policy – to discuss a potential bad faith claim against Horace Mann that could result in extracontractual exposure.  The letter specifically warned defense counsel that Horace Mann would need to “open” its policy limits at the mediation if it desired to settle the case.  Plaintiff’s counsel acknowledged in the letter that defense counsel would not be involved in evaluating the bad faith implications present by the claim, but nevertheless urged that Horace Mann be advised that plaintiff intended to explore extracontractual relief at the mediation, and that as such, the letter should be forwarded to Horace Mann for consideration.  The letter was in fact forwarded to Horace Mann on September 20, 2010 – eight days prior to the inception of the Lexington policy. The mediation was held in December 2010 and proved unsuccessful.   Twenty-seven days after the mediation, Horace Mann gave notice of potential claim to Lexington and advised that it was considering a settlement of the underlying claim for an amount up to $1.5 million.  Settlement, however, was not reached prior to a jury awarding the underlying claimant $17 million, which ultimately was compromised for $7 million.

Lexington subsequently denied coverage to Horace Mann on the basis that the claim was not first made during the policy period, but instead was first made long prior to the inception of its policy.   Lexington advanced two arguments in support of this position.  Lexington first contended that the September 14, 2010 letter from plaintiff’s counsel to defense counsel constituted a “a written demand for monetary damages,” and thus fell within its policy’s definition of “claim.”  Specifically, Lexington argued that by using language such as “extracontractual amounts” and “opening” the policy limit, plaintiff’s counsel signaled its intention to seek recovery directly from Horace Mann.  Horace Mann argued in response that the letter at most was notice of a potential claim rather than an actual claim.  The court agreed with Horace Mann, observing that:

[w]hile the letter is in "written" form, it is not addressed to Horace Mann. The letter is from [plaintiff’s] counsel to [defense] counsel. Because the letter was not addressed to Horace Mann, it can hardly be considered a demand on the same. The express policy language covers wrongful acts by Horace Mann, and therefore, requires that the written demand for damages be made upon the insured, Horace Mann, and not a third-party.

That the letter ultimately was forwarded to Horace Mann, prior to the policy’s inception, did not impact the court’s reasoning.  In fact, explained the court, under Florida law, the underlying plaintiff could not assert a direct claim against Horace Mann prior to a verdict or settlement, which as of September 14, 2010, had not yet happened.

Lexington argued in the alternative that the September 14, 2010 letter advising of the mediation satisfied its policy’s second definition of claim; namely, a “a judicial, administrative, arbitration, or other alternative dispute proceeding in which monetary damages are sought.”  While the mediation happened in December 2010, i.e., during the policy period, Lexington argued that the letter advising of the mediation should be considered when the claim was first made.  The court rejected this argument as well, observing that “[a]t most, the letter constitutes notice of mediation, not the "alternative dispute proceeding" itself as defined by the policy language.”  The court again relied on the reasoning that because the letter was written to defense counsel rather than Horace Mann, it could not satisfy the definition of claim.  The court also rejected Lexington’s argument that Horace Mann was required to give notice of the mediation before it occurred.  The court found no support for this position in the policy language.  While the definition of claim required Horace Mann to give notice of a mediation within sixty days, the policy language was silent as to whether this notice must happen before or after the mediation.  As such, and because Horace Mann gave notice of the mediation twenty-seven days after it happened, the court found that Horace Mann satisfied this policy condition.

Wednesday, September 4, 2013

Ninth Circuit Affirms Dismissal of Negligent Misrepresentation Claim

In its recent decision in MultiCare Health System v. Lexington Ins. Co., 2013 U.S. App. LEXIS 17981 (9th Cir. Aug. 28, 2013), the United States Court of Appeals for the Ninth Circuit, applying Washington law, had occasion to consider whether a party with whom the insured contracted has standing to bring a misrepresentation claim against an insurer and broker for failing to disclose a policy’s self-insured retention in a certificate of liability insurance.

Lexington Insurance Company insured the Medical Staffing Network (“MSN”), a staffing company providing temporary nursing staff to hospitals, under a professional liability policy with limits of liability of $5 million.  MSN entered into a contract with Good Samaritan Hospital (the “GSH”) whereby MSN provided nursing personnel to GSH.  As part of this contract, MSN was required to provide GSH with a Certificate of Liability Insurance.  USI Insurance Services, on behalf of Lexington, subsequently provided MSN with an Acord form certificate describing the Lexington policy, and MSN in turn provided the form to GSH.  While the Acord form accurately described the policy’s limits of liability and the identity of the insurer, it did not identify the fact that the policy was subject to a $1 million self-insured retention.  Notably, the form is a standard pre-printed form that does not contain a space in which to enter information concerning deductibles or retentions.

GSH and MSN were named as defendants in a wrongful death suit alleging that a nurse provided by MSN injured the decedent while at GSH.  GSH’s counsel shared a copy of the Acord form with plaintiff’s counsel, who subsequently agreed to voluntarily dismiss GSH from the suit based on the belief that MSN had sufficient insurance to satisfy any judgment.  The matter proceeded to arbitration resulting in a judgment against MSN in the amount of $785,000 – an amount within the Lexington policy’s retention.  MSN subsequently filed for bankruptcy to avoid paying this amount.  Plaintiff thereafter successfully vacated its dismissal of GSH based on its argument that it would not have dismissed GSH in the first place had the Acord form identified the $1 million self-insured retention.  GSH subsequently sought a defense and indemnification from Lexington and USI based on theories of negligent misrepresentation and bad faith.  While GSH acknowledged that it did not qualify as an insured under the policy, it contended that the defendants had a duty to not misrepresent the terms of an insurance policy and that this duty was breached by failing to disclose the retention on the Acord form.  GHS argued, therefore, that as a result of this misrepresentation, Lexington and USI should be required to defend GSH in the underlying suit and pay for any resulting judgment.

The United States District Court for the Western District of Washington granted defendants’ motion to dismiss on the basis that GSH failed to properly state a cause of action for negligent misrepresentation On appeal, the Ninth Circuit affirmed, finding that the Acord form did not contain any false information that would support a misrepresentation claim.  The court rejected GSH’s assertion that defendants had an affirmative duty to disclose this information to GSH since no fiduciary relationship existed among the parties.  Notable for the court was that the Acord form contained no column for identifying retentions or deductibles, but that it is common knowledge that insurance policies typically impose such requirements on insureds.  As such, the Ninth Circuit concluded that:

We do not believe that the Washington Supreme Court would find a duty to disclose a self-insured retention amount on a certificate that summarizes insurance policies and does not contain a column for retention or deductible amounts. This is especially true in light of the fact that the hospital could have asked Medical Staffing for a copy of its insurance policy.

The Ninth Circuit also held that the lower court properly rejected GSH’s request for leave to amend its complaint to claim that third parties frequently rely on certificates of insurance in transacting business with insureds.  The court concluded that such an assertion would not establish a duty under Washington law for insurers or brokers to disclose a self-insured retention on a form that has no column in which to include such an amount.