Colorado Supreme Court Issues Decisions on Statute of Limitations for Statutory Bad Faith Claims and the Implied Waiver of Attorney-Client Privilege

The Colorado Supreme Court has been busy the past two weeks, issuing a couple rulings that should be of interest to the insurance industry:

Statute of Limitations for Bad Faith Statute: In Rooftop Restoration, Inc. v. American Family Mutual Insurance Co., 2018 CO 44 (May 29, 2018), the Colorado Supreme Court held that the one-year statute of limitations that applies to penalties, does not apply to claims brought under C.R.S. 10-3-1116, Colorado’s statutory cause of action for unreasonable delay or denial of benefits. Section 10-3-1116 provides that a first-party claimant whose claim for payment of benefits has been unreasonably delayed or denied may seek to recover attorney fees, costs, and two times the covered benefit, in addition to the covered benefit. A separate Colorado statute, CRS 13-80-103(1)(d) provides a one-year statute of limitations for “any penalty or forfeiture of any penal statutes.” To arrive at the conclusion that the double damages available under section 10-3-1116 is not a penalty, the Court looked at yet another statutory provision, governing accrual of causes of action for penalties, which provides that a penalty cause of action accrues when “the determination of overpayment or delinquency . . . is no longer subject to appeal.” The Court stated that because a cause of action under 10-3-1116 “never leads to a determination of overpayment or delinquency . . . the claim would never accrue, and the statute of limitations would be rendered meaningless.” Para. 15. Presumably, the default two-year statute of limitations, provided by CRS 13-80-102(1)(i), will now be found to apply to causes of action seeking damages for undue delay or denial of insurance benefits.

Implied Waiver of Attorney Client Privilege: On June 4, 2018, the Court held that the attorney-client privilege was not impliedly waived when former counsel for State Farm submitted an affidavit refuting factual allegations of plaintiff. In In re Plaintiff: State Farm Fire & Cas. Co. v. Defendants: Gary J. Griggs & Susan A. Goddard, 2018 CO 50, a State Farm adjuster had testified that a medical lien was in the amount of $264,075. State Farm’s attorney at the time then discovered that the lien was actually in the amount of $264.75. While the attorney was investigating the source of the error, plaintiff’s counsel moved to disqualify State Farm’s counsel (based on the attorney’s previous attorney-client relationship with the firm representing the plaintiff). The court disqualified the attorney. The new attorney for State Farm then disclosed the correct lien amount to plaintiff, and noted that the service provider was the source of the error. Plaintiff then sought sanctions against State Farm, in the form of a directed verdict on her bad faith claim, alleging that State Farm deliberately and intentionally concealed the correct lien information. In response, State Farm submitted an affidavit from the former attorney, which stated that at the time of his disqualification, he was still investigating the source of the lien error. Plaintiff argued that by submitting the attorney affidavit, State Farm put at issue the attorney’s advice. The Supreme Court disagreed, explaining that the mere possibility that privileged information may become relevant in a lawsuit is not enough to imply a waiver. Rather, the party asserting waiver “must show that the client asserted a claim or defense that depends on privileged information.” Para. 18. The Supreme Court found that the attorney affidavit did not refer to any claims or defenses, did not refer to advice provided by the attorney to State Farm, and was not offered in support of a claim or defense, but rather to rebut plaintiff’s factual argument. As such, the Court concluded that “State Farm’s submission of the [attorney] affidavit did not place privileged communications at issue and, therefore, did not result in an implied waiver of the attorney-client privilege.” Para. 24.

If there are any questions about either of the above cases or if you assistance with any insurance coverage, bad faith, or mountain states litigation issues, please contact jarnett-roehrich@grsm.com.

San Diego Team Prevails with Motion to Dismiss First Amended Complaint without Leave to Amend on behalf of Multi-National Insurance Company

On March 6, 2018, the United States District Court for the Southern District of California granted the firm’s client, a multi-national insurance company, the motion to dismiss the plaintiff’s first amended complaint without leave to amend. The motion was filed by Gordon Rees Scully Mansukhani San Diego partner Matthew G. Kleiner and senior counsel Jordan S. Derringer.

The plaintiff originally filed her complaint alleging causes of action for breach of contract, bad faith, breach of fiduciary duty and fraud based upon negligent misrepresentation and concealment. The plaintiff’s claims arose out of the insurer’s denial of a claim for accidental death benefits in connection with the death of her husband resulting from a plane crash. The plaintiff alleged that the insurer client provided inadequate notice of an aviation exclusion that was present in a replacement insurance policy and allegedly broader than an aviation exclusion in her prior policy issued by another insurer. According to the plaintiff, the exclusion was not clear and conspicuous and was unconscionable. The plaintiff further stated that the client’s letter advising that her policy was similar to her previous insurance policy was incorrect and therefore, Gordon & Rees’s client breached its fiduciary duty to the plaintiff. The plaintiff’s contention regarding the letter also formed the basis of the negligent misrepresentation and concealment causes of actions.

After Gordon & Rees’s attorneys were successful in filing a motion to dismiss, the plaintiff filed a first amended complaint setting forth identical causes of action but alleging that Gordon & Rees’s client’s policy included a sickness exclusion that was not present in her previous insurance company’s policy and that this policy contained a non-contributory benefit that was not available under the current policy. Gordon & Rees attorneys again filed a motion to dismiss the first amended complaint arguing that the plaintiff failed to correct the defects from the original complaint and that the additional allegations regarding the presence of a sickness exclusion and the lack of a non-contributory benefit were irrelevant as the plaintiff’s claim was not denied on the sickness exclusion and she failed to prove entitlement to any benefits under the her previous policy.

The trial court granted Gordon & Rees’s motion to dismiss the amended complaint without leave to amend and held that the aviation exclusion in the policy was plain, clear and conspicuous. The court also found that the exclusion was not unconscionable and that the notice of change of insurance was plain, clear and conspicuous because the aviation exclusion in the client’s policy was not a reduction in coverage because the plaintiff was not entitled to benefits under her current or previous policy. As the plaintiff’s breach of contract cause of action failed, the plaintiff was unable to state a cause of action for bad faith. The court held that the plaintiff failed to state a cause of action for breach of fiduciary duty because generally, an insurer is not a fiduciary of the insured and the plaintiff failed to demonstrate that the insurer assumed a higher duty of care or knowingly undertook to act on behalf of or for the benefit of the plaintiff. With respect to the plaintiff’s fraud claims, the court held that the insurer’s statement that the policies were similar was not a misrepresentation and, even if it were, the plaintiff’s reliance thereon was not justified. The court also held that the plaintiff did not sustain any damages in connection with these claims because she could not prove an entitlement to benefits under the previous insurance company’s policy. Finding that leave to amend would be futile, the court dismissed the first amended complaint with prejudice and ordered judgment in favor of Gordon & Rees’s client.

To read the court’s full decision, please click here.

Insurance Adjuster Employed by an Insurance Company May Be Liable for Bad Faith in Washington

As a general proposition, an adjuster working for an insurance company is not subject to personal liability under the common law or under state insurance laws for conduct within the scope of his/her employment. Recently, however, the Washington Court of Appeals, Division One, in Keodalah v. Allstate Ins. Co., 2018 Wash. App. LEXIS 685 (2018), held that an individual adjuster, employed by an insurance company, may be held liable for bad faith and violation of the Washington Consumer Protection Act (“CPA”).

In Keodalah, Moun Keodalah (“Keodalah”) was involved in an accident with a motorcycle, after which Keodalah sought uninsured/underinsured motorist (“UIM”) benefits of $25,000 under his auto policy issued by Allstate. Allstate offered $1,600 based on an assessment that Keodalah was 70 percent at fault, even though the Seattle Police Department and the accident reconstruction firm hired by Allstate concluded that the accident was caused by the excessive speed of the motorcyclist. When Keodalah questioned Allstate’s evaluation, Allstate increased its offer to $5,000. Thereafter, Keodalah sued Allstate for UIM benefits.  Despite having the police investigation report, its own accident reconstruction firm’s findings, and the 30(b)(6) deposition testimony of the Allstate adjuster, who acknowledged that Keodalah had not run a stop sign and had not been on his cell phone at the time of the accident, Allstate maintained its position that Keodalah was 70 percent at fault. At trial, the jury determined that the motorcyclist was 100 percent at fault and awarded Keodalah $108,868.20 for his injuries, lost wages, and medical expenses.

Keodalah then filed a second lawsuit against Allstate and the adjuster, including claims under the Insurance Fair Conduct Act (“IFCA”), the CPA, as well as for insurance bad faith. The adjuster moved to dismiss the claims against her under Rule 12(b)(6). The trial court granted the motion but certified the case for discretionary review. First, the court held that there was no private cause of action for violation of a regulation under the IFCA, following the recent Washington Supreme Court decision in Perez-Cristantos v. State Farm Fire & Cas. Ins. Co., 187 Wn.2d 669 (2017).

The Court of Appeals then addressed whether an individual insurance adjuster may be liable for bad faith and for violation of the CPA. The court looked to the Revised Code of Washington (“RCW”) 48.01.030, which serves as the basis for the tort of bad faith. RCW 48.01.030 imposes a duty of good faith on “all persons” involved in insurance, including the insurer and its representatives, and a breach of such duty renders a person liable for the tort of bad faith. The term “person” is defined as “any individual, company, insurer, association, organization, reciprocal or interinsurance exchange, partnership, business trust, or corporation.” RCW 48.01.070.  Because the adjuster was engaged in the business of insurance and was acting as an Allstate representative, she had the duty to act in good faith under the plain language of the statute. As a result, the Court of Appeals held that the adjuster can be sued for bad faith.

With respect to the CPA claim, the court noted that the CPA prohibits “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.” RCW 19.86.020. The Court of Appeals, Division One, previously ruled that under “settled law,” the “CPA does not contemplate suits against employees of insurers.” International Ultimate, Inc. v. St. Paul Fire & Marine Ins. Co., 122 Wn. App. 736, 87 P.3d 774 (Wash. App. 2004). There, the court held that to be liable under the CPA, there must be a contractual relationship between the parties and because there is no such relationship between an employee of the insurer and the insured, the employee cannot be liable for a CPA violation. The court in Keodalah, however, rejected the adjuster’s reliance on International Ultimate, holding that the prior decision was without any supporting authority, and it was inconsistent and irreconcilable with the Washington Supreme Court case of Panag v. Farmers Ins. Co. of Wash., 166 Wn.2d 27, 208 P.3d 885 (2009) (Washington Supreme Court declined to add a sixth element to the Hangman Ridge elements that would require proof of a consumer transaction between the parties). It appears that the holding in International Ultimate may be losing ground, as at least two federal district court cases have questioned the validity of that case. Lease Crutcher Lewis WA, LLC v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2009 U.S. Dist. LEXIS 97899, *15 (W.D. Wash. Oct. 20, 2009), (statement at issue in International Ultimate “is unsupported by any citation or analysis); Zuniga v. Std. Guar. Ins. Co., 2017 U.S. Dist. LEXIS 79821, *5-6 (W.D. Wash. May 24, 2017) (pointing out at least two problems with the statement at issue in International Ultimate).

While the adjuster’s actions in Keodalah appear to have been extreme, presumably policyholders in Washington will rely on this case to sue an insurance company’s adjusters in their individual capacities for bad faith and CPA violations. The court’s holding may have far reaching consequences. For example, will insurers need to appoint separate counsel for their adjusters when the adjusters are personally named in litigation? How will this affect the practice of removing cases from state to federal court? To the extent an insured wants to destroy diversity jurisdiction for its out-of-state insurer, it may choose to name an in-state adjuster, which would limit the insurer to Washington State Court when litigating coverage issues. This is an extremely alarming development for insurers and their employee adjusters in Washington State, who should take this as a reminder to be vigilant in ensuring good faith claims handling and the aggressive defense of bad faith claims.

Court Enforces Automatic Additional Insured Provision’s Pre-Condition Requiring Underlying Contract to Be Fully Executed Pre-Loss

Many liability policies contain provisions, typically in endorsements, automatically bestowing additional insured status on third parties when called for in certain types of contracts. These endorsements usually require that such contracts be in writing and signed by both parties prior to the date of the event for which coverage is sought. In Selective Ins. Co. of Am. v. BSA, No. 15-0299, 2018 U.S. Dist. LEXIS 56178 (E.D. Pa. April 2, 2018), a Philadelphia federal judge recently enforced the signed written agreement requirement as an unambiguous condition precedent to coverage, denying additional insured status where the underlying contract had not been signed by the named insured.

At issue was a Blanket Additional Insured clause which provided coverage to any organization that the insured, Keystone College, agreed to add to the policy in a written contract, so long as the contract was signed by both the named insured and the additional insured before any loss. The Boy Scouts of America (“BSA”) sought coverage under this provision after a Keystone student was injured on campgrounds owned by BSA. The campground rental agreement required that Keystone add the BSA as an additional insured. Crucially, however, Keystone never signed it.

Rejecting the BSA’s argument that Keystone’s post-accident ratification of the contract sufficed to make BSA an additional insured, the Court held that Selective was entitled to insist upon true compliance with policy’s express requirement of “a written agreement signed by both parties.” The Court thus distinguished the legally-irrelevant issue of whether the policy holder and the BSA had entered a binding agreement among themselves from the distinct, and controlling, issue of whether the policy’s express conditions for automatic coverage had been satisfied. Because they were not, the court refused to find that the third-party agreement expanded the insurer’s coverage obligations under the policy.

The takeaway from this decision is that insurers are entitled to insist that unambiguous conditional language of policies be enforced as written. The relevant inquiry was not whether the parties to the incompletely-executed underlying contract considered themselves bound to it, but whether those conditions had been complied with. As is should be, the insurer was only bound by the terms it had agreed to in the policy, and the policyholder’s failure to comply with this unambiguous condition precedent precluded automatic additional insured status under the policy for its contractual counterparty.

New York High Court Reconfirms That Pure Pro Rata Allocation Remains the Rule in Continuous Trigger Situations, Rejecting Attempt to Shift Allocation to Insurers for Periods Where Insurance Was Commercially Unavailable

Rejecting policyholder arguments that losses during periods where pollution liability insurance was commercially unavailable should be allocated to insurers of other periods, the New York Court of Appeals recently confirmed that New York remains a pure pro rata/time on the risk allocation state. In Keyspan Gas East Corporation v. Munich Reinsurance America, Inc., the policyholder, Keyspan Gas East Corporation (Keyspan), sought coverage to clean up environmental contamination at a site that began in the 1890s and continued for decades. Century Indemnity Company (Century) issued eight excess insurance policies between 1953 and 1969, and the trial court found that environmental liability insurance was unavailable prior to 1925 and after 1970.

The Court of Appeals previously adopted the pro rata approach to allocating responsibility for coverage for progressive injury claims spanning across multiple policy periods in Consolidated Edison Co. of N.Y. v Allstate Ins. Co., 98 NY2d 208 (2002). Keyspan, however, argued that an equitable exception should be created for periods where insurance was commercially unavailable, and that liability for such periods should be allocated to insurers of other time periods. Rejecting this so-called “unavailability rule,” the Court found Keyspan’s arguments irreconcilable with the unambiguous language of Century’s policies, which like nearly all general liability policies, limits the insurer’s liability to property damage that occurs “during the policy period.” Losses sustained outside that period – such as years insurance was unavailable – are not within the scope of coverage.

Importantly, the Court took pains to emphasize that its recent decision in Matter of Viking Pump, Inc., 27 NY3d 244 (2016), that “all sums” allocation is appropriately applied to policies containing “anti-stacking” or “noncumulation” clauses that collapse coverage across multiple policy periods into a single period, did not presage a retreat from the Court’s prior adoption of pro rata allocation. Instead, the Court emphasized that its fundamental rule is that policies must be enforced according to their contractual language and that so-called “public policy” or “equity” concerns cannot serve to permit New York’s Courts to rewrite the bargain between an insurer and its insured.

The Court’s holding is a significant win for insurers in New York involved in “long-tail” insurance claims, particularly those stretching across several decades. The holding reaffirms strict compliance with the pro-rata approach to allocation, and holds insurer’s liable only for their time on the risk. Emphasizing the importance of permitting insurers to select for themselves the risks they choose to underwrite, the Court rejected Keyspan’s bid to rewrite the policy for “public policy” reasons, and refused to find coverage that was never underwritten and never contemplated by the parties. While this case involved environmental contamination, it also can be expected to have important repercussions for long-tail personal injury claims such as asbestos, where coverage for asbestos claims has been commercially unavailable to most commercial insureds since the mid-1980s.

Why Insurers and Their Attorneys Need to Pay Close Attention to Their Discovery Burden in Washington

As previously reported in this blog, Washington case law generally affords insureds a broad right to the discovery of claim file materials, including information that should be protected from disclosure by attorney/client privilege or the work product doctrine. Cedell v. Farmers Ins. Co. of Washington, 176 Wn.2d 686, 295 P. 3d 239 (2013). The discovery pitfalls created by Cedell were on full display in a recent Western District of Washington decision that granted an insured’s motion to compel production of work product and attorney/client communications from an insurer’s claims file. Westridge Townhomes Owners Ass’n v. Great American Assur. Co., 2018 U.S. Dist. LEXIS 27960 (W.D. Wash. February 21, 2018)

The background facts are somewhat unclear, but it appears that the insured in this case made a claim for coverage under two insurance policies and there was an allegedly inadequate response from the insurers. The insured sued its insurers for coverage in 2016 before the insurers issued a declination of coverage letter. The two insurers retained the same attorney to represent them, and that attorney subsequently wrote a declination letter on behalf of the insurers, which was sent to the insured on April 12, 2017. The insured ultimately sought production of the entire claim file, which had not been split between the claim investigation and the coverage litigation. The insurers argued, among other things, that the insured was not entitled to anything after the litigation commenced in 2016 on work product grounds, and certainly was not entitled to communications with their attorney.

In ruling on the insured’s motion to compel, the Court concluded that the insurers failed to satisfy their burden of showing that communications with their attorney up to the date of the declination letter were protected, even though the parties were in litigation, because the Court was convinced that their attorney acted as an investigator and evaluator of the claim while the litigation was proceeding. The Court stated that “nothing in Cedell limits the discoverability presumption to pre-litigation evidence…” Furthermore, the insurers failed to show that their communications with their attorney took place because of litigation as opposed to being created in the normal scope of their insurance business. The Court ordered production of all attorney/client communication and work product up to the date the declination letter was sent, ruling that “documents containing [the insurers’ attorney’s] mental impressions regarding the insurers’ quasi-fiduciary duties to the insured, including his liability assessments and coverage advice, are subject to production.”

The Court did not do an in camera review of the documents at issue, as requested by the insurers and authorized by Cedell, writing that the insurers had failed to meet their threshold burden to justify such a review. In this regard, the Court was critical of the insurers’ privilege logs and conclusory explanations in the briefing of why the documents should be protected. “The Court finds that it is insufficient for the parties to rely on a request for in camera review to avoid their responsibility to explain why such documents should be withheld.”

Additionally, one of the insurers moved that if it had to produce such information, the plaintiff should be compelled to produce the same. The Court denied that motion, noting that an insured does not owe a quasi-fiduciary duty to its insurer and that Cedell is not a two-way street.

This ruling should serve as an important reminder to insurers and their counsel about the dangers of discovery in Washington following Cedell. For insurers to chip away at the scope of Cedell, they must take their discovery obligations seriously and lodge specific, well-supported objections in order to protect certain categories of privileged information. Insurers must not only be aware of Cedell, but also be aware that they will often have the burden of convincing the Court that an attorney/client communication or work product document should be protected from discovery. Specifically, insurers should be prepared to argue that the privileged information was not related to the evaluation of the claim, but rather for the specific purpose of rendering legal advice.

What is certainly clear is that an insurer cannot make a blanket assertion that documents are protected and expect the Court to review the documents in camera, which appears to have happened in this case. An insurer should instead be prepared to address each document individually and explain why it is not related to the evaluation of the insured’s claim. Finally, when a claim has been pending and litigation is commenced, the file should always be split so that a new litigation file is created and claim evaluation materials are kept separate from litigation materials.

Insurance Coverage for Wrongful Incarceration Claims in Ohio

Over the past 18 months, we have examined numerous states’ approaches to insurance coverage for underlying claims of wrongful incarceration and malicious prosecution. See here, here, here and here.

Last summer, the Sixth Circuit Court of Appeals, interpreting Ohio law, weighed in on this issue. Selective Ins. Co. v. RLI Ins. Co., 2017 U.S. App. LEXIS 16327 (6th Cir. Aug. 24, 2017). The Sixth Circuit ruled that the district court erred in finding an excess insurer liable for a settlement of an underlying malicious prosecution claim arising out of a claimant’s wrongful conviction. The court concluded that coverage was not triggered because the claim did not occur until several months after the policy period expired, when police withheld new exculpatory evidence from the wrongfully convicted claimant and there was no longer probable cause for the claimant’s arrest and prosecution.

In Selective, “Insurer A” issued an excess policy to the City of Barberton (“City”) from June 29, 1997 to June 29, 1998, and “Insurer B” issued an excess policy to the City from June 29, 1998 to June 29, 1999. The underlying claimant, who was exonerated of rape and murder based on DNA evidence after spending several years in jail, sued the City and its police officers, alleging violations of state law and his federal constitutional rights. All claims against the City were dismissed. The surviving claims against the individual officers included a § 1983 claim for a violation of due process based on the officers’ failure to disclose exculpatory evidence, and state law claims of malicious prosecution and loss of consortium. Specifically, the failure to disclose exculpatory evidence, i.e., the Brady violation, involved an inter-departmental memorandum that a police officer drafted identifying a suspect in two other aggravated robberies as the likely suspect in the claimant’s rape and murder case. The civil case settled for $5.25 million, to which Insurer B contributed $3.25 million. Insurer A denied coverage, claiming that the malicious prosecution of the claimant did not “occur” during its policy period.

As part of the settlement, Insurer B took an assignment of rights from the insured and filed suit against Insurer A for a declaration of coverage under Insurer A’s policy. Insurer B argued on summary judgment that the malicious prosecution of the claimant “occurred” when the charges were filed against the claimant on June 11, 1998. As a result, coverage was triggered under Insurer A’s policy, whose policy period ended on June 29, 1998. Insurer A also moved for summary judgment, arguing that the tort of malicious prosecution occurred at the time of the Brady violation, which occurred in January 1999, six months after its policy expired.

The district court disagreed with Insurer A, stating that although the January 1999 concealment of exculpatory evidence was enough on its own for the claimant’s malicious prosecution claim, there was also evidence of wrongdoing by the police officers during the earlier policy period, such as the dismissal of alibi witnesses and a DNA mismatch. Therefore, the claimant may have had a viable malicious prosecution claim even prior to the alleged Brady violation, during the first policy period. The district court then relied on what it called the “majority rule” from other jurisdictions as to trigger of coverage for malicious prosecution claims, holding that coverage for such claims is triggered at the time that the underlying charges are filed. Because the claimant was first arrested during the first policy period, the court ruled that Insurer A owed coverage and had to reimburse Insurer B.

On appeal to the Sixth Circuit, Insurer A again argued that it was not liable for the excess liability claim because no tort occurred during the policy. The Sixth Circuit agreed, concluding that the district court erred in finding Insurer A liable for the settlement. According to the court, because there was probable cause to prosecute and detain the claimant until exculpatory evidence came into existence, the officers’ actions before the exculpatory evidence came into existence could not have caused a covered loss under the RLI policy. The court explained that under Ohio law, malicious prosecution requires the instituting or continuing of prosecution without probable cause. In Ohio, a claimant can recover for a prosecution that was not malicious at its inception, but became malicious later, when it continued without probable cause. The key issue is whether there was probable cause and when such probable cause disappeared. The court determined that in the underlying matter, the City and police officers had probable cause until the alleged Brady violation, such that the malicious prosecution and the deprivation of due process could only have occurred in January 1999, after expiration of Insurer A’s policy period. Therefore, the court concluded that under the plain language of the policy, the police officers’ liability to claimant was not covered under Insurer A’s policy.

The Sixth Circuit distinguished the district court’s “majority rule” based upon the policy language at issue in Insurer A’s policy and because none of the cases relied upon dealt with a situation like claimant’s case, “where the injury—i.e., the filing of charges—occurred before any tortious activity, and therefore could not have been caused by the tortious activity.”

This case demonstrates the importance of carefully analyzing the specific elements of a malicious prosecution claim in a particular jurisdiction, as well as the specific policy language at issue. Such careful analysis translates to a predictable conclusion in trigger of coverage for wrongful incarceration cases.

The next installment will review the law in Mississippi. In the meantime, if there are any questions about other jurisdictions or jurisdictions already discussed, please contact us (sries@grsm.com or sallykim@grsm.com) and we can address your questions directly.

New York’s Highest Court Expands the Phrase “Issued or Delivered” Under N.Y. Ins. Law § 3420(a)(2)

In a broad-reaching decision issued late last month, New York’s highest court, the New York Court of Appeals, clarified that the phrase “issued or delivered” in New York Insurance Law Section 3420 applies not only to policies issued by New York insurers or to New York insureds, but also to any policies insuring risks in the state.

Following a fatal automobile accident involving his wife, the plaintiff, Michael Carlson – individually, as the administrator of his wife’s estate, and as an assignee of the underlying individual tortfeasor who was a driver for an express shipping company – brought suit against the shipping company and it’s insurers pursuant to New York Insurance Law § 3420(a)(2) and (b) to collect on multiple insurance policies. Section 3420(a)(2) provides, in relevant part, that liability insurance “issued or delivered in this state” must contain certain provisions “that are equally or more favorable to the insured and to judgment creditors so far as such provisions relate to judgment creditors,” including the right of a direct action. Subsection (b) provides, subject to certain limitations that such actions may be brought by personal representatives of a judgment creditor and assignees of judgments obtained against an insured.

Because a plaintiff must establish that the policy sued upon was “issued or delivered” in New York in order to recover under the law, one insurer argued that the statute failed to apply where its policy was issued in New Jersey and delivered in Washington and then Florida. The court disagreed, stating that its prior decision in Preserver Insurance Company v. Ryba, 10 N.Y.3d 635 (2008) resolved the question in deciding that Section 3420 applies to policies that cover insureds and risks located in New York.

In Preserver the Court concluded that Section 3420(d) required insurers to provide written notice when disclaiming coverage under policies “issued for delivery” in New York. Preserver held that “issued for delivery” referred to the location of the insured risk, and not where the policy document itself was handed over or mailed to the insured. Applying this ruling to all subparts of Section 3420, the New York Court of Appeals thus held in its recent decision that a plaintiff can collect against an insurer if its insured has a “substantial business presence” in New York that “creates risks in New York,” and such an insurer must adhere to the requirements of New York Insurance Law § 3420.

Moreover, Carlson noted that the original legislative intent of Section 3420 was to protect tort victims in New York State. Further amendments to the statute in 2008 expanded the law’s reach. Those amendments also altered the “issued for delivery” language in Section 3420(d) to match the “issued or delivered” language elsewhere in the statute, but there is no indication that the legislature’s minor change to Section 3420(d) was intended to overturn the holding in Preserver. Carlson ruled that interpreting “issued or delivered in this state” narrowly, to apply only to policies issued by an insurer located in New York or by an insurer who mails a policy to a New York address, would undermine the legislative intent of the statute. The Court noted, however, that its interpretation of “issued or delivered” applies only to New York Insurance Law § 3420 and does not apply to other statutes.

In sum, Carlson held that the plaintiff was able to maintain his cause of action under New Yok Insurance Law § 3420 even though the insurer issued the policy in New Jersey and delivered it in Washington and Florida. The insured at issue in Carlson had a substantial business presence and created risks in New York, and therefore the insurer was subject to New York Insurance Law § 3420. The phrase “issued or delivered” in New York will continue to cover both insureds and risks located in the state.

Insurers in all jurisdictions should take note of this decision. As the dissent in Carlson observes, the majority’s ruling as to the meaning of “issued or delivered” in Section 3420(a) “enacts sweeping change across the Insurance Law, generating substantial implications, both known and unknown.” An insurer located outside of New York issuing a policy outside of New York may now be subject to New York law, whether or not a policy is issued in New York or to a New York-based insured.

A link to the decision (Carlson v. American Int’l Group, Inc., 2017 N.Y. LEXIS 3280, 2017 N.Y. Slip Op. 08163 (N.Y. Nov. 20, 2017)) is available on the New York State website: http://nycourts.gov/reporter/3dseries/2017/2017_08163.htm.

Employer’s Liability Insurer Not Obligated to Cover Claims Alleging Intentional Conduct

In Seneca Ins. Co. v. Cybernet Entertainment, LLC, et al., No. 16-cv-06554, the United States District Court for the Northern District of California ruled that the State Insurance Compensation Fund (“State Fund”) has no duty to defend Cybernet Entertainment, LLC (“Cybernet”), a producer of adult films, in a series of personal injury lawsuits filed by three actors alleging that they contracted human immunodeficiency virus (HIV) while on set. Cybernet maintained a Workers’ Compensation and Employer’s Liability Insurance Policy (the “Policy”) issued by the State Fund, and the instant dispute arose after Cybernet sought coverage to defend the underlying lawsuits.

After contracting HIV, the actors sought workers’ compensation benefits pursuant to the Act and under the Policy. The State Fund initially paid partial benefits to two of the three actors, but denied liability for the third actor’s claims. The actors thereafter filed civil actions against Cybernet in California State Court. Cybernet unsuccessfully responded to the lawsuits by demurring on grounds that California workers’ compensation provided an exclusive remedy and barred all tort claims. The State Fund agreed to defend Cybernet in these lawsuits subject to a reservation of rights, but later denied coverage after the California Superior Court overruled the demurrers, citing exclusions in the employer’s liability section of the Policy for claims (1) covered by workers’ compensation and (2) arising from Cybernet’s intentional actions.

By way of background, the Act provides a comprehensive system of remedies for workers who suffer injuries in the course and scope of their employment. The Act provides, in part, that workers’ compensation is the “sole and exclusive remedy of the employee…against the employer.” Cal. Lab. Code § 3602(a). California Courts apply a two-pronged test to determine whether the Act preempts tort claims – (1) the injury must arise out of an in the course of the employment; and (2) the act giving rise to the injury must constitute a risk reasonably encompassed within the compensation bargain between employee and employer. See Shoemaker v. Myers, 801 P.2d 1054 (1990). The Court found that claims based upon the allegedly negligent conduct of Cybernet (negligent supervision, negligent hiring, etc.) were preempted under the Act and no duty to defend existed under the Policy, which excludes “any obligation imposed by a workers’ compensation…benefits law.”

The Court was equivocal with respect to the preemptive impact of the Act on claims arising from the allegedly intentional conduct of Cybernet (intentional misrepresentation, fraud, battery, etc.), but found that the language of the Policy obviated any need for a decision under the Act. The Court framed the issue as follows: “to the extent that plaintiffs’ claims arise from Cybernet’s intentional conduct and therefore are not necessarily preempted…the issue becomes whether the State Fund has a duty to defend Cybernet with regard to these claims under the terms of the Policy.” Generally, the Policy provides “liability insurance” for “bodily injury by accident or…disease” and defines “accident” as “an event that is neither expected nor intended from the standpoint of the insured.” The State Fund argued that Cybernet was not entitled to coverage for any claims arising from intentional actions because the Policy excludes coverage for any “injury intentionally caused or aggravated” by Cybernet. The Court agreed, granting the State Fund’s partial motion for summary judgment, reasoning that no coverage exists and finding that the State Fund has no duty to defend Cybernet from claims arising from its allegedly intentional acts.

No Duty to Defend Drug Makers in Actions Alleging Deceptive Marketing Fueled Opioid Abuse and Addiction

On November 6, 2017, the California Court of Appeal for the Fourth Appellate District affirmed a trial judge’s decision that The Traveler’s Property Casualty Company of America (“Travelers”) did not owe a duty to defend various pharmaceutical manufacturers in two actions alleging deceptive marketing of opioid products because the alleged injuries in the underlying actions were not caused by an accident. Traveler’s Prop. Cas. Co. of Am. v. Actavis, Inc. (Nov. 6, 2017, No. G053749) 2017 Cal. App. LEXIS 976.

The County of Santa Clara and the County of Orange brought a lawsuit (the “California action”) against Actavis, Inc. and other pharmaceutical companies engaged in a “common, sophisticated, and highly deceptive marketing campaign” designed to increase the sale of opioid products by promoting them for treatment of long-term chronic pain, a purpose for which Actavis allegedly knew its opioid products were not suited. The City of Chicago brought a separate lawsuit (the “Chicago action”) against Actavis making essentially the same allegations. Both actions alleged that Actavis’ marketing scheme resulted in a “catastrophic” and nationwide “opioid-induced ‘public health epidemic’” and a resurgence in heroin use. Both actions also alleged that the Counties and City have and will incur increased costs of care and services to their citizens injured by prescription and illegal opioid abuse and addiction.

Travelers declined any duty to defend under commercial general liability policies issued by Travelers and St. Paul Fire and Marine Insurance Co. (collectively “Travelers”), and brought this action seeking a declaration that it had no duty to defend or indemnify Actavis with respect to both actions.

The St. Paul policies cover “damages for covered bodily injury or property damage” that are “caused by an event.” The policies defined “event” to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Similarly, the Travelers policies cover damages “because of ‘bodily injury’ or ‘property damage’” caused by an “occurrence.” The term “occurrence” is also defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The St. Paul and Travelers policies also include product exclusions that bar coverage for bodily injury or property damage resulting from or arising out of “your product” or “your work.”

Following a bench trial on stipulated facts, the trial court issued a statement of decision concluding that neither the California nor Chicago action alleged an “accident” as required by the policies to create a duty to defend, and the product exclusions precluded coverage for the claims.

The Court of Appeal agreed, noting that under California law, a deliberate act is not an accident, even if the resulting injury was unintended, unless the injury was caused by an additional, unexpected, independent, and unforeseen happening. The Court found that the allegations that Actavis engaged in “a common, sophisticated, and highly deceptive marking campaign” to increase the sale of opioids and corporate profits “can only describe deliberate, intentional acts” for which there could be no insurable “accident” unless “some additional, unexpected, independent, and unforeseen happening” produced the injuries alleged in the underlying actions.

The Court rejected Actavis’ assertion that the injuries were indirect and unintended results caused by “mere negligence and fortuities” outside of Actavis’ control. “[W]hether [Actavis] intended to cause injury or mistakenly believed its deliberate conduct would not or could not produce injury is irrelevant to determining whether an insurable accident occurred.” Instead, the Court must look to “whether the California Complaint and the Chicago Complaint allege, directly or by inference, it was [Actavis’] deliberate conduct, or an additional, unexpected, independent, and unforeseen happening, that produced the alleged injuries.” The Court found that it was neither unexpected nor unforeseen that a massive marketing campaign to promote the use of opioids for purposes for which they are not suited would lead to a nation “awash in opioids” or an increase in opioid addiction and overdoses.

The Court also rejected Actavis’ contention that the alleged injuries are not the “normal consequences of the acts alleged” because in order for the opioid products to end up in the hands of abusers, doctors must prescribe the drugs to them. “The test, however, is not whether the consequences are normal; the test is whether an additional, unexpected, independent, and unforeseen happening produced the consequences.” The Court opined that the role of doctors in prescribing, or even misprescribing, opioids is not an independent or unforeseen happening.

Although the trial court declined to determine whether the California or Chicago actions sought damages because of potentially covered “bodily injury,” the Court found that those actions alleged two categories of “bodily injury”: (1) the use and abuse of opioid painkillers including overdose, addiction, death, and long-term disability; and (2) use and abuse of heroin, the resurgence of which was alleged to have been triggered by use and misuse of opioids. Applying a broad interpretation of “arising out of” as used in the product exclusions, the Court held that both categories of “bodily injury” arise out of Actavis’ opioid products, and are, therefore, barred by the product exclusions in the policies.

The Court also noted a split of authority whether product exclusions apply only to defective products. Although recognizing that the California Supreme Court has not addressed the issue, the Court agreed with the Florida Supreme Court’s reasoning in Taurus Holdings v. U.S. Fidelity (Fla. 2005) 913 So.2d 528, that the term “any product” in the product exclusions applies broadly and does not limit the application of the exclusions to defective products.

Actavis reaffirms California law that a deliberate act resulting in unintended injuries is not an “accident,” unless the injuries were caused by an additional, unexpected, independent, and unforeseen happening. This decision also reiterates California’s broad interpretation of “arising out of” as used in coverage provisions and exclusions.