Federal Court Says Subpoena Is a “Claim” Triggering Insurance Coverage

Jared Zola | Policyholder Informer | July 12, 2018

An issue frequently raised in coverage disputes involving claims-made liability insurance policies is determining whether certain pre-lawsuit events or disputes constitute a “claim” sufficient to trigger coverage.

Unlike occurrence-based liability policies that respond in the policy year or years during which the coverage-triggering event occurred (e.g., the years in which a person sustained injury in an asbestos bodily injury claim), a claims-made liability insurance policy is triggered upon the insured’s receipt of a claim. Upon an insured providing notice of a claim, its insurers may dispute whether the notice-triggering event constitutes a “claim” at all.

Given variations in policy “claim” definitions and the lack of defined terms in some instances, the point at which a dispute ripens into a “claim” that triggers coverage is frequently disputed. A recent Illinois federal district court decision rejected the insurer’s motions to dismiss and held that a Department of Justice (“DOJ”) subpoena was a “claim” when, as was the case there, the insured sought coverage for defense costs incurred responding to the subpoena.

While issued in the context of a motion to dismiss and not on the merits, the decision deftly rebukes the insurer’s assertions that a government subpoena fails to assert a “claim” against the insured for “wrongful acts” triggering coverage.

Astellas US Holding, Inc. v. Starr Indemnity and Liability Company

In a May 30, 2018 decision, an Illinois federal district court refused to dismiss three insurers from insured Astellas US Holding, Inc.’s suit seeking coverage for the costs it incurred responding to a U.S. Department of Justice subpoena.

The DOJ issued a subpoena to Astellas demanding certain documents relating to the DOJ’s industrywide investigation of pharmaceutical companies for alleged federal healthcare offenses. The subpoena directed Astellas to appear before government officials and produce documents about Astellas’ payments to charitable organizations that provided financial assistance to patients taking its drugs. It advised Astellas that failure to comply exposed it to liability in judicial enforcement proceedings and punishment for disobedience.

Astellas incurred defense costs responding to the subpoena that exceeded the self-insured retention stated in its primary D&O insurance policy. The primary insurer refused to provide coverage—as did several excess insurers—and a coverage lawsuit followed. The insurer filed a motion to dismiss Astellas’ complaint asserting, amongst other purported grounds for dismissal, that (1) the subpoena did not rise to the level of a “claim” that triggers coverage, and (2) the subpoena did not allege a “wrongful act.”

The insurance policy defined a “claim,” in pertinent part, to include a “written demand for non-monetary relief.” It also defined “wrongful act” to include “any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act by the Company.”

The insurer asserted that the production of documents in response to a subpoena does not rise to the level of a “demand for relief.” In its motion papers, the insurer sought to define “relief” as “legal remedy or redress,” or as “the redress or benefit, especially equitable in nature (such as an injunction or specific performance), that a party asks of a court.” Of course, these so-called definitions that the insurer sought to impose on its insured do not appear in the insurance policy.

Because the subpoena only sought information and did not make a request of the court, the insurer concluded that it did not fit within the plain meaning of a demand for relief. It asserted that the threatened enforcement proceedings are discrete from the informational investigation.

The court rejected the insurer’s position. The court refused to conclude that the subpoena merely requested, as opposed to demanded, information. It reasoned that courts have the power to compel parties to give testimony or to produce documents as demanded in the subpoena. Accordingly, the court held that the subpoena demanded a form of non-monetary relief and that the subpoena was not distinct from the potential enforcement proceedings—“it defined the scope of the judicial enforcement.”

The insurer also argued that Astellas’ interpretation would lead to an absurd result because the insurance policy is only meant to protect insureds from potential liability due to allegations of wrongdoing, which the subpoena lacked.

The court disagreed with the insurer’s characterization of the subpoena. It held that the insurance policy’s broad definition of a “claim” indicated that the policy was designed to cover something like the subpoena—which is a demand for relief in response to an accusation of wrongdoing. Accordingly, the court held that the “result” in this insistence—that the insurer may have to cover Astellas’ defense costs incurred responding to the subpoena—“is not absurd, it is precisely what the policy intended.”

Conclusion

Inherent in coverage cases addressing whether subpoenas constitute “claims” is the recognition that insurers frequently argue both sides of this issue in an effort to avoid their coverage obligations to the insureds. If an insured provides notice of a pre-lawsuit event, its insurer frequently contends that the event does not constitute a “claim.” However, if an insured determined that the same pre-lawsuit event did not yet rise to the level of a “claim” under the policy and later gives notice of a lawsuit arising from the same factual nexus, for example, its insurer frequently contends that coverage does not exist for the subsequent lawsuit because the insured should have provided notice of the earlier event; a “claim.”

If insurers truly want to preclude coverage for costs incurred responding to government subpoenas, there is an easy solution—explicitly and unambiguously exclude coverage for such defense costs. Unwilling to risk losing market share by excluding this valuable coverage, insurers do not use exclusionary language and then seek to impose onerous interpretations not found in the insurance policy.

Perhaps recognizing this tactic, the Astellas case is an example of courts across the country accepting the insured’s business judgment of what event constitutes a “claim” to maximize coverage. The insureds involved in everyday business disagreements and disputes are better positioned than an insurer in determining when such a matter rises to the level of a “claim” for which the insured will seek coverage.

Policyholder Attorneys: Be Careful Playing the Odds During Trial on First-Party Coverage Disputes – It Could Land You Right Back in Front of a Jury

Erin Dunnavant | Property Insurance Coverage Law Blog | July 7, 2018

On July 5, 2018, the Fourth District Court of Appeals, (“Fourth DCA”) reversed a jury’s verdict for Homeowner Sanjay Kuwas based on his counsel’s improper arguments and examination of his insurance company’s litigation manager during trial.1

Kuwas’ home suffered property damage due to water losses that occurred in 2011 and 2015. He was insured by Homeowners Choice Property & Casualty Insurance Company (“Homeowners Choice”) during both losses and made claims on both losses that were ultimately denied. In response, Kuwas hired attorneys who sued Homeowner’s Choice for breach of contract. Among Homeowners Choice’s affirmative defenses filed in response to the lawsuit were:

  • The loss was excluded due to sewer backups;
  • Neglect of the insured to use all reasonable means to save and preserve the property after the loss;
  • Constant or repeated seepage or leakage; and
  • Inadequate maintenance.

Prior to trial, Homeowners Choice dropped the defense of sewer backups and proceeded on the other above-listed defenses.

During trial, counsel for Kuwas argued that Homeowners Choice was “playing the odds” when it denies a claim “in the hopes that the party who is seeking to be paid under a policy will not sue them.” Apparently Kuwas’s counsel argued these points on multiple occasions: during opening statement, while examining Homeowners Choice’s litigation manager, and during closing. For example, during closing, Kuwas’s counsel argued that,

Everything that one needed to know was stuff that [Homeowners Choice] knew from day one. And what they did was, they decided to play the odds. Right? We’ll talk a little bit about that. They decided, we’re going to play the odds. And we’re just going to disregard responsibilities that they have, personal responsibility.

Homeowner’s Choice objected to these comments as improper and during the opening and examination, some objections were sustained while others were overruled. The objections made during closing were overruled by the trial court.

Throughout trial Kuwas’ counsel also emphasized Kuwas’s payment of premiums. For example, Kuwas’s counsel argued during opening, “[s]o my client paid X [amount] year, after year, after year, after year from back in the ‘90s…” and then he segued into another comment about the insurance company having “played the odds.” Kuwas’s counsel also argued that Kuwas “deserves his house back because he paid not to be in this position.”

Finally, Kuwas made comments during trial that undermined, or as the court put it “disparaged” Homeowners Choice’s affirmative defenses. Among the comments by Kuwas’s counsel objected to by Homeowners Choice were, that the parties were “fighting like the dickens over whether or not a sewer backup is excluded. And then we come to court after all this litigation, after all of this depositions and motions, and whatnot… and [Homeowners’ Choice] comes in and says, oh, by the way, we just were kidding about that one…You know the plaintiff’s right, that doesn’t apply, okay, but let’s try something else, right?”

At the close of trial, the jury found for Kuwas and against Homeowners Choice, granting Kuwas a significant award. Afterwards, Homeowners Choice filed motions for new trial and to set aside the verdict, which were both denied.

Homeowners Choice appealed the jury’s verdict, arguing that the trial court erred in several ways, only one of which was analyzed by the Fourth DCA: whether the trial court had properly denied Homeowner’s Choice motion for new trial based on the improper arguments of Kuwas’s counsel and improper questioning of Homeowners Choice’s litigation manager. The Fourth DCA reversed on that issue and remanded the case for new trial.2

In its reversal, the court analyzed the lower court’s denial of Homeowner’s Choice’s motion for new trial using an “abuse of discretion” standard, which is a difficult standard to meet on appeal because the trial court—i.e., the judge with the front row seat—is usually given broad deference. The appellate court also looked at the standard that governs preserved issues of improper argument, which is “whether the comment was highly prejudicial and inflammatory”3 in performing its analysis.

Regarding counsel’s arguments regarding “playing the odds,” in light of Homeowners Choice’s arguments that such comments implied bad faith, or implied that Homeowners Choice denied policyholder claims for any or no reason, the Fourth DCA agreed with Homeowners Choice and found those comments were grounds for reversal. With respect to plaintiff counsel’s arguments regarding the payment of premiums, the Fourth DCA did not believe that the comments rose to a level requiring reversal, at least not on their own (although the appellate court acknowledged that such comments could be grounds for reversal, as Homeowners’ Choice argued and cited case law to support.4) Finally, with Kuwas’ counsel’s argument on disparaging Homeowners Choice’s affirmative defenses, the Fourth DCA also took Homeowners Choice’s side. Homeowners Choice argued that Kuwas’s comments implied that the jury should punish Homeowners Choice for defending itself against Kuwas’s claims. They also argued that Kuwas’ counsel made these arguments to attract the jury’s attention to irrelevant pretrial conduct, implying that Homeowners Choice should be penalized for requiring Kuwas to prove his case. Although Kuwas advanced rebuttal that these arguments were actually made to point out the differences between the denial letters and the affirmative defenses, that argument did not hold water with the Fourth DCA, who ultimately agreed with Homeowners Choice finding these comments were “so highly prejudicial and inflammatory such that [Homeowners Choice] was denied its right to a fair trial.”

As an advocate for policyholders, I typically prefer writing blogs about when an insured (and not an insurance company) prevails. However, after reviewing this case, I thought it was important to point out that it appears courts are holding insureds and their counsel accountable for making sure that even issues that could be construed as implying bad faith should be reserved for after battles over coverage are decided.
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1 Homeowners Choice Prop. & Cas. Ins. Co. v. Kuwas, 4D17-2383, 2018 WL 3301890, at *1 (Fla. 4th DCA July 5, 2018).
2 The other issues on appeal were either affirmed without discussion or were not addressed, as they were rendered moot by the reversal.
3 Murphy v. Int’l Robotic Sys., Inc., 766 So. 2d 1010, 1012 n.2 (Fla. 2000).
4 Government Employees Ins. Co. v. Kisha, 160 So. 3d 549, 552-53 (Fla. 5th DCA 2015)(where a discussion of the length of an insureds’ relationship with her insurer was found to be an impermissible plea for sympathy that impeded the jury’s ability to fulfill its duty of impartiality, and warranted a new trial).

When the Insurance Company Labels Your Loss a Collapse, Can It Still Deny Your Collapse Claim?

Nicole Vinson | Property Insurance Coverage Law Blog | June 28, 2018

At least one Michigan court has ruled that even when the execute general adjuster calls a building’s damage a collapse and labels it as a “cave in,” the denial will stand where the policy language supports an exclusion.1 This case arises out damages that occurred to a large commercial shop that repairs commercial trucks. There was a failure of the trusses and the roof began to sag, causing one of the walls to bulge outward due to the sudden pressure. Following the policy’s duty to mitigate the loss, the insured retained a company to install temporary shoring to support the roof and prevent further damage.

Community Garage made a claim with Auto-Owners for collapse and agreed the building could not be safely operated until repairs were made.

The policy Auto-Owners provided Community Garage excluded collapse coverage but provided “Additional Coverage – Collapse.” Under this coverage the policy required the collapse to be abrupt: “Abrupt collapse means falling down or caving in of a building or any part of a building with the result that the building or part of the building cannot be occupied for its intended purpose.”

The policy goes on to explain Additional Collapse coverage does not apply to something that is nearly a collapse.

Here is the exact policy language:

D. Additional Coverage- Collapse

3. This Additional Coverage- Collapse does not apply to:

a. A building or any part of a building that is in danger of falling down or caving in;

b. A part of a building that is standing even if it has separated from another part of the building; or

c. A building that is standing or any part of a building that is standing, even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage, or expansion.

Auto-Owners denied the claim and said even though the building was not safe, the building was still standing and the denied the claim.

In court filings, Community Garage argued that the roof did abruptly cave in and the building cannot be used for it intended purpose. Community Garage set forth policy construction and interpretation arguments that are often helpful to policyholders. The Michigan cases cited in support show that the policy should be given its plain and ordinary meaning and any ambiguity that is reasonably susceptible to more than one meaning will be resolved in favor of coverage for the insured.

Community Garage also pressed the court to require Auto-Owners prove this exclusion applied to this loss.

To assist in its argument, Community Garage had emails from defendant’s Executive General Adjuster and testimony of an expert who referred to the damage as “collapse” or “caving in.”

Both the trial court and the appellate court disagreed with Plaintiff and found that the property damage was not a covered loss and not considered a collapse. The court found no ambiguity and instead said that the policy included a provision that outlined what doesn’t qualify as collapse. The court explained that along with the explanation of collapse, the policyholder must also read Subsection D 1 and Subsection D (3)(a) that excludes coverage for any part of the building that is simply “in danger of falling down or caving in.”

The court addressed the emails by saying that collapse and caving was being used in the common usage and not specifically the way the policy details collapse and caving in—meaning the adjuster was using a general term. Further, the adjuster had recommended additional consideration of the policy form and called out Subsection D (3) for review.

Whether other courts will have different rulings depends on cases like this will depend on policy language and factual circumstances of the loss. Much of the analysis here seemed to center around whether the sagging roof was actually caving it. A drooping roof is what the court found was happening at Community Garage but the quick action of the owners to shore up the building may have been what stopped a traditional cave in and also protected the workers and occupants.

Interested in more posts about collapse coverage? Check out:

Policy Conditions “Conformity to State Law” May Extend the Period Time to File Suit.

Christina Phillips | Property Insurance Coverage Law Blog | July 1, 2018

Some insurance policies will contain a clause within the conditions section entitled “Conformity to State Law.” This provision contains language similar to:

“Conformity to State Law. When a policy provision is in conflict with the applicable state law of the State in which this policy is issued, the law of the state will apply.”

This small provision can have a big impact on the terms and conditions of the policy and should not be glossed over. This issue was addressed by the Court of Appeals of Indiana in State Farm Fire & Casualty Company v. Riddell National Bank.1 Riddell was the mortgagee of a property under a property insurance policy issued by State Farm to the homeowners. Riddell learned that the homeowners had moved out and that the property was damaged by water and mold.

Riddell filed a claim with State Farm. Following State Farm’s denial, Riddell sued. State Farm moved to dismiss, arguing that Riddell’s claim was time barred based on the policy’s “Suit Against Us” limitation, which stated that the action be commenced within one year from the date of loss or damage.

Indiana Code section 27-1-13-17, provides that a policy of insurance covering a first-party loss to property in Indiana may not be issued, renewed or delivered to any person in Indiana if the policy limits a policyholder’s right to bring an action against an insurer to a period of less than two years from the date of loss.

State Farm conceded that the policy condition requiring suit to be brought within one year was unenforceable pursuant to Indiana Code section 27-1-13-17(b), but argued that the express intent of the policy was to limit the time period to the two-year limitation within the Code. The Indiana Court of Appeals concluded that Indiana Code section 27-1-13-17 did not provide a two-year default statute of limitations, but section 34-11-2-11 provided such a default which required such actions on written contract actions be commenced within ten years. The court held that pursuant to the policy’s conformity to state law provision, the ten-year statute of limitations applied and the claim was timely filed.

The court highlighted that an alternative result may have been reached had State Farm drafted its policy language to state something such as “the claim must be filed within one year or within the applicable minimum time requirement allowed by state law.” An important reminder that a policy should be reviewed in its entirety, considering all language, terms and conditions.
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1 State Farm Fire & Cas. Co. v. Riddell Nat’l Bank, 984 N.E.2d 655 (Ind. App. 2013).

Bill Wilson’s Suggestions for Insurance Professionals’ Duties and Obligations

Chip Merlin | Property Insurance Coverage Law Blog | July 2, 2018

Bill Wilson is paramount educator of Insurance. His latest book, When Words Collide: Resolving Insurance Coverage and Claims Disputes, is an excellent resource all insurance claims experts and professionals should have in their library. I thought so much of it I have ordered the book for each Merlin Law Group attorney.

Wilson makes these remarks regarding duties and ethical obligations of insurance professionals which everybody in the insurance business should strive to follow and many would suggest must follow:

1. Always remember the overriding mission of our industry… to protect individuals, families, and organizations from serious and potentially catastrophic loss. Always place the public interest above your own interests. Always.

2. Seek to become a life-long learner by continually maintaining and improving your professional knowledge at every opportunity. Continuing education is more than accumulating hours prescribed by regulators. Become a selfdirected learner. Ask questions. Challenge dogma. Dig deeper.

3. Make sure that every decision you reach is legal, moral and ethical. It goes without saying that we must strive to obey all laws and regulations, not only to the letter but also within the spirit of the law. Our conduct should always be gauged to avoid any unjust harm to others.

4. Remain open minded about means and methods of improving the insurance mechanism while being diligent in the performance of your occupational duties. But, in your effort to improve industry efficiency and effectiveness, NEVER forget Habits #1-3 above… always weigh the virtue and value of seemingly innovative approaches and their congruence with our mission to serve the public justly.

5. More specifically, in conjunction with Habit #3, aspire to go far beyond the minimal legal constraints of our industry by raising the professional and ethical standards of the industry and industries with which we associate. Lead by example. Inculcate Habit #1 into every decision you make. As Mark Twain said, “Always do right; this will gratify some people and astonish the rest.”

6. Involve yourself in local and national insurance society and association activities and in the activities of other industries through your professional efforts. Your goal should be to establish and foster productive and honorable relationships among fellow insurance professionals, members of other professions and industries, and the public.

7. Whenever possible, assist in every effort and take every opportunity you possibly can to improve the public understanding of insurance and risk management. Combat the deleterious consumer impression that insurance is a commodity and advocate for the value of the counsel of insurance and risk management professionals.

(Emphasis added)

His blog and commentary has been cited at least twice by us:

I thought about Bill Wilson’s book yesterday while reading Christina Phillips’ post, Policy Conditions “Conformity to State Law” May Extend the Period Time to File Suit. I sent her post to our eleven-attorney office in Puerto Rico as we are trying to determine legal ways Puerto Rico policyholders may avoid the one-year statute of limitations which many will face if they do not file suit this September.

Bill’s book noted that the late insurance educator Don Malecki always demanded those interpreting insurance coverage read the entire Insurance policy and not just the section of the policy they were focusing upon. I agree with Bill Wilson’s statement and dedication about Don Malecki:

I’d also like to recognize the late, great Don Malecki, CPCU, ARM, who was one of the most brilliant insurance writers, consultants, and expert witnesses in my memory. My website at http://www.insurancecommentary.com/ is dedicated to his memory and legacy. Don’s attention to detail when reviewing, analyzing, and interpreting insurance policies was an inspiration to me and thousands of other insurance professionals who knew his work.