Should We Expect a Surge in Reinsurance Disputes?

Larry P. Schiffer | Squire Patton Boggs | October 23, 2017

I recently came across a number of articles in the insurance trade press discussing the economic effect of the recent catastrophes on the reinsurance market. Some of the commentators wondered whether all of the property and related losses will cause reinsurance premiums to rise and end the very long soft reinsurance market. Others thought that the recent disasters are still not enough to turn the market, which may not bode well for some reinsurers. What does any of this have to do with reinsurance disputes?

Disputes arise under reinsurance contracts for many reasons. Whether a claim is properly ceded and covered, whether a policy properly attached to a treaty, whether the nature and manner in which the cedent is handling the underlying business is consistent with the parties’ understanding are some examples of issues that may arise between a cedent and its reinsurer. When the insurance and reinsurance markets are strong and everyone is making money, there is little economic incentive to dispute marginal claims or arbitrate how a cedent is conducting business under the reinsurance program. Keeping up relationships with cedents and brokers, developing more assumed business and retaining cedents as customers is more important than disputing issues that could result in the loss of future business. So in good times, disputes tend to get worked out.

But when reinsurers are battered by claims and when the competition to write reinsurance is under pressure from a soft reinsurance market exacerbated by additional competition from the capital markets, the incentive to work out disputes over marginal, but economically meaningful, issues diminishes. Economic stress on reinsurers is a potential catalyst for an increase in reinsurance disputes.

Typically, when the wind blows, property rates (and sometimes casualty rates) harden and reinsurance capacity shrinks. But that has not been the case for a long time now. With the advent of capital markets capacity taking a good chuck of what would have been traditional reinsurance risk, reinsurers without a strong balance sheet continue to struggle. If a reinsurer under economic stress cannot raise its premiums because of market overcapacity and capital markets competition there may be little choice but to dispute claims and other contract issues. While in strong economic times certain issues might not ever be considered as an issue for a dispute, a reinsurer with a low RBC ratio might have no choice but to raise closer-question issues to avoid overpaying on claims. None of this is to say that a reinsurer will dispute for dispute’s sake. But where perhaps a questionable claim might be paid for a good client in strong economic times, in weak economic conditions a reinsurer may not be able to afford to be so generous to its cedent.

At the end of the day, the job of a reinsurance company is to indemnify its cedent for the reinsurer’s share of the cedent’s losses. The outflow of reinsurance claim payments generally is the most significant drain on a reinsurer’s surplus. When a reinsurer’s surplus drops, it may scrutinize ceded claims more carefully to avoid paying claims that are marginally outside the scope of the reinsurance agreement. The question is whether the significant losses that will be coming through as a result of the recent catastrophes seen in the US and around the world will raise reinsurance rates or put new pressure on reinsurers to shore up their surplus by disputing cessions from their cedents.

The Paradigm Shift on Risk in Construction

Joseph A. Cleves, Jr. | Taft Stettinius & Hollister LLP | November 7, 2017

Many owners still rely on heavy-handed contracts to provide them with risk certainty. The goal is to reduce their risk by shifting it to designers and contractors.

While this approach has a certain logical appeal, it has the paradoxical result of increasing risk instead of eliminating it. A review of case law shows that careful drafting of contracts does not provide the imagined protection. The reason is found in the contradictory, unpredictable results that reported decisions reveal on provisions that either limit or shift liability. For example, a limitation on delay damage claims may cancel an owner’s implied warranty in one court’s estimation. Yet another court may nullify such a clause, citing the owner’s planning and design deficiencies as the root cause of the delay. More and more litigation of bedrock cases and principles, such as Spearin and the Economic Loss doctrine, have resulted in a proliferation of inconsistent decisions. The deeply fractured landscape of legal precedent has resulted in an environment where the outcome of disputes and impact of contract terms are unforeseeable. Rather than placing a premium on careful contract drafting, this approach renders careful contract drafting useless in the circumstances for which it was intended.

The search for stability calls for a dramatic change in approach — a paradigm shift. Among the possible solutions on the horizon, only an approach that eschews claims-making and litigation seems to offer the potential for success. Integrated Project Delivery (“IPD”) provides a radically different approach to construction. It supplants adversarial and fragmented relations with a contractual commitment to incentivizing collaboration among project participants. Strong consideration of IPD becomes essential in light of recent case law and recurrent conflicts spawning litigation among owners, designers and contractors.

Post-loss Assignment of Claims in California

Lawrence Moon | Property Insurance Coverage Law Blog | November 17, 2017

In a prior blog, I discussed the California Supreme Court’s decision in Fluor Corporation v. Superior Court,1 regarding the post-loss assignment of insurance benefits. In Fluor, the California Supreme Court held that section 520 of California’s Insurance Code prohibits insurance companies from refusing to honor post-loss assignments of benefits, regardless of whether the assigned benefits (a) had accrued at the time of the assignment (i.e., constituted “Noncontingent Benefits”), or (b) had not yet accrued but could accrue if additional events occurred or additional conditions satisfied (i.e., constituted “Contingent Benefits”).

Within days of the California Supreme Court’s decision in Fluor, an affiliate of Hartford Accident & Indemnity Company, which was effectively the “losing” party in Fluor, relied on the decision in Fluor to obtain a victory in a (federal) District Court case that also concerned a post-loss assignment of rights pertaining to an insurance policy. In Hartford Casualty Insurance Company v. Fireman’s Fund Insurance Company,2 Hartford Casualty sued Fireman’s Fund on its own behalf and as the assignee of three of Fireman’s policyholders. Hartford had issued a business liability policy to one of the Fireman’s policyholders, Herndon Partners. Herndon was owned by another of Fireman’s policyholders, Paul Owhadi. For its part, Fireman’s had issued (1) a homeowner’s policy to Mr. Owhadi, under which Herndon Partners was named as an additional insured, and (2) an excess liability policy to Mr. Owhadi and the third policyholder, Susan Owhadi.

Fireman’s excess policy contained exclusions for business activity, business property, and workers compensation. The Fireman’s Fund policies also contained a clause which stated, “Assignment of this policy or a claim will not be valid unless we give our written consent.”3

All of the policies covered, or seemed to cover, the property on which a worker was electrocuted and died. At the time of the death, the property was owned solely by Herndon Partners. Hartford defended Herndon in the wrongful death lawsuit that followed but Fireman’s Fund denied coverage because Herndon was not a named insured under either of its policies. Fireman’s also raised the business exclusions in its excess policy as grounds for denying coverage under that policy.

After an $8.8 million judgment was entered against Herndon, all three of the policyholders assigned to Hartford, “claims against Fireman’s Fund related to the wrongful death lawsuit and the two Fireman’s Fund policies.”4 Hartford then filed a complaint against Fireman’s Fund for indemnity, contribution, professional negligence, declaratory judgment, and reformation of the Fireman’s Fund policies. Specifically, Hartford alleged that Fireman’s Fund knew that the property was owned by Herndon and that it was a rental property. Therefore, according to Hartford, Fireman’s policies should be “reformed” to delete the business exclusions and name Herndon as an insured.

Fireman’s moved to dismiss the reformation claim alleging that Hartford lacked standing to bring that claim because (1) Fireman’s policies expressly prohibited the assignment of claims without its consent, and (2) the California Supreme Court’s decision in Fluor did not apply to the reformation claim because a reformation claim does not seek “defense or indemnification coverage.”5

The District Court rejected Fireman’s arguments, holding that under section 520 of California’s Insurance Code and the California Supreme Court’s decision in Fluor, the clause in Fireman’s policies that prohibited assignments was void regarding post-loss assignments.6 The District Court also held that section 520 “applies broadly” and protected Hartford’s cause of action for reformation.7, 8

The decision in Hartford is significant to the degree it suggests that the courts in California may interpret and apply section 520 broadly to post-loss assignments that pertain to rights or benefits under an insurance policy, including legal rights and causes of action not set forth in the policy. While the decision in Hartford pertained specifically to liability policies, neither the language of section 520 nor any court decisions I have found appear to limit the statute’s application to liability policies.

Determining the validity of an assignment pertaining to an insurance claim or policy always begins with an analysis of the terms of both the policy and the assignment. Before making any major decisions concerning an assignment, policyholders should seek independent professional advice and, when applicable, obtain multiple bids or offers from prospective assignees or purchasers of the assigned rights.
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1 Fluor Corp. v. Superior Court, 61 Cal.4th 1175, 354 P.3d 302 (Cal. 2015).
2 Hartford Cas. Ins. Co. v. Fireman’s Fund Ins. Co., 2015 WL 5168643 (N.D. Calif. Sept. 3, 2015).
3 Id., fn. 3 (emphasis added).
4 The decision in Hartford does not specify what claims were assigned or how they were described in the assignment.
5 According to the opinion in Hartford, the quoted language was drawn from the Fluor decision by Fireman’s Fund. Partly because that phrase is found in multiple locations in the Fluor decision, it is not clear which instance of the phrase Fireman’s Fund was referring to. However, I believe the quotation is from the Supreme Court’s closing paragraph in Fluor: “For the reasons set forth, Insurance Code 520 applies to third party liability insurance. Under that provision, after personal injury (or property damage) resulting in loss occurs within the time limits of the policy, an insurer is precluded from refusing to honor an insured’s assignment of the right to invoke defense or indemnification coverage regarding that loss. This result obtains even without consent by the insurer — and even though the dollar amount of the loss remains unknown or undetermined until established later by a judgment or approved settlement.” [Emphasis added.]
6 Id., *4 (“Thus, under Insurance Code § 520, the clause prohibiting the assignment of claims against Fireman’s Fund is void”).
7 Id. (“Nothing in the text of Insurance Code § 520 limits its applicability to only claims involving ‘defense or indemnification.’”).
8 Section 520 states, in its entirety, “An agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.”

The Perils of Online Mechanic’s Lien Services

John R. Lockard | Vandeventer Black LLP | November 16, 2017

There are several online services that prepare and file mechanic’s liens in jurisdictions throughout the United States. I recently had the opportunity to review a memorandum for mechanic’s lien that was prepared by one of these services and filed in a local Virginia court. In reviewing the document, I discovered several problems with the memorandum of lien, including:

– It did not conform to the format included in the Code of Virginia;

– It failed to identify the general contractor or the subcontractor for the project as required by the Code of Virginia; and

– It failed to identify the correct address or parcel of property upon which the work was performed.

There is no question that the lien’s failure to identify the correct property would be fatal to the lien. For the other issues, it is not clear that each problem on its own, or even in conjunction with the other issues, would invalidate the lien. However, even if those issues would not ultimately cause the lien to fail, they would almost certainly lead to litigation over whether the lien was valid, instead of focusing on the contractor’s right to payment. The contractor could spend significant legal fees litigating these types of issues with the lien, and could still end up not being paid.

Preparing a mechanic’s lien in most jurisdictions and Virginia, in particular, is much more complex than simply filling in blanks on a form. The lien must include complete and correct information for the project. For example, the property description must match the legal parcel where the work was performed. Someone also needs to make sure that all amounts included in the lien are for work performed on that particular parcel of land. If any work at all was performed outside the limits of the parcel as shown in the property records, the entire mechanic’s lien could be invalid.

Virginia law does not require that a memorandum of mechanic’s lien be prepared or filed by an attorney; but the law is complex on lien filing and enforcement, and the types of issues above illustrate the risks of liens prepared by someone unfamiliar with the requirements of Virginia law or the details of the particular construction project. In the case described above, the lien would likely not be enforceable—meaning that the contractor would be left without security for payment for its work. Contractors and suppliers should strongly consider contacting an attorney experienced in Virginia construction law to discuss the requirements for filing a mechanic’s lien. An experienced construction law attorney can assist in preparing and enforcing a mechanic’s lien and also with pursuing other options to collect the debt.

Good Faith, Bad Faith, No Faith: Will a Subjective Good Faith Standard Influence How Litigants Approach Mediation?

Brian J. Laliberte | Tucker Ellis | November 16, 2017

I. Introduction

Mediation as a dispute resolution mechanism does not succeed because courts, statutes, or rules impose a good faith standard on participants or sanction bad faith conduct. Mediation succeeds because litigants and their lawyers prepare their case, know their objectives, and work to achieve them. Ideally, requiring lawyers and litigants to adhere to minimal objective good faith requirements, to act professionally and civilly, and to respect the process should be sufficient to facilitate meaningful participation in mediation. Often, it is not. In some cases, lawyers and litigants misbehave and frustrate the process. Will a subjective good faith mediation standard influence how litigants approach mediation?‡

II. Good Faith/Bad Faith/No Faith

A. Objective Good Faith

What is good faith mediation? Most courts interpret the concept narrowly. Generally, it has been limited to requiring parties to do the following: (1) provide a mediation statement prior to the mediation date; (2) attend the mediation; and, (3) have a representative with authority to settle present. These are the most basic and widely accepted objective good faith mediation requirements.

These requirements often are memorialized in detailed pre-trial mediation orders issued pursuant to Fed. Civ. R. 16. Rule 16 authorizes the use of pretrial conferences to “formulate and narrow issues for trial and to discuss means for dispensing with the need for costly and unnecessary litigation.”i As such, “[p]retrial settlement of litigation has been advocated and used as a means to alleviate overcrowded dockets, and courts have practiced numerous and varied types of pretrial settlement techniques for many years.”ii Indeed, since 1983, “Rule 16 has provided that settlement of a case is one of several subjects which should be pursued and discussed vigorously during pretrial conferences.”iii

Rule 16 also addresses a court’s authority to sanction litigants for failing to comply with pretrial orders including orders directing them to mediate and to do certain things prior to a scheduled mediation. Rule 16 states:

On motion or on its own, the court may issue any just orders, including those authorized by Rule 37(b)(2)(A)(ii)-(vii), if a party or its attorney:

(A) fails to appear at a scheduling or other pretrial conference;

(B) is substantially unprepared to participate or does not participate in good faith in the conference; or

(C) fails to obey a scheduling or other pretrial order.

In addition to rule-based powers to sanction, Courts have inherent powers to control the proceedings before them and to see to “the orderly and expeditious disposition of cases” through sanctions and other means.iv

Complying with a court’s mediation order, appearing at mediation, and sending a representative with authority to negotiate (and/or with access to higher corporate authority), are basic requirements any litigant and its lawyer can meet. If, for some reason, one of those requirements cannot be met, it behooves counsel for that litigant to contact opposing counsel, the mediator, and/or the court to obtain relief. A litigant’s unexcused failure to satisfy minimal objective good faith mediation requirements likely warrants sanctions. Such sanctions should be designed to compensate the non-offending party for the fees and costs expended to prepare for and attend mediation. They should not, however, serve to influence the outcome of the case. In short, objective good faith mediation requirements should serve the interests of judicial economy and case administration without imposing punitive or coercive sanctions upon litigants.

B. Subjective Good Faith

Courts have struggled to define subjective good faith requirements intended to evaluate the quality of litigant participation in mediation. The district court in In Re A.T. Reynolds & Sons, Inc., explained the pros and cons of using subjective good faith mediation standards.v

It vacated sanctions entered by the bankruptcy court after an unsuccessful mediation between two creditors. The bankruptcy court held that one creditor (Wells Fargo) failed to mediate with another creditor in good faith. It explained that:

Passive attendance at mediation cannot be found to satisfy the meaning of participation in mediation, because mediation requires listening, discussion and analysis among the parties and their counsel. Adherence to a predetermined resolution, without further discussion or other participation, is irreconcilable with risk analysis, a fundamental practice in mediation…. [T]his Court has authority to order the parties to participate in the process of mediation, which entails discussion and risk analysis.vi

The bankruptcy court found that Wells Fargo engaged in bad faith mediation for the following reasons: (1) Wells Fargo failed to meaningfully participate in mediation because it “insisted on being dissuaded of the supremacy of its legal obligation in lieu of participating in discussion and risk analysis;” (2) the Wells Fargo corporate representative (a) only had authority to settle for a predetermined amount, despite the potential actual amount in controversy; (b) the representative was only prepared to discuss certain specific legal issues; (c) the representative had no authority to enter into “creative solutions that might have been brokered by the Mediator;” and, (3) Wells Fargo “sought to control the procedural aspects of the mediation by resisting filing a mediation statement and demanding to know the identity of the other party representatives.”vii It then concluded that “attendance without participation in the discussion and risk analysis… constitutes failure to participate in good faith.”viii

The district court rejected the bankruptcy court’s qualitative analysis of Wells Fargo’s participation in the mediation. It explained that such an analysis: (1) interferes with litigant autonomy; (2) may encroach upon confidential attorney-client communications and work product; and (3) may coerce settlement in cases where a litigant otherwise may take a “no pay” or “nuisance value” settlement position.ix The district court characterized the bankruptcy court’s analysis of Wells Fargo’s conduct as impractical and unrealistic. It concluded that an inquiry into the reasons a litigant has taken a certain settlement position, in the absence of a statute or rule authorizing such an inquiry and defining a standard, goes too far.x

C. Bad Faith

Defining bad faith can be an inherently vague notion that is difficult or even impossible to reasonably and logically enforce.xi Using a common definition of bad faith may be helpful. In the litigation context, it may include unreasonable, unprofessional, or vexatious conduct.

Specific examples of “bad faith” conduct during mediation include: refusing to discuss the mediation process with the mediator and opposing counsel before the conference; unprofessional and acrimonious statements or behavior during mediation (e.g., insulting the opposing party, counsel or the mediator); placing unreasonable time limits on offers/counteroffers; unilaterally terminating or abandoning a mediation without explanation; and disrespecting the mediator or the process (e.g., interrupting, ignoring, or refusing to engage in dialogue).xii

None of this conduct should require an inquiry into a litigant’s motives. Rather, it should be evaluated against professional conduct rules, local standards for civility among members of the bar, and common sense. It also should be evaluated in the context of the entire litigation i.e., has a litigant and/or its lawyer behaved badly throughout the case.

Finally, in addition to compensatory sanctions, punitive sanctions may be appropriate in the “bad faith” context. Punitive sanctions should be crafted to both punish recent unprofessional, uncivil and vexatious conduct and to deter it in the future.

D. No Faith?

It may be fair at this point to ask: What value does mediation have if litigants only must adhere to basic, non-stringent objective good faith standards? What value does it have if there is no subjective evaluation of litigant participation? These are not questions a reviewing court or appointed neutral should answer. These are questions that in-house, transactional, and trial lawyers should be asking each time they are presented with an opportunity to mediate a dispute regardless whether it is voluntary or mandatory. The answer should not be “none.” If it were, it would reflect a lack of faith in mediation that should not govern our approach to dispute resolution.

Lawyers, therefore, must take responsibility for engaging in mediation consistent with their duty to zealously represent their client and their corresponding duties of professionalism and civility. This will facilitate adherence to both objective and subjective good faith standards, even if the latter cannot be defined precisely or enforced. It also will diminish the likelihood that litigants will engage in bad faith conduct designed to degrade the mediation process.

III. Conclusion

Lawyers should approach mediation with the intent to maximize its value regardless of the context. This takes effort and a commitment to prepare for mediation as thoroughly as one would for a hearing or argument. To maximize the value of mediation, lawyers must: know their client; know their case; know their adversary; identify their client’s objectives; value the claims rationally; set the stage for mediation with their client and their adversary; time the mediation to maximize potential outcomes; negotiate from a position of strength (if possible); and, be prepared to take the case to trial. Preparing to mediate using these guidelines will serve the client’s best interests and should demonstrate good faith participation in the process regardless of outcome and regardless whether objective or subjective criteria are used to evaluate it.