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.
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.”

Bad Faith Claim Handling – How to Avoid it Without Simply Paying All Insurance Claims

A. David Fawal | Butler Snow | November 7, 2017

“Bad faith” – just the sound of it can bring fear to even the most experienced claim adjuster. And for good reason. In many states, an allegation of bad faith in claim handling or a claim decision can bring with it the threat of punitive or exemplary damages.  The standard by which bad faith is judged varies, with some states imposing statutory liability, while in other states it is a judicial creation. Claim handlers could be forgiven for believing the only way to avoid a bad faith lawsuit is to simply pay all claims regardless of merit, but I submit there is another way. And having a good “bedside manner” is a start.

Having defended hundreds of bad faith lawsuits over the years, I have noted a common theme. I call it “bedside manner”, similar to what you expect from your doctor.  In the vast majority of bad faith lawsuits I have seen, there is almost always some communication failure between the claim handler and the insured, with the insured coming away feeling as if the adjustor is ignoring the insured, or worse, doesn’t care. Keeping the insured informed through every step of the process is a good practice to follow. While it is true that denying an insured’s claim is never good news for an insured, responsiveness, compassion and understanding by the adjuster toward the insured can go a long way to alleviating the ill will that sometimes leads to a bad faith claim.

Practicing good customer relations is not the only way to avoid bad faith. Another pointer is to be sure to know the applicable insurance policy inside and out. Lack of familiarity with the insuring agreement, conditions or exclusions tends to manifest itself in confusion and frustration on the part of the adjuster and the insured, sometimes leading the insured to lack confidence in any claim decision being explained.

While bad faith is most typically associated with claim denials, many states also recognize bad faith investigation. It goes without saying (but I’ll say it anyway), that the best way to avoid a claim of bad faith investigation is to …. you guessed it …. investigate. If the claim file does not contain the factual basis to support the claim decision, chances are an adequate investigation has not been conducted, or if conducted, has not been documented. But it is not enough to simply conduct an investigation into the claim – there should also be a review and evaluation of that investigation before a decision is made, and the claim file should reflect that review and evaluation.

Which brings us to another tip for avoiding bad faith – documenting the file.  There is an old mantra that says “if it isn’t noted in the claim logs, it didn’t happen.” That is a good mantra to keep in mind.  Claim activity should be noted in the file, to support the decision made and the basis for it. It is much easier to point to notes in the file showing what was done than to try and recall things that are not documented and try to explain years later that certain things were actually done during the investigation, but not noted in the file. Of course, when entering claim notes, assume that everything in the claim file will be revealed for courtroom scrutiny. Use detailed, accurate and courteous entries in the daily log and in all reports and avoid unnecessary editorial, careless or harsh comments.

Paying claims regardless of merit is not the solution. In the end, prompt, courteous and accurate communications with the insured are paramount. It may not be possible to always avoid a bad faith claim, but remembering a few of these pointers could go a long way in that direction.


Ignore Broader Claim Constructions at Your Own Risk

Raghav Bajaj | Haynes and Boone LLP | October 23, 2017

In Owens Corning v. Fast Felt Corp., No. 2016-2613, 2017 U.S. App. LEXIS 19827 (Fed. Cir. October 11, 2017), the Federal Circuit reversed the Patent Trial and Appeal Board’s (PTAB) final written decision in IPR2015-00650. While the PTAB found that the petitioner had failed to show obviousness of any challenged claim, the Federal Circuit disagreed, finding that under a proper broadest reasonable interpretation of the claims, the “record conclusively establishe[d] obviousness.” Owens Corning, 2017 U.S. App. LEXIS 19827 at *2. The Federal Circuit therefore reversed the PTAB’s final written decision without remand, finding the challenged claims unpatentable as obvious.


Owens Corning petitioned for inter partes review of Fast Felt’s U.S. Patent No. 8,137,757, which claims and describes methods of “applying nail tabs to roofing and building cover materials” which cover wood roof decks and stud walls. ’757 Patent, Abstract. For example, during the construction of a roof, an underlayment (usually an asphalt saturated substrate) is typically attached directly to the wood frame of the roof, using nails or staples. Shingles or other materials are then applied atop the underlayment. One problem addressed by the ’757 Patent is that staples and nails either pull out of the wood frame when the underlayment is uplifted (for example, due to wind), or the underlayment itself tears at the stapling or nailing location. Prior methods of solving this problem were manual, and usually involved using roofing nails with large heads, or using washers or tabs secured underneath the nail head. These methods were time consuming, expensive, and potentially dangerous.

The ’757 Patent therefore proposes to use an automated process to “permanently and reliably” affix a tab material to the underlayment surface (e.g., a dry felt or fiberglass roofing material), whether or not the tab material is later coated with shingles or other roofing materials. The process can be a gravure or gravure-like process in which print material from an engraved cylinder is transferred directly onto a substrate.

The PTAB instituted trial on three obviousness grounds challenging claims 1, 2, 4, 6, and 7. Owens Corning, 2017 U.S. App. LEXIS 19827, at *4-5. Owens Corning only appealed the PTAB’s obviousness finding on two of the grounds. Id. at *4. The primary reference on appeal was U.S. Patent No. 6,451,409 to Lassiter (“Lassiter”), which teaches a process of using nozzles to deposit polymer nail tabs on roofing and building cover materials in order to solve problems similar to those disclosed in the ’757 Patent. Id. The secondary references, U.S. Patent No. 5,101,759 to Hefele (“Hefele”) and U.S. Patent No. 6,875,710 to Eaton (“Eaton”), taught an offset-gravure printing process to form coatings on flexible materials, and using a transfer roll to apply substances to reinforce substrates, respectively. Id. at *4-5.

The PTAB’s final written decision found that all elements of the independent claims were disclosed in Lassiter when combined with either Hefele or Eaton. Id. at *5. Fast Felt provided minimal argument on appeal as to these findings, and the Federal Circuit quickly disposed of its challenge. Id. However, the PTAB found that Owens Corning failed to show that a person of skilled in the art would have combined Lassiter with Hefele or Lassiter with Eaton. Thus, the PTAB found that the claim 1 was not shown to be obvious, and as claims 2, 4, 6, and 7 were not materially different, those claims were also not shown to be obvious as well. Id. at *5-6.


On appeal, Owens Corning’s argument challenged the Board’s implicit claim construction that a “roofing or building cover material” was limited to a material that either has been, or would be, coated or saturated with asphalt or an asphalt mix. Id. at *6. Owens Corning argued that such a construction was not correct under the broadest reasonable interpretation standard applicable during PTAB proceedings.

Although the PTAB construed the term “roofing or building cover material” in the final written decision, the Federal Circuit found that the PTAB’s understanding of the construction was not consistent with the construction itself. In particular, the PTAB construed the term to mean “base substrate materials such as dry felt, fiberglass mat, and/or polyester mat, before coating or saturation with asphalt or asphalt mix, and asphalt coated or saturated substrates such as tar paper and saturated felt.” The PTAB also stated that its construction did “not require an asphalt-coated substrate.” Id. at *6-7.

In the analysis of Lassiter, the Federal Circuit found that the PTAB “made clear its understanding of its construction…as requiring materials that would eventually be coated with asphalt,” and indicated that such an understanding was incorrect. Id. at *7. The court found evidence of the PTAB’s understanding from the final written decision’s finding that Lassiter would have discouraged a skilled artisan from using “high temperatures and roller pressure” to apply nail tabs to a base substrate. But the Federal Circuit noted that such statements in Lassiter were only in the context of an asphalt coating process after nail tabs have been applied. Further, the Federal Circuit found that Fast Felt’s experts considered only “heavily saturated asphalt” materials in their declarations. Id.

Likewise, the Federal Circuit perceived the PTAB’s erroneous understanding of its construction from its rejection of the petitioner’s contention that Hefele’s and Eaton’s methods were interchangeable with those of Lassiter. Id. at *7-8. The PTAB alleged that Owens Corning had not accounted for the differences in materials, relying on Fast Felt’s experts’ statement that Hefele and Eaton did not address asphalt-saturated substrates. But the Federal Circuit found that the PTAB failed to address roofing or building materials that would not be coated in asphalt, unduly limiting the claims. Id. at *8.

As a result, the Federal Circuit found the PTAB’s exclusion of materials that would not be coated in asphalt to be inconsistent with the broadest reasonable interpretation of the claims. Id. at *8. Although the preferred embodiments of the patent focused on asphalt-covered materials, that focus was insufficient to limit the claim scope. Id. at *8-9. The Federal Circuit also noted that the claims themselves are not limited to roofing materials, as each claim recited building cover material as well, and the specification likewise encompassed building cover material which would not be covered with asphalt. *9. Therefore, the Federal Circuit found that the broadest reasonable construction of “roofing or building cover material” encompassed materials that “neither have been nor are coated or saturated with asphalt or asphalt mix.” Id. at *9. On this basis, the PTAB’s construction was found to be in error. Id.

Because all of the evidence and argument of record supported a finding of obviousness under the proper broadest reasonable interpretation of the claims, the Federal Circuit simply reversed the PTAB’s final written decision, instead of remanding the case to the Board for further proceedings. Id. at *9-10.

All of Fast Felt’s argument and evidence was predicated on the narrow claim construction which excluded materials that would not be coated in asphalt. Id. at *13. The PTAB had already found that Lassiter, when combined with Hefele or Eaton, disclosed all of the elements of the claims. Id. at *5. The Federal Circuit further found that Lassiter suggested that a person of ordinary skilled in the art would have been motivated to print nail tabs on building cover materials that would not be asphalt coated, consistent with its broader interpretation. Id. at *11-12. The only expert testimony on this point was offered by Owens Corning, whereas Fast Felt “had no meaningful evidence…that was independent of its too-narrow view of what materials are covered” by the ’757 Patent. Id. at *12-14. Fast Felt also did not respond to Owens Corning’s evidence about other building cover materials, and the Federal Circuit found that Fast Felt’s expert opinions were again too narrowly focused. Id.

Thus, the Federal Circuit stated that there was only one possible finding: that a person of skill would have been motivated to combine the prior art references to “print nail tabs on building cover materials that are not (already or to be) asphalt coated or saturated.” Id. at *14. With no sufficient evidence to contradict that finding, the Federal Circuit reversed the PTAB’s decision as to the challenged claims, finding them unpatentable for obviousness. Id. at *14-15.


Practitioners should be sure to develop a complete record at the PTAB, including evidence and arguments to support patentability/unpatentability contentions under alternative claim constructions, to ensure that the Federal Circuit’s disagreement with the PTAB’s reasoning does not result in a reversal without remand. In particular, expert declarants should consider alternative theories and not unduly limit their analysis. Further, practitioners should be mindful of the contours of the broadest reasonable interpretation standard. In particular, this decision should serve as a reminder that preferred embodiments will not be enough to narrow claim scope at the PTAB.

Objectors Beware – Exposure to Claims Brought by Adversely Impacted Developers is Alive and Well

Carl A. Rizzo | Cole Schotz PC | October 31, 2017

Parties objecting to development projects have traditionally been immunized from liability for common law torts, such as malicious prosecution, abuse of process and tortious interference.  This immunity, grounded in the well-recognized Noerr-Pennington doctrine, affords immunity to those who petition the government for redress.  (See  Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc.365 U.S.  127 (1961); United Mine Workers of America v. Pennington, 381 U.S. 657 (1965) (holding that parties seeking relief from the government are generally afforded immunity unless such actions are objectively baseless).

While the immunity afforded objectors has been a difficult one to breach, recent decisions suggest that actions brought against these objectors require careful review of the facts and underlying circumstances before they can be summarily dismissed.  In order to overcome Noerr-Pennington immunity, a litigant must satisfy a two-prong test:  First, proof must be established that the actions of the objector were “objectively baseless,” meaning no reasonable litigant could realistically expect success on the merits of its claims.  Second, proofs must also establish that the conduct in question was brought with the specific intent to further wrongful conduct through the use of the governmental process – as opposed to the outcome of that process.  Importantly, the second prong is only considered if the challenged litigation is first found to be objectively meritless.

Recently, however, meeting the first prong has been made easier by our court’s consideration of an objector’s track record and the presence of other repeated failed filings.  (See Main Street at Woolwich, LLC v. Ammons Supermarket, Inc. 451 N.J. Super. 135 (App. Div. 2017).  In Main Street, the court relied upon a Third Circuit decision in holding that the trial court failed to properly consider the defendant’s alleged pattern of sham litigation.  Hanover 3201 Realty, LLC v. Village Supermarkets, Inc. 806 F.3d 162, 180 (3rd Cir. 2015), cert. denied __ U.S. __, 136 S.Ct. 2451 (2016).  By demonstrating that an objector has engaged in a series of unsuccessful administrative and/or court challenges, developers can establish that this activity represents a pattern of utilizing the process to serve the anticompetitive purpose of injuring market rivals.  Under such circumstances, a court could very well conclude that the claims of such objectors were not brought to redress any actual grievances, but rather to promote delay and cause injury.  Accordingly, this broad immunity can be lost where the conduct at issue is merely intended to interfere directly with the business relationships of a competitor.

As a consequence, before filing any action seeking government redress, a putative objector, much like any other litigant, should carefully evaluate the bases for its objections with a legal professional to ensure that they are both grounded in fact as well as supported by sound legal underpinnings.  To do otherwise is to invite abuse of process type claims that now have a much greater likelihood of success.  Reviewing any possible strategy that involves objecting to a rival’s application for development is now, more than ever, a critically important step to insulating the objector from exposure to counter-suits that were previously viewed as questionable nuisance type actions.

Tic Toc Tic Toc: The Clock Is Running on Construction and Design Claims by the State of Connecticut Beginning October 1, 2017

Niel Franzese | Robinson & Cole | October 11, 2017

Our readers may recall that Public Act No. 15-28 was signed by the Governor back in 2015, subjecting the State of Connecticut and its political subdivisions to a statute of limitations for asserting actions and claims arising out of “construction-related work.” The law became effective as of October 1, 2017. “Construction-related work” is defined in the Act to include the design, construction, construction management, planning, construction administration, surveying, supervision, inspection or observation of construction of improvements to real property. Notably, it applies not only to the State, but also its subdivisions such as cities, towns, and other entities like school districts.

The limitations period set forth in the Act is 10 years from the date of substantial completion of a given improvement. The 10 year limitations period applies going forward to improvements to real property substantially completed on or after October 1, 2017. For improvements substantially completed before October 1, the limitations period runs to October 1, 2027. Prior to the Act, the State and its political subdivisions were generally not subject to any statutes of limitations for such claims due to the legal doctrine of nullum tempus occurrit regi, which provides that a state is not subject to statutes of limitations unless it specifically consents to be. Literally translated, it means that “no time runs against the king.”

For purposes of the Act, substantial completion is defined as the time that the real property at issue is first used by the public owner or first available for use after having been completed in accordance with the agreement covering the improvement, including any agreed changes to the agreement, whichever occurs first. However, any public highway, bridge improvement or improvement to a railroad right-of-way, ferry, port or airport infrastructure is considered substantially complete upon the issuance of a certificate of acceptance of the work relieving the contractor of maintenance responsibility.

The Act provides that the limitation does not bar actions or claims (1) on written warranties or guarantees which expressly provide for a longer effective period, including tolling agreements, (2)  based on willful misconduct in connection with the performance or furnishing of construction-related work, (3) arising under any environmental remediation law or pursuant to any contract entered into by the State or any political subdivision of the State in carrying out its responsibilities under any environmental remediation law, or (4) pursuant to any contract for enclosure, removal or encapsulation of asbestos.

As we wrote previously, this new development is largely in response to the Connecticut Supreme Court decision, State of Connecticut v. Lombardo Brothers Mason Contractors, Inc., et al., 307 Conn. 106 (2012), in which the Court held that the State was not subject to any statute of limitations for initiating claims for defective construction with respect to the University of Connecticut Law Library in Hartford. The coming of the effective date for Public Act No. 15-28 will undoubtedly bring some stability and predictability to the often uncertain arena of defective construction and design claims by public owners.