Coverage Dispute Handling Has Evolved in 25 Years

Denise Johnson | Claims Journal | March 20, 2017

Changes in response time, the way research is conducted and the sources of bad faith have all impacted how coverage is evaluated, according to a panel discussion conducted by the American Bar Association’s Trial and Insurance Program Session. The program was held recently at the Arizona Biltmore Resort in Phoenix, Ariz. To coincide with its 25th anniversary, panelists discussed the way coverage dispute handling and evaluation has changed during that time.

Jill Berkeley, a Chicago-based partner and chair of Neal Gerber & Eisenberg’s Insurance Policyholder practice group, said that coverage evaluation has evolved from assessing basic issues to the importance of strategic thinking. She also noted the increased pressure to respond immediately to coverage questions, despite the necessity to sometimes mull complex issues.

Research is a necessary and time-consuming component of any coverage evaluation. The ability to access research, even if it was available electronically, could still be time intensive because it couldn’t be accessed via every device, said Tampa-based attorney Lisa Oonk. She recalls that when she began in the business, a firm she worked in used a teletype machine to communicate with Lloyd’s of London. With email, there is no need to wait days or hours for a response, she added.

Oonk also noted the increased expectation that communication should be instantaneous.

Boston-based insurance coverage counsel Barbara O’Donnell, with the firm of Zelle McDonough & Cohen, said that bad faith has changed significantly in the 25 years since the committee began. She explained there has been significant changes in statutory penalties, excess judgments and attorneys’ fees relating to bad faith lawsuits. In addition, the potential sources of bad faith have widened, she said. Jurisdictional awareness, including the careful consideration of statutory requirements as they relate to claims handling, the burden of proof, potential penalties and recoverable remedies are now all considered important in case evaluation, she added.

Robert Westerfield, a senior partner with Bowles & Verna in Walnut Creek, Calif., said that the biggest change in practice is the initial choice of law while the reasons why a policyholder files bad faith lawsuits remains unchanged. Bad faith allegations offer the plaintiff the opportunity to broaden discovery, providing a chance to try the case in front of a jury. In the past 25 years, he’s seen less cases where insurers refuse to defend insureds and noted there have been major changes to California’s statutory penalties related to bad faith.

The panelists also discussed reservations of rights (ROR), allocation and privileged communication.

According to Berkeley, in the past, there was more emphasis placed on how to write an ROR letter. She explained that more thought now goes into analyzing its impact on the case and whether it could have an impact on the defense.

In terms of allocation, the insurance policy language, relating to indemnity and defense costs, needs to be reviewed, Berkeley said, and attention needs to be paid to determine how both are allocated as well as whether all of the primary policies have to be exhausted prior to triggering excess policies.

Oonk said that defense costs aren’t subject to the allocation rule, though a couple of cases have applied time on risk for defense costs for uninsured time periods, if the insured can prove that it couldn’t buy any more coverage.

According to Westerfield, in recent years, issues dealing with privileged communication have put claims adjusters in the precarious position of having to be deposed. When insurers assert privilege, it prevents them from explaining any part of their evaluation at trial. He added that claim adjusters can’t be prepped for deposition because counsel can’t show them documents deemed privileged.

Attorneys: A Common Interest Agreement May Not Be Worth the Paper It’s Written On

Joseph L. Francoeur and Michael S. Tripicco | Wilson Elser | March 22, 2017

It is a very common practice for counsel to co-defendants or co-plaintiffs to enter into agreements that shield their communications. The agreements are expressions of intent that the communications will be protected by the “common interest doctrine” that extends the attorney-client privilege to discussions with parties that share a common interest. Under the doctrine, the attorney-client privilege is not waived when such communications are made between parties sharing a common legal interest.

In Ambac Assur. Corp. v Countrywide Home Loans, Inc., 27 NY3d 616 (2016), the New York Court of Appeals expressly limited the application of the common interest doctrine to “co-defendants, co-plaintiffs or persons who reasonably anticipate that they will become co-litigants.…” In doing so, the Court of Appeals clarified that the policy underpinning the doctrine was to enable two or more parties to coordinate a common claim or defense without fear that such efforts might later become the subject of disclosure.

Despite the frequent use of common interest agreements, there are limitations that may vitiate the privilege entirely and leave communications unprotected and discoverable to the other side. In applying the holding in Ambac, a New York County Supreme Court judge recently ruled that the common interest doctrine did not apply to communications between counsel where one party assigned claims to the other.

In 59 S. 4th LLC v A-Top Ins. Brokerage, Inc., 2017 N.Y. Slip. Op. 30050[U] (Sup. Ct., N.Y. County, Jan. 10, 2017), an owner of a residential development project initiated a lawsuit against an insurance broker, alleging that the broker had misrepresented the scope of work the general contractor could undertake with its current insurance. In addition, the owner obtained an unconditional assignment of any potential claims the general contractor may have possessed against the broker regarding the procurement of insurance. Subsequent to the assignment and during the litigation, the plaintiff owner and (non-party) general contractor entered into a “common interest agreement” before entering into a series of discussions. That agreement contemplated that certain communications between the owner and the general contractor would be privileged and confidential. When counsel for the broker sought production of those communications, the owner refused to produce them citing the common interest doctrine. The broker then moved to compel.

In granting the broker’s motion, the Court reaffirmed the limited applicability of the common interest doctrine as set forth by the Court of Appeals in Ambac. The Court reasoned that, because the assignment completely divested the general contractor of any interest it may have had in the outcome of the litigation, the general contractor could not – by definition – become a co-plaintiff in the action. As a result, the entirety of verbal and written communications between the owner and general contractor were deemed not privileged and subject to disclosure to the other side.

Following the holdings in Ambac and 59 S. 4th LLC, any lawyer considering entering into a common interest agreement should be mindful that these agreements are not automatically upheld. Instead, careful practitioners must confirm whether their situation meets the requirements set forth in Ambac above, or they, too, may see their private communications deemed unprotected.

Indecent Exposure: New Decision Confirms Subcontractors Liability To CD Damages Is Expansive

Michael Ludwig | Jones, Skelton & Hochuli, PLC | March 24, 2017

How broad is a “broad-form” indemnity provision in a construction contract?  A recent decision by the Arizona Court of Appeals has held such a provision allows a developer great latitude in recovering monies paid for settlement and also its attorneys’ fees and costs.

Amberwood Development v. Swann’s Grading, 1-CA-CV15-0786, arose from a lawsuit by homeowners against Amberwood alleging, among other things, construction defects from soil movement.  Amberwood arbitrated the dispute with some of the homeowners resulting in a $1.75 million award against it and it settled the claims of the remaining homeowners for another $723,000. Swann’s Grading had provided a defense to Amberwood for the arbitration but did not indemnify Amberwood.  This suit was Amberwood’s effort to recover indemnity from Swanns for the arbitration award and settlement.

Like many construction contracts, Amberwood’s subcontract contained a “broad form” indemnity provision which required Swanns to defend and indemnify Amberwood “from any and all claims, damages or Attorney’s fees…arising out of the acts or omissions of [Swanns]…with regard to the performance or omission of any of [Swanns] duties and obligations under the contract.”  At the bench trial, Amberwood presented expert testimony that because Swanns performed the rough and fine grading, the majority of the damages awarded “arose out of” its work. This evidence was unrebutted by Swanns  expert who only argued that Swanns work did not cause any of the claimed damages.  The trial judge agreed with Amberwood and found that 70.6 % of the litigation settlement and 72.7 % of the arbitration award were for issues that “arose out of” Swanns  work. The trial judge entered an award against Swanns to reimburse Amberwood those amounts. This award was upheld on appeal.

This case made clear several important lessons for construction defect litigants and insurers.  A broad form indemnity provision is highly advantageous for developers and disadvantageous for subcontractors.  To prevail, a developer is not required to prove that a subcontractor was negligent, it need only prove that the claims and damages sought by Plaintiffs “arose out of” the work performed by the subcontractor, even if other trades were perhaps partially responsible. Put another way, “fault” of the subcontractor is of little consequence.  Once the developer prevails, it is entitled to recover that portion of indemnity and defense fees that are attributed to the subcontractor. The former is usually determined by the jury, the latter by the judge post trial. And as made abundantly clear in Amberwood, this liability can even include being held responsible for the fu ll amount of damages even where another trade is perhaps partially responsible.   In CD cases, the attorneys’ fees and expert costs (of the developer and Plaintiff) can be as sizable as the construction defect damages at issue.

In conclusion, broad form indemnity provisions can now result in greater potential exposure to subcontractors than previously thought.  Early analysis of a subcontractors scope of work compared to claims alleged by Plaintiff should be done to assist in identifying early potential exposure.

Connecticut Supreme Court Issues Important Clarification For Independent Contractor Test

Guy Brenner and Carolyn M. Dellatore | Proskauer | March 23, 2017

On March 21, 2017, the Connecticut Supreme Court issued an important ruling, finding that an individual may be still considered an independent contractor under the state’s Unemployment Insurance Act even if he/she only provides services to one business or entity.  In so doing, the Connecticut Supreme Court reversed a decision by the Unemployment Insurance Board finding certain workers to be employees simply because the putative employer could not show that they performed work for other companies.

Procedural Background

In Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act, the Plaintiff-Appellant, Southwest Appraisal Group, LLC (“Southwest”) operated an automotive appraisal company and exclusively utilized independent contractors as its appraisers.  The Connecticut Unemployment Insurance Administrator audited Southwest in 2011 and determined that certain of the contractors were in fact employees.  The Administrator assessed back taxes against Southwest, who appealed the assessment to the Unemployment Insurance Board.  The Board affirmed the Administrator’s assessment with regard to three individuals.  Southwest appealed the decision to the Connecticut Superior Court.

The ABC Test and the Trial Court’s Decision

In determining whether a worker is an employee or independent contractor for purposes of the Connecticut Unemployment Insurance Act, courts apply a three-prong “ABC test” which examines the following factors in order to determine independent contractor status:

  1. the worker is free from direction and control of the employer;
  2. the services the worker provides are outside the employer’s usual course and/or place of business; and
  3. the worker is customarily engaged in an independently established business of the same nature as the services performed. See CT General Statutes § 31-222 (a)(1)(B)(ii).

In order to be deemed an independent contractor, all three prongs of the ABC test must be met.

The trial court in Southwest determined that, while the appraisers satisfied the first two prongs of the ABC test, they were not “customarily engaged in an independently established business” because they only provided appraisal services for Southwest.  While the appraisers were all free to contract with other entities and owned their own appraisal businesses (with independently-maintained offices, equipment, and business cards) the trial court found that “there is no indication on this record that any of these three businesses would survive without their relationship with the plaintiff.”  According to the lower court, this economic dependency was dispositive to the analysis, as termination of the relationship with Southwest would “result in the unemployment of the putative employees.”

Southwest appealed the decision to the Connecticut Supreme Court.  The sole issue on appeal was whether part C of the ABC test does, in fact, require proof that the workers performed services for third parties other than the putative employer in order for them to be deemed independent contractors.

Analysis and Holding

The Connecticut Supreme Court reversed the trial court’s decision, holding that the trial court placed too much emphasis on breadth of the contractors’ client base. Rather, it held that the crux of the inquiry under part C is whether “the worker is wearing the hat of an employee of the employing company, or is wearing the hat of his own independent enterprise.”  The Court instructed that “part C must be considered in relation to the totality of the circumstances, with that inquiry guided by a multifactor test. . . . [J]ust as the mere freedom to provide services . . . for third parties is not by itself dispositive under part C . . .  whether the individual actually provided services for someone other than the employer is [not] dispositive proof of an employer-employee relationship.’’

The Court then provided a non-exhaustive list of ten factors to consider in “evaluating the totality of the circumstances under part C”:

  1. the existence of state licensure or specialized skills;
  2. whether the putative employee holds himself or herself out as an independent business through the existence of business cards, printed invoices, or advertising;
  3. the existence of a place of business separate from that of the putative employer;
  4. the putative employee’s capital investment in the independent business, such as vehicles and equipment;
  5. whether the putative employee manages risk by handling his or her own liability insurance;
  6. whether services are performed under the individual’s own name as opposed to the putative employer;
  7. whether the putative employee employs or subcontracts others;
  8. whether the putative employee has a saleable business or going concern with the existence of an established clientele;
  9. whether the individual performs services for more than one entity; and
  10. whether the performance of services affects the goodwill of the putative employee rather than the employer.

The Court added that “improper primacy” should not be attributed to “the relative size or success of the putative employee’s otherwise independent business in connection with the totality of the circumstances analysis under part C.”  Such emphasis on that particular factor would unfairly subject the putative employer to “the decisions of the putative employee and an unpredictable hindsight review,” without consideration of ‘‘the intent of the parties, the number of weekly hours the putative employee actually worked for the employer, or whether the putative employee even sought other work in the field.”


Southwest Appraisal Group, LLC v. Administrator, Unemployment Compensation Act is a welcome development for Connecticut businesses that engage independent contractors, eliminating concern over the inflexible requirement that such workers must provide services for third parties – a fact that, to the extent it is known to the principal, can change over time. Despite this favorable decision, companies should regularly evaluate their relationships with independent contractors under the “totality of the circumstances” test described above, which certainly includes consideration of whether the worker provides services to others. Employers should likewise bear in mind that the Southwest holding only addresses independent contractor classification under Connecticut’s Unemployment Insurance Act. Companies in Connecticut that utilize independent contractors need to be aware that different tests applicable under other statutes and regulations, both state and federal, remain in effect.

Crumbling Foundation and the Collapse Provision in a Homeowners Policy

Jennifer Van Voorhis | Property Insurance Coverage Law Blog | March 26, 2017

Recently, Connecticut has had an increase in insurance claims for crumbling foundations due to faulty foundations poured in the 1980s and 1990s. Some foundations poured during this time frame contained a mineral, pyrrhotite, which can cause cracking when it reacts with oxygen and water. It is estimated nearly 20,000 foundations poured contain the mineral.

The problem many policyholders are encountering is the collapse provision in their insurance policies. Typical policy language defines collapse as “an abrupt falling down or caving in of a building or any part of a building”; contrasted with language in the same policy: “a building or any part of a building that is standing is not considered to be in a state of collapse even if it shows evidence of cracking, bulging, sagging, bending, leaning, settling, shrinkage or expansion.” These apparently conflicting definitions of collapse arise from the conflicting meaning of the term “collapse” as it has evolved in court cases from the various states. The traditional view defined collapse as a falling down or caving in, and the liberal view allowed for a substantial impairment of structural integrity without an actual collapse. In addition to this, some homeowners are burdened by a “sudden” clause, where the collapse must be sudden to be covered, and the deterioration of a foundation occurs over time.

Connecticut has requested that insurance companies work with their insureds in good faith, and requested they join Connecticut’s “Crumbling Concrete Assistance Program,”—a relief fund for homeowners. If you are a Connecticut policyholder dealing with a foundation issue, Connecticut recently passed a law sealing complaints filed with Connecticut’s Department of Consumer Protection, and other state agencies, to protect homeowners worried filing such a complaint might harm any subsequent claim with the insurance company.