Monthly Archives: February 2020

The Legal Framework for Insurance Disputes in USA

Posted on by
Reply

Summer Craig and Susannah S. Geltman | Simpson Thacher & Bartlett

All questions

The legal framework

i Sources of insurance law and regulation

The regulation of insurance in the US is primarily performed by the states. In 1945, the US Congress passed the McCarran-Ferguson Act, which provides that ‘No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.’ Under the McCarran-Ferguson Act, federal law preempts state insurance law only if it specifically relates to ‘the business of insurance’.

The law of insurance in the US generally falls into one of two broad categories: (1) the regulation of entities that participate in the business of insurance; and (2) the regulation of the policyholder–insurer relationship. State law pertaining to the regulation of entities is generally comprised of statutes enacted by state legislatures and administrative regulations issued by state agencies, such as departments of insurance.

Each state also has statutory and common law applicable to the policyholder–insurer relationship. State statutes address a range of topics, including, among others, the disclosure obligations of the parties to an insurance contract, the nature of a policyholder’s notice obligations and the circumstances in which a victim of tortious conduct may sue a tortfeasor’s insurer directly. State common law is an important source of law for resolving disputes between policyholder and insurer. Practitioners must carefully assess potentially applicable law at the outset of a dispute, as insurance law (whether common law or statutory) varies by jurisdiction.

ii Insurable risk

In the US, the validity of an insurance contract ordinarily is premised on the existence of an insurable interest in the subject of the contract. An insurable interest may be defined as any lawful and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction or pecuniary damage. The insurable interest doctrine was first adopted by courts and has since been codified in state statutes. The purpose of the insurable interest requirement, as articulated by courts and commentators, is to discourage wagering and the destruction of life and property and avoid economic waste.

iii Fora and dispute resolution mechanics

Litigation of insurance disputes

The US judicial system is comprised of two separate court systems. The US itself has a system comprised of federal courts and each of the 50 states has its own system comprised of state courts. Although there are important differences between federal and state courts, they share some key characteristics. Each judicial system has trial courts in which cases are originally filed and tried, a smaller number of intermediate appellate courts that hear appeals from the trial courts and a single appellate court of final review.

Unlike state courts, which include courts of general jurisdiction that can address most kinds of cases, federal courts principally have jurisdiction over two types of civil cases. First, federal courts may hear cases arising out of the US Constitution, federal laws or treaties. Second, federal courts may address cases that fall under the federal ‘diversity’ statute, which generally authorises courts to hear controversies between citizens of different US states and controversies between citizens of the US and citizens of a foreign state. For diversity jurisdiction to exist, there must be ‘complete’ diversity between litigants (i.e., no plaintiff shares a state of citizenship with any defendant) and the ‘amount in controversy’ must exceed US$75,000.

Most insurance disputes are litigated in the first instance in federal or state trial courts. Federal courts commonly exercise jurisdiction over insurance disputes under the diversity statute. In this context, an insurance company, like any other corporation, is deemed to be a citizen of both the state in which it is incorporated and the state in which it has its principal place of business.

An insurance action that is originally filed in state court may be ‘removed’ to federal court based on diversity of citizenship of the litigants. In the absence of diversity of citizenship or some other basis of federal court jurisdiction, insurance disputes are litigated in state courts. The venue is typically determined by the place of injury or residence of the parties, or may be dictated by a forum selection clause in the governing insurance contract. The law applied to the dispute may likewise be dictated by a choice-of-law clause in the insurance contract or, in the absence of such a clause, determined by a court based on relevant choice-of-law principles.

Arbitration of insurance disputes

Some insurance contracts contain arbitration clauses, which are usually strictly enforced. The Federal Arbitration Act (FAA) and similar state statutes empower courts to enforce arbitration agreements by compelling the parties to arbitrate. If an insurance contract contains a broadly worded arbitration clause, virtually every dispute related to or arising out of the contract typically may be resolved by arbitrators rather than a court of law.

While all US states recognise the validity and enforceability of arbitration agreements in general, some states have made a statutory exception for arbitration clauses in insurance contracts. Complex legal issues may arise when an insurance contract obligates parties to arbitrate but applicable state statutory law prohibits the arbitration of insurance-related disputes. Although state laws that prohibit arbitration are generally preempted by the FAA, by virtue of the Supremacy Clause in the US Constitution, state anti-insurance arbitration statutes may be saved from preemption by the McCarran-Ferguson Act. As noted, the McCarran-Ferguson Act provides that state laws enacted ‘for the purpose of regulating the business of insurance’ do not yield to conflicting federal statutes unless a federal statute specifically relates to the business of insurance. Because the FAA does not specifically relate to insurance, courts have held that the FAA may be ‘reverse preempted’ by a state anti-insurance arbitration statute if the state statute has the purpose of regulating the business of insurance. As discussed in Section IV, courts are split regarding whether the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), an international treaty that mandates the enforcement of arbitration agreements, may be reverse preempted pursuant to the McCarran-Ferguson Act.

Where an insurance dispute is resolved through arbitration, the resulting award is generally considered to be binding, although there are grounds to vacate or modify an award under the FAA, similar state statutes and the New York Convention. The FAA describes four limited circumstances in which an arbitration award may be vacated by a court: (1) where the award was procured by corruption, fraud or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown or in refusing to hear evidence pertinent and material to the controversy; or if by any other misbehaviour the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made. One area of legal uncertainty is whether a court may vacate an award based on an arbitrator’s ‘manifest disregard’ of the law. Although the manifest disregard standard is not listed in the FAA, some courts have ruled that an award may be vacated on this basis.

California Appellate Court Confirms: Additional Insureds Are First-Class Citizens

Posted on by
Reply

Scott Thomas | Payne & Fears

Many businesses shift risk by requiring others with whom they do business – e.g., vendors, subcontractors, suppliers, and others – to procure insurance on their behalf by making the business an “additional insured” under the other person’s liability insurance policy.  Unfortunately, insurance companies sometimes treat these additional insureds as second-class citizens, refusing to acknowledge that the additional insured has the same rights as the policyholder, who paid the premium.  In Philadelphia Indemnity Insurance Company v. SMG Holdings, a California appellate court removes any doubt whether these additional insureds are third-party beneficiaries entitled to the same rights – and bound by the same duties – as the entity that bought the policy.  

While the dispute at issue in SMG Holdings was a narrow one – i.e., whether the additional insured was bound by the policy’s arbitration clause – the implications of its holding are far ranging in ways that, in some instances, may benefit the additional insured.  For example, because the additional insured is an intended beneficiary under the policy, neither the insurer nor the policyholder may do anything to impair the additional insured’s rights under the policy; if they do, they may be liable for tortiously interfering with the additional insured’s contract rights.  This means that (again, by way of example) if the insurer attempts to rescind, or cancel, or amend the policy in a way that impairs the additional insured’s rights, the additional insured may have recourse.  It also means that if the policyholder does something untoward that jeopardizes the additional insured’s rights under the policy, the policyholder may be liable to the additional insured for any resulting harm.

SMG Holdings also reminds us that – subject to the terms and conditions of the policy – additional insureds are entitled to the same benefits as is the named insured.  For example, an insurer may not, as insurers have been known to do, refuse to fully defend (or defend at all) its additional insured against a third-party claim when it is, at the same time, fully defending its named insured.  

Of course, all of this is a two-way street: These same principles may, in certain instances, benefit the insurer in a dispute with its additional insured.  But we won’t elaborate here, because that would be giving aid and comfort to the enemy.  

What is important to businesses facing risks arising out of relationships with their business partners is that additional-insured coverage under policies issued to those partners is a valuable risk-shifting tool that should not be neglected.  

A Rundown of Common Mediation Mistakes

Posted on by
Reply

Stuart Rudner | Rudner Law

In many cases, lawyers are failing to use mediation effectively and doing a disservice to their clients. The good news is that if you choose a good mediator, the vast majority of cases will settle despite the lack of effort and preparation on the part of counsel. However, it often results in a substantial amount of wasted time and bumps in the road that could easily be avoided.

So what are counsel doing wrong?

Underestimating the time needed

In my mediation practice, I have settled all but a handful of cases over the past year. At the same time, all but a handful of cases have gone over the amount of time that counsel had booked for mediation. People often comment that three hours is an unrealistically short period of time to allow the parties to discuss the case with the mediator, engage in meaningful settlement discussions, and then (hopefully) document the resolution. That is true. And I encourage counsel to simply book a full day rather than booking a half day and having their clients end up paying for the half day plus several hours of overtime. Otherwise, parties and counsel often have to scramble to clear their afternoon so we can continue to work toward settlement.

Failing to use the mediation brief to explain the case

One of the reasons that three hours is usually too short is because the first hour is spent telling the mediator what the case is really about. This is because counsel did not draft their mediation briefs strategically, if they did so at all. In many cases, all I receive are the pleadings. Even when briefs are submitted, it is amazing how often they do not let me know what the case is really about.

Some counsel clearly use the same template over and over again, simply plugging in the name and key statistics of the parties and the relationship. Time will undoubtedly be wasted if I review the briefs, conclude that it is a straightforward notice case (since nothing else is mentioned), only to discover, after speaking with the parties, that there are complex issues such as just cause for dismissal, breaches of restrictive covenants, or harassment and bullying.

If you want to help your clients, take the opportunity to write a strategic, compelling brief. Give your mediator a clear picture of what that dispute is about, the issues, the facts and the evidence.

Failing to prepare the clients

It is shocking to me that counsel often fail to take the time to properly prepare their clients for mediation. While it may seem tedious, spending some time will allow the mediation to proceed far more efficiently.

For example, if it is obvious that certain issues will arise, discuss them in advance with your client. It is particularly disheartening to see the look of shock on a plaintiff’s face when the fact that they will have to repay employment insurance benefits comes up, for example. We then have to backtrack and explain the law to the plaintiff, who is now ready to leave because he feels as though the employer is somehow acting in bad faith.

Discussion about these issues in advance would help to avoid wasting time at mediation talking the defendant down and explaining why if there is a plausible basis for such an allocation, it can help us to reach a resolution and in fact, allow them to do so by paying less than they might otherwise have to.

Failing to ensure clients have realistic expectations

In many mediations, the first hour is wasted discussing issues that should have been covered in the briefs, and the next half hour is wasted on what I often refer to as the “silly round” of offers. That is when the plaintiff insists on asking for $1 million, or compensation until age 65, when their case is really worth a few months or $50,000, and the defendant responds in kind by offering something like $2,500.

Part of preparing your clients for mediation is having a frank discussion with them about the strengths and weaknesses of their case. Don’t just leave it to your mediator to be the bearer of bad news; you don’t do your client any favours by failing to be honest with them about their chances.

Not having the decision-maker in the room

It is critical to have the decision makers present at mediation. I have had several mediations come to a premature end because the defendants’ representative at mediation had limited authority and the powers that be were unavailable. That is unfair to all parties involved and can render the mediation a waste of time.

If for some reason the ultimate decision-maker cannot physically attend, it is critical that they be available by phone throughout. Furthermore, the person on the phone should be part of the discussions with the mediator. When I am asked to wait outside while the decision-maker is called, I am prevented from doing my job by explaining to them how the matter can and should be resolved. Mediation is a process, and the process has to be followed if we are going to maximize our odds of reaching a positive outcome. If counsel simply call the decision-maker when we are near the end, and try to explain in two minutes why they recommend a specific offer, it is entirely possible that the decision-maker will reject the recommendation since they do not have the benefit of the extensive discussions that have taken place without them

The bottom line

A mediator is very different than a judge. I want to work with the parties and their counsel to find a reasonable resolution. To do so, it helps to understand the issues, the evidence, and the goals and concerns of the parties. Be candid with me, and it will make it much easier for me to help your client. Conversely, if you deliver a boilerplate brief that doesn’t mention the real issues, fail to give your client a realistic assessment of the case, refuse to discuss the case candidly with me, and insist on taking unreasonable positions, then the mediation will either take far longer than it should, or will be a complete waste of time.

I know that many mediators claim that they don’t keep score, but I do, and every case that I don’t settle is a loss. So please help me to keep my winning percentage high and, in the process, make your client happy.

Illinois Appellate Court Clarifies What Is and Is Not an “Occurrence” in the Construction Defect Context

Posted on by
Reply

Marianne Bradley and Anthony Miscioscia |White and Williams

On December 31, 2019, the First District Illinois Appellate Court issued its decision in Owners Insurance Company v. Precision Painting & Decorating Corporation, clarifying what does and does not constitute “property damage” caused by an “occurrence” in the construction defect context. 2019 IL App. (1st) 190926-U, 2019 Ill. App. Unpub. Lexis 2425.

The underlying case involved allegations of negligence, consumer fraud and breach of contract. In particular, the underlying homeowner claimants alleged that Precision Painting & Decorating Corporation (Precision), whom the homeowners had hired to perform certain exterior paintwork at their home, failed to conform to U.S. Environmental Protection Agency (EPA) regulations with respect to the presence of lead-based paint. In its contract, Precision had agreed to take special care with respect to containing lead dust while working on the homeowners’ property. Despite having agreed to do so, Precision (allegedly) took almost no precautions, resulting in significant contamination to the interior of the home.

Owners Insurance Company (Owners) had issued Precision a CGL policy, providing coverage for “property damage” caused by an “occurrence,” defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Precision tendered its defense to Owners. Owners filed a DJ Action arguing that it owed no duty to defend as the homeowners had failed to allege any “property damage” caused by an “occurrence.” Specifically, Owners argued that, under Illinois law, damages resulting from an insured’s breach of contract are not recoverable under a CGL policy.

The trial court agreed, finding that no “accident” or “occurrence” was alleged. The trial court observed that the homeowners’ contract with Precision had specifically provided for various EPA-required precautions with respect to the use of lead-based paint. The trial court concluded that Precision’s failure to implement those precautions was not an “accident,” which in the trial court’s view, referred to something “unforeseen or untoward or disastrous.” Instead, the trial court characterized Precision’s conduct as nothing more than a foreseeable breach of contract.

Precision appealed, and the Appellate Court reversed and remanded. The Appellate Court found that the trial court’s focus on foreseeability was misplaced. It observed that: “[i]nstead of focusing on the foreseeability of the event itself (the release of lead-based particles), or even generally the damages (lead contamination),” Illinois case law instructs courts “to focus on what, specifically, was damaged, and whether the remediation of that damage fits within the general purpose of a CGL policy.” Id. at *12 (emphasis added). The Appellate Court emphasized that: “when the underlying lawsuit against the insured contractor alleges damages beyond repair and replacement, and beyond damage to other parts of the same project over which that contractor was responsible, those additional damages are deemed to be the result of an ‘accident.’” Id. at *14.

The Appellate Court was careful to contrast these so-called “beyond” damages with damages arising out of faulty workmanship, alone. It reiterated that it is well-settled under Illinois law that “there is no occurrence when a [contractor’s] defective workmanship necessitates removing and repairing work.” Id. at *14. This is true even when a contractor’s faulty workmanship results in consequential damages to any other part of the project for which the contractor has responsibility, as it remains part of the contractor’s work product. However, where damages extend beyond the scope of a contractor’s work product, the court concluded that those damages are more properly classified as unforeseeable accidents, and thus “occurrences.”

The Appellate Court found that Precision’s “work product” was limited to the exterior of plaintiffs’ house. Thus, any damage to the interior of the home, as well as to the surrounding land, was outside the scope of Precision’s project. Because plaintiffs had alleged damages “beyond repair and replacement, and beyond damage to other parts of the same project over which [Precision] was responsible,” plaintiffs had satisfactorily alleged “property damage” caused by an “occurrence.” The Appellate Court reversed and remanded in accordance with those findings.

Sometimes a Reminder is in Order. . .

Posted on by
Reply

Christopher G. Hill | Construction Law Musings

Recently, I was talking with my friend Matt Hundley about a recent case he had in the Charlottesville, VA Circuit Court.  It was a relatively straightforward (or so he and I would have thought) breach of contract matter involving a fixed price contract between his (and an associate of his Laura Hooe) client James River Stucco and the Montecello Overlook Owners’ Association.  I believe that you will see the reason for the title of the post once you hear the facts and read the opinion.

In James River Stucco, Inc. v. Monticello Overlook Owners’ Ass’n, the Court considered Janes River Stucco’s Motion for Summary Judgment countering two arguments made by the Association.  The first Association argument was that the word “employ” in the contract meant that James River Stucco was required to use its own forces (as opposed to subcontractors) to perform the work.  The second argument was that James River overcharged for the work.  This second argument was made without any allegation of fraud or that the work was not 100% performed.

Needless to say, the Court rejected both arguments.  The Court rejected the first argument stating:

In its plain meaning, “employ” means to hire, use, utilize, or make arrangements for. A plain reading of the contractual provisions cited–“shall employ” and references to “employees”–and relied on by Defendant does not require that the persons performing the labor, arranged by Plaintiff, be actual employees of the company or on the company’s payroll. It did not matter how the plaintiff accomplished the work so long as it was done correctly. The purpose of those provisions was to allocate to Plaintiff responsibility for supplying a sufficient workforce to get the work done, not to impose HR duties or require the company to use only “in house” workers. So I find that use of contracted work does not constitute a breach of the contract or these contractual provisions.

The Court reminds us, and the defendant, that employ in these types of construction contracts does not require use of ones own forces, but simply to use enough resources to get the job done as required by the contract.  The Court also went on to say that because of the fixed price nature of the contract, the Association would have paid the same amount regardless of the method of completion used by James River Stucco so the Defendant could not show any damages from the alleged breach of contract through the use of subcontracted work.

The Court rejected the second out of hand stating that the Defendant had not plead any facts that could lead the Court to conclude that the work was not performed as billed.  The Court pointed out that any alleged poor performance or other issues were more properly defenses to James River’s case in chief and not properly part of a Counterclaim.

In sum, this case is an example of how some of the things that we construction attorneys would think are so obvious are not always as clear as we may think.  We all could use a reminder on occasion.