The “Advice of Counsel Defense” in Coverage Cases: You Might Be Waiving More Than You Realize

Eileen GilBride, Patrick Gorman and Donald Myles | Jones, Skelton & Hochuli

In United Specialty Ins. Co. v. Dorn Homes Inc.,__ F.R.D. __, 2020 WL 443872,(D. Ariz. Jan. 28, 2020), the United States District Court, District of Arizona, analyzed whether the insurer’s assertion of the advice of counsel defense operates to waive the work-product defense for documents its counsel created but did not communicate to the insurer client.  The court said yes, assertion of the defense waives the work-product protection. The insurer must disclose those work-product protected documents if it affirmatively waives the attorney client privilege by relying on advice of counsel defense.  Moreover, the court ordered the insurer to produce work-product documents that were created even after it had filed its declaratory judgment action, though many courts hold that the waiver ends with the filing of the declaratory lawsuit.

In this case, coverage counsel for the insurer, United Specialty, filed a declaratory judgment action against the insured, Dorn Homes, claiming there was no coverage for construction defects on 87 homes alleged against Dorn. The day before the lawsuit was filed, the insurer had issued a coverage determination for five of the 87 homes. Dorn Homes was continuing to pay for repairs and remediation on the 87 homes, and the claims adjustment process was ongoing at the time of filing. Dorn counterclaimed for bad faith, and the insurer asserted advice of counsel as a defense, thus waiving the attorney-client privilege.

The insured sought disclosure of coverage counsel’s file, and asked for “All documents relating to coverage of Dorn’s claim including time entries of the law firm whether before or after the case was filed.” Dorn cited three reasons for obtaining these documents: (1) the insurer’s assertion of the advice of counsel defense waived work product protections for pre- and post-lawsuit documents related to coverage; (2) the insurer waived work product protection under Evidence Rule 502 (which discusses the attorney-client privilege and work product doctrines and limits on waiver); and (3) Dorn had a “substantial need” for the information and had no other way to obtain it.

The insurer argued it was not required to disclose attorney work product that its counsel had not communicated to it (since the insurer could not have relied on its attorney’s uncommunicated work product in making coverage decisions); and that its assertion of the advice of counsel defense did not waive the protection for post-lawsuit attorney work product.

The court disagreed with the insurer on both points. First, the court held that the insured could obtain attorney work product even though it had not been communicated to the insurer. Said the court, “A party may not invoke the sword of an advice of counsel defense and also raise the shield of the work-product doctrine.” The court reasoned that fairness required giving the insured the opportunity to fully test the legitimacy of the advice of counsel defense, which would involve allowing Dorn to inquire into the basis and facts surrounding the advice provided by counsel, not just those materials that communicated the advice to the insurer. The court agreed with the insured that to rule otherwise “would ignore the vast number of ways [coverage counsel] could share information with [the insurer] without technically sending a document, especially with modern technology.” Work product, including uncommunicated work product, might reveal communications between the insured and counsel and thus be probative of what information the insurer’s counsel considered, the reasonableness of its advice, and whether the insurer relied on the advice in good faith. In short, permitting the work-product documents to remain privileged would ignore “the potential for litigation abuses, and erects too much of an impediment to the truth seeking process.”

Second, the court said the insured could obtain work product material created even after the lawsuit was filed. Many courts conclude that the privilege waiver ends upon the lawsuit’s filing because once the lawsuit is filed, defense counsel is engaged in critical trial preparation, including analyzing the weaknesses of their client’s case. As such, there is an enhanced interest in protecting against disclosure of trial strategy and planning. The disclosure of such analyses would chill communications between trial counsel and client and would impair trial counsel’s ability to give the client candid advice regarding the merits of the case. In this case, however, the insurer’s waiver of the privilege lasted throughout the case due to the specific circumstances involved here. Specifically, the filing of the complaint did not form a clear cutoff of research and analysis that would inform the advice of counsel defense. The suit was filed the day after the insurer issued a coverage determination for five of the 87 homes at issue; the insured was continuing to pay for repairs and remediation on the 87 homes; the claims adjustment process remained fluid and ongoing at the time of filing; and counsel’s billing records reflected their research on coverage in the days immediately after the filing. In short, said the court, the presumption that nothing transpiring during litigation is pertinent to the client’s state of mind was “not in accord with the reality of litigation.”

As the court concluded, “invoking the advice of counsel defense is not a painless decision or a free lunch. There are discovery consequences to such an assertion. Fairness requires that a party who seeks to be absolved of willful infringement because it relied on counsel’s advice pay the discovery price.”

Florida Court Holds Insurer Not Required To Plead Exclusions As Affirmative Defenses To Preserve Defenses To Coverage

Kelly N. Hallisey | Phelps Dunbar

A Florida appellate court held that under a named perils policy, an insurer need not plead a policy exclusion as an affirmative defense in order to present evidence that an insured’s damage was the result of a non-covered cause of loss. Citizen’s Prop. Ins. Corp. v. Kings Creek South Condo, Inc., No. 3D18-661, 2020 Fla. App. LEXIS 3493 (Fla. 3d DCA Mar. 18, 2020).

An insured made a claim for wind damage to its property under a named perils insurance policy. The insurer denied the claim as the damage was not caused by wind but was instead a result of multiple causes of loss not covered by the policy. The insured filed a breach of contract action. During the trial, the insurer attempted to present evidence that the damage was caused by improper maintenance, but the insurer objected, arguing that the insurer was relying on the policy’s Existing Damage Exclusion, which the insurer did not plead as an affirmative defense. The trial court agreed and granted a directed verdict in favor of the insured. The insurer appealed.

The appellate court focused on the definition of affirmative defense and the fact that the insured’s policy was a named perils policy. The appellate court explained that when an insurer presents an affirmative defense, it is advising that there would be coverage if not for the pled exclusion. The appellate court held that the insured had the burden to prove that a covered cause of loss caused damage to its property under the named perils insurance policy, so the insurer was simply presenting evidence that the damage was caused by non-covered causes of loss to rebut the insured’s evidence of a covered cause of loss. Accordingly, the appellate court reversed and remanded, finding that the insurer did not need to plead the exclusion as an affirmative defense.

First Circuit: No Coverage, No Duty to Investigate Alleged Loss Prior to Policy Period

Eric B. Hermanson and Austin D. Moody | White & Williams

On April 1, 2020, the First Circuit, applying Massachusetts law, issued a potentially useful decision addressing the Montrose “known loss” language in ISO Form CGL policies. In Clarendon National Insurance Company v. Philadelphia Indemnity Insurance Company,[1] the court applied this language to allow denial of defense for claims of recurring water infiltration that began before the insurer’s policy period, and it found an insurer had no duty to investigate whether the course of property damage might have been interrupted, or whether other property damage might have occurred during the policy period, so as to trigger coverage during a later policy.

In the underlying dispute, a condominium owner (Doherty) asserted negligence claims against her association’s property management company (Lundgren) stemming from alleged water infiltration into her condominium. The complaint said leaks developed in 2004 in the roof above Doherty’s unit, and repairs were not made in a timely or appropriate manner. The following year, the complaint said, a Lundgren employee notified Doherty that the threshold leading to her condominium’s deck was rotting. In February 2006, Doherty discovered a mushroom and water infiltration on the threshold and notified Lundgren. At that time, Lundgren asked its maintenance and repair contractor (CBD) to replace the rotting threshold. According to the complaint, CBD did not do this repair in a timely manner and left debris exposed in Doherty’s bedroom.

In March 2006, the complaint said, a mold testing company hired by Lundgren found hazardous mold in Doherty’s unit, caused by water intrusions and chronic dampness. Lundgren’s attempts at remediation were ineffectual. In September 2008, Doherty’s doctor ordered her to leave the condominium and not to return until the leaks were repaired and mold was eliminated.

In February 2009, Doherty filed suit. Lundgren tendered defense to two different insurers: Clarendon, which insured Lundgren from June 24, 2004, to June 24, 2005, and Philadelphia Indemnity (Philadelphia), which insured the company from September 1, 2007, to September 1, 2008. Clarendon agreed to defend under reservation of rights. Philadelphia declined to defend, based on the “known loss” provision in its CGL insuring agreement:

b. This insurance applies to “bodily injury” and “property damage” only if:

. . . .

(3) Prior to the policy period, no insured listed . . . and no “employee” authorized by you to give or receive notice of an “occurrence” or claim, knew that the “bodily injury” or “property damage” had occurred, in whole or in part. If such a listed insured or authorized “employee” knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

After the underlying case settled, Lundgren assigned its rights to Clarendon, which sued Philadelphia. Clarendon argued that Doherty’s complaint could be read to suggest that leaks prior to Philadelphia’s policy period had been repaired. It argued that new leaks might have arisen during the period of Philadelphia’s policy. At a minimum, Clarendon argued, Philadelphia had an obligation to investigate the underlying allegations before denying defense.

The District of Massachusetts rejected Clarendon’s arguments. Clarendon appealed, and the First Circuit affirmed. It found the underlying complaint unambiguously alleged damage resulting from continuing leaks that began prior to the Philadelphia policy’s inception, and it found nothing in the complaint was “reasonably susceptible” to an interpretation in which the original leaks were resolved prior to Philadelphia’s policy inception.

Finally, and importantly, the First Circuit held that when an underlying complaint does not contain allegations that would implicate coverage, the insurer has no duty to investigate further. An insurer cannot ignore known facts extrinsic to the complaint, but it has no duty to go looking for such facts.

The First Circuit’s decision provides helpful guidance for insurers faced with allegations of property damage prior to policy inception, and clarifies – importantly – that an insurer in this situation has no independent duty to investigate for damage during the policy period.

[1] No. 19-1212, 2020 U.S. App. LEXIS 10257 (1st Cir. Apr. 1, 2020).

Recovery of Attorney’s Fees in Federal Flood Cases Under the Equal Access to Justice Act?

Shane Smith | Property Insurance Coverage Law Blog | September 2, 2019

A recent Southern District of Florida decision addressed this issue.1

A property in Islamorada, Florida, which was owned by the estate of Raymond K. Hampson, was damaged by Hurricane Irma in September 2017. The personal representative for the estate, Timothy R. Hampson (“Hampson”) made a claim for damages under the standard flood insurance policy (“SFIP”) covering the property. When Hampson sued Wright National Flood Insurance Company, a Write Your Own (“WYO”) carrier, for breach of the insurance contract, Hampson also sought an award of attorney’s fees, costs and case expenses under the Equal Justice to Access Act (the “EAJA”), 28 U.S.C. § 2412.

In 1980, Congress enacted the EAJA and significantly expanded the federal government’s liability to pay the attorney’s fees of parties that prevail against the government in litigation or administrative proceedings.

A party may recover attorney’s fees and costs under the EAJA as the prevailing party in a case “brought by or against the United States. . . unless the court finds that the position of the United States was substantially justified.”2 The statute defines “United States” to include “any agency and any official of the United States acting in his or her official capacity.”3

Wright filed a motion to dismiss Hampson’s claims for attorneys’ fees, costs, and case expenses under the EAJA. Wright argued that Hampson could not recover attorneys’ fees, costs, and case expenses under the EAJA against a WYO carrier.

Chief District Judge K. Michael Moore of the Southern District of Florida agreed:4

[A]ttorney’s fees are not recoverable under the EAJA in cases for breach of an SFIP brought against a WYO program insurance carrier participating in the United States Government’s NFIP because WYO carriers are not considered “agencies” under the EAJA. Dwyer v. Fidelity Nat’l Prop. & Cas. Ins. Co., 565 F.3d 284, 289(5th Cir. 2009) (“[S]erving as a fiscal agent and a participant in a heavily regulated federal program did not transform Fidelity into a federal agency under the EAJA.”). The EAJA must be applied according to its express terms and attorney’s fees against a WYO carrier in a suit for SFIP funds may not be maintained under the EAJA. Id. at 289–90.

District Courts in this circuit have uniformly found that a plaintiff is not entitled to attorney’s fees and costs under the EAJA. See e.g.Cosgrove v. Wright Nat’l Flood Ins. Co., No.4:18-cv-10117-KMM, Paperless Order Denying Plaintiff’s Request for EAJA Fees (S.D. Fla. June 3, 2019), ECF No. 29 (holding that EAJA fees were not recoverable against a WYO Company because it was not an “agency” under the EAJA); Island Club Condo., Inc. v. Wright Nat’l Flood Ins. Co., 4:18-cv-10303-JLK (S.D. Fla. May 9, 2019), ECF No. 16 (granting motion to dismiss claim for attorney’s fees under the EAJA because “serving as ‘fiscal agents,’ without more, does not convert WYO insurers into official government agencies”); Chatman v. Wright Nat’l Flood Ins. Co., No. 3:17-CV-00125-HES-PDB, 2017 WL 3730558, at *1–2 (M.D. Fla. June 21, 2017) (granting motion to dismiss claim for attorney’s fees pursuant to the EAJA because Wright National Flood Insurance Company, a WYO carrier participating in the NFIP, “is not an agency of the United States as required by the EAJA”)(citation omitted); Perdido Sun Condo. Ass’n v. Nationwide Mut. Ins. Co., 2007 WL 2565990, at *4 (N.D. Fla. Aug. 30, 2007). Here, Plaintiff brings a claim for breach of an SFIP against Defendant, a WYO carrier participating in the NFIP pursuant to the NFIA. Compl.¶¶ 1–5. Thus, Plaintiff’s claims for attorney’s fees, costs, and case expenses pursuant to the EAJA are dismissed.

The Hampson court cited an earlier Middle District of Florida case but disagreed with the holding in that case:5

Plaintiff relies on Arevalo v. Am. Bankers Ins. Co. of Fla., No. 219CV159FTM99UAM, 2019 U.S. Dist. LEXIS 99000, 2019 WL 2476644, at *3 (M.D. Fla. June 13, 2019) to support its arguments that attorney’s fees and costs are warranted. Therein, the Middle District of Florida found that “it is not so much whether American Bankers is an ‘agency’ of the United States under the Act. Rather, it seems to matter more whether the government is the source of the funds or who would pay an award of attorney’s fees.” Id. Therefore, the Middle District of Florida concluded that “it is at least plausible at this point in the litigation that attorney’s fees may be paid from federal funds by FEMA.” Id. However, this Court disagrees and declines to depart from the case law in this circuit and other courts finding that a WYO carrier is not an agency of the United States as required by the EAJA.

The Hampson holding demonstrates that a policyholder cannot recover attorney’s fees, costs and expenses from a WYO carrier under the EAJA in Hurricane Irma flood insurance cases filed in the Southern District of Florida.
1 Hampson v. Wright National Flood Ins. Co., No. 4:19-cv-10083 (S.D. Fla. Aug. 12, 2019).
2 28 U.S.C. § 2412(d)(1)(A), (b).
3 28 U.S.C. § 2412(d)(2)(C).
4 Hampson v. Wright National Flood Ins. Co., No. 4:19-cv-10083 (S.D. Fla. Aug. 12, 2019) at *3-4.
5 Id. at *4, fn 3.

Will Your Next Insurance Coverage Dispute be Heard in Georgia’s Business Court?

Abby Vineyard | Barnes & Thornburg LLP | April 24, 2019

In 2020, Georgia corporate policyholders may have a new court to hear insurance coverage disputes. The Georgia General Assembly passed House Bill 239 on Day 40 of the legislative session, outlining how Georgia’s new statewide business court will operate.

The court will have jurisdiction over claims falling under Georgia’s Uniform Commercial Code, Business Corporation Code, Trade Secrets Act, Uniform Securities Act, and—of particular relevance to policyholders—over contract claims “between businesses arising out of business transactions or relationships” and more. The amount in controversy must exceed $500,000, but the court will also have the powers of a court of equity and thus be able to hear declaratory judgment actions.

There will be one division and one judge, appointed by the governor, who will have at least 15 years of experience as a complex business litigator or judge. The court may be located in Atlanta or Macon, both large metropolitan areas.

A plaintiff can initiate an action in business court, or a case can be transferred to the business court with all parties’ consent. If less than all parties consent, a party may move to transfer the case but must overcome the presumption of the case remaining in the original court. The filing fee is a hefty $3,000, which is paid by the plaintiff or allocated among the transferring parties.

However, the court has wide latitude in deciding which cases it wants to hear: the bill states that the court has the power to transfer any case filed in business court to the state or superior court and reject any petitions to transfer to the business court, even if such claims are within its jurisdiction. Additionally, a defendant may petition the court to move the case to the state or superior court, which compels the court to transfer the case unless the contract at issue specifically states that disputes must be litigated in business court.

So, what does this mean for policyholders? It depends.

In some ways, this is a positive development in that it provides for streamlined litigation without the common issue of an overcrowded docket. The court will not have to split time presiding over criminal, domestic, or other non-business-related civil matters. And the judge will be a seasoned business litigator or judge, offering an expertise and familiarity with nuanced contract issues that not all judges have.

However, there are a few drawbacks that might outweigh the benefits of filing suit in business court. Given the court’s considerable leeway over its docket, the policyholder has no guarantee that the case will remain in business court, and the unusually high filing fee makes this a bigger risk than normal. Without having seen this court in action, it is hard to imagine how many cases the single-judge court will agree to take on. A carrier’s ability to compel a transfer in the absence of a policy provision prohibiting such an action also makes for less stability. It will be interesting to see how many cases filed in business court actually remain in business court.

Assuming the governor signs the bill, the court will begin taking cases on August 1, 2020. Of course, it goes without saying that this development is of interest beyond policyholder v. carrier disputes. Any entity that has a business-related dispute arise in Georgia should at least consider the merits of litigating in business court instead of traditional court. Whether litigating in business court makes sense will be a case-by-case inquiry.