Legal Spotlight: October 1, 2014
Firms Given More Control Over Independent Counsel
Signal Products Inc. manufactured handbags and luggage using a design known as the “Quattro G Pattern executive in brown/beige colorways,” in accordance with its license from Guess? Inc.
In 2009, Gucci America Inc. filed suit against Guess?, Signal and others, claiming the design “infringed on a distinctive Gucci trade dress known as the ‘Diamond Motif Trade Dress.’ ” Signal’s share of the infringement claim was $1.8 million.
Signal filed suit in U.S. District Court in California after its insurers — American Zurich Insurance Co., which had issued a primary commercial general liability policy, and American Guarantee and Liability Insurance Co., which had issued an umbrella liability policy — refused to pay $1.9 million in defense costs.
Zurich countersued, seeking a summary judgment that it was not required to reimburse Signal for a $750,000 interim legal payment to the primary legal firm retained by Guess? (of a total $1.9 million in fees for Signal) or for $1.2 million in legal fees for a second law firm that represented Signal in the action.
The insurers argued they were not required to pay fees to the second law firm because Signal had already retained another law firm to represent it, and that the fees were not incurred in connection with Signal’s defense.
U.S. Judge Christina Snyder in August rejected requests from both sides for summary judgment, ruling more information was needed to determine reasonableness of legal fees and other “genuine issues of disputed material fact.”
However, she did rule, in this case of first impression, that Signal could use more than one law firm as independent counsel when there is a potential conflict of interest in insurance cases.
“Having accepted that multiple attorneys may serve as … counsel, there does not appear to be any principled grounds for requiring as a matter of law that all of those attorneys need to be employed at the same law firm,” she wrote.
Scorecard: The insurers may have to pay up to $1.2 million to the second of two law firms, in addition to possibly having to pay up to $1.9 million in litigation costs to the primary firm.
Takeaway: California law allows an insured to retain more than one law firm as independent counsel in an insurance dispute.
Attorneys’ Fees Not Included in Damages Exclusion
Both actions were settled by PNC: One in 2010 for $12 million — which included $3 million in attorneys’ fees, $77,857 in costs and expenses, and $15,000 toward incentive fees for the representative plaintiffs — and one in 2012 for $90 million, including $27 million for attorneys’ fees, $183,302 for reimbursement of costs, and $30,000 in plaintiffs’ incentive awards.
On May 21, a U.S. judge in the Western District of Pennsylvania recommended that the insurers cover the settlement costs. Both Houston Casualty Co. and Axis Insurance Co. had issued policies with a $25 million liability limit, subject to a $25 million retention.
In June, U.S. Judge Cathy Bissoon in that district disagreed. She ruled that the insurers were not responsible for the part of the settlements that returned overdraft fees to customers — since fees were excluded from the definition of “damages” in the policy.
Attorneys’ fees and costs totaling $30.3 million, she ruled, were not excluded. She ordered more proceedings on the claims expenses and damages.
Scorecard: Two insurers are responsible to cover up to $30.3 million for attorneys’ fees and costs that were included in settlements of two class-action lawsuits.
Takeaway: The fee exception to damages does not extend to the entirety of settlement costs, particularly attorneys’ fees, costs and incentive awards.
Underwriters Must Pay Recall Costs
When Abbott Laboratories agreed in December 2000 to acquire the global operations of Knoll Pharmaceutical Co., it notified its Lloyd’s of London carriers, in accordance with its product recall insurance coverage. That coverage stated the new entity would automatically be covered, but additional premiums would have to be negotiated.
As part of the negotiation with a group of underwriters led by Beazley and American Specialty Underwriters, Abbott indicated there was no “current situation, fact or circumstance” that would lead to a claim under the Accidental Contamination policy (which would include any government drug recalls).
A premium was eventually paid and accepted in July 2001, even after the company advised the underwriters that the U.S. Food and Drug Administration may pull Knoll’s popular thyroid drug Synthroid from the market.
The company and its underwriters did execute in October 2001 a “tolling agreement … that would allow the parties to preserve their rights with respect to any Synthroid-related claims.”
On March 6, 2002, the Italian Ministry of Health suspended all sales and marketing of sibutramine (manufactured by Knoll as Meridia).
Abbott filed a claim under the policy, and on May 16, 2003, the underwriters informed Abbott the tolling agreement was cancelled because Abbott “had not fully responded to their document and information request.” When it asked what information was needed, Abbott received no response.
On June 2, 2003, the underwriters filed suit to rescind the policy, while Abbott countersued for a declaratory judgment for coverage, breach of contract and “vexatious delay damages.”
A judge rejected the underwriters’ claim for recission, noting that the insurers had accepted the additional premium and that the Synthroid situation had been disclosed in a timely manner.
For damages, the court put the company’s losses at $155.2 million. Minus a deductible and 10 percent coinsurance, the underwriters were told to pay $84.5 million, plus about $2.8 million in costs and interest.
A three-judge panel on the Appellate Court of Illinois, First Judicial District, upheld that decision on appeal on July 28.
Scorecard: The underwriters have to pay $84.5 million plus $2.8 million in costs and interest.
Takeaway: By accepting the premium and failing to pursue issues of due diligence, the underwriters undercut their argument for a “material misrepresentation” by the company.
E&S Going Strong
The state of the excess and surplus lines market is strong, as evidenced by the nearly 4,000 attendees, who networked their way through the annual convention of the National Association of Professional Surplus Lines Offices in Atlanta, from Sept. 15 to17.
“There’s a lot of optimism about the market and [the number of attendees] is a testament to the strength and vitality of surplus lines,” said Brady Kelley, executive director of the national organization, which focuses on networking and education for the surplus lines industry.
In fact, A.M. Best reported that surplus lines companies “have been extremely successful when compared with the overall property/casualty (P/C) industry.”
Surplus lines now account for about 13.7 percent of all commercial lines direct premiums written, up from 6.1 percent in 1993, according to a 20-year retrospective on U.S. surplus lines released by A.M. Best in September.
“In 2013, 22 of the top 25 surplus lines groups produced year-over-year growth in premium (as measured by direct premiums written) — a testament to what is likely a contraction in the standard market’s appetite for risk and a broad flow of business back into surplus lines,” according to the report.
“A lot of people are optimistic because the economy is still growing and when the economy is growing, it can make up for a lot of foolish decisions.” — Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox
But the sector is not without its challenges, specifically overcapacity in the market, according to Alan Jay Kaufman, chairman, president and CEO of Burns & Wilcox, international insurance brokers and underwriting managers.
“The market here is soft,” he said. “I think it’s soft in more areas than people want to talk about. … I would not say ‘doom and gloom.’ A lot of people are optimistic because the economy is still growing and when the economy is growing, it can make up for a lot of foolish decisions.”
E&S underwriting, said Stanley Galanski, president and CEO of The Navigators Group Inc., is “the essence of underwriting. There are no rules. There are no rates. There are no mandatory forms. In E&S, it’s all about your expertise and your judgment.”
To be successful, companies must have underwriters who can bring a “high level of expertise to the risk” and deep relationships with wholesale brokers, he said.
It also requires constant innovation, said Mario Vitale, CEO, Aspen Insurance. “Specialty E&S is tailored for high risk situations. It allows underwriters skilled in these special niches to apply their tools of the trade to help the insured, to help the brokers, with creative risk-based solutions.”
He said Aspen would be releasing some new products in 2015, and noted that there were numerous emerging risks to occupy carriers, including the impact of climate change, nanotechnology, fracking, drones, bitcoin and wearables.
“I believe all of these trends and all of these emerging technologies will bring risks and will bring demands for solutions and underwriter innovations to find them,” he said.
“It’s unbelievable how that [cyber] market is developing so quickly.” — James Drinkwater, president of AmWINS Brokerage
Jeremy Johnson, president and CEO of Lexington Insurance Co., the E&S division of AIG, said in a recent A.M. Best webinar that his organization is designing products to deal with risks from drones, celebrity risk and cyber bullying, and also has “in the pipeline” products to address risks related to Uber and Airbnb.
“If we are not staying ahead of where our customers are going as an industry, we won’t be relevant,” he said.
Bruce Kessler, division president, ACE Westchester, which focuses on the wholesale distribution of excess and surplus lines products, said, “You have to be strategic as an E&S company as to where to grow and where to shrink.”
But, he also noted, the “ease of entry” into the space, which he sees as “healthy and robust.”
“It’s easy for new capacity to come in,” he said, and that has put some pressure on property/catastrophe rates. That softening is “probably the biggest talk of the conference.”
Overcapacity offers one of the industry’s biggest challenges, Kaufman said. “Standard lines companies are aggressively looking to write the gray areas that may at one time have been E&S and now it’s back to standard lines. … You will see companies taking greater risks than they normally have in the past — risks that they don’t understand.”
Jeff Saunders, president of Navigators Specialty, said, “The capital in the industry is looking for a better return than from a Treasury note.”
While the influx of capital has reduced rates — significantly on property and less significantly elsewhere — the company has to compete “no matter what the rate environment is,” he said. That requires E&S insurers to be “agile while rotating in and out of sectors.”
E&S strategies are also increasingly being influenced by predictive modeling, ACE Westchester’s Kessler said. He also noted that he is seeing greater interest in product recall and cyber coverage.
Other experts at the NAPSLO conference agreed that cyber policies were finally taking off.
“It’s unbelievable how that market is developing so quickly,” said James Drinkwater, president of AmWINS Brokerage and one of NAPSLO’s Wholesale Broker directors, during a panel discussion at the conference.
“Companies are getting hit [with cyber attacks] constantly,” Vitale said. “As long as there are more hackers, they will get more sophisticated and we will have to do a better job of staying on top of emerging trends.”
The opportunities in E&S outweigh the challenges, said Peter Clauson, senior vice president, excess casualty, Liberty International Underwriters.
When LIU excess casualty was established in 1999, he said, the E&S business was about a $10 billion market. “Fifteen years later, we are at $37 billion, and there’s a lot of talk that in five years, we could be a $50 billion market.
“That’s a lot of growth and opportunity,” he said.
Legal Spotlight: September 15, 2014
Insurer Wins Priest Abuse Case
Between 1979 and 1986, now-former priests of the Roman Catholic Church of the Diocese of Phoenix sexually abused adolescent males. The diocese settled four sexual abuse cases, and obtained partial coverage from its primary insurance carrier, Lloyd’s of London.
Its excess liability carrier, Interstate Fire & Casualty Co., (IFC) denied the diocese’s claim. The insurer sought a declaration that it was not responsible for coverage, while the church sought $1.9 million in damages, claiming breach of contract and bad faith.
The U.S. District Court for the District of Arizona found in favor of the church, but in a 2-1 decision, the U.S. 9th Circuit Court of Appeals reversed that decision in July.
The argument came down to whether “any” means “any” or whether it means “any one,” according to the majority opinion.
The insurance policy excluded liability “of any Assured for assault and battery committed by or at the direction of such Assured … .”
The appeals court agreed with IFC’s argument that “such Assured” refers back to “any Assured” — so that coverage would be excluded for “both the insured who committed the assault and battery as well as innocent co-insureds [referring to the diocese].”
It rejected the diocese’s “effort to infuse ambiguity into an otherwise clear agreement,” according to the opinion.
In a dissenting opinion, however, Senior Judge D.W. Nelson, found the wording more ambiguous, and said there were “three possible qualities that ‘such’ can refer to,” including Assureds facing liability; the “entire class of those covered by the policy;” or “those Assureds who committed or directed assault and battery.” Thus, she would have ruled in favor of the diocese.
The case was remanded to the lower court to determine attorneys’ fees and costs.
Scorecard: Interstate Fire & Casualty Co. was not responsible for more than $1.9 million in settlement costs.
Takeaway: The decision adds uncertainty to the so-called “any insured” exclusions, which generally are interpreted narrowly.
Warranty to Repair Supersedes an Implied Warranty
Doug and Karen Crownover spent “several hundred thousand dollars” to fix problems in the foundation and HVAC system at their Texas home, which was built by Arrow Development Inc.
In its October 2001 construction contract, Arrow had provided the Crownovers a warranty to repair work, but the developer failed to correct the problems or abide by an arbitrator’s ruling that ordered it to pay damages to the couple.
Arrow later entered bankruptcy, and the Crownovers sought recovery from Mid-Continent Casualty Co., which had issued a succession of comprehensive general liability policies to Arrow from August 2001 through 2008.
Mid-Continent denied the demand for payment, citing several exclusions in the policy. The couple then filed suit against the insurer for breach of contract, and a district court in Texas granted Mid-Continent’s request for summary judgment.
It based that decision — which was upheld by the U.S. 5th Circuit Court of Appeals in June — on a contractual-liability exclusion in the insurance policy.
That clause excludes claims when the insured assumes liability for damages in a contract or agreement unless the insured would be liable for those damages absent the contract. In this case, the contractual liability referred to the warranty to repair work that was included in the construction agreement.
The court rejected the couple’s argument that Arrow was liable for the repair work in the absence of the warranty because it had an “implied warranty of good workmanship.”
In its findings, the court ruled that the arbitrator found in favor of the Crownovers explicitly based on the warranty to repair, and that an express warranty supersedes an implied warranty. The court also ruled the arbitrator’s decision was based on Arrow’s failure to repair the work, not for the work done initially.
Scorecard: Mid-Continent Casualty Co. did not have to pay “several hundred thousand dollars” to the owners of a defectively built home.
Takeaway: The ruling aids insurers fighting indemnification in construction defect cases, as it narrows the scope of the contractual-liability exclusion that had been set in a recent Texas Supreme Court decision.
Effort to Focus on Condo’s Decreased Market Value Rejected
In 2010, a fire destroyed a commercial office condominium building owned by Whitehouse Condominium Group in Flint, Mich.
The Cincinnati Insurance Co. owed Whitehouse the “actual cash value” of that building at the time of loss. The question, eventually determined by the U.S. 6th Circuit Court of Appeals in June, was how much that actual cash value amounted to.
The policy defined actual cash value as the “replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.” At issue in the case was the definition of “obsolescence.”
While the insured argued the word related only to “functional” obsolescence — generally meaning something inherent to the building itself such as an outdated electrical panel — the insurance company said the word also included “economic” obsolescence, meaning a decrease in market value due to an external event.
Whitehouse said the insurer’s position was “definitional high jinks,” arguing that economic obsolescence is a “specialized concept used only in certain settings and does not fall within the general meaning of obsolescence.”
The U.S. District Court for the Eastern District of Michigan agreed with that position, ordering a summary judgment in favor of Whitehouse. On appeal to the 6th Circuit, a three-judge panel affirmed that decision.
Scorecard: The condominium association received $1.6 million more on its property claim due to the ruling.
Takeaway: When contract terms are ambiguous, the common definition applies, and in Michigan, in particular, if a term has two different reasonable interpretations, it is construed against the insurer.