Thursday, June 23, 2016

First Circuit certifies to SJC question of whether insurer must pay attorney's fees for insured's counterclaim

This case may signal a significant development in insurance coverage law -- so significant that it almost overshadows the overwhelming chutzpah of the underlying plaintiff.  (But, as they say, innocent until etc.)  (The traditional definition of chutzpah:  A man kills his parents, then throws himself on the mercy of the court because he is an orphan.) 

In Mount Vernon Fire Ins. Co. v. VisionAid, Inc., __ F.3d __, 2016 WL 3202961 (1st Cir.), the United States Court of Appeals for the First Circuit certified to the Supreme Judicial Court of Massachusetts the question of whether an insurer is required to litigate a counterclaim on behalf of an insured. 

Gary Sullivan sued his former employer, VisionAid, alleging that his termination was the product of illegal age discrimination. VisionAid's insurer, Mt. Vernon Fire Insurance Company, is defending VisionAid.

VisionAid asserts as a defense that it fired Sullivan because he misappropriated several hundred thousand dollars of corporate funds.  No real reason to italicize that, except:  He stole several hundred thousand dollars of corporate funds and then sued his employer for discrimination.  

Sullivan filed his age discrimination claim with the Massachusetts Commission Against Discrimination.  He initially demanded $400,000 to settle his claim.  He repeatedly reduced his demand until he was asking $5,000, before he eventually offered to walk away with no money at all if VisionAid would agree to sign a mutual release.  VisionAid refused to consent to a mutual release as it wanted to go after Sullivan for the allegedly stolen money. 

Sullivan voluntarily dismissed his MCAD claim.  A few months later he filed his claim for age discrimination and other causes of action in Massachusetts state court.  Mt. Vernon agreed to defend VisionAid "unless and until such time that it is determined that there is no coverage under the policy." 

VisionAid responded that it would exercise its right to choose its own attorney.  (When an insurer defends under a reservation of its right to later deny coverage, the insured can choose its own attorney.  That attorney is paid by the insurer.)  Mt. Vernon withdrew its reservation of rights and , because of this, indicated that the counsel it appointed would remain VisionAid's defense counsel.  It stated that it was not required to pay for the prosecution of VisionAid's counterclaim against Sullivan.  Mt. Vernon told VisionAid to hire (and pay for) its own lawyer if it wished to pursue the counterclaim.

Mt. Vernon then filed a suit for declaratory judgment seeking a decision on whether it was required to pay for the prosecution of VisionAid's proposed misappropriation counterclaim.  VisionAid counterclaimed that Mt. Vernon's duty to defend against Sullivan's lawsuit included the duty to prosecute the misappropriation counterclaim, and that VisionAid had the right to be represented by independent counsel for the entire Sullivan action at Mt. Vernon's expense.  VisionAid's theory was that the interests of it and Mt. Vernon were no longer aligned because Mt. Vernon had an interest in diminishing the value of the counterclaim or eliminating it because it was an impediment to settlement. 

The First Circuit certified to the SJC the following questions:

1.   Whether, and under what circumstances, an insurer may owe a duty to its insured to prosecute through insurance defense counsel the insured's counterclaims for damages where the insurance policy provides that the insurer has a "duty to defend any claim," i.e. "any proceeding initiated against the insured."

2.  Whether, and under what circumstances, an insurer may owe a duty to its insured to fund through insurance defense counsel the prosecution of the insured's counterclaims for damages, where the insurance contract requires the insurer to cover "defense costs" or the "reasonable and necessary legal fees and expenses incurred by [the insurer], or by any attorney designated by [the insurer] to defend [the insured], resulting from the investigation, adjustment, defense and appeal of a claim."

3.  Assuming the existence of a duty to prosecute the insured's counterclaims, in the event it is determined that an insurer has an interest in devaluing or otherwise impairing such counterclaim, does a conflict of interest arise that entitles the insured to control and/or appoint independent counsel to control the entire proceeding, including both the defense of any covered claims and the prosecution of the subject counterclaims?

Monday, June 6, 2016

Captive insurers

The American Bar Association has published a fascinating article on captive insurers and how some of them are used as vehicles for tax abuse.   

Thursday, June 2, 2016

Massachusetts Appeals Court holds insurer did not breach settlement duty where trial verdict resulted in excess judgment

Elsa Villanueva was injured when she was struck by a car owned and operated by Valerie Troiano.  Troiano was insured by Commerce. 

Commerce determined that Villanueva was more than fifty percent at fault in the accident (and therefore under the Massachusetts comparative negligence law Troiano was not liable) because she had stepped out from between two parked cars into a traffic lane, not into a crosswalk, on a dark, rainy morning, wearing dark clothing.  It offered $5,000 to settle the claim.

Troiano was not cited for the accident.  Villanueva, who had no memory of the accident, sued Troiano.

Shortly before trial, after several attempts Commerce was able to obtain a statement from Manuel Martinez, the only witness to the accident.  He told the Commerce investigator that Troiano was driving too fast and left fhe scene of the accident.  He also stated that he could not identify the gender of the driver because it was at night and still dark.  Commerce's investigator indicated that Martinez was a friend of Villanueva. 

Also shortly before trial Commerce received a medical report indicating that Villanueva had a permanent injury from the accident.  Villanueva rejected Commerce's offer of a high-low arbitration with a low of $5,000 and a high of $100,000. 

After Martinez appeared for a deposition Commerce offered the policy limit of $100,000.  Villanueva rejected that offer as well.

At trial, the jury awarded $414,500 to Villanueva.  It determined that Villanueva's comparative negligence was thirty-five percent in the accident.  Commerce immediately paid the policy limit of $100,000.

Villanueva then sued Commerce for unfair claims settlement practices.  After trial the judge granted Commerce judgment as a matter of law on the grounds that Villanueva did not present any expert testimony that Commerce breached its statutory duty, and that, on the facts and the law as presented at trial a reasonable fact finder could not find that Commerce had breached its statutory duty. 

On appeal, Villanueva argued that as soon as Commerce learned that Martinez faulted Troiano for the accident liability was reasonably clear and Commerce was required to make a reasonable offer of settlement.  Commerce's initial offer of $5,000 was unreasonable.  Villanueva also argued that the Commerce's subsequent pretrial offer of the $100,000 policy limit demonstrated that it knew that liability exceeded the policy limit and that its prior $5,000 was unreasonable. 

In Villanueva v. Commerce Ins. Co., 89 Mass. App. Ct. 1124 (2016) (unpublished), the Massachusetts Appeals Court affirmed the dismissal of the case against Commerce.  It held that Commerce's belief that Troiano would win on the merits of the underlying claim because Villanueva was more than fifty percent at fault was reasonable. 

Villanueva argued that the fact that Commerce set a reserve at $100,000 showed that it knew that the case should settle for that amount.  The judge disagreed, noting testimony by a witness for Commerce that the reserve represents a worst-case scenario for the insurer and is based only on a damages assessment without taking liability defenses into account. 

The court also held that the amount of the jury award in the underlying claim did not compel a finding that Commerce acted unreasonably. 

The court also affirmed the holding of the trial court that expert testimony was required to establish that Commerce breached its duty.   It held that although expert testimony may not be required in every case asserting a breach of duty to settle claims, it was needed in the present case. 

Tuesday, May 17, 2016

Mass. Appeals Court finds title attorney liable to title insurance company

Stewart Title Guaranty Company, a title insurer, retained Attorney Robert Kelley to issue title insurance policies to owners and lenders in connection with real estate transactions.

Stewart sued Kelley for negligence and sought indemnity with respect to several  closings.  In Stewart Title Guaranty Co. v. Kelley, 89 Mass. App. Ct. 1121, 2016 WL 1741537 (unpublished), the Massachusetts Appeals Court held that Kelley was liable for breaching the standard of care at least with respect to two of those closings. 

In the first, Kelley issued a title insurance policy even though the property was encumbered by a prior mortgage and two attachments that were recorded in the Plymouth Country Registry of Deeds.  Kelley's defense was that he hired a reputable title examiner for the title review.  The court adopted Stewart's argument that "while a shortcoming in the performance of the examiner may create rights of Kelley against the examiner, the examiner's good reputation is not a defense to an action for negligence by Stewart against Kelley." 

(That discussion illustrates the fact that indemnity clauses in contracts by which title insurers retain attorneys to issue title policies have the effect of transferring risk from the title policy to the attorney's malpractice policy.) 

The court also held that expert testimony was not required on the issues of negligence, because the claimed legal malpractice was so gross or obvious that laypeople could rely on their common knowledge or experience to recognize it from the facts.

In another closing, Kelley mailed sufficient funds to close out a previous line of credit with Citizens Bank so that a different mortgage would be the senior mortgage on the property.  His file did not contain a standard letter instructing the lender to close the line of credit.   Citizens did not close out the line of credit and the borrower thereafter withdrew additional funds, resulting in a loss to Stewart. 

The court held that Kelley's failure to send the letter or to keep a copy of it deprived Stewart of the material it needed to establish that the credit line was  closed and thereby to extinguish the Citizens claim. The court again held that no expert testimony was necessary to prove negligence in that instance.


Monday, April 11, 2016

Court refuses to stay coverage or underlying lawsuit in Bill Cosby litigation

I posted here about the lawsuit filed by AIG, Bill Cosby's homeowner's insurer, seeking a declaration that it has no duty to defend him in the defamation suit against him alleging that he lied when he denied allegations of rape.

The AIG policies provide coverage for defamation, libel or slander, but exclude claims "arising out of any actual, alleged or threatened . . . sexual molestation, misconduct or harassment." 

As I predicted in my earlier post, Cosby sought to stall.  He  moved to dismiss on abstention grounds or, in the alternative, to stay the action pending resolution of the underlying litigation.  AIG  moved to stay the underlying litigation pending resolution of the coverage action.

In AIG Property & Casualty Co. v. Green, __ F. Supp. 3d __, 2015 WL 8779732 (D. Mass.), the United Stated District Court for the District of Massachusetts denied the motions of both parties. 

Cosby's abstention argument is that the federal court should abstain from exercising jurisdiction over the insurance action while the underlying action is proceeding.  The court rejected that argument because the abstention doctrine applies when the underlying action is in state court, but the underlying Cosby lawsuit is in the same federal court as the insurance lawsuit.  It rejected Cosby's argument that the doctrine should be extended to when the other action is pending in federal court. 

The court rejected Cosby's motion to stay because a determination of insurance coverage issues would not resolve any of the factual issues at stake in the underlying litigation.  The duty to defend is determined by allegations of the complaint, not by facts proven at trial.  Additionally, the coverage issue does not concern questions of facts that are disputed in the underlying case; the only question is whether the claims for defamation arise out of sexual misconduct. 

AIG moved to stay the underlying litigation until the insurance issue is resolved.  It argued that the underlying parties would not be prejudiced because the stay would be short and because the events alleged took place so long ago. 

The court rejected AIG's motion as "procedurally improper.  AIG may not request a stay of another action by filing its motion here, nor may it seek a stay of a case in which it is not a party."  Rather, AIG can only seek a stay of the underlying action by moving to intervene as a party in that action. 

The court also ruled that the facts that the insurance coverage suit can be resolved quickly and the events alleged in the underlying suit occurred long ago militate against, not for, staying the underlying litigation. 

In a later decision, the court held that a subsequently added plaintiff in the underlying litigation was a necessary but not indispensable party, so that her addition to that litigation did not destroy the court's diversity jurisdiction over the coverage litigation.  AIG Property Casualty Co. v. Green, __ F. Supp. 3d __, 2016 WL 1228571 (D. Mass.)

Tuesday, April 5, 2016

Superior Court holds condo owners' claim against another owner not barred by insurance provisions in condo documents

A fire caused damage to a condominium complex.  Owners of residential units in the complex alleged that the fire was started by another unit owner named Anthony Siracusa.  They sued him for damages. 

Siracusa moved for summary judgment, asserting that the other unit owners were barred from bringing suit against him.  He relied on two provisions of the condominium trust documents.  The first provided:  
Each unit owner is solely responsible to obtain his or her own insurance coverage in appropriate kinds and amounts to insure his or her unit, personal effects and contents, unit improvements and coverage for the Condominium Trust's deductible as well as insuring for liability and all such other coverages which said Unit Owner desires.
The second provision required that any insurance obtained by unit owners must waive the right of subrogation against other unit owners.

In Koch v. Siracusa, 2016 WL 872932 (Mass. Super.), a Superior Court judge disagreed that the provisions barred unit owners from bringing a claim against another unit owner.  

The court held that the first provision is a message to unit owners that failure to purchase insurance is at their own peril but does not foreclose their claims against other owners.

The court held that the requirement to waive subrogation if insurance is procured does not preclude unit owners from suing each other for losses that are not covered by insurance.  (Indeed, that is not what subrogation means.  Subrogation is means by which an innocent third party, such as an insurer, can recover from a tortfeasor for losses the third party paid.  The insurer stands in the shoes of the insured who has already been compensated.  That is not the situation in this case; the unit owners are merely bringing a claim for losses they have suffered, not standing in the shoes of someone else who suffered a loss who they in turn compensated.) 

Thursday, March 31, 2016

US District Court holds that "insured contract" provision does not require insurer to defend third party absent request from insured that it do so

Ski resort Jiminy Peak purchased from Weigand Sports a ride called an Alpine Coaster.  The purchase and sale contract provided that that Wiegand would defend and indemnify Jiminy in lawsuits related to the Coaster. 

Six years after the Coaster was installed two minors were injured while riding it.  Weigand was insured by Navigators Specialty Insurance at that time. 

The Navigators policy provided that it would pay "those sums that [Weigand] becomes legally obligated to pay as damages" because of bodily injury, including damages it assumed in an "insured contract."   The policy defined insured contract as "[t]hat part of any other contract or agreement pertaining to [Wiegand's] business . . . under which [Wiegand] assume[d] the tort liability of another party to pay for 'bodily injury' . . . to a third person or organization."

In the case of an insured contract, Navigators would pay reasonable attorney fees and litigation expenses "incurred by or for a party other than in insured . . . deemed to be damaged because of 'bodily injury' . . . 'provided  . . .that the party's defense [had] also been assumed in the same 'insured contract'" and that the damages arose in a suit to which the insurance policy applied. 

Jiminy sought defense from Navigators.  Navigators argued that the insured contract provision only requires it to make payments to the insured, and only when the insured has actually requested payment.  It argued that even if Wiegand is found to owe Jiminy its defense costs, it would be up to Wiegand to determined whether it wishes to pay the amount or to make a claim to Navigators. 

In Jiminy Peak Mountain Resort, LLC v. Wiegand Sports, LLC, 2016 WL 1050260 (D. Mass.), the United States District Court for the District of Massachusetts agreed with Navigators.  It held that the insured contracts  provision indicated that "Navigators and Wiegand did not, in fact, intend that in a case like this one Navigators would have any direct obligations to Jiminy based on the Contract. . . . Any obligation upon Navigators to pay such costs will arise only after an insured, in this case Wiegand, makes a claim for payment and its only obligation will be to Wiegand."