Saturday, August 19, 2017

How I spent my summer vacation

There was a lot of jogging on the beach at dawn, walking at sunset, and comparing lobster rolls from different takeout windows.  But there was also some channel surfing (a clicker all to myself -- that's a luxury I rarely get), and I came across this US Senate hearing on insurance issues.  I was immediately sucked in by lawmakers talking about insurance other than medical insurance -- indeed, liability insurance.  Here's the link.

I was particularly interested by questions from Senator Blumenthal of Connecticut.  He accused  homeowner's insurers of fraud because they changed policy terms to exclude specific losses without adequately informing the policyholders.  His questions start at around the 47 minute mark. 

One of the responses from the panel was to the effect of, "We don't know how to get homeowners to read their policies before they experience a loss."  I can only imagine.  I was just going over my own homeowner's renewal policy.  Sure, I'll talk to my agent about the limit on the mold endorsement, which I want to be higher.  And I skimmed through at least the titles of the endorsements.  But even I -- an insurance coverage geek who regularly litigates homeowner's policy issues -- could not bring myself to read the policy closely.  And really, what good would it do me?  Other than the limits, what can I negotiate in the policy?  What should I?  How can I anticipate every possible loss and every possible way that it may not be covered?

Senator Blumenthal complained specifically about policy exclusions that exclude damage to foundations as a result of faulty building material.  One of the responses from the panel was that the proper claim is against the manufacturer of the defective product, not the homeowner's insurer.  Yeah, sure, if you can figure out who the manufacturer was, it still exists, you can find it, you can afford to pay an attorney and you can find one to take your case, there's no applicable statute of limitations or statute of repose, and you can wait the several years it will take to resolve a third-party claim.

I'm not opposed to policy exclusions, not even major ones for construction defects.  But I do think that representatives of the insurance industry should be straightforward about why they exist.  After all, the fact that a third party may ultimately be liable for a loss is not in and of itself a good enough reason to exclude a type of claim.  All other things being equal, the homeowner's insurer can pay the loss and then bring a subrogation action against the manufacturer.   The exclusion exists because paying those claims are expensive and the insurers don't want to underwrite that type of risk.  Just be straightforward about it.  No policy covers everything. 

Thursday, July 27, 2017

First Circuit examines McCarran-Ferguson Act, Nebraska Law, and Federal Arbitration Act to affirm arbitrator's decision that dispute over insurance fees was not arbitrable

Mountain Valley Property (MVP) purchased from Applied Underwriters a comprehensive insurance package that included multiple lines of insurance.  As part of the package it entered into a three-year Reinsurance Participation Agreement  (RPA) with AUCRA, a company related to Applied Underwriters.  The RPA contained a mandatory arbitration clause and a Nebraska choice-of-law clause.

MVP sued Applied Underwriters and its related companies, asserting that the package was overpriced and that it was charged unlawful fees in premiums and in amounts claimed to be due under the RPA. 

The United States District Court for the District of Maine referred the claims against AUCRA to arbitration for a determination of their arbitrability.  The arbitrator ruled that the case was not arbitrable and had to be adjudicated in court. 

The arbitrator noted that a Nebraska statute provides that a written contract to submit to arbitration a controversy thereafter arising between the parties is enforceable, except when the written contract "is an agreement concerning or relating to an insurance policy."

Section 1012(b) of the McCarran-Ferguson Act, 15 U.S.C. §§1011-1015 provides, "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."

Therefore, the arbitrator concluded, the Federal Arbitration Act, which provides generally that arbitration clauses in contracts are enforceable, is "reverse-preempted" by the Nebraska statute.

AUCRA moved to vacate the arbitration award.  That motion was denied.  AUCRA appealed the denial of the motion to vacate.

In Mountain Valley Property, Inc. v. Applied Risk Services, Inc., __ F.3d __, 2017 WL 2981798 (1st Cir. 2017), the court did not determine whether the decision of the arbitrator was correct.  It held that it was enough under the Federal Arbitration Act that the arbitration award did not demonstrate a manifest disregard for the law. 

Thursday, July 20, 2017

US District Court holds that Bill Cosby's homeowner's insurer has a duty to defend him in cases asserting he defamed alleged sexual assault victims by denying the assaults

I've posted here and here about the declaratory judgment action by AIG, Bill Cosby's homeowner's and umbrella insurer, seeking a declaration that it has no duty to defend or indemnify him in three defamation lawsuits against him.  Those lawsuits allege that Cosby lied when he denied the plaintiffs' accusations that he raped them.  They allege defamation rather than assault because the statute of limitations has run on assault claims  The defamation allegations are not barred because the statements were made at a later period in time.  (A criminal trial against Cosby for sexual assault ended in a mistrial as a result of a deadlocked jury.) 

AIG contended that the defamation allegations come within an exclusion in the homeowner's policy  for sexual misconduct excluding "liability . . . for  . . . personal injury arising out of any actual, alleged, or threatened by any person: (a) sexual molestation, misconduct or harassment; . . . or (c) sexual, physical or mental abuse." The umbrella policy has a similar but not identical exclusion.  

AIG had filed a declaratory judgment  action in California with respect to a separate civil lawsuit by a plaintiff making the same allegations against Cosby.  The California court granted Cosby's motion to dismiss.  Applying California law, the California court held that AIG has a duty to defend Cosby because the sexual misconduct exclusions do not unambiguously bar coverage.  It held that under that state's law the phrase "arising out of" can be interpreted broadly or narrowly.  Under a narrow interpretation, the plaintiff's injuries arose out of Cosby's statements, not sexual misconduct.

In a recent decision in the Massachusetts case, AIG Property Casualty Co. v. Green, 217 F.Supp.3d 415 (D. Mass. 2016), the first issue before the United States District Court for the District of Massachusetts was whether AIG was judicially estopped from arguing that Massachusetts law differs from California law in the interpretation of "arising out of."  In California AIG had argued that there was no difference between Massachusetts and California law because both states interpret the phrase broadly.  In Massachusetts it was now arguing that there was a difference and that Massachusetts law should apply.

Let me say that as a litigator the discussion of judicial estoppel made my stomach hurt.  The AIG attorneys in California had to argue that under both California and Massachusetts law the phrase "arising out of" is broadly construed.  The only other alternative would be to concede that in one of the states the phrase is construed narrowly, and the court should apply the law of the state construing it broadly.  Unless it was incontestably true that California construes "arising out of" narrowly, the latter argument would border on malpractice.  When the California court held that "arising out of" should be construed narrowly in the context of the case before it, should AIG no longer be allowed to argue that Massachusetts construes the phrase broadly?  In my view that would simply be unfair. 

The US District Court agreed with me and declined, in its discretion, to apply the doctrine of judicial estoppel.  It held that there was no evidence that AIG was attempting to defraud or mislead either court.  It merely argued in California that coverage was barred under the law of either state.  AIG would gain no unfair advantage by arguing in Massachusetts that the laws of California and Massachusetts conflict. (The court did not say this, but the conflict of law arose, or at least became more obvious, as a result of the California decision.)

That ruling became moot, however, because the court then held that the exclusions did not apply under Massachusetts law either.  The court quoted a number of cases that vaguely define "arising out of" as requiring an intermediate level of causation, between proximate (or direct) cause but more than causation in fact (but for X happening, Y could not have happened).  The court found that the sexual misconduct exclusions are "at least ambiguous."  It held, "while no doubt related to and setting the stage for the defamation claims, the alleged sexual misconduct is multiple steps removed from the defamatory injury-causing statements." 

AIG has appealed the decision.  Stay posted. 

Thursday, July 13, 2017

US District Court denies summary judgment to insurer in bad faith claim on the basis of statements made by its attorney

In Continental Western Ins. Co. v. Preferred Mut. Ins. Co., 2016 WL 6434081 (D. Mass.), the United States District Court for the District of Massachusetts chose not to recite the facts, which were undisputed.  So I'm guessing a little here, and I have no idea what the underlying case was about.   

This appears to be a subrogation case.  A subrogation case is one where an insurer paid a loss, and then sued the tortfeasor or other liable party for reimbursement of the amount it paid.  In this case, the defendant in the subrogation case was covered by insurance, so it's an insurer versus insurer dispute.  Preferred Mutual Insurance Company was the insurer seeking subrogation.  Continental Western Insurance insured the individual sued by Preferred Mutual. 

Continental turned the tables on Preferred Mutual and sued it, alleging that it engaged in unfair and deceptive trade practices by filing claims against Continental's insured without conducting a reasonable investigation based on all available information.  Preferred Mutual moved for summary judgment, meaning that it asked the court to rule prior to trial that there were no facts in support of Continental's claim.

It lost, because of communications between its attorney and its claims specialist.  Those statements included:
The evidence that Mr. Lodigiani was actually engaged in a partnership with Elvins Brantley appears thin.

Preferred Mutual would have difficulty in sustaining the burden of proving Mr. Lodigiani was involved in a partnership with Elvins Brantley.

The law is clear, it is the facts that are in short supply.

It is likely we must ignore facts that cut against coverage and give Mr. Lodigiani the benefit of the disputed facts, among them his assertion that he was not in a partnership.  
 None of which is to say that Preferred Mutual can't prevail at trial.  These may be isolated statements in a slew of evidence pointing to liability.  But they are enough to require a trial where all the facts can be considered. 

Friday, June 16, 2017

United States District Court holds that the reference proceeding statute is constitutional

I've been discussing in my last two posts Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), a federal court case alleging bad faith practices by an insurer, Peerless, before and during a reference proceeding.

The plaintiffs sought a declaration that the reference proceeding statute, Mass. Gen. Laws ch. 175 §99, ¶Twelvth, violates Article 11 of the Declaration of Rights of the Massachusetts Constitution, which guarantees the right "to obtain right and justice freely, and without being obliged to purchase it, completely, and without any denial, promptly, and without delay; conformably to the laws."  Specifically they alleged that the reference proceeding statute violates Article 11 because it requires that insureds pay for referees and because referees, rather than judges determine the amount of the loss. 

The court noted that the free access to courts clause of Article 11 "requires that all cases be decided by a judge, and that litigants need not 'purchase' access to justice."

Using logic that strikes me as disingenuous, the court held that, unlike a probate court matter in which the court appointed a parent coordinator with binding authority to resolve conflicts between divorcing parents, the reference proceeding did not take place over the objection of either party.  Rather, the plaintiffs made a business decision to purchase casualty insurance.  Pursuant to the policy both parties agreed to submit disputes over the amount of loss to a reference proceeding.

While it is true that parties can agree to alternative dispute resolution clauses in a contract, that is not quite what happened here.  Rather, the reference proceeding statute requires that disputes over the amount of loss under certain insurance policies must be determined by a reference proceeding.  That is why the requirement is in the property policies.  The parties are not allowed to negotiate over it. 

While it may be true that the plaintiffs did not have to purchase property insurance -- and that is probably not the case, as mortgages require property insurance -- it is not true that the parties included the reference proceeding clause by their own free will.

The court also notes in a footnote that the plaintiffs failed to allege that they incurred any costs in connection with the reference proceeding.  In their motion to amend the complaint they argued that the reference proceeding statute requires an insured to expend significant sums of money to pay for referees and that the plaintiffs paid over $30,000 in fees to the referees.  The court asserts that there were no supporting allegations in the supplemental complaint. 

That seems overly harsh to me.  The reference proceedings statute provides that of the three referees, the insureds will pay the fee of the first, the insurer will pay the fee of the second, and they will split the fee of the third.

The court then held that the "no purchase of justice" provision of Article 11 is to guarantee that "all litigants similarly situated may appeal to the courts both for relief and for defense under like conditions and with like protection and without discrimination."  A statute that "does not pertain to a suspect class, . . . involves a right . . . that is not fundamental, . . . and is rationally related to achieving its purpose . . . passes constitutional muster."

The court noted that the plaintiffs have not alleged that they are being treated differently than any other class of insureds under policies issued with the same mandatory language, or that they are part of a suspect class.  It also noted that free access to courts is not a fundamental right.  Therefore, the reference proceeding statute need only be rationally related to achieving its purpose.  The plaintiffs did not allege that the requirement of a reference proceeding is not rationally related to achieving the purpose of establishing a summary method of establishing the amount of loss.

I agree that the reference proceeding statute is rationally related to the purpose of having a summary method of establishing the amount of a property loss.  I nevertheless am trouble by the decision -- or perhaps by the earlier decision quoted by the court holding that access to courts is not a fundamental right.  If that's the case, then why is it part of the Massachusetts Declaration of Rights?  I'm not a constitutional law scholar, but it seems to me that the legislature should not be able to take away a right protected by the constitution.  Moreover, does this mean that the legislature can decide that parties to a tort case don't have  a right to a judicial hearing?  How about contract cases?  

Wednesday, June 14, 2017

Federal Court denies motion to amend complaint to add new allegations of bad faith settlement practices based on facts that did not exist when lawsuit was filed

In my last post I discussed Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), a property damage case in which the plaintiff insureds sued the insurer, Peerless, in federal court while a reference proceeding was pending.  After the reference proceeding the plaintiffs sought to file a supplemental complaint in the federal court case.

The proposed supplemental complaint alleged that during the reference proceeding Peerless engaged in various acts of trickery or deceit, including harassing the plaintiffs with requests for false stipulations which could result in them waiving their claims, and falsely claiming it never received written discovery from them. 

The court held that such actions would not represent a separate violation but a continued course of conduct that began before the lawsuit commenced.  On that ground the court denied the addition of the proposed additional count alleging such conduct.  

While I understand the logic that continuing conduct is not a separate violation, it seems to me that the plaintiffs should be allowed to amend their complaint to allege new facts in support of the allegations of bad faith settlement practices. 

Monday, June 12, 2017

US District Court holds that cross-examination is proper remedy for biased experts testifying on behalf of insurer

Morningside operated a bakery inside a commercial condominium unit owned by Amaral Enterprises.  On February 19, 2013, water from a burst pipe allegedly caused a $1.5 million loss at the bakery.  Morningside and Amaral filed a claim with their insurer, Peerless Insurance. That claim proceeded to a reference proceeding, an arbitration required by Mass. Gen. Laws ch. 175 §99, ¶Twelvth in certain property loss claims.

In the meantime, on February 6, 2015 the plaintiffs sued Peerless in federal court, seeking a declaratory judgment that Peerless is obligated to cover the losses, for breach of contract, and for unfair claims settlement practices in breach of Mass. Gen. Laws ch. 93A.

On July 6, 2015, the referees returned an award of about $93,000.  After the award the plaintiffs moved to file a supplemental complaint in the federal court action, alleging additional violations of ch. 93A.  Specifically, the plaintiffs alleged that they were subjected to unfair claims settlement practices because at the reference proceeding Peerless called two witnesses it claimed were experts, but who were neither independent or objective.  One was a certified public accountant who has worked for Peerless and its parent company, Liberty Mutual, her entire career.  The other was a CPA who was in a business partnership with the attorney representing Peerless.

The plaintiffs also alleged that Peerless refused to resolve their claim and engaged in various acts of trickery or deceit, including harassing them with requests for false stipulations which could result in the plaintiffs waiving their claims, and falsely claiming it never received written discovery from the plaintiff.

The plaintiffs also sought a declaration that the reference proceeding statute violates Article 11 of the Declaration of Rights of the Massachusetts Constitution, which guarantees the right "to obtain right and justice freely, and without being obliged to purchase it, completely, and without any denial, promptly, and without delay; conformably to the laws."  I will discuss the "trickery and deceit" allegations and the constitutional argument in future posts.  

In Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), the United States District Court for the District of Massachusetts addressed the motion of the plaintiffs to amend the complaint.  It held that the proposed supplemental complaint did not set forth sufficient facts to support an inference that Peerless acted in an unfair, fraudulent, or deceptive manner in relation to testimony by its experts.  "There is nothing improper (or even unusual) about a company eliciting testimony from an employee about a transaction or occurrence in issue, including testimony that draws on that employees particular area of expertise, such as accounting."  The court held that the proper remedy for potential bias is cross-examination.  Similarly, an expert may be impeached with respect to his or her financial interests in the case.