Good Deeds, Smart Business, Corporate Waste, and Ex Gratia Payments

Americans in the Gulf States have endured Katrina and Rita in close succession, similar to how their Florida neighbors suffered through a series of hurricanes last year. Those who have been affected by these hurricanes naturally turn to their insurers for help. When losses stem from both of the recent hurricanes, however, insurers can compound their insureds’ financial woes by requiring them to absorb separate deductibles for each storm.
Some insurers have responded by saying that only one deductible will be required in these circumstances. That decision, however, potentially exposes those insurers on the reinsurance and shareholder fronts.

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Stay What? Coverage Claims May Proceed Against Insolvent Insurers

When insurance companies become insolvent, they are eligible for reorganization or liquidation pursuant to special state-law “bankruptcy” proceedings. As with federal bankruptcies, the debtor typically seeks a stay of litigation against it, ostensibly for the purpose of permitting the bankruptcy court to centrally manage the valuation of claims and distribution of assets.
In insurance bankruptcies, it is common for the liquidation or rehabilitation court to issue an order stating that all actions against the insurer are stayed. When an action is pending outside that forum, complex issues of federalism and statutory constructions seemingly are presented; when the action against the insurer is pending in federal court, the questions are doubly complex – or so they seemed before a lucid opinion by the United States Court of Appeals for the Ninth Circuit, which recently cut through all the questions presented and held the issues were quite simple after all.

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Katrina — Submit Your Proofs of Loss or Forfeit Insurance Coverage — Updated!

The federal government provides flood insurance protection principally through private insurance companies. These flood policies require that the insured file a sworn proof of loss within 60 days from the date of the damage. In the circumstances of Katrina, there has been a great desire to assist policyholders in obtaining their coverage benefits. FEMA apparently has responded by relaxing the period within which to file a claim and, if necessary, to bring suit.

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Tragedy and Failure

Insurers dealing with Katrina losses are caught between a rock and a hard place — more accurately, between flood and wind-driven rain. Generally, under typical homeowners policies, flood-caused loss is excluded but wind-driven rain and other windstorm-caused loss is covered. The Mississippi attorney general, under pressure from leading members of the plaintiffs’ mass-tort bar, has brought suit seeking to force insurers to pay claims, notwithstanding the terms of the insurance policies.
There is historical precedent for insurers’ paying claims following mass disaster in derogation of policy terms. The story is told famously of Cuthbert Heath, an underwriter at Lloyd’s of London, who following the San Francisco earthquake cabled his US attorneys saying: “Pay all our policyholders in full irrespective of ther terms of their policies.” And there seems to be little doubt that this decision of C.E. Heath helped establish the positive reputation (deserved or not) Lloyd’s enjoyed in the US for many, many years.

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Defending Defense Costs: Parrying the Attack of the Legal-Fee Auditors

A common play by insurers that have failed to perform their duty to defend is to challenge the defense costs their policyholders incur on the grounds that they were unreasonable. The suggestion is that had the carrier defended the costs would have been less because the carrier would have hired cheaper defense counsel, or it would have ridden tighter herd on the costs incurred, or it would have required that only a limited number of lawyers be involved, or any of several other grounds for second-guessing the costs incurred by the policyholder. In addition to advancing these arguments, insurers have fabricated a specialized mouthpiece for making these points: “legal fee auditors.” But both the legal premise and the “expert” testimony offered in support increasingly are being looked upon with the skepticism properly applied to the excuses of a breaching party that is seeking to reduce its obligation to pay damages – especially when that breaching party is an insurance company that was supposed to defend its insured in the first place.

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Absolute Nonsense

What we once conceived of as the environmental coverage wars continue in a new, broader form where insurance companies seek to deny coverage for the liabilities of their policyholders whenever they stem from toxic exposures.
In 1986, the “absolute” pollution exclusion was widely introduced. There is agreement that Superfund-type claims and other true environmental liability claims are barred under the various guises of the absolute pollution exclusion. But the insurers have not limited their claim denials to that context.

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Businesses Far from Katrina May Have Insurance Claims

Businesses lucky enough to be located outside of Katrina’s wrath still are exposed to losses from the hurricane: while they may not have suffered physical losses to their assets, their suppliers or customers, or both, may have been damaged. As a result, these “unaffected” businesses may have coverage for their own economic losses stemming from Katrina.

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Update on Coverage for Blast Faxes

The Appellate Court of Illinois has rejected the reasoning of two key recent federal appellate decisions from the Seventh and Fourth Circuits that barred coverage for an insured’s liability for blast faxes under the TCPA (Telephone Consumer Protection Act). Instead, the appellate court found the carrier to have a duty to defend under its coverage for advertising injury.

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