Cleaning Up the Mess in Texas: Insurer Funding Payment of Liability Claims When Coverage Is Doubted

In May 2005, the Texas Supreme Court unanimously held that a liability insurer that voluntarily settles a claim against an insured may recover the payment against its own insured if it proves that the claim is uncovered and it reserved its right to seek recoupment. The Texas Supreme Court, while unanimous in result, was badly splintered in rationale.
Two years ago, the Court granted rehearing. Yesterday, the Court changed course, with a majority ruling that an insurer does not have a unilateral right or an equitable claim to recover a settlement payment. Excess Underwriters v. Frank’s Casing (Tex. Feb. 1, 2008). The court reaffirmed its prior decision in Matagorda County, which barred a primary insurer from seeking recoupment of defense cost. Recent case law in other jurisdictions have split on the issue, but the more robust recent opinions (Illinois, Massachusetts, Wyoming) line up with Texas.

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The “Insurance Hoax” — Insurers Paying Too Little and Too Late

Bloomberg recently published a hard-hitting piece decrying the property-casualty industry’s claims-handling practices. Insurers perceive that the article to punches below the belt, as this response from the Insurance Information Institute shows. The III piece is interesting to me because of its immoderate tone, something at odds with most of the writing that comes from III, which is a great source of financial statistics in particular on the performance of the P-C insurance industry. While the III is certainly right that insurers pay claims every day, the III and the rest of the industry need to recognize the wide-spread perception that at the point of claim insurers adopt an adversarial posture. Experienced, thoughtful observers of the industry have written about this at length (and the linked article is I think the most important thing ever written on the P-C industry), and the point of first-party insurance bad-faith law in part is to counterbalance the power imbalance that insurers hold over their insureds at the time of claim — at the time their insureds are most in need and dependent on their performance, which explains the emotional oomph that typifies through-the-eyes-of-insureds’ reporting on insurers’ claims-paying (or claims-denying) practices.
I agree with the III that the Bloomberg story is too facile, and it is inappropriate to leap from the observation that an insurer paying less than what the policyholder wanted ineluctably means that the insurer is paying less than what the policyholder deserved. I recently suffered a major homeowners’ loss when a (crazed) intruder broke into my home and caused huge amounts of damage; our insurer was fantastic in dispatching someone to board up a broken door, arrange for a contractor to do repair work, and reimburse us for other loss (including paying the vendor of our choice on some home electronics). So I know first hand that insurers can ride to the rescue, treat their customers with “good hands,” and live up to their advertising slogans. On the other hand, I bring suits against insurers on behalf of clients when I think amounts are owed and unpaid, and I am kept busy by wrongful denials by insurers inflicted against my corporate clients (both large and small). At a time when respected news outlets like Bloomberg (and CNN and PBS) feel comfortable producing pieces that seem well suited to the Fight Bad Faith Insurance Companies website, the insurance industry should look deep into its practices and understand the perceptions of consumers and businesses to ensure that insurers’ historic mission of helping their insureds, being “there” in the time of need, is embraced and, more importantly, put into practice every day in paying claims.

Does a Court’s (Reversed) Disparagement of the Policyholder’s Coverage Claim Alone Eviscerate Its Bad-Faith Claim?

A common enough scenario in a liability-insurance case: the parties file cross-motions for summary judgment, with the insurer arguing it has no duty to defend. In Acme United Corp. v. St. Paul Fire & Marine Ins. Co. (7th Cir. Jan. 9, 2007), the question presented was whether an advertising injury liability insurance policy provided coverage for a suit against the insured for product disparagement. In Acme, the district court accepted the argument of the insurer, thus cutting off the ability of the policyholder to obtain recovery of the defense costs it had run up. Where, as here, the appellate court reverses and finds coverage, does the district court’s now-reversed ruling effectively impale the policyholder’s bad-faith claim?

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Cone of Silence or Echo Chamber: A Policyholder’s Privileged Communications and its Insurers

An insurance company that receives a claim from one of its policyholders inevitably wears both a white hat and a black one. The insurer is there to help its insured deal with the claim – it may dispatch claims handlers or service providers to help the policyholder in its time of need; the insurer, however, also is the insured’s adversary in the sense that it must determine whether it has any obligation to pay the insured. To the latter extent, the insured and the insurer have directly adverse interests. (The law of first-party insurance bad faith is predicated on the recognition in part of this fundamental adversity of interests between the insurer and its insured, especially at the precise moment when the insured is calling upon the insurer for performance.)
The insurer’s wearing two hats poses the opportunity for mischief when those roles get confused or blurred. Take the example of a defense lawyer hired by an insurance company to defend the insured: the defense attorney plainly has an attorney-client relationship with the insured, the touchstone of which is confidentiality. Assume that the defense lawyer is told a fact by the insured that supports the insurer’s denying coverage: the insured confesses to being drunk while driving, the insured acknowledges that it knew of a latent problem before it purchased the policy, or the insured knew of the potential claim against it for a long time but had simply hoped it would go away and so did not notify the insurer sooner. The insurance company might wish to learn of this fact because it might permit it to terminate its defense obligation and avoid paying anything on the claim. In these circumstances, may the defense counsel tell the insurance company about this admission from the insured?

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Jury Instructions in Insurance-Coverage and Insurance Bad-Faith Cases

There is no formbook of jury instructions for complex insurance-coverage disputes, and even were there such a tome at best it would be a point of departure and not the destination. Complex insurance coverage disputes are marked by factual uncertainty, difficult legal terrain, and close parsing of issues. One mistake that lead counsel often makes in my view is not to personally take ownership of the jury instructions and instead delegates their preparation to the junior member of the team. Ultimately, it is the jury instructions that determine the case – and the appeal. Thus, it should be the responsibility of lead trial counsel to be intimately familiar with the drafting, submission, and argument over instructions to the jurors.

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Conflict of Laws and Insurance Disputes: Choice of Law or Choice of Outcomes?

Most insurance policies are silent as to which state’s substantive law governs their terms. As a result, insurance-coverage lawyers often find ourselves deep into the world of choice of law and conflict of laws, a subject most of us sidestepped in our law-school education. Conflicts issues are (largely) untethered from the merits yet can be outcome determinative, so it is crucial to understand and focus on choice-of-law principles in complex insurance disputes, which can yield the application of different state laws within a single case to issues of contract formation, performance, and bad faith.

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Discovery of Other-Insured Claim Files in Insurance and Bad-Faith Disputes

Among the typical skirmishes in insurance-coverage litigation is the scope of discovery. In seeking discovery in insurance-coverage cases and for insurance bad-faith claims, policyholders seek information from insurers about the underwriting of the policy at issue and the carrier’s handling of the policyholder’s claim for coverage. Disputes arise once the policyholder moves beyond those materials to information showing the general practice of the insurer, how the insurer’s response to the particular insured compares with how it has handled other claims, and the insurer’s own understanding of the policy language as evidenced through claims-handling manuals, training materials, and other types of interpretative aids. See generally Saldi v. Paul Revere Life Ins. Co., 224 F.R.D. 169 (E.D. Pa. 2004); Colonial Life v. Superior Court(Perry) 31 Cal. 3d 785 (1982); Carey-Canada v. Cal. Union Ins., 118 FRD 242 (D.D.C. 1986). One recurring subject has been other-claims information, that is, information in claim files dealing with other insureds.

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Aloha to Unasserted Coverage Defenses: Waiver, Estoppel, and Mend the Hold in Insurance Cases

Sometimes when an insurance company does not have an obligation to perform, it can be required to pay anyway. There are typically three doctrinal hooks that force insurers to provide coverage in circumstances where the terms of the contract strictly speaking does not require them to do so: waiver, estoppel, and “mend the hold.”

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It’s Good to Be a Bad Insurance Company in America

The most recent Supreme Court decision on the constitutionality of punitive damages was a third-party insurance bad-faith case. State Farm Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003). In that case, the Supreme Court gave strong indications that in insurance cases the maximum punitive damages that may be constitutionally awarded is predicated on a one-to-one ratio between the punitive damages and the compensatory damages, i.e., they must be (nearly) equal to one another. However, on remand from the US Supreme Court the Utah Supreme Court held that, considering the facts involving State Farm and the Campbells, the insurer’s conduct and the injury involved merited punitive damages that were nine times the compensatory-damages award. 2004 UT 34.
Recently, the Oregon Court of Appeals had the opportunity to address the question of the appropriate ratio between punitive and compensatory damages in an insurance bad-faith case, finding that a three-to-one ratio was appropriate. Goddard v. Farmers Ins. Co., (Ore. Ct. App. Oct. 12, 2005). And the court made clear that this ratio approached the asymptotic limit.

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