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 Covenant to Provide Notice: Materiality or Prejudice Needed To Refuse Payment

Sometimes courts get it right, both analytically and in the result. This was true in the landmark decision of the Texas Supreme Court in PAJ, Inc. v. Hanover Insurance Co. (Texas Jan. 11, 2008). In this case, the Texas court holds that “an insured’s failure to timely notify its insurer of a claim or suit does not defeat coverage if the insurer was not prejudiced by the delay.” While I agree with the holding, what may be more significant is the court’s adoption of the right analytical approach, specifically, considering the notice provision as covenant whose breach discharges the insurance company’s performance only where that breach constitutes a material breach of the contract.

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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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‘Round and ‘Round the Tort Liability Goes – When It Stops, Whither the Insurance Chose?

Generally, the law allows “choses in action” to be alienated (sold). This is a change that has been adopted over the course of the last 100 years or more. See W.W. Cook, The Alienability of Choses in Action, 29 Harv. L. Rev. 816 (1916). Because claims under insurance contracts properly viewed are choses in action, (Black’s Law Dictionary (5th ed. 1979) at 219), most courts have allowed insurance claims to be sold, too, even when the transaction takes the form of an “assignment.”

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Running Out of Time: Statute of Limitations for Liability Insurance Policies

Liability-insurance policies were introduced in 1881, yet there is no great certainty in most states as to when the statute of limitations commences for bringing suit on an insurance policy for performance. Somewhat complicating matters – and simplifying it too – is the availability of declaratory relief, a remedy designed in part to pull insurance disputes into court. So to understand the application of statute of limitations in this context, one must draw distinctions among several concepts: (i) anticipatory repudiation of contract, which is considered a present breach of contract; (ii) anticipatory relief of seeking a declaration of rights before breach of contract; (iii) continuing breach of the duty to defend by an insurer; and (iv) breach of the duty to indemnify. The Alaska Supreme Court recently confronted these issues and elected to follow the California Supreme Court’s approach to the questions presented.

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Late Notice by Liability Insurance Policyholders as Excuse Not to Pay – of Notice, Covenants, Conditions, Material Breaches, Innominate terms, and American versus English Law

Courts continue to struggle with claims where the policyholder may not have provided notice as soon as one might have liked, and the coverage litigation typically centers on whether the dispositive argument is “no harm, no foul” — that is, policyholders will argue that coverage is not lost unless the insurer has been prejudiced in some fashion from the allegedly “late” notice. The Illinois Supreme Court and a Texas appellate court both have confronted this question recently, and these are largely consistent with recent holdings from New York’s highest court finding that the notice provision must be enforced as written – no ifs, ands or buts.

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Insurance Industry Spared from Bankruptcy: Asbestos 524(g) Settlements

The California Court of Appeal has reversed a ruling holding that liability insurers of an asbestos company had immediate obligations to perform in full once a trust was established through section 524(g) of the bankruptcy code that concurrently extinguished the liability of the policyholder vis a vis the asbestos claimant creditors. Fuller-Austin v. Highlands Ins. (Cal. App. Jan. 19, 2006). The “acceleration” of insurers’ obligations that these 524(g) trusts might create has caused apoplexy in the insurance industry, and the California court’s reversal of the insurance ruling that the creation of the trust meant the insurers had immediate obligations to perform for the total (non-bankruptcy) value of the future claim stream no doubt produced a collective sigh of relief from the insurance industry (and their reinsurers).

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When ERISA Suits Tagalong to D&O Claims the Fiduciary-Liability Coverage Might Not

Corporate directors and officers litigation today often involves claims asserted under the federal securities laws as well as under federal employee-benefits law (ERISA). The plaintiffs in these suits are conceptually different: securities-law plaintiffs are people who (and entities that) purchased or sold the company’s securities; ERISA plaintiffs are participants in employee-benefit plans that held or permitted the investment in company securities. Increasingly, ERISA cases are tagging along to securities cases: the directors and officers (who often are plan fiduciaries) are alleged to have failed to disclose certain facts about the company’s operations or finances to the market generally (for securities claims) or to participants in company-sponsored employee-benefit plans (for ERISA claims).
The United States Court of Appeals for the First Circuit recently had the opportunity to address coverage for a tagalong ERISA claim that was made four years after a securities-law class action was filed. In a very troubling opinion, the court ruled that no coverage was available for the ERISA class action because the gravamen of the complaint echoed the allegations in the earlier securities class action. The basis of the court’s ruling was not that the policyholder had failed to disclose the early securities-law class action, but rather that a generic prior-and-pending litigation exclusion barred coverage. Federal Ins. Co. v. Raytheon Co. (1st Cir. Oct. 21, 2005)

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Grab Your Umbrella — and Magnifying Glass

For the past two decades, policyholders and insurers have been fighting over whether the cost of cleaning up hazardous-waste sites is covered under general-liability policies by arguing over the nature of that liability. The argument has tended to center on the meaning of the word “damages” and the insuring agreement’s promise to afford indemnification for the sums payable “as damages.”
Departing somewhat from the standard version of these arguments, the California Supreme Court ruled in 2001 that covered “damages” were limited to amounts awarded by a court. Now, the court has reaffirmed that holding, County of San Diego v. Ace Property & Casualty Ins. Co. (Cal. Aug. 29, 2005), but in a companion case held that an umbrella policy that afforded coverage for “expenses” in addition to “damages” unambiguously applied to clean-up costs incurred in an administrative proceeding. Powerine Oil Co. v. Superior Court (Cal. Aug. 29, 2005). The court purports to be implementing the “mutual intent” of the parties, with the result that one insured has coverage due to the inclusion of the word “expenses” and the other one does not.

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An Insurance Company’s Duty to Consent

In many types of insurance policies, the carrier’s obligation to perform is tied to its consenting to the incurrence of costs or the settlement of an underlying case. One assumes that an insurer cannot withhold consent willy-nilly, for that would make coverage illusory. There is a dearth of authority, however, that makes express the circumstances in which an insurer is not permitted to withhold consent – that is to say, the circumstances in which it is required to consent. The Supreme Court of Iowa recently addressed that question and made clear that insurers are obligated to consent when faced with a reasonable request.

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