notice, tender and reservation of rights: crafting...

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Presenting a live 90-minute webinar with interactive Q&A

Notice, Tender and Reservation of

Rights: Crafting Coverage Correspondence,

Evaluating Issues Raised by Defense Under ROR

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, JULY 12, 2017

Christian A. Cavallo, Partner, Goldberg Segalla, Newark, N.J.

Renee C. Callantine, Principal, Cornerstone Law Group, San Francisco

Eliot M. Harris, Member, Williams Kastner, Seattle

Christopher R. Weiss, Esq., Goldberg Segalla, Newark, N.J.

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Part One Notice and Tender

Renee C. Callantine San Francisco, CA

5

Policyholder’s Obligations: Comply with Policy Conditions

•Provide notice

•Cooperate with investigation

•Make “no voluntary payments”

6

Notice

•Notice of Occurrence

•Notice of Claim

•Tender of Defense

7

Considerations re Notice and Tender

• Identify relevant policies • Coverage period • Excess coverage • Additional insured coverage • Targeted tender

• Identify applicable law

• Notice to broker sufficient?

• Notice/Prejudice rule

8


Responding to the Tender An insurer typically has 3 ways to respond to the

tender of a liability claim:

1. Unconditional acceptance • Agree to defend and indemnify insured up to policy limit

• Waive any coverage issues

• Participate in defense and potential settlement

2. Disclaimer of coverage • Refuse to defend or indemnify insured for claims against it

• State requirements for timing and substance of such letters (e.g.,

N.Y. Ins. Law 3420(d))

• Typically cannot control defense or contest reasonableness of

settlement

• “Fairly debatable” basis – Pickett v. Lloyds, 131 N.J. 457 (1992)

3. Conditional acceptance under reservation of rights 10


Purpose of Reservation of Rights

Permits insurer to provide an initial defense while

reserving its right to later dispute coverage

• Insurer usually has limited information at inception of case

Additional info may show claims are not covered

Insurer wants to avoid defense/indemnity for non-covered claims and

preserve right to reimbursement of defense costs expended

• Insured may need quick defense to respond to pleadings

Notifies insured of potential coverage limits to make

informed decision

• E.g., scope of defense, covered and non-covered claims,

potential exclusions to coverage, potential conditions

11


Scope of Reservation of Rights

• Coverage defenses – claim outside purview of

insuring agreement or exclusion applies

• Policy defenses – basis for rescinding/voiding

coverage or denial due to breach of condition

• Reimbursement of fees, costs and payments

expended

• Request info from insured to further analyze

defenses

12


Timing of Reservation of Rights • Most states have rules about promptly responding

to request for coverage (e.g., N.J.A.C. 11:2-17.7)

• While no specific time for ROR letter, it should be

sent within a reasonable time

4 months or less can be reasonable. See Fire Ins. Exch.

v. Fox, 423 N.W.2d 325, 327 (Mich. App. 1988)

10 months or more can be unreasonable. See

Transamerica Ins. Group v. Chubb & Son, Inc., 554 P.2d

1080 (Ct. App. Wash. 1976)

• Focus is typically whether the untimely reservation

is prejudicial to the insured

• May need to update ROR as new info becomes

available

13


Drafting the ROR - Preparation • Choice of Law

Which state’s substantive law governs the provisions of

the policy at issue

Certain provisions may be void under state public policy

• Policies (and coverage parts) at issue

Type of policy – occurrence based or claims made

Primary or excess policy

Different coverage parts in package policy

• Relevant pleadings

• Extent of tender

Multiple insureds requesting coverage (e.g., owner and

company are sued)

14


Drafting the ROR - Generally

• “Fairly inform” insured of coverage position

• Some jurisdictions have no specific statutory or

regulatory requirements

• Must be comprehensive – risk of waiver and

estoppel in certain jurisdictions

Typically waiver and estoppel cannot be used to create

insurance coverage when none exists

Exception to general rule is when insurer assumes

defense without timely reserving its right to deny coverage.

See, e.g., Merchants Indem. Corp. v. Eggleston, 179 A.2d

505, 512 (N.J. 1962)

15


Drafting the ROR - Contents

• Introduction

• Factual background and procedural history

• Pertinent policy provisions

• Insurer’s coverage position

• Requests for additional information

16


Drafting the ROR - Introduction

• Identify claim/lawsuit against insured or putative

additional insured

• Identify documents reviewed

• Provide very brief summary of coverage position

(i.e., agree to defend under reservation of rights as

set forth in detail below)

17


Drafting the ROR – Factual

Background

• Identify pleadings that assert claims against the

insured

May be more than one pleading at issue (e.g., third-party

claims, cross-claims as well as Plaintiff’s complaint)

• Address specific counts in pleadings – whether they

pertain to insured

• Acknowledge that allegations may lack merit, but

this does not affect coverage

18


Drafting the ROR – Policy Provisions

• Identify each policy number, effective dates and

applicable limits

• Note whether any policy has “burning limits” –

where defense costs reduce indemnity limits

• Set forth applicable insuring agreement, exclusions,

conditions and definitions

• Set forth any endorsements or policy change forms

that may alter limits or relevant terms

• Note right to rely upon other provisions, whether or

not specifically quoted in letter

19


Drafting the ROR – Coverage Position • Issues affecting coverage for the entire lawsuit

E.g., occurrence outside of policy period, person does not

qualify as insured, exclusion that pertains to all claims

• Issues affecting coverage for certain claims

Intentional act claims v. negligence claims

Claims for punitive damages

• Whether duty to defend is triggered

Is policy umbrella, true excess, or excess by its terms?

No “suit” at the time of the tender

• Extent of legal analysis

Is letter addressed to coverage counsel or insured?

20


Drafting the ROR – Coverage Position

• With respect to issues identified reserve certain

rights to:

Withdraw from the defense

Deny coverage for all or part of settlement or adverse

judgment

Re-evaluate coverage/ supplement ROR upon discovery

of new information

Seek reimbursement of fees and costs expended

• Include “catch-all” reservation

Reserving all rights under the Policy at law, or in equity,

and noting that nothing in the letter should be construed by

the insurer as an admission of liability or waiver of any

defense. 21


Additional Considerations • State specific issues

Right to independent counsel due to defense under ROR

Provide insured with option to “accept or reject” defense

under ROR. See Burd v. Sussex Mut. Ins. Co., 56 N.J.

383, 389 (1970) (NJ does not recognize independent

counsel and instead requires such language)

Insured’s right to enter into a Morris agreement. See

United Servs. Auto. Ass’n v. Morris, 154 Ariz. 113 (1987)

• Balancing preservation with being overly broad

Do not need to include extraneous facts or inapplicable

policy provisions

May avoid overly burdensome requests (due to business

relationship)

• Identify defense counsel and issues with payment

of defense costs 22

Potential Conflicts of Interest

Renee C. Callantine

[email protected]

415.230.8737

23

mailto:[email protected]

Does a Reservation of Rights Entitle the Insured to Independent Counsel?

Some states: Mere assumption of defense under a reservation of rights entitles insured to independent counsel. ◦ Union Ins. Co. v. Knife Co., Inc., 902 F. Supp. 877, 880 (W.D.

Ark. 1995) (Insured entitled to independent counsel whenever some, but not all, claims are covered)

Other states: Insurer must offer independent counsel if reservation of rights creates a potential conflict of interest. ◦ Golotrade Shipping and Chartering, Inc. v. Travelers Indem.

Co., 706 F. Supp. 214, 219 (S.D.N.Y. 1989)

Michigan: Insured has no right to independent counsel. Appointed counsel must resolve conflicts in favor of the insured. ◦ Federal Ins. Co. v. X-Rite, Inc., 748 F. Supp. 1223, 1229 (W.D.

Mich. 1990).

24

Majority Rule

Insurer must offer independent counsel if reservation of rights creates an actual

conflict of interest. The conflict must be “significant, not merely theoretical, actual, not merely potential” - Dynamic Concepts, Inc. v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1007 (1998) “The requirement of providing independent counsel for the insured arises only when there is an actual conflict of interest, rather than an appearance of a conflict of interest.” – Mut. Serv. Cas. Ins. Co. v. Luetmer, 474 N.W.2d 365, 368 (Minn. App. 1991). 25

How to determine if actual conflict exists

A conflict of interest triggering a right to independent counsel exists where “the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends.” N. county Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 689 (Tex. 2004).

When the dispute between the insured and third party will require resolution of an issue that will bear directly on the outcome of the coverage dispute. Long v. Century Indem. Co., 163 Cal.App.4th 1460 (2008).

26

Issues that do not Give Rise to Right to Independent Counsel

Reservation of right to seek reimbursement of defense costs or amounts paid to settle claims against insured. Long v. Century Indem. Co., 163 Cal. App. 4th 1460 (2008)

Parties disagreement about venue not a conflict triggering right to independent counsel. N. County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 688 (Tex. 2004)

27

Other Issues that may not Give Rise to Right to Independent Counsel

• Mere presence of covered and non-covered claims

• Reservation on issue not litigated in underlying matter

• Damages sought in excess of policy limits

• Punitive damages

• Defense of multiple insureds

28

Application: Reservation not on issue pertinent to resolution of underlying action

Where insurer reserves right to deny coverage because the person suing the insured in a personal injury action might be a “resident relative” whose claims are excluded from coverage, no true conflict exists because that issue will not be decided in the underlying action. See McGee v. Sup. Ct., 176 Cal.App.3d 221, 228 (1985).

Claimant in underlying copyright infringement claim had to prove only that it had ownership of a valid copyright and the copying of constituent elements of the work that are original; thus insurer’s reservation of rights on several potential exclusions that did not involve this proof did not trigger a right to independent counsel, even where they involved issues that were raised in the underlying action. Partain et al. v. Mid-continent Specialty Insurance Services, Inc., 2012 U.S. Dist. LEXIS 7530, *46.

29

Classic examples of reservations triggering right to Independent Counsel

• Where there are claims for both intentional and non-intentional acts, and the insurer reserves its right to deny coverage for intentional conduct.

• Toxic tort claims where some claims of injury would fall under the pollution exclusion.

• Construction defect claims where some damage would fall outside coverage.

30

Reservation based on Policy defense?

Continental Ins. Co. v. Bayless and Roberts, Inc., 608 P.2d 281 (Alaska 1980) – Insurer’s reservation on ground that insured violated policy conditions gave rise to right to independent counsel.

“Where, as here, the insurance company challenges the insured's right to enforce the policy on the ground the insured has breached a condition thereof, the insured has a right to demand an unconditional defense. Thus, the insurance company must either affirm the policy and defend unconditionally or repudiate the policy and withdraw from the defense.”

31

Who Chooses Independent Counsel?

• In some states, the insured selects independent counsel

• There may be statutory or other limitations on rates – e.g., Cal. Civ. Code section 2860(d)

• In some states, the insurer has the right to select independent counsel

• E.g., Michigan Millers Mut. Ins. Co. v. Bronson Plating Co., 496 N.W.2d 373, 378 (Mich.Ct.App. 1992), overruled in part on other grounds in Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776 (2003).

• In some states, independent counsel must be mutually agreed upon

• E.g., Fla. Stat. Ann. 627.426

32


Choice of Law Consideration

• Is right procedural issue or substantive issue?

Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938) (procedural

matters governed by law of forum)

• Borden-Perlman Ins. Agency, Inc. v. Utica Mut. Ins.

Co., 2016 WL 1368589, at *5 (N.J. Super. Ct. App.

Div. Apr. 7, 2016) (finding reimbursement issue was

substantive and applied state law that governed the

terms of the policy)

34


Obligation to Reserve Right to

Reimbursement

• At a minimum, insurer should reserve this right in

ROR letter to preserve issue

Buss v. Superior Court, 939 P.2d 766 (Cal. 1997) (noting

insurer must properly reserve its right to reimbursement to

seek same)

Knapp v. Commonwealth Land Title Ins. Co. Inc., 932 F.

Supp. 1169 (D. Minn. 1996) (finding policyholder’s

acceptance of defense under ROR with right to reimburse

was implicit agreement)

Cincinnati Ins. Co. v. Grand Pointe LLC, 501 F. Supp. 2d

1145 (E.D. Tenn. 2007) (permitting reimbursement under

Tennessee law when noted in ROR)

35


Need for Policy Provision Allowing

Such Recovery

• Some courts will not permit ROR letter to broaden

the rights of the insurer (and obligations of the

insured) under the contract

General Agents Ins. Co. of Am., Inc. v. Midwest Sporting

Goods Co., 828 N.E.2d 1092 (Ill. 2005) (finding insurer

could not unilaterally modify its contract to create right)

Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707, 715

(8th Cir. 2009)(stating that the most recent decisions “have

refused to recognize claims by insurers for reimbursement

of defense costs expended under a unilateral reservation

of rights, absent a provision for such reimbursement in the

insurance policy.”).

36


Reasons in Favor of Allowing

Reimbursement (the “majority” approach)

• “Unjust enrichment” where insurer is paying for

unbargained-for defense costs. See Buss, 16 Cal. 4th

at 51; Hebela v. Healthcare Ins. Co., 851 A.2d 75, 86 (N.J.

App. Div. 2004)

• Further public policy that insurers would provide

defenses to insureds even in “questionable cases”.

• If insured fails to object to reserving right for

reimbursement, it is arguably estopped from doing

so later. See Century Sur. Co. v. Franchise Contractors,

LLC, 2016 WL 1030134, at *13 (S.D.N.Y. Mar. 10, 2016)

37


Reasons Against Permitting

Reimbursement (the “minority” approach) • If policy does not provide right to reimbursement,

ROR letter cannot broaden rights of insurer under

the terms of the contract

• Insurer has a contractual obligation to provide

defense for potentially covered claims. See Am. &

Foreign Ins. Co. v. Jerry's Sport Ctr., Inc., 2 A.3d 526 (Pa.

2010)

• Allowing reimbursement may undermine the broad

duty to defend. See Perdue Farms Inc. v. Travelers

Casualty and Surety Co. of Am., 448 F.3d 252 (4th Cir. 2006)

(finding partial reimbursement would create “backdoor

narrowing” of the duty to defend)

38


Considerations That May Affect Claim

• Which state’s substantive law governs the policy at

issue

• Whether insured specifically objected to reservation

of right or stayed silent

• Whether policy provides for right to reimbursement

• Whether non-covered claim was potentially covered

initially or was never covered

39

Control of the Defense

Eliot M. Harris Williams Kastner

[email protected]

If Coverage Is Denied

Insured controls its own defense

Insured is responsible for payment of defense costs

Insurer has no right to control defense

If coverage is later found, may be required to pay all defense costs…regardless of rate and reasonable

41

If Coverage is Accepted Without Reservation

Generally, insurer has complete control of defense Exceptions can apply, e.g., potential for excess exposure

Insurer responsible to choose and pay for defense counsel “Tripartite Relationship” Insurer Insured Retained Defense Counsel

“Common interest” throughout litigation. Communications protected by privilege. Relationship between counsel and insured. Limitations of retained counsel’s representation.

42

If Coverage Is Accepted With Reservation

Who controls (and selects) the defense for defense under ROR depends on jurisdiction

Insurer retains control over defense under ROR, e.g., Washington State

Right to independent counsel – e.g., Indiana

Potential right to independent counsel when conflict arises – e.g., California

When independent counsel is required, there are other issues to consider

Statutory or other limitations on rates?

Who chooses independent counsel?

Varies by state

Some states require mutual agreement by insured and insurer – e.g., Florida

43

Insured perspective: ◦ Phrasing of discovery

◦ Decision to develop evidence in underlying case that may relate to coverage issues

◦ Summary judgment considerations ◦ Decision to move (or not move) for summary judgment on

potentially covered claims that would leave only uncovered claims remaining

◦ Trial strategy ◦ Jury instruction and jury interrogatories ◦ Potential that verdict may have implications on coverage

depending on how the verdict form is worded

Impact of Coverage Issues on Defense - ROR

44

Impact of Coverage Issues on Settlement - ROR

• Ability to settle when defended under ROR – Varies by State

• In some states, insured must obtain insurer consent to settle when defended under ROR – e.g., Washington

• In other states, insured has right to settle without insurer’s consent if notice is provided - e.g., Arizona

• Impact of policy limits (or less) settlement demand on insurer – Insurer must decide to accept demand

– Personal contribution by insured?

– If rejected, insurer risks potential waiver of policy limits for excess judgment against insured

– Potential bad faith/punitive damage exposure • Insured may have right to assignment of claim without insurer’s consent upon

rejection of policy limits demand

45

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