Oct 4 2019

MM Insurance Law Update – 10/4/19

NEW CASES OF CONSEQUENCE

SEVENTH CIRCUIT    D&O/Breach of Contract Exclusion (WI)

A customer's breach of contract claim against the manufacturer of "anaerobic digester" that was designed to break down microorganisms in cow manure into commercially valuable biogas has been held to trigger coverage under a professional liability policy notwithstanding an exclusion for claims based upon or arising out of breach of contract whether expressed or oral … " Whereas a Wisconsin District Court had ruled that the exclusion applied, the Seventh Circuit ruled in Crum & Forster Specialty Insurance Company v. DVO, Inc., No. 18-2571 (7th Cir. Sept. 23, 2019) that giving the exclusion such broad effect would render the E&O insurance "illusory." The case was therefore remanded to the trial court for a reformation of the policy to conform to the insured’s reasonable expectation of coverage.

NINTH CIRCUIT    Property Insurance/War Exclusions (CA)

The Ninth Circuit announced last week that it will not grant en banc review of its July ruling in Universal Cable.

ILLINOIS    Opioids/Allocation/Bad Faith

A federal district court has ordered a general liability insurer to reimburse a drug distributor for $3.5 million that it paid the State of West Virginia resolve claims that its sales caused or contributed to the opioid epidemic. Having previously ruled that Cincinnati had an obligation to defend these claims, Judge Mills now rules in Cincinnati Ins. Co. v. H.D. Smith Wholesale Drug Co., 12-3289 (N.D. Ill. Sept. 26, 2019) that under Illinois law an insured is not required to allocate between covered and non-covered claim if it is able to demonstrate that the primary focus of the underlying action was a "covered loss" and it settled in reasonable anticipating of liability. In this case, the court found it was reasonable for H.D. Smith to settle, as all of the other defendants had also settled, and that claims that were covered under the policy were the “primary focus” of the State’s claims. The court declined to enter a summary judgment with respect to the insured's bad faith claims, finding that there were issues of fact as to whether Cincinnati had acted "vexatiously" in violation of Section 155.

MASSACHUSETTS    Consent Judgments/Procedure

The Supreme Judicial Court of Massachusetts has issued a significant new opinion imposing limitations on the ability of policyholders to assign rights to tort claimants pursuant to consent judgments in cases that their insurer is defending their reservation of rights. In Commerce Insurance Company v. Szafarowicz, SJC 12655 (Mass. Oct. 1, 2019), the Supreme Judicial Court ruled that a trial judge had not abused his discretion in refusing to permit an automobile liability insurer to intervene in the underlying case given the risk of prejudice to the insured. The court ruled that it was sufficient that the insurer be given the opportunity to bring a post-verdict declaratory judgment action in which it could challenge whether its insured acted negligently or intentionally had been “fairly litigated.” As a result, the Supreme Judicial Court also ruled that the trial judge had not abused his discretion in denying Commerce’s motion to stay the proceedings in the wrongful death case until its parallel declaratory judgment action could be tried and the issue of coverage resolved. The court also ruled that Commerce’s effort to halt post-judgment interest from accruing on the $7 million judgment by offering to pay its $500,000 policy limit was ineffective because the offer was conditional on the money being repaid if Commerce prevailed on its coverage defenses. The court also refused to find that the insured’s pre-judgment assignment of rights was necessarily collusive or unreasonable as matter of law. Rather, the Court ruled that in such cases "the risk of collusion must be balanced against policy considerations that encourage settlement agreements …" The court concluded, therefore, that "an insurer who defends a claim under reservation of rights is bound by the amount of a judgment arising from a prejudgment settlement/assignment agreement where (1) the insurer is given notice of the settlement/assignment agreement and an opportunity to be heard by the Court before a judgment enters; (2) the insurer contests the judgment; and (3) the insured, after hearing, meets his or her burden of showing that the settlement is reasonable in amount." The SJC further found, however, that "because the consequence of a settlement/assignment agreement is that the plaintiff may collect damages only from the insurer, having released the insured defendants from personal liability, a reasonable settlement amount may not exceed the limits of the insured's potential insurance coverage, because the plaintiff may recover damages no more than that from the insurer." Further, the Court found that the issue of whether the resulting judgment was "reasonable" was not immunized from dispute merely because the parties stipulated to liability and allowed the trial judge to determine the amount of damages after a bench trial. The court declared that the amount of post-judgment interest that Commerce would eventually owe will run from the date of the original judgment in the amount that the Court ultimately deems to be reasonable. In an unusual concluding section, Chief Justice Gants observed that whereas the trial judge would have to decide what was “reasonable” in this case, in future cases where a judge concludes that the amount of an assignment/settlement is unreasonable, the parties should be given an opportunity to renegotiate their agreement in an amount that is reasonable.

OTHER DEVELOPMENTS OF NOTE

* * * Inside the Insurance Industry * * *

Travelers’ 2019 Risk Survey of 1200 business leaders finds the cyber risks are now uppermost on the mind of policyholders. 55% of survey respondents listed cyber as their biggest worry, followed by medical cost inflation (54%), employee benefit costs (53%), the ability to attract and retain talent (46%) and legal liability (44%).

Business Insurance reports that a “dramatic cutback in limits is leaving wholesalers scrambling to fill excess and surplus lines programs for policyholders who face higher rates in a hardening market.”

* * * New Coverage Litigation * * *

Nautilus has brought an action for declaratory relief in the U.S. District Court for the Northern District of Texas alleging in Nautilus Insurance Company v. Smoke and Vape DZ, LLC, No. 19-771 (N.D. Tex) that it does not owe coverage to the insured vape shop for a wrongful death action arising out of an exploding e-cigarette.

* * * Tripartite Update * * *

The Ethics Committee of the New Hampshire Bar Association has issued Advisory Opinion No. 2018-19/2 declaring that New Hampshire law is unsettled with respect to whether insurance companies are clients of appointed defense counsel that, until this issue was settled by the New Hampshire Supreme Court, law firms should be clear about who they represent. Although an earlier ethics opinion from the committee had suggested that New Hampshire is a “dual client” state, the Committee concludes in this opinion that the law is in fact unsettled and that its 1993 and 2002 opinions on tripartite issues needed to be harmonized. Furthermore, the court declared that if New Hampshire is deemed to be a "dual client" state, defense counsel might face ethical dilemmas with respect to whether they might communicate facts to insurers that would be harmful to their policyholder client. The committee recommended to law firms, therefore, that "if they want to have a relationship only with the insured, something that will avoid future conflicts if the insured provides information such as in the above example, they should make this clear to the insurance company." Conversely, the Committee declared that “If the insurance company insists that it also have an attorney client relationship with the lawyer for privilege, malpractice, and communication purposes, then the potential conflicts under NH RPC Rule 1.7 described above may require the lawyer to withdraw in some situation. Such withdrawal could prove costly to the company, especially if the conflict arises late in the litigation, as the company will have to hire a new lawyer for the insured and, to protect its non-coverage claims, one for itself as well.”

* * * Cyber Update * * *

Here’s the latest newsletter from MM’s cyber-practice group.

The State of New York sued Dunkin’ Donuts last week, claiming that it failed to alert customers to attacks on their personal information in 2015 and 2018.

* * * Must See CLE * * *

DRI Annual Meeting
New Orleans
October 16-19, 2019

American College of Coverage Counsel Symposium
Fort Lauderdale
November 1, 2019

DRI Insurance Coverage Forum
Hartford, CT
November 6, 2019

FDCC I-3 Symposium
November 6-8, 2019
New York City

DRI Insurance Coverage and Practice Symposium
New York City
December 5-7, 2019

 

 

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