On April 30, 2015, we blogged about Hartford Casualty Insurance Company v. J.R. Marketing, LLC, Case No. S211645, then set for oral argument in the California Supreme Court. [see the prior post: California’s “Independent” Cumis Counsel Regime Faces a Novel Challenge] The Court decided the case on August 10, 2015, ruling that Hartford could seek reimbursement of unreasonable or excessive fees directly from Cumis counsel. We’ll outline here the implications of the ruling and suggestions for how policyholders and Cumis counsel might respond.
On the one hand, the Court took pains to describe its ruling as very narrow. Hartford had denied coverage and resisted paying the defense invoices even after the trial court found it owed a duty to defend. Squire Sanders, representing J.R. Marketing, then obtained an enforcement order requiring Hartford to pay its invoices within thirty days, but giving Hartford the right to seek reimbursement of uncovered fees and costs, including unreasonable or excessive fees, once the case was over. By the end of the case, Squire had been paid $15 million. The Court repeated that its decision was grounded in the enforcement order, which Squire had drafted and gave Hartford an express right to reimbursement. In that context, the Court held that allowing Hartford to recover from Squire in the first instance was consistent with the law of unjust enrichment and would not interfere in the attorney-client relationship. Running through the decision, including Justice Liu’s concurring opinion, is an undercurrent of suspicion that Squire, with an unsophisticated client and an enforcement order in hand, felt it had carte blanche to bill to its heart’s content.
In June, I blogged about County of Los Angeles Board of Supervisors v. Superior Court, 235 Cal. App. 4th 1154 (2015). In that case, the California Court of Appeal (Second Appellate District) concluded that legal defense bills qualified as privileged attorney-client communications, and therefore need not be produced in response to a California Public Records Act request. I noted that the case could have major implications for the insurer-policyholder relationship, particularly whether and/or when an insured could feel comfortable submitting defense bills to an insurer. The California Supreme Court has now granted review in the case. The ultimate pronouncement from the Supreme Court will likely provide useful guidance for insurers and policyholders alike regarding the appropriate treatment of defense counsel invoices.
Critical Insurance Issues for Your Next Mediation: What You Need to Know and Do to Settle a Complex Civil Case Involving Insurance Issues
On Wednesday, September 30, from 12:00 to 1:30 pm I will be co-moderating a panel discussion on insurance issues that arise in the context of mediating complex civil cases. Panelists will include Hon. William Bettinelli (Ret.), mediator at JAMS, and Daniel Purcell, Partner at Keker & Van Nest. The panel will be held at the Bar Association of San Francisco (301 Battery Street, Third Floor, San Francisco, CA). Click here for more information and to register.
Our Insurance Recovery Group is often asked to help emerging companies understand their insurance program and assist with claims. This is the first in a series of posts that will address the insurance issues impacting growing companies. The series will cover everything from how to analyze the coverage you have and placement issues, to contractual indemnity and insurance requirements, and how to proceed if you have a claim.
Today’s post is on understanding the insurance you currently have. If you are new to your company or new to your insurance role, you should work with your insurance broker to determine what coverage the company already has in place. The broker will also guide you through new policy placements as well as renewals of existing policies. Confidence in your broker is critical, because you will be relying on their judgment regarding rates, availability, scope of coverage and exclusions, limits, size of deductibles or self-insured retentions, and pricing. It is not uncommon for companies periodically to solicit competing proposals from brokers as they continue to grow and seek advice from professionals with specialized knowledge regarding their particular industry.
by John Green
Several solar panel manufacturers and their distributors have been sued in class actions alleging the panels are defective and need to be replaced. As will be explained below, these kinds of claims are covered by general liability insurance (CGL), the type of policy purchased by virtually any business.
Claims for Defective Solar Panels Allege Property Damage
General liability policies typically cover bodily injury and property damage. “Property damage” is defined to include “loss of use of tangible property that is not physically injured.” Claims that the panels are defective and have led to a loss of electrical generation capacity of the roof are claims for “loss of use” of the roof for that purpose.
Consumers bought solar panels so they could use their roof surfaces to generate electricity. Due to the alleged problems with the panels, class members are claiming damages for the lost use of their roof surfaces for collecting solar energy and generating electricity from it. Class members have also suffered loss of use of the inverters. Inverters are connected to the panel array and convert the DC power generated by the solar system into domestic AC power. Defective panels reduce the use of the inverter (as less current is passed through it and converted to usable AC). Moreover, inverters have minimum thresholds, and the reduced output may shut the inverter down entirely. Thus, the claims of class members would also include loss of use of their inverters.
Insurance policies covering data breach liability began appearing roughly ten years ago. We noted then a troublesome provision in some forms that seemed to exclude coverage for the insured’s failure to maintain data security – in other words, the very risk the insured was seeking to insure. We’ll call it the “Mistake Exclusion.” One AIG form from 2006, for example, excluded coverage arising out of “your failure to take reasonable steps to use, design, maintain and upgrade your security.” A 2009 Darwin form excluded coverage for any claim arising out of “any failure of an Insured to continuously implement the procedures and risk controls identified in the Application for this insurance.” But isn’t liability insurance supposed to do just that – protect against the insured’s mistakes, innocent or negligent? We hoped and expected that as the market for these policies matured, savvy brokers and risk managers would insist that these Mistake Exclusions be removed or substantially narrowed. But that has not happened.
We now have the first case we are aware of by an insurer seeking to enforce a Mistake Exclusion. In Columbia Casualty Company v. Cottage Health Systems, filed May 7, 2015 in the U.S. District Court in Los Angeles, Columbia seeks to enforce an exclusion barring coverage for a data breach claim arising out of any “failure of an Insured to continuously implement the procedures and risk controls identified in the Insured’s application for this Insurance and all related information submitted to the Insurer in conjunction with such application whether orally or in writing.” Columbia’s complaint arises out of a class action suit against Cottage alleging that, for a period of two months in 2013, 32,500 patient records were accessible via the Internet. Cottage had hired a third-party vendor to store Cottage’s records electronically and that vendor mistakenly set the File Transfer Protocol settings to allow public access. Columbia funded Cottage’s defense and settlement, but is suing to recover all of its payments from Cottage.
by John Green
Companies often monitor or record conversations between their employees and customers for training or quality control purposes. California law prohibits monitoring or recording unless both parties consent. Class actions have been brought against a number of companies alleging that calls were routinely recorded without customer consent. These claims may be covered by a company’s general liability (CGL) policy.
CGL policies generally provide coverage for “personal injury” offenses, which are defined to include “oral or written publication of material that violates a person’s right of privacy.” Call recording is prohibited by California’s Invasion of Privacy Act, which was enacted to protect “the right of privacy of the people of this state.” Cal. Penal Code § 630. Thus, call recording claims fall within the Personal Injury coverage for “privacy” claims.
Recently, the California Court of Appeal decided County of Los Angeles Board of Supervisors v. Superior Court, 235 Cal. App. 4th 1154 (2015), a case considering whether the Los Angeles County Sheriff's Department could be required to produce legal defense bills in response to a California Public Records Act request. While not an insurance case, the case could have implications for a common practice in the insurance context: submitting defense bills to the insurer.
The Board of Supervisors court held that attorney billing statements are “confidential communications” within the meaning of California Evidence Code Section 952, and therefore their production could not be compelled. Significantly, the court held that the LA County Sheriff could not be required to simply redact portions of the attorney time descriptions that reflected attorney opinions or advice. Indeed, the court concluded that a communication between attorney and client, arising in the course of representation for which the client sought legal advice, need not include “legal opinion or advice” at all in order to qualify as a privileged communication. Because the bills were, by definition, an attorney-client communication, they were privileged in their entirety.
This new ruling presents a conundrum for California insureds. An insurance company that is footing the bill for the defense of a lawsuit will of course demand to see the bills, and as a practical matter it is unrealistic to expect that the insurer will pay them without being able to review the descriptions. In situations where the insurer is defending without a reservation of rights, the insured's and the insurer's interests are completely aligned and the two are effectively joint clients. But by providing the defense bills to an insurer who has reserved its right to deny coverage – or who has not yet taken a coverage position at all – is the insured waiving privilege? If the plaintiff in the underlying lawsuit demands that the insured produce “all communications with its insurer,” could the insured then be required to produce its legal bills to plaintiff?
On Wednesday June 3, from 12:00 to 1:15 p.m., I’ll be co-presenting "Lawyers in the Cross-Hairs: Recent Trends in Claims Against Attorneys, Related Ethical and Insurance Issues, and Defense Strategies" at the Bar Association of San Francisco (301 Battery Street, Third Floor, San Francisco, CA).
Presenting with me will be John B. Sullivan of Long & Levit, LLP and Matthew S. Kahn of Gibson, Dunn & Crutcher LLP. We will focus on recent trends in claims against lawyers arising out of business transactions, and related defense strategies and insurance coverage issues.
Please see the event flyer for more details:
Lawyers in the Cross-Hairs
We hope you will join us.
Policyholders seeking insurance funds to settle a case often face an insurer’s demand that some amount should be allocated to uncovered claims or parties. The issue arises often under directors and officers liability (D&O) policies, when settlements resolve the liability of covered directors and the uncovered company. But general liability insurers also demand to “allocate” settlements, suggesting, for example, that half of the settlement is uncovered because the complaint alleges both negligent and intentional conduct. Surprisingly, California courts have not clearly addressed the issue outside of the D&O context. How should you respond?
For D&O policies, courts first recognized the “larger settlement rule” in Harbor Ins. Co. v. Cont’l Bank Corp., 922 F.2d 357, 368 (7th Cir. 1990). The question there was how to allocate a settlement between the potential liability of the covered directors and officers, and of the uncovered company. The court held that the insurer is liable for the entire settlement, except for the amount, if any, by which the settlement was made larger because of claims against uninsured parties. In other words, if the same dollars were paid to settle the potential liability of both, those dollars must be allocated to the covered claims against the directors and officers.
The Ninth Circuit affirmed the larger settlement rule in Nordstrom, Inc. v. Chubb & Sons, Inc., 54 F.3d 1424, 1433 (9th Cir. 1995) (Washington law); and Safeway Stores, Inc. v. Nat’l Union Fire Ins. Co., 64 F.3d 1282, 1287 88 (9th Cir. 1995) (California law).