CA Court of Appeals Confirms that Insured Need Not Accept 2860 Rate Caps For Work Done After Tender, But Before Insurer Accepts Defense
A recent unpublished decision from California’s Second Appellate Division highlights one of the most common mistakes lawyers make when obtaining insurance coverage for the defense of a lawsuit: accepting the insurer’s ultra-low hourly rate caps for charges incurred before the date on which the insurer actually acknowledged its defense obligation and began defending.
The case is City Arts, Inc. v. Superior Court (Travelers Property Casualty Company of America), B256132 (issued Dec. 9, 2014). There, Travelers agreed that its obligation to defend an underlying lawsuit against City Arts was triggered no later than April 2009. However, Travelers did not actually agree to begin reimbursing defense costs until February 2010. (In the intervening 10 months, Travelers and City Arts exchanged a series of letters arguing about whether Travelers had a duty to defend, before Travelers finally relented in February 2010.) Nevertheless, Travelers claimed that it could impose its hourly rate caps on all charges incurred from April 2009 forward.
On November 12, 2014, I will be participating in a webinar “Data Breach and Liability Insurance: Managing the Potential Risk and Addressing Claims” through the Commercial Law Web Advisor. I’ll be joined by two insurer-side attorneys at Sedgwick LLP, Alex Potente and Eryk Gettell. We’ll be discussing coverage under commercial general liability policies for third-party liability claims arising out of data security breaches and the recent Sony decision in the New York trial court (now on appeal), recent case law addressing the meaning of “publication” in “personal and advertising injury” offense coverage for “oral or written publication of material that violates a person’s right of privacy”, and the insurance industry’s push this year to endorse general liability policies to limit coverage for data security breaches.
We gave a similar presentation in July and all thought it would be of interest to our clients and contacts. I really enjoyed this format, which allowed us to present the material in a point-counterpoint debate that I thought helped flesh out the interesting coverage and practical issues raised by these claims with a fair amount of depth.
For more details and to register for the webinar, please go to the Commercial Law Web Advisor website.
An automatic stay in bankruptcy prevents anyone from accessing the property of the debtor estate, including the directors’ and officers’ liability (D&O) policies which insure individual directors and officers of the estate as well as the debtor. That does not mean, however, that the policy limits can be treated as a slush fund to satisfy creditors’ claims against the estate. The policy limits (or proceeds) remain available to settle covered liability claims against the covered individuals or, if they exist, covered liability claims against the company which survive the bankruptcy proceeding.
In deciding whether the D&O policy proceeds are subject to the stay, courts look to whether the policy only provides coverage to directors and officers (Side A coverage), or whether it also provides coverage to the debtor (Side B coverage or Side C coverage). In the former case, the proceeds are not considered property of the estate. However, if the individuals and the company both maintain legitimate claims for coverage under Side B or C of the policy, the result can turn on the specific facts unique to the case. See In re Mila, 423 B.R. 537, 543 (9th Cir. BAP 2010). Where the individuals and the estate have legitimate competing claims against the policy, “the bankruptcy court must balance the harm to the debtor if the stay is modified with the harm to the directors and officers if they are prevented from executing their rights to defense costs.” Even in cases where the D&O policy proceeds are considered property of the estate, courts may nonetheless grant relief from the stay “to allow the insurer to advance defense costs payments when the harms weigh more heavily against the directors or officers than the debtor.” Id. at 544.
“The insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.”
The above sentence appears in California Civil Code section 2860(c); it limits a defending insurer’s obligation to provide independent counsel of the insured’s own choosing in cases where the insurer’s reservation of rights gives rise to a potential conflict of interest between the insurer and the insured.
In California, insurers routinely insist that they pay no more than $225 per hour (or even less) to their retained defense counsel, and refuse to pay higher hourly rates to independent counsel. Clearly, the statutory language itself can be used to create leverage points in a negotiation with insurers about “2860 rates,” as it places the burden on the insurer to demonstrate that it routinely pays those rates to defend similar actions in that community.
But before the insurer even announces its intent to impose 2860 rate caps, there are things an insured can do to place itself in a strong bargaining position regarding defense costs issues. By drafting a thoughtful and thorough notice letter, an insured can lay the groundwork (and create leverage) for future negotiations.
by David Smith
Last weekend’s Napa earthquake served as a wake-up call for everyone living and working in the Greater Bay Area. As with all natural disasters, after the immediate clean-up is over the analysis will begin as to how to make buildings safer and how to prevent and minimize injuries and damage.
But if you have a business that was affected by the earthquake, now is the time to be looking at your insurance policies, even while you are still sweeping up the debris and are wondering what the extent of the damage is.
If you have earthquake coverage, your insurance company can be an important resource. Insurers have experience handling disasters of all types. They have a large pool of consultants and experts who can help minimize the effect of the earthquake on your business – by providing resources to help with clean-up, estimating the extent of the damage, finding contractors quickly, and generally helping you through the crisis period.
However, insurance companies don’t know your business or your premises nearly as well as you do. Insurance adjusters – particularly in times of disasters when they are flooded with claims – will sometimes try to impose “cookie-cutter” solutions on unique situations. This could be especially true in the Wine Country, given the unique nature of the items damaged, such as historic buildings or high-quality wine. An area such as Napa, replete with wineries and specialty boutiques, restaurants and businesses, is ripe for coverage disputes over the value of damaged property, even after the scope of the damage has been agreed.
The 6.0 Napa earthquake has altered business in an around the Napa Valley, and Law360 called to ask my thoughts on earthquake insurance. While the article requires a subscription, my key point is:
“This earthquake is a reminder of what we’ve been told for some time now — that the odds of a major earthquake in Northern California over the next 20 years are very high,” said Dennis Cusack, a partner at Farella Braun & Martel LLP. “It’s a very real risk, and in some cases, a greater risk than a fire on a property. It should lead businesses to at least consider the costs and benefits of earthquake insurance.”
Read the full article here (subscription required).
We recently litigated and successfully settled an insurance coverage case that offers a model for managing a case thoughtfully. Too often, parties reflexively dive into litigation with its procedural hurdles and delays, unbounded discovery, and often unnecessary motion practice, without considering whether a more efficient but fair alternative exists. Our group regularly seeks to fashion a sensible case-specific dispute resolution process at the outset. These models also allow us to offer creative fee arrangements that build incentives to optimize the costs and recoveries for the client.
Our client company and its officers were named in an intellectual property lawsuit. The same insurer provided CGL and D&O policies. It denied coverage under the CGL. It initially agreed to defend under the D&O policy but later withdrew its defense over our objections.
On July 29, 2014, I spoke on a panel about recent developments in California bad faith law and related trends. My co-presenter was Robert K. Scott of The Law Offices of Robert K. Scott, and we gave the presentation at ACI’s 28th National Advanced Forum on Bad Faith Claims & Litigation in San Francisco. The title of the presentation was “The Positions of the Policyholder’s Bar: How insurers can avoid bad faith claims and tailoring your litigation strategies to the latest wave of first-party and third-party claims.” Some of the highlights included:
- the recent trend of bad faith claims handling conduct by insurers in responding to defense cost submissions by independent counsel under Section 2860, including the hiring of outside auditors to justify reduced insurer payments on defense bills;
- the state of the “genuine dispute” doctrine in bad faith claims arising out an insurer’s breach of the duty to defend (i.e., Mt. Hawley v. Lopez, 215 Cal. App. 4th 1385 (2013)); and
- 2013 case law on whether insurers have an affirmative duty to proactively seek settlement in excess-of-limits exposure cases (i.e., Reid v. Mercury Ins. Co., 220 Cal. App. 4th 262 (2013) and Travelers Indem. Of Conn. v. Arch Specialty Ins. Co., 2013 WL 6198966 (E.D. Cal. Nov. 26, 2013)). See John Green’s article about Reid posted on this blog.
These are evolving areas of law that are likely to produce further disputes between insurers and insureds. Early insurance coverage advice can help avoid these disputes, or at least position the insured for a more favorable outcome if litigation becomes necessary. I’ll be writing in more detail about these on this blog over the next couple months.
by John Green
Insurers often take the position that indemnification for claims for “restitution” are barred by public policy, and contend they have no obligation to reimburse a settlement of such claims. They often take this position even if the policy itself states that coverage can only be denied if there is a “final adjudication” the insured has obtained a personal profit to which it was not entitled.
This position is based largely on Level 3 Communications, Inc. v. Federal Insurance Co., 272 F.3d 908 (7th Cir. 2001). In that case, Judge Posner ruled that indemnification of restitution was barred by public policy, and the public policy prohibition applied regardless of whether indemnification is for a judgment or settlement. Level 3, however, did not address the “Personal Profit” exclusion. We have argued that Level 3 does not apply to settlements, particularly where there is a “Personal Profit” exclusion which is expressly limited to cases in which liability is determined by a “final adjudication.” Recently, a Federal District Court in Minnesota has reached exactly this conclusion. See U.S. Bank Nat’l. Assoc. v. Indian Harbor Insurance Company , U. S. District Court. Dist. of Minn., Case No.: 12-CV-3175 (July 3,2014). In U.S. Bank, the Court looked at Delaware law, and determined there was no Delaware public policy against indemnification for restitution. Moreover, the Court held that the “Ill-Gotten Gains” exclusion further supported coverage.
A five-paragraph opinion by the New York Appellate Division suggests the potentially devastating consequences of ignoring the fine print of Directors & Officers Liability insurance policies. In Associated Community Bancorp., Inc., et al. v. St. Paul Mercury Ins. Co., 2014 NY Slip Op 04697 (App. Div., First Dept.), the court held that a bank caught up in the Madoff debacle had no coverage, not even for defense costs, for investor claims.
The court devoted one paragraph to each of the four exclusions which it found eliminated coverage for the investors’ claims. Three of those exclusions are fairly unique to Bankers Professional Liability Insurance Policies and are not found in most D&O policies. However, the Court’s final ground for denying coverage was the policy’s “Personal Profit and Advantage Exclusion” (often called the Profit/Advantage Exclusion).