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Erica Villanueva has extensive experience handling claims under a variety of insurance policies, including general liability, directors’ and officers’ liability, aviation, employment practices liability, property and business interruption policies.  She works with policyholders to ensure that their claims are properly presented to insurers, in order to obtain the maximum possible insurance recovery.  Ms. Villanueva advocates on behalf of her clients to resolve any coverage disputes that may arise during the course of a claim, taking a practical and proactive approach to negotiation with insurers.  In cases where a negotiated resolution is not possible, Ms. Villanueva litigates insurance coverage disputes.  She has substantial coverage litigation experience, both at the trial and appellate levels.

A recent unpublished decision from California’s Second Appellate Division highlights one of the most common mistakes lawyers make when obtaining insurance coverage for the defense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.

Continue Reading CA Court of Appeals Confirms that Insured Need Not Accept 2860 Rate Caps For Work Done After Tender, But Before Insurer Accepts Defense

“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. 

Continue Reading Setting Up a Successful Negotiation Regarding “2860 Rates”

In May, California’s Second Appellate District affirmed a summary ruling that a Commercial General Liability insurer did not have a duty to defend a subcontractor who supplied faulty “seismic tie hooks” that were encased in concrete shear walls.  The case is Regional Steel Corporation v. Liberty Surplus Insurance Corporation, Cal. Ct. App. 2d Dist. B245961, and the court has just granted Liberty’s request to certify the case for publication. 

The Second Appellate District declined to follow the “incorporation doctrine,” adopted by the First Appellate District in cases such as Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal.App.4th 1 (1st Dist. 1996), Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal.App.4th 847 (2000).  At issue in Armstrong was the cost of removing asbestos-containing building materials, which had been installed in larger structures.  At issue in Shade Foods was a supply of ground almonds that was contaminated with wood chips, but had been incorporated into “nut clusters” for breakfast cereal.  In both cases, the First Appellate District held that the mere incorporation of these faulty products or material into third-party property constituted covered “property damage.” 

Continue Reading Newly-Published Regional Steel Case Raises More Questions Than It Answers

By Dennis Cusack and Erica Villanueva

Maintaining appropriate insurance is critical for the entire aviation industry.  Many US-based airlines, aircraft owners/financiers, and aircraft lease servicers devote significant resources at the front end setting up their insurance programs, maintaining schedules of insured assets, and making annual trips to London for meetings with the major players in the Lloyd’s aviation market.  But it is equally important that companies plan for the possibility of major claims under their policies.  Companies do not always anticipate some of the unique challenges that US-based insureds face when making a claim under their aviation policies.

Continue Reading Common Policyholder Pitfalls When Navigating London Aviation Insurance Claims

Over the past few days, there has been much hand-wringing over the Second Circuit’s decision in Mehdi Ali v. Federal Insurance Co., __ F.2d __ (2d Cir. 2013) in which the court declined to extend the holding of Zeig v. Massachusetts Bonding & Insurance Co. , 23 F.2d 665 (2d Cir. 1928), to the specific facts of the case before it. Commentators are chalking it up as a major victory for insurers, claiming that policyholders have now lost a key precedent, one which had previously allowed them to argue that an excess insurer can be required “drop down” to cover losses below its attachment point.

Not so fast.

As an initial matter, the Zeig case does not stand for the proposition described above. The Zeig case held that an excess insurer could be required to pay losses above its attachment point, if the insured had actually sustained those losses. In Zeig, an insured suffered a property loss which exceeded the limits of his primary policy, but settled with that insurer for less than the full primary policy limits. The Second Circuit reasoned that, because the insured could demonstrate that it had actually suffered property losses in excess of the primary limits, the excess insurer could be required to pay that portion of the loss which exceeded its attachment point.

Continue Reading Recent Media Coverage Overstates Impact of New Second Circuit Case Regarding “Drop-Down” Issue

You never get a second chance to make a first impression.

This adage is never more true than when tendering a claim to your client’s liability insurer. When the claim is tendered correctly, you can minimize delay, avoid disputes and establish a healthy working relationship with the insurer. Here are four simple guidelines for tendering a claim.

Click here for the complete article previously published in The Recorder.

On November 23, 2010, the California Supreme Court declined review of the First Appellate District’s decision in Howard v. American National Fire Insurance Co., 187 Cal. App. 4th 498 (2010).  As I noted in a prior blog postHoward provides powerful, additional support for policyholders demanding that their liability insurer fund a settlement.

In Howard, the Court of Appeal considered whether an insurer can be held liable for bad faith breach of its duty to settle if it rejects a settlement offer that is within the total available limits of all the insurers’ policies, but which exceeds the limits of its own individual policy.  In the first clear statement of California law on this issue, the First Appellate District concluded that in a “multiple insurer case, the law cannot excuse one insurer for refusing to tender its policy limits simply because other insurers likewise acted in bad faith.  If this were not the case, insurers on the risk could simply all act in bad faith, thus immunizing themselves from bad faith liability.”  The Court of Appeal went on to find that an excess judgment is not necessarily required in order to support a finding of bad faith failure to settle, particularly where the insured also sustains consequential damages arising out of the insurer’s conduct.

California policyholders and their counsel frequently face the situation presented in Howard:  a loss giving rise to a potential for coverage under multiple policies.  Before the Howard decision, each insurer would often take the position that it had no duty to settle unless the plaintiff’s settlement demand was within the limits of its own individual policy.  The First Appellate District clearly rejected this premise, holding that each such insurer faces bad faith exposure if it rejects a reasonable settlement demand that is within the combined indemnity limits of all triggered policies.  Now, the California Supreme Court has both denied review and denied the defendant insurer’s depublication request.  Thus, Howard remains a citable authority on which policyholders can rely to demonstrate that their insurer has a present duty to fund settlement.

In a recent blog post, I cautioned that California insureds should question the conventional wisdom that "wage and hour" class actions simply aren’t covered under Employment Practices Liability (EPL) policies. A new order from the Central District of California lends further support for this view. In Professional Security Consultants, Inc. v. United States Fire Insurance Co., Case No. CV 10-04588 SJO (SSx), Judge James Otero recently denied an EPL insurer’s motion to dismiss a complaint seeking coverage for costs incurred to defend and settle an underlying wage and hour class action.

The underlying litigation alleged that employer Professional Security Consultants ("PSC") violated various provisions of the California Labor Code, including wrongfully withholding overtime compensation. PSC was insured under an EPL policy issued by United States Fire ("US Fire"). US Fire moved to dismiss the coverage action on the basis of its "FLSA" (Fair Labor Standards Act) Exclusion. The exclusionary language at issue was typical of such exclusions, barring coverage "for violations of the responsibilities, obligations or duties imposed by…the Fair Labor Standard Act…or similar provisions of any federal, state or local or foreign statutory or common law."

Citing California law regarding the breadth and scope of an insurer’s duty to defend, the court denied US Fire’s motion. The court noted that the policy’s definition of an "Employment Practices Wrongful Act" included "employment-related misrepresentations." Comparing this policy language to the allegations of the complaint, the court emphasized the underlying plaintiffs’ allegation that PSC "[d]isseminated false information throughout [PSC’s] facilities and amongst [PSCs] employees, reciting that, under [PSC’s] labor policies and practices and under California law, the members of the Illegal Wages Class were not entitled to overtime compensation." The complaint therefore alleged "employment-related misrepresentations," triggering the potential for coverage under the policy.

The court also rejected US Fire’s argument that there was no potential indemnity coverage because any amounts allegedly owed to the underlying Plaintiffs were not covered "Loss" under the policy. The court observed that the policy’s definition of covered Loss included "damages," and that the underlying complaint expressly sought to recover damages.

Although decided under the liberal motion to dismiss standard, this new ruling provides another reminder that a FLSA Exclusion is not necessarily an absolute bar to EPL coverage for wage and hour class actions. As I noted in my prior post, the law governing insurance coverage wage and hour class actions is far from settled in California. To determine whether the potential for coverage exists, insureds should closely examine both their own policy language and the specific allegations of the underlying complaint.

A recent California Court of Appeal case, Howard v. American National Fire Insurance Co., 187 Cal. App. 4th 498 (2010), addresses a question that all insurance litigators will find of particular interest: whether an insurer can breach its duty to settle by rejecting a settlement offer that is within the total available limits of all the insurers’ policies, but which exceeds the limits of its own individual policy.  In the first clear statement of California law on this issue, the First Appellate District ruled that the answer is “yes.”

In the underlying case, plaintiff James Howard filed suit against the Roman Catholic Bishop of Stockton, alleging negligent hiring and supervision of a priest who sexually abused him throughout his childhood.  Although several of the Bishop’s insurers agreed to defend, American National Fire Insurance Company did not.  Howard’s lowest pre-trial settlement demand was $1.85 million.  American’s limits were $500,000, and the total combined indemnity limits of all the insurance policies implicated by Howard’s claim was $4.3 million.  American refused to make any meaningful contribution, and the case did not settle.

At trial, James Howard obtained a judgment against the Bishop of $2.5 million in (insurable) compensatory damages and $3 million in (uninsurable) punitive damages.  The Bishop struggled to satisfy the judgment.  The Bishop ultimately entered into several settlements with his insurers and Howard, eventually assigning all rights against American to Howard.

The Court of Appeal affirmed a finding that American breached its duty to settle and acted in bad faith.  The Court concluded that American could not avoid bad faith liability merely because its $500,000 limit, on its own, would have been insufficient to fund Howard’s lowest settlement demand.  In a “multiple insurer case,” the Court found, “the law cannot excuse one insurer for refusing to tender its policy limits simply because other insurers likewise acted in bad faith.  If this were not the case, insurers on the risk could simply all act in bad faith, thus immunizing themselves from bad faith liability.”

The court went on to find that an excess judgment is not necessarily required in order to support a finding of bad faith failure to settle, particularly where the insured also sustains consequential damages arising out of the insurer’s conduct.  Here, “the Bishop was exposed to dire financial circumstances as a direct result of American’s failure to defend, indemnify, or settle James Howard’s claim.” The Court of Appeal therefore concluded that, on the facts of this case, American acted in bad faith.

On its face, the Howard case has little in common with most business insurance disputes.  However, policyholders and their counsel frequently face the situation in which a loss gives rise to a potential for coverage under multiple policies.  For example, a continuous or progressive loss may trigger multiple CGL policies.  A plaintiff will rarely make a settlement demand that is within the limits of a single policy year.  In such circumstances, insurers will often taken the position that they are under no duty to settle.  As there is no pending settlement demand within its own policy limits, the insurer reasons, the insured would not be able to demonstrate the requisite causation and damages necessary to prevail on a claim for breach of the implied covenant of good faith and fair dealing.  The new Howard decision clearly rejects this premise, holding that each such insurer faces bad faith exposure if it rejects a reasonable settlement demand that is within the combined indemnity limits of all triggered policies.

Nor is the Howard case strictly limited to progressive losses that trigger multiple, successive primary policies.  Rather, the Court of Appeal speaks broadly of “multiple insurer” cases, which could also be interpreted to apply to a tower of primary and excess policies in place during a single policy period.  Thus, policyholders facing a settlement demand that exceeds the limits of the primary policy, but is within the limits of the combined primary and excess layers, can also rely on Howard

Howard provides powerful, additional support for policyholders who seek to demonstrate that their liability insurer has a present duty to fund settlement.  For this reason (and because the Howard court upheld a judgment of over $4 million in compensatory damages, punitive damages, costs and interest), American is already challenging the decision.  It has petitioned for rehearing, and a petition for review is likely if the attempt to secure a rehearing fails.  The Howard case is definitely one to watch.

In Clarendon America Insurance Company v. North American Capacity Insurance Company, E048176, 4th Dist. Ct. App. (Super. Ct. No. CIVRS701868), a new California Court of Appeal decision, the Fourth Appellate District has rejected an insurer’s attempt to apply multiple self-insured retentions to a single lawsuit.

Clarendon America Insurance Company (“Clarendon”) and North American Capacity Insurance Company (“NAC”) issued general liability insurance policies to a home builder (“Tanamera”) for two successive one-year policy periods.  Tanamera was sued by a group of individual homeowners for various alleged construction defects in one of its housing developments.  Of the 43 homes involved in the action, eight were completed during the NAC policy period (and therefore were covered by the NAC policy).

Clarendon agreed to defend the action, and ultimately settled it by paying a single lump sum to the homeowner group.  NAC, however, refused to defend or contribute to the settlement.  NAC’s policy imposed a self-insured retention (“SIR”) of $25,000 “per claim,” and NAC took the position that Tanamera had to pay a separate $25,000 SIR for each of the eight homes covered under its policy ($200,000 total).  Unless and until Tanamera did so, NAC argued, it had no duty to defend the litigation or contribute to settlement.  Clarendon sued NAC for equitable indemnity and contribution, and NAC moved for summary judgment on the basis of it SIR policy language.

The SIR provision stated, in pertinent part:

The Self-Insured Retention, shown above, applies to each and every claim made against any insured, to which this insurance applies, regardless of how many claims arise from a single ‘occurrence’ or are combined in a single ‘suit’.

The court acknowledged that on its face, this language appeared to draw a distinction between “claims” and “suits,” with a “suit” being capable of alleging multiple “claims.”  Based on this distinction, NAC argued that the term “claim” could only refer to each of the 43 homes involved in the construction defect litigation, while the term “suit” referred to the entire action.  Thus, NAC reasoned, Tanamera was required to satisfy a separate SIR for each of eight separate “claims” (the eight homes completed during the NAC policy period).

The Clarendon court, however, was not willing to take this leap.  The court observed that the term “claim” was undefined, and noted that in other places in the policy, the words “claim” and “suit” were used interchangeably.  Thus, the court could not accept the interpretation advanced by NAC as being the only reasonable interpretation of the SIR provision.  In the context of the policy as a whole and under the specific circumstances of this case, the term “claim” was subject to more than one reasonable interpretation, and therefore was ambiguous.  See E.M.M.I. Inc. v. Zurich Am. Ins. Co., 32 Cal. 4th 465, 470-71 (2004) (a case relied upon heavily by the Clarendon court).

The court went on to consider whether NAC had met its burden to show that the ambiguity should be resolved in NAC’s favor.  To do so, NAC had to establish that it would not have been objectively reasonable for Tanamera to expect that only one SIR would apply to a construction defect lawsuit involving multiple homes and multiple claimants.  See E.M.M.I. Inc., 32 Cal. 4th at 471.  The court concluded that NAC had presented no evidence below to support such a conclusion.  (Indeed, the court found support for the opposite conclusion by extrapolating NAC’s argument:  In a lawsuit involving all 450 homes covered under the policy, NAC’s interpretation would require Tanamera to pay $11.25 million in SIRs before it could access $2 million in liability limits.)

Although the Clarendon case involved a dispute among two insurers, the decision has positive implications for policyholders, who often confront this issue in coverage disputes with their insurers.  Insurers frequently attempt to leverage their policies’ SIR provisions in order to defer or entirely avoid their coverage obligations, attempting to apply multiple SIRs to a single lawsuit.  Clarendon makes clear that California courts will not permit this result unless the policy language clearly and unambiguously dictates it.