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When James W. Marshall found gold in 1848 in California, over 300,000 prospectors migrated to California to take part in the new financial economy. The Oregon gold rush started a few years later at Josephine Creek, and a smaller rush happened in Washington State in the early 1880s starting at Swauk Creek. As a result of this influx of prospectors to the gold-rich West Coast, and the high risk/high reward nature of the business, appetite for risk in the region increased dramatically. Prospectors knew that it was a big risk to get a big reward.

This appetite for risk continues to this day in the realm of third-party liability coverage. When you purchase a general liability policy, the insurer agrees that it will pay any covered settlement or judgment up to the “policy limits,” an amount negotiated when the policy is purchased. But the insurance policy does not typically require an insurer to settle a case before trial. Courts have changed that.Continue Reading The Gold Rush – Risks and Rewards When an Insurer Prospects for a Defense Verdict

If an insurance company owes a duty to defend, the dispute should be decided promptly, on the pleadings. Any delay undermines the duty to defend. The scope of the duty to defend should be adjudicated on the pleadings as quickly as possible to give policyholders the true value of their policies and the benefit of their contracts.

The value and purpose of the duty to defend

The duty to defend is one of the most valuable components of an insurance policy. Like it or not, American society is litigious. Companies cannot prevent lawsuits through good conduct, laudable intentions, or strong compliance programs.  Refuting liability and damages is expensive even if the core facts are undisputed or the case is frivolous.

For a single company or individual, the frequency and size of litigation generally is unpredictable, making budgeting for defense costs a difficult task.  In any single year, the risk of litigation is low, but when a claim does come in, defense costs can be significant.  This litigation landscape is a problem for legal departments trying to budget or reserve for litigation costs.

The duty to defend addresses this problem using the principles of risk transfer and risk pooling.

  • Risk transfer: the risk and costs of defending litigation is transferred to the insurance company in exchange for a premium payment.
  • Risk pooling: the insurance company takes the collective risks of litigation against all policyholders in a pool large enough that aggregate defense costs can be statistically analyzed and predicted on an annual basis.

This way no one has to assess the risk that any individual company is sued or anticipate those defense costs. Policyholders can include insurance premium costs in their legal budgets, and shift covered defense costs onto the insurer. The insurance company underwriters can evaluate the aggregate defense spend at a gross systemic level and charge premiums to cover those costs (with a healthy profit margin).Continue Reading The duty to defend requires an early judgment

On November 8, 2016, the District Court in the District of Massachusetts held that AIG has a duty to defend Bill Cosby against pending defamation claims under both Massachusetts and California law. The court rejected AIG’s contention that the defamation claims fall within the exclusion for sexual misconduct since they were “arising out of” claimants’ original allegations of sexual misconduct.  Instead, the court found the exclusion was at least ambiguous in the context of these defamation claims and, therefore, a duty defend is owed.

It is generally well known that William H. Cosby, Jr., (known familiarly in his comedy and acting career as Bill Cosby), has been accused on a number of occasions of sexual misconduct many years ago. Cosby has denied the allegations in public statements issued personally and through representatives.

Based upon these denials, three defamation cases were filed against Cosby and others in the District Court of Massachusetts.  Green v. Cosby, Case No. 14-cv-30211, Ruehli v. Cosby, Case No. 15-cv-13796, and McKee v. Cosby, Case No. 15-cv-30221.  Cosby sought coverage for the defamation claims under a Massachusetts homeowners policy (“Homeowner’s Policy”) and a personal excess liability policy (“Excess Policy”), both purchased from AIG.  The policies cover claims alleging personal injury, which is defined to include “[d]efamation, libel or slander” emotional distress.  While the Homeowner’s Policy includes a duty to pay defense costs, the Excess Policy includes a duty to defend.  Both policies exclude actions “arising out of” sexual misconduct, harassment or abuse.
Continue Reading The Cosby Show: The Insurance Coverage Episode

A California appeals court recently sharpened the teeth of insurance companies’ duty to settle [Ace Am. Ins. Co. v. Fireman’s Fund Ins. Co. (2016) 2 Cal. App. 5th 159].  By broadening the situations in which an insurer can be held liable for failing to settle within limits to include cases that never go to verdict or judgment, this ruling protects policyholders from unreasonable insurer decision-making without forcing them into risky trials.  With a clear split among the California Appellate Divisions, this issue is now ripe for Supreme Court review.

On the set of Warner Bros.’ superhero film “Green Lantern,” a stunt gone wrong injured a special effects supervisor, who then sued Warner Bros. Entertainment Inc. and related entities to recover damages for his injuries. Warner Bros. had a $2 million primary policy and $3 million umbrella policy with Fireman’s Fund, and an excess policy of $50 million with Ace American to respond to the accident.
Continue Reading Recent California Ruling Enables Excess Carriers to Put Additional Pressure On a Primary Carrier to Accept a Reasonable Policy Limits Demand

A California district court pushed back on the restrictive interpretation of a standard intellectual property exclusion and found coverage for a policyholder’s patent related lawsuit. The United States District Court (Northern District of California) recently ruled that claims asserting (1) the breach of a patent license agreement and (2) patent misuse were covered under a commercial insurance policy, and not subject to the policy’s intellectual property exclusion.  Moreover, the court found that the mere fact that claims are related to assertions of infringement does not preclude coverage unless the claims assert injuries as a result of that infringement.

The Underlying Action

Policyholder Tessera initiated an International Trade Commission (ITC) investigation, accusing several companies of infringing its patents by importing and selling semiconductor packages.  Several of these companies were customers of Powertech Technology Inc. (PTI), a company that had obtained a license agreement from Tessera.  In December 2011, PTI sued Tessera on several claims and defenses relating to Tessera’s ITC investigation, including breach of the licensing agreement, fraud and deceit, and patent misuse. In February 2012, Tessera tendered the defense and immunity of these claims under three commercial insurance policies issued by St. Paul Mercury Ins. Co. (St. Paul), which accepted the tender of defense under a full reservation of rights, but disputed coverage.  After initial motion practice, Tessera and PTI resolved the action by settlement.

The Coverage Action

In April 2012, St. Paul initiated an action for declaratory relief against Tessera, claiming that the standard intellectual property exclusion in its policy excluded from coverage the claims asserted against Tessera. The exclusion at issue bars coverage for: “injury or damage or medical expenses that result from any actual or alleged infringement or violation of any of the following rights or laws: […] Patent…Other intellectual property rights or laws….”  The exclusion also bars coverage for “any other injury or damage or medical expenses alleged in a claim or suit that also alleges any such infringement or violation.” 
Continue Reading A Recent California Federal Court Decision Restores Coverage For Some Patent-Related Lawsuits

On Monday, April 25, 2016, the Supreme Court of Colorado ruled that policyholders could not be indemnified for a settlement incurred before providing their insurers of notice of the claim—even if the insurer did not suffer any prejudice from lack of notice. In a 4-3 decision in Travelers Prop. Cas. Co. v. Stresscon Co., No. 13SC815 (Colo. Apr. 25, 2016) (“Stresscon”) the court held that “no-voluntary-payments” provisions (or “consent-to-settle” provisions) would excuse an insurer’s duty to indemnify settlement amounts of which the insured had not provided notice.

The question before the court was whether the notice-prejudice rule it had applied to occurrence-based liability policies in Friedland v. Travelers Indem. Co., 105 P.3d 639 (Colo. 2005) (“Friedland”) prevented an insurer from avoiding indemnification under the “no-voluntary-payments” provision. In Friedland, the Colorado Supreme Court agreed with jurisdictions that require an insurer to show prejudice before denying a claim if notice was untimely. The court stated in Friedland that notice provided after a claim had settled did not necessarily preclude a policyholder’s recovery of insurance benefits, but created a presumption that the insurer suffered prejudice. If the policyholder adequately rebutted the presumption of prejudice, then the insurer would be permitted to deny coverage only if it proved actual prejudice. The court did not address the question of how the notice-prejudice rule interacted with a no-voluntary-payments provision.

This question was answered Monday in Stresscon. In Stresscon, a concrete subcontractor (the policyholder) was sued by its contractor to recover damages incurred as a result of construction delays caused by the policyholder. Before any suit had been filed, the policyholder entered into a settlement with the contractor without consulting its insurance company. Several months later, the policyholder sued its insurer (and other entities) and ultimately recovered a jury verdict for bad faith breach of contract.
Continue Reading Colorado Supreme Court Holds That An Insurer Need Not Show Prejudice If Denying Coverage For A Settlement Prior to Notice of Claim