April 2024

Greetings to everyone in Insurance Land. Here is the first edition of my Coverage Review newsletter with the top seven things that I want you to know about insurance right now.?

This newsletter is 2,085 words, an 8.8-minute read.

1. ?? Certified Letter Good Enough for AWOL Insured

The Hawaii Supreme Court held that an insured’s receipt of a reservation of rights letter that explained the carrier had retained defense counsel for him established an attorney-client relationship between counsel and the insured.

Why it matters: The decision provides liability insurers some guidance on how to defend an insured under reservation when it cannot locate the insured.

Tortured procedural history: The insurer originally defended the insured against a wrongful death suit under reservation and filed a separate declaratory judgment action on the duty to defend.

• The trial court in the declaratory judgment action held the insurer had no duty to defend.
• The insurer withdrew its defense of the insured from the wrongful death suit.
• The trial court in the death case then entered default judgment against the insured for $3,562,000.
• The appellate court in the declaratory judgment action reversed course and said the insurer had a duty to defend.

Now what? The insurer sent the insured a letter by certified mail that informed the insured that it would defend the insured again under reservation of rights.

• The insurer’s letter had defense counsel’s contact information.
• It informed the insured that counsel would try to set aside the default judgment within the one year allowed.
• The insured signed for the letter.
• Defense counsel then sent the insured letters, left him voicemails, and hired investigators but could not locate him.

At the hearing on motion to set aside the default judgment, the plaintiff’s counsel argued that defense counsel had no authority to act on behalf of the insured.

• Defense counsel’s rebuttal: “We did do our best to try to contact him which then puts me in a weird position because what do I do? Sit on my hands and allow the one-year time period to lapse or do I do something and I file the motion? Well, I’m not going to sit on my hands.? I’m going to do my best to try to defend him properly, and that’s why we filed this motion, your Honor, and that’s why we’re here today.”

The Hawaii Supreme Court agreed with defense counsel.

• ?“A one-way certified letter falls short of our ideal standard for client communication, but [the insured] was a difficult client to find; it took two private investigators to finally track him down. We conclude that the letter sufficed to reestablish representation under the circumstances.”
• An insured in Hawaii may reject a reservation-of-rights defense, but the Supreme Court held that the insured’s “inaction” after receipt of the insurer’s letter “manifested implicit consent” “in the unique insurer-insured context.”?

2. ?? Coverage Counsel Should Pick Up the Phone

Unless the client says otherwise, it’s a good idea for a carrier’s outside insurance coverage counsel to call and discuss his or her initial coverage analysis with the adjuster before committing that analysis to a formal written opinion.

Why would you do this? Insurers often receive written coverage opinions from outside counsel that are inaccurate, unhelpful, incomplete, too lengthy, too expensive, or damaging to the insurer’s handling of the claim. A pre-written-opinion conference can stop these terrible written opinions in their tracks.

Isn’t this improper? Nope. A pre-written-opinion conference serves several important claim handling purposes, including:

• Identifying coverage issues and necessary information.
• Providing a better understanding of the coverage issues.
• Determining the format the written opinion should take.
• Analyzing the potential discoverability of the written opinion.
• Establishing a claim resolution strategy.

Want to learn more? Check out my article outlining the benefits of a pre-written-opinion conference between an insurance company and its coverage counsel.

3. ?? Coverage Counsel Acting as a Claims Professional

A federal district court in New York held that an insurer lost attorney-client privilege over communications with its outside coverage counsel when counsel advised the insurer which documents the carrier should seek from its insured as part of a coverage investigation.

Why it matters: The holding is one of the boldest court decisions that has embraced the emerging doctrine that an insurer has no attorney-client privilege with its coverage counsel when counsel performs a traditional claims function.

The backstory: The insurer’s claims adjuster in the New York case asked coverage counsel which documents the insurer should seek from its insured in order to give the insured an interim coverage position on a first-party bond claim. The court said:

• “Conducting an investigation prior to providing a coverage position is [the adjuster] Markey’s job.”
• “To perform this job Markey no doubt routinely asks [the insurer] GAIC’s insureds for documents.”
• “Here, he simply asks [coverage counsel] Graziano to be a part of a function that is central to Markey's essential job description,?i.e.,?to gather information from the insured.”
• “He could easily have drafted his own request to further his claims investigation.”
• “That he asked Graziano to write the request for him shows that Graziano was acting as a claims investigator, and not providing a legal opinion for his client.

This federal court in New York joined other state or federal courts in Indiana, New York, Missouri, Washington, Mississippi, and Oklahoma that either have adopted or considered this doctrine in various forms and contexts.

Go deeper: You can learn more about this troubling attack on insurers’ attorney-client privilege in my article here.

• You can also hear me discuss this issue with Sarannah McMurtry and Deborah Rosenthal at Perrin?Conferences’ Insurance Coverage & Allocation Issues Conference on May 8, 2024, at the Union League of Philadelphia. Insurer claims professionals and in house counsel can attend for free and obtain CE/CLE credits.

4. ?? Insurers Fight Back on Late Notice

More insurers are issuing insurance policies that try to negate the rule in some states that insurers must show prejudice to avoid coverage for an insured’s late notice of a claim or lawsuit.

Why it matters: Many jurisdictions impose an overly onerous actual prejudice standard on insurers when the insured gives late notice. These policy provisions try to address that unfairness.

• One Missouri court held that an insurer failed to show prejudice even though the insured’s late notice of a lawsuit resulted in entry of default judgment against the insured.
• In fairness, the insurer failed to explain why the suit against the insured was defensible, but still, it was a default judgment.

The insurer response: Some policies now place late notice conditions into the insuring agreement or add language that void coverage for late notice.

Will this work? A Florida appellate court recently held that policy language can change the default rule on prejudice.

• Florida typically presumes prejudice as a result of an insured’s late notice.
• The Florida appellate court, however, held that certain policy language in that case changed the rule to require the insurer to show prejudice.
• What is good for the goose should be good for the gander (translation: if policy language can change a default prejudice presumption to a prejudice requirement, then policy language could change a default prejudice requirement to no requirement at all).

5. ?? The Claim Is The Product

Elissa Doroff, who is Head of Americas, Claims at Mosaic Insurance, published an article on LinkedIn on how insurance start-ups can compete with claims excellence. Every claim professional and their in-house, outside and defense counsel should read it.

Why? She argues that carriers should not “regard claims as a back-office function of an insurance company.” In her words, “the claim is the product.”

Go deeper: Doroff writes: “A claims process that appears unnecessarily labored, bureaucratic, and plagued by delays will leave policyholders feeling the insurer is trying to renege on its promise to pay, whether or not that is actually the case.”

• In my experience, this is true. Some of the most difficult claims that I have encountered have turned not on complicated issues of coverage or caselaw, but on the simple fact that the plaintiff or the insured or their counsel (rightly or wrongly) felt ignored or disrespected by the insurer’s claims professional or their counsel.

“The bottom line,” Doroff contends, “is that claims are at the crux of the relationship between insurance buyer and insurer. In the eyes of the insured, the payment of a claim is the product of the insurance transaction, the validation of the policy itself. Claims directly impact client satisfaction and business retention.”

“If insureds have confidence the claims process will be fair, efficient, and transparent, they feel greater assurance they are getting the coverage they paid for,” Doroff concludes.

• I agree. And when the claims department establishes this relationship with its insured, I have found that counsel retained by the insurer to defend the insured against a liability claim has a better opportunity to work with the insured to arrive at a favorable result.

6. ?? Sophisticated Insured Exception to Ambiguity Rule

Two recent appellate decisions have held or suggested that courts may not necessarily interpret ambiguous policy language against insurers when the insured is a sophisticated party.

The big picture: Insureds always argue if insurance policy language is ambiguous, the insurer loses. These decisions show there is another option.

The first ruling: The Seventh Circuit held that a bankruptcy court should have considered extrinsic evidence to determine whether a $250,000 sublimit endorsement for “Third Party EPL” applied instead of an overall liability limit of $5 million.

• Although the policy did not define “Third Party EPL,” the appellate court acknowledged it was an “insurance term of art.”
• The appellate court held that the bankruptcy court should have considered evidence of the parties’ coverage negotiation history—“at least in a case involving a sophisticated insured that was able to negotiate the scope of the relevant coverage, notwithstanding the general principle that ambiguities are construed in favor of the insured.”

The second ruling: A New York appellate court considered extrinsic evidence and ruled that a multi-year policy’s “occurrence” limit should apply on a term basis, rather than an annual basis.

• The court explained that the rule interpreting ambiguities against insurers does not apply when the policyholder is “sophisticated.”
• “The insurer’s ‘custom-and-practice expert … gave unrebutted testimony that [the insured] was sophisticated because, in addition to its large self-insured retention, it … maintained a separate insurance department for handling claims, had several layers of excess coverage, and obtained insurance through [a] large corporate brokerage….?Given this evidence, the court has little difficulty concluding that Brooklyn Union was sophisticated,’” the New York appellate court explained.

Behind the rulings: The principle that courts should construe ambiguities in insurance policies against the carrier makes more sense when the insurer drafts all policy language, the parties do not negotiate the terms, and the insured lacks sophistication in insurance. It makes less sense when one or more of these factors are missing.

7. ?? Mediating Liability Claims As A Team

Last month, I spoke on a panel with insurance coverage and defense counsel Catherine Naltsas and policyholder counsel Seth Lamden on how to effectively mediate liability claims with insurance coverage issues at the “West Coast Waves - Navigating Insurance Coverage Currents” seminar for the American Bar Association’s Tort Trial & Insurance Practice Section in La Jolla, California.

Who cares? For one, I do. It was gorgeous out there and I cannot wait to go back! ?? More importantly, the panel discussion made me realize more than ever this key fact: a successful resolution of a liability claim at mediation depends on cooperation between the insured and the insurer.

Between the lines: Liability claims with insurance coverage issues, particularly ones with potential extra-contractual risk, can be a moving target and very fact specific. These cases often pose substantial risks for both insured and insurer.

• ?An insured may face the possibility of paying an uncovered or excess verdict and potentially incurring substantial legal fees in a bad faith action against its insurer, which may be unsuccessful.
• An insurer may face the possibility of paying an excess verdict and additionally incurring substantial legal fees to defend a bad faith action, which may be successful. In some jurisdictions, if the insurer loses, it also may incur punitive damages and the insured’s legal fees.
• These risks increase if the relationship between the insured and the insurer becomes adversarial before or at mediation.
• Because insurance coverage and bad faith litigation poses enormous risks for both the insured and the insurer, it is in both sides’ interests to avoid these outcomes and cooperate to resolve the claim the mediation.

Want to know more about how to do this? If you work for an insurer, contact me and I can send you a white paper on the topic.

Coverage Review is written by Michael L. Young, an award-winning litigation partner at Reichardt, Noce & Young LLC in St. Louis, Missouri. For over twenty years, Michael has focused his practice on insurance coverage and extra-contractual matters and currently represents insurer clients in Missouri and Illinois. He also serves as Adjunct Faculty at Saint Louis University School of Law and teaches a course in Insurance Law. ?? Be sure to check out his popular insurance podcast Tales From Insurance Land.