May 2024

Greetings to everyone in Insurance Land. Here is the May 2024 edition of my Coverage Review newsletter with the top six things that I want you to know about insurance right now.

This newsletter is 2,063 words, an 8.7-minute read.

1. ?? Co-Insurer Failure to Preserve Coverage Defense

An Illinois appellate court held that a liability insurer’s failure to file a timely declaratory judgment action prevented it from asserting its coverage defenses in an action brought against it by a co-insurer.

Why this matters: When one of an insured’s liability carriers wrongfully declines coverage, it often leaves the insured’s other insurer holding the bag to settle the case.

• A settling insurer typically seeks reimbursement from the declining insurer by arguing the declining insurer’s policy covers the claim too.
• This Illinois decision shows that a settling insurer also may seek recovery from a declining insurer on the grounds that the declining insurer failed to preserve its coverage defenses.

The deets of the claim: A dump truck driving to a road construction project struck and killed a 13-year-old bicyclist.

• The resulting wrongful death suit against Davis Concrete alleged that the concrete services company failed “to ensure adequate safety measures were in place for public individuals, like bikers and pedestrians, who encountered the construction area.”
• Nationwide insured Davis Concrete as a named insured.
• State Farm insured Davis Concrete as an additional insured under a CGL policy.
• State Farm declined coverage for Davis Concrete under an auto exclusion. It did not file an action for declaratory judgment.
• Nationwide paid $400,000 to settle the claim against Davis Concrete and sought recovery against State Farm in a declaratory judgment action.

The appellate decision: The court said that State Farm had to reimburse Nationwide for the Davis Concrete settlement.

• If an insurer in Illinois declines coverage and does not timely file a declaratory judgment action, the insurer is “estopped from raising any policy defenses to coverage, even if those defenses would have been successful had the insurer not breached its duty to defend.”
• The appellate court said State Farm breached its duty to defend: “Because the underlying negligence complaint alleged facts outside of the CGL policy's automotive exclusion and within, or potentially within, the policy's coverage, we conclude that State Farm's duty to defend was triggered and that State Farm breached its duty by not defending Davis Concrete in the underlying suit.”
• Because State Farm did not file an action for declaratory judgment, the court held that “State Farm was estopped from asserting any policy defenses to coverage.”
• Notably, the appellate court concluded: “Nationwide, as Davis Concrete's subrogee, is entitled to indemnity for the $400,000 it contributed to the … settlement on Davis Concrete's behalf.” (emphasis added).

The takeaway: When a liability insurer provides coverage and sees that another carrier has declined coverage for the insured, the carrier providing coverage should examine not only whether its co-insurer’s coverage decision is correct, but also whether that co-insurer has preserved its coverage defenses.

2. ?? New York Reads “Claim” Broadly

A federal district court in New York held that a demand for an accounting made by several plaintiffs in a real estate management matter constituted a “claim” for purposes of a claims-made policy even though the demand did not request monetary damages.

Why it matters: Whether and when a “claim” is made and must be reported to the insurer under a claims-made policy is highly specific to the policy language and jurisdiction at issue.

The policy requirements: The policy in the New York case stated that the insurer agreed to pay certain loss that “results from a Claim first made and reported in writing during the Policy Period.”

• The policy defined “Claim” as “a written demand received by [the insured] for monetary, non-monetary or injunctive relief.”

The demand specifics: The letter issued by plaintiffs to the property manager:

• Contended that “there are many serious issues arising from Pine’s management… and such claims should survive a motion to dismiss and a motion for summary judgment.”
• Asserted that the manager “breached its fiduciary dut[ies], “ha[d] not acted in good faith,” “breached provisions of the governing Operating Agreements,” “failed to disclose material facts,” was “ involved in related party transactions,” and “failed to provide key documents.”
• Requested non-monetary relief in the form of an accounting and demanded ten categories of documents for inspection.
• “Suggest[ed] that a meeting be scheduled to resolve [these] concerns,” in an effort to “bring about a mutually satisfactory resolution of these claims without having to commence litigation that would be costly to all parties involved.”

What the court said: “Here, the [demand] Letter alleged misconduct, cited theories of liability, referenced legal authority, demanded specific documents, requested an accounting, and suggested a meeting. That is sufficient under New York law to constitute a claim.”

• Because the “claim” was not reported during the policy period, the policy did not provide coverage.

3. ??? Detail Needed for ROR Letters

I think it is a good practice for insurance companies to fully explain their coverage defenses in a reservation of rights letter.

Why do this? Many jurisdictions require the insurer to provide some level of detail in their reservation of rights letters or else the coverage defense is lost. For example, a Missouri appellate court explained that an ROR letter should:

• Promptly advise the insured of any grounds on which it appears that all or any part of that asserted liability might not be covered.
• Be “specific and unambiguous”.
• Should “fully explain the insurer's position ... with respect to the coverage issue”.
• “[M[ust avoid any confusion.”

But there’s more: An ROR letter that fully explains the coverage defenses:

• Sets the insured’s expectations as to the coverage and defense provided.
• Allows defense counsel to know the coverage landmines to avoid in the defense of the insured.
• Better prepares the claims professional to explain the coverage defenses later in any litigation.

Go deeper: Check out my slide deck on key things to consider in ROR letters here .

4. ?? California Complicates Policy Cancellations

A California appellate court held that an auto liability insurer must send cancellation notices to all insureds named on its policy to effectively cancel the policy for non-payment of premium, not just those persons designated as “named insureds.”

Why this matters: The decision provides yet another example of how courts often interpret insurance cancellation statutes generously in favor of coverage for insureds.

The basic facts: Tania Molinar caused a serious car accident resulting in the death of her passenger and injuries to another driver.

• Tania Molinar was listed as a “Rated Driver” on the declarations page of her parents’ automobile liability policy.
• The declarations listed her parents as the “Named Insured.”
• A month before the accident, the auto insurer mailed a cancellation notice to Tania’s parents for non-payment of premium.
• The insurer did not mail a cancellation notice to Tania.

The California statute governing notice of cancellation of an automobile insurance policy required notice to "the named insured."

The court’s conclusion: “There is … no dispute that Tania was identified by name on the declarations page…. [T]herefore, she qualifies as an ‘insured[] named in the policy’ who was entitled to notice of cancellation under the statute…. The mere fact that [the insurer] labeled Tania as a rated driver does not alter her status as an ‘insured’ who was covered and specifically ‘named in the policy.’”

• The cancellation was ineffective and the insurer had to provide liability coverage for Tania.

The bottomline: Cancelling an insurance policy is risky business, particularly when cancellation results in no coverage for a serious injury claim under a personal lines policy.

• An insurer should check both its policy language and applicable statutes to make sure its cancellation complies with the law.
• Courts do not want to allow cancellation in these situations and will interpret any cancellation requirements accordingly.
• If an insurer is going to stand on a cancellation, it should double-check to make sure it has met all policy and statutory requirements.

5. ???? Litigation Conduct Sinks Insurers

Courts around the country are increasingly allowing evidence of an insurer’s conduct in coverage or bad faith litigation to prove the insurer’s bad faith for the underlying claim.

Why this matters: Insurers often believe that once a coverage or bad faith suit is filed, the matter becomes one for the lawyers to handle—in some jurisdictions, that is just not true.

Some context: In most states, the doctrine of litigation immunity or litigation privilege bars evidence of an insurer’s post-suit conduct in bad faith actions except in cases involving “extraordinary facts.”

On the other hand: Some courts have permitted evidence of insurer litigation conduct to prove bad faith in certain factual situations, such as the insurer’s:

• False or unsupported pleadings in Pennsylvania .
• Failure to produce information in discovery in Colorado .
• Appeal from an adverse trial court ruling in Illinois .
• Post-suit settlement offer in Missouri .

The takeaway: Insurers should examine whether their conduct in coverage or bad faith litigation—from filing through trial and appeal—supports their position that they are handling and responding to the claim in good faith.

• While some may place an emphasis on zealous and aggressive prosecution or defense of an insurance company’s position, an insurer’s litigation tactics and strategy, or those employed by outside counsel on its behalf, may prove counterproductive in a jurisdiction in which the insurer cannot avail itself of the protection afforded by litigation privilege or immunity.

Go deeper: You can check out an article I co-authored on this topic .

• You can also watch a webinar that I recorded with attorney Nick Arnold where we discuss these issues in detail. (The webinar is behind a paywall, but I have one free pass to give away to the first person who emails me for it.)

Discuss in person: Sarannah McMurtry , Deborah Rosenthal , Hillary Ladov , and I also will touch upon this topic at our “Role of Coverage Counsel When Handling a Claim” presentation 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 the Perrin conference for free and obtain CE/CLE credits.

6. ?? Connecticut Issues Artificial Intelligence Bulletin

The Connecticut Insurance Department issued a bulletin requiring domestic insurers to complete an Artificial Intelligence Certification by September 1, 2024 demonstrating that decisions or actions affecting consumers made and supported by AI Systems comply with the Connecticut Unfair Insurance Practices Act.

Why this matters: In the move to incorporate artificial intelligence systems in their claims and business practices, the Connecticut bulletin reminds insurers that they still must handle claims in good faith.

Computer flashback: The Washington Supreme Court held earlier this year that an insurer’s use of the FAIR Health computer database to assess the reasonableness of medical charges in PIP and med pay claims did not violate the state’s Consumer Protection Act.

• The database allows insurers to compare providers’ charges for specific treatments in a geographical area and determine different percentiles of those charges.
• The insurer’s claims practice in that case was to pay a bill in full if it was below the 80th percentile for the area, and if charge exceeded the 80th percentile benchmark, the payment was reduced to that amount.
• The appellate court rejected the argument that the insurer’s use of the database was unreasonable: “The FAIR Health database sets reasonableness on a scale by ordering submitted claims by amount and providing various percentile markers. Schiff argues that specific factors about providers must be incorporated into the review process, but FAIR Health incorporates certain factors inherently. For example, FAIR Health calculates the compensation for a doctor’s experience by including all bills submitted to insurance providers in a given area.”
• “Though some concerns have been expressed that the 80th percentile practice and the use of FAIR Health may result in treatment charges being reduced over time, this would not occur based on anything within the control of FAIR Health. The FAIR Health database contains claim bills as charged, not as paid. The market controls the 80th percentile and the range of charges. The market range can shift, but neither Liberty nor FAIR Health have the ability to shift the charged amount downward. More likely, the scale will naturally shift upward over time if and when providers increase their charges,” the court concluded.

Other states like Delaware and Illinois have reached similar conclusions.

The bottomline line: The insurance industry’s adoption of emerging technologies like artificial intelligence is not necessarily inconsistent with good faith claims handling if care is taken to develop systems with local claim handling requirements in mind, as suggested by these cases and the Connecticut bulletin.

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 .