Challenges In Insurance Coverage Litigation


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This covers basic questions about coverage under insurance policies under Arkansas law

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Challenges In Insurance Coverage Litigation

  1. 1. Challenges in Insurance Coverage Litigation Gerry Schulze B.J. Walker May 5, 2004
  2. 2. Analyzing Insurance Contract Provisions • Pre Litigation Opinions on Underwriting and Coverage Issues – Does the Policy Cover the Damage Claimed? – Did the Damage Occur within the policy period?
  3. 3. What is Insurance? • Insurance is a special kind of contract • Insurance is heavily regulated • Three elements: – Risk Distribution – Among a substantial number of members – Through an insurer engaged primarily in the business of insurance
  4. 4. Risk Distribution • Risk: According to Black’s • The chance of injury, damage, or loss • The chance or degree of probability of loss to the subject matter of an insurance policy • The amount that an insurer stands to lose • A person or thing that an insuraer considers a hazard • The type of loss covered by a policy
  5. 5. Who will suffer the risk? • Without insurance, the unlucky person who suffers the misfortune • A person who intentionally or negligently proximately causes the misfortune to occur to others • Under certain statutory schemes, the party the legislature decides should bear the loss (Workers’ Compensation, e.g)
  6. 6. What risk can be transferred • Obviously, the actual misfortune cannot be transferred. If someone runs over me in the parking lot and breaks my leg, I can’t transfer the broken leg to him • Economic loss, and economic compensation for other losses is all we can transfer.
  7. 7. Insurance transfers risk • Insurer work on the basis of statistics • Actuaries calculate the risk of certain eventualities over the population of the insured • Insurers fix premium rates to cover losses, administrative costs, and other costs – Bonuses for insurance executives, for example
  8. 8. Factors in calculating risk/cost • To figure out a premium the actuary has to consider – What is the risk to be covered? – How frequently will the risk occur? – How much will it cost to cover the risk? – What will it cost to administer the program?
  9. 9. The Insurer • Primarily in the business of insurance • Compare warranties on merchandise – An insurer is in the business of insuring against risk of loss – A manufacturer can guarantee that its widgets will work. There is always a risk that the widgets won’t work. If that risk occurs, the insurer will replace the widgets. But the manufacturer isn’t really an insurer
  10. 10. Insurers act as underwriters • Underwriting in this context is just the act of assuming a risk by insuring it • The insurer assumes liability to pay the proceeds on loss • Historically, there were mutual assessment associations. Sometimes it was hard to collect when members were assessed. That’s where the underwriter came in.
  11. 11. Underwriting • Lloyd’s Coffee House in London, 1600’s, shippers would pass around a slip of paper with relevant facts. Interested person would write on the slip the amount of insurance, the rate, and his initials. Hence: Underwriting.
  12. 12. So what must the insurer do? • Gather data to fix premiums • Determine what losses it will cover • Drafting insurance contracts consistent with the law • Investigate and pay (or not pay) claims – It’s the “or not pay” that is why we’re here today
  13. 13. Types of Insurance • In theory just about anything legal could be insured • In practice most insurance actually written can be categorized as: – Life Insurance – Fire and Casualty Insurance – Marine and Inland Marine Insurance
  14. 14. Life Insurance • Pay on death—easy enough • Who is involved: – Insurer – “Owner” of the policy—who can change beneficiary – “Owner” often is, but is not always the subject of the policy, the cestui que vie – “Beneficiary” Who is paid in the event of loss
  15. 15. Fire and Casualty • Fire – Pretty simple concept – Except that by now this insurance also can cover other losses such as weather (lightning, water, etc). There is also earthquake, riot, etc. insurance available.
  16. 16. Casualty • Liability • Theft/burglary • Accident • Health • Property damage • Workers Compensation • Fidelity and surety bonds • Car insurance • Boat / airplane insurance
  17. 17. Marine Insurance • “Perils of the sea” • Fairly comprehensive, covering all losses except those excluded. • Similar, Inland Marine Insurance, covers gaps between seas and docks.
  18. 18. Yacht Insurance Policy • PERILS • Upon the Hull, Spars, Sails, Tackle, Apparel, Machinery, Boats, and other Furniture of and in the Yacht hereby insured. • Touching the adventures and perils which we, the Assurers, are contented to bear, and do take upon us, they are of the • seas, men-of-war, fire, enemies, pirates, rovers, assailing thieves, jettisons, letters of mart and countermart, reprisals, • takings at sea, arrests, restraints and detainments of all kings, princes and people, of what nation, condition or quality • soever, barratry of the Master and Mariners, and of all other like perils, losses and misfortunes, that have or shall • come to the hurt, detriment or damage of said Yacht or any part thereof.
  19. 19. Floater policies • All risk insurance on personal property not situated at a fixed location. Another kind of inland marine insurance.
  20. 20. No fault Compensation • Workers’ Compensation • Automobile No Fault
  21. 21. Policy language: Liability Insurance • The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of ... the property damage to which this insurance applies, caused by an occurrence.
  22. 22. Occurrence • An accident, including continuous repeated exposure to conditions, which results in bodily injury or property damage, neither expected nor intended from the standpoint of insured.
  23. 23. Language of Insurance Policies • Legal Language is a dialect of English – Special meaning of words--jargon – Special constructions • Subjunctive more common • Struggle for more precision in language • Use of “magic words”
  24. 24. Talking about legal writing • What is it that makes the language of contracts, including insurance contracts, so difficult for not only the lay person, but the lawyer as well? • In the most carefully crafted language, insurance policy forms, educated lawyers and judges can disagree greatly about the meaning of words, phrases, clauses, and paragraphs.
  25. 25. Characteristics of Legal Writing • Clarity – Word choice – Organization – Avoid Legalese where possible • In functional writing, legalese is often preferable • In persuasive writing you can get by with it when you have to • In “informative” writing it will seldom do much good
  26. 26. Characteristics of Legal Writing • Conciseness – Strunk’s advice, “Make each word tell.” – Sometimes you have to balance the need for completeness and the need for concise writing – Avoid repetition
  27. 27. Characteristics of Legal Writing • Accuracy/Precision – The goal is to be precise and understandable. – Ambiguity works against the insurer.
  28. 28. Kinds of Legal Writing • Informative • Persuasive • “Functional”
  29. 29. Informative • Letters to client – Not necessarily “simple” but not “legalese” – Explain terms • Interoffice memoranda • Opinion letter – understandable. – disclaimers
  30. 30. Persuasive • Briefs – Vary in complexity – Probably the most time consuming of all documents – Different concerns with • Trial Courts • Appellate Courts • Administrative Agencies • Settlement Brochures
  31. 31. Functional • This kind of document is one which is supposed to create a result – Will – Deed – Complaint – Trust – Power of Attorney – Contract – Real Estate Documents and, for our purposes – INSURANCE POLICY
  32. 32. Pre Litigation Opinions • Locate and read all relevant policies – Sometimes more than one policy may apply • Especially in business cases – Coordination of benefits • Who’s primary? • Excess coverage? • Umbrella coverage?
  33. 33. Read the Policy • , "Read the Statute and Read the Policy." State Farm Mut. Auto. Ins. Co. v. Beavers, 321 Ark. 292, 295, 901 S.W.2d 13 (1995)
  34. 34. Notice Provisions • Insurance policies typically have notice provisions. – Notice of “occurrence” – Notice of “claim” – Notice of “suit.”
  35. 35. Notice of loss • The insurance policy provides: 1. What To Do In Case Of Loss. If a covered loss occurs, the insured must: (a) give us immediate written notice. In case of theft, also notify the police. .... (d) send to us, within 60 days after loss, a proof of loss signed and sworn to by the insured, including: .... 10. Suit Against Us. We may not be sued unless there is full compliance with all the terms of this policy. Suit must be brought within one year (in Kansas 5 years) after the loss or damage occurs. Ripley v. Shelter Mut. Ins. Co. 1991 WL 89652, *1 (Ark.App.) (Ark.App.,1991)
  36. 36. Another example • Duties After Loss. In case of an accident or occurrence, the insured shall perform the following duties that apply. You shall cooperate with us in seeing that these duties are performed: • a. Give written notice to us or our agent as soon as practicable, which sets forth: • the identity of this policy and insured; • reasonably available information on the time, place and circumstances of the accident or occurrence; and • names and addresses of any claimants and available witnesses; • b. Immediately forward to us every notice, demand, summons or other process relating to the accident or occurrence. • "Immediately" means within a reasonable time under the circumstances. With most losses, the circumstances are that damage has been done, and evidence of how the damage was done, and how much damage was done, is quickly disappearing.
  37. 37. Definition of Damage • Property damage in the policy is defined as: • (1) Physical injury to or destruction of tangible property which occurs during the policy period, including the loss of use thereof at any time resulting therefrom, or • (2) Loss of use of tangible property which has not been physically injured or destroyed provided such loss of use is caused by an occurrence during the policy period.
  38. 38. Pre-Litigation Negotiations • Open a dialog with the insurer/insured if you can. • Sometimes it’s a waste of time, but if both parties are willing to resolve the dispute, it’s in both parties’ best interest to do it sooner rather than later.
  39. 39. Whether a Policy Covers the Damages Claimed—Example • Hit-and-run automobile means an automobile which causes bodily injury to an insured arising out of physical contact of such automobile with the insured or with an automobile which the insured is occupying at the time of the accident, provided: (1) there cannot be ascertained the identity of either the operator or owner of such "hit-and-run automobile. . .
  40. 40. Broad “Personal Injury” coverage under Commercial and General Liability coverage • “Personal injury" means injury, other than "bodily injury," arising out of certain enumerated "offenses." These include: • a. False arrest, detention or imprisonment; • b. Malicious prosecution; • c. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies by or on behalf of its owner, landlord or lessor; • d. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services; or • e. Oral or written publication of material that violates a person's right of privacy
  41. 41. Pollution Exclusions • This insurance does not apply to: • (1) "Bodily injury" or "property damage" arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants at or from premises owned, rented or occupied by the named insured. • (2) Any loss, cost or expense arising out of any governmental direction or request that the named insured test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants. • Pollutants means solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
  42. 42. Another Pollution Exclusion • In consideration of the premium charged, it is hereby agreed and declared that this policy shall not apply to bodily injury of property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere, or any water course or body of water.
  43. 43. Another version • 2. a "hit and run" land motor vehicle whose owner or driver remains unknown and which strikes: • a. the insured; or • b. the vehicle the insured is occupying and is the proximate cause of bodily injury to the insured.
  44. 44. Uninsured Motorist—Contact Rule • Still good law, probably • State Farm Mutual Ins. Co. v. Henderson, ___ Ark. ___ , ___ S.W.3d ___, 2004 WL 396355 (Mar. 4, 2004).
  45. 45. There may be a way out • Additionally, Henderson urges us to consider a recent act of the legislature, Act 1043 of 2003, which amended Ark.Code Ann. § 27-19-503 (Repl.2004) to provide a presumption that both a motorist and the vehicle itself are uninsured if the motorist fails to file a certificate of insurance within ninety days of an accident. Prior to that change, section 27-19-503 only provided such a presumption to the motorist, but not to the vehicle. Henderson asserts that this change relieves him of the burden to prove that the other vehicle was uninsured, as required in Ward, 259 Ark. 696, 535 S.W.2d 830. [FN1] We do not address this argument, as the amendment to section 27-19-503 was not made until some three years after the issuance of Henderson's policy and the date of his accident. This court has previously recognized that an insurance policy is governed by statutes in effect at the time of its issuance.
  46. 46. Whether the damage occurred during the policy period An occurrence policy provides coverage if the event insured against takes place within the policy period, regardless of when the claim is presented. The "claims made" policy provides coverage only if a claim is made during the policy period.
  47. 47. Duty to Defend • Can be broader than duty to indemnify • "As a general matter, the duty to defend is determined by comparing the allegations in the underlying complaint to the scope of the coverage provided by the insurance policy. If injury or damage within the policy coverage could result from the underlying suit, the duty to defend arises." Union Insurance Company v. The Knife Company, 897 F.Supp. 1213 (W.D.Ark. 1995).
  48. 48. Duty to Defend • ... the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damage, even if any of the allegations of the suit are groundless, false, or fraudulent ...
  49. 49. Comprehensive General Liability • In examining the duty to defend, this court has recognized the general rule that the allegations in the pleadings *176 against the insured determine the insurer's duty to defend. Murphy Oil USA, Inc. v. Unigard Security Ins. Co. 347 Ark. 167, 175-176, 61 S.W.3d 807, 812 (Ark.,2001)
  50. 50. Duty to defend broader • Additionally, this court has recognized that the duty to defend is broader than the duty to indemnify. See Commercial Union Ins. Co. of America v. Henshall, supra. However, the duty to defend arises when there is a possibility that the injury or damage may fall within the policy coverage. See Home Indemnity Co. v. City of Marianna, 291 Ark. 610, 727 S.W.2d 375 (1987). Conversely, where there is no possibility that the damage alleged in the complaint may fall within the policy coverage, there would be no duty to defend. Murphy Oil USA, Inc. v. Unigard Security Ins. Co. 347 Ark. 167, 176, 61 S.W.3d 807,812 - 13 (2001)
  51. 51. If the possibility of damages exists, the duty to defend arises • Home's secondary argument is that genuine issues of material fact remain. We are not persuaded that that is so. One fact assertedly undecided deals with the issue of whether damages will result in the federal suit. But the duty to defend is broader than the duty to pay damages and as we have seen, it is enough if the possibility of damages exists. If injury or damage within the policy coverage could result, the duty to defend arises. Commercial Union Ins. Co. v. Henshall, 262 Ark. 117, 553 S.W.2d 274 (1977).
  52. 52. Claim for reimbursement of Defense and Settlement Costs • An insured who is forced to defend and settle a case may have a cause of action against an insurer which wrongfully denied coverage • An insurer which defended an action under reservation of rights may have a claim for reimbursement against the insured.
  53. 53. Reimbursement • Brady & Handleman, INSURER'S RIGHT TO REIMBURSEMENT: NEGLECTED BUT VALUABLE REMEDY, 59 Def.Cou.J. 547 (Oct 1992) • Dennis Wall, 68 INSURED'S REIMBURSEMENT OF INSURERS'S DEFENSE EXPENSES: SOME PRACTICAL • STEPS, 65 Def.Cou.J. 68 (1998) • Melinda Kirk, THE INSURER'S RIGHT TO SEEK REIMBURSEMENT: WILL THE BUSS STOP IN • OKLAHOMA?, 38 Tulsa L.J. 599 (2000) – Interesting because it’s from another state that has not developed much law on the subject. – Buss refers to a seminal California case
  54. 54. Reimbursement • There are some practical difficulties – Insured probably won’t have the money – Insurer’s duty to defend is broader than duty to cover the losses.
  55. 55. Insurer’s right to withdraw defense • Arguably, if circumstances change in the course of litigation and it becomes clear that there is no conceivable liability covered by the policy, an insurer might withdraw • If so, it does so at its own risk.
  56. 56. Actions that Trigger Coverage • Occurrence – Means an accident, including continuous or repeated exposure to substantially the same general harmful conditions
  57. 57. Claim Analysis/Denial • Read the statute and read the policy • Who is the insured • What is covered • What is excluded • How much is payable?
  58. 58. Identifying the Insured • Named Insured • Defined Insured • Insured under “omnibus clause”
  59. 59. Named Insured • Since plain language came into effect, it’s usually something like, “Throughout this policy the words “you” and “your” refer to the Named Insured in the Declarations. The words “we,” “us,” and “our” refer to the Company providing this insurance.
  60. 60. Homeowner, example • --”and a spouse if a resident of the same household” • “Insured means you and the following persons if permanent residents of your household: – Your relatives – Anyone under the age of 21
  61. 61. Commercial General Liability, example • "your employees, other than your executive directors, but only for acts within the course and scope of their employment by you." Tri-State Ins. Co. v. Sing, 41 Ark. App. 142, 850 S.W.2d 6 (1993).
  62. 62. Omnibus Clause • Any person using your covered auto • Permission issues – Hell or High Water rule
  63. 63. Drafting a Reservation of Rights Letter • There are a lot of cases nationwide that hold that an insurer must state all possible grounds for claims denial in the reservation of rights letter. – Colorado Lawyer article, 26-AUG Colo. Law. 93 (Robinson and Powers)
  64. 64. Robinson and Powers • If the issue of coverage is anything but certain, it is advisable that the insurer provide a defense for its insured under a reservation of rights and, if appropriate, institute a declaratory judgment action to determine the insurer's obligations. A reservation of rights letter should be sent as soon as a coverage question is recognized, and it must inform the insured in detail of all the potential defenses to coverage the insurer has discovered from its investigation and analysis of the claim or suit.
  65. 65. Robinson and Powers, continued • Defenses known to the insurer, or those that the insurer reasonably should have known, that are omitted from the reservation of rights letter may be waived by the insurer. However, if additional grounds come to the knowledge of the insurer during its continued investigation of the claim or during discovery in the underlying lawsuit, the insurer can supplement its reservation of rights letter to add the newly discovered coverage defenses.
  66. 66. Robinson and Powers, Continued • The reservation of rights letter should make specific reference to the insurance policy and should quote from the actual policy provisions that are the basis for the insurer's decision to reserve the right to assert that there is no coverage for the claim under the policy. The reservation of rights letter should be sent to each person or entity that may assert a right to be considered a named insured or additional insured under the policy. Additionally, because an insured is entitled to know the excess insurer's position regarding coverage, the excess insurer should issue a reservation of rights letter to preserve the right to deny coverage.
  67. 67. Robinson and Powers, continued • Finally, the insurer should include in the reservation of rights letter a statement that it is reserving any and all rights that it might have under the pertinent insurance policy. This phrase was recently scrutinized in Employers' Fire Ins. v. Western Guaranty Fund, [in which the court held that while Employers' participated in the defense of its insured, it expressly reserved "any and all rights" which it might have under the policy to later contest the existence of any duty it may have to provide a defense. While the court refused to determine whether such language was sufficient to allow Employers' to seek reimbursement from the insured for defense costs, it found that the reservation of rights letter made it clear that the insurer's participation in the defense of its insured could not be construed as a waiver of its right to contest its duty to defend under the policy.