1. JURISDICTIONAL ISSUES AFFECTINGJURISDICTIONAL ISSUES AFFECTING
THE INSURER-INSUREDTHE INSURER-INSURED
RELATIONSHIPRELATIONSHIP
Moderator: Gary Gassman, PartnerModerator: Gary Gassman, Partner
Meckler, Bulger, Tilson, Marick & PearsonMeckler, Bulger, Tilson, Marick & Pearson
Robert (“Robin”) WesterfieldRobert (“Robin”) Westerfield
Partner, Bowles & VernaPartner, Bowles & Verna
Robert Cutbirth, CounselRobert Cutbirth, Counsel
Tucker, Ellis & WestTucker, Ellis & West
Al Chute, Senior Claims OfficerAl Chute, Senior Claims Officer
Chubb & SonChubb & Son
Kristine TejanoKristine Tejano
Claims Counsel, XL GroupClaims Counsel, XL Group

2. Overview of our ProgramOverview of our Program
This morning we will be exploring four primary issues:This morning we will be exploring four primary issues:
• Venue, Choice Of Law, And Mandatory ArbitrationVenue, Choice Of Law, And Mandatory Arbitration
Clauses That Can Modify The Rights And Obligations OfClauses That Can Modify The Rights And Obligations Of
Parties To An Insurance PolicyParties To An Insurance Policy
• ““Four Corners” Vs. “All Available Facts” JurisdictionsFour Corners” Vs. “All Available Facts” Jurisdictions
And Their Effect On Defense Rights And InvestigationAnd Their Effect On Defense Rights And Investigation
ObligationsObligations
• How Different Jurisdictions Approach The Legal ConceptHow Different Jurisdictions Approach The Legal Concept
Of “Breach” Of The Duty To Defend And ItsOf “Breach” Of The Duty To Defend And Its
RamificationsRamifications
• How Different Jurisdictions Evaluate Available DamageHow Different Jurisdictions Evaluate Available Damage
Rights And RemediesRights And Remedies

3. ICLC 2009
The Boring Insurance Way

4. The CategoriesThe Categories
Oh Lord,Oh Lord,
Where Do WeWhere Do We
Go?Go?
Good God,Good God,
Now WhatNow What
Do I Do?Do I Do?
You’re Kidding,You’re Kidding,
You WantYou Want
What?What?
1010 1010 1010
2020 2020 2020
3030 3030 3030

5. A liability policy is issued to a Minnesota Insured, whose broker is
based in Chicago, where the policy was delivered by the New York-
based insurer. Litigation against the insured was filed in New York.
The policy contains a standardized venue provision stating that all
disputes under the policy are to be resolved by binding arbitration, and
controlled by the law of the state where the Insured maintains its
principal place of business. An endorsement then states that the law of
the jurisdiction most favorable to the insured will be applied.
1. What disputes are encompassed by such a provision?
2. If you are the Insurer/Insured facing a coverage dispute, does
such a clause cause you to consider early coverage litigation?
Jurisdiction and Choice of Law Clauses

6. In some jurisdictions, issues of rescission are not encompassed
in venue/forum selection clauses. They view such clauses as
only relating to claims ‘under the policy,” rather than disputes as
to the actual validity of the policy.
Jurisdiction and Choice of Law Clauses
If you believe that a particular jurisdiction or forum is better
suited to your concern, such a dispute may cause you to
earlier file a coverage case.
The Endorsement to the Policy may, however, change this
result if the Court is willing to entertain the view that it applies
to “all” disputes.

7. Declaratory Relief – When Needed
An insured maintains its primary place of business in Illinois, with
liability litigation filed it in that state. The Complaint arises from a
commercial banking and trust transaction that went terribly wrong,
resulting in the bank’s client asserting claims for breach of contract,
breach of the covenant of good faith, breach of fiduciary duty, and
interference with contractual relations. Based upon the insurer’s
reading of the complaint, regardless of how the causes of action are
labeled or characterized, the allegations all arise from the bank-
client contractual obligations.
1. Does the Insurer need to file a Declaratory Relief Action to
analyze its duty to defend?
2. What are the Insurer’s obligations, and the Insured’s rights
pending the results of the DRA?

8. Declaratory Relief Actions may be required in some jurisdictions,
such as Illinois, where the mere issuance of a reservation of rights
letter is insufficient to protect the insurer’s interests
Concerns for the Insurer: Costs, potential reflexive “bad faith” cross-
complaint, potential distractions to defense/settlement efforts.
Concerns for the Insured: Costs, potential distractions to
defense/settlement efforts.
Further challenges: Case may be stayed pending outcome of
underlying case if the facts are intertwined and potential discovery
concerns.
Declaratory Relief – When Needed

9. SELECTING YOUR FORUM
The insured is an interstate home builder based in Missouri. Plaintiffs are
Florida residents whose children were killed when one of the insured’s trucks,
carrying employees to a worksite in Texas, crossed a center line and struck
their vehicle just outside of Little Rock, Arkansas. A mediator places the
claim value at $3 million. The insured is on the verge of bankruptcy.
The liability complaint asserts that the employees had been drinking, with the
driver having a blood alcohol level twice the legal limit. The complaint adds
that the employees had just been visiting the driver’s elderly mother in Hope,
Arkansas. The driver tells the claims examiner that his mother’s house was
along the way, that he only had one drink, and that his employer knew about
the “detour.” The employer denies such knowledge, and he has fired the
driver. Everyone expects coverage litigation to be filed.
What are the competing interests that may cause the interested parties to
“run” to the courthouse, and which courthouse would/should they pick?

10. SELECTING YOUR FORUM
Depending on the factual allegations, the Complaint might be
viewed differently in a “four corners” jurisdiction as
compared to an “all facts” jurisdiction. The case also raises a
series of questions that may need to be resolved in a
declaratory relief action, particularly based on the
jurisdiction.
These situations are problematic because the insurer, the
employer, and the employee-driver all have competing and
potentially divergent interests.
The insured, particularly the employer, may have the greatest
exposure because …

11. Four Corners Jurisdictions
The Insured is an investment advisor based in Arizona or Florida.
The Insured is sued by a client alleging that it failed properly to
advise the client of risks of certain recommended investments.
The client has lost hundreds of thousands of dollars, and files suit
for breach of contract and breach of fiduciary duty, asserting that
the Insured not only “intentionally” failed to disclose the “known
risks” of these investments, but that the insured “knowingly”
advised the client to make “dangerous” investments solely
because they provided the insured with an “undisclosed kickback.”
1. What is the obligation of the Insurer to “investigate” the
claim beyond the allegations in the complaint?
2. What is the obligation of the Insurer to defend the claim?

12. Four Corners Jurisdictions
In a “four corners” jurisdiction, you are generally limited to evaluating
the facts in the complaint. Here, the facts alleged in the complaint
detailed an integrated scheme to defraud the client in order for the
insured to obtain wrongful profits.
From the standpoint of the insured, you probably want or need to look
for “ambiguous” wording in order to argue that there is an element of
“negligence” that can be read into the “four corners” of the complaint.
One of the other problems with this type of scenario is that the insured
investment advisor may be free from any wrongdoing. There is a
down market, with “reasonable investment choices made, and no
improper “kickbacks.” The insured may be “tarred” by public
disclosures of misdeeds by others. But, in strict “four corners”
jurisdictions, this may not matter.

13. Due to budget cuts, a School District must lay off teachers and professional
staff. By law these individuals must get three-months notice. Two weeks
after the notice letters are issued, four individuals targeted for layoffs allege
that the principal of John Day School engaged in acts of racial and sexual
discrimination. To recover compensatory damages, Plaintiffs must prove
intentional discrimination, but the District’s policy states that no coverage
exists for intentional acts established “in fact or by final adjudication.”
The Hispanic principal asserts that he engaged in no wrongful acts and that
the suits are a “conspiracy” to avoid the layoffs. The school’s secretary,
however, reveals that the principal said last week that “this is my chance to
get rid of those lazy Japanese women” and “this is my chance to keep hard
working Latino men here.” Secretary is married to a Japanese man.
1. Based on the foregoing facts, would the extension of a defense be
proper or required?
2. Would it matter if (a) the layoff process was strictly based on seniority
and/or (b) an e-mail search finds similar statements by principal?
All Relevant Facts Jurisdictions

14. In “all relevant facts” jurisdictions, allegations solely framed as “intentional”
misconduct may not eliminate a duty to defend. Responsive or extrinsic
facts suggesting negligence or unintended consequences may trigger a duty
to defend.
Yet, the policy language remains controlling. The question is whether the
insurer obtains enough information to conclusively state that uninsurable
discrimination “in fact” occurred. “Judgment calls” on the “interpretation”
of the facts may not be supportable in front of a judge or jury.
Claim investigations must, therefore, carefully consider biases and limited
perceptions/observations, as well as “unexpected” sources of claimed
“facts.” Even written documents might need to be interpreted (i.e., “joking
statements”). Yet, the duty to defend remains measured by the limited scope
of coverage and conclusive facts can support a withdrawal of a defense.
ALL RELEVANT FACTS JURISDICTIONS

15. The complaint asserts that Plaintiff was injured “on various dates in
2007 and 2008” by repeated “misappropriations” of funds from its
brokerage account. The brokerage company is reportedly on the
verge of bankruptcy. Plaintiff believes the only chance for recovery is
the triggering of insurance coverage. So, the complaint only contains
causes of action captioned in terms of “negligence,” although the
factual allegations speak only in terms of intentional misconduct by
the involved employees. The policy incepted on January 1, 2008.
1. As the insurer under an “occurrence” based policy, can you deny/
withdraw a defense if it later learns the only misappropriations
occurred in 2007?
2. Can you deny/withdraw the defense if there is undisputed
documentation that senior management knew of the misconduct
and allowed it to occur?
WHEN DO EXTRINSIC FACTS PROVIDE A BASIS TO
DENY OR WITHDRAW A DEFENSE

16. WHEN DO EXTRINSIC FACTS PROVIDE A BASIS TO
DENY OR WITHDRAW A DEFENSE
If the question of when the improper withdrawals occurred is no longer
in dispute, the insurer may be able to deny or withdraw its defense. If
the issue remains in dispute, regardless of external facts, the defense
probably cannot be withdrawn or denied. This would fall under the
concept that an insurer has a duty to defend “false or fraudulent” suits.
If the documentation is unequivocal regarding intentional misconduct,
there may be a right to withdraw the defense in some jurisdictions
(keeping in mind “final adjudication” or other policy provisions). You
must also evaluate whether “senior management’s” knowledge is
equivalent to corporate knowledge and approval. A corporate entity can
obtain a defense and indemnity for the intentional acts of its insureds,
unless the “senior managers” involved are effectively the “company” for
purposes of evaluating the company’s obligations.

17. RECOUPMENT OF ADVANCED DEFENSE FEES
An insured architect designed a commercial real estate building. He also
provided construction oversight services. The architect’s professional liability
policy limited coverage only to design-related services. The Complaint asserts
that the architect’s roof design was flawed (allowing for water intrusion), with the
architect failing to properly supervise the general contractor and subcontractors
regarding structural foundation work.
The insurer defended under a reservation of rights. At mediation, the mediator
suggests that the architect faces liability under both theories, stating that “under
the circumstances it will take a combined $1 million to extricate the architect
from the case.” The mediator says he cannot break down the figure any
further. $500,000 in defense fees have been advanced.
1. What must the insurer consider in determining whether to seek an
“advance funding” agreement or a right of recoupment?
2. What should the insured consider with respect to the insurer’s efforts
and in gauging its response?

18. There is a separation of factual allegations -- two different areas of
the building (roof vs. foundation) and two different functions (design
vs. construction oversight). There may be overlap in these areas, but
they also involve separate tasks, time entries, and activities.
The mediator has not helped the situation, but this may be due to his
need to get the case settled and he may know that if he steps into this
allocation morass he may not get the $1 million he needs to resolve
the case. Yet, you cannot apply a retroactive defense allocation
based on settlement exposures and you cannot undertake a further
“relative exposure” analysis without greater detail or agreement.
The insured and its counsel have their work cut out for them, which
may be made more complicated if panel counsel is involved (i.e., is
this a situation in which a right to independent counsel exists?).
RECOUPMENT OF ADVANCED DEFENSE FEES

19. California insured John Rich owns commercial office buildings. An employee of
Clean Co., his janitorial contractor in Texas, is injured when he slips on marble
flooring the employee claims was “too slippery.” Rich maintains the employee,
who had been mopping floors, had soap on his shoes and the suit is “bogus.”
Clean Co. was supposed to name Rich as an additional insured under its CGL
policy issued by Good Guys Assurance. Rich received a Certificate of
Insurance stating he was was an “additional insured.” Good Guys denies
coverage asserting that Rich is not an “additional insured” and that no
“additional insured” request was made by Clean Co.’s broker/agent. Good
Guys also concludes that there is no basis to conclude that the shoes caused
the injuries.
Rich’s liability policy has a $250,000 SIR which Rich paid in defending against
this lawsuit. Rich lost, the marble was slippery, and there was no soap.
1. As Rich’s attorney, how would you counsel your client?
2. If you were Good Guys, what concerns would you have in this situation?
THE FINANCIAL RISKS AND BENEFITS

20. Rich has a variety of issues to consider:
• He accepted a “certificate of insurance” – is there a “broker
issue” that is going to complicate the issue?
• Rich won – there was no act/omission by Clean Co. or its
employees causing the loss? Good Guys were correct that
there was no soapy involvement.
• Rich is out a lot of money, but he’s going to be really unhappy
if he throws good money after bad.
Good Guys also has issues to consider:
• Rich has spent money, he has resources, and depending on the
jurisdiction, he may want to file suit and increase everyone’s
costs, with Good Guys also facing the payment of Rich’s
attorneys’ fees.
THE FINANCIAL RISKS AND BENEFITS

21. A Florida insured is named in a complaint asserting breach of contract
claims and damages. Coverage was properly denied. An amended
complaint is filed factually and legally expanding the allegations to
include “tortious interference with contract” and “breach of fiduciary
duties.” The amended complaint is tendered, and the insurer reflexively
reaffirms its earlier coverage denial believing the allegations were
wrongfully “manipulated” in an effort to create coverage, with the
complaint still based solely on excluded “contract” theories.
The insured’s counsel issues a pre-suit demand letter discussing the
effect of the litigation on the insured’s health, on his finances ($75,000
in defense fees), and on his solvency now that Plaintiff has issued a
“policy limit” settlement demand that, if rejected, “will never be seen
again.” The value of the case seems likely to exceed the policy limit.
1. What should the insurer do?
2. If the insured wants to protect her interests, what should she do?
Managing Post-Complaint Changes in Position

22. Whether it is the insured or the insurer, one of the most difficult
things to do is acknowledge a mistake. The situation becomes
more complicated when the parties have become polarized through
threats or written accusations that may arise either before or after
the mistake has been made.
In jurisdictions where policy limits can be “uncapped,” or there is a
right to recover extra-contractual damages, the insurer should
usually seek to proactively open the lines of communication and
seek alternatives. Prolonging the impasse, or failing to change a
position shown to be problematic, places you at far greater risk.
From the insured’s standpoint, even in jurisdictions where you can
seek “extra-contractual” relief, the insured needs to be mindful that
pressing the issue too hard may backfire. A “slam dunk” case may
not be a “slam dunk.”
Managing Post-Complaint Changes in Position