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Archive: 2019

Article: Defense Costs Coverage 101

January 16, 2019

A recent New York Law Journal article by Howard B. Epstein and Theodore A. Keyes, “Defense Costs Coverage 101,” reports on defense fees and costs in the insurance coverage practice area.  This article was posted with permission.  The article reads:

Upon receipt of a claim, the risk manager or in-house counsel should coordinate with the company’s insurance broker to make sure notice is submitted to the insurer. However, even earlier, in anticipation of claims, counsel should review the terms of the relevant insurance policies and develop an understanding of the defense cost coverage provisions.

An insurance company’s obligation to pay defense costs incurred by its insured in response to a claim typically falls into one of two categories: (1) a duty to defend or (2) a duty to advance defense costs. The duty to defend is most often included in general liability (GL) policies while the duty to advance is more likely to be included in directors’ and officers’ liability (D&O) policies. Policy forms can vary, however, and a GL or D&O policy may contain either type of defense obligation. In addition, specialty insurance policies covering, for example, employment practices or pollution liability risks may contain either a duty to a defend or duty to advance clause.

Regardless of the type of insurance policy, an insurer may be willing to consider including either defense clause if requested by the broker or the insured. While each of these clauses provides insurance for defense costs incurred by the insured, there are distinctions worth considering which may dictate which clause is preferable for a given insured.

Duty to Defend

While case law varies to some degree from state to state, the duty to defend is broader than the duty to advance under New York law and the law of the majority of other jurisdictions. It is also well-settled that the duty to defend is broader than the insurer’s duty to indemnify for loss under a policy. The duty to defend is triggered “whenever the allegations in a complaint against the insured fall within the scope of risks undertaken by the insurer, regardless of how false or groundless those allegations may be.” Seaboard Surety Company v. Gillette Company, 64 N.Y.2d 304, 486 N.Y.S.2d 873 (1984). Even where some asserted claims fall outside the scope of covered risks, as long as some of the claims are within the scope of coverage, the insurer will have a duty to defend. Once triggered, the insurer is required to pay defense costs on behalf of the insured.

While the duty to defend is broader than the duty to advance, it also gives the insurer control over the defense of the claim. Typically, where a policy contains a duty to defend, the insurer will have the right to appoint defense counsel. Thus, with a duty to defend policy, the insured gets the benefit of broad defense coverage but gives up the right to choose defense counsel and, effectively, control of the defense.

An exception to this rule, in most jurisdictions including New York, is that where there is a conflict of interest between the insured and the insurer, the insured is entitled to select independent defense counsel. Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 442 N.Y.S.2d 422 (1981). In the case of such a conflict, the insurer is responsible to pay the reasonable defense fees of independent counsel.

Duty to Advance Defense Costs 

In contrast to the duty to defend, the duty to advance merely requires the insurer to reimburse the insured for costs incurred in defense of claims. Moreover, while the duty to defend requires the insurer to pay defense costs on behalf of an insured whenever the claims alleged fall within the scope of the risk insured, the duty to advance only requires the insurer to advance defense costs for covered claims.

Policies that contain a duty to advance clause generally require the insurer to advance defense costs on an unspecified “timely basis” or within a specified period of time that can range from 30 to 120 days after submission of invoices. Such policies also typically permit the insurer to allocate defense costs to covered and uncovered claims and thus, in some cases, provide a basis for the insurer to advance only a percentage of the defense costs. In addition, a duty to advance is conditional—in the event that it is subsequently determined that there is no coverage for the claims, the insurer may have a right to seek recoupment of the defense costs from the insured.

On the other hand, in the context of a duty to advance, the insured is typically entitled to select its own defense counsel and has control of the defense as well as the responsibility to defend the claim. In addition, a duty to advance will typically be triggered by a written demand seeking monetary relief whereas a duty to defend, in some policies, will only be triggered by an actual suit.

Key Considerations

Whether a duty to defend or duty to advance is a better fit for a particular insured may depend on several factors including the insured’s profile and the types of potential claims. For example, a cost-conscious insured may prefer a duty to defend because defense costs will be paid directly by the insurer and because the insurer is more likely to pay 100 percent (or close to 100 percent) of the defense costs above the applicable deductible or retention. In contrast, under a policy with a duty to advance, there is likely to be considerable lag time between the submission of legal invoices and payment by the insurer, and there is also a stronger possibility that the insurer will pay less than 100 percent of the invoices—either based on an allocation between covered and uncovered claims or persons or based on the insurer’s defense counsel guidelines.

Where choice of counsel is important to the insured, a duty to advance will likely be the preferred option. Choice of counsel may be of primary importance to an insured if the insured has a relationship with counsel in whom they have developed confidence. Similarly, if the claims at issue require a particular expertise or in-depth understanding of a specific industry, the insured may believe it is better positioned to select counsel than the insurer. Likewise, where the claims asserted threaten the continued viability of the insured’s business, the insured will likely prefer to retain counsel with whom they have substantial experience or counsel with a reputation for expertise in the relevant area.

While a duty to advance clause typically grants the insured the right to select counsel, in some cases selection of counsel will be subject to insurer approval, such approval not to be unreasonably withheld. In the case of either a duty to defend or advancement policy, it may also be possible to negotiate pre-approval of defense counsel.

Where control of the defense is the primary concern, a duty to advance policy will likely be a better fit for the insured. Control may be the primary concern where the insured is involved in a regulated industry and where it may be the subject of investigations or claims by government agencies. Similarly, where the insured operates in an industry in which litigation is relatively common or routine, the insured may prefer to have control over its defense. Likewise, where a claim concerns private, confidential or even potentially embarrassing issues, the insured will likely prefer to have control of the defense.

Timely Notice and Tender

In any event, regardless of the type of defense obligation, the risk manager or in-house counsel should be sure to give timely notice of claim in order to avoid jeopardizing the right to coverage. In addition, it is crucial to give notice as soon as possible because an insurer’s obligation to pay defense costs is not typically triggered until notice has been submitted. So while a couple of weeks’ delay in providing notice may not jeopardize coverage, the defense costs incurred prior to the notice will not be recoverable from the insurer. Further, to the extent that an opportunity for early settlement negotiations may arise, it will be necessary to coordinate those discussions with the insurer. Consequently, notice should always be provided before any significant defense costs are incurred.

Howard B. Epstein is a partner at Schulte Roth & Zabel, and Theodore A. Keyes is special counsel at the firm.

Saveri Firm Wins Fight Over $54M Fee Award in Fourth Circuit

January 15, 2019

A recent The Recorder story by Scott Flaherty, “San Francisco’s Saveri Wins Fight Over $54M Fee Award,” reports that San Francisco’s Joseph Saveri Law Firm, a specialist in antitrust class actions, has prevailed in a dispute with another plaintiffs firm over fees from a price fixing case that settled in 2013 for $163.5 million.

The U.S. Court of Appeals for the Fourth Circuit ruled in the Saveri firm’s favor on Monday, shooting down a bid by Miami’s Criden & Love for additional fees from an underlying antitrust case in Maryland federal court that accused titanium dioxide suppliers of fixing prices. The fee dispute began after a class settlement in the antitrust litigation that led to a $54 million award for plaintiffs lawyers involved in the case.

Criden & Love had argued that it deserved a referral fee from Joseph Saveri, a former Lieff Cabraser Heimann & Bernstein partner who split off in 2012 to start his own firm. But the appeals court held that Saveri, who served as lead counsel in the price fixing case, never actually entered a referral agreement with Criden & Love and had no obligation to pay.

“The appellant [Criden & Love] asserts a number of claims in this case, all of which ask for the same thing: a referral fee payment from Saveri’s law firm,” the Fourth Circuit wrote in a per curiam opinion.  “There is simply no basis on this record for finding the appellant entitled to such a payment.”

In reaching its decision, the appeals court first walked through the basics of referral fee arrangements among plaintiffs lawyers. The court explained that antitrust legal precedent allows only consumers who purchased goods or services from a supplier to challenge alleged anti-competitive conduct on that supplier’s part.

Because many buyers are hesitant to sue their suppliers and potentially disrupt their businesses, there’s a relative shortage of plaintiffs for antitrust class actions, the Fourth Circuit continued. Firms such as Criden & Love “step into the void,” finding purchasers willing to sue and referring them to larger antitrust specialist firms that have the resources to pursue a major class action. Criden & Love, in turn, typically earns a referral fee equal to 12.5 percent of whatever the larger firm earns.

In this case, Criden & Love in 2010 referred a purchaser of titanium dioxide, a substance used in paints and inks, to Lieff Cabraser and a second plaintiffs firm, Berger & Montague. At the time, Saveri was still at Lieff Cabraser and entered an appearance on behalf of the referred client, a business called Isaac Industries.

Saveri left Lieff Cabraser in 2012 to start his own firm, effectively ending his representation of Isaac Industries as an individual client, and his firm later filed an appearance for another titanium dioxide purchaser called Breen Color Concentrates, the Fourth Circuit wrote.

Saveri eventually became co-lead plaintiffs counsel in the price fixing litigation, alongside Lieff Cabraser and Cera LLP. When the case settled in 2013 for some $163.5 million, it opened the door for a sizable fee award. In all, the plaintiffs lawyers made $54 million and Saveri, as lead counsel, earned about $10 million of that, the Fourth Circuit wrote.

Criden & Love, for its part, took in about $2.8 million, with $900,000 of that coming as referral fees from Lieff Cabraser and Berger & Montague. But the firm believed Saveri, too, owed Criden & Love a referral payment, setting off a string of legal proceedings that led to Monday’s ruling.

The Fourth Circuit found that Saveri explicitly did not enter a referral deal with the other plaintiffs firm, and that Saveri’s $10 million in lead counsel fees compensated him only for his work once he was at his new firm and had left Lieff Cabraser.

“Saveri’s relationship to Isaac Industries was identical to his relationship to all other class members; he never represented the company’s individual interest,” the Fourth Circuit wrote. “That role continued to be filled by his old firm, Lieff Cabraser, which paid C&L the full fee the firm was owed.”

Saveri said on Tuesday that he felt “entirely vindicated and justified” in the position he and his firm took in the fee litigation. The titanium dioxide settlement marked one of his firm’s first major results after its launch, and Criden & Love’s claim for fees served as a distraction during the firm’s early days, he added.

“This brings the end to a long and meritless dispute with the Criden & Love firm,” Saveri said. “It’s unfortunate because in the underlying case, it was one of our firm’s first cases, and we obtained a really good result for the class.”

Fee Expert John O’Connor Wins 60 Percent Fee Reduction in Federal Court

January 11, 2019

In a case in the U.S. District Court for the Central District of California, Jayantibhai Patel, et al. v. City of Long Beach et. al., NALFA member John D. O’Connor of O’Connor & Associates in San Francisco served as an expert witness on the reasonable of attorney fees on behalf of the non-prevailing party, the City of Long Beach.  Plaintiffs’ attorney Frank Weiser requested $344,000 in fees for prevailing in a claim against the City of Long Beach that its ordinance allowing unannounced inspection of hotel records amounted to an unreasonable search and seizure. 

Attorney fee expert John O’Connor recommended the fee request at $122,000.  The court ultimately awarded $143,880 in attorney fees, reducing plaintiffs’ fee request by 60 percent.  The court keyed in on several issues raised by O’Connor.  U.S. District Judge Andre Birottee cited John O’Connor’s expert declaration several times in the fee ruling.  On hourly rates, Judge Birotte, said, “The Court finds Mr. O’Connor analysis more compelling”. 

For more on John O’Connor, visit www.joclaw.com.

Federal Circuit Denies Request to Rehear Attorney Fee Ruling in IP Matter

January 10, 2019

A recent Law 360 story by Christopher Cole, “Fed. Circ. Denies Rembrandt Bid to Rehear Atty Fee Ruling,” reports that the Federal Circuit has denied Rembrandt Technologies LP's request for rehearing in its bid to escape paying a massive sum in attorneys’ fees for alleged misconduct while pursuing intellectual property claims in multidistrict litigation against several cable companies.  The circuit said that there would be no rehearing from either the full bench or the original three-judge panel, which had upheld a district court ruling ordering Rembrandt to pay the cable companies' legal fees but had struck a $51 million fee award. 

The ruling dashes an effort by Rembrandt to convince the appeals judges that the earlier decision drew conclusions the lower court never reached about alleged misconduct during the patent enforcement actions, including improper payment of witnesses and document spoliation.  “Upon consideration … the petition for panel rehearing is denied,” the court said in a non-precedential ruling in which the judges offered no further comment.  “The petition for rehearing en banc is denied.”

Rembrandt had sought to reverse the July decision by a circuit panel affirming a Delaware federal judge’s ruling that the firm litigated a long-running patent dispute with multiple cable providers in an “unreasonable manner,” partly by paying witnesses based on the contingency of winning the case.  The firm also either engaged in or failed to stop spoliation, the federal judge found.  The patent actions that led to the dispute over attorneys’ fees stretch back more than 10 years and roped in dozens of cable providers, equipment makers and broadcast networks that Rembrandt accused of infringing several patents, most of which covered cable modem technology.

In August 2015, U.S. District Judge Gregory M. Sleet fount that the long-running multidistrict litigation, involving allegations of infringement of broadcasting and cable transmission patents, was exceptional and ordered Rembrandt to pay attorneys’ fees and costs.

While the Federal Circuit panel agreed with the trial court’s characterization of Rembrandt’s conduct as “exceptional” in justifying a fee award, the appeals judges in the July ruling reversed a $51 million award — equal to almost all the cable companies’ fees — saying the district judge did not explain why that amount was warranted, sending the fee determination back to the judge.  But Rembrandt argued in court papers filed in September that the panel only upheld that the conduct was “exceptional” based on findings that it believed the judge “could have” made to justify such an award but did not actually make.

The case is In Re: Rembrandt Technologies LP Patent Litigation, case number 17-1784, in the U.S. Court of Appeals for the Federal Circuit.

Companies Fight Over Defense Fees in Puerto Rico

January 9, 2019

A recent Law 360 story by Rick Archer, “High Court Grants Win to Social Security Atty in Fee Row,” reports that Ambac Assurance Corp., Whitebox Multi-Strategy Partners and the Bank of New York Mellon are sparring in a Puerto Rico federal court over who will pay for Mellon’s defense against Ambac and Whitebox’s claims that it mismanaged the island’s sales tax bonds.  In court papers BNYM argued that, under the terms of the plan restructuring the debt of Puerto Rico’s sales tax corporation, Ambac and Whitebox need to set money aside against the possibility they will be required to pay its defense costs, while Ambac and Whitebox argued BNYM is not owed indemnification against their claims by anyone.

Bond insurer Ambac and senior bondholder Whitebox filed suit against Mellon in 2017, alleging it had mishandled its duty as the trustee for the bondholders of the Puerto Rico Sales Tax Financing Corp., or COFINA, by failing to declare a default before April 2017.  In November, the court sent a plan to restructure nearly $18 billion of COFINA’s debt to a creditor vote.  Under the terms of the plan, Ambac and Whitebox dropped their negligence-based claims against Mellon but retained their claims of gross negligence and intentional misconduct, according to court papers.

At issue is a provision of the plan that calls for the court to determine at the plan confirmation hearing how much Ambac and Whitebox should be required to post as bond or how much should be withheld from their plan distributions to reimburse Mellon if it wins the lawsuits.  In its reservation of rights, Mellon argued the suits “lack merit” and that it has a senior, secured claim for indemnification for legal expenses from COFINA.  It said the plan places the burden of that indemnification on Ambac and Whitebox as a matter of fairness to keep those costs from being deducted from the recoveries of the bondholders who had completely dropped their legal claims as part of the reorganization plan.

“The plan recognizes that COFINA and the other beneficial holders should not be penalized for the intransigence of Whitebox and Ambac in continuing to pursue the lawsuits despite an otherwise global settlement,” it said.  Ambac and Whitebox, however, argued in their motion that neither case has been resolved and no fees have been awarded yet and that BNYM is not entitled to advance payment.  They also argued under the terms of the bond resolution COFINA, rather than Ambac or Whitebox, is obligated to indemnify BNYM.

“Moreover, even if COFINA’s indemnity obligations were somehow assumed by Ambac and Whitebox, the plain language of the resolution is clear that BNYM does not have the right to be indemnified in respect of claims for gross negligence, willful misconduct or intentional fraud, which are the only claims that Ambac and Whitebox will assert in the actions post-confirmation,” they said.

The restructuring case is In re: Commonwealth of Puerto Rico, case number 3:17-bk-03283, in the U.S. District Court for the District of Puerto Rico.