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Category: Coverage of Fees / Duty to Defend

Florida Legislation Would Limit Attorney Fees in ‘AOB’ Cases

February 12, 2019

A recent Daily Business Review story by Jim Saunders, “Plan to Limit Attorney Fees in’AOB’ Cases Stalls in Committee,” reports that, in what could be a glimpse of the battles to come over the heavily lobbied issue, a Senate committee bottled up a proposal that would limit attorney fees in cases involving the insurance practice known as “assignment of benefits.”  The Senate Banking and Insurance Committee tabled a bill (SB 122) sponsored by Chairman Doug Broxson, R-Gulf Breeze, after it became apparent the measure would fail if brought up for a vote.  Though the 2019 legislative session does not start until March 5, it was at least an initial blow to the insurance industry and other business groups pushing to limit attorney fees in so-called AOB cases.

Sen. Tom Lee, R-Thonotosassa, joined three Democrats in opposing the bill, making it impossible for Broxson to patch together a majority on the eight-member committee.  Insurers and their allies argue that fee limits are needed because of an increase in AOB litigation that is driving up consumers’ property-insurance premiums.  But Lee said there are “some bad actors on both sides of the equation” and indicated he thought Broxson’s bill could end up hurting consumers who need homes repaired for such things as water damage.

“We are going to kill the patient while we try to cure the problem,” Lee said.  Sen. Keith Perry, however, said the bill “is a step in the right direction” and argued consumers will face higher insurance rates if lawmakers don’t solve the problem.  “We owe it to the working-class people of the state of Florida to do something,” Perry, R-Gainesville, said.

Assignment of benefits is a decades-old practice that has become highly controversial in recent years.  Lawmakers have repeatedly considered proposals to address the issue but have not been able to reach agreement.  In assignment of benefits, homeowners in need of repairs sign over benefits to contractors, who ultimately pursue payments from insurance companies.  Insurers contend that the practice has become riddled with fraud and litigation, while plaintiffs attorneys and other groups say it helps make sure claims are properly paid.

Under state law, insurance policyholders are entitled to have their attorney fees paid if they prevail in cases against insurers.  In 1972, a Florida Supreme Court ruling also extended the right to recover attorney fees to people, such as contractors, who have been assigned insurance benefits, according to a Senate staff analysis.

But Broxson’s bill would have prevented continuing to extend the right to attorney fees to contractors.  The staff analysis said that such a change would “make the assignment of post-loss benefits less valuable.  The assignee [the person assigned the benefits] would have to pay his or her own attorney fees to enforce the insurance contract.”

Judge Blasts Attorney for Wasting Time, Awards $1.6M in Fees

January 29, 2019

A recent Law 360 story by Daniel Siegal, “Judge Blasts Atty for Wasting Time, Awards $1.6M in Fees,reports that a Denver federal judge awarded a host of insurance companies nearly $1.6 million in attorneys' fees for defeating allegations that they unfairly denied coverage to homeowners, holding the plaintiffs’ attorney personally liable for most of the fees and blasting his “prolix, redundant and meandering” filings that wasted the insurers’ time.  In a 22-page ruling, U.S. District Judge John Kane granted the consolidated bid for attorneys' fees filed by dozens of defendants, including Allianz Life Insurance Co. of North America Inc., Chubb Corp. and insurance standards organization ACORD, finding that their request for about $1.6 million in fees was “fully foreseeable” and reasonable given the sprawling allegations.

“Plaintiffs initiated this litigation and were in control of its course.  There is no indication defendants’ counsel acted unreasonably or stepped outside the bounds of competent representation of their clients,” Judge Kane wrote.  “Plaintiffs cannot now complain that the fees incurred by defendants are excessive because such an inordinate number were forced to take part … They have imposed costs on virtually the entire insurance industry, and under the law, they must shoulder the result.”

Judge Kane wrote that the plaintiffs’ attorney, Josue David Hernandez of the Law Office of Josue David Hernandez, must personally bear liability for the attorneys' fees incurred by the defendants in the district court, given “his incessant filing of absurdly lengthy and legally incorrect briefs” and vexatious conduct throughout the litigation.  Some fees were incurred by the defendants on appeal, and Judge Kane asked them to file only the amount of fees that applied to the district court proceeding.

Judge Kane said he analyzed the plaintiffs' positions only to the extent that he could “extract them from the morass” of the briefing filed by Hernandez.  “I have struggled to decipher plaintiffs’ legal arguments throughout this case,” Judge Kane wrote.  “Those that pertain to the attorney fee award are no exception.”  The judge sided with the defendants’ expert witness’ testimony that the hours of legal work they expended defending the case were reasonable and necessary over the plaintiffs’ argument, which was based not an expert’s testimony but an “unreliable and bewildering” 24-factor test of Hernandez’s own concoction.

Judge Kane also noted that throughout the litigation, the plaintiffs had repeatedly made extra work for the defendants, such as filing a 40-page motion for more time to respond to the defendants’ motion to dismiss.  After the defendants filed a seven-page opposition to that motion, the plaintiffs followed with a 47-page reply brief that “illustrates a system gone mad,” the judge said.

Terence Ridley of Wheeler Trigg O’Donnell LLP, who represented First American Property and Insurance Co. and argued on behalf of all fee-seeking defendants, told Law360 that he was honored to argue the motion for the numerous insurers, saying that “the language of the order is important, and the order is important.”  Hernadez told Law360 via email that Judge Kane's ruling had failed to address key issues, including whether Colorado's attorneys fee statute was preempted by federal law, and the fact that the defendants had filed more papers and other documents in the case than the plaintiffs. 

"If one were to take the time to review the actual documents on the public record (which is something I would encourage anyone truly interested in the case to do), they would likely find that the ruling failed to include the necessary treatment of at least eight extremely significant issues raised," he said. 

Named plaintiff Dale Snyder and 17 others filed suit in June 2014, and in a 260-page amended complaint asserted 23 claims against 113 defendants, alleging a broad, multi-decade conspiracy to deny homeowners coverage of damages from floods and fires.  In January 2016, Judge Kane dismissed the suit due to the plaintiffs' failure to include a “short and plain statement of the claim showing that the pleader is entitled to relief” in the complaint.  The Tenth Circuit affirmed that ruling in May 2017 and ordered appellate attorneys' fees to be awarded to the defendants.

The case is Dale Snyder et al. v. ACORD Corporation et al., case number 1:14-cv-01736, in the U.S. District Court for the District of Colorado.

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.

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.

Travelers Wins Attorney Fees in Insurance Coverage Litigation

January 3, 2019

A recent Law 360 story by John Kennedy, “Travelers Wins Atty Fees Spat in Litigation Coverage Dispute,” reports that Travelers acted reasonably when it initially refused to reimburse a pipe manufacturer for attorneys' fees linked to a Canadian lawsuit over allegedly defective water pipes, a Washington federal judge said.  Weighing dueling summary judgment motions filed by Travelers Property Casualty Co. of America and Northwest Pipe Co., U.S. District Judge Benjamin H. Settle sided with the insurer and rejected Northwest Pipe’s request. Although Travelers initiated the suit in February 2017 seeking answers to insurance coverage questions stemming from the Canadian litigation, Judge Settle’s order dealt only with the pipe-maker’s counterclaims that the insurer acted in bad faith.

Ultimately, Judge Settle found that no reasonable juror could say Travelers acted improperly when it decided not to pay for the services of Portland, Oregon-based lawyer Michael J. Sandmire of Ater Wynne LLP.  That refusal was based on a one-sentence email that said Northwest Pipe had hired Sandmire and a second attorney based out of Vancouver, British Columbia, the judge said.  The email failed to explain why an Oregon attorney was necessary to defend a case in Canada or that Northwest Pipe was seeking reimbursement for fees it had already incurred, Judge Settle said. 

“Travelers stated that it ‘is not agreeing to pay for the services of Mr. Sandmire,’” Judge Settle said.  “This was a reasonable position because, without further explanation, there should be no need for the services of an additional attorney, especially one that is not even licensed to practice in the country of the underlying litigation.”  Northwest Pipe has been a Travelers customer since at least 2006, the year the Greater Vancouver Water District hired the pipe manufacturer to help build two underground pipelines for waste and drinking water, court documents show.

In 2013, the Water District accused Northwest Pipe of making faulty parts and installing them improperly, delaying the entire project.  Two years later, the utility took the dispute to court in British Columbia.  After Northwest Pipe told Travelers it had hired Sandmire and the other attorney to handle the case, the insurer agreed to defend the pipe-maker and use the Canadian lawyer, but refused to pay for Sandmire.  The pipe manufacturer said Travelers didn’t even evaluate Sandmire before denying coverage of his fees and that its failure to do so was an act of bad faith and a violation of the Washington Consumer Protection Act.

Travelers made numerous arguments that Northwest Pipe hadn’t shown it acted unreasonably, including that it didn’t deny any aspect of the company’s coverage claim.  Judge Settle agreed with that argument only somewhat because the email, albeit brief, put Travelers on notice that it would be asked to cover the attorneys’ fees.  When Northwest Pipe demanded reimbursement for Sandmire’s bills, Travelers asked for more information.  When it got that, it agreed to pay for Sandmire’s work, plus interest.  The pipe-maker refused, not wanting to let Travelers off the hook for breach of contract, the judge said.

The case is Travelers Property Casualty Co. of America, et al., v. Northwest Pipe Co., et al., case number 3:17-cv-05098, in the U.S. District Court for the Western District of Washington.