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Category: Coverage of Fees / Duty to Defend

Insurer Fights $19M Fee Request in Coverage Action

June 14, 2019

A recent Law 360 story by Ryan Boysen, “Insurer Fights $19M Atty Fee Bid in Heparin Coverage Suit,” reports that Travelers Property Casualty Co. is pushing back against American Capital Ltd.’s request for nearly $19 million in attorney fees following a 2017 ruling that found the insurer liable for some defense costs in underlying tainted blood thinner litigation, calling the request untimely and its hourly rates “extraordinarily high.”

In an opposition brief, Travelers said the fee request submitted by the private equity firm’s attorneys at Reed Smith LLP ran afoul of several basic tenets of controlling Maryland law, starting with a local rule that requires a motion seeking attorney fees to be filed “during a 14 day window” that starts when judgment is entered, which happened two years ago in this case.

Travelers said American Capital also never properly preserved its right to seek attorney fees, which means the claim was “extinguished” when U.S. District Judge Deborah K. Chasanow ruled mostly in favor of American Capital following a four-week bench trial.  “Accordingly, the final judgment bars defendants’ untimely motion, which the court should deny,” Travelers said.  Even if those procedural problems were fixed, the hourly rates that led to the $19 million figure were “wildly in excess” of local Maryland guideline rates and further inflated by glaringly inefficient work practices, the insurer said.

At one point in time, for example, 36 lawyers and 21 attorneys at Squire Patton Boggs were working on the matter, the insurer said, before American Capital’s lead attorney John Schryber departed and ultimately ended up at Reed Smith.  “The defendants have submitted no factual basis regarding reasonable Maryland hourly rates sufficient to justify the request for a massive departure from the guideline rates,” the insurer said.  Expert testimony picking apart those rates and other aspects of the fee request was filed under seal along with the brief.  Travelers said that if the motion weren’t denied outright, it would seek a trial on the matter.

The coverage dispute stemmed from the tidal wave of litigation American Capital had been facing over a bad batch of the blood thinner heparin manufactured by its portfolio company Scientific Protein Laboratories LLC.

Travelers argued it wasn’t obligated to defend American Capital in those suits because SPL wasn’t technically an insured under its policy, but Judge Chasanow ultimately found that other language in the policy extends coverage to all companies the insured holds a “majority interest” in.  That order appears to have been the first federal ruling to clarify that the “majority interest” language — "widely-used" by various insurers, according to the opinion — extends coverage held by a private equity firm to its portfolio companies.  The Fourth Circuit upheld that reasoning earlier this year.

Besides being untimely, Travelers said the $19 million request was massively bloated because, while Maryland law allows victorious insureds to seek attorney fees as damages in coverage disputes, those fees can only cover the insured’s efforts to prove the insurer’s duty to defend.  Instead of narrowly tailoring its request to isolate the time spent on that specific issue, Travelers said American Capital simply dumped the whole kitchen sink into its request and sought reimbursement for work that was likely done on separate claims that were ultimately defeated, like a claim for bad faith damages.

Those other claims, Travelers said, had nothing to do with establishing its duty to defend.  Therefore the fee request overall is tainted by including hours that were likely billed for work on those claims and other legal arguments that were equally unrelated, Travelers said.  “Simply put, defendants have failed to identify what part of its claimed $16.5 million in alleged fees and nearly $2.0 million in expenses actually were for establishment of a duty to defend,” Travelers said.

Travelers also said that American Capital hadn’t proved it ever actually paid any of the $19 million in fees, or that it ever had an obligation to do so.  That’s an open question because American Capital and SPL entered into a fee-sharing agreement with Baxter Healthcare Corp. to fight and then settle the heparin suits.

Attorney Fees Take a Hit Under New Florida Law

June 11, 2019

A recent Daily Business Review story by Rachel Lean, “Attorney Fees Take Hit Under New Florida Law,” reports that a new Florida law to curb alleged fraud by contractors could create collateral damage for lawyers by slashing attorney fees in insurance litigation — and all just in time for hurricane season.  Before May 23, contractors could enjoy a one-way attorney fee privilege.  It meant win or lose, they wouldn’t be liable for attorney fees if they sued an insurer to collect insurance benefits that homeowners had assigned to them in exchange for doing repairs.

Insurers, meanwhile, weren’t entitled to fees — until Florida Gov. Ron DeSantis signed House Bill 7065 into law.  The former David-and-Goliath-esque statute was designed to look out for the policyholder, considered to be at a disadvantage compared with high-powered insurance professionals with corporate counsel and significant funds in their arsenal.

But critics—led by pro-insurance groups—cried foul. They claimed the statute had exacerbated abuse through inflated repair costs and excessive lawsuits over assignment of benefits, or AOB, which were created to speed up repairs, shield consumers from exploitation and save them from having to chase claims.  Now, under the new law, homeowners can still use the one-way statute to file lawsuits against insurers, but they can’t transfer that right to contractors through AOB agreements—a provision that critics says disincentivizes contractor attorneys.  And there’s another change: The law includes a new formula for third-party cases to decide which side, if any, is entitled to attorney fees after a judgment.

‘No guard rails’

Tallahassee attorney Anna Cam Fentriss represents licensed contractors through the Florida Roofing and Sheet Metal Contractors Association and Florida’s Association of Roofing Professionals and was glad of the change.  Fentriss feels that while a homeowner, or “the little guy,” typically needs less risk in litigation against giant companies, there’s no reason contractors couldn’t duke it out.  “You’re transferring that benefit from an unsophisticated party to a sophisticated party, and that creates a type of imbalance that you absolutely should not have and shouldn’t encourage,” Fentriss said.

AOB is one avenue for third parties to collect payment from insurers, allowing them to legally stand in a policyholder’s shoes.  But Fentriss claims many of her members have never heard of AOB as it wasn’t widely used until a cottage industry emerged among water-damage restoration and roofing contractors.  “Some of these contractors out there, and sometimes with the help of attorneys, they really push it,” Fentriss said.  “And there’s nothing, no guard rails to stop them, as long as they have that one-way attorney fee, because they can put forth anything.”

Now, contractors might have to charge lower rates to homeowners or accept less money from insurers to avoid going to court and risking attorney fees.  Critics say by curbing attorney fee awards, the new law forces contractors to choose between doing quality work and chasing payments to stay afloat.  Tampa restoration contractor David Sweet, who regularly testifies as an expert witness in insurance suits, said many of the lawsuits end in judgments and settlements—a sign of their merit, Sweet suggests.

“When an insurance company tells you that they’re losing lots and lots of money in litigation expenses, what did they really just say?” he said.  “They’re actually losing almost all of their cases.”  But Liz Reynolds, regional vice president of state affairs for the National Association of Mutual Insurance Companies in the Southeast, says AOB litigation is so prevalent that some insurers first learn of claims only after they’re hit with contractor lawsuits.  That’s why Reynolds hopes the new legislation will reduce lawsuits in Florida, a nationwide outlier in attorney fee privileges, thanks to the former win-or-lose award provision for contractors.

“No other state has a one-way attorney fee statute, and assignment of benefits are being used in other states,” Reynolds said.  “Now you would have to have a more egregious situation to have the insurer pay the attorney fees for the assignee.”  But California attorney Edward Cross disagrees.  Cross has represented disaster-recovery and restoration contractors since 1997, and says he’s noticed an “unfriendly” environment for contractors “as the insurance industry and its partners grow increasingly aggressive in driving down prices.”

But even so, Cross, who doesn’t handle AOB cases in Florida, believes California has done well without a one-way attorney fee statute.  “I have always subscribed to the school of thought promoted by President George H.W. Bush— that the loser in litigation should pay the other side’s attorney fees,” he said.

Even more litigation?

But some observers aren’t sure the new law will have the desired effect.  In fact, some expect the opposite.  Policyholders attorney David Graham of David Graham Insurance Lawyers in Jacksonville, for instance, suspects the new attorney-fee provision could lead to even more litigation.  “I think, ultimately, any smart attorney is going to work around that by representing the policyholder directly,” Graham said.

But William Stander, who heads multiple insurance trade groups, including the Florida Property and Casualty Association, applauded the change.  Stander advocated for the rollback of one-way fees for vendors, particularly those doing water-damage mitigation, which created a cottage industry and what he said spawned “no-risk litigation” for contractors.  “They should have some skin in the game, and not be able to sue in the sense of throwing darts at a wall and hope something hits,” Stander said.

Whatever happens, contractor Ken Larsen said he’s tired of what he considers an unnecessarily adversarial industry when compared to the rest of the U.S. and the world.  “It is astounding to most others contractors in our industry in Australia, Europe and elsewhere,” Larsen said.  “Why on earth do we do battle like this on every insurance claim, to the point where it’s hard feelings and companies going broke?”

Insurer on Hook for Attorney Fees After Improperly Denying Coverage

June 6, 2019

A recent Daily Report story by Greg Land, “Failure to Defend Entire Lawsuit Leaves Insurer on Hook for $1.2M in Legal Fees,” reports that the Georgia Court of Appeals agreed with a Macon judge that an insurer is on the hook for some $1.2 million in legal fees after it improperly denied coverage for a commercial policyholder facing a lawsuit.  Southern Trust Insurance agreed to cover some of the claims in a 2014 lawsuit but said others were not its responsibility.  Instead of agreeing to defend the suit and reserving its right to later deny coverage, the insurer instead “sat on its hands” and failed to seek declaratory judgment as to what its policy covered while its insured ran up legal fees.

“This case presents interesting questions regarding the duty to defend and the propriety of a declaratory action to settle disputes over the extent of the insurance company’s obligations,” wrote Judge Todd Markle for a panel including Judges Sara Doyle and Christian Coomer.  As detailed in the opinion and underlying documents, the case began when a petroleum distribution company, Mountain Express Oil, was sued by a supplier in August 2014 for claims including breach of contract, unjust enrichment, injunctive relief and slander/libel, among others.

Mountain Express had a policy with Southern Trust under which the insurer agreed to pay damages resulting from claims for “personal and advertising injury,” the definition of which included claims for libel/slander.  “However,” the contract said, “we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘personal and advertising injury’ to which this insurance does not apply.”  Mountain Express “immediately” retained legal counsel with Bondurant, Mixson & Elmore and Atlanta solo James Johnston Jr.

Mountain Express’ lawyers filed an answer to the complaint in October 2014, and the next day the company notified Southern Trust in writing about the lawsuit.  On Dec. 29, 2014, Southern Trust told Mountain Express that it was denying coverage for the claims except those for libel/slander and had retained lawyers with Swift, Currie, McGhee & Hiers to defend those claims.  It also said it was reserving its rights to deny coverage on those claims.

Mountain Express sent the insurer a letter in January 2015 asserting that the policy covered all of the claims.  “Although the letter gave written notice of [Mountain Express’] objections,” it “acknowledged a possible compromise, to be drafted by Southern Trust, allowing the Bondurant firm to continue handling the defense with reimbursement from Southern Trust at Swift Currie’s rates,” the opinion said.

That agreement was never in writing, but Southern Trust nonetheless reimbursed its client more than $40,000 in the following months for work Bondurant did on the libel and slander claim.  That claim was dropped in an amended complaint filed in late 2015.  Mountain Express paid for its lawyers’ work on the other claims separately.

The lawsuit settled in 2016, and Mountain Express demanded that Southern Trust pay all of its litigation expenses minus what the insurer had already paid, which ultimately totaled almost $1.2 million.  When Southern Trust refused, Mountain Express filed a complaint for breach of contract and bad faith in Bibb County Superior Court, arguing that the insurer had a duty to defend the entire lawsuit.  Both sides moved for summary judgment, with Mountain Express “arguing that Southern Trust’s failure to file a declaratory action to determine its duty to defend all claims barred it from contesting the full amount of attorney fees.”

Southern Trust countered that it had fulfilled its contractual duties, but in 2018 Macon Judicial Circuit Chief Judge Edgar Ennis Jr. ruled for Mountain Express.  While Mountain Express could have informed its insurer earlier of the suit, wrote Ennis, “Southern Trust has made no explanation for why it sat on its hands from notification in late September until the issuance of its reservation of rights letter on December 29,” Ennis wrote.

“Furthermore, when it was clear that accepting a defense under a reservation of rights was not agreeable to Mountain Express, particularly a partial defense … Southern Trust should have taken the path that Georgia case law has previously laid out: an action for declaratory judgment” and an effort to stay the proceedings “while the coverage question is resolved.”

“Instead, it entertained negotiations with Mountain Express with a view toward letting the Bondurant firm handle representation of all claims while agreeing to pay only for its work on some of the claims at the lower rate it had negotiated with Swift Currie firm,” Ennis said.  “However, Georgia law is clear that, if an insurer is in for a penny it is in for a pound, when it comes to what claims it must defend.”

In upholding Ennis’ ruling, Markle said the language of the policy specified that Southern Trust had the “right and duty to defend the insured against any ‘suit’ seeking those damages.”  “By using the term ‘suit,’ instead of ‘claim,’” Markle said, “Southern Trust obligated itself to defend the entire suit if any of the individual claims could be covered under the policy.”

“But Southern Trust failed to perform its obligation,” he wrote, when it reserved its rights “only with respect to the libel/slander claim and retained counsel to defend that portion of the suit.  By refusing to defend the entire suit under the terms of the policy, Southern Trust was in breach.”

When Mountain Express “objected to its refusal to provide coverage, indemnification, and a defense to the entire suit, as well as to the reservation of rights with regard to the libel/slander claim … Southern Trust was obligated to file a declaratory action to determine the scope of its responsibilities,” Markle wrote.  “As the trial court found, the failure to do so is fatal to its claims,” he said.

Florida Legislation Changes Fee-Shifting Rule in Insurance Coverage

May 15, 2019

A recent Law 360 story by Jeff Sistruck, “4 Things Attys Need to Know About Fla’s ‘AOB’ Reform Bill,” reports that Florida Gov. Ron DeSantis gave the insurance industry cause for celebration when he said he would sign legislation aimed at curbing what carriers call an epidemic of abusive litigation by repair contractors seeking payment under property policies.  Here, Law360 breaks down four key provisions of the so-called Assignment of Benefits reform bill.

Fee-Shifting Switch

The bill passed by the Florida Legislature is expected to have a significant impact on long-standing insurance practices in the Sunshine State, where homeowners often assign their insurance benefits to contractors working on hurricane-damaged houses.  Once signed by the governor, it will take effect July 1.

In recent years, insurers have complained that some contractors have abused the Assignment of Benefits, or AOB, system by accepting assignments from policyholders and then performing excessive repairs or imposing inflated charges, leading to widespread coverage litigation.  Reform advocates have blamed that spike in litigation for increases in insurance premiums.  According to attorneys and experts interviewed by Law360, the surge in AOB actions was attributable in large part to Florida’s “one-way” attorney fee rule, which required an insurance company to pay an assignee’s costs to litigate a coverage suit, regardless of which side prevailed in court.

The new bill replaces that rule with a formula that allows for an award for either the assignee or the insurer — or neither — based on a comparison of a court’s judgment and pre-suit settlement offers.  That change doesn’t apply to policyholders who sue their insurers directly.  The formula for determining attorney fee awards compares the gap between the insurer's pre-suit settlement offer and the assignee's pre-suit demand, dubbed the "disputed amount," and the difference between the judgment obtained and the settlement offer.  If the difference is less than 25% of the disputed amount, the insurer is entitled to attorney fees.  If the difference is 25% to 49% of the disputed amount, neither party gets fees.  And if the difference is 50% or more, the assignee is entitled to a fee award.

Beth A. Vecchioli, senior director for government consulting at Carlton Fields, said the new fee shifting provision is an attempt to “level the playing field so everyone has skin in the game.”  “The current one-way attorney fee provision was always originally designed to help consumers who don't have the same financial resources as their insurers to go through litigation,” Vecchioli said.  “Once these assignments started popping up, though, the insurer was no longer in litigation against a consumer, but against another sophisticated commercial company.  It didn't seem fair or right that the insurance industry still had to deal with this one-way attorney fee provision in those situations."

However, Rob Friedman of Friedman PA, who represents policyholders, said that while the bill’s fee shifting provision applies only to contractors wielding AOBs, he is concerned that insurers may use their legislative success to try to curtail or eliminate the one-way fee rule in disputes with policyholders, too.  “[The one-way fee provision] has been one of the most important protections insurance consumers have under the law,” Friedman said.  “While this erosion of that protection is limited to assignment of benefits situations, I am concerned the industry is targeting the one-way fee provision more broadly.  This may be a slippery slope for the industry to push for doing away with that provision altogether or to erode it in other contexts as well."

Pre-suit Protocol

The new bill states that assignees must give insurance companies notice of intent to file a suit and cannot serve the insurer before it has a chance to make a coverage determination within the statutory time frame.  The insurer must respond within 10 days with a settlement offer or a demand for appraisal or other alternative dispute resolution.

Fred Karlinsky, co-chair of Greenberg Traurig LLP's insurance regulatory and transactions practice, said that in the past, some contractors have quickly filed suit before even giving insurers the chance to perform their own investigations.  “Under this legislation, we will hopefully avoid some of these 'gotcha'-type situations,” he said.  As Friedman sees it, though, the new raft of pre-suit requirements may discourage contractors, particularly smaller operations, from taking on repair jobs.  Companies will have to “lawyer up” at the outset of a job just to understand their rights and obligations under the AOB reform bill, he said.

“A small 'mom and pop' contractor isn't going to want to take on a $1,000 roof repair under an assignment of benefits if they have to hire a lawyer just to tell them what their rights and obligations are,” Friedman said.  “There are so many pitfalls in this statute that a contractor could wind up facing a coverage denial for violating any number of requirements."

Limiting AOBs

In another notable change, the bill opens the door for insurers to offer policies that cannot be assigned to a third party as long as they clearly provide notice to prospective policyholders of those restrictions and also offer assignable policies with the same coverage.  If an insurer opts to sell both types of policies, the restricted policy must cost less.  In addition, an insurer must notify its policyholders “at least annually” of the coverage options it is making available.

According to attorneys and experts, that provision provides clarity for the insurance industry, which had faced confusion about whether insurers can ever place restrictions on AOBs.  “This concept was originally developed by the [Florida] House under the theory that it is better for consumers to have more options than less,” said Vecchioli of Carlton Fields.  “They recognized that they couldn't completely restrict all assignments.  This is a smart, consumer choice-driven option, allowing insurers to offer both options."

Assessing the Impact

The new bill also contains a built-in mechanism for assessing the effectiveness of the AOB reforms.  Starting on Jan. 30, 2022, insurers must submit annual reports to Florida’s Office of Insurance Regulation accounting for each “residential and commercial property insurance claim” paid under an AOB agreement in the preceding year.

According to attorneys and experts, those numbers will give the Florida Legislature concrete information to decide whether additional measures are needed to further rein in abuses of the AOB system.  The true test of the legislation will come when the next major hurricane or other catastrophe hits the Sunshine State, yielding huge quantities of AOB-related claims data, sources said.  "We would welcome the Legislature continuing to monitor AOB fraud and making any changes they feel are appropriate,” Greenberg Traurig's Karlinsky said.

Insurer Fights $1.6M Fee Coverage After Attorney Mishandled Suit

May 9, 2019

A recent Law 360 story by Kevin Penton, “Insurer Fights $1.6M Fee Coverage After Atty Mishandled Suit,” reports that an insurance company for a lawyer who was bench-slapped for the “incessant filing of absurdly lengthy and legally incorrect briefs” is arguing that it’s not responsible for covering nearly $1.6 million in fees awarded to insurance carriers on the winning side of the underlying case. 

Because Dougherty & Holloway LLC and attorney Josue Hernandez did not warn ALPS Property & Casualty Co. of any actual or potential claims against them when they applied for professional liability insurance in February 2018, the company should not be liable for the fees awarded by a Colorado federal judge in January and February, the insurance company argued in a complaint on Friday.

In January, U.S. District Judge John Kane awarded a host of insurance companies nearly $1.6 million in fees after they defeated allegations that they had unfairly denied coverage to homeowners, according to court documents.  In February, the judge held that Hernandez should be held personally responsible for just over $1 million of the amount, according to the order.

ALPS noted the long procedural history of the underlying case in its complaint, including that the insurance companies filed for attorney fees as early as May 2016.  Yet when Hernandez and the two attorneys who comprise Dougherty & Holloway applied for the liability insurance, they answered “no” to whether they were aware of any “fact, circumstance, act, error, or omission” that could be used as the basis for a claim, according to the complaint.

“Any claims for attorney’s fees asserted by claimants arising out of the January 2019 order and/or February 2019 order are outside the coverage afforded by the policy because, prior to the policy’s April 21, 2018 effective date, the insureds knew or reasonably should have known that its actions on behalf of its clients in the lawsuit might be the basis of a claim against the insureds,” the complaint reads.  Judge Kane held in January that Hernandez must be held personally responsible for a portion of the fees given “his incessant filing of absurdly lengthy and legally incorrect briefs” and vexatious conduct throughout the litigation, according to the judge’s order.

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.