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Category: Coverage of Fees / Duty to Defend

Fifth Circuit: Defense Fees/Costs Can Count Against Insurance Policy Limits

April 7, 2017

A recent Law 360 story by Rick Archer, “Policy Limits Apply to Hospital System’s Defense Claims,” reports that the Fifth Circuit has ruled defense costs can count against insurance policy limits, leaving Mississippi-based hospital system Singing River Health Services is on the hook for some of the legal fees it paid defending itself from pension fraud claims.  The panel reversed a district court decision that SRHS’ defense costs did not erode its policy limit with Federal Insurance Co., finding it ignored the wording of the policy.

“Reading several clauses out of the policy, including ones that make clear that a non-eroding policy will cost extra, is inconsistent with the requirement to consider the language of the policy as a whole,” Judge Catharina Haynes, writing the opinion for the panel, said.

The suit stems from costs the hospital system incurred defending against federal class actions and two state suits accusing it of failing to make annual required contributions into a retirement fund.  The hospital settled the suits in January 2016 for $156 million.

Federal Insurance had argued a $1 million policy limit applied to the defense costs, while SRHS claimed Federal was obligated to pay the entire cost.  A district court agreed the limit did not apply to defense costs, but also found a number of SRHS’ claims were barred by a policy exclusion for losses resulting from employee benefits program laws.

The panel reversed the district court on the policy limits decision, saying the policy explicitly states defense costs erode the policy limit, and that SRHS specifically declined to purchase extra coverage for defense costs.  The panel also rejected claims state law requires the defense costs be covered and that the eroding coverage clause was invalid because it was not placed in SRHS’ board’s minutes.

“Mississippi law does not allow the courts to use rules of construction to defeat the parties’ own agreement as expressed in the policy, Judge Haynes said.  The panel upheld the district court hearing on the exclusion, rejecting SRHS’ claim that it did not apply because the plaintiffs made constitutional and common law claims with an argument that those laws also govern pension plans.

“Accordingly, they ‘govern’ employee benefit plans because the obligations they create control the pension plans.  Indeed, the plaintiffs in the SRHS lawsuits only bring claims under the identified common law and statutes because they create obligations with which pension plans must comply,” Judge Haynes said.

The case is Federal Insurance Company v. Singing River Health System, case number 15-60876 in the Federal Court of Appeals for the Fifth Circuit.

Attorney Fees Against Lloyd’s Underwriters Affirmed

March 31, 2017

A recent Business Insurance story by Judy Greenwald, “Bad Faith, Attorneys Fee Awards Against Lloyd’s Underwriters Affirmed,” reports that a California appeals court has upheld a $50,000 punitive damages award plus more than $1 million in attorneys fees (known as Brandt fees in California) against Lloyd’s of London underwriters in connection with its denial of coverage under a fire insurance policy because of a mistake in listing the insured.

In January 2011, the Saddleback property suffered a fire resulting in a $2,150,000 million loss, and Saddleback submitted a claim to Lloyd’s, which hired an attorney to investigate the loss.  In May 2011, the attorney sent a letter to Saddleback on behalf of Lloyd’s denying coverage “because Saddleback owned the property and J.K. Properties did not have an insurable interest in the damaged property,” according to the ruling.

J.K. Property and Saddleback filed suit against defendants including Lloyd’s in January 2012, charging breach of contract, professional negligence and bad faith.  An amended complaint added a reformation cause of action to add Saddleback as an additional insured on the policy at issue.  A reformation is a remedy available when an otherwise valid insurance policy does not reflect the parties’ true intentions.

At a bifurcated hearing in July 2014 in Santa Ana, the court determined Saddleback and Lloyd’s had intended Saddleback be named as the insured under the policy, and the court reformed the contract to list the named insured as “Saddleback Inn, LLC and JK Properties, Inc., dba Saddleback Inn.” Lloyd’s paid Saddleback $2,884,583, reflecting the $2,150,00 for the fire damage and $734,583 in interest.

During the second phase of the trial, a jury determined Lloyd’s had unreasonably denied payments and awarded Saddleback $50,000 in punitive damages, plus $1,062,117 in attorneys fees and expenses.  Lloyd’s appealed the punitive damages and attorneys fees awards, which a three-judge California Court of Appeals panel unanimously affirmed. 

“Underwriters argue there is no bad faith liability as matter of law when an insurer properly denied coverage under a policy as issued, even if a court later reforms the policy to provide coverage,” said the ruling.  However, said the court, “Ultimately, a claim for bad faith liability hinges on whether the insurer’s refusal to pay policy benefits was reasonable at the time.”

AIG, Other Insurers Liable for Verizon Defense Fees & Costs

March 29, 2017

A recent Business Insurance story by Judy Greenwald, “AIG, Other Insurers Liable for Verizon Defense Costs in Failed Spinoff,” reports that an American International Group Inc. (AIG) unit and several excess insurers are obligated to provide more than $48 million in defense costs to Verizon Communications Inc. in connection with litigation over the spinoff of a unit that later went bankrupt, says a Delaware court.

The litigation concerns Verizon’s 2006 spinoff of its print and electronic directories business into a stand-alone company, Idearc Inc., which eventually defaulted on notes issued in connection with the deal and filed for bankruptcy in March 2009, according to the ruling by Delaware Superior Court in Wilmington in Verizon Communications Inc. et al. v. Illinois Insurance Co. et al. 

In anticipation of the spinoff, Verizon and Idearc had purchased primary and excess executive and organizational liability policies to insure against litigation risks and potential liabilities that had arisen from the transactions, according to the ruling by the Wilmington court.
 
AIG unit Illinois National issued the primary policies, while excess policies, which were “follow-form” and incorporated the primary policy’s provisions, were issued by Stamford, Connecticut-based XL Specialty Insurance Co., a unit of XL Group Ltd.; Schaumburg, Illinois-based Zurich American Insurance Co.; and Twin City Fire Insurance Co., a unit of the Hartford Connecticut-based Hartford Insurance Group.

The runoff polices provide coverage for liability resulting from claims made during the six-year period from November 2006 to November 2012, according to the ruling.  Policy provisions allow Verizon to recover defense costs where a securities claim is brought against both Verizon and an insured person and a joint defense is maintained, said the ruling. 

Shortly after Idearc defaulted on the notes, several lawsuits were filed against Verizon and others alleging liability about the spinoff, including litigation filed by Minneapolis-based U.S. Bank, which demanded $14 billion in damages from Verizon.  Verizon sought and obtained dismissal of a number of the claims asserted, with judgment by a Texas court later affirmed by the 5th U.S. Circuit Court of Appeals in New Orleans.

Plaintiffs incurred significant legal expenses in successfully defending the U.S. Bank action, but insurers denied defense costs on the basis the litigation was not a securities claim as defined in the policies, and filed litigation in the matter with the state court.  After an extensive and complex analysis of policy language, the Delaware court ruled in the plaintiffs’ favor. 

“Here, it appears the financial incentive to sell these polices and obtain a marketing advantage by touting their more expansive coverage trumped the common sense, plain language approach to clearly articulating what was covered,” said the ruling

When Someone Else Pays the Legal Bills

March 7, 2017

A recent CEBblog article by Julie Brook, “When Someone Else Is Paying Your Fees,” writes about when a third party pays some of all of your legal fees in California.  This article was posted with permission. The article reads:

When, in a noncontingent matter, a third party is paying all or some of the attorney fees for your client, do you know how to deal with the issues that can arise?  Short answer: Address them upfront in your fee agreement.  Here are sample provisions to get you started.

You should be aware that Cal Rules of Prof Cond 3-310(F) requires informed written consent of your client when someone else is paying for his or her attorney fees.  In explaining this requirement to your client, advise him or her of the potential problems that might arise with this arrangement.

Here are two alternative sample provisions you can use in your fee agreement, depending on whether the third person will be a party to the agreement:

[Alternative 1: If the person/entity responsible for payment of fees and costs isn’t a party to the fee agreement]

Another person or entity may agree to pay some or all of Client’s attorney fees and costs.  Any such agreement will not affect Client’s obligation to pay attorney fees and costs under this agreement, nor will Attorney be obligated under this agreement to enforce such agreement.  Any such amounts actually received by Attorney, however, will be credited against the attorney fees set out in this agreement [or delivered to Client if there is no balance due Attorney].  The issue raised by having a third party pay the fees is the potential or perceived potential that the third party may try to influence the prosecution of the case to minimize costs or to achieve other goals.  However, the fact that another [person/entity] may agree to pay some or all of Client’s attorney fees will not make that [person/entity] a client of Attorney and that [person/entity] will have no right to instruct Attorney in matters pertaining to the services Attorney renders to Client.  Unless Client gives written permission to discuss all or a portion of Client’s matters with [the person/the entity] paying all or a portion of the attorney fees, Attorney will not disclose any confidential information to [him/her/it].  By signing this agreement, Client consents to this arrangement and acknowledges that Attorney has advised Client of the advantages and disadvantages of this arrangement.

[Alternative 2: If the person/entity responsible for payment of fees and costs will be a party to the fee agreement]

[Name] agrees to pay attorney fees for services performed and costs incurred in the representation of Client under this agreement.  [Name] acknowledges that [his/her/its] agreement to pay attorney fees and costs does not make [him/her/it] a client of Attorney.  Unless Client gives written permission to discuss all or a portion of Client’s matters with [name], Attorney will not disclose any confidential information to [him/her/it].

Alternative 1 avoids potential ethical issues posed by such arrangements by making it clear that the party paying the bills isn’t the client and isn’t party to the confidential attorney-client relationship.

But if you want a remedy against the third party if he or she stops paying, you must have an agreement with that individual or entity.  One way to do that, illustrated in Alternative 2, is to make the payor a party to the fee agreement.  It’s best, however, to have a separate written agreement with the payor rather than having him or her sign the same engagement letter as the client; this will preserve the attorney-client privilege of the fee agreement with the client.

Also, consider doing the following when a third party is paying the bills:

  • Give notice of fee dispute arbitration.  Even though the party assuming responsibility for payment doesn’t become your client in the sense of directing the representation or becoming privy to confidential information, you should send notice of the right to compel arbitration of a fee dispute to this individual or entity as well as to the client. Wager v Mirzayance (1998) 67 CA4th 1187.
  • Refund advanced fees at end of case.  To the extent funds advanced by a third party remain after the case is concluded, you should refund the balance to the payor, not the client.  See California State Bar Formal Opinion No. 2013-187.

Insurer Fights Fee Discovery in Texas

February 22, 2017

A recent Law 360 story by Michelle Casady, “Texas High Court Told to Nix Attys’ Fee Discovery Ruling,” reports that National Lloyd's Insurance Co. urged the Texas Supreme Court to upend a lower court ruling compelling discovery of its attorneys’ fee information in litigation with property owners who allege the insurer underpaid their damage claims, contending that information is privileged.

The justices heard arguments on whether National should be able to keep that fee information under wraps — a fight that stems from four property insurance cases in which the property owners argued they had been shortchanged on claims following two hailstorms in Hidalgo County, Texas, in March and April 2012.

Scot Doyen, arguing on behalf of the insurer, told the court that siding with the property owners would “add layers of complexity to an area of the law that is otherwise clear and workable,” that the information sought is privileged and that the “relational nature” of fee consideration renders its fees irrelevant.  Such fees hinge on "the relationship between the party and the lawyer, not the relationship between the party and the other party,” he told the court.  “It is relational to that specific lawyer to client relationship," Doyen said.

Arguing on behalf of the insured property owners, Jennifer Bruch Hogan rejected the notion that an opposing counsel's fee information, including hourly rates and total hours billed, is “patently irrelevant,” though she said the tasks themselves may be privileged information subject to redaction.

“The second point I want to make is that the defendants have voluntarily designated their lead trial lawyer as a testifying expert, and not as a testifying expert on their own attorneys' fees, but as a testifying expert who can challenge the plaintiffs' attorneys' fees as unreasonable and unnecessary,” she also told the court, adding that the arrangement had put the case in "an unusual posture." 

In its petition for writ of mandamus filed with the state high court in August 2015, National argued that a defendant's fees are irrelevant, and that there are other methods in place — including the lodestar method and Arthur Andersen factors — that can be used without compelling a party to turn over rate and fee information it argues is privileged.

National's petition said the Thirteenth Court of Appeals decision caused a split among state appellate courts over whether a plaintiff can discover a defendant's attorneys' fee information, which it said is reflective of a split in other state and federal courts as well.  It said that the state high court has never adjudicated the issue and the Thirteenth Court erroneously relied on Chief Justice Nathan Hecht's concurring opinion in the 2012 case El Apple I v. Olivas in justifying its holding that the fee information is both relevant and discoverable.

As part of the underlying legal battle, the property owners were seeking damages and attorneys' fees on their breach of contract and Texas Insurance Code claims, according to court documents.  The cases were consolidated with thousands of others in a multidistrict litigation in Texas, and special master Roberto Ramirez was appointed to resolve any disputes.  In March 2015, according to the petition, the property owners in this case moved for additional discovery on attorneys’ fee information, including rates, invoices, payments and audits.  The insurers objected.

In April 2015, the special master permitted the additional discovery, which resulted in requests for the information being served to National Lloyds, Wardlaw Claims Service Inc. and Ideal Adjusting Inc., which objected to the requests.  After a hearing, the special master overruled each objection, according to the petition, and an appeal to the Thirteenth Court of Appeals followed.

The case is In re: National Lloyds Insurance Co et al., case number 15-0591, in the Supreme Court of the State of Texas.