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Category: Coverage of Fees / Duty to Defend

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.

Insurers Fight Over Paying Attorney Fees in Litigation

April 4, 2019

A recent Law 360 story by Frank Runyeon, “Equinox Gym Insurers Battle Over Sex Assault Suit Fees,” reports that one of Equinox Fitness’ insurers is not paying its fair share of the luxury gym’s legal fees in an ongoing sexual assault lawsuit involving two former employees, Beazley Insurance Co. alleged in a complaint filed in California federal court.  In its 21-page filing, Beazley said that National Casualty Co. stiffed the fitness company when a worker claimed in a Jane Doe suit in Los Angeles Superior Court that another employee assaulted her and that she was retaliated against when she complained.  When NCC failed to pay, Beazley was stuck with the bill, according to the suit.

“Without satisfactory explanation, consideration of the facts, or reliance on any legal authority, NCC wrongfully denied coverage for the Doe Lawsuit on a number of unsupportable bases,” Beazley said.  “A significant portion of the Doe Lawsuit falls squarely within the coverage provided by the NCC Policies.”

In the meantime, Beazley says it’s stuck paying advance legal fees for Equinox’s defense in a case where the central allegation — that an Equinox massage therapist sexually assaulted a Pilates instructor and others on the premises — fell under NCC’s coverage, but not Beazley’s.  Beazley argued that both NCC’s general liability and employment liability policies required it to provide coverage to Equinox for any damages or lawsuit seeking damages for bodily injury, which, it said, would include the alleged sexual assault.  Beazley said its policies did not provide coverage for sexual assault claims, but did provide coverage for other allegations in the suit.

“Beazley noted that the claims in the Doe Lawsuit for harassment, discrimination, retaliation, and wrongful termination appeared to involve covered Wrongful Acts, but the claims for assault, battery, and ratification did not,” the company said.  The sexual assault lawsuit was filed in Los Angeles Superior Court in 2017, seeking damages for 11 causes of action, including sexual assault and battery, sexual harassment, discrimination, retaliation, failure to investigate and wrongful termination.

In her complaint, the Pilates instructor said that she and the massage instructor were Equinox employees who traded services at the encouragement of the company.  After the massage instructor assaulted her after-hours on the premises, she said she reported the incident to a manager who told her that at least four employees and three clients had previously said they “felt uncomfortable during a massage” with the man.  Several women later told her “they, too, were victims,” she said.  The instructor accused the company of failing to warn its clients about the man and then firing her after she took a leave of absence.

The case is Beazley Insurance Company Inc. v. National Casualty Company, case number 2:19-cv-02175, in the U.S. District Court for the Central District of California.

Deepwater Horizon Defendants Drown in Legal Fees

March 11, 2019

A recent Texas Lawyer story by Steven Meyerowitz, “Deepwater Horizon Defendants Drown in Legal Fees,” reports that the Supreme Court of Texas has ruled that an insurance policy issued to the minority owners in the Deepwater Horizon operation did not limit their right to recover for the legal fees and related expenses they incurred defending against liability and enforcement claims as argued by the policy’s underwriters.  Pursuant to a joint venture arrangement with BP entities and MOEX Offshore 2007 LLC, Anadarko Petroleum Corporation and Anadarko E&P Company, L.P. (together, “Anadarko”) held 25% of the ownership interest in the Macondo Well in the deep waters of the Gulf of Mexico.

During drilling operations on April 20, 2010, the well below the Deepwater Horizon drilling rig blew out.  Over the ensuing months and years, numerous third parties filed claims against the BP entities, Anadarko, and MOEX, seeking damages for bodily injury, wrongful death, and property damage.  Many of those claims were consolidated into a multi-district litigation (MDL) proceeding in the federal district court for the Eastern District of Louisiana.  The federal government also pursued civil penalties under the Clean Water Act and a declaratory judgment of liability under the Oil Pollution Act of 1990.

The MDL court granted a declaratory judgment, finding BP and Anadarko jointly liable under the Oil Pollution Act.  BP and Anadarko then reached a settlement agreement in which Anadarko agreed to transfer its 25% ownership interest to BP and pay BP $4 billion.  In exchange, BP agreed to release any claims it had against Anadarko and to indemnify Anadarko against all other liabilities arising out of the Deepwater Horizon incident.  In light of that agreement, the United States agreed not to pursue claims against Anadarko.  BP, however, did not agree to cover Anadarko’s legal fees and other defense expenses, which totaled well over $100 million, according to Anadarko.

Before the incident, Anadarko had purchased an “energy package” insurance policy through the Lloyd’s London market.  The policy provided excess liability coverage limited to $150 million per occurrence.  The policy did not require the underwriters to defend Anadarko against liability claims.  But it did require the underwriters to reimburse Anadarko for expenses it incurred providing its own defense.  The underwriters contended, however, that an endorsement within the policy reduced the $150 million limit when — as in this case — Anadarko’s liability arose out of the operations of a joint venture.  Based on the product of Anadarko’s percentage interest in the Deepwater Horizon joint venture (25%) and the total coverage limit under Section III ($150 million), the underwriters contended that this endorsement capped their excess coverage liability at $37.5 million.

Anadarko agreed that the Joint Venture Provision reduced the amount the Underwriters had to pay to cover Anadarko’s joint venture liabilities to third parties.  Anadarko contended, however, that the Joint Venture Provision capped the excess coverage only for Anadarko’s liabilities to third parties, and not for its “defense expenses.”  Therefore, it argued, in addition to the $37.5 million already paid, the underwriters still had to pay all of Anadarko’s defense costs up to the total $150 million limit.  When the parties could not resolve their dispute, Anadarko filed suit, seeking payment of its defense expenses up to $112.5 million ($150 million minus the $37.5 million already paid).

The trial court denied the Underwriters’ summary judgment motion and granted Anadarko’s summary judgment motion in part.  Finding the Joint Venture Provision unambiguous, the trial court concluded that the clause at issue in the Joint Venture Provision applied to and limited coverage for Anadarko’s defense expenses, but that an exception also applied and increased the Underwriters’ liability to “the combination of Anadarko’s working interest percentage ownership and the additional percentage for which Anadarko becomes legally liable, . . . subject only to the limits of the policy after subtracting monies that Underwriters have already paid.”

The court of appeals reversed the trial court’s judgment and rendered judgment for the Underwriters.  The dispute reached the Texas Supreme Court.  The court reversed the court of appeals’ judgment, rendered judgment granting Anadarko’s motion for partial summary judgment, and remanded the case to the trial court.  In its decision, the court explained that the primary issue was whether the clause at issue in the Joint Venture Provision limited Section III’s excess liability coverage only for amounts Anadarko was required to pay in response to third party claims or also for amounts Anadarko paid as defense expenses.  The court concluded that the clause did not limit the coverage for defense expenses and that, as a result, it did not have to address any exception.

The court observed that the clause stated that “the liability of Underwriters under this Section III shall be limited to” $37.5 million (that is, the product of Anadarko’s 25% interest in the joint venture — and $150 million — the total limit under Section III).  With a focusing on specific policy language, the court found that the clause only limited the underwriters’ liability for Anadarko’s “liability . . . insured,” which did not include its defense expenses.

The court was not persuaded by the underwriters argument that the reference to Anadarko’s “liability . . . insured” included defense expenses and that even if the term “liability” did not include defense expenses, the clause limited their liability for all of Anadarko’s Ultimate Net Loss, which included defense expenses.

The court observed that, although the policy did not define the term “liability,” it consistently distinguished between Anadarko’s “liabilities” and “expenses.”  Based on the policy’s usage of the term “liability” and its distinguishing references to “expenses,” the court concluded that, consistent with the term’s “common meaning within insurance and other legal contexts,” “liability” referred in this policy to an obligation imposed on Anadarko by law to pay for damages sustained by a third party who submitted a written claim.

The case is Anadarko Petroleum Corp. Houston Casualty Co., No. 16-1013.

AIG Can’t Recoup $19M in Fees/Costs in Underlying Claim

February 27, 2019

A recent Law 360 story by Jeff Sistrunk, “AIG Can’t Escape Paying AlixPartners’ $19M Costs on Appeal,” reports that an AIG unit cannot recoup over $19 million paid to help AlixPartners LLP defend and settle a claim that it gave bad advice to a private equity firm that acquired a model railway maker, a Michigan appeals court affirmed, agreeing that AlixPartners’ notice of the claim was timely. 

A panel of the state Court of Appeals upheld Judge Wendy Potts’ March 2017 ruling granting AlixPartners' motion for summary disposition on AIG unit Illinois National Insurance Co.'s complaint, saying the trial judge got it right when she determined that the consulting firm had properly notified the insurer of the underlying arbitration claim lodged by Kingsbridge Capital Management GP Ltd.  As such, Illinois National cannot recover the sums it paid on AlixPartners’ behalf, the panel found.  “Finding no error in the court’s determination as to when the claim was first made, we affirm the trial court’s finding that the Kingsbridge claim was covered under [the policy],” Judge Deborah A. Servitto wrote for the panel.

London-based Kingsbridge had hired AlixPartners to perform due diligence in connection with its acquisition of Marklin, a German model train company.  The consulting firm prepared a report indicating that, by shifting production to Asia and implementing online marketing, Marklin could significantly increase its earnings before interest, tax, depreciation and amortization, or EBITDA, according to court documents.  In May 2006, AlixPartners and Marklin signed a separate management consulting contract, with AlixPartners agreeing to help implement the restructuring concept it crafted, court papers indicated.

By 2007, though, Marklin’s earnings were almost €6 million ($8.3 million) lower than the projections AlixPartners had presented.  Marklin sent a letter in March 2008, and a subsequent letter the following month, requesting that AlixPartners return part of its fees, according to court papers.  Due to the problems at Marklin, Kingsbridge initiated arbitration against AlixPartners in late 2011, alleging the consulting firm committed malpractice during the due diligence process.  An arbitrator found in favor of Kingsbridge, determining that Marklin’s earnings and debt level were significantly lower than AlixPartners had presented in its investment advice.  However, while the award was on appeal, Kingsbridge and AlixPartners reached a multimillion-dollar settlement.

Illinois National had agreed to defend and indemnify AlixPartners, while reserving its rights to later challenge coverage.  After paying $19.1 million in defense and settlement costs on AlixPartners' behalf in the Kingsbridge action, the insurer filed the instant suit in 2014, seeking reimbursement.  AlixPartners contended that it had properly reported the Kingsbridge dispute to Illinois National under a policy spanning from March 15, 2008, through June 15, 2009, with an extended reporting period through the end of August 2009.  The consulting firm gave notice to the insurer in August 2009 after receiving a draft arbitration complaint from Kingsbridge a month prior, according to court documents.

Illinois National, on the other hand, argued that AlixPartners first became aware of the Kingsbridge dispute when it received Marklin's March 2008 letter and, as a result, failed to properly report the claim.  Judge Potts sided with AlixPartners, finding in her March 2017 order that, among other things, the consulting firm's fee dispute with Marklin and the arbitration against Kingsbridge were two different matters.

In the decision, the appellate panel said Judge Potts’ reasoning was sound.  Kingsbridge’s claim revolved around AlixPartners’ advice on the Marklin acquisition, while Marklin’s claim concerned the consulting firm’s alleged mismanagement of the model train maker, the panel noted.  In addition, it said, the Illinois National policy excluded claims pertaining to fee disputes, so AlixPartners had no obligation to report Marklin’s demands to the insurer.

“The Kingsbridge arbitration complaint clearly referred to issues specific to the defendant’s contract with Kingsbridge in the same way that the March and April letters referred to matters unique to the defendant’s Marklin agreement,” Judge Servitto wrote.  The appeals panel also said Judge Potts properly declined to retroactively reform AlixPartners’ policy. Illinois National had argued that AlixPartners wrongfully concealed the fee dispute with Marklin in its application for a policy renewal.

Judge Potts, however, pointed out that none of the questions in the renewal application requested information regarding any circumstances that may have resulted in a claim against AlixPartners.  Under Michigan law, a policyholder is not obligated to volunteer information about any pending or prior claims, the judge said in her order.  The appellate panel agreed with Judge Potts that AlixPartners was not required to disclose Marklin's letter demands to Illinois National, given that those fee-related claims were excluded from coverage under the policy.  “[Illinois National] fails to provide an explanation as to why an uninsured claim need be reported and how a claim that [Illinois National] would not be responsible to cover under the policy would materially change the risk for those claims that it contracted to cover," Judge Servitto wrote.

The case is Illinois National Insurance Co. v. AlixPartners LLP, case number 337564, in the State of Michigan Court of Appeals.

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...

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