I'd like to thank my kindergarten teacher, my wonderful colleagues, my family, and . . .

especially Randy Maniloff of Coverage Opinions for giving me a prize for coming up with one of the best vanity license plates that only others in the insurance coverage world would understand.  (If you don't feel like clicking on the link, my submission was QMIS CSL.) 

 

My kids were incredibly impressed by the pen that accompanied the prize.  It's possible that I am more excited by my forthcoming free copy of Randy's book, General Liability Insurance Coverage: Key Issues in Every State. 

 

It is a thrill and an honor to be associated with Coverage Opinions, one of the best and most interesting publications on coverage issues. 

 

 

Insurers will use drones to assess Hurricane Harvey damage

I wrote here a couple of years ago about the increasing use of drones in assessing property damage after large weather events.  At the time I was concerned that use of drones would actually decrease efficiency in assessing claims. 

Slate has an article here about the planned use of drones after Hurricane Harvey.  It does look like the use of drones will allow insurers to more quickly assess external damage to numerous properties than would be possible with adjusters being present for each inspection.  An important feature of the use of drones is that they can take pictures where it would be unsafe for adjusters to venture.  But, as the Slate article points out, there is also a downside: since the adjusters will not be physically present at the property, the face to face interaction between the insurer and the policyholder is lost.  Given the scale of destruction expected from Harvey, that seems like a reasonable tradeoff for speed and safety of damage assessments.

Invitation: Come to my September 12 panel discussion on lawyer's professional liability insurance and what happens if you get sued

On Tuesday September 12, 2017 at 7:30 AM John Torvi of Landy Insurance and I will be speaking at the Business Lawyer’s Network in Waltham, Massachusetts on the topic of Your Lawyer’s Professional Liability Policy and What Happens If You Get Sued.  This program is free and should be of interest to attorneys from all practice areas.  You do not need to be a member of BLN to attend.  

Here’s a full description of the panel discussion and a link to sign up: 

Your Lawyer’s Professional Liability Policy and What Happens if You Get Sued 

Date: Tuesday, September 12, 2017, at 7:30 am

Place:  Morse, Barnes-Brown & Pendleton, P.C. City Point, 230 Third Avenue, 4th Floor, Waltham, MA 02451

You can sign up at  https://bln-prof-liability.eventbrite.com  Click on “Register.”  It is not necessary to print tickets.

Learn about  your legal malpractice insurance plan, the scope of protection, and insurance defense and coverage issues in a claim or lawsuit.

•             Dissecting a Lawyer’s Professional Liability Insurance Policy, including whether what  is written  in  the annual application matters, the declarations page, who and what                 is  covered, and the optimal limits and deductibles.

•             Insurance issues that may arise when there is a claim against you, including the duties of the insurer and insured, declinations to defend or a defense under a “reservation of rights,” and settlement.

•             Simple risk management techniques to avoid malpractice claims.

Speakers:

Attorney Nina Kallen, a member of the Business Lawyers Network, is a solo practitioner in MA who specializes in insurance coverage and bad faith litigation.  She also drafts dispositive motions and appellate briefs on a subcontract basis for other attorneys in all areas of civil litigation. Attorney Kallen is a graduate of Northeastern University School of Law and Yale University.  Attorney Kallen authors an award‐winning blog, Insurance Coverage Law in Massachusetts, http://insurancecoveragemassachusetts.blogspot.com. You can learn more about Attorney Kallen at her website, www.kallenlawyer.com.

John Torvi is the Vice President of Marketing & Sales at the Herbert H. Landy Insurance Agency of Needham, MA. John has been in the insurance industry, focusing on the needs of business owners, for almost 25 years. He is a frequent speaker and contributor to professional journals and conferences for the legal industries.  The Landy Agency is a national leader in providing professional insurance services for attorneys, real estate professionals and accountants. John can be reached at 781‐292‐5417 or johnt@landy.com. Or visit www.landy.com for more information.

Business Lawyers Network (BLN) is comprised of lawyers concentrating in complementary disciplines such as corporate, securities, commercial contracts, government contracts, secured lending, taxes, litigation, import/export, immigration, real estate, environmental, patents, trademarks, licensing, etc. Non-lawyer business professionals are also welcome, but the topic and focus of discussion will be on lawyers and the legal profession.

I hope to see you there.

How I spent my summer vacation

There was a lot of jogging on the beach at dawn, walking at sunset, and comparing lobster rolls from different takeout windows.  But there was also some channel surfing (a clicker all to myself -- that's a luxury I rarely get), and I came across this US Senate hearing on insurance issues.  I was immediately sucked in by lawmakers talking about insurance other than medical insurance -- indeed, liability insurance.  Here's the link.

I was particularly interested by questions from Senator Blumenthal of Connecticut.  He accused  homeowner's insurers of fraud because they changed policy terms to exclude specific losses without adequately informing the policyholders.  His questions start at around the 47 minute mark. 

One of the responses from the panel was to the effect of, "We don't know how to get homeowners to read their policies before they experience a loss."  I can only imagine.  I was just going over my own homeowner's renewal policy.  Sure, I'll talk to my agent about the limit on the mold endorsement, which I want to be higher.  And I skimmed through at least the titles of the endorsements.  But even I -- an insurance coverage geek who regularly litigates homeowner's policy issues -- could not bring myself to read the policy closely.  And really, what good would it do me?  Other than the limits, what can I negotiate in the policy?  What should I?  How can I anticipate every possible loss and every possible way that it may not be covered?

Senator Blumenthal complained specifically about policy exclusions that exclude damage to foundations as a result of faulty building material.  One of the responses from the panel was that the proper claim is against the manufacturer of the defective product, not the homeowner's insurer.  Yeah, sure, if you can figure out who the manufacturer was, it still exists, you can find it, you can afford to pay an attorney and you can find one to take your case, there's no applicable statute of limitations or statute of repose, and you can wait the several years it will take to resolve a third-party claim.

I'm not opposed to policy exclusions, not even major ones for construction defects.  But I do think that representatives of the insurance industry should be straightforward about why they exist.  After all, the fact that a third party may ultimately be liable for a loss is not in and of itself a good enough reason to exclude a type of claim.  All other things being equal, the homeowner's insurer can pay the loss and then bring a subrogation action against the manufacturer.   The exclusion exists because paying those claims are expensive and the insurers don't want to underwrite that type of risk.  Just be straightforward about it.  No policy covers everything. 

First Circuit examines McCarran-Ferguson Act, Nebraska Law, and Federal Arbitration Act to affirm arbitrator's decision that dispute over insurance fees was not arbitrable

Mountain Valley Property (MVP) purchased from Applied Underwriters a comprehensive insurance package that included multiple lines of insurance.  As part of the package it entered into a three-year Reinsurance Participation Agreement  (RPA) with AUCRA, a company related to Applied Underwriters.  The RPA contained a mandatory arbitration clause and a Nebraska choice-of-law clause.

MVP sued Applied Underwriters and its related companies, asserting that the package was overpriced and that it was charged unlawful fees in premiums and in amounts claimed to be due under the RPA. 

The United States District Court for the District of Maine referred the claims against AUCRA to arbitration for a determination of their arbitrability.  The arbitrator ruled that the case was not arbitrable and had to be adjudicated in court. 

The arbitrator noted that a Nebraska statute provides that a written contract to submit to arbitration a controversy thereafter arising between the parties is enforceable, except when the written contract "is an agreement concerning or relating to an insurance policy."

Section 1012(b) of the McCarran-Ferguson Act, 15 U.S.C. §§1011-1015 provides, "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance."

Therefore, the arbitrator concluded, the Federal Arbitration Act, which provides generally that arbitration clauses in contracts are enforceable, is "reverse-preempted" by the Nebraska statute.

AUCRA moved to vacate the arbitration award.  That motion was denied.  AUCRA appealed the denial of the motion to vacate.

In Mountain Valley Property, Inc. v. Applied Risk Services, Inc., __ F.3d __, 2017 WL 2981798 (1st Cir. 2017), the court did not determine whether the decision of the arbitrator was correct.  It held that it was enough under the Federal Arbitration Act that the arbitration award did not demonstrate a manifest disregard for the law. 

US District Court holds that Bill Cosby's homeowner's insurer has a duty to defend him in cases asserting he defamed alleged sexual assault victims by denying the assaults

I've posted here and here about the declaratory judgment action by AIG, Bill Cosby's homeowner's and umbrella insurer, seeking a declaration that it has no duty to defend or indemnify him in three defamation lawsuits against him.  Those lawsuits allege that Cosby lied when he denied the plaintiffs' accusations that he raped them.  They allege defamation rather than assault because the statute of limitations has run on assault claims  The defamation allegations are not barred because the statements were made at a later period in time.  (A criminal trial against Cosby for sexual assault ended in a mistrial as a result of a deadlocked jury.) 

AIG contended that the defamation allegations come within an exclusion in the homeowner's policy  for sexual misconduct excluding "liability . . . for  . . . personal injury arising out of any actual, alleged, or threatened by any person: (a) sexual molestation, misconduct or harassment; . . . or (c) sexual, physical or mental abuse." The umbrella policy has a similar but not identical exclusion.  

AIG had filed a declaratory judgment  action in California with respect to a separate civil lawsuit by a plaintiff making the same allegations against Cosby.  The California court granted Cosby's motion to dismiss.  Applying California law, the California court held that AIG has a duty to defend Cosby because the sexual misconduct exclusions do not unambiguously bar coverage.  It held that under that state's law the phrase "arising out of" can be interpreted broadly or narrowly.  Under a narrow interpretation, the plaintiff's injuries arose out of Cosby's statements, not sexual misconduct.

In a recent decision in the Massachusetts case, AIG Property Casualty Co. v. Green, 217 F.Supp.3d 415 (D. Mass. 2016), the first issue before the United States District Court for the District of Massachusetts was whether AIG was judicially estopped from arguing that Massachusetts law differs from California law in the interpretation of "arising out of."  In California AIG had argued that there was no difference between Massachusetts and California law because both states interpret the phrase broadly.  In Massachusetts it was now arguing that there was a difference and that Massachusetts law should apply.

Let me say that as a litigator the discussion of judicial estoppel made my stomach hurt.  The AIG attorneys in California had to argue that under both California and Massachusetts law the phrase "arising out of" is broadly construed.  The only other alternative would be to concede that in one of the states the phrase is construed narrowly, and the court should apply the law of the state construing it broadly.  Unless it was incontestably true that California construes "arising out of" narrowly, the latter argument would border on malpractice.  When the California court held that "arising out of" should be construed narrowly in the context of the case before it, should AIG no longer be allowed to argue that Massachusetts construes the phrase broadly?  In my view that would simply be unfair. 

The US District Court agreed with me and declined, in its discretion, to apply the doctrine of judicial estoppel.  It held that there was no evidence that AIG was attempting to defraud or mislead either court.  It merely argued in California that coverage was barred under the law of either state.  AIG would gain no unfair advantage by arguing in Massachusetts that the laws of California and Massachusetts conflict. (The court did not say this, but the conflict of law arose, or at least became more obvious, as a result of the California decision.)

That ruling became moot, however, because the court then held that the exclusions did not apply under Massachusetts law either.  The court quoted a number of cases that vaguely define "arising out of" as requiring an intermediate level of causation, between proximate (or direct) cause but more than causation in fact (but for X happening, Y could not have happened).  The court found that the sexual misconduct exclusions are "at least ambiguous."  It held, "while no doubt related to and setting the stage for the defamation claims, the alleged sexual misconduct is multiple steps removed from the defamatory injury-causing statements." 

AIG has appealed the decision.  Stay posted. 

US District Court denies summary judgment to insurer in bad faith claim on the basis of statements made by its attorney

In Continental Western Ins. Co. v. Preferred Mut. Ins. Co., 2016 WL 6434081 (D. Mass.), the United States District Court for the District of Massachusetts chose not to recite the facts, which were undisputed.  So I'm guessing a little here, and I have no idea what the underlying case was about.   

This appears to be a subrogation case.  A subrogation case is one where an insurer paid a loss, and then sued the tortfeasor or other liable party for reimbursement of the amount it paid.  In this case, the defendant in the subrogation case was covered by insurance, so it's an insurer versus insurer dispute.  Preferred Mutual Insurance Company was the insurer seeking subrogation.  Continental Western Insurance insured the individual sued by Preferred Mutual. 

Continental turned the tables on Preferred Mutual and sued it, alleging that it engaged in unfair and deceptive trade practices by filing claims against Continental's insured without conducting a reasonable investigation based on all available information.  Preferred Mutual moved for summary judgment, meaning that it asked the court to rule prior to trial that there were no facts in support of Continental's claim.

It lost, because of communications between its attorney and its claims specialist.  Those statements included:

The evidence that Mr. Lodigiani was actually engaged in a partnership with Elvins Brantley appears thin.

Preferred Mutual would have difficulty in sustaining the burden of proving Mr. Lodigiani was involved in a partnership with Elvins Brantley.

The law is clear, it is the facts that are in short supply.

It is likely we must ignore facts that cut against coverage and give Mr. Lodigiani the benefit of the disputed facts, among them his assertion that he was not in a partnership.  

 None of which is to say that Preferred Mutual can't prevail at trial.  These may be isolated statements in a slew of evidence pointing to liability.  But they are enough to require a trial where all the facts can be considered. 

United States District Court holds that the reference proceeding statute is constitutional

I've been discussing in my last two posts Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), a federal court case alleging bad faith practices by an insurer, Peerless, before and during a reference proceeding.

The plaintiffs sought a declaration that the reference proceeding statute, Mass. Gen. Laws ch. 175 §99, ¶Twelvth, violates Article 11 of the Declaration of Rights of the Massachusetts Constitution, which guarantees the right "to obtain right and justice freely, and without being obliged to purchase it, completely, and without any denial, promptly, and without delay; conformably to the laws."  Specifically they alleged that the reference proceeding statute violates Article 11 because it requires that insureds pay for referees and because referees, rather than judges determine the amount of the loss. 

The court noted that the free access to courts clause of Article 11 "requires that all cases be decided by a judge, and that litigants need not 'purchase' access to justice."

Using logic that strikes me as disingenuous, the court held that, unlike a probate court matter in which the court appointed a parent coordinator with binding authority to resolve conflicts between divorcing parents, the reference proceeding did not take place over the objection of either party.  Rather, the plaintiffs made a business decision to purchase casualty insurance.  Pursuant to the policy both parties agreed to submit disputes over the amount of loss to a reference proceeding.

While it is true that parties can agree to alternative dispute resolution clauses in a contract, that is not quite what happened here.  Rather, the reference proceeding statute requires that disputes over the amount of loss under certain insurance policies must be determined by a reference proceeding.  That is why the requirement is in the property policies.  The parties are not allowed to negotiate over it. 

While it may be true that the plaintiffs did not have to purchase property insurance -- and that is probably not the case, as mortgages require property insurance -- it is not true that the parties included the reference proceeding clause by their own free will.

The court also notes in a footnote that the plaintiffs failed to allege that they incurred any costs in connection with the reference proceeding.  In their motion to amend the complaint they argued that the reference proceeding statute requires an insured to expend significant sums of money to pay for referees and that the plaintiffs paid over $30,000 in fees to the referees.  The court asserts that there were no supporting allegations in the supplemental complaint. 

That seems overly harsh to me.  The reference proceedings statute provides that of the three referees, the insureds will pay the fee of the first, the insurer will pay the fee of the second, and they will split the fee of the third.

The court then held that the "no purchase of justice" provision of Article 11 is to guarantee that "all litigants similarly situated may appeal to the courts both for relief and for defense under like conditions and with like protection and without discrimination."  A statute that "does not pertain to a suspect class, . . . involves a right . . . that is not fundamental, . . . and is rationally related to achieving its purpose . . . passes constitutional muster."

The court noted that the plaintiffs have not alleged that they are being treated differently than any other class of insureds under policies issued with the same mandatory language, or that they are part of a suspect class.  It also noted that free access to courts is not a fundamental right.  Therefore, the reference proceeding statute need only be rationally related to achieving its purpose.  The plaintiffs did not allege that the requirement of a reference proceeding is not rationally related to achieving the purpose of establishing a summary method of establishing the amount of loss.

I agree that the reference proceeding statute is rationally related to the purpose of having a summary method of establishing the amount of a property loss.  I nevertheless am trouble by the decision -- or perhaps by the earlier decision quoted by the court holding that access to courts is not a fundamental right.  If that's the case, then why is it part of the Massachusetts Declaration of Rights?  I'm not a constitutional law scholar, but it seems to me that the legislature should not be able to take away a right protected by the constitution.  Moreover, does this mean that the legislature can decide that parties to a tort case don't have  a right to a judicial hearing?  How about contract cases?  

Federal Court denies motion to amend complaint to add new allegations of bad faith settlement practices based on facts that did not exist when lawsuit was filed

In my last post I discussed Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), a property damage case in which the plaintiff insureds sued the insurer, Peerless, in federal court while a reference proceeding was pending.  After the reference proceeding the plaintiffs sought to file a supplemental complaint in the federal court case.

The proposed supplemental complaint alleged that during the reference proceeding Peerless engaged in various acts of trickery or deceit, including harassing the plaintiffs with requests for false stipulations which could result in them waiving their claims, and falsely claiming it never received written discovery from them. 

The court held that such actions would not represent a separate violation but a continued course of conduct that began before the lawsuit commenced.  On that ground the court denied the addition of the proposed additional count alleging such conduct.  

While I understand the logic that continuing conduct is not a separate violation, it seems to me that the plaintiffs should be allowed to amend their complaint to allege new facts in support of the allegations of bad faith settlement practices. 

US District Court holds that cross-examination is proper remedy for biased experts testifying on behalf of insurer

Morningside operated a bakery inside a commercial condominium unit owned by Amaral Enterprises.  On February 19, 2013, water from a burst pipe allegedly caused a $1.5 million loss at the bakery.  Morningside and Amaral filed a claim with their insurer, Peerless Insurance. That claim proceeded to a reference proceeding, an arbitration required by Mass. Gen. Laws ch. 175 §99, ¶Twelvth in certain property loss claims.

In the meantime, on February 6, 2015 the plaintiffs sued Peerless in federal court, seeking a declaratory judgment that Peerless is obligated to cover the losses, for breach of contract, and for unfair claims settlement practices in breach of Mass. Gen. Laws ch. 93A.

On July 6, 2015, the referees returned an award of about $93,000.  After the award the plaintiffs moved to file a supplemental complaint in the federal court action, alleging additional violations of ch. 93A.  Specifically, the plaintiffs alleged that they were subjected to unfair claims settlement practices because at the reference proceeding Peerless called two witnesses it claimed were experts, but who were neither independent or objective.  One was a certified public accountant who has worked for Peerless and its parent company, Liberty Mutual, her entire career.  The other was a CPA who was in a business partnership with the attorney representing Peerless.

The plaintiffs also alleged that Peerless refused to resolve their claim and engaged in various acts of trickery or deceit, including harassing them with requests for false stipulations which could result in the plaintiffs waiving their claims, and falsely claiming it never received written discovery from the plaintiff.

The plaintiffs also sought a declaration that the reference proceeding statute violates Article 11 of the Declaration of Rights of the Massachusetts Constitution, which guarantees the right "to obtain right and justice freely, and without being obliged to purchase it, completely, and without any denial, promptly, and without delay; conformably to the laws."  I will discuss the "trickery and deceit" allegations and the constitutional argument in future posts.  

In Bearbones, Inc. d/b/a Morningside Bakery v. Peerless Indem. Ins. Co., 2016 WL 5928799 (D. Mass.) (unpublished), the United States District Court for the District of Massachusetts addressed the motion of the plaintiffs to amend the complaint.  It held that the proposed supplemental complaint did not set forth sufficient facts to support an inference that Peerless acted in an unfair, fraudulent, or deceptive manner in relation to testimony by its experts.  "There is nothing improper (or even unusual) about a company eliciting testimony from an employee about a transaction or occurrence in issue, including testimony that draws on that employees particular area of expertise, such as accounting."  The court held that the proper remedy for potential bias is cross-examination.  Similarly, an expert may be impeached with respect to his or her financial interests in the case.

Bankruptcy court holds that bank can apply insurance proceeds to outstanding loan of borrower in default on loan

Nadler & Darwish, a company that was in bankruptcy proceedings, was in default on mortgages on property it owned.  After a fire its insurer issued a check for $165,000.  Following standard procedure, the insurer issued the check jointly to Nadler & Darwish, the insurance adjuster (probably a public adjuster, who advocates for an insured in property loss cases and is entitled to a percentage of the loss paid) and Mechanics Cooperative Bank, the bank that held the mortgages on the property.

The bank endorsed the check on Nadler & Darwish's behalf, deposited it, paid the adjuster's commission, and then used the rest to reduce Nadler & Darwish's outstanding loan obligations to the bank.

Nadler & Darwish moved that the bank be ordered to repay the amount of the check except the adjuster's commission.  In In re Nadler & Darwish, LLC, 2016 WL 5396652 (D. Mass.) (unpublished), the Bankruptcy Court ruled in favor of the bank.  It held that under Massachusetts statute and case law, when a mortgage is in default and  a fire destroys the property, the mortgage bank can assert its rights with respect to the proceeds of the insurance policy as the intended third-party beneficiary of the policy.  Although a check made out to more than one party can only be cashed if all the parties endorse it, under the mortgage documents the bank was given power of attorney that allowed it to sign on behalf of Nadler & Darwish. 

United States District Court for the District of Massachusetts holds that two year period for replacing property under replacement cost and ordinance and law coverage is not tolled by ACV payment delays caused by insured

Policies insuring property damage to buildings owned by the insured typically divide payment of loss into three coverages.  The insurer will initially pay the actual cash value (the "ACV") of the loss, which means the value of the damaged property at the time of the loss.  Then, once the property is actually repaired or replaced, insureds who have replacement cost coverage will receive the difference between the actual cash value and the reasonable amount they paid to repair or replace the property.

In a fire loss, for example, the insurer will first pay the actual cash value of the beat up, cat scratched armchairs (not that I'm projecting).  It will pay the difference between that and the cost of the new, not yet (but doubtless soon to be) scratched armchairs when the insured submits receipts that the new armchairs were purchased.  Insurance policies typically provide that replacement cost coverage will only be paid on repairs or replacements made within two years of the loss.

A third type of coverage, "Ordinance or Law" coverage, applies to the cost of bringing a building up to current codes.  Older buildings are often not compliant with current safety standards set forth in sanitary and health codes.  The buildings are "grandfathered in," meaning that the owners are usually not required to make changes that bring the buildings up to current standards. 

But once a certain amount of money is spent on a building, they are required to be brought up to current code.  (As a side note, that's why some buildings fall into worse and worse disrepair.  The owners may be able to afford to put a few thousand dollars into an electrical system, but once they do that they have to bring the entire building up to code.  That can cost many times as much as the original repairs.)

Ordinance or Law Coverage, like replacement cost coverage, is often limited to repairs made within two years of the loss.

When there is a dispute over the amount of loss in a property damage case, that amount will often be determined by a specialized type of arbitration called a reference proceeding.

One issue that often arises is whether the two year time limit to repair or replace property for replacement cost coverage and Ordinance or Law coverage to kick in is extended when an insurer's payment of the actual cash value is so untimely that the insured cannot afford to repair or replace the property within two years.

In Shri Gayatri, LLC v. Charter Oak Fire Ins. Co., 206 F. Supp.3d 684 (D. Mass. 2016) the United States District Court for the District of Massachusetts held that the time to repair or replace the damaged property was not tolled by a delay in payment of the actual cash value.  The reason for that holding was that the delay in payment was the a result of the insured's own delays and failures to communicate with the insurer. 

Massachusetts Superior Court holds that insurer cannot retroactively recoup defense costs but can refuse to pay costs that have been incurred

The April 17, 2017 issue of Massachusetts Lawyers Weekly quoted me (password required) in an article about a decision by the Massachusetts Superior Court, Holyoke Mutual Ins. Co. In Salem v. Vibram USA, 2017 WL 1336600 (Mass. Super.)  

That case holds that if an insurer agrees to defend its policyholder in a claim and then wins a separate declaratory judgment action determining that it has no duty to defend, the insurer is not entitled to recoup the defense costs it has already paid out.  That is an important holding on a question that has been unsettled in Massachusetts.

As I discussed in the Lawyers Weekly article, the case also holds, in my opinion contradictorily, that the insurer does not have to pay defense costs that have been incurred but not paid by the time of the ruling that there is no duty to defend.  There is no indication in the decision that the insurer had given notice to the policyholder before the bills were incurred that it did not intend to pay them.  The distinction between bills that had been submitted and paid by the insurer and bills that had been submitted and not yet paid by the insurer seems like a random one. 

In Vibram, the policyholder had exercised its right to control its own defense by hiring counsel of its choice, who would be paid by the insurer.  It was entitled to do so because the insurer was defending under a reservation of its right to later deny coverage. 

The court held that the fact that the policyholder was controlling its own defense meant that it was not harmed by the retroactive decision of the insurer not to pay bills that had already been incurred. 

The policyholder was Vibram USA, a large corporation with significant resources.  (I am a big fan of Vibram's  barefoot sneakers.)  But elsewhere in the decision the court appropriately pointed out that the resources of the policyholder should not be a factor in determining the duty of the insurer, because similar policies are issued to individuals and small businesses and the insurer has the same duty to all policyholders.  Yet the court did not take into account that an individual or a small business might make a different decision about what kind of defense costs to incur if it understands an insurer will pay those costs than if it has been told by the insurer that it will not pay those costs. 

The court explained its rationale in part by holding that “there is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while a declaratory judgment action is still pending.” That is certainly a correct statement of law.  But, as the court pointed out earlier in the decision, “[i]n the first instance, it is for the insurer to determine whether any of the allegations of the complaint, if proved, could support a claim covered by the policy.  If it declines to provide a defense, it faces potential liabilities that will likely exceed the cost of defense.”  Those liabilities are ch. 93A damages that can be awarded for breach of a duty to defend, and fee shifting in a declaratory judgment action over the duty to defend if the policyholder prevails. 

The court cited Herbert A. Sullivan v. Utica Mut. Ins. Co.,439 Mass. 387, 395 (2003) for the proposition that an insured can change its mind about whether it has a duty to defend.  But in Herbert A. Sullivan  the insurer did not change its mind – the circumstances changed.  The initial complaint in that case alleged negligence, a claim that was covered under the policy.  The amended complaint eliminated the negligence claim, and none of the remaining allegations involved covered losses.   

The coverage question at issue in Vibram was whether a policy provision covering Advertising Injury included coverage for a claim based on the unauthorized use by the policyholder of a famous person’s name to sell the policyholder’s product.  The court does not indicate that any circumstances changed that would affect that analysis.  While an insurer is entitled to revisit its own legal analysis, I did not see in the decision any rationale for allowing it to do so retroactively.     

As I told Lawyers Weekly, the court’s holding that an insurer can retroactively refuse to pay defense costs that have already been incurred allows an insurer to have its cake and eat it too.  It can agree to defend under a reservation of rights, thereby avoiding potential ch. 93A damages for breaching a duty to defend, while also not paying  the defense costs it agreed to pay, perhaps ever. 

United States District Court holds insurer has duty to defend allegation of defective product

Michael Ladas alleged in a suit against IMS that it had manufactured non-compliant and defective components of a product made for the United States army, in violation of the federal False Claims Act.  (What that product was, as well as other facts, has been redacted from the publicly available version of the court's opinion.)  The underlying suit eventually settled, after IMS had spent more than $400,000 in legal fees. 

IMS had sought coverage from its insurer, All America.  All America denied a duty to defend or indemnify.  In Innovative Mold Solutions, Inc. v. All America Ins. Co., Inc., 2016 WL 3814774 (D. Mass. 2016), the United States District Court held that All America had violated its duty to defend.

Because of the redactions it is somewhat difficult to follow the court's analysis.  The first question before it was whether the damage alleged was covered property damage.  The issue was whether the damage was to property that belonged to someone other than IMS, since faulty workmanship to an insured's own product is not covered.  The court held that there was a duty to defend because the underlying complaint alleged that faulty epoxy potentially caused damage to components that were supplied by other entities.

The next issue was whether the underlying complaint alleged an occurrence within the meaning of the policy.  All America argued that IMS changed the composition and application of epoxy, which was an intentional act and not an occurrence.  IMS asserted that the injury was an occurrence because it had not intended the injury.  The court agreed with IMS.

Finally, the court held that the faulty workmanship exclusions did not apply.  Exclusion j(6) does not apply to property damage included in the products-completed operations hazards, which means that it does not apply to property damage that occurs away from premises owned or rented by the insured.  The other faulty workmanship exclusions do not apply to damage to property owned by someone other than IMS. 

Massachusetts Appeals Court holds that auto insurer does not have to pay sales tax for replacement vehicle if no such taxes have been incurred

The standard Massachusetts auto policy includes a provision that damages for a vehicle totalled by the insured "include any applicable sales tax."

In Ramirez v. Commerce Ins. Co., 91 Mass. App. Ct. 144 (2017), the Massachusetts Appeals Court held that that provision applies only if the claimant has actually purchased a replacement vehicle on which sales tax was assessed.  

Wrbasy Ramirez was involved in a collision with a car driven by Edith McGuinness, who was insured by Commerce. Ramirez's vehicle was declared a total loss.  Ramirez chose to retain ownership of it, so Commerce was liable to him for the actual cash value less the salvage value.

Ramirez accepted Commerce's calculation as far as it went, but objected to the omission of Massachusetts sales tax in the amount of his loss.  Commerce informed him that he would be reimbursed for sales tax upon proof that he purchased a replacement vehicle and incurred the tax.

The Massachusetts Appeals Court agreed that Commerce did not have to pay the sales tax.  It reasoned that such tax does not constitute an element of damages if Ramirez did not actually incur the tax by purchasing another vehicle.  

Massachusetts Appeals Court distinguishes slander of title from slander

Wayne and Cynthia Robbins were sued for slander of title.  The underlying plaintiff alleged that they published false claims with respect to the ownership of land that was owned by him.

The Robbinses sought insurance coverage from their homeowner's insurer, Hingham Mutual Fire Insurance Company.  Hingham declined to defend or indemnify, asserting that the policy did not provide coverage for slander of title.

In Robbins v. Hingham Mutual Fire Ins. Co., 91 Mass. App. Ct. 1108, 2017 WL 729749 (unpublished), the Massachusetts Appeals Court agreed with Hingham.  It held that although the policy provides coverage for slander, slander of title is a different tort.  Slander encompasses "a publication of a false and defamatory statement by spoken words of and concerning the plaintiff."  Slander of title involves "disparagement of a person's title to real or personal property."

There's no good reason why slander of title shouldn't be a covered loss, as long as the standard exclusions apply.  Seems like its time to amend the personal injury coverage in homeowner's policies. 

I will be speaking at a panel discusion, "Your Lawyers Professional Liability Insurance and What Happens if You Get Sued"

I am excited to announce that John Torvi of Landy Insurance and I will be speaking at the Social Law Library in Boston on the topic, "Your Professional Liability Insurance and What Happens if You Get Sued."  The program is on Wednesday, March 22, 2017, from noon to 1:00 PM.

This will be an informative one hour discussion on developing and understanding a legal malpractice insurance plan. Learn about how your professional liability insurance will (and will not) protect your practice, and insurance defense and coverage issues that may arise if you find yourself the subject of a claim or lawsuit.

(Scroll down for more information.)

I am thrilled to co-present this discussion with John. With over 20 years experience in the insurance industry, John is an expert on what attorneys and other professionals need and don't need in their professional liability policies.  He's also a great guy.

The program costs $10 and is limited to 25 attendees.  Lunch will be provided.   You do not need to be a member of the Social Law Library to attend.

You can register here. 

Massachusetts Appeals Court rules on how insurers may valuate damaged vehicles

One of my favorite insurance blogs, Agency Checklists, offers a summary of Morgan v. Mass. Homeland Ins. Co., __ Mass. App. Ct. __, 2017 WL 264507,  a recent Massachusetts Appeals Court case that discusses how auto insurers should determine the value of totaled vehicles. 

US District Court holds anti-SLAPP statute does not apply to insurers' claim that law office participated in fraudulent scheme

Two insurers, Metropolitan and Commerce, brought suit against chiropractic companies and a law firm, alleging a scheme to defraud the insurers.  According to the insurers, the chiropractors billed them for chiropractic treatment that was unreasonable and unnecessary, was wrongfully and grossly exaggerated, was not rendered at all in some cases, was rendered by unlicensed personnel, was rendered to non-injured body areas, and was rendered for fabricated symptoms and injuries. 

 

The insurers alleged that the law firm unlawfully recruited and solicited patients insured by the insurers, referred those patients to the chiropractors for treatment, and submitted and prosecuted false and inflated claims for insurance benefits using false chiropractic records. 

 

The insurers alleged that they incurred millions of dollars in damages as a result of the false claims. 

 

The law firm moved to dismiss under the anti-SLAPP statute, Mass. Gen. Laws ch. 231 §59H. That statute makes it unlawful to sue someone for petitioning the government, which, under the Massachusetts version of the statute, includes use of the court system.  A defendant who prevails on  a special motion to dismiss under the anti-SLAPP statute is entitled to attorney's fees. 

 

The law firm asserted in its motion to dismiss that all of the claims against it must be dismissed because they are based on petitioning activities -- namely, use of the courts to bring claims against the insurers. 

 

In Metropolitan Property Casualty Ins. Co. v. Savin Hill Family Chiropractic, 2016 WL 7469711 (D. Mass.), the United States District Court for the District of Massachusetts held that the anti-SLAPP statute did not apply because the firm failed to meet the burden of proving that the claims against it were based on petitioning activities alone and that there was no substantial basis for the claims aside from the petitioning activities.