Presentation on theme: "DISPUTES AND LITIGATION WITH MEMBERS, REINSURERS AND EXCESS INSURERS Presented by: Robert Cutbirth, Esq. Tucker, Ellis & West, LLP 135 Main Street, 7 th."— Presentation transcript:
DISPUTES AND LITIGATION WITH MEMBERS, REINSURERS AND EXCESS INSURERS Presented by: Robert Cutbirth, Esq. Tucker, Ellis & West, LLP 135 Main Street, 7 th Floor San Francisco, CA 94105 – 415-617-2235 Robert.Cutbirth@TuckerEllis.com
DISPUTES HAPPEN Risk pools provide coverage through “pooled self-insurance” and/or “group purchased” coverage. The pooled coverage may be reinsured, with the pool also purchasing excess coverage from another pool or insurer. This session is a high-level overview of two interrelated issues: The obligations of pools and their members to deal with one another in “good faith,” and The obligations of pools and their members to deal with one another in “good faith,” and The obligations of pools and their excess insurers and/or reinsurers to deal with one another in “good faith.” The obligations of pools and their excess insurers and/or reinsurers to deal with one another in “good faith.”
RISK POOL RISK POOL REINSURER RISK POOL EXCESS INSURERS MEMBERS TPA
RISK POOL MEMBERS Underwriting You Didn’t Tell Me What You Were Doing You Didn’t Ask About What I was Doing Claims You Didn’t Tell Me About the Claim/Didn’t Cooperate in the Claim You Didn’t Properly Manage the Claim/ Didn’t Accurately Decide My Coverage Rights Investments/Accounting: You Didn’t Properly Invest Pooled Funds/Account for Losses/Project Budgetary Needs
RISK POOL RISK POOL REINSURER Underwriting You didn’t tell me what your members were doing When: Before and maybe during risk Claims You didn’t give me adequate notice You acted with an improper purpose
RISK POOL EXCESS INSURERS Underwriting You didn’t tell me what your Members were doing You didn’t ask; We didn’t have to tell When: Before Risk Claims You didn’t give me adequate notice/didn’t manage the claim properly You have to take care of yourself
RISK POOL REINSURER EXCESS INSURERS MEMBERS Aside from Texas (“good faith”) no case has defined this duty for risk pools – but, we have common law “good faith and trust duties in place There are some jurisdictions holding that primary insurers owe duties of “good faith” to excess insures; many do not; others address this issue only through the rights of the “insured” Reinsurance agreements are often covered by the doctrine of “uberimae fidae” – utmost good faith – applicable to both underwriting and claims issues; although that can change based on policy language
The Categories Good Thing I Wore My Cup Reinsurers Drive Me Nuts Crazy Excess Insurers 10 20
You also just realized that the “pollution exclusion” in your reinsurance agreement (added by special endorsement) and in your excess first party property policy may provide even less coverage than your governing coverage document. The Member threatens to leave the pool unless you at least contribute half of the clean-up and repair costs, $400,000, claiming that you are acting in “bad faith.” The Threatening Member A claim arises from a break of a sewer line that spreads water and waste materials onto the Member’s and an adjoining neighbor’s properties. It’s a big stinky mess, made worse when the Member challenges your denial of coverage under a “pollution exclusion” under your first and third party programs.
The Threatening Member Risk Pools provide broad and flexible coverage, but the coverage remains limited by the governing coverage documents and applicable public policies. The risk pool must protect itself financially, but it also needs to retain members to meet its various obligations. Governing board members may need to be reminded that they have a duty to protect the pool, not their interests because in most circumstances its no longer their money – an intellectual hurdle for some Members – it’s the risk pool’s money. Even if a duty of good faith applies, the risk pool need not grant coverage or expend funds when there is no contractual or legal basis to do so. In fact, “accommodations” may be illegal. The risk pool funds may be subject to “gift of public funds,” “public contract,” and other restrictions creating “legal” limitations on what can be paid.
The Non-Cooperating Member A Member is named in disability litigation that may require proof of intentional misconduct before compensatory damages can be awarded. Plaintiffs’ earlier EEOC Complaint, leading to adverse factual evidence, has caused Plaintiff to become more contentious. The EEOC Complaint was never noticed to the risk pool even though the governing coverage document describes a claim as “any written demand asserting a right to damages.” Plaintiff offers to resolve her claim for $250,000 and a modified office that will cost the Member $50,000. All experts agree the office modifications would involve a “reasonable accommodation.” Defense costs are increasingly rapidly, with the Member rejecting the settlement terms (over the recommendations of the risk pool and counsel), demanding that the risk pool pay for any judgment, and demanding that the risk pool pay for the office modifications.
Breach of the duty to provide notice and/or to cooperate in the defense or settlement of a claim generally requires proof of prejudice before coverage can be denied (unless your governing coverage document contain more explicit terms). Your member, however, is costing the risk pool money and may be creating heightened indemnity exposure. Risk pools tend not to send “reservation of rights” letters, but failure to do so may cause reinsurance/excess insurance problems if the adverse result implicates coverage outside of the risk pool’s “self-insured” program. If the risk pool is “estopped” to deny or limit coverage, the reinsurer/excess insurer may dispute or deny coverage.. The Non-Cooperating Member
If the liability case is lost, and the Member maintains its position, the amounts in question may trigger a coverage dispute that cannot be avoided because the risk pool is not designed to pay amounts that the Member should otherwise pay in the ordinary course of its business. Forums/Dispute Resolution Internal Resolution (Governing Board decides) -- Your review remedy is solely internal Binding Arbitration (Outside Individual(s) decides) -- Picking the arbitrator/controlling the process Civil Litigation -- The default proposition -- May be the only forum for certain types of claims Competing Duties and Dispute Resolution Methods
Underwriting -- What to tell your Reinsurer You are a school district risk pool. Your pool provides broad “Educators’ Legal Liability,” “Property Liability,” and “Business Automobile Coverage.” Your $5 million program is fully reinsured in excess of $1million in defense and indemnity exposures. Your Members are facing very difficult financial times. They are desperate to find ways to come up with money to fund their operations. Through unexpected channels, you learn that your Members are: 1.Having students in auto shops repair junked vehicles that are then sold at a profit to third parties? 2.Having employees provide financial and administrative services to other public agencies? You are coming up on the renewal of your program. What, if anything, do you tell your reinsurer now, and at renewal time?
UNDERWRITING - WHAT TO TELL YOUR REINSURER Obligations You have to figure out whether you cover these exposures (or want to cover these exposures), and, if so, Whether the exposures are materially different than what a reasonable reinsurer in the same position would have expected, and, if so, The facts you need to disclose in meeting that obligation Consequences Under traditional standards, the entire program could be rescinded. Under modern (Illinois) approach, rescission may only be available in the case of actual fraud
CLAIMS – “Following the Fortunes”? Executive Director of a Member is driving her personal auto on Member business. She strikes the city’s popular Mayor, paralyzing him below the waist. The claim is valued at no less than $5 million and is a “front page” case that everyone wishes would just go away.. The police report suggests that E.D was impaired at the time of the accident. You later learn that E.D. was addicted to pain medication that likely impaired her ability to operate her vehicle safely. Two witnesses also suggest that the mayor had been in a local bar and seemed shaky as he walked off the curb. You have a $5 million program that is reinsured above $1 million. The reinsurance program contains a “follow the fortunes” clause. E.D.'s automobile insurer ($50,000 limit) is providing a defense through in- house counsel who is doing very little to evaluate or manage the case.
Claims – “Follow the Fortunes”? Many reinsurance agreements do not provide for claim management authority or intervention – the reinsurer simply “follows the fortunes” of the primary coverage provider. The exceptions to coverage are (a) lack of timely notice, and (b) reckless or intentional mismanagement of a claim, or (c) a “gratis” payment.. But, if you abandon your obligations (i.e., to primary insurer), you may have a problem because it probably does not excuse your obligation of claim management. Here, you may have a problem if you do not make an independent (a) coverage decision – intoxication exclusion, (b) let someone else make defense decisions increasing your indemnity exposure (and the reinsurer’s exposure), or (c) make a settlement decision based on “public pressure” or other external conditions.
Supervisor states that he engaged in no wrongful acts and that the suits are a “conspiracy” to avoid the layoffs. His assistant, however, states that he wanted to get rid of those “lazy, limping Japanese women.” The assistant is married to a Japanese man. Defense counsel believes the value of the case is $3 million. Your program provides $1 million in primary coverage; your excess program provides the next $5 million. Excess insurer keeps telling you to (a) settle out on behalf of the district, (b) deny coverage to Supervisor, and (c) hire experts and take other actions which are costly and, you believe, “unreasonable.” Excess insurer’s correspondence is beginning to sound very threatening. The Intermeddling Excess Insurer A transportation district must lay off several drivers, but the union agreement requires three-months notice. Two weeks after the notice letters are issued, four targeted employees allege that their supervisor engaged in racial and disability discrimination. There is no coverage for intentional acts established “in fact or by final adjudication.” Supervisor and District are both named in the suit.
Depending on the jurisdiction, you may owe a duty of care to the excess insurer with respect to both defense and settlement issues. Excess policies, however, usually contain a provision allowing them to “associate” in the defense or settlement negotiations. They may have no immediate “duty” to act, or even send a coverage position, but they cannot sit back to their own detriment. The Excess Insurer’s demand for settlement and issuance of a coverage denial is problematic. In many jurisdictions you cannot settle out less than all of your insureds. That would be a problem here unless you can conclusively determine that supervisor is not entitled to coverage. He may at least be owed a defense, and may be entitled to indemnity (at least on the disability claim). You have a right to control defense and settlement decisions. When there is a potential challenge, however, you need to carefully document your file, using your defense counsel’s documented recommendations to your advantage. THE INTERMEDDLING EXCESS INSURER
EXCESS INSURER DOESN’T LIKE THE RISK Risk Pool provides $1 million in liability coverage, and purchases a $10 million blanket excess policy written on a “following form” basis. The Excess Policy states that coverage is extended to all “insureds” covered under the primary program. Member is hosting a “special fundraising event” at the Crusty Crab, at which a local band will play. The Member signs a standard use agreement with CC containing “indemnity” and “additional insured” requirements. The agreement says Members’ coverage will be primary. A fight breaks out and people are killed. Excess insurer rejects coverage saying it was never advised that coverage would be provided to third parties for risks and events unrelated to the Member’s business. Crusty Crab says that if Excess Insurer doesn’t pay, it wants the Member to pay under its indemnity clause.
The Excess Insurer probably doesn’t have a good case, absent specific policy language. Several cases hold that the excess insurer is bound by “additional insured” endorsements even when they are added after a loss. The real issue is whether the excess insurer was misled in its underwriting. If the insurer was generally or specifically aware of “public” events, it would be difficult for the excess insurer to argue that it did not expect that “additional insured” endorsements for such events would be required. As the “primary” coverage provider, you may be able to step in and resolve the claim in excess of your limits, protecting your member, subject to a EXCESS INSURER DOESN’T LIKE THE RISK right of subrogation or indemnity. This might also become important if the Member asserts (as it might) that any failure of underwriting disclosure lies with you, and their rights and interests should not be lost.