1. TCCA Winter Seminar December 8, 2014 Advanced Duty to Defend John P. Buckley AVP – Claims Western National Mutual Ins. Co. 5350 West 78th St. Minneapolis, MN 55440

2. Overview of Presentation Major topics, national view as well as Minnesota and Wisconsin rules Not enough time to address topic of independent counsel Written materials have citations to case law PLRB’s new E-Book “Duty to Defend: A Fifty State Survey”

3. I. Triggering the Duty to Defend & Preserving Insurer’s Rights Duty to defend is broader than duty to indemnify Anything “arguably covered” Complaint silent on pivotal fact Examples – Bresse Homes & Erie Exchange (p.3) Complaint alleges unviable claim (p.4) Missing required element – defend Statute of limitations – defend Plaintiff lacks standing – no defense?

4. I. Triggering the Duty to Defend & Preserving Insurer’s Rights The 4-Corners / 8-Corners Rule Based on policy language? Based “in law”? (p.5) When extrinsic evidence may be considered To prove contract / policy issues To establish duty to defend – To deny duty (p.5-6) Extrinsic fact cannot contradict Extrinsic fact must be shown to insurer timely Example – Assurance v. Lexington (p.9) Practice Tip – Ask!

5. Minnesota and Wisconsin Both states apply the 4 corners rule Minnesota allows an insurer to consider extrinsic evidence when the actual facts clearly resolve the duty to defend issue. The burden is on the insurer to show the facts fall clearly outside coverage Wisconsin restricts inquiries to the 4 corners of the complaint. Dahl v. Penninsula Builders & Erie

6. I. Triggering the Duty to Defend & Preserving Insurer’s Rights Defense triggered by notice from others Notice from plaintiff, other defendants, other insurers Duty to contact insured to ask if they want coverage – Cincinnati Ins. v. West (p.9)

7. I. Triggering the Duty to Defend & Preserving Insurer’s Rights Reservation of rights letters Different from denial letters Need to include all coverage issues (p.10) Need to explain “to the extent…” Remodeling Dimensions (p.11) Need to be sent timely – State Statutes (p.12) Advantage Builders – Mid-continent Casualty Co. Practice Tip – Can tort plaintiff see RofR letter?

8. I. Triggering the Duty to Defend & Preserving Insurer’s Rights What if the insurer guesses wrong? Started defending when didn’t have to… Reserving the right to end defense, withdraw, recoup defense costs (p.13-14) Good faith refusal to defend… waive right to argue coverage issues for indemnity? Majority Rule = no waiver, NY’s K2 decision (p.15-16) Minority Rule = estoppel, IL’s Ehlco decision (p. 16-17)

9. Minnesota and Wisconsin Minnesota – no waiver of coverage defenses Wisconsin Procedure to resolve coverage issues Incorrect denial of duty to defend without following procedure will result in a waiver of coverage defenses

10. IV. Reviewing Invoices & Allocating Defense Costs Multiple insurers sharing defense costs for one defendant Get clear logistics for submission of invoices and who approves Billing guidelines and electronic invoicing systems Waiver of privilege information in invoices? Can an insurer force independent defense attorneys to comply?

11. IV. Reviewing Invoices & Allocating Defense Costs Methods of allocation (p.18-19) Pro-rata by limits, by number of policies Equal shares by number of insurers Pretender defense costs (p.19-20) Insurer AInsurer BInsurer C Invoice 1 = $50,000$50,000 (no other tenders yet) Invoice 2 = $50,000$25,000$25,000 Invoice 3 = $60,000$20,000$20,000$20,000 Invoice 4 = $50,000$25,000$25,000 (C proves no coverage) TOTAL = $210,000$120,000$70,000$20,000 Equitable contribution claims between insurers for reallocation (p.20)

12. IV. Reviewing Invoices & Allocating Defense Costs Must the insured share defense fees for periods without coverage? (p.21) Forgo coverage, self-insured, missing policies “Non-Defense” Activities (p.22) Defending non-covered claims in “mixed action” case “Complete Defense” Doctrine – Defend all counts NOT for Title Insurance Policies  Mass S. Ct. – GMAC Mortg. LLC, 985 N.E.2d 823, 828 (2013)  7 th Cir. (IL law) – Philadelphia Indemnity, 2014 WL 5858965

13. IV. Reviewing Invoices & Allocating Defense Costs “Non-Defense” Activities (p.23-24) Defense counsel acting as coverage counsel Prosecution of offensive vs defensive counterclaims Logistics of parsing time entries (p.25) Insurer generally bears burden of proof to avoid paying specific activities

14. V. Scope and Length of Duty to Defend How long must a defense be provided? Tendering limits doesn’t end defense (p.26) Might be OK with “pay & walk” provision Amendment / elimination / dismissal of covered claims (p.26-27) Does it prejudice the insured’s ability to defend (p.27) Bodart – withdrawal after coverage DJ ruling (p.27) Appeals – offensive v defensive appeals (p.28) Hypo – exhaust limits by paying judgment, insured wants appeal Practice Tip – Communicate with the insured and ease the logistics

15. V. Scope and Length of Duty to Defend Obligation of Excess and Umbrella Insurers Duty vs right to participate in the defense No duty so long as primary has not yet exhausted its limits (p.29) Excess “follow form” policy adopts the primary policy’s duty to defend? (p.29) Home Ins. v. Am. Home Products Johnson Controls

16. Hypo 1 – Environmental Case Company is sued by the USEPA for environmental contamination over a period of many years. Three insurers agree to defend under a reservation of rights that the property damage did not occur during their various policy periods. Insured company selects independent counsel How should 3 insurers split defense costs? Does the insured, or the 3 insurers, bear burden of finding other carriers in other years?

17. Hypo 1 – Environmental Case The independent defense counsel contacts an insurer from one of the early missing policy periods and obtains that insurer’s agreement to participate in the defense under a reservation of rights. Does the independent counsel have an obligation to alert the three participating insurers to this development? Can the three participating insurers seek reimbursement of prior defense costs from the new insurer?

18. Hypo 1 – Environmental Case The independent defense counsel files dispositive SJ motions, the trial court takes them under advisement for several months. During that time, defense counsel has five summer associates spend 600 hours researching and preparing motions in limine and jury instructions (600 hours x $250/hr = $150,000). Carrier A objects to paying its one-third share, says that the activities are unnecessary given the pending SJ motions and took unreasonably too long to conduct. Carrier B pays its one-third share without comment. Can the insured argue that Carrier B’s payment forces Carrier A to pay for the same activities? Can Carrier B seek reimbursement for the amount it paid?

19. Hypo 2 – ADA & Injury Case An employee of a cement subcontractor has a doctor’s note stating he must wear shorts due to circulatory disease and excessive sweating. After General Contractor’s site manager refuses, cement worker wears long pants on a hot day, becomes dehydrated and develops a kidney stone. He sues the GC with vague allegation he is employee of the GC. One count for Americans with Disabilities Act, one count for bodily injury negligence and no allegations about his own employer. General Contractor tenders as an “additional insured” and explains that plaintiff cement worker is not its employee. Can that extra fact trump the plaintiff’s own allegation? M.A. Mortenson (p.7) Must the insurer pay for defense related to the ADA claim? Can the insurer stop defending the ADA claim if it wins a SJ motion and dismissal of the bodily injury claim?

20. TCCA Winter Seminar December 9, 2014 Advanced Duty to Defend John P. BuckleyDawn M. Gonzalez Director of Legal Services Equity Partner Western National Mutual Ins. Co.Baugh Dalton Carlson & Ryan LLC 5350 West 78th St.135 S. LaSalle, Suite 2100 Minneapolis, MN 55440Chicago, IL 60603 Thank You!