YOUR TENDER HAS BEEN DENIED - NOW WHAT? · 0 © 2014 Dickie, McCamey & Chilcote, P.C. All rights...

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© 2014 Dickie, McCamey & Chilcote, P.C. All rights reserved.

Confidential Attorney/Client Work Product.

YOUR TENDER HAS BEEN DENIED - NOW WHAT?

Robert J. Marino, Esquire Insurance Law & Litigation Practice Group

April 1, 2014

Presentation to Pittsburgh Chapter of Association of Corporate Counsel (ACC)

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Introduction/Definitions

First party claims Third party claims Focus of this presentation We have decided to include some discussion

of what is an effective “tender” of insurance coverage. Knowing this will assist you to avoid the consequences of the denial of a tender.

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First Party Insurance Claims

A “first party” insurance claim is a claim by a named insured (or insured) against its own insurance carrier, or another insurance carrier under which that party is “an additional named insured” or “additional insured.”

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First Party Insurance Claims (cont.)

You all know, but just to reiterate, first party claims are those against a company’s carrier for property damage, business interruption losses, or any other coverages available to you for direct losses under your company’s CGL or other policy of insurance.

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Third Party Insurance Claims

“Third party claims” are those held by a stranger to the insurance contract against your company, the named insured or insured under the applicable insurance policy. (CGL, Professional Liability, D&O, etc.)

Due to the limitations of time, we are going to be discussing what is an effective tender in relation to third party claims.

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“Tender” Defined

Black’s Law Dictionary has five (5) definitions of the word “tender,” none of which refers to “insurance tenders.” • The closest definition is “[a]n offer or bid put

forward for acceptance.”

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“Tender” Defined (cont.)

Definition of “tender” in insurance treatises • The most appropriate definition of the word

“tender” in insurance treatises is as follows: “[a]n insured tenders a claim to an insurer by providing notice to the insurer that informs the insurer that a third party has made a claim against the insured, and that the insured expects some action from the insurance company.”

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“Tender” Defined (cont.)

New Appleman Insurance Law Practice Guide, Section §10.04 at 10-10 (2011). • This is most often referred to as “tender of the

defense” [of a claim or lawsuit]. • This is usually construed as a request by the insured

under the insurance contract that the insurer provide a defense to a civil lawsuit in which the insured has been named as a defendant.

• The “tender” should always be in writing. (More on this later).

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Differences Between “Tender” and “Notice”

Preliminary Comment • The insurance contract almost always defines

when, how, where, in what manner, and under what circumstances such “notice” to the insurer of a claim needs to be given.

• Strict compliance with the insurance contract provisions is required.

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Differences Between “Tender” and “Notice” (cont.)

• A close relationship with the corporation’s insurance broker is necessary, quite obviously. Often, it is the broker’s role and responsibility to assist, in conjunction with the company’s Risk Manager, in: Identifying the insurance policy(ies), which will

provide protection and insurance coverage to the company; and Preparing and presenting the appropriate “notice” to

the carrier(s) involved, pursuant to the insurance contract requirements.

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Majority rule as to whether “notice of a claim” constitutes an effective “tender” of the claim/lawsuit: • The majority of courts apply the rule of law

that the insurer’s obligation to investigate a claim/defend a civil lawsuit arises at the point of “notice,” even though the “notice” does not include a request by the insured to defend.

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See e.g., Garcia v. Underwriters at Lloyds, 143 NM 732, 2008 NMSC-0018, 2008 NM Lexis 189 (2008)

Minority view of “notice” constituting “tender.” • A minority of courts hold that the written or other

notification by the insured of the existence of the claim/lawsuit also must include a statement that the insured desires and expects the insurer’s assistance in order for there to be a valid “tender” which triggers the insurer’s duty to defend.

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Recommendation on effective tender • Unless there is some compelling reason

not to, as soon as the company learns of the existence of an incident which might give rise to civil liability, and/or receives a letter or other communication from a person or entity making a claim, the company should, as soon as

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possible, send a letter to its insurance carrier. The letter should include both a notification of the claim, as well as a statement that your company wants the carrier’s assistance under the policy to investigate the claim and/or defend its interest in the lawsuit, as the case may be.

• The company’s insurance broker should always be sent written notice as well.

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• The tender letter should be sent to the insurance carrier directly, if the policy of insurance requires that it be done, as opposed to being provided only to your company’s broker.

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• In your or your Risk Manager’s discussions with your broker in advance of a new insurance policy issuance, or renewal of an older policy, a discussion between the broker and Risk Manager as to what the insurance policy provides in the event of required notice to the insurer should take place.

• The tender letter should be sent by both first class mail and fax to the insurance carrier and/or otherwise as required by the notice provisions of the language of the insurance policy itself.

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• The tender letter should identify and reference any documents or written claim materials which have been submitted to your company by the claimant, or an attorney for the claimant. In the alternative, if there is no written claim, the carrier should be sent an incident report, or some other document evidencing the nature of the incident or occurrence.

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Effect of a Proper “Tender” (Third Party Claim)

An effective tender triggers the insurance carrier’s corresponding duty to: • Determine whether there is a duty to provide

substantive coverage for the claim under the policy; and

• Determine whether there is a duty to provide a defense to your company;

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Effect of a Proper “Tender” (Third Party Claim) (cont.)

Absent notice of an occurrence to the carrier which might trigger the carrier’s duty to defend, many courts have held that the carrier is not liable for pre-notice defense costs, or expenses incurred by the insured. See, e.g., Sherwood Brands v. Hartford Accident & Indemnity Co., 698 A.2d 1078 (Md. 1997).

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Be Aware of Right to Co-Primary Insurance Coverage

Although time does not permit an extensive discussion of this, your company may, of course, be an additional named insured on other policies of insurance in addition to being a named insured on your own policy.

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Be Aware of Right to Co-Primary Insurance Coverage (cont.)

In these situations, especially where your company is also the beneficiary of a separate indemnification clause in the contract, an early, separate tender of coverage/indemnification and defense to the contractor’s carrier is advisable.

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Depending on the language of multiple policies which may provide additional insurance coverage to your company, the carriers may be co-primary, one may be excess over the other.

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If two primary policies of insurance have mirroring “other insurance” clauses in them, and again depending on the jurisdiction in which the policies are most appropriately to be litigated/interpreted, both carriers are required to provide indemnification on a pro rata basis within the limits of their coverage.

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As just one example, if carrier “A” has one million dollar CGL limit and carrier “B” has a ten million dollar CGL limit, and both policies “other insurance” clauses are deemed to be mirroring, each carrier is required to provide coverage on a pro rata basis, with carrier “A” required to cover under ten percent of the loss, and carrier “B” required to cover over 90 percent of the loss, by settlement or verdict.

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In these situations, the carriers typically resolve the issues of who controls the settlement negotiations in accordance with their respective exposures under the policy limits.

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Targeted Tender Doctrine

A majority of courts have rejected the “targeted tender” doctrine under which an insured has the right to choose which insurer would be required to defend and indemnify it. In those states which have adopted the “targeted tender” doctrine, the carrier to whom claim/suit is tendered has an obligation, if coverage otherwise exists, to indemnify and defend the insured and no right to equitable contribution against any other carriers who may be on the risk.

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Targeted Tender Doctrine (cont.)

In Pennsylvania, in the case of J.H. France Refractories Co. v. Allstate Insurance Co., 534 Pa. 29, 626 A.2d 502 (1993), the Supreme Court of Pennsylvania, in a case involving coverage for asbestos-related claims, held that each insurer which was on the risk during the development of an asbestosis-related disease is a primary insurer.

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Targeted Tender Doctrine (cont.)

The insured was free to select the policy or policies on which it was to be indemnified and then continue to seek indemnification from any of the remaining insurers which were on the risk during the development of the disease until the policy limits were exhausted. Pennsylvania retained the right of carriers to seek equitable contribution of sums that they paid in excess of their pro rata obligation under their policies of insurance compared to the co-primary policies.

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Effect of Denial/Disclaimer of Coverage v. Reservation of Rights

There are three possible responses of an insurance carrier to notice/tender of insurance coverage for an incident/third party claim:

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Effect of Denial/Disclaimer of Coverage v. Reservation of Rights (cont.)

• Unconditional acceptance of the claim for investigation/defense;

• Complete disclaimer of coverage; and • Issuance of a reservation of rights letter,

coupled with an agreement to defend the insured and the claim/lawsuit.

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Flow Chart

Incident/Potential Claim • What to do? Provide written notice to your broker and all

potential insurance carriers in writing, with a copy of the claim letter from the claimant and/or counsel for the Claimant. If there is no counsel, provide a copy of the

incident report to your broker and the insurance carrier(s), in writing, requesting that the carrier defend and protect your company’s interests.

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Flow Chart (cont.)

Third Party lawsuit filed. • What to do? In response to receipt of suit papers, the company

should immediately provide written notice to its broker and all applicable insurance carriers, sending copies of the suit papers and requesting that the insurance carrier protect the company’s interests, and provide indemnification and a defense to the company/insured. This leads to three scenarios.

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Flow Chart (cont.)

Carrier unconditionally accepts coverage. • Absent your choice of counsel, the carrier will appoint

counsel to defend the company. • This is the best possible outcome, and in almost all

instances – unless your company has the right to consent to settlement in the insurance contract, most jurisdictions hold that the carrier has the exclusive right to settle or try the case.

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Flow Chart (cont.)

Carrier denies the tender of coverage (indemnifications/and a defense) altogether – i.e., disclaims coverage.

• Engage outside counsel to defend the case at your expense. • Consider the propriety of filing a separate action in declaratory

judgment, against any and all applicable carriers, seeking an order of court requiring that the insurance carrier provide coverage and a defense.

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Flow Chart (cont.)

In appropriate circumstances, consider filing a separate suit against any applicable carrier who owes coverage and defense for breach of contract/insurance bad faith if the denial of coverage in the defense lacked a reasonable basis.

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Flow Chart (cont.)

Carrier in response to receipt of the suit papers, issues a reservation of rights letter but appoints independent counsel to defend the company. Your company must make a determination whether

to accept the insurer’s choice of counsel.

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Flow Chart (cont.)

In this event, your company remains unqualifiedly bound to the terms of any “consent to settlement” provision of the insurance policy, and the insurer retains full control of the litigation, consistently with the policy’s terms and subject to its obligation of good faith. Alternatively, your company may decline the insured’s

tender of a qualified defense and your company may furnish its own defense, either pro se or through independent counsel, retaining full control of the defense including the option of settling the underlying claim under terms it believes best.

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Flow Chart (cont.)

Should coverage be later found, in this scenario, the insured (your company) may recover from the insurer your defense costs and the cost of any settlement that your company may independently reach with the plaintiffs, to the extent that these costs are being fair, reasonable, and non-collusive. Babcock and Wilcox Co. v. American Nuclear

Insurers, 76 A.3d 1 (Pa. Super. Filed July 10, 2013) enunciated the foregoing rights of an insured.

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Flow Chart (cont.)

The Babcock and Wilcox Co.’s holding, which is one of the most significant decisions in Pennsylvania insurance law in the last several years, is now subject to review by the Pennsylvania Supreme Court. Caveat: That court has granted a Petition for

Allowance of Appeal in that case, limited to the following issue:

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Flow Chart (cont.)

• “Does a policy holder forfeit its right to insurance coverage by settling an underlying and covered claim without its insurer’s consent, where the insurer is defending subject to a reservation of rights to disclaim coverage, the settlement is at arm’s length, is fair and is reasonable, and the insurer has failed to offer any amounts in settlement?”

• The Petition for Allowance of Appeal was granted in January 2014 and will be the subject of written briefs and later oral argument. A decision is not expected until later this year or early next.

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Flow Chart (cont.)

• Please note that the decision of the Superior Court of Pennsylvania in the Babcock & Wilcox Co. case is not necessarily the decision that would apply in other jurisdictions on this question of whether an insured can, in the face of the liability insurance carrier’s issuance of a reservation of rights letter and assignment of separate outside counsel to defend the company, proceed to settle the case independently. In some jurisdictions, this is not permitted and your company would not be legally able to collect the amount of any settlements you reach on your own with plaintiff’s lawyer, nor be able to recoup the costs of the defense in the lawsuit.

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Flow Chart (cont.)

• The theory in those jurisdictions is that the carrier is providing a defense, has not denied coverage altogether, and may in fact settle the third party case at a later date.

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Flow Chart (cont.)

• Pennsylvania’s decision has some similarities to the “Cumis” doctrine enunciated in California in the case of San Diego Federal Credit Union v. Cumis Insurance Co., 208 Cal. Rptr. 434, 162 Cal App 3d 358 (1984). (Where there are divergent interests of the insured and insurer brought about by the carrier’s reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable costs for hiring independent counsel by the insured; the insurer may not compel the insured surrender control of the litigation.)

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Remedies for Denial of Tender

Filing of a Declaratory Judgment Action • Through your own counsel, seek a declaration

from a court of the insurance carrier’s duty to either provide indemnification and/or defense for the lawsuit.

• This suit can include other causes of action such as breach of contract or alleged bad faith (which in the alternative can be made as part of a separate common law action for beach of contract/bad faith).

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Remedies for Denial of Tender (cont.)

• Should be brought in a situation where the carrier denies coverage and the defense altogether.

• If the carrier is defending under a reservation of rights, the propriety of this filing depends on what basis the coverage is being withheld/ reserved conditionally.

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Continuing to Defend the Lawsuit Directly • Defend the case to conclusion with your own

counsel and seek: Recovery in a separate suit for the costs of any

settlement you reach, or any verdict, under a theory that the carrier had an obligation to provide coverage/indemnification, and An award for the legal fees, costs, and expenses in

defending the case.

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Bringing a Separate Civil Suit for Breach of Contract/Bad Faith • Bear in mind that the cause of action for

breach of contract most likely accrues at the time the carrier denied coverage altogether, which will start the running of the breach of contract statute of limitations in the particular jurisdiction supplying the controlling rule of law.

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• In the separate lawsuit for breach of contract to recover any amounts paid in settlement to the claimant and/or attorneys’ fees, costs and expenses, it must be shown that the settlement amount paid is fair, reasonable, and noncollusive.

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Note that there is a two (2) year statute of limitations under Pennsylvania law for an insurance carrier’s alleged bad faith conduct in denying coverage in a defense to the insured. • This is pursuant to the Pennsylvania statutory

bad faith cause of action set forth at 42 Pa. C.S.A. §8371.

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See Ash v. Continental Insurance, 593 Pa. 523, 932 A.2d 877 (Pa. 2007) and Cozzone v. AXA Equitable Life Insurance Co., 858 F. Supp. 2d. 452 (M.D. Pa. 2012).

• Importantly, the statute of limitations on a bad faith claim begins to run/accrues when the insured first learned that the carrier has denied coverage under the policy.

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Requirements for a viable bad faith claim under Pennsylvania law • Note that the insurance carrier’s denial of

coverage does not necessarily mean the carrier has committed any acts of bad faith.

• Your company must prove, by clear and convincing evidence two elements:

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The insurer lacked a reasonable basis for (denying coverage) denying benefits under the policy; and The carrier knew or recklessly disregarded the lack

of reasonable basis. Terletsky v. Prudential Property and Casualty Insurance Co., 437 Pa. Super 108, 649 A.2d 680 (1994).

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• Note also that mere negligence, oversight, or technical mistakes by the insurance carrier are not enough to prove bad faith in the denial of coverage/denial of your tender of coverage. It requires proof of a scienter element such as recklessness.

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The Pennsylvania statute governing bad faith insurance actions provides: • “In an action arising under an insurance

policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions:

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1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%.

2) Award punitive damages against the insurer. 3) Assess court costs and attorney fees against the

insurer.” 42 Pa. C.S.A. §8371.

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Definition of Bad Faith

Any frivolous or unfounded refusal to pay proceeds of a policy; it is not necessary that such refusal be fraudulent. For purposes of an action against an insurer for failure to pay a claim, such conduct imports a dishonest purpose and means a breach of a known duty (i.e. good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.

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First and Third Party Insurance Bad Faith Claims

What is Third Party Bad Faith? • Pennsylvania has long recognized a

policyholder’s right to bring a bad faith claim against an insurance company that fails to fulfill its duties of defense and/or indemnity under a liability insurance policy. Cowden v. Aetna Casualty Ins. Co., 134 A.2d 223 (Pa. 1957)

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First and Third Party Insurance Bad Faith Claims (cont.)

What is Third Party Bad Faith? • An excess verdict is generally required and

the bad faith claim is usually brought by 3rd party plaintiff after insured assigns her right to bring the claim under the insurance policy.

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First and Third Party Insurance Bad Faith Claims (cont.)

What is Third Party Bad Faith? • Note this is a separate right your company

may have in the scenario where the carrier has assumed control of the litigation and has not disclaimed coverage or reserved its rights, as in the Babcock & Wilcox decision.

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Who May Assert a Third Party Bad Faith Claim

The right to assert “3rd Party Bad Faith” claim accrues to a policyholder and arises out of an insurer’s alleged mishandling of a third party claim.

Absent an assignment, a third party claimant is not entitled to bring a common law bad faith claim against your insurer. Brown v. Candelora, 708 A.2d 104 (Pa. Super. 1998)

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Other Cases of Importance

Trustees of The University of Pennsylvania v. Lexington Insurance Co., 815 F.2d 890, 1987 U.S. App. LEXIS 4188 (3d Cir. 1987)

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Other Cases of Importance (cont.)

Affirming an award in favor of an insured, reimbursing the insured for the cost of a two-tiered settlement with the plaintiff in the underlying case and awarding costs, attorneys fees, and punitive damages for the insurer’s bad faith. The insurer had denied coverage based in part on the insured’s alleged late notice of a medical malpractice claim. Therefore, where the insurer is denied coverage completely, it acts at its own risk and the insured may proceed in its best interest.

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Barr v. General Accident Group, 360 Pa. Super. 334, 520 A.2d 485, 1987 Pa. Super. LEXIS 6941 (1987) (when an insurer initially had provided the insured with a defense in an underlying personal injury lawsuit pursuant to a reservation of rights, but then later withdrew the defense and denied coverage, the court enforced a settlement agreement reached later between the insured and the claimant in the underlying case and enforced the assignment of all rights of the insured against the carrier thereafter).

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Querrey & Harrow, Ltd. v. Transcontinental Insurance Co., 885 N.E. 2d 1235, 2008 Ind. LEXIS 366 (2008) (excess insurer which brought claim for alleged malpractice against the insured-selected counsel for alleged excessive amount paid toward a settlement had no cause of action because the law firm’s duty existed to the insured and not the carrier).

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Questions

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Thank you for attending.

For further information, please contact: Robert J. Marino, Esquire

Dickie, McCamey & Chilcote, P.C. Two PPG Place, Suite 400 Pittsburgh, PA 15222-5402

Phone: 412-392-5221 Fax: 412-392-5367

Email: [email protected]

YOUR TENDER HAS BEEN DENIED - NOW WHAT? · 0 © 2014 Dickie, McCamey & Chilcote, P.C. All rights...

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