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Insurance Cases To Watch In The 2nd Half Of 2015
Share us on: By Jeff Sistrunk
Law360, Los Angeles (June 19, 2015, 3:21 PM ET) — Attorneys are eagerly awaiting the California Supreme Court’s decision on when policyholders can transfer insurance rights during mergers and corporate restructurings, and anticipating guidance from New York’s high court on complex allocation and exhaustion issues in asbestos lawsuits. Here are five cases that insurance attorneys will be tracking in the second half of the year.
Fluor Corp. v. Superior Court
The California Supreme Court is mulling over whether to disturb its 2003 ruling in Henkel Corp. v. Hartford, which created a barrier to transferring insurance rights during mergers, acquisitions and restructurings. The high court heard arguments in the case last month and is expected to issue a decision by early fall.
In its asbestos coverage case against Hartford Accident and Indemnity Co., Fluor is asking the court to reverse Henkel, citing an obscure 1872 California law that allows a company to assign its rights under insurance policies to successors after a loss has already occurred.
The high court didn’t consider the statute when it held in Henkel that policyholders can transfer insurance rights without permission from a carrier only when a loss has been reduced to a settlement or judgment.
California “has the minority rule right now on the transfer of insurance rights and how and whether it can be done in the context of an asset purchase, so I think a lot of folks are speculating about why the California Supreme Court would take the case if not to overrule its prior decision and bring the state within the majority,” said Dickstein Shapiro LLP partner John Gibbons.
“The case has garnered a great deal of attention because the issue being addressed has presented insurers with the ability to eliminate coverage when there has been no material change to the risk that was insured,” Gibbons said.
Fluor is represented by John Wilson and Brook Roberts of Latham & Watkins LLP.
Hartford is represented by Jason R. Litt, Jeremy B. Rosen and John A. Taylor of Horvitz & Levy LLP, Alan Weil of Gaims Weil West & Epstein LLP and James Ruggeri and Joshua Weinberg of Shipman & Goodwin LLP.
The case is Fluor Corp. v. the Superior Court of Orange County, case number S205889, in the Supreme Court of California.
In re: Viking Pump Inc. and Warren Pump LLC Insurance Appeals
The Delaware Supreme Court last month asked New York’s highest court to provide guidance on key questions relating to allocation and exhaustion that arose in a decade-old battle over excess coverage for asbestos injury claims against Viking Pump Inc. and Warren Pumps LLC.
Following oral arguments on appeals in the case, the Delaware high court certified to the New York Court of Appeals the question of whether under New York law, when there are noncumulation and prior insurance provisions, the proper method of allocation is “all sums” or pro rata.
Given the answer to the first question, the Delaware Supreme Court further asked its counterpart in New York to weigh in on the question of, when the underlying primary and umbrella insurance in the same policy period has been exhausted, what rule determines when a policyholder may access its excess insurance — vertical or horizontal exhaustion.
The excess insurers argue that the Delaware Chancery Court erroneously ruled that the policies provided for an all sums responsibility allocation, under which each policy can be held liable for an entire loss. Instead, they say, New York law requires pro rata allocation, which spreads out liability proportionally among the policies.
The pump companies also lodged appeals of lower court decisions, particularly a holding that they must exhaust all of their primary and umbrella policies before being able to tap excess layers, or horizontal exhaustion.
According to the companies, given the multiple policy periods, vertical exhaustion should apply, meaning they could reach excess coverage for certain years even if their primary policies for other years haven’t been drained.
“If you’re on the insurers’ side, you’re looking for what you view as a recent trend toward pro rata allocation to continue. If you’re on the policyholders’ side, you’re hoping for all sums allocation,” said David M. Kroeger, co-chair of Jenner & Block LLP’s reinsurance practice. “New York is a significant player in the insurance world, particularly when it comes to asbestos litigation. The Court of Appeals’ ruling would have an effect on any sort of long-tail claims where pro rata v. all sums allocation and horizontal v. vertical exhaustion are at issue.”
The pump companies are represented by Jennifer C. Wasson and Michael B. Rush of Potter Anderson & Corroon LLP, Robin L. Cohen and Keith McKenna of Kasowitz Benson Torres & Friedman LLP, Lisa A. Schmidt and Travis S. Hunter of Richards Layton & Finger PA and Michael P. Foradas, Lisa G. Esayian and William T. Pruitt of Kirkland & Ellis LLP.
The carriers are represented by Kenneth J. Nachbar of Morris Nichols Arsht & Tunnell LLP, Tancred Schiavoni and Gary Svirsky of O’Melveny & Myers LLP and Garrett B. Moritz and Nicholas D. Mozal of Ross Aronstam & Moritz LLP, among others.
The appeals are In re: Viking Pump Inc. and Warren Pump LLC Insurance Appeals, case numbers 518,2014, 523,2014, 525,2014 and 528, 2014, in the Delaware Supreme Court.
Templo Fuente da Vida Corp. v. National Union Fire Insurance Co. of Pittsburgh, Pa.
The New Jersey Supreme Court is poised to issue a ruling in a case involving the question of whether an insurer must show prejudice from a policyholder’s late notice in order to deny coverage under a claims-made policy.
A state appeals panel held that National Union Fire Insurance Co. of Pittsburgh, Pa., didn’t have to cover a $3.2 million settlement on behalf of a policyholder accused of mishandling a church and day care center’s real estate loan.
The insured, Morris Mortgage Inc., didn’t provide notice to National Union until about six months after being served with the underlying complaint. In a June 2014 opinion, the appellate panel affirmed the trial court’s ruling that MMI didn’t give National Union notice of the plaintiffs’ claim “as soon as practicable” and, therefore, coverage was barred under the terms of the policy.
According to Gibbons, the appeals court’s decision goes against the traditional rule in New Jersey that “late notice is only a defense or elimination of coverage when the insurance company has been affirmatively and specifically prejudiced by the late notice.” The issue frequently arises in the context of occurrence-based policies, he noted.
“Notice was provided within the claims-made policy period, and thus there is no policy distinction between occurrence and claims-made policies that would justify allowing the insurer to eliminate insurance coverage without showing prejudice,” Gibbons said. “This simply allows the insurer to avoid its insurance obligations when it has not been prejudicially impacted by the late notice.”
Hinshaw & Culbertson LLP partner Sina Bahadoran said he will be interested to see if the New Jersey high court decides to modify the no-prejudice rule “when there’s some additional element of urgency interjected into the policy when there’s no bright line.”
“If the court affirms, it’s sure to have significant consequences for the D&O/claims-made market,” Bahadoran said. “And it would open up a lot of questions. If 5 1/2 months is too long, how about 4 1/2 or less?”
National Union is represented by Andrew L. Indeck and Jessica V. Henry of Weber Gallagher Simpson Stapleton Fires & Newby LLP.
The plaintiffs are represented by Mitchell B. Seidman and Andrew J. Pincus of Seidman & Pincus LLC.
The case is Templo Fuente De Vida Corp. and Fuente Properties Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pa., case number 074572, in the New Jersey Supreme Court.
Columbia Casualty Co. v. Cottage Health System
As data breach coverage issues continue to push to the forefront, attorneys will be on the lookout for litigation involving disputes under the first wave of cyber-specific insurance policies.
“This industry is hungry for anything it can get from the courts as to how these cyber policies will hold up,” Gibbons said.
In what is believed to be one of the first cases of its kind, Columbia Casualty Co. last month sued hospital operator Cottage Health System in California federal court, asserting that it has no obligation to cover Cottage in connection with a data breach that exposed the confidential medical records of 32,500 patients. Cottage settled a class action over the incident for $4.1 million, and the California Department of Justice is investigating the breach.
Columbia, which issued a “NetProtect360” claims-made liability policy to Cottage, argued that coverage is barred because the company failed to implement the security procedures and risk controls it identified in its policy application. According to the complaint, the data breach occurred because the file transfer protocol settings on Cottage’s Internet servers permitted anonymous users to access patients’ information via Google Inc.’s search engine.
Security issues are “extremely unique to and sensitive in” the arena of cyberrisk exposure and insurance, said Greg Podolak, head of Saxe Doernberger & Vita PC’s cyberrisk practice.
“I think this is one of those issues — policyholders need to be really careful when they make representations to the carrier about what security protocols they maintain and when they agree to certain exclusions in their insurance product,” Podolak said. “I think there needs to be some certainty on this issue from a policyholder perspective; anytime a compromise of security contributes to a loss, this exact issue is going to be a concern.”
Columbia is represented by Matthew T. Walsh of Carroll McNulty & Kull LLC.
Cottage is represented by Linda Kornfeld, Jerold Oshinsky and Kirsten C. Jackson of Kasowitz Benson Torres & Friedman LLP and by L. Donald Boden of Griffith & Thornburgh LLP.
The case is Columbia Casualty Co. v. Cottage Health System, case number 2:15-cv-03432, in the U.S. District Court for the Central District of California.
Hartford Casualty Insurance Co. v. J.R. Marketing LLC
In the coming months, the California Supreme Court is also expected to issue an opinion in a closely watched case concerning an insurance company’s ability to seek reimbursement of defense costs from a policyholder’s independent, or Cumis, counsel. Oral arguments in the case were held last month.
Hartford is challenging a California appeals court’s ruling that it lacked a quasi-contractual right based on common law to sue Squire Patton Boggs LLP for reimbursement of any allegedly improper fees the firm charged in defending Hartford’s policyholder, J.R. Marketing LLC, against claims that J.R.’s founders stole business from a former employer.
The insurer argues that it doesn’t make sense for Cumis counsel to bill any amount they want, no matter how excessive or unreasonable, and then pass on liability for the excessive fees to their client or the client’s insurer.
Policyholder attorneys, meanwhile, have expressed concerns that a ruling in Hartford’s favor would contravene the intent of California Civil Code Section 2860 by threatening the independence of Cumis counsel.
“The looming presence of the insurer questioning each strategic decision would certainly compromise independent counsel’s ability to work exclusively in the best interest of the insured,” said Kilpatrick Townsend & Stockton LLP associate Heather W. Habes.
Habes pointed out that Hartford was found to have breached its duty to defend and was responsible for the insured’s defense costs.
“From the policyholder’s perspective, an insurer that has failed to protect its insured should not be able to lob allegations against independent counsel, after the fact, in a further effort to avoid fully paying for the defense of its insureds,” Habes said.
Hartford is represented by Jonathan M. Freiman of Wiggin and Dana LLP, David Axelrad and Andrea Ambrose Lobato of Horvitz & Levy LLP, Catherine Rivard of Mendes & Mount LLP and Ira Greenberg of Locke Lord LLP.
Squire Patton Boggs LLP is represented by Theodore J. Boutrous and Julian Wing-Kai Poon of Gibson Dunn and Michelle Mei-Lin Full of Squire Patton Boggs.
The case is Hartford Casualty Insurance Co. v. J.R. Marketing LLC, case number S211645, in the California Supreme Court.
–Editing by Katherine Rautenberg and Philip Shea.