The Role of the Lawyer in Avoiding (or Establishing) Bad ... · Pre-Litigation Issues (cont.) Is the Relationship Tripartite -- Identifying Conflicts Early •Insurer Multiple policyholders

The Role of the Lawyer in Avoiding (or Establishing) Bad Faith Liability:

From Initial Claims Handling to Post-Litigation

Cary Lerman Kristi Singleton Munger Tolles & Olson LLP Dickstein Shapiro LLP

Pre-Litigation Issues

Nature of Representation

• Tripartite

Insurer-retained attorney

Staff counsel

“Dual attorney-client relationship with insurer and insured.” State Farm Mut. Auto. Ins. Co. v. Fed. Ins. Co. (1999) 72 Cal.App.4th 1422, 1429.

“[C]oalition for a common purpose, a favorable disposition of the claim – with the attorney owing fiduciary duties to both.” Purdy v. Pac. Auto. Ins. Co. (1984) 157 Cal.App.3d 59, 76.

No need for a formal retainer letter, but a cover letter good idea.

Pre-Litigation Issues (cont.)

• Independent (Cumis) counsel

Rationale: “Ethical inability of an attorney to represent conflicting interests.” United Pac. Ins. Co. v. Hall (1988) 199 Cal.App.3d 551, 556.

“Cumis counsel is independent and represents only the insured.” Assurance Co. of Am. v. Haven (1995) 32 Cal.App.4th 78, 88.


• The Attorney’s fiduciary duties

All lawyers owe undivided loyalty, competence and zeal to their clients. (Rules of Professional Conduct, Rule (“RPC”), Rules 3-100, 3-110. A.B.A. Rule 1.1.

Cannot accept representation of client if lawyer will be in an adverse or antagonistic position (without written informed consent). Anderson v. Eaton (1930) 211 Cal. 113, 116.

Insurer risks committing bad faith if it imposes onerous controls on the lawyer’s exercise of her judgment.

Counsel may not allow the insurer to interfere with the attorney’s independent judgment or direct or regulate his judgment. RPC Rule, 3-310(F).


Is the Relationship Tripartite -- Identifying Conflicts Early

• Insurer

Multiple policyholders

“Conflict of interest between jointly represented clients occurs whenever their common lawyer’s representation of the one is rendered less effective by reason of his representation of the other.” Spindle v. Chubb/Pac. Indem. Grp. (1979) 89 Cal.App.3d 706, 713.

Consider retaining separate lawyers

Written consent required. RPC § 3-310.

Establish firewalls within claims department


• Reservation of rights

Issue: Is the ROR based on coverage disputes that have nothing to do with the issues in the underlying action? Long v. Century Indem. Co. (2008) 163 Cal.App.4th 1460, 1471.

Conflict if the coverage dispute can turn on positions taken in the underlying action.

But, conflict must be significant and actual and not merely theoretical or potential. Fed. Ins. Co. v. MBL, Inc. (2013) 219 Cal App.4th 29.


• Does the potential for an excess limits judgment in and of itself create a conflict?

California: No. See Civ. Code § 2860 (b).

Illinois: Yes, if a “nontrivial probability” of an excess judgment. Perma-Pipe v. Liberty Surplus Ins. Corp. 2014 U.S. Dist. LEXIS 54867 (N.D. Ill. Apr. 21, 2014).

NO YES


• Multiple policies

May create a conflict.

Fid. Nat’l Fin., Inc. v. Nat’l Union, Case No. 09-CV-140-GPC-KSC (Apr. 9, 2014).

E&O policy evaluation cannot be used by insurer for Financial Institution Bond coverage determination.

Firewalls


• Unconditional defense permits control of defense.

“[T]he insurer’s unconditional defense … constitutes a waiver … and an estoppel … to assert [noncoverge].” Miller v. Elite Ins. Co. (1980) 100 Cal.App.3d 739, 754.

• Right to Cumis counsel may be waived in writing. Civ. Code § 2860(e).

• Insurer risks committing bad faith if it fails to provide a lawyer free of conflicts and antagonistic interests.


• Staff or retained counsel

Related claims or cases?

– Must do a conflicts check

Policyholders adverse?


Initial engagement letter

– Particularly important where staff counsel is used

– Letter should clearly state that

» staff counsel are employees of insurer

» retained exclusively for the lawsuit

» will not advise the insured on coverage issues

» possibility of an excess judgment

» right of the insured to hire own lawyer at own expense.

Business cards and pleading captions

Must disclose full implications of reservations of rights. San Diego Navy Fed. Credit Union v. Cumis Ins. Soc’y, Inc. (1984) 162 Cal.App.3d 358, 375 (Cumis).


• Cumis counsel

Determination at outset

Risks arising from denial of Cumis counsel – Conflicted defense equals no defense


• Communications Issues

Insurer responsibilities – Advise on-going case development

– Settlement offers

– Mediation

– Decision to go to trial


• Staff counsel

Independent obligations owed to policyholder client

– Independent professional judgment required. ABA Standing Committee on Ethics & Professional Responsibility, Formal Opinion 03-430 (July 9, 2003).

– Primary duty is to further best interests of insured. Purdy v. Pac. Auto. Ins. Co. (1984) 157 Cal.App.3d 59, 76.

Advise client of on-going case developments

– Must inform client of significant case developments. (RPC 3-500). A.B.A, Rule 1.4.

– “This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment and to advise the insured of any steps he might take to avoid same.” Boston Old Colony Ins. Co. v. Gutierrez, 386 So.2d 783, 785 (Fla. 1980).


• Claims department deliberations

Ok for internal reporting requirements that bind staff counsel. – Escalation protocol

Claims department may be the decision maker on certain strategic issues, such as settlement, but cannot interfere with the independent judgment of the lawyer.

• Mediation issues

Disclosure of mediation and invitation to attend


• Cumis counsel

Must disclose all information concerning the action. Civ. Code § 2860(d).

Inform insurer of factual and legal developments related to the defense. Rockwell Int’l Corp. v. Super. Ct. (1994) 26 Cal.App.4th 1255, 1265-66.

Duty includes obligation to assess and share with insurer potential liability, damages, chances of success.

But

– Ethical obligation to client not to reveal client confidences.

– Need not reveal “privileged material relevant to coverage disputes.” Civ. Code § 2680(d).


Defense/Investigation Obligations

• Insurer

Early and complete investigation

Claims assessment – liability and damages

Timely payment of defense invoices

– Pay defense invoices in full within 30 days. See Cal. DOI Reg. § 2695.7(h).

– Review each invoice carefully. Cal. DOI Reg. § 2695.7(d).

– Shortfall in payments could be breach of the defense obligation. Cf Mullen v. Glens Falls Ins. Co. (1977) 73 Cal.App.3d 163, 173-74.

– Denial of any portion of an invoice requires prompt, detailed explanation, and should be documented in the claim file. Cal. DOI Reg. § 2965.7(b).


Limits Settlement Demands and “Blue Sky” Issues • Issue: Implications of a limits settlement offer with the

potential for a judgment in excess of limits? Must send all demand letters to the insurer offering an in-limit

settlement offer.

Counsel must independently assess whether to recommend settlement. – Counsel must also inform the policyholder of the offer. RPC§ 3-510.

“A lawyer in a captive law firm must be willing to write to his or her own employer, a [demand] letter when circumstances would require a prudent attorney to do so. LEI 99-01 Ethical Propriety of Insurance Company Captive Law Firms, 1999-SEP W. Va. Law. 20, 22. – Cannot prohibit staff counsel from writing demand letters. LEI 99-01

Ethical Propriety of Insurance Company Captive law Firms, 1999-SEP W. Va. Law. 20, 22.


Approval and payment of experts

Settlement issues – Must respond to all settlement demands

» Document the record

– Must avoid unreasonably low settlement offers.

» “No insurer shall attempt to settle a claim by making a settlement offer that is unreasonably low.” (Cal. DOI Reg. § 2695.72(g).)


Staff counsel

• Binding arbitration

Consent of insured required? – Likely yes, unless in policy

– Hawaii requires insured consent

Selection of arbitrator

Binding high-low


• Claims Department may reject the recommendation of staff counsel.

Implications of rejection.

Must advise policyholder of right to accept offer and to pay excess over what insurer is willing to pay.

• Policy limits demands

Fair and complete evaluation by staff counsel.

If Claims disagrees, escalate within insurer.

Consider referral to retained counsel for second opinion.

Document basis for disagreement and decision.


Issue: What if insurer has a practice of paying excess judgments if a prior policy limits offer was rejected by the insurer over the objection of the client? • May staff counsel share his knowledge regarding

excess judgment practices with his client? Yes.

• Insurer should not bar attorney from disclosing the insurer’s past practice of paying excess judgments. “A lawyer shall explain a matter to the extent reasonably

necessary to permit the client to make informed decisions regarding the representation.” Oklahoma Ethics Rule 1.4.


Proactive steps:

• Educate staff counsel on company practice.

Correct rumors.

• Require attorneys to consult with the insurer before disclosure.

Prior approval? No.

In the Matter of the Rules of Prof’l Conduct and Insurer Imposed Billing Rules and Procedures, 2 P.3d 806 (Mont. 2000)

Prior consultation? Yes.

No disclosure of confidential information about particular cases or clients.

Do not prohibit staff counsel from putting information in writing.


Miscellaneous Privilege Issues

• Tripartite relationship

Counsel in a joint privileged relationship with insured and insurer. Evid. Code § 962.

No privilege of confidentiality among the three parties.

– Implications

» Neither client may assert privilege if communication offered in evidence in subsequent, adverse litigation. Evid. Code § 962; Am. Mut. Liab. Ins. Co. v. Super. Ct. (1974) 38 Cal.App.3d 579, 591-92; Glacier Gen. Assurance Co. v. Super. Ct. (1979) 95 Cal.App.3d 836, 841.

But, if counsel learns of facts that adversely impact coverage, may not disclose them to insurer. Bus. & Prof. Code, § 6068, subd. (c), State Bar Formal Opinion No. 1995-139.

– Withdrawal may be required. RPC, Rules 3-700(B)(1) and 3-700 (B)(2). Derivation- A.B.A. Code DR 2-110, 5-101, 5-102.


Cumis counsel

• Invoices

Common interest exception to privilege waiver doctrine.

• No disclosure of privileged, coverage-related communications. Civ. Code § 2860 (d).

POST-LITIGATION ISSUES

Post-Litigation Issues

There are two scenarios in which Post-Litigation behavior can affect bad faith claims:

• Post-Litigation conduct can be used as further evidence to support the policyholder’s existing bad faith claim This is the most common scenario

• Post-Litigation conduct also can form the basis for a new and independent bad faith claim

Post-Litigation Issues

There are potential negative consequences to both the insurer and the policyholder if they do not engage in “best practices” in the litigation of a bad faith claim

Post-Litigation (cont.)

• In many jurisdictions, an insurer’s post-litigation conduct can be used to support the bad faith claim, or as the basis of a new bad faith claim White v. Western Title, 710 P.2d 309 (Cal. 1985)

– “[T]he contractual relationship between insurer and insured does not terminate with commencement of litigation.”

Gregory v Cont’l Ins. Co, 575 So.2d 534 (Miss. 1990) – “An insurance carrier’s duty to promptly pay a legitimate claim

does not end because a lawsuit has been filed against it for nonpayment. Put more bluntly, if you owe a debt the duty to pay does not end when you are sued for nonpayment of it.”

O’Donnell v. Allstate Ins. Co., 734 A.2d 901 (Pa. Super. 1999) – [W]e refuse to hold that an insurer’s duty to act in good faith

ends upon the initiation of suit by the insured.”


• But, some jurisdictions acknowledge that the duty of good faith runs both ways, and are reluctant to find bad faith on the part of the insurer where the insured’s does not appear to have been acting in good faith

A few courts have permitted “comparative bad faith” to be used as an affirmative defense – Ins. Co. of N. Am. v. Milberg Weiss Bershad Specthrie & Lerach,

No. 95 Civ. 3722 (LLS) (S. D. N.Y. 1996)

– State Farm Fire & Cas. Co. v. Gandy, 880 S.W.2d 129 (Tex. Ct. App. 1994), rev’d on other grounds, 925 S.W.2d 691 (Tex. 1996)


• Policyholders also can be sued for abuse of process or for malicious prosecution

Insurers have brought abuse of process claims where policyholders have filed allegedly frivolous bad faith claims but these – It is rare, however, for courts to find abuse of process in the

context of a bad faith claim

– Courts are more likely to consider sanctions to be an appropriate remedy in such circumstances

Post-Litigation – Policyholder Discovery

• Generally, insurers have an advantage because of their size, sophistication, and experience litigating

• Policyholders should be given wide latitude in discovery, as long as they can articulate why the requested information could lead to admissible evidence regarding the specific bad faith claim

Post-Litigation – Policyholder Discovery (cont.)

Communications between defense counsel and insurer

• Are communications regarding the status and evaluation of the underlying claim discoverable to support a bad faith claim? Many courts will order production of the communications, even if

they are attorney work product

Some courts also will permit defense counsel to be deposed

Often depends on whether “Reliance on Advice of Counsel is considered a valid affirmative defense to a bad faith claim


“Reliance on Advice of Counsel”

• In some jurisdictions, reliance on advice of counsel is a valid defense to a bad faith claim. Gordon v. Nationwide Mut. Ins. Co., 285 N.E.2d 849 (N.Y. 1972).

• An insurer’s failure to follow counsel’s advice may be evidence of bad faith. Thompson v. Commercial Union Ins. Co. of New York, 250 So.2d 259 (Fla 1971).

• In other jurisdictions, reliance on advice of counsel is completely irrelevant to the defense of a bad faith claim. Blakely v. American Employers Ins. Co., 424 F.2d 728 (5th Cir. 1970).


• Other Categories of Documents That a Policyholder May Be Entitled to in Discovery:

Entire Claims File

– Policyholder is entitled to broad discovery, including, presumptively, the enter clams file. “The insurer may overcome the presumption by showing in camera its attorney was not engaged in the quasi-fiduciary tasks of investigating and evaluating the claim.” Cedell v. Farmers Ins. Co. of Wash., 295 P.3d 239 (Wash. 2013)


Other policyholder information

– Relevant because many bad faith statutes require the policyholder to show that the insurer has a “pattern and practice” of denying claims in bad faith.

» Lees v. Middlesex Ins. Co., 643 A.2d 1282 (Conn. 1994)

» Southard v. State Farm Fire & Cas. Co., 2012 WL 2191651 (S.D. Ga. June 14, 2012)

– Policyholders should be judicious in requesting this information – do not ask for information on every claim filed against an insurer, limit requests to similar claims


Communications with reinsurers and reserve information regarding value of the underlying claim

– This information is more obviously relevant in the context of third-party underlying claims, but also can be relevant to first-party claims

Claims Handling Manuals/Training Manuals

– Manuals may be relevant to whether the insurer’s policies embody or encourage bad faith practices. Grange Mut. Inx. Co. v. Trude, 151 S.W.3d 803 (Ky. 2004)

– If an insurer does not have claims handling manuals or training materials, this should raise a red flag

Agendas and notes taken at meetings where the underlying claim was discussed

Post-Litigation – Insurer Strategy

• Insurers should hire different counsel to defend bad faith claim – do not use same counsel that investigated or defended the underlying claim

Counsel that was involved in the decision to deny coverage may be biased in determining whether the denial was proper

Counsel that was involved in underlying claim could be a witness in the bad faith litigation

Post-Litigation – Insurer Strategy (cont.)

• Do not outsource the ultimate decision on whether a claim is covered to internal or outside counsel defending the coverage claim

• Continue to adjust the claim even after a coverage lawsuit has been filed

• Do not automatically oppose broad discovery requests

Sometimes the full story will help, not hinder, your defense of a bad faith claim

If an insurer attempts to avoid producing information that a policyholder would be entitled to in the ordinary course of the investigation of a claim, the withholding of that information in litigation could be used as proof of bad faith

Post-Litigation – Insurer Strategy (cont.)

• Avoid the following litigation tactics that may be used as evidence of bad faith

Filing frivolous counterclaims

– Krisa v. The Equitable Life Assurance Soc., 109 F. Supp. 2d 316 (M.D. Pa. 2000)

Excessive deposing of insured

Conducting discovery into personal matters

Making out-of-court statements about the policyholder or the claims at issue

Making “nuisance value” settlement offers

Post-Litigation In the Context of an Ongoing Investigation

There are also unique considerations if the coverage lawsuit and bad faith claim are initiated while the claim is still being investigated by the insurer

• Insurer’s coverage counsel may discover information during the course of the litigation that supports coverage

• Insurer may engage in litigation tactics for the sole purpose of delaying the resolution of the claim

• Insurer may try to “bundle” settlement offers to dispose of underlying claim and bad faith claim simultaneously

• Insurer may prematurely halt investigation into the underlying claim

QUESTIONS?