by sohalang | Oct 15, 2012 | Blog News, Uncategorized
The Regence Group, et al. v. TIG Specialty Insurance Company, Oregon District Court Cause No. 3:07-cv-01337-HA, October 12, 2012 Opinion and Order on Summary Judgment (Dkt. No. 846)
Facts
Defendant TIG issued a Managed Care Organizational Liability Insurance Policy to Regence for the period of January 1, 2001 to January 1, 2002. The Policy provided coverage for managed care errors and omission liability, as well as insurance company errors and omissions. The Policy had professional liability limits of $50 million per claim/$ 50 million aggregate, and a self-insured retention applicable to indemnity of $250,000 per claim/$500,000 annually.
The Policy provided that TIG would pay sums Regence was obligated to pay as damages, including damages assumed under contract, arising out of” [ w ]rongful acts committed in the course of your business operations” and “[w]rongfu1 acts committed in the course of your providing insurance services.” The term “wrongful act” is defined under the Policy as “a negligent act, error, omission, misstatement or misleading statement, or breach of duty.” “Insurance services” is defined as “services of an insurance company rendered by or on behalf of the insured, including such services provided to others,” which includes “[c]laims handling and adjusting.”
“Business operations” is defined under the Policy as:
a. Review of healthcare services, including the cost of health care or necessity
of healthcare and utilization review/management, to evaluate the appropriate
use of medical care resources, including but not limited to:
• Cost of health care;
• Necessity of healthcare;
• Prospective review to authorize treatment or expenses;
• Concurrent review to evaluate continued patient care;
• Retrospective review to evaluate medical services already rendered; or
• Case management or disease management.
b. Claims handling.
c. Provider selection, contracting, retention, supervision, monitoring and
termination [and]
d. The following activities or services you provide, or contractually agree to
provide: …
• Development of practice guidelines and treatment protocols which affect
healthcare treatment decisions ….
The Policy also included several exclusions, including the capitation exclusion, which provided that the Policy did not apply to “Business Risks.” According to the Policy, “Business Risks” included claims arising out of “[c]apitation payments, including any withholds for risk or bonus agreements, or payments, fee-for-service payments or other salary payments owed to contracted or employed health care providers[.]”
In exchange for an additional premium, Regence specifically negotiated coverage for RICO claims and an endorsement was added to the policy to that deleted the RICO exclusion in the policy. Regence believed that it was covered for all types of RICO claims, but TIG limited coverage to only certain types of RICO claims. However, TIG never communicated to Regence that it was its position that the capitation exclusion would preclude coverage for RICO claims.
Regence was sued in 2001 in three class action lawsuits alleging RICO claims. TIG agreed to defend Regence in all three actions, reserving its right to assert the capitation exclusion. In all the actions, the plaintiffs alleged that Regence violated RICO by systematically denying, delaying and or diminishing the payments due to physicians so they the physicians were not paid in a timely manner.
Public Policy
First, TIG argued that Oregon public policy precluded coverage for RICO claims which are based on intentional conduct. The court found that there was a genuine issue of material fact that precluded summary judgment on this question. The court found that Regence’s choice to settle the class action cases was not an affirmation that it violated RICO, rather the decision to settle could have been made for business decisions. Moreover, the court found that there had been no showing or evidence developed that Regence ever specifically intended to cause injury by entering into the alleged conspiracy. If TIG were to convince a jury that Regence acted intentionally to cause harm, then public policy likely would preclude coverage for the RICO claims.
What Standard Applies When Determining whether an Insurer Has a Duty to Pay a Settlement?
Next, the Court was asked to determine whether TIG had a duty to indemnify Regence for the settlement amount. The court found that although the Oregon courts have not decided this issue, other courts have held that when an insured settles a claim before trial, the court in a coverage action should determine whether the settled claims fall within the coverage of the policy by looking at the facts inherent in the settlement and the allegations in the underlying complaint. See, e.g., Texas Farmers Ins. Co. v. Lexington Ins. Co., 380 F. App’x 604, 607 (9th Cir. 2010) (quoting In re Feature Realty Litig., 468 F. Supp. 2d 1287, 1295-96 (E.D. Wash. 2006)); Travelers Ins. Co. v. Waltham Indus. Labs.Corp., 883 F.2d 1092, 1099 (1st Cir. 1989) (stating that the duty to indemnity following a settlement is determined by the basis of the settlement); Am. Home As sur. Co. v. Dykema, Gossett, Spencer, Goodnow & Trigg, 811 F.2d 1077, 1083 (7th Cir. 1987) (“Because the case was settled before trial, [the underlying] allegations are accepted as true for purposes of determining insurance coverage.”).
Regence, however, argued that when an insured settles a potentially covered claim, Oregon courts use the duty to defend analysis to determine whether the settled claim falls within the coverage of the policy. See Am. Hardware Ins. Grp. v. West One Auto. Grp., Inc., 2 P.3d 413, 415 (Or. Ct. App. 2000) (“Because defendant settled [the underlying] claims, the duty to indemnify is determined by the same principles.”). The court stated, “Regence appears to have misunderstood the standard. No other court has followed the reasoning in American Hardware, and in fact, the case on which the court in American Hardware relies holds to the contrary. See id. (citing Nw. Pump & Equip. Co. v. Am. States Ins. Co., 925 P.2d 1241, 1243 (Or. Ct. App. 1996) (“The duty to defend is triggered by the bare allegations of a pleading. In contrast, the duty to indemnify is established by proof of actual facts demonstrating a right to coverage.”)).”
Capitation Exclusion
The court found that the TIG policy unambiguously provided that it would pay both defense and indemnity for RICO claims. Interestingly, the court resorted to extrinsic evidence surrounding the formation of the policy to determine what the unambiguous language of the policy provided. Resorting to extrinsic evidence, as well as judicial estoppel, the Court explained, “This court need not decide which authority’s reasoning is more persuasive because TIG represented to its reinsurers during arbitrations that the Policy provided coverage for the Thomas claims. As a result, the court deems TIG to have admitted that the capitation exclusion does not apply to the claims alleged in Thomas.”
Bad Faith/ Special Relationship
TIG argued that there was no special relationship between it and Regence because with regard to the duty to defend, the parties had entered into an agreement that “Regence maintained “the control of the defense of the litigation” in Thomas, and was authorized to “make the ultimate decisions relating to the strategy, including but not limited to, whether to settle; the terms and conditions of any settlement; the amount of any settlement …. ” However, the court also found that the parties agreed to discuss “all major strategic decisions” about the defense of Thomas, agreed to “work together to try to adopt mutually agreeable strategies,” and that Regence shared privileged documents with TIG.” The court found, under the facts of this case, that this was enough to give rise to a special relationship.
by Soha Lang | Sep 20, 2012 | Blog News, Uncategorized
In Morgan v. Amex Assur. Co., No. SC S059655 (Or Sept. 14, 2012), the insured obtained automobile insurance when she was living in Vancouver, Washington. The insurer issued a Washington insurance policy and delivered it to the insured’s Vancouver address. The insured made an underinsured motorist claim under her policy. After the insurer declined tender, the insured filed suit. The Court of Appeals held that the insured was not entitled to any attorney fees under ORS 742.061 based on a second statute, ORS 742.001, that limited the scope of Chapter 742 to “insurance policies delivered or issued for delivery in this state.” On further review, Oregon Supreme Court reversed the Court of Appeals and held that attorney fees were available. Looking to the history of ORS 742.001, the Oregon Supreme Court concluded that “the legislative history demonstrates that, in enacting [ORS 742.001], the 1967 legislature intended to expand the state’s authority to impose substantive regulations on insurers transacting business in Oregon, consistently with federal limitations. The legislature did not intend that [ORS 742.001] would limit the scope of any remedial sections, such as [ORS 742.061], included within Chapter 6 of the 1967 Act.” Slip op. at 11-12.
by sohalang | May 18, 2012 | Blog News, Uncategorized
On May 17, 2012, the Washington Supreme Court issued two decisions construing ensuing loss coverage under first party property policies. The first was Vision One, LLC, et al. v. Philadelphia Indem. Ins. Co., et al., 85350-9 (May 17, 2012). In Vision One, the Washington Supreme Court overturned a Court of Appeals decision favorable to the insurer and reinstated the judgment of the trial court, which had awarded the insured damages for an ensuing loss, but not for the cost to repair damage due to faulty workmanship and defective design.
The Supreme Court explained coverage under an ensuring loss provision as follows:
While coverage may be excluded when a certain peril causes a loss, a resulting or ensuing loss clause operates to carve out an exception to the policy exclusion. For example, a policy could exclude losses “caused directly or indirectly” by the peril of “defective construction,” but then an ensuing loss provision might narrow the blanket exclusion by providing that “any ensuing loss not excluded is covered.”
In this way, ensuing loss clauses limit the scope of what is otherwise excluded under the policy. Such clauses ensure “that if one of the specified uncovered events takes place, any ensuing loss which is otherwise covered by the policy will remain covered. The uncovered event itself, however, is never covered.”
The court provided the following example to illustrate how an ensuing loss clause works:
Suppose a contractor miswires a home’s electrical system, resulting in a fire and significant damage to the home. And suppose the homeowner’s policy excludes losses caused by faulty workmanship, but the exclusion contains an ensuing loss clause. In this situation, the ensuing loss clause would preserve coverage for damages caused by the fire. But it would not cover losses caused by the miswiring that the policy otherwise excludes. Nor would the ensuing loss clause provide coverage for the cost of correcting the faulty wiring.
The Washington Supreme Court explained that an ensuing loss clause may not cover losses that are otherwise excluded. However, the Supreme Court rejected the Court of Appeals’ analysis regarding whether collapse was an independent cause of loss.
[The Court of Appeals’] analysis fails to consider that collapse is a covered peril under the policy. Many events can be characterized as both a loss and a peril. Characterizing collapse as the loss, rather than the peril, rests on a semantic distinction without a difference and ignores the policy’s coverage for all risks, including those “[c]aused by collapse of the building.”
The Supreme Court held the efficient proximate cause rule only “applies only when two or more perils combine in sequence to cause a loss and a covered peril is the predominant or efficient cause of the loss.”
The efficient proximate cause rule operates as an interpretive tool to establish coverage when a covered peril “sets other causes into motion which, in an unbroken sequence, produce the result for which recovery is sought.”
(emphasis added). The court held that “[t]he opposite proposition, however, is not a rule of law.” “When an excluded peril sets in motion a causal chain that includes covered perils, the efficient proximate cause rule does not mandate exclusion of the loss.”
The court left open the possibility that an insurer may draft policy language to deny coverage when an excluded peril initiates an unbroken causal chain, but held that Philadelphia had not preserved that issue for appeal.
The second case, Sprague v. Safeco Ins. Co. of Am., No. 85794-6 (May 17, 2012), is the companion decision to Vision One. There, Safeco issued a “homeowner’s all risk insurance policy,” which excluded construction defects and rot. These exclusions were subject to ensuing loss provisions, which stated that “any ensuing loss not excluded or excepted in this policy is covered.” The policy in effect during the relevant period was not subject to a collapse exclusion.
Safeco’s expert determined that wood decay had resulted in substantial impairment of the insured’s home. The expert opined that inadequate flashing and inadequate ventilation of fin walls supporting two large decks caused the decay. The Washington Court of Appeals held that “the losses that are faulty construction and rot are not covered, but the ‘ensuing losses,’ those that result from such faulty construction or rot, are covered because such an ensuing loss is not excluded elsewhere in the policy.”
The Washington Supreme Court overturned the Court of Appeals and held that the rot and faulty workmanship exclusions applied to preclude all coverage because, unlike in Vision One, there was no ensuing loss.
As in Vision One, there is no coverage here for the fin walls because of the policy exclusions for rot and defective workmanship. If there had been losses other than to the fin walls—an injury to a person hurt by the collapse or property damaged by the deck failure—coverage would have existed under the ensuing loss provisions of the policy. Unlike Vision One, that was not the case here. The only loss was to the deck system itself. That loss resulted from rot caused by construction defects.
Accordingly, because the court found that both causes of loss were excluded, the ensuing loss provisions in the policy did not apply. The Sprague Court did not discuss the efficient proximate cause rule.
by Soha Lang | May 18, 2012 | Blog News, Uncategorized
In Sauter v. Houston Casualty Co., No. 66809–9–I (Wash. App. May 14, 2012), the insurer issued a directors’ and officers’ liability policy to named insured S-J Management, LLC (“SJM”). SJM’s directors and officers were also insureds “while acting in [their] capacity … as such on behalf of the Insured Organization.” Michael Sauter (“Sauter”) was SJM’s CEO and manager. Sauter was the guarantor on a line of credit to SJM and secured his guaranty with real property that he personally owned. When SJM defaulted on the line of credit, the bank demanded payment from Sauter, who also failed to pay. SJM’s board agreed to indemnify Sauter but, because it was insolvent, SJM could not do so. SJM’s counsel then tendered to the insurer claiming that Sauter’s guaranty obligation was covered. The insurer denied coverage.
Sauter filed suit against the insurer. Sauter contended that he had executed the guaranty in his capacity as CEO and manager of SJM and that his failure to satisfy the obligation was a “Wrongful Act” under the policy. The trial court granted summary judgment in favor of the insurer.
The Court of Appeals affirmed and held that the insurer had no duty to indemnify. It reasoned that Sauter had acted in his personal capacity, rather than in his capacity as an officer or director of SJM, because (1) he signed the guaranty in his own name rather than as an officer of SJM, (2) he personally owned the real estate that was the collateral and (3) as a legal matter, SJM could not be the guarantor of its own obligation. The court also reasoned that, if Sauter had executed the guaranty as SJM’s officer/director, then SJM, and not he, would have been liable.
The Court of Appeals then addressed whether Sauter’s assumption of the guaranty was a “loss” under the policy. It noted that other jurisdictions have rejected the contention, as here, that a voluntary contractual obligation can be a “loss.” However, the court did not resolve this issue because Sauter’s contention failed on another ground. Under the policy, the “loss” must result from a claim for a “Wrongful Act.” Here, the purported loss did not result from a “Wrongful Act” because the purported loss was Sauter’s assumption of the guaranty agreement and not his failure to satisfy his obligation under the guaranty.
by Soha Lang | Feb 13, 2012 | Blog News, Uncategorized
In Matsyuk v. State Farm Fire & Cas. Co., 2012 WL 402050, the Washington Supreme Court addressed the pro rata fee sharing rule announced in Mahler v. Szucs, 135 Wn.2d 398 (1998). The Mahler rule provides an “equitable” exception to the American rule on attorney fees (that litigants must bear their own legal expenses) by requiring a personal injury protection (PIP) insurer to share in the legal costs incurred by its injured insured in obtaining a recovery from the responsible tortfeasor or the tortfeasor’s insurer. The underlying theory is that the PIP insurer is benefited by its insured’s recovery because it creates a “common fund” from which the reimbursement of PIP benefits is paid. Mahler has subsequently been applied to a range of PIP reimbursement scenarios, including where the injured insured collected PIP and uninsured/underinsured motorist benefits from the same carrier.
This case adds one additional scenario to which the Mahler rule applies: where the injured party is insured under a PIP policy held by the tortfeasor and also recovers under the tortfeasor’s liability policy. In holding that Mahler applies, the Court expressly “disapproved” of a Court of Appeals case, Young v. Teti, 104 Wn. App. 721 (2001), which had concluded that Mahler rule is inappropriate where an injured, faultless third person recovers only from the insured tortfeasor, rather than also from the injured party’s own PIP insurer.
In addition, the majority allowed one of the plaintiffs to recover Olympic Steamship fees for litigating this matter, reasoning that the situation is properly characterized as a coverage dispute. Even though the majority had earlier held that the pro rata fee sharing of legal expenses is based on equitable principles and not on specific policy language, the majority stated that Olympic Steamship fees were appropriate because “[t]he question is a legal one involving interpretation of the insurance policy.” Finally, the majority reinstated the plaintiff’s bad faith claim that the insurer refused to effectuate the liability settlement until the plaintiff released her PIP claims against the same insurer.
by sohalang | Jan 20, 2012 | Blog News, Uncategorized
Despite the challenges facing carriers in Washington when disputing the reasonableness of a covenant judgment, Soha & Lang, P.S. attorneys have once again obtained a judicial determination that a stipulated covenant judgment settlement was unreasonable.
On January 9, 2012, Federal District Court Judge John Coughenour ruled that a $5.75 million covenant judgment settlement of a condominium construction defect lawsuit was unreasonable, that the reasonable settlement value of all of the plaintiff homeowners association’s claims was $1,921,525.70, and that the value of the association’s breach of fiduciary duty claim, the only potentially covered claim, was $300,000.i
Applying the first of the factors identified in Chaussee v. Maryland Cas. Co.,ii the releasing party’s damages, Judge Coughenour first considered the association’s cost of repair claim. Judge Coughenour found that the defense repair estimate prepared by McBride Construction, which was about $1.8 million less than the association’s estimate, was more reasonable than plaintiff’s repair cost estimate prepared by Charter Construction. The court also reduced the association’s loss of use claim from $963,012 to $96,000— a reduction of over 90%—and reduced the association’s attorney fee claim by about 65%. As a result of the court’s adjustments, the amount of the association’s damages was reduced from $8,463,679 to $4,270,057 before the court applied the remaining Chaussee factors.
Judge Coughenour then discussed several of the remaining Chaussee factors, including the merits of the association’s liability theories, the merits of the defense theories, and the defendants’ ability to pay. Based upon the weaknesses in the association’s legal theories, evidentiary problems with the association’s case, and the defendants’ lack of material assets to satisfy a judgment, the court applied a 55% reduction to the association’s adjusted damage claim of $4,270,057 to arrive at $1,921,525.70 as the reasonable settlement value of the all of the association’s claims.
Recognizing that the association’s breach of fiduciary duty claim was the only potentially covered claim, Judge Coughenour separately addressed this claim’s value. The association argued that the measure of damages for this claim was the cost of repair. However, Judge Coughenour expressed doubt that any alleged breach of fiduciary duty by the developer-appointed pre-turnover board caused water damage to the complex. Moreover, citing Water’s Edge Homeowners Ass’n v. Water’s Edge Assocs.,iii the court held that the cost of repair is not the proper measure of damages for a breach of fiduciary duty claim. Based upon evidence presented by the intervening insurers represented by Soha & Lang, P.S., the court held that the reasonable value of the only potentially covered claim was $300,000.
Judge Coughenour’s analysis reflects further recognition by Washington courts that stipulated settlements involving judgment-proof defendants raise concerns about the reasonableness of such settlements. The court explained that because of the defendants’ lack of material assets, the defendants did not have incentive to obtain the best possible settlement amount. Accordingly, the court held that the “final settlement amount must be discounted to reflect this reality.”
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i. Aspen Grove Owners Ass’n v. Park Promenade Apartments, LLC et al., No. CV09–1110 (W.D.Wash. Jan. 9, 2012). Soha & Lang, P.S. attorneys Tyna Ek, Mary DeYoung, and Paul Rosner represented the intervening insurers.
ii. 60 Wn. App. 504, 803 P.2d 1339 (1991).
iii. 152 Wn. App. 572, 216 P.3d 1110 (2009).
