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Florida’s landscape has a great propensity for sinkhole activity, which causes extensive damage to policyholders’ property. The Florida Legislature has passed many laws regulating the adjustment and remediation of sinkhole claims.

One of the most important sinkhole statutes is Florida Statute 627.707(5)(a), which involves the remediation of the sinkhole and the obligation of the carrier to repair the policyholder’s property.

Florida Statute 627.707(5)(a) states:

If a sinkhole loss is verified, the insurer shall pay to stabilize the land and building and repair the foundation….

This statute is important because carriers often fail to properly remediate confirmed sinkhole claims. Most policyholders are at an extreme disadvantage because they have no idea of the different methods to remediate sinkholes and the carrier’s obligations under the policies and Florida Statute 627.707(5)(a). This statute requires the carrier to “stabilize the land and building and repair the foundation.” If sinkhole activity is causing certain measurable damage to the policyholder’s foundation, the carrier is required to repair it.

The most common remediation plan recommended by carriers includes only pumping grout below the structure. If sinkhole activity has damaged the foundation of the property, this “grout” only remediation plan fails to address the carrier’s obligation to repair the foundation. The most common repair method utilized to repair the foundation includes underpinning the structure to limerock beneath the surface.

I recently posted about a new article in the Defense Research Institute’s For the Defense publication, addressing the apex doctrine, in which courts have placed limits on depositions of senior executives of corporations and high-ranking government officials.  Shortly after publishing that post, I came across a new decision by the West Virginia Supreme Court of Appeals on this issue in an insurance case (albeit not a class action).  West Virginia’s highest court adopted the apex deposition doctrine and granted a writ prohibiting enforcement of a lower court order requiring the deposition of MassMutual’s chairman, president and CEO.

In State ex. rel. Massachusetts Mut. Life Ins. Co. v. Sanders, No. 11-1514, 2012 W. Va. LEXIS 94 (W. Va. Feb. 24, 2012), an individual case alleging fraud and tax fraud in connection with an IRS 412i plan, the plaintiffs sought to depose Roger Crandall, chairman, president and CEO of MassMutual.  Mr. Crandall had no personal involvement with the plaintiffs.  The reasons cited by the plaintiffs for taking his deposition were:

1) the annuity contract was signed with Mr. Crandall’s facsimile signature; 2) MassMutual publicly proclaims its commitment to investigating and reporting fraud; 3) Mr. Crandall is MassMutual’s “face” of compliance regarding reporting and investigating any suspected fraud or wrongdoing because he has publicly proclaimed that MassMutual is an ethical company and because, as MassMutual’s president, he signs Internal Control Certifications in accordance with the Sarbones-Oxley Act; 4) Mr. and Mrs. Demory [the plaintiffs] wrote a letter to Mr. Crandall regarding their dispute; and, 5) there have been similar lawsuits filed regarding the “defective 412i Plans.”  

 Id. at *8-9. 

The court, on an issue of first impression in West Virginia, adopted the apex deposition rule applied in Texas and other jurisdictions, setting forth the following protocol:

[T]he Court holds that when a party seeks to depose a high-ranking corporate official and that official (or the corporation) files a motion for protective order to prohibit the deposition accompanied by the official's affidavit denying any knowledge of relevant facts, the circuit court should first determine whether the party seeking the deposition has demonstrated that the official has any unique or superior personal knowledge of discoverable information. If the party seeking the deposition cannot show that the official has any unique or superior personal knowledge of discoverable information, the circuit court should grant the motion for protective order and first require the party seeking the deposition to attempt to obtain the discovery through less intrusive methods. Depending upon the circumstances of the particular case, these methods could include the depositions of lower level corporate employees, as well as interrogatories and requests for production of documents directed to the corporation. After making a good faith effort to obtain the discovery through less intrusive methods, the party seeking the deposition may attempt to show (1) that there is a reasonable indication that the official's deposition is calculated to lead to the discovery of admissible evidence, and (2) that the less intrusive methods of discovery are unsatisfactory, insufficient or inadequate. If the party seeking the deposition makes this showing, the circuit court should modify or vacate the protective order as appropriate. As with any deponent, the circuit court retains discretion to restrict the duration, scope and location of the deposition. If the party seeking the deposition fails to make this showing, the trial court should leave the protective order in place.

Id. at *33-35.

Two weeks ago, I wrote about suspicious fire claims. This week, I want to explore suspicious theft claims.

By Paul E. Breene and Mark S. Hersh

When an investigation is commenced by a federal or state government entity, whether by service of a subpoena or by less formal means, a company should have two standard operating procedures: first, hire excellent and experienced counsel to respond to the investigation or subpoena, and second, determine whether insurance coverage may be available to pay for what are frequently significant defense costs that may be incurred in connection with the investigation.

Securing insurance coverage for subpoenas and informal investigations, both civil and criminal, can be an arduous process, but policyholders who plan ahead and know the pitfalls can give themselves a significant advantage in securing timely coverage. Significantly, failing to secure coverage for an investigation can mean that there will be no coverage if the investigation leads to lawsuits or other legal proceedings. The attorneys in Reed Smith's Insurance Recovery Group have extensive experience advising clients on these and related issues.

Prompt Notice

The most common pitfall is failing to give prompt notice to your insurance company. At the first indication of a government investigation, a company should consider whether it needs to give notice to its Directors’ & Officers’ (“D&O”) insurance carrier. This is generally done through a broker. Failing to give prompt notice, which usually occurs because no one realized that government investigations might be covered by insurance, is the most frequent mistake policyholders make and it could be fatal to obtaining coverage. In some states, late notice is a complete defense to coverage even if the insurer has suffered no prejudice as a result. And if late notice blows coverage for an investigation, it likely will also blow coverage for any lawsuits or other legal proceedings that may follow.

The question of whether insurance coverage is available for fees and costs incurred in connection with responding to subpoenas and informal investigations depends in large part on the language of their D&O insurance policy and the specific facts and circumstances surrounding the subpoena or investigation.

Is The Investigation a “Claim”

The starting point for the analysis is whether or not the subpoena or investigation fits within the D&O policy’s definition of the term “Claim.”

There are several different definitions that appear in D&O policies, a typical definition defines “Claim” as:

 (a) any civil proceeding in a court of law or equity including any mediationor alternative dispute resolution ordered orsponsored by such court;

(b) any criminal proceedingin a court of law; and

(c) any administrativeor regulatory proceeding commenced by the filing of a notice of charges, formal investigative order, orsimilar document.”

Another definition of “Claim” includes “formal and informal government investigations.” Several courts also have held that a Subpoena can be a Claim. In determining whether a Suboena constitutes a “Claim,” courts have looked to the nature of the particular subpoena in light of the policy language. Thus, an SEC “Order Directing Private Investigation and designating Officers to Take Testimony” has been held to be a Claim for the purpose of coverage under a D&O policy. Where a subpoena is merely served on a policyholder in its capacity as a “custodian of records,” however, it is unlikely to qualify as a Claim that would trigger payment of defense costs. 

In a recent case, MBIA Inc. v. Federal Ins. Co., et al, No. 08 CIV 4313, slip op. (S.D.N.Y. Dec. 30, 2009) (“MBIA”), the MBIA was hit with “inquiries” and subpoenas by the New York State Attorney General and the SEC. The definition of Claim in MBIA’s D&O policy included “a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document” that arose from the purchase or sale of securities.   The court held that the subpoenas and inquiries fit within the definition of Claim in the policies and, therefore, the defense costs incurreed in responding to them were covered.

Is the Claim Covered Under The Policy

In addition to the definition of the term “Claim,” the investigation must also relate to something that is covered under the policy. The typical D&O policy provides coverage for loss arising from a “Claim” based on an “actual or alleged Wrongful Act.” Thus, whether or not a subpoena represents a “Claim,” there may still be a question whether an actual or alleged Wrongful Act is involved.

An insurance company may argue that there are no allegations of any Wrongful Act in the subpoena, thus negating the duty to defend. Most subpoenas and government investigations, however, have either explicit or implicit suggestions of wrongdoing that should satisfy this requirement, at least where the company or its directors or officers are a target of the investigation. The insurance company may also contend that so called “personal conduct” exclusions relating to fraud, illegal profits, and intentional violations of law, may preclude coverage. Such exclusions should not, however, deprive the policyholder of its right to a defense since in most D&O policies, they are only triggered by a “final adjudication” of the wrongful conduct. The policy language may allow the insurance company to seek reimbursement of the amounts paid toward the defense if one of the exclusions is triggered, at least the policyholder will have been able to mount a proper defense to the charges with the insurance company paying the bill in the first instance.

Reporting Potential Claims

Even if a subpoena or government investigation does not qualify as a Claim under the policy, a Company may still want to report it to its D&O insurer. D&O policies almost always give the insured the option of reporting potential claims – normally called “circumstances that may give rise to a claim” – in order to secure coverage for the potential claim within the policy period in effect when the potential claim is reported. So if the investigation is reported as a potential claim in policy period A, but does not blossom into a Claim (e.g. a lawsuit) until policy period B, it will be covered under policy period A. The main caveat is that policies normally require potential claims to be reported with a great deal of specificity, so attention must be paid to this requirement.  

One reason to report an investigation as a potential claim is that the company may be required to disclose the investigation anyway in connection with an application for new insurance, because non-disclosure may carry the risk that the carrier later will try to rescind the policy. But disclosing potential claims in connection with new insurance runs the risk that the investigation and any resulting claims will be excluded from coverage under the new insurance, so it is important to secure coverage under the expiring policy instead. Reporting potential claims also may have the advantage of parking claims in an expiring policy period and leaving the new policy untouched for fresh potential claims (D&O policies typically have one-year policy periods). 

A Note on E&O Insurance

In some cases, a government investigation might be covered under a company’s Errors & Omissions (“E&O”) insurance policy rather than its D&O policy. For example, if a company is being investigated in connection with professional services it has provided to the government pursuant to a government contract, the E&O policy may be implicated (and the matter may be excluded from coverage under the D&O policy). Issues regarding notice under an E&O policy are very similar to notice issues under a D&O policy. If it is unclear whether an investigation will be covered under a company’s E&O or D&O policy, notice may be given under both.

Conclusion

Do insurance companies charge premiums for coverage that can never be triggered?  That is the essential allegation in Keeling v. Esurance Ins. Co., 2012 U.S. Dist. LEXIS 26998 (S.D. Ill. Mar. 1, 2012).  In my October 4, 2011 blog post, I wrote about a Seventh Circuit decision finding federal jurisdiction in this case, based on the possibility of punitive damages pushing the amount in controversy over $5 million.  After jurisdiction was established, Esurance challenged the complaint in a motion to dismiss.  The motion to dismiss was denied (except for dismissal of a fraudulent misrepresentation claim). 

The plaintiff claimed that underinsured motorist (UIM) coverage of $20,000/$40,000 was illusory under Esurance’s policies because it would never be paid.  The plaintiffs focused on the following provision in Esurance’s policies:

“Underinsured motor vehicle” means a land motor vehicle or trailer of any type to which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the limit of liability for this coverage.

However, “underinsured motor vehicle” does not include any vehicle or equipment:

1. To which a bodily injury liability bond or policy applies at the time of the accident but its limit for bodily injury liability is less than the minimum limit for bodily injury liability specified by the financial responsibility law of Illinois.

Id. at 7-8 (emphasis added).  The class was defined as insureds who bought UIM coverage from Esurance with limits of $20,000/$40,000 in Illinois.  The claim was that this coverage was worthless to insureds because the minimum required coverage under Illinois law is $20,000/$40,000.  Thus, the plaintiff asserted that if an Esurance policyholder bought UIM coverage of $20,000/$40,000, the only way coverage would apply  under the definition of “underinsured motor vehicle” would be if the underinsured motorist had coverage less than Illinois law required, which was unlikely unless the driver was from out of state.  But if the underinsured motorist had lower limits than what Illinois law requires ($20,000/$40,000), then the exclusion (paragraph “1” above) would bar coverage, and therefore there would never be coverage. 

Esurance argued that coverage should be based on whether the underinsured motorist or his or her insurer pays less than the limits, rather than what the policy limits are, but the court rejected that position, finding it inconsistent with the terms of the policy and applicable Illinois law.  The court also rejected Esurance’s argument based on the filed rate doctrine because the case was not a challenge to premium rates but rather a challenge to the illusory nature of the coverage.

One problem insurance companies sometimes experience, which can lead to these kinds of class actions, is that when policy forms are written or revised that is done by the underwriting department without involvement of the claims department and without involvement of any lawyers who are familiar with the kinds of issues raised in coverage litigation and class actions.  The issue presented by this case seems like precisely the type of issue that could be flagged by a company that is proactive in attempting to identify problems that might lead to class actions.  (See my blog post about Rob Herrington’s book, “Verdict for the Defense,” for more on that.)

by Jesse M. Caplan and Serra J. Schlanger

Since November 2011 the Center for Consumer Information & Insurance Oversight (“CCIIO”) in the Centers for Medicare & Medicaid Services has completed 22 reviews of health insurance premium rate increase filings in the individual and small group markets. Under the new federal rate review regulations, CCIIO has determined that six of the reviewed premium rate increases represented “unreasonable” increases while 16 of the rate increases were deemed “not unreasonable.”

This Implementing Health and Insurance Reform alert provides a summary and analysis of the completed federal rate review determinations to date. It also provides a link to Epstein Becker Green’s interactive National Health Insurance Rate Review Scorecard, which offers insurance carriers, lawyers, and other stakeholders an up-to-date resource on federal and state health insurance rate review programs, standards, and initiatives.

It was just last week that I discussed the importance of crop insurance to farmers still suffering from the effects of last year’s record drought. And wouldn’t you know it, while I was thumbing through the Houston Chronicle, I found an article which provides a closer look at how the drought affected Texas.

William Pack of the Houston Chronicle reported this past Saturday that crop insurance indemnity payments in Texas have set a record this past year with $2.5 billion in claims paid through March 12, 2012. The article notes that as time went on, yields got worse and worse and at least one livestock expert expects livestock and crop losses to get worse. Pack quotes Travis Miller, an extension service soil and crop sciences specialist, “It’s hard to imagine the damage [the drought] has caused across the state. It’s nothing anybody alive has seen before.”

The USDA crop production summary for 2011 showed that only 57% of the 21.2 million acres of crops planted in Texas were harvested. In comparison, almost 87% of the plant acreage was harvested in 2010.

Officials emphasized the importance of crop insurance as a buffer to help farmers through losses from droughts, floods and other natural disasters. As mentioned last week, a government subsidy keeps rates low for farmers, but it’s up to the farmers to ultimately decide the amount of coverage they want. Mark Lamon, who grows wheat, corn and sunflowers in Medina County, Texas said “[crop insurance] does provide an effective safety net.”

To put things a little more in perspective, Texas’ $2.5 billion in indemnity payments from 2011 is tops in the country, beating second-place North Dakota by about $1 billion. Pack states that this is also Texas’ highest total since 1989, the year record-keeping began.

After Wal-Mart v. Dukes, some commentators have suggested that plaintiffs’ attorneys are likely to file more class actions seeking exclusively declaratory or injunctive relief, on the theory that it might be easier to obtain certification of those cases.  Prof. Jack Coffee of Columbia Law School has suggested this, as I noted in my October 25, 2011 blog post.  The Third Circuit recently issued an opinion on certification of injunctive relief claims under Rule 23(b)(2) in McNair v. Synapse Group, Inc., No. 11-1743, 2012 U.S. App. LEXIS 4593 (3d Cir. Mar. 6, 2012).  Andrew Trask, who pens the Class Action Countermeasures blog, has a great blog post summarizing the facts and holding of McNair and providing his analysis.  I’ll focus here on what I see as the impact of this decision for insurance cases. 

As brief background, the defendant in this case, Synapse, sells magazine subscriptions.  Subscriptions are offered at low initial rates, with automatic renewal unless cancelled.  (I’m sure you’ve seen some of these offers, I certainly have.)  The plaintiffs’ theory of liability was that the renewal notices sent in the mail were so deceptive that people would throw them out and not call to cancel their subscription if they wanted to do so.  After an initial denial of class certification, the case was re-framed to seek only injunctive relief, and certification was again denied.  The Third Circuit granted review under Rule 23(f) and affirmed. 

The Third Circuit focused solely on whether the named plaintiffs had standing to seek injunctive relief, finding that they did not because they were no longer customers of Synapse, and thus could not establish a reasonable likelihood of future harm.  Given that the named plaintiffs are now familiar with the allegedly deceptive tactics of Synapse, the court rejected their argument that they could be misled again by those tactics, and thus they did not have standing to seek injunctive relief.  The court also rejected the plaintiffs’ argument that the “capable of repetition yet evading review” doctrine would apply where there was no reasonable expectation by the named plaintiffs of being subjected to the same conduct again. 

The Prudential Insurance Company of America (Prudential) was sued in three separate cases in the Federal Courts of Missouri, Georgia, and Arizona for the wrongful termination of long-term disability benefits that are promised under the Employee Retirement Income Security Act (ERISA). In all three cases filed through the respective plaintiffs' disability lawyers, Prudential is accused of denying the Plaintiffs the short-term or long-term disability benefits that were promised under the Plaintiffs' respective plans.

The Missouri Case

In Mary J. Vs. The Prudential Insurance Company of America, a long-term disability lawsuit was filed by the Plaintiff against Prudential via a Missouri disability attorney in the Eastern District of Missouri Eastern Division. The Plaintiff had been employed full-time by Harrah's Operating Company, Inc. (Harrah's) since 2000, making her eligible for long-term disability benefits through Harrah's Group Policy No. 42111 Plan. This Plan was insured by Prudential.

The Plaintiff ceased working in October 2007 due to degenerative arthritis of both knees and filed for long-term disability benefits. Prudential approved the claim on February 21, 2008. However, Plaintiff was notified on September 23, 2009 that she would no longer receive long-term disability benefits after February 20, 2010.

Plaintiff appealed the denial on February 9, 2010, but Prudential upheld the denial on August 30, 2010. Due to exhausting all administrative remedies, Plaintiff has filed this lawsuit against Prudential.

The Georgia Case

In Deborah D. Vs. The Prudential Insurance Company of America, Plaintiff was employed as a Program Manager by DRS Technologies, Inc., which provided both short-term and long-term disability benefits via an insurance plan that was insured and paid for by Prudential.

Plaintiff became disabled on or about August 23, 2010, leading to her filing a timely short-term disability claim, along with medical documentation, with Prudential. Prudential initially approved the STD claim and paid Plaintiff through October 24, 2010.

However, beginning October 24, 2010, Prudential terminated Plaintiff's benefits on the basis that it had not received enough medical information to continue providing STD benefits. Plaintiff appealed this termination, but via letter dated March 7, 2011, Prudential upheld its original denial.

On September 2, 2011, Plaintiff again appealed and provided additional medical and vocational information to support her claim. However, on October 6, 2011, Prudential upheld its previous denials and declared that this decision was its final decision on the Plaintiff's claim. Plaintiff has exhausted all administrative remedies and has filed this lawsuit against Prudential.

The Arizona Case

In Gerard L. Vs. Prudential Insurance Company of America and Anheuser-Busch Companies, Inc. (Anheuser-Busch), Plaintiff was employed by Anheuser-Busch as a local employee until on or about March 31, 2009 when he became disabled and unable to work as a Senior Manager of Accounting due to serious medical conditions. This employment enabled the Plaintiff to be covered under Anheuser-Busch's group long-term disability insurance policy, which was funded by Prudential.

Plaintiff filed a disability application for Total and Permanent Disability and Group Life Insurance benefits under the terms of the Plan. Prudential denied his claim via letter dated December 14, 2010. Plaintiff filed an appeal of this decision and submitted additional medical evidence to support his claim. This included an Independent Medical Evaluation performed on January 26, 2010 that stated that Plaintiff would be unable to work for at least the next 12 months. In addition, Plaintiff applied for and received Social Security Disability benefits through the Social Security Administration.

Despite the additional evidence, Prudential upheld its original denial via letter dated March 23, 2011. Plaintiff again filed an appeal and submitted additional medical evidence. Prudential issued a final denial via letter dated August 1, 2011. Plaintiff has exhausted all administrative remedies and has filed this lawsuit against Prudential.

Relief Requested From The Lawsuits

In the three aforementioned cases, the Plaintiffs seek the following relief from Prudential in their lawsuits:

• Prudential pays all benefits that are owed to the Plaintiffs, along with accrued interest
• Prudential reinstates the eligibility of Plaintiffs to receive future benefits for as long as they remain eligible to receive such benefits as defined by the terms of their respective Plans
• Prudential pays all attorneys' fees
• Prudential pays all associated court costs
• Prudential pays all other relief that the Court deems to be fair and just

Since 2001, Colorado policyholders have technically been able to assert a claim against insurers for violation of Colorado’s Consumer Protection Act (“CCPA”) bad faith handling of their insurance claims. See Showpiece Homes Corp. v. Assurance Company of America, 38 P.3d 47 (Colo. 2001) (“the list [of enumerated unfair or deceptive trade practices] in section 6–1–105 is not exhaustive and because deceptive or unfair practices in the business of insurance could clearly injure the public they are within the purview of the CCPA.”).

The CCPA is theoretically a good tool for policyholders to use as leverage against their insurance company because a violation of the CCPA could result in treble damages and attorney’s fees. Unfortunately, very few policyholders have succeeded on a CCPA claim against their insurer because the burden of proof for the insured is extremely high. The insured must prove: (1) that the defendant engaged in an unfair or deceptive trade practice; (2) that the challenged practice occurred in the course of defendant's business, vocation, or occupation; (3) that it significantly impacts the public as actual or potential consumers of the defendant's goods, services, or property; (4) that the plaintiff suffered injury in fact to a legally protected interest; and (5) that the challenged practice caused the plaintiff's injury. Rhino Linings USA, Inc. v. Rocky Mountain Rhino Lining, Inc., 62 P.3d 142, 146 (Colo. 2003).

Most plaintiff’s lawyers agree it is extremely difficult to prove the first and third elements of this claim because the first element must be pled with specificity, like a claim for fraud pursuant to C.R.C.P. 9(b), and it is impossible to show the third element-- a “public impact” --unless plaintiff is able to obtain or discover numerous other policies and claims which were handled (or mishandled) in the same way as the plaintiff’s claim. Many CCPA claims are kicked out at the very early pleading stage through motions to dismiss filed by defendant insurance companies.

Recently, however, the U.S. District Court of Colorado issued a slip opinion that clarifies what is required at the pleading stage and the scope of discovery for plaintiffs asserting a CCPA claim against their insurer. In D.R. Horton, Inc.-Denver v. The Travelers Indem. Co. of Am., No. 10-CV-02826-WJM-KMT, 2012 WL 527204, at *5 (D. Colo. Feb. 16, 2012), the Court stated,

The relevant factors to consider in evaluating whether a challenged practice significantly impacts the public are: (1) the number of consumers directly affected by the challenged practice, (2) the relevant sophistication and bargaining power of the consumers affected by the challenged practice, and (3) evidence that the challenged practice has previously impacted other consumers or has the significant potential to do so in the future. [Rhino at 149.]

As an initial matter, the Court clarifies that it does not apply the heightened pleading standard of Rule 9(b) to this element of the CCPA claim.

D.R. Horton at *4.

This clarification is helpful to policyholders because it would be difficult, if not impossible, to plead with specificity the number of consumers directly affected by the challenged practice or the relevant sophistication and bargaining power of the consumers affected by the challenged practice, as insurance companies keep this information strictly confidential unless compelled to produce it by a court order or subpoena.

The Court further noted that the insured is clearly entitled to discovery as to public impact before a Court may dismiss an insured’s CCPA claim.

It is difficult to imagine how an insured could ever maintain a CCPA action against an insurer for bad faith handling of the insured's claim if the plaintiff needed to show at the pleading stage a widespread pattern or practice of the insurer in handling the claims of other insureds in the same way. See Riggs v. City of Albuquerque, 916 F.2d 582, 586 (10th Cir.1990) (discussing “[t]he importance of permitting discovery when crucial information is in the exclusive control of the defendant”).

D.R. Horton at *5, footnote 7.