TABLE OF CONTENTS
The View from the Chair
Emerging Primary and Excess Coverage Issues in Continuous Trigger Regimes
ERISA Class Actions
Advantages and Disadvantages of Class Actions from a Plaintiff’s Lawyer's Perspective
This article outlines the issues that affect the construction of additional insured coverage. A construction subcontract agreement commonly requires that an additional insured endorsement be obtained, and may also require that a subcontractor obtain additional insured status for the general contractor. One issue that comes up in the construction defect arena that is not typically addressed by the subcontract is the duration of the subcontractor’s obligation to obtain additional insured coverage and whether such coverage exists once the named insured’s work on a project is completed. Construction defects frequently do not evidence themselves until the project has been completed for several years. If property damage does not occur until after the expiration of the subcontractor’s policy in place at the time of the original construction, being an additional insured is of no consequence to the general contractor. Moreover, where the defects surface several years after the project is built, even if the general contractor has additional insured status, the issue becomes whether additional insured coverage extends to completed operations. The current versions of the Insurance Services Offices, Inc. (ISO) additional insured endorsements limit coverage to the named insured’s ongoing operations.
The subcontract may require the subcontractor to indemnify the general contractor. Ideally, the insuring obligation should mesh with the indemnity provisions contained in the subcontract, allowing the subcontractor to effectively transfer his indemnity obligations to his insurer by obtaining an additional insured endorsement that will provide coverage equivalent to the indemnity owed pursuant to the subcontract. The scope of the indemnification is dependent on the language of the contract.
An additional insured has a direct contractual relationship with the named insured’s insurance company, such that whether an additional insured has coverage under the policy is controlled by the policy provisions. The ISO has form endorsements, CG 20 09, CG 20 10 and CG 20 33, which confer additional insured coverage. Questions arise as to whether the additional insured has coverage for its own negligence and whether there is additional insured coverage for completed operations. The 1985, 1993, and 1996 versions of the CG 20 09 endorsement limit coverage for the additional insured to the time period of the named insured’s ongoing operations. Exclusions incorporated into the CG 20 09 additional insured endorsement from the body of the CG form include: expected or intended injury; workers compensation and similar laws; employer’s liability; and pollution. The following exclusions do not apply: contractual liability; liquor liability; aircraft, auto or watercraft; mobile equipment (transported by auto); damage to property, to your product, and to your work; and recall of products, work or impaired property. The 1996 ISO CG form clarifies the extent to which coverage is available for contractually assumed defense obligations in its revision of the contractual liability exclusion. The "insured contract" exception to this exclusion may eliminate the need for an additional insured endorsement.
The potential for coverage as an additional insured is another wrinkle in the complexities that arise in determining what insurance coverage may exist for property damage arising from defective construction. Careful attention must be paid to both the policy language and the oblications identified in the contractual agreements between the parties that built the allegedly defective project to make a determination of the extent of coverage that exists. Additional insureds should be treated no differently than the named insured, and with the recent policy language revisions, they now may have greater rights to coverage with or without an additional insured endorsement.
Emerging Primary and Excess Coverage Issues in Continuous Trigger Regimes
This article focuses on a group of ancillary problems generated by the adoption in several jurisdictions of the "continuous trigger." The continuous trigger is the accrual of an evolutionary process that began the first time an insured sought to access two policies issued in successive years and apply them to the satisfaction of a single claim or suit. All classes of loss subject to this analysis involve an injury inflicted over a period of more than one year. Courts have concluded that where damage occurred in more than one policy period, more than one policy was triggered. The tests have varied. A manifest injury is one that is known or should be known to the insured and can be identified, priced, and either included or excluded from the next policy term. The manifestation test and the "one case, one set of limits" approach gave way to alternative "multiple trigger" analyses which purported to conform more closely to a "scientific" understanding of the injury process and incidentally tapped additional "years of coverage."
The same standard GL grant that is triggered by "bodily injury or property damage within the policy period" also obligates the carrier to pay "all sums" for which the insured is held liable. The injury sustained during the policy period "perdures," meaning that if any portion of the underlying injury occurred during the policy period, all injury sustained after the inception of the policy, even that sustained after the expiration of the policy, is covered by the policy. Thus, the insured can select one or several policies to respond to all of a single multidecade occurrence and thereby avoid uninsured years, exhausted years, years with large deductibles and SIRs, years with fronted primaries or which the insured had reinsured through a captive, or years set aside for other large losses.
Several exhaustion theories exist. The doctrine of horizontal exhaustion provides that the policyholder must exhaust all triggered primary coverage before resorting to any triggered excess policy. Under so-called "bathtub" exhaustion, excess policies in a given year are triggered when their attachment point is reached by the rising tide of payments, rather than when all available primary coverage is exhausted. Horizontal exhaustion cannot be rationalized with regimes that do not permit the insured to stack the limits of triggered policies in response to a single multiyear claim. This theory is also marginalized under regimes that require allocation to triggered years. Under a forced allocation regime, there is no basis for an action between carriers for equitable contribution or indemnity, as each carrier deals with the insured for its own allocated share of the loss, and no carrier is at risk of being forced to pay amounts that should in equity have been paid by another carrier.
The article also discusses the issue of whether the amount available to indemnify the insured is limited to the per occurrence limits of a single policy, or whether the insured is entitled to aggregate (stack) the single occurrence limits of several of the triggered policies. The article identifies the next appellate battleground as the effort of carriers who have paid a disproportionate share of a given loss to secure contribution or indemnification from other carriers within the trigger period who were not tapped or were not tapped as hard.
ERISA Class Actions
This article discusses class actions brought under ERISA, and includes synopses of illustrative ERISA class certification cases. Many cases involving employee benefit plans are brought as class actions or putative class actions, and are subject to the requirements of Rule 23 of the Federal Rules of Civil Procedure as to certification, administration, and settlement. These actions are generally brought on behalf of a class or putative class of some or all of the plan participants and beneficiaries asserting claims under Section 502(a) of ERISA. ERISA claims brought in state court are subject to removal to federal court, and the Supreme Court has held that the doctrine of "complete preemption" applies to ERISA, so that even a state court complaint making no reference to ERISA may be removed if it alleges facts supporting an ERISA claim.
Defendants agreeing to settle a class action generally want the benefit of the preclusive effect of the settlement on the entire class, and plaintiffs usually want certification as well, in order to effectuate the relief agreed to and to provide a basis for or to enhance the amount of a fee award. A class action cannot be dismissed or compromised without court approval and notice of the proposed dismissal or compromise must be given to all members of the class. The trial court has the discretion to determine whether the settlement is fair, reasonable, and adequate. Courts consider whether the proposed settlement was reached after arm’s length negotiation, whether counsel is experienced in similar cases, whether sufficient discovery has been conducted, and whether the number of objectors or their relative interest is small. Settling and nonsettling defendants should consider potential contribution and indemnity issues, including whether settling defendants will have a right to seek any reimbursement against nonsettling defendants and vice-versa, and the impact of any settlement on the recovery plaintiffs can obtain at trial.
Under ERISA, the court may allow reasonable attorneys' fee and costs of action to either party after considering: the degree of the offending party’s culpability or bad faith; the offending party’s ability to satisfy personally an award of attorneys' fees; whether such an award will deter others from the same actions; the amount of benefit conferred by the action on all the members of the plan; and the relative merits of the parties’ positions. The amount of fees is generally determined under the "lodestar method," which is based on the reasonable number of hours spent on the case and reasonable hourly rates for the participating lawyers. The common fund doctrine provides that the attorney’s fees may be paid from the common fund that was created, obtained, preserved, or increased for the benefit of others. It is often applied in class actions and allows attorneys to petition the court for fees.
The author states that knowledge of basic class action law and procedure is essential in an ERISA class action, like any class action. It is also critical, however, to appreciate the various ways in which ERISA may affect a class action at every stage of the proceeding. Among other issues ERISA considerations affect jurisdiction, forum options, the decision whether to seek or oppose class certification, the court's decision on certification, the definition of the class, the effects of settlement, and the nature and availability of an attorneys' fee award.
The Relationship Between Alternative Markets and Reinsurers: The Reinsurance Perspective
This article provides an overview of the development of the relationship between alternative market entities and reinsurers; describes some of the provisions in reinsurance contracts pertinent when the reinsurer is reinsuring alternative market entities; and identifies and discusses legal issues that may develop further as reinsurers’ relationships with alternative markets progress. Basically, the product provided by reinsurers is an indemnity contract with specific terms and conditions between the entity assuming the risk initially (traditionally a licensed insurer) and the reinsurer. With the availability and affordability crises of the 1980s, alternative forms of risk assumption referred to as "alternative risk transfer mechanisms" or "alternative markets" have taken hold in the marketplace. Entities commonly understood to constitute "alternative markets" are large self-insureds, associations, groups, pools, state funds, risk retention groups, captives and risk purchasing groups.
In drafting the reinsurance contract, two significant issues to be addressed contractually are: how to provide services that the traditional ceding insurer might normally undertake, such as claims handling and underwriting; and how the business is brought to the reinsurer, specifically whether or not there is a consultant, a producing broker, an agent, or managing general agent, whose role must be taken into account. Pertinent provisions in a reinsurance contract include the: business reinsured clause; loss and loss adjustment expense clause; extra-contractual obligations and losses in excess of policy limits clauses; declaratory judgment expense clause; reports and remittance clause; right to inspect and to audit clauses; and follow the fortunes clause.
There are several potential legal issues which reinsurers of alternative market clients may wish to assess. Reinsurers will maintain that the contract between the reinsurer and the alternative market reinsured involves commercially sophisticated parties dealing at arms length. Whether reinsurers can continue in the future to cloak their clients as "sophisticated parties" and themselves as one step removed from the ultimate insured may depend on the size, experience, and characteristics of the individual alternative market client. The duty of utmost good faith requires a reinsured to disclose all material facts concerning the original risk and all material underwriting information. It is unclear whether and how reinsurers will seek to assert this duty. Generally, the courts have upheld the view that privity of contract exists only between the reinsurer and the reinsured entity, and not with the original policyholder. Reinsurers make use of "front" carriers; if the reinsurers and the original policyholders by contract and conduct ignore or bypass the insurance carrier in the process, the reinsurers’ exposure to direct action by the policyholder, as well as by others involved in the transaction, increases. Other issues include: insolvencies of captives, pools, and risk retention groups; whether the courts view the parties as being in an reinsurance or insurance relationship; and reinsurers’ service contracts with intermediaries to whom reinsurers may grant significant administrative, managerial, claims, or underwriting authority.
This article presents an example, from a defendant insurer's point of view, of the effect that class action litigation in state court can have on a defendant in a particularly hostile state court environment. An insurance company in Alabama provided cancer insurance. Its original cancer policies provided 100 percent coverage for both radiation and for out-of-hospital medications prescribed in connection with the treatment of cancer. When chemotherapy treatment became more prevalent, the company’s "old" cancer policies were amended, providing 100 percent coverage for radiation and chemotherapy for new buyers. Its pre-1986 cancer policies ("old" policies) provided only scheduled or limited benefits for other costs incurred in connection with cancer treatment. In 1986, the company’s "new" cancer policies provided new benefits never before offered by the company, but placed new limits on certain benefits that had previously been unlimited. In 1990, the company introduced a second series of "new" policies with higher benefits than provided by the 1986 series "new" policies. Customers were given the option to exchange "old" policies for "new" policies for a higher premium.
In 1991, the insurance company was defending against several alleged fraud and forgery cases, that included claims by some policyholders that they were fraudulently induced to exchange their "old" cancer policies (with unlimited benefits for radiation, chemotherapy, and out-of-hospital prescription drugs) for the "new" policies (which contained monetary limits on those benefits). With 400,000 families carrying the cancer insurance, the company chose to settle the initial phase of individual pattern and practice litigation, including the cancer exchange cases. Shortly thereafter, several individual cancer exchange fraud cases were filed in Mobile and another class action suit was filed in Barbour County. The insurance company entered into a no-opt-out settlement, subject to court approval after notice to the class and an opportunity for objectors to be heard. Meanwhile, an individual cancer exchange suit was filed by a plaintiff who had never suffered cancer but who alleged that she had been fraudulently told that the new policy was better and claimed that the higher premiums she had paid for the new policy over several years constituted recoverable damages. A verdict in the plaintiff’s favor was reversed on appeal. The settlement was eventually approved.
The settlement has served as the prototype for similar Alabama class action settlements. Rather than immediately fighting class actions, business defendants ask whether the class action device can ward off the slings and arrows of multiple individual punitive damage cases. The possibility of a no-opt-out settlement is often one of the first considerations in formulating a class action defense strategy. The insurance company that settled has since changed the way it conducts business. The debit service method of door-to-door premium collection has been abandoned, and the company now conducts post-sale recorded interviews to ensure that there are no misunderstandings about the policy being purchased. Moreover, the company has evidence that the new policies did provide higher overall benefits to the vast majority of persons who suffered cancer. Many insurance companies in Alabama are working to sustain the use of arbitration clauses in insurance policies.
The article concludes that although the class action settlement benefitted the insurer, it did so at a substantial cost. The author asks whether this meant that the settlement was inherently unfair or collusive, and says that the answer is "no": the class action device is not just a weapon of terror for the exclusive use of the plaintiff's bar. In appropriate circumstances, it can also provide shelter for besieged defendants. That should be accepted as one of the fundamental justirications and one of the most important goals of Rule 23.
General Electric v. Joiner and Kumho Tire v. Carmichael: The Ipse Dixit Twins
This article discusses the Supreme Court cases of General Electric v. Joiner and Kumho Tire v. Carmichael, both of which further define the Court’s pronouncement in Daubert v. Merrill Dow Pharmaceuticals and both of which use the term "ipse dixit," defnied as "something asserted but not proved."
In Joiner, the court held that the appropriate standard to use in assessing a trial court’s evaluation of expert testimony under Daubert is the abuse of discretion standard. In Kumho Tire, the Court focused on the trial court’s need for flexibility in using the Daubert criteria and the Court’s insistence that Daubert applies to all expert testimony, not just "scientific" expert opinion. These cases signal two clear trends. First, the standard of review for evidentiary rulings, even under Daubert, continues to be whether or not the trial court abused its discretion. Second, a trial court can look at the conclusions of the expert to determine if they are connected to the existing scientific data by a small enough analytical gap. If they are not, they can be excluded.
In Joiner, the Supreme Court upheld the district court’s finding that the plaintiff’s experts’ opinions were merely subjective belief or unsupported speculation and, as such, inadmissible. In response to the argument that the district court improperly considered the conclusions the experts drew and not just their methodology, the Court stated that conclusions and methodology are not entirely distinct from one another and that nothing in either Daubert or the Federal Rules of Evidence requires a district court to admit opinion evidence which is connected to existing data only by the ipse dixit of the expert.
In Kumho Tire, the trial court excluded the plaintiff’s expert’s testimony that the manufacture and design of a tire caused a blowout, on the ground that the testimony failed Rule 702’s reliability standard. The court examined the proposed testimony in the light of the Daubert criteria, such as testability, subjection of the theory to peer review, error rate, and degree of acceptance within the scientific community. The appellate court reversed, concluding that the expert’s testimony fell outside Daubert’s scope because Daubert applied only when the expert relied on the application of scientific principles rather than skill or experienced based observation. The Supreme Court disagreed, and held that Daubert applies to all expert testimony, and that Rule 702 requires the application of its reliability standard to all evidence that falls within its scope. If the testimony’s factual basis or its application are called into question, the trial court has a duty to determine if it has a reliable grounding in the knowledge and experience of the relevant discipline. In response to an inquiry asking if the trial court may consider several more factors that the Daubert court said might bear on the trial court’s determination of admissibility, the Court answered a conditional "yes." Given the Rule’s flexibility and the breadth of situations it must address, no list of factors to consider can be required or excluded for all cases.
Advantages and Disadvantages of Class Actions from the Perspective of a Plaintiff’s Lawyer
This article discusses the requirements for obtaining certification, advantages and disadvantages of class actions, and alternatives to class actions. Federal Rule of Civil Procedure 23(a) provides that in order to be certified as a class: the class must be so numerous that simple joinder is impractical; there must be common questions of law and fact; the claims of the representative parties must be typical of the class; and the plaintiffs’ representative must fairly and adequately protect the interests of the class. In addition, the potential class action must fall within one of the three categories of Rule 23(b).
Advantages to class action treatment include the fact that some claims are not viable unless brought as class action because the size of the claim is too small and there are substantial economies of scale flowing from a class action. Second, filing a class action historically has tolled statutes of limitations for absent class members, regardless of whether or not a class is ever certified. Third, because the potential recovery in a class action usually will dwarf that of an individual claim, defendants are more likely to take seriously a class action than an individual case, possibly increasing the opportunities for settlement. Fifth, the avoidance of inconsistent results, although it is not entirely clear that class action treatment can completely avoid this problem because many of the issues likely to result in divergent verdicts are not common to all class members and would be handled separately in any event. Disadvantages include: the expense and delay of the certification battle; the loss of control over the litigation; settlement difficulties in that the existence of a class action may raise the stakes so high that settlement cannot be achieved and, by including other claimants in the litigation, the value of the initial plaintiff’s claim may be diluted as funds are needed to compensate other class members who otherwise would not pursue a claim; increased expense; procedural difficulties in that certification of a class may result in the bifurcation of the trial with separate trials needed to be conducted on damages issues without those juries hearing the damages cases having been exposed to the liability evidence; and competing class actions.
Alternatives to class action treatment include joinder under Rule 20 if the claims arise out of the same transaction or occurrence and involve common issues of law and fact. Another alternative is to file numerous individual claims in the same court and seek to obtain many of the cost saving advantages of a class action through consolidation under Rule 42. Third, plaintiff lawyers can try to convince a court to adopt a master pretrial order permitting the coordinated handling of similar cases.
The article concludes that despite recent decisions reversing class certifications in several highly publicized cases, class actions will continue to be valuable devices for handling claims in the insurance and consumer arena. There are some significant disadvantages to using a class action, however, that should cause plaintiffs’ attorneys not already doing so to look at alternatives.