DISPUTES AND LITIGATION WITH MEMBERS, REINSURERS AND EXCESS INSURERS

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DISPUTES AND LITIGATION WITH MEMBERS, REINSURERS
AND EXCESS INSURERS

• Presented by
• Robert Cutbirth, Esq.
• Tucker, Ellis West, LLP
• 135 Main Street, 7th Floor
• San Francisco, CA 94105 415-617-2235
• Robert.Cutbirth_at_TuckerEllis.com

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DISPUTES HAPPEN

• Risk pools provide coverage through pooled
  self-insurance and/or group purchased
  coverage.
• The pooled coverage may be reinsured, with the
  pool also purchasing excess coverage from another
  pool or insurer.
• This session is a high-level overview of two
  interrelated issues
• The obligations of pools and their members to
  deal with one another in good faith, and
• The obligations of pools and their excess
  insurers and/or reinsurers to deal with one
  another in good faith.

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MEMBERS
TPA
RISK POOL
RISK POOL REINSURER
RISK POOL EXCESS INSURERS
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MEMBERS
Claims You Didnt Tell Me About the Claim/Didnt
Cooperate in the Claim You Didnt Properly Manage
the Claim/ Didnt Accurately Decide My Coverage
Rights
Underwriting You Didnt Tell Me What You Were
Doing You Didnt Ask About What I was Doing
RISK POOL
Investments/Accounting You Didnt Properly
Invest Pooled Funds/Account for Losses/Project
Budgetary Needs
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RISK POOL
Underwriting You didnt tell me what your members
were doing When Before and maybe during risk
Claims You didnt give me adequate notice You
acted with an improper purpose
RISK POOL REINSURER
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RISK POOL
Underwriting You didnt tell me what your
Members were doing You didnt ask We didnt
have to tell When Before Risk
Claims You didnt give me adequate notice/didnt
manage the claim properly You have to take care
of yourself
RISK POOL EXCESS INSURERS
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MEMBERS
Aside from Texas (good faith) no case has
defined this duty for risk pools but, we have
common law good faith and trust duties in place
Reinsurance agreements are often covered by the
doctrine of uberimae fidae utmost good faith
applicable to both underwriting and claims
issues although that can change based on policy
language
RISK POOL
There are some jurisdictions holding that
primary insurers owe duties of good faith to
excess insures many do not others address this
issue only through the rights of the insured
REINSURER
EXCESS INSURERS
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Jeopardy
The Boring Risk Pool Way
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The Categories
Good Thing I Wore My Cup Reinsurers Drive Me Nuts Crazy Excess Insurers
10 10 10
20 20 20
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The Threatening Member
A claim arises from a break of a sewer line that
spreads water and waste materials onto the
Members and an adjoining neighbors properties.
Its a big stinky mess, made worse when the
Member challenges your denial of coverage under a
pollution exclusion under your first and third
party programs.
You also just realized that the pollution
exclusion in your reinsurance agreement (added
by special endorsement) and in your excess first
party property policy may provide even less
coverage than your governing coverage
document. The Member threatens to leave the pool
unless you at least contribute half of the
clean-up and repair costs, 400,000, claiming
that you are acting in bad faith.
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The Threatening Member
Risk Pools provide broad and flexible coverage,
but the coverage remains limited by the governing
coverage documents and applicable public
policies. The risk pool must protect itself
financially, but it also needs to retain members
to meet its various obligations. Governing board
members may need to be reminded that they have a
duty to protect the pool, not their interests
because in most circumstances its no longer their
money an intellectual hurdle for some Members
its the risk pools money. Even if a duty of
good faith applies, the risk pool need not grant
coverage or expend funds when there is no
contractual or legal basis to do so. In fact,
accommodations may be illegal. The risk pool
funds may be subject to gift of public funds,
public contract, and other restrictions
creating legal limitations on what can be paid.
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The Non-Cooperating Member
A Member is named in disability litigation that
may require proof of intentional misconduct
before compensatory damages can be awarded.
Plaintiffs earlier EEOC Complaint, leading to
adverse factual evidence, has caused Plaintiff to
become more contentious. The EEOC Complaint was
never noticed to the risk pool even though the
governing coverage document describes a claim as
any written demand asserting a right to
damages. Plaintiff offers to resolve her claim
for 250,000 and a modified office that will cost
the Member 50,000. All experts agree the office
modifications would involve a reasonable
accommodation. Defense costs are increasingly
rapidly, with the Member rejecting the settlement
terms (over the recommendations of the risk pool
and counsel), demanding that the risk pool pay
for any judgment, and demanding that the risk
pool pay for the office modifications.
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The Non-Cooperating Member
Breach of the duty to provide notice and/or to
cooperate in the defense or settlement of a
claim generally requires proof of prejudice
before coverage can be denied (unless your
governing coverage document contain more explicit
terms). Your member, however, is costing the
risk pool money and may be creating heightened
indemnity exposure. Risk pools tend not to send
reservation of rights letters, but failure to
do so may cause reinsurance/excess insurance
problems if the adverse result implicates
coverage outside of the risk pools
self-insured program. If the risk pool is
estopped to deny or limit coverage, the
reinsurer/excess insurer may dispute or deny
coverage..
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Competing Duties and Dispute Resolution Methods

• If the liability case is lost, and the Member
  maintains its position, the amounts in question
  may trigger a coverage dispute that cannot be
  avoided because the risk pool is not designed to
  pay amounts that the Member should otherwise pay
  in the ordinary course of its business.
• Forums/Dispute Resolution
• Internal Resolution (Governing Board decides)
• -- Your review remedy is solely internal
• Binding Arbitration (Outside Individual(s)
  decides)
• -- Picking the arbitrator/controlling the
  process
• Civil Litigation
• -- The default proposition
• -- May be the only forum for certain types of
  claims

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Underwriting -- What to tell your Reinsurer
You are a school district risk pool. Your pool
provides broad Educators Legal Liability,
Property Liability, and Business Automobile
Coverage. Your 5 million program is fully
reinsured in excess of 1million in defense and
indemnity exposures. Your Members are facing very
difficult financial times. They are desperate to
find ways to come up with money to fund their
operations. Through unexpected channels, you
learn that your Members are 1. Having students
in auto shops repair junked vehicles that are
then sold at a profit to third
parties? 2. Having employees provide financial
and administrative services to other public
agencies?
You are coming up on the renewal of your program.
What, if anything, do you tell your reinsurer
now, and at renewal time?
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UNDERWRITING - WHAT TO TELL YOUR REINSURER

• Obligations
• You have to figure out whether you cover these
  exposures (or want to cover these exposures),
  and, if so,
• Whether the exposures are materially different
  than what a reasonable reinsurer in the same
  position would have expected, and, if so,
• The facts you need to disclose in meeting that
  obligation

• Consequences
• Under traditional standards, the entire program
  could be rescinded. Under modern (Illinois)
  approach, rescission may only be available in the
  case of actual fraud

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CLAIMS Following the Fortunes?
Executive Director of a Member is driving her
personal auto on Member business. She strikes
the citys popular Mayor, paralyzing him below
the waist. The claim is valued at no less than
5 million and is a front page case that
everyone wishes would just go away.. The police
report suggests that E.D was impaired at the time
of the accident. You later learn that E.D. was
addicted to pain medication that likely impaired
her ability to operate her vehicle safely. Two
witnesses also suggest that the mayor had been in
a local bar and seemed shaky as he walked off the
curb. You have a 5 million program that is
reinsured above 1 million. The reinsurance
program contains a follow the fortunes clause.
E.D.'s automobile insurer (50,000 limit) is
providing a defense through in-house counsel who
is doing very little to evaluate or manage the
case.
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Claims Follow the Fortunes?
Many reinsurance agreements do not provide for
claim management authority or intervention the
reinsurer simply follows the fortunes of the
primary coverage provider. The exceptions to
coverage are (a) lack of timely notice, and (b)
reckless or intentional mismanagement of a claim,
or (c) a gratis payment.. But, if you abandon
your obligations (i.e., to primary insurer), you
may have a problem because it probably does not
excuse your obligation of claim management.
Here, you may have a problem if you do not make
an independent (a) coverage decision
intoxication exclusion, (b) let someone else make
defense decisions increasing your indemnity
exposure (and the reinsurers exposure), or (c)
make a settlement decision based on public
pressure or other external conditions.
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The Intermeddling Excess Insurer
A transportation district must lay off several
drivers, but the union agreement requires
three-months notice. Two weeks after the notice
letters are issued, four targeted employees
allege that their supervisor engaged in racial
and disability discrimination. There is no
coverage for intentional acts established in
fact or by final adjudication. Supervisor and
District are both named in the suit.
Supervisor states that he engaged in no wrongful
acts and that the suits are a conspiracy to
avoid the layoffs. His assistant, however,
states that he wanted to get rid of those lazy,
limping Japanese women. The assistant is married
to a Japanese man. Defense counsel believes the
value of the case is 3 million. Your program
provides 1 million in primary coverage your
excess program provides the next 5 million.
Excess insurer keeps telling you to (a) settle
out on behalf of the district, (b) deny coverage
to Supervisor, and (c) hire experts and take
other actions which are costly and, you believe,
unreasonable. Excess insurers correspondence
is beginning to sound very threatening.
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THE INTERMEDDLING EXCESS INSURER
Depending on the jurisdiction, you may owe a duty
of care to the excess insurer with respect to
both defense and settlement issues. Excess
policies, however, usually contain a provision
allowing them to associate in the defense or
settlement negotiations. They may have no
immediate duty to act, or even send a coverage
position, but they cannot sit back to their own
detriment. The Excess Insurers demand for
settlement and issuance of a coverage denial is
problematic. In many jurisdictions you cannot
settle out less than all of your insureds. That
would be a problem here unless you can
conclusively determine that supervisor is not
entitled to coverage. He may at least be owed a
defense, and may be entitled to indemnity (at
least on the disability claim). You have a right
to control defense and settlement decisions.
When there is a potential challenge, however, you
need to carefully document your file, using your
defense counsels documented recommendations to
your advantage.
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EXCESS INSURER DOESNT LIKE THE RISK
Risk Pool provides 1 million in liability
coverage, and purchases a 10 million blanket
excess policy written on a following form
basis. The Excess Policy states that coverage is
extended to all insureds covered under the
primary program. Member is hosting a special
fundraising event at the Crusty Crab, at which
a local band will play. The Member signs a
standard use agreement with CC containing
indemnity and additional insured
requirements. The agreement says Members
coverage will be primary.
A fight breaks out and people are killed. Excess
insurer rejects coverage saying it was never
advised that coverage would be provided to third
parties for risks and events unrelated to the
Members business. Crusty Crab says that if
Excess Insurer doesnt pay, it wants the Member
to pay under its indemnity clause.
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EXCESS INSURER DOESNT LIKE THE RISK
The Excess Insurer probably doesnt have a good
case, absent specific policy language. Several
cases hold that the excess insurer is bound by
additional insured endorsements even when they
are added after a loss. The real issue is whether
the excess insurer was misled in its
underwriting. If the insurer was generally or
specifically aware of public events, it would
be difficult for the excess insurer to argue that
it did not expect that additional insured
endorsements for such events would be
required. As the primary coverage provider, you
may be able to step in and resolve the claim in
excess of your limits, protecting your member,
subject to a
right of subrogation or indemnity. This might
also become important if the Member asserts (as
it might) that any failure of underwriting
disclosure lies with you, and their rights and
interests should not be lost.