Claims and Bad Faith Law Blog

'And a Little Unknown Agency Shall Lead Them': ...

  ... The Federal Housing Finance Agency Leads The Way on the Road to Recoupment.

   The Federal Housing Finance Agency is investigating Trustees for pools of Mortgages and Servicers of the pooled Mortgages.  The FHFA has subpoenaed unidentified records from 64 different entities.  Subpoenas became necessary when polite requests were ignored.

   "Among the bigger trustees in the business are Deutsche Bank and the Bank of New York, while loan servicers include Bank of America and many more.  None of the banks would confirm if they had received subpoenas."  Gretchen Morgenson, "Fair Game/Holding Bankers' Feet to the Fire" p. 1, col. 1 (New York Times, "SundayBusiness" Section, Sunday, July 18, 2010).

   The FHFA is the Conservator of Fannie Mae and Freddie Mac.  It is charged with recouping the Federal Taxpayers' payments and losses on failed Mortgages where the circumstances warrant recoupment.  That clearly seems to be the focus of the FHFA investigation:  "Once that question has been answered, Fannie and Freddie can force the institutions that sold the securities to repurchase the improper loans, allowing taxpayers to recover some of the losses they've swallowed on Fannie's and Freddie's federal bailout."  Id.

   Reports of the demise of recoupment and restitution following the Great Collapse are premature.

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No Federal Declaratory Judgment to Indemnify Pending State Court Lawsuit.

   In Colony Insurance Co. v. Nicholson, Download Colony Insurance Co. v. Nicholson (S.D. Fla. Case No. 10.60042.CIV, Order Filed July 19, 2010)FREE ACCESS also published as 2010 WL 2844802 (S.D. Fla. July 19, 2010)(Westlaw subscription required to access Westlaw), the Federal Court issued an Order reflecting holdings that were entirely predictable under Federal and Florida Law.  The  Nicholson Case was filed in Federal Court by Colony Insurance Company.  Colony requested a Declaratory Judgment of no Duty to Defend and no Duty to Indemnify its Insureds (who were two of the Defendants in its Federal Court Action, along with the Plaintiff in the underlying case) in a pending State Court Lawsuit.

   First, the Federal Court held in this Declaratory Judgment Action that there is a Duty to Defend the Insured in the pending State Court Case.   Nicholson, 2010 WL 2844802 at *3.

   Then, for the reason that the State Court Lawsuit is pending, the Federal Court refused to issue a Declaratory Judgment on the other issue presented to it, which was whether there is a Duty to Indemnify for any settlement or Judgment in the State Court Case.  Declaratory Relief on that issue would certainly be premature.  Since Florida Law always determines a Liability Insurer's Duty to Indemnify based on the actual facts rather than on merely the allegations which determine a Duty to Defend, the Federal Court held that the DJA was not ripe for Declaratory Relief on that issue.  Id. at *3.

   Accordingly, the Federal Judge granted the Defendants' Motion for Summary Judgment (which was originally filed as a Motion for Judgment on the Pleadings and was "converted" by the Federal Court into a Motion for Summary Judgment).

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BP Oil Spill: Consequential Damages Claims, Business Interruption Coverage?

   The BP Oil Spill Catastrophe is providing many resulting Claims for Damages.  Insurance Coverage issues they generate include the Insurance Coverage Issues of Business Interruption Coverage.

   Estimates of future Damage to Gulf Coast people and businesses include these:

• 17, 000 lost jobs and $1,200,000,000.00 in "lost economic growth" through the end of December, 2010 if the spill is stopped in August.
• 100,000 lost jobs and $7,400,000,000.00 in "economic losses" if the spill instead continues through December, 2010.

These estimates and a rising chorus of cries that relief money should be sent to Florida first because it has no fault, or less fault, than its neighbors in Louisiana, Mississipi, Alabama and Texas, are mentioned by Robert Trigaux, "Venture Blog/As Florida Resentment Rises Over Spill, New Report Warns of Job, Economic Losses Ahead" (Posted on Tuesday, July 20, 2010 on St. Petersburg Times Online Venture Blog).

Dennis Wall is Co-Author of the leading book on Insurance Coverage for Catastrophe Claims, "CATClaims:  Insurance Coverage for Natural and Man-Made Disasters" (West Publishing Company 2008; 2010 Supplement in process).  Mr. Wall will speak on a panel at the American Conference Institute's Bad Faith Litigation Conference in Orlando, Florida on November 30, 2010 on "Dealing With Catastrophic Disasters:  How to Properly Investigate and Handle Overwhelming Claims".

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Insurance Coverage Claims Discovery Affects Pending Bad Faith Claims, Too.

   Insurance Coverage Claims affected the disposition of other issues in a recent pending Bad Faith Case:  Cleveland Construction Inc. v. Fireman's Fund Insurance Co., Download Cleveland Construction Inc. v. Fireman's Fund Insurance Co. (W.D.N.C. Case No. 3.09.cv.200, Order of Senior District Judge Mullen Filed July 19, 2010) FREE ACCESS also published as 2010 WL 2836105 (W.D.N.C. July 19, 2010)(Westlaw subscription required to access Westlaw).

   First, the Federal Court granted the Plaintiff's Motion to Compel production regarding "Claim No. 80.  "Plaintiff's Amended Complaint alleges bad faith and unfair or deceptive trade practices.  Defendant's evidence as to Claim 80 would reveal patterns and practices of investigating and settling claims under the 'All Risk' insurance policy."  Accordingly, the Federal Court granted the Motion to Compel in this regard.  Cleveland Construction, 2010 WL 28326105 at *2.

   Then, the Federal Court also granted the Plaintiff's Motion for Leave to File a Supplemental Expert Report, id., because of the additional discovery allowed in granting the Plaintiff's Motion to Compel.

Counsel and their clients in Bad Faith Cases will always want to keep their Insurance Coverage Issues in mind, even as they prosecute or defend the Bad Faith Claims in those Cases.

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"Court II" Damages, Unspecified, Support First-Party Bad Faith Statutory Claim.

   Part of the holding in the following First-Party Statutory Bad Faith Claim, concerning the sufficiency of the Civil Remedy Notice of Insurer Violation in that case, was addressed in a post on Insurance Claims and Issues on Wednesday, July 21, 2010.  This post addresses another holding in the same Federal Court Order in that case, concerning Damages allegations sufficient to support the First-Party Statutory Bad Faith Claim.

   Unspecified Damages Claims were held sufficient as a matter of Florida law to support a Statutory First-Party Bad Faith Claim, in the Federal case of  Royal Marco Point I Condominium Ass'n v. QBE Insurance Corp., Download Royal Marco Point I Condominium Ass'n v. QBE Insurance Corp. (M.D. Fla. Case No. 2.07cv16, Memorandum Opinion Filed July 13, 2010)FREE ACCESS DOWNLOAD also published as 2010 WL 2757240 *3 (M.D. Fla. July 13, 2010)(Westlaw subscription required to access Westlaw).  The Federal Court in that case denied the Defendant Insurance Company's Motion to Dismiss and its Motion for Summary Judgment.

   The Plaintiff Condominium Association, according to the Court's Opinion, alleged variously that because of the alleged actions of the Defendant, it had to spend money "from its operating account," "exhausted its maintenance reserves," assessed levies for repair costs on unit owners, "hired counsel and engaged its broker to attempt to secure payment," "took out a line of credit from Marco Community Bank to attempt to meet these repair costs," and "secured a $1.5 million small business loan ("SBA loan") with the U.S. Small Business Administration."  Royal Marco Point I Condominium Ass'n v. QBE Insurance Corp., 2010 WL 2757240 at *1-*2.

   Some or all of these allegations of Damages were thus viewed by the Federal Court in announcing a decision that the operative Complaint supported the Condominium Association's First-Party Bad Faith Statutory Claim in that case.

Compensatory and Consequential Damages Allegations and Recoveries in all kinds of Bad Faith Cases are exhaustively addressed by Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" §§ 13:2 - 13:9  (Shepard's/McGraw-Hill First Edition, West Publishing Company Second Edition and 2010 Supplement).

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Not "Bad Faith" Setup Defense, But Unreasonable Demand Guts Case.

   In AAA Nevada Insurance Co. v. Chau, Download AAA Nevada Insurance Co. v. Chau (D. Nev. Case No. 08.cv.00827, Order Filed July 15, 2010)FREE ACCESS DOWNLOAD also published as 2010 WL 2802164 (D. Nev. July 15, 2010)(Westlaw subscription required to access Westlaw), a Federal Judge repeated a holding that has been reached on the facts of many alleged Bad Faith Cases in many different Courts:  When the Claimant makes an unreasonable demand, that eliminates the ordinary Bad Faith Claim; it is not a separate "Defense" of a "Bad Faith Setup".

   As the Court described the holding:

   As a matter of law, Plaintiff's [Liability Insurance Company's] actions did not amount to bad faith.  Plaintiff clearly had a reasonable basis for their failure to comply with the two-week deadline.

   Interveners' [sic] argue that there are materially disputed facts regarding the reasonableness of Plaintiff's actions.  Plaintiff recites evidence that AAA's agents knew the claim was going to exceed the policy limits (see Claim Log Notes, 11/28/2006, Ex. 1, # 83); it was twenty-eight days after the injury that the demand letter was sent; the testimony of Interveners' [sic] insurance expert ...; Plaintiff's decision not to solicit the wrongful death claim ...; Plaintiff's failure to settle within the time allowed by the demand letter; Plaintiff's alleged failure to keep its insureds informed of settlement; and AAA's "admission" that there were factual disputes as to the policy limits.  None of this is sufficient to create a genuine dispute of material facts as to whether or not AAA lacked a reasonable basis to comply with the demand letter.  Interveners' [sic] demand letter was itself unreasonable and appears to be nothing more than an attempt to set up a potential bad faith claim.  Accordingly, summary judgment [for the Liability Insurance Company on the Bad Faith Claim in that case] is appropriate.

AAA Nevada insurance Co. v. Chau, 2010 WL 2802164 at *5.  [Emphasis added.]

   As noted, this holding is in line with the majority view, if not unanimous view, on this issue.  See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith", Ch. 5, Insurer's Defenses Against Action by Insured -- Settlement, § 5:18, "Unreasonable Demand by Third Party" (Shepard's/McGraw-Hill First Edition; West Publishing Co. Second Edition and 2010 Supplement).

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"Bad Faith," Undefined by Statute, Did Not Include This Investigation.

   Robert Luse and Kay Luse sued Liberty Mutual Fire Insurance Company for Statutory Bad Faith.  In this First-Party case, the Luses suffered a fire in their home.  They were the Policyholders on a LibertyGuard Condominium Policy.  After the fire, Liberty conducted an investigation and determined that the Luses' house was liveable.  Mr. Luse experienced a deterioration in his health, apparently, and "a drop in his oxygen saturation levels."  Mr. Luse was being treated by a respiratory therapist but there was no evidence that Liberty knew this at the time.  The Luses sued Liberty for an alleged Bad Faith Investigation, among other things, under 42 Pa. C.S.A. § 8371.  Luse v. Liberty Mutual Fire Insurance Co., Download Luse v. Liberty Mutual Fire Insurance Co. (M.D. Pa. Case No. 1.09.CV.1221, Opinion Filed July 7, 2010) also published as 2010 WL 2698342 *1-*2 (M.D. Pa. July 7, 2010)(Westlaw subscription required to access Westlaw).

   The Federal Court noted that the Pennsylvania Statute does not define "Bad Faith," but that Pennsylvania State Case Law has defined that term.  It means, for purposes of Section 8371, "'frivolous or unfounded refusal to pay proceeds of a policy which imports a dishonest purpose and means a breach of a known duty (i.e. good faith and fair dealing), through some motive of self-interest or ill will; mere negligence or bad judgment is not bad faith.'"  Luse, 2010 WL 2698342 at *4.  "In addition, there is a heightened burden of proof in bad faith claims, and a plaintiff must demonstrate by clear and convincing evidence that an insurer acted in bad faith."  Id.

   The Federal Court held that Liberty's investigation in this First-Party Case was not "Bad Faith" under the Pennsylvania Statute and granted Liberty's Motion for Summary Judgment.  With regard to LIberty's investigation, the Court reviewed the record and summarized its holding in this conclusion, in pertinent part:

   Liberty was under a duty to reasonably investigate all claims, and the undisputed facts in this case suggest that they met this obligation.  If Plaintiffs believed they needed to be relocated due to health concerns they should have raised this issue when they contacted Liberty.  Instead, they mentioned nothing until August 10, 2007, at which time  passing comment was made that individuals in the house had respiratory issues.  No request was made that they be relocated, and the cleaning that was requested was immediately authorized.  It was not until the call from Ms. Shultz [Mr. Luse's respiratory therapist] on August 24, 2007, that Liberty became aware of Mr. Luse's health condition, after which, Liberty immediately undertook to have the family relocated.  Plaintiffs have failed to present that there are genuine issues of material fact, which if resolved in Plaintiffs' favor would allow a reasonable jury to conclude, by clear and convincing evidence, that Liberty acted in bad faith.  Therefore, summary judgment for Liberty will be granted.

 Id. at *6.  [Emphasis added.]

   It may be that the same result in this particular case would have been reached on the same record if the burden of proof had been by a preponderance of the evidence instead of by clear and convincing evidence.

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Interpleader Into Good Faith Safe Harbor: Court Sets New Course.

   The issue before us is whether an insurer may meet its duty to equally consider settlement offers, when presented with multiple claims in excess of policy limits, by promptly and in good faith interpleading its policy limits and continuing to provide a defense to its insured.  Holding this is so, we affirm the summary judgment entered.

McReynolds v. American Commerce Insurance Co., Download McReynolds v. American Commerce Insurance Co. FREE PUB LIC ACCESS (Ariz. Ct. App. Div. 1, Dep't A, Case No. 09.0017, Opinion Filed July 13, 2010) also published as 2010 WL 2749641 *1 ¶ 1 (Ariz. Ct. App. July 13, 2010)(Westlaw subscription required to access Westlaw).

   "McReynolds ... filed a complaint alleging ACIC acted in bad faith and violated its duty of good faith and fair dealing by failing to give equal consideration to the insured's interests.  ACIC filed a successful motion for summary judgment and was awarded attorneys' fees."  McReynolds v. ACIC, 2010 WL 2749641 at *1 ¶ 6.  In the eyes of the Arizona Court of Appeals, the thrust of McReynolds' Bad Faith suit against ACIC was "about whether the insurer had a duty to properly manage the policy limits, and, if so, whether the good faith filing of a prompt interpleader satisfies that duty."  Id. at *2 ¶ 9.  [Emphasis added.]

   This case presented an open issue of Arizona law.  The Court of Appeals never directly answered the above-italicized question, which it saw as central to McReynolds' Bad Faith Case.  Instead, even assuming there is such a duty, and pointedly noting that this was a case in which "an insurer is faced with multiple claims in excess of its policy limits," the Court said, "we consider it (as did McReynolds' expert) to be part of the duty to equally consider settlement offers.  Infra ¶ 18."  Id. at *3 ¶ 10.  [Boldface added; italics by the Court.]

   The Court of Appeals did answer another question, however, very loudly and very clearly:

   We think the favored approach to managing multiple claims in excess of the policy limits must include some provision for certainty to insureds, insurers, and litigants short of submitting each case to a jury.  In that regard, as a matter of Arizona law, we hold that (1) the prompt, good faith filing of an interpleader as to all known claimants with (2) payment of the policy proceeds into the court and (3) the continued provision of a defense for the insured as to each pending claim, acts as a safe harbor for an insurer against a bad faith claim for failure to properly manage the policy limits (or give equal consideration to settlement offers) when multiple claimants are involved and the expected claims are in excess of the applicable policy limits.

Id. at *8 ¶ 26.  In reaching this conclusion, the Court broke new ground or, continuing with the Court's own "safe harbor" metaphor, charted a new course.  See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 3:40 & n. 320, "Multiple Claimants" (Shepard's/McGraw-Hill First Edition; West Publishing Co. Second Edition and 2010 Supplement).

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Too Clever By Half: The Secret Story of AIG's "Releases".

   This adds to posts about AIG's attempted Secret Releases of its Counterparties given during its near-death throes in late 2008, which are posted here on June 30, 2010 entitled, "Fed Demanded Secret Waiver Immunity by AIG:  Bad Faith Too?"; also a post here on July 6, 2010, "AIG's Secret "Unknown Claims" Release Worthless Paper?", and another post exploring the Release and its language on Insurance Claims and Issues Web Log also on July 6, 2010, "Who Fleeced the Fiduciaries?  AIG's "Unknown Claims" Release Could Be ... Worthless Paper".  The contentions of the New York Fed, that these abnormal conditions are normal, are stated and addressed in a post here on July 12, 2010, "New York Fed:  'Not me'; Denies Forcing AIG Secret Release".

   The insureds or "Counterparties" on certain Credit Default Swaps or Credit Insurance issued by AIG apparently wrote up a form "Termination Agreement" for AIG to sign for each of their CDS's.  Here is a copy courtesy of New York Times reporter Ms. Louise Story:  Download AIG Termination Agreement With Release Incl. of .Unknown Claims.  The overly broad Release language is found in Paragraph 1(b)(ii) on page 2, and their "Unknown Claims" definition is just as overly broad in paragraph 1(b)(v) on page 3.

   Note that the Release language includes "claims based on breach of fiduciary duty ..., aiding and abetting fraud or breach of fiduciary duty, ... [and] breach of the implied dovenant of good faith and fair dealing".

   I have proofed and compared them to the provisions input on July 6, 2010 in the post,  "Who Fleeced the Fiduciaries?  AIG's "Unknown Claims" Release Could Be ... Worthless Paper".  All the words quoted from the "Termination Agreement" are correctly and completely quoted in the post.

   The conclusion of the July 6 post on Insurance Claims and Issues is accurate too:  "The validity and effect of the secretly kept AIG Release of Counterparties, which was unearthed by New York Times reporters Louise Story and Gretchen Morgenson, are unlikely to be accepted at face value by the Courts in the United States."  That includes the State and Federal Courts in New York.  Paragraph 11 of the "Termination Agreement" provides that it "shall be governed by and construed in accordance with the law of the State of New York," and that each of the parties to it submits to jurisdiction both in the United States District Court for the Southern District of New York, and in any New York State Court "sitting in New York City".

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A One-Case Career for Insurance Companies and Their Lawyers: ...

... The Continuing Travails of American International Group, Inc., et al. v. ACE INA Holdings, Inc., Advantage Workers Compensation Insurance Co., Alaska National Insurance Co., .... Wausau Business Insurance Co., Wausau General Insurance Co., and Wausau Underwriters Insurance Co., et al. (Plenty of Travails.  No Trials Yet).

   In the case of American Int'l Grp., Inc., et al. v. ACE INA Holdings, Inc., et al, Download American International Group, Inc., at al v. ACE INA Holdings, Inc., et al (N.D. Ill. Case Nos. 07CV2898, 09CV2026 Opinion Filed June 30, 2010) also published as 2010 WL 2674656 (N.D. Ill. June 30, 2010)(Westlaw subscription required to access Westlaw), one holding was reaffirmed and one holding was reached on June 30, 2010 in this massive case  -- really, three cases in one -- that draw comment here.

   Before we take notice of the two holdings that compel our particular attention here, it will be important to understand a little about this massive mixture of consolidated cases.  "The original complaint in this matter was filed by NCCI acting solely as attorney-in-fact for the participating companies of the NWCRP ("Participating Companies") against plaintiffs.  All of the counts of that complaint were based on alleged intentional fraudulent conduct by plaintiffs in underreporting workers compensation premiums to the Pool."  AIG v. ACE, 2010 WL 2674656 at *2.

   By the time of the decision in this case on June 30, 2010, AIG and what must be all of its many subsidiaries were also Plaintiffs and they filed a First Amended Complaint which had Ten Counts.  The Defendants were and are 19 Insurance Companies ("the 'Pool Board Members'"), apparently 3 "RICO Defendants" and another company which together with the RICO Defendants were collectively known as "the 'Underreporting Participating Companies.'"  Id. at *1.  Here in brief summary are the Ten Counts:

   The amended complaint alleges violations of the Racketeer Influenced and Corrupt Organizations, Act, 18 U.S.C. §§ 1962(c) and (d) ("RICO"), against the RICO Defendants (Counts One and Two), civil conspiracy against the RICO Defendants (Count Three),  breach of fiduciary duty against the Pool Board Members (Count Four), two counts of fraud against the Underreporting Participating Companies (Counts Five and Six), breach of contract against the Underreporting Participating Companies (Count Seven), unjust enrichment against the Underreporting Participating Companies (Count Eight), equitable accounting against the Underreporting Participating Companies, the Pool, and NCCI (Count Nine), and an action on an open, mutual, and current account against the Underreporting Participating Companies, the Pool, and NCCI (Count Ten).

Id.  [Emphasis added.]  Addressing Motions to Dismiss for Failure to State a Claim Upon Which Relief Can Be Granted, under Fed. R. Civ. P. 12(b)(6), in pertinent part the first holding of remark at this time, was a reaffirmation of one of the Court's many previous rulings in this same case, in which the Court denied previous Motions to Dismiss a Claim for breach of fiduciary duties based upon similar allegations in the original Complaint.  Id. at *8, *13.  The Court denied the Motions to Dismiss Count Four of the First Amended Complaint, id. at *8 and *13, the Count containing allegations of breach of fiduciary duty "by failing to investigate and assert claims for fraudulent conduct of the Underreporting Participating Companies and assisting in the concealment of that conduct."  Id. at *8. 

   The other holding which draws interest at this time, concerns not a Count for alleged Liability but a Claim for alleged grounds to assess Punitive Damages.  This holding came in a Class Action which was Consolidated with the AIG v. ACE lawsuit.  The Class Action was, surprisingly enough, filed on behalf of two ardent opponents of class action lawsuits filed on behalf of others, namely,  Safeco and Ohio Casualty, and their alleged class.  Applying New York substantive law to make this determination, the Federal Court denied the Motions to Dismiss the "Class Plaintiffs' [Safeco's and Ohio Casualty's and their putative class] claims for punitive damages" against the "Class Defendants [ AIG and the AIG Companies]".

   Count Three of the Class Action Complaint, the Court held, states a claim for an independent tort "that does not arise out of a breach of contract as to either AIG or the AIG Companies.  Therefore, punitive damages are available if Class Plaintiffs can plead and prove that Class Defendants engaged in 'gross, wanton, or willful fraud or other morally culpable conduct.'"  Id. at *22.

   For similar reasons, the AIG Motion to Dismiss "the Liberty Parties' [Liberty Mutual, Liberty Mutual Fire, Liberty Insurance, and The First Liberty] claim for punitive damages on this basis is denied."  Id. at *17. 

   A class action and Punitive Damages Allegations and alleged Breaches of Fiduciary Duties, plus dozens of Insurance Companies and what looks like a list of all the attorneys in the Western World.  Whew.  What a case.

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New York Fed: "Not me"; Denies Forcing AIG Secret Release.

   This post adds the reaction of New York Fed General Counsel and Executive Vice President Thomas Baxter in a Letter to the Editor of The New York Times published on Friday, July 9, 2010.  Mr. Baxter took issue with a report published on June 30, 2010 in The New York Times, which is the subject of many posts:  Here on June 30, 2010 entitled, "Fed Demanded Secret Waiver Immunity by AIG:  Bad Faith Too?"; also a post here on July 6, 2010, "AIG's Secret "Unknown Claims" Release Worthless Paper?", and another post exploring the Release and its language on Insurance Claims and Issues Web Log also on July 6, 2010, "Who Fleeced the Fiduciaries?  AIG's "Unknown Claims" Release Could Be ... Worthless Paper".

Part One.  The New York Fed Makes Up a Story to Sell to Nonlawyers.  It's Sticking With It.   (Now That Nonlawyers Know About the Secret Release by AIG of "Unknown Claims"). 

   A high official in the bureaucracy of the New York Fed has responded to Louise Story and Gretchen Morgenson,  "Documents on Bailout of A.I.G. Show How Big Banks Benefited" p. A1, col. 1 (New York Times Nat'l ed., Wed., June 30, 2010).  New York Fed General Counsel and Executive Vice President Thomas C. Baxter, Jr. wrote in pertinent part in a Letter to the Editor of The New York Times that was published on Friday, July 9, 2010:

   The article suggests that a "legal waiver" clause in the agreement that terminated the credit default swap[s] was unusual; that regulators forced A.I.G. into the agreement; and that it unduly benefited the counterparties.  We disagree in every respect.  Regulators did not force A.I.G. into the waiver clause.  The waiver clause was a standard legal provision.  It was a mutual release by which A.I.G. and the counterparties released each other from liability.

[Emphasis added.]

   This was apparently big news in some quarters.  See, for example, Hugh Son, "Fed Says It Didn't Force AIG to Include Legal Waiver for Banks"  (Bloomberg.com, Friday, July 9, 2010).

Part Two.  The Real Story About Releases.  Or, When  Releases Really Are Given and How Releases Really Work.

   This is a two-part answer.  The first part of the answer is that including Mutual Releases in an agreement of this kind never happens.  (Although Mr. Baxter is correct that it purports to be a "mutual release," but he is not correct when he calls it "a waiver provision".  To lawyers and to Courts, "waiver" involves the relinquishment of a known right and not of something called "Unknown Claims".)

   Second, the language of this Release is neither ordinary or usual.  It is clear to practicing lawyers that it was inserted as a "Hail Mary" to try to protect counterparties-clients from the consequences of their own, er, deeds.  And it is also clear that the lawyers that wrote it do not practice much, and that they knew they were dealing with a prostrate 'other party' in AIG that would sign anything put in front of it at the time, and did.

   Put it in the context of its time:  This Release was given by AIG to Claimants after the Federal Reserve of New York had already decided to pay those same Claimants 100 cents on the dollar for all their Claims.  In the ordinary course of things, the settling Claimants would provide a Release of their Claims on A.I.G., and in this case, they did.

   But what did A.I.G. get as "consideration," i.e., what did it get in return for A.I.G.'s Release of the Claimants?  That the Claimants can argue that no-one can sue them regardless of what they did or did not do?  Even in 2010, that sounds unnatural.  And it is unnatural.  It is never done.

   And it is against public policy.

Conclusion.

   To sum up:  Get real, people.

 Please Read The Disclaimer.

Where Chiropractor Says Further Treatment Unnecessary, Nonpayment Not Bad Faith.

   In the case of Gorrell v. State Farm Mut. Auto. Insurance Co., Download Gorrell v. State Farm Mutual Auto. Insurance Co. (D. Nev. Case No. 2.08cv01757, OpinIon Filed June 28, 2010)(FREE ACCESS) also published as 2010 WL 2628651 (D. Nev. June 28, 2010)(Westlaw subscription required to access Westlaw), a treating chiropractor told the Defendant Insurance Company that Kathleen Gorrell and Daniel Gorrell would reach Maximum Medical Improvement by July 1, 2007.  Gorrell, 2010 WL 2628651 at *3.

  For some reason, their Insurance Carrier insisted on an IME or Independent Medical Examination which was performed by another chiropractor.  The IME chiropractor also concluded that Mr. and Mrs. Gorrell would reach MMI no later than July 1, 2007.  Id.  The Defendant Insurance Carrier, which provided the Plaintiffs with Med Pay for otherwise covered "reasonable medical expenses," declined to pay for additional chiropractic treatment in a letter it sent to them in August,  2007.  Id. at *1.

   On these facts, the Federal Court in this case granted the Insurance Company's Motion for Summary Judgment "as to Plaintiffs' claim for breach of the implied covenant of good faith and fair dealing," citing Nevada law.  Id. at *4.

   The same Federal Judge had concluded previously in this same decision, that Wyoming and not Nevada law applied.  In fact, "[b]ecause Wyoming law applies to this case," the Court earlier held, "Plaintiffs' cause of action for unfair claim practices under NRS 686A.300 fails as a matter of law."  Id. at *2.

   Presumably the Court would have reached the same result in that First-Party Bad Faith case under Wyoming law, based upon the evidence presented.  See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 11:17, "Fairly or Reasonably Debatable Claims" (Shepard's/McGraw-Hill First Edition; West Publishing Co. Second Edition and 2010 Supplement).

Please Read The Disclaimer.

No Bad Faith Tort Failure to Pay or Otherwise Breach Michigan Insurance Contract ...

   ... But -- if there is a separate legal duty, not just separate conduct apart from the breach of contract, then tort Damages may be available under Michigan law.

   It has been firmly held that the Michigan Courts simply do not recognize a cause of action in tort for alleged Bad Faith breach of an Insurance contract, including any separate and independent tort for alleged Bad Faith failure to pay the Insured's own First-party claim, as in the case of  Cromer v. Safeco Insurance Co. of Am., Download Cromer v. Safeco Insurance Co. of America (E.D. Mich. Case No. 2.09cv13716, Opinion and Order Filed April 14, 2010) also published as 2010 WL 1494469 *3 (E.D. Mich. April 14, 2010)(Westlaw subscription required to access Westlaw).

But, if there is a separate legal duty that has been breached apart from the alleged breach of contract, then in that event Michigan law may recognize an action for Tort Damages.  Old Republic National title Insurance Co. v. Escrow and Title Services, Inc., Download Old Republic National Title Insurance Co. v. Escrow and Title Services, Inc. (W.D. Mich. Case No. 1.08cv796, Opinion and Order Filed June 30, 2010) also published as 2010 WL 2650434 *8-*16 & *8 n.4 (W.D. Mich. June 30, 2010)(Westlaw subscription required to access Westlaw)(recognizing rule; holding that the rule did not apply to alleged negligence claim at bar involving agency contract to issue Title Insurance Policies).

Please Read The Disclaimer. 

Damages for Wrongful Refusal to Defend: Want Interest On That?

  In Stryker Corp. v. XL Insurance America Inc., Download Stryker Corp. v. XL Insurance America, Inc. (W.D. Mich. Case No. 4.01CV157, Opinion Filed June 24, 2010)(FREE ACCESS) also published as 2010 WL 2584026 (W.D. Mich. June 24, 2010)(Westlaw subscription required to access Westlaw), the Federal Court grappled with issues of Interest under Michigan Statutes.

   First, the Stryker Court reminded readers that it had previously held that Michigan's Uniform Trade Practices Act, § 500.2006,applied to this Third-Party Insurance Case even though the Michigan Statute contains language referencing a "Proof of Loss".  Stryker, 2010 WL 2584026 at *1.  This holding allowed the Plaintiffs-Insureds to 12% interest per year.  The question in this decision was when did that entitlement begin to accrue.

   The Federal Court in Michigan held that, under current Michigan law, interest on the Insured's settlement amounts in the underlying case would begin to run at least "from the time that interest would otherwise begin to run under § 500.2006until the time that Defendant paid the Pfizer Settlement."  Id. at *6.  The entitlement was not destroyed, only the amount remained to be determined after this holding.  The Court determined:  "Plaintiffs are entitled to accrual of interest under that statute from the time that they settled the third-party claims."  Id. at *8.

  Further, the Stryker Court construed Section 500.2006's"reasonably in dispute" limitation.  Under the Michigan Statute, "the 'reasonably in dispute' limitation applies to a 'third party tort claimant'; it does not apply to a claimant that is an 'insured ....'"  Id. at *7.  The Federal Court therefore held in that case, that "the insured under a contract of insurance is entitled to interest under § 500.2006for late payment of claims, even if the underlying insurance claim was reasonably in dispute."  Id. at *7.  [Emphasis by the Court.]

   There were also claims against the non-defending Liability Insurance Company in that case, for the costs of defense.  "In addition to the amounts paid by Plaintiffs to settle the third-party claims, the judgment in this matter also includes the costs of defense incurred by Plaintiffs for defending the third-party claims."  id. at *11.  Interest accrued under the Michigan Statute, Section 500.2006, without the limitation the Court previously applied to the Plaintiffs' settlement expenditures.  Parenthetically, while that holding is clearly stated, it is not entirely clear from the Court's opinion how much interest would apply to the costs of defense expended by the Insureds, nor when exactly that entitlement accrued in that case, at least as seen from the perspective of the outside observer.  See also Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 13:5, "Compensatory Damages--Judgment Interest Owing to Third Party" (Shepard's/McGraw-Hill First Edition, West Publishing Co. Second Edition and 2010 Supplement).

Prejudgment Interest, TOO?  The Stryker Court also dealt with the Insureds' claim for prejudgment interest under another Michigan Statute in that case, Mich. Comp. Laws § 600.6013(8).  As applied by the Federal Court in that case, that Statute "allows the prevailing party to recover prejudgment interest on a money judgment."  Id. at *13.  "Under § 600.6013(8), interest accrues from the date of the filing of the complaint.  [Citation omitted.]  Thus, interest starts to run under§ 600.6013(8)earlier than under § 500.2006for third-party claims of which Defendant received notice after Plaintiffs filed their complaint."  Id.  The amount of interest under Section 600.6013(8)was left open for determination, but the Federal Court held that the Plaintiffs-Insureds are entitled to prejudgment interest under that Statute in that case.  Id.  See also Dennis J. Wall, supra, § 13:11, "Prejudgment Interest".

   Old saying for Liability Insurance Companies with a Duty to Defend:  "When in Doubt, Defend" which may also be called not only a rule of thumb but also a rule of "interest" to which might successfully be added, and when in doubt, file a Declaratory Judgment Action while defending under a Reservation of Rights where that option is available.  See generally Dennis J. Wall, supra, § 3:4, "Informing the Insured--Reservation of Rights".

Please Read The Disclaimer.

AIG's Secret "Unknown Claims" Release Worthless Paper?

    Insurance Claims and Issues Web Log posts this morning about "Who Fleeced the Fiduciaries?  AIG's "Unknown Claims" Release ... Could be Worthless Paper".  It explores Bad Faith, Fraud and Fiduciary Duties issues, among other issues arising out of this previously secret Release.

Please Read The Disclaimer There.

Wrongful Denial of Defense and "Consequential Damages" Consequential Liability Exposure.

   Recent case law has involved several Claims for allegedly Wrongful Denial of a Duty to Defend, with Claims for Consequential Damages as a result.

   In Rieser v. Evanston Insurance Co., Download FREE ACCESS Rieser v. Evanston Insurance Co. (S.D. Cal. Case No. 09CV1104, Opinion Filed June 15, 2010) also published as 2010 WL 2487074 (S.D. Cal. June 15, 2010)(Westlaw subscription required to access Westlaw), a Federal Judge described what she thinks are two lines of "Breach of Contract" Consequential Damages awards under California law in such cases.  These two lines of awards will be found in the case law of many States besides California:  (1) "Default" cases in which the Liability Insurer wrongfully denies all Coverage including a Duty to Defend, and as a consequence the Insured goes into default, i.e., a Default is entered against the Insured in the underlying case; and (2) "Defense" cases in which the Insured successfully defends itself after the Disclaimer of all Coverage and then sues to recover its Defense Fees and Expenses incurred in the underlying case.  Rieser, 2010 WL 2487074 at *2-*3.

   In the Rieser case, the Federal Court decided that a "victory by unopposed motion for summary judgment is certainly a form of victory by default" in the underlying case.  "As such, the Court finds that there remains a genuine issue of material fact for the jury" as to whether the Judgment entered as a consequence in the underlying case against the Insured "can be said to be a foreseeable and proximate result of Defendant's breach of its duty to defend."  Id. at *3.

   Claims for Consequential Damages for alleged Breach of Contract by Wrongful Refusal to Defend are also at issue in the case of Post v. St. Paul Travelers Insurance Co., Download ACCESS FREE Post v. St. Paul Travelers Insurance Co. (E.D. Pa. Case No. 06.CV.4587, Memorandum Order signed June 15, 2010, Filed June 16, 2010) also published as 2010 WL 2490750 (E.D. Pa. June 15, 2010)(Westlaw subscription required to access Westlaw).  The Plaintiffs-Insureds alleged Breach of Contract Claims and Bad Faith Claims, among other Claims, as a result of an Insurance Company's allegedly wrongful refusals to defend them.  At the time of this decision, the Court had granted a Motion for Summary Judgment on the Breach of Contract Claims in favor of the Insureds-Plaintiffs, and had also granted the Insurance Company's Motion for Summary Judgment on the Bad Faith Claim.  Post, 2010 WL 2490750 at *1 & n.1.

  Two other things are especially important to an understanding of that case:  Mercy was the Insured Law Firm's client in an underlying case, and under Pennsylvania Law as applied by the Federal Court in the Post case, ordinarily a Breach of the Duty to Defend will be subject to the Contract Rule of Consequential Damages, specifically, that in the case of a Wrongful Refusal to Defend (at least in a case in which the Insured goes ahead and thereafter defends itself) "'the recovery for breach of the covenant to defend will ordinarily be the cost of hiring substitute counsel and other costs of the defense.  This recovery may be in addition to any other obtained against the insurer.'"  Post,  2010 WL 2490750 at *12.

   In that case, an Insurance Company which had issued a 'lawyer malpractice' or Professional Liability Policy providing professional errors and omission Coverage to attorneys, denied all Coverage under the Policy including a Duty to Defend before suit was filed against the attorneys for alleged legal  malpractice.  In addition, the Insurance Company denied its Duty to Defend the Insured lawyers against a sanctions petition, under the Policy.  The Federal Court in that case previously determined that Insurance Coverage existed and so the issues now presented involved what amounts of consequential damages could be recovered, and when they began to accrue such that the Insurance Company should pay them as a consequence of its Breach of its Insurance Contract Duty to Defend.

  The Federal Court in Post held that in that case, "Post's receipt of Mercy's written notice of its intention to sue him for malpractice triggered St. Paul's duty to defend.  Therefore, St. Paul had a duty to cover Post for Mercy's malpractice claim on October 12, 2005."  Post, 2010 WL 2490750 at *11.  [Emphasis by the Court.]  The Court found as a fact:  "On October 12, 2005, Williams sent a follow-up letter to Post.  The letter made clear that Ms. Zimmerman's testimony and the allegations of misconduct by Post were what drove Mercy to settle the [underlying] case."  Id. at *3.  Thus, held the Federal Court, "Post is entitled to reimbursement for work done directly relating to Mercy's potential malpractice claim as of October 12, 2005".  Id. at *17.

   The Federal Court in that case also held that "[i]t is apparent from the facts established at trial that Mercy was involved in the Sanctions Petition from the beginning.   Therefore, coverage for work related to the Sanctions Petition began when the Petition was filed, on November 21, 2005."  Id. at *11.

   See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 13.09, "Consequential Damages" and § 13.13, "Attorney's Fees--Settlement or Defense of Third Party's Claim" (Shepard's/McGraw-Hill First Edition; West Publishing Co. Second Edition and 2010 Supplement).

Please Read The Disclaimer.  Next Week:   "Damages for Wrongful Denial of Defense:  Want Interest With That?"