The Best Defense Is A Good Setoff

If you got it, of course. Today, I’m talking about the common law doctrine of setoff as it applies in California litigation. Contractual offsets are a different topic for another day, such as offsetting worker’s compensation payments from uninsured motorist benefits. That’s not what I’m talking about here, though it is a related concept.

In California, setoff is a doctrine often alleged in an Answer but not actually litigated. The doctrine of setoff (sometimes also called “offset”) applies when the party being sued has or had a claim against the plaintiff/claimant that may be used to reduce the amount of money damages that the plaintiff can recover. Setoff was an equitable concept that the California Legislature codified in Code of Civil Procedure, § 431.70.

Setoff does not apply in every case. A good investigation of the facts, and especially a thorough interview with the insured defendant may disclose the existence of this defense. It applies where cross-claims for money exist or used to exist. Because it is an equitable doctrine, it has unusual characteristics. For example, even if the statute of limitations ran on the defendant’s claim against the plaintiff years before the plaintiff filed suit, the defendant can use this defense to reduce or eliminate the damages the plaintiff is presently seeking.

Take the following example, plaintiff and defendant had a “take or pay” contract for the purchase of motor fuel. In these agreements, the buyer agrees that it will take and pay the seller a minimum of X dollars per month, even if the buyer does not take any fuel. The buyer fails to pay the minimum contract price of $10,000 a month for six months. Six years later, the plaintiff buyer sues the seller for defamation, since the seller told anyone who would listen where a terrible business plaintiff ran. The seller/defendant is insured under a CGL providing a defense for defamation claims.

The statute of limitations for breach of written contract in California is 4 years. The defendant seller cannot sue to recover money from the plaintiff; however, § 431.70 allows that defendant/insured to reduce plaintiff’s recovery by $60,000.

So, if plaintiff tries its case, and obtains a verdict for $50,000, the judgment will be for the defendant/insured, and the insured would be able to recover its litigation costs as “the prevailing party.” Pretty cool, right?

To raise the defense properly, it’s not going to be enough under California or federal law to just plead “Offset” or “Setoff.” When attacked, courts generally hold the defendant has to plead all the facts necessary to support the cause of action or claim that the setoff is based on. If the claim is not time-barred, this can be done by filing a cross-complaint and incorporating the cross-complaint into the setoff defense. Note however that cross-complaints for relief other than indemnity trouble insurance defense counsel (and  the insurers who hire them) because defense counsel defends insureds; they are not hired to prosecute affirmative claims the plaintiff, generally speaking.

The limit of the defense is that the setoff can only be used defensively–especially if the defendant’s claim or cause of action that the setoff is based is time-barred. One other important limitation. If this is the second lawsuit between the plaintiff and the defendant, and the defendant either raised or “should have raised” the claim in prior litigation, the defendant cannot get a second bite at the apple by raising setoff for a claim that was or should have been litigated between the same parties in earlier litigation.

Another useful way that setoff may be used is in defense of a judgment. Let’s say that a judgment against an insured exists. The insured finds someone who the judgment creditor has wronged in the past, and buys that third party’s causes of action against the judgment creditor. The judgment debtor can bring a new action for declaratory relief seeking to setoff the judgment debt by the value of the assigned claims–even if those claims would be time-barrred. This can be helpful to private businesses suffering judgments and in cases where there is a blend of insured and uninsured claims where a well-funded insured may be actively participating in its defense.

Sometimes the best defense is a good offset.

Employee’s Negligence Trumps Owner of Premise’s Knowledge of Dangerous Condition Creating Triable Issues of Fact

In premise liability cases, a tried and true defense to a customer’s slip and fall action was to argue that the spillage or other dangerous condition happened before the business knew about the spill or other condition that caused or contributed to the customer’s injury.

Recently, a California appellate reversed summary judgment in favor of a defendant jewelry store when the plaintiff established an inference that the business owner or its employees may have caused cleaning fluid to have been spilled on a backroom floor that was only accessible to plaintiff to the defendant store owner’s employees. The appellate court found that when the employee can show sufficient facts to create a reasonable inference that the store owner or the store’s employees caused the dangerous condition, notice of the condition is presumed, thereby preventing summary judgment.

The appellate court admitted that the facts were unusual in that the typical case, the customer has no idea who caused the spill and cannot prove that it is more reasonable to believe the store’s employees, as opposed to another customer, caused the dangerous condition.

Why the case certainly does not mark the end of the defense of lack of notice, it does make defending premises liability claims more difficult where the plaintiff can show either that the store or a store employee caused the dangerous condition or can at least show that a reasonable inference could be drawn that a store employee, as opposed to a third party, caused the dangerous condition.

And just because summary judgment was defeated does not necessarily mean that the trier of fact will find for the plaintiff. If the store is able to show at trial that more than just store employees had access to area the where plaintiff and had access to the cleaning fluid plaintiff slipped on, the store owner may still be able to defense the claim on the merits.

But the case does serve as a reminder of the importance of a thorough fact investigation into the accident. The more people that had access to the area where the fluid was or who could have spilled the fluid, the less likely a court would find a “reasonable” inference existed that a store employee caused the dangerous condition. And, in cases where it is clear that the employee caused the spill that the customer slipped on, the claim will likely be decided on agency or “respondeat superior” rather than on notice. There, the issue will be how reasonable and how quick the store’s response was to clean up the spill and whether there were adequate warnings, as these defenses will decide the case over a claim that the store lacked sufficient notice of the dangerous condition. In sum, employees can be more dangerous than you think to the defense of slip and fall claims.

When Should An Insurer Deny Coverage For The Insured’s Unconsented To Settlement With The Claimant? Not When The Insured Is Settling Only Uncovered Claims

Most standard liability policies contain a clause either as a condition of coverage or as an exclusion that the insured cannot make a “voluntary” payment to settle claims without the insurer’s consent. Sounds relatively simple, right? Not really.


The paradigm case where an insurer will be well within its rights to deny coverage for the insured’s voluntary payment is where the insured settles a covered claim without tendering the claim to the insurer first but then demands that the insurer reimburse the insured for the settlement. Unlike other “notice” provisions, in California, the insurer is not required to show prejudice before standing on the voluntary payments clause to deny coverage.


Because an insurer is not required to show prejudice from late notice of the tender of indemnity for voluntary settlement payments, California courts have denied coverage for voluntary payments and settlements made post tender and while the insurer was defending the claim.


One might think then that anytime an insured settles a claim, pre or post-tender, the insurer could deny coverage. The answer? Sort of. Why? It depends on what the insured is settling. The following example illustrates the problem.


Say the insurer is defending covered and uncovered claims under a reservation of rights, and is also reserving its right to seek reimbursement for defending uncovered claims as authorized by the California Supreme Court’s Buss decision. A mediation is scheduled and the insured and the insurer are participating in the mediation. The insured is worried about a large uncovered judgment being entered against. You, the claims adjuster, believe you have a good chance of defensing the covered claims or obtaining a result far less than the plaintiff’s demand. You offer nothing towards the settlement of the non-covered claims. The insured ponies up his own dough to effect a settlement with plaintiff for all the non-covered claims because the insured is afraid of:

(1) A massive judgment for which there is no insurance coverage as per the insurer’s reservation of rights letter; and

(2) A second lawsuit by the insurer for reimbursement for the defense of the uncovered claims.

Presently, no California state court has addressed this exact factual scenario, despite this becoming a more common situation. Do you believe you could justifiably deny all coverage to the insured if the insured settled only the non-covered claims, thereby leaving only the covered claims to be litigated?


The Ninth Circuit Court of Appeals said no, in a case involving Tosco oil refineries in the context of worker’s compensation insurance for claim arising out of the Northern District of California. (See Travelers Prop. Cas. Co. of America vs. ConocoPhillips Co. [Tosco] (9th Cir. (Cal.) 2008) 546 F.3d 1142, 1146.) The Ninth Circuit recognized that in ever case where a California court denied coverage for the insured’s breach of the “no voluntary payments” clause of the policy, the insured was seeking reimbursement for the settlement of covered claims, thereby denying the insurer the right to defend the claim as the insurer saw fit. (Recall that though insurer’s have a duty to defend in liability insurance, it always described as the “right” and duty to defend.)


In the Tosco case, the insurer denied coverage for the covered claims it was defending because the insured had settled the non-covered claims that the insurer was defending under a reservation of rights. Tosco was not seeking reimbursement for its settlement of the non-covered claims, but merely sought the continued defense and indemnity for the admittedly covered claims. The Ninth Circuit found that Tosco’s insurer could not rely on the no voluntary payments coverage provision to deny Tosco coverage for the insured claims. (The court also found that the insured didn’t technically “pay” money to the claimant but did not take an authorized “credit,” which the court also found did not technically qualify as a “payment” so as to amount to a breach of the policy’s “no voluntary payments” exclusion.)


Even the California state cases that have denied coverage for breach of the “no voluntary payments clause” recognize an exception to the insurer’s ability to lawfully deny coverage where the insured “faces a situation requiring an immediate response to protect [the insured’s] legal interests.” (Truck Ins. Exch. vs. Unigard Ins. Co. (2000) 79 Cal.App.4th 966, 977, fn. 15.)


The above fact pattern is snake pit to the unwary. Relying on the “no voluntary payments” clause to deny coverage for the covered portion of the claim is a high risk proposition. The insured will argue that he or she was forced to settle to avoid a large uncovered judgment and to avoid a subsequent Buss action. There is little equity in arguing to a judge or jury that the insurer has the legal right to:

(1) Bar the insured from capping the insured’s personal, non-covered liability exposure; and
(2) Run up defense costs and fees on the uncovered claims only to seek reimbursement for defending the non-covered claims in addition to the insured having to pay the claimant the uncovered portion of the judgment.

“That dog don’t hunt.” It will likely result in a successful breach of contract/insurance bad faith action because it won’t look like the insurer gave at least as much consideration to the insured’s interests as the insurer gave itself. 


The solution? Don’t deny all coverage if the insured wants to settle claims you are disclaiming coverage for. But, do remind the insured that the insurer has no obligation to reimburse the insured for settling non-covered claims. There may even be times when it would be worth making a small costs of defense contribution to resolve non-covered claims, thereby eliminating the need for independent or Cumis counsel.

Smithing Gold: Goldsmith Court Holds Automated Computer-Generated Evidence Is Admissible

By John Armstrong

Three areas of law affect insurance claims. They are (1) substantive law, which creates the legal right to make a claim such as creating the legal elements necessary to make a valid claim; (2) procedural law, which provides rules regarding how and when a claim must be be lawfully made; and finally (3) evidence law, which provides rules regarding how one must prove (or disprove) a claim or a defense.

A recent problem in evidence law has been whether computer-generated evidence may be admissible in court. Computer-generated evidence is often attacked for lacking foundation, that is, that the computer-generated information is not what it purports to be. If this attack fails, it is often attacked as inadmissible hearsay in that the computer record “an out-of-court statement offered to prove the truth of the matter asserted.”

A recent criminal infraction case made its way up from the California trial court’s appellate division to the District Court of Appeal addressing these issues. The Goldsmith court held that computer-created evidence is presumed admissible.

The holding is important because it has implications far beyond nailing red light runners who are caught on camera, which was what the case was about.

In Goldsmith, the defense argued that the computer-generated photos and video showing the car running the red light was inadmissible because there was no evidence that computer equipment used to capture the photos and videos were accurate or reliable–an attack on the foundational requirements to have evidence admitted. The court agreed that Evidence Code, § 1401(a) required authentication of photos or video before they may be received in evidence, but found that merely required the party offering the evidence to show that the photo or video is what it purported to be or the establishment of such facts by any other means provided by law as per Evidence Code, § 1400(b).

Evidence Code, §§ 1552 and 1552 establish a legal presumption that printed representations of computer information and of images stored on a video or digital medium are representations of the computer information and images that they purport to represent. Based on this, the court concluded that the images and information, such as the date, time, and location of the violation and how long the light had been red when each photo was taken and imprinted on the photographs were presumed to accurately represent the digital data in the computer. Thus, the court concluded that Evidence Code, § 604 required the trier of fact to assume the existence of these presumed facts.

That the images were accurate depictions of the data stored on the computer did not end the inquiry. To be admissible, the evidence still had to be accurate and reliable. As to this issue, the appellate court deferred to the California Supreme Court’s holding in People v. Martinez (2000) 22 Cal.4th 106, at 111-112, 119-120, and 132. In Martinez, the Supreme Court held that testimony regarding the acceptability, accuracy, maintenance, and reliability of computer hardware and software was not a prerequisite for the admission of data stored on a computer.

In substance, the Supreme Court in Martinez and the appellate court in People v. Goldsmith (2012), held that California courts presume that computer-generated data that is retrieved from a computer is accurate and reliable. This presumption could be rebutted however through cross-examination. Note that the Goldsmith court found that this presumption would not apply to data inputted by humans. It would be limited to situations where the computer were set to automatically record the evidence without human intervention.

Where the data automatically records the evidence, the evidence is presumed admissible. The party opposing such evidence must prove to the trial judge that the evidence is authentic authenticity, accuracy, and reliability, and usually trial courts will let this evidence and then allow it to be attacked by cross-examination, etc., i.e., these factors go to the weight of the evidence as opposed to its admissibility.

Next, the Goldsmith dealt with the hearsay problem, namely, that the computer-generated photos and video were offered to prove the matter asserted, namely, that Goldsmith ran the red light. The Goldsmith court found no hearsay problem by finding that the computer-generated data and the data printed on the photographs by the computer did not fall within California’s definition of hearsay (Evid. Code, § 1200), since the purported “statements” were not made by a “person” based on the California Evidence Code’s definition of what a “person” is. Instead, the court viewed the computer-generated information as “demonstrative evidence,” which is “not hearsay.”

The point? Let’s say a business automatically stores and records information on its computers. Goldsmith may require that this evidence is admitted, leaving the opponent of the evidence to attack on only how credit to give this evidence, as long as the data is not manipulated by or entered by people.

Imagine the possibilities. If an insured’s business tracks information about employees automatically, this computer-generated data is going to be admitted into evidence for better or worse, as long as it is relevant to some issue at trial. Trial counsel will only be able to attack the data’s credibility, not its admissibility. This will affect the settlement value of a claim, summary judgment/adjudication motions, settlement, and trial outcomes.

In sum, Goldsmith teaches that courts are catching up on technological advances. They are thus reluctant to waste valuable trial time arguing over why computer-generated information is reliable and accurate absent compelling proof in a particular case. The best way to avoid the evidentiary presumptions of admissibility would be to show that the data was entered by a person or likely was manipulated by a person entering or retrieving the data. Absent such proof of tampering, courts are going to find that computer-generated and stored information is admissible because it is automated and not subject to manipulation by people. Trial counsel will be limited to attacking the relevance of the evidence and its credibility. Goldsmith signals the end to most attacks on such evidence’s admissibility in the first instance, which is an issue of law subject to the trial court’s broad discretion.

Is California Bringing Back Statutory Bad Faith Claims? California Supreme Court Revisits Moradi-Shalal

By John Armstrong


California experimented with allowing third-party claimants to sue insurers for insurance bad faith in the landmark case of Royal Globe. The decision was decried by the Insurance Bar and commentators throughout the United States. They found that, among other problems, it created uncertainty when an insurer would be liable for such “third party” bad faith, i.e., before the insured was determined liable to the claimant?


Royal Globe authorized a private right action to recover damages for an insurer’s violation of the California Department of Insurance’s insurance regulations, codified in the California Code of Regulations. The portion of these regulations dealing with good faith claims handling were based on California Insurance Code, § 790 et seq., styled the “Unfair Insurances Practices Act” or “UIPA.” Based on these statutes, the California Insurance Commissioner adopted a series of regulations styled “good faith claims practices,” which the California Insurance Commissioner may still enforce against insurers issuing policies to California insureds.


Years after Royal Globe, the California Supreme Court expressly overruled Royal Globe in Moradi–Shalal v. Fireman's Fund Insurance Companies (1988) 46 Cal.3d 287, at 292, by holding that that there was no private right of action to recover damages for violations of the California Department of Insurance’s regulations.


Subsequent California appellate court decisions thereafter repeatedly held that there was no private right action for violations of the California Department of Insurance’s insurance regulations. Appellate courts expansively applied this bar to even first party claims though factually Royal Globe and Moradi-Shalal involved third party claims. And, though not considered in Moradi-Shalal, appellate courts have barred claims under California’s broad Unfair Competition Law (“UCL”), codified at Business & Professions Code, § 1700, et seq., when a private right of action was based on Insurance Commissioner regulations.
In the last few years, however, courts have carefully examined the holding in Moradi-Shalal and determined that it did not outright bar claims against insurers based on regulatory violations. Similarly, the Ninth Circuit has also limited the holding of Moradi-Shalal as barring only private damage claims against insurer for regulatory violations.


To summarize the problem, though appellate courts have applied Moradi-Shalal to first party cases, the California Supreme Court never has decided this. Also, Moradi-Shalal did not decide or discuss whether a plaintiff has a private right of action for restitution or injunctive relief under California’s Unfair Competition Law (“UCL”) [Business and Professions Code, § 17200 et seq.]. In the last few years, the Supreme Court has applied § 17200 broadly because the remedies are more limited, that is the return or money or property that defendant obtained from the plaintiff and injunctive relief versus compensation from the harm sustained from an alleged regulatory violation. Finally, Moradi-Shalal never discussed whether a private right of action under California’s UCL exists for insurance regulatory violations other than claims handling or for express statutory violations of the California Insurance Code.


Presently, two cases are pending before the California Supreme Court addressing these issues raised above; namely, Zhang v. Superior Court (2009) and Hughes vs. Progressive (2011). Both opinions are presently unpublished and not citable as authority until the California Supreme Court decides these cases.


In Hughes, the appellate court found that the plaintiff stated a private cause of action under the UCL for alleged statutory violations of Insurance Code, § 758.5, which prohibits insureds from being required to use a specific auto repair facility designated by the insurer and from suggesting the use of a specified auto repair facility without telling the insured in writing that the insured may select another repair facility. Though § 758.5 was not part of the UIPA, it authorizes the Insurance Commissions to enforce its provisions along with the UIPA.


In Zhang, the appellate court allowed allowed a UCL false advertising claim against an insurer for allegedly falsely representing that the insurer would properly and promptly pay claims though it allegedly had no intention of doing so.


The above cases are important to insurers doing business in California in that these companion decisions are likely to change the landscape for what insurers may be sued for in California. There is a good chance for a modest expansion of Moradi-Shalal—especially since the California Legislature narrowed the standing requirements for UCL claimants to only those persons directly affected, and because of the limited remedies a UCL plaintiff may recover.


Restitution would ordinarily be a return of the insured’s premium for successful fraudulent advertising plaintiff under Zhang. A Hughes plaintiff, may be entitled to recover whatever the insured pay to the company designated/recommended repair facility and possibly the return of the insured’s insurance premiums. These remedies are far less drastic than the Royal Globe remedy allowing claims for money damages, including all detriment and losses the insured suffered, plus emotional distress, and other damages. On the other hand, Supreme Court would be within its rights to take an expansive of Moradi-Shalal and eliminate claims based on statutory or regulatory violations, other than common law claims for insurance bad faith.


The lesson? It’s a safer and better practice to do what the California Insurance Code requires and to follow the the California Insurance Commissioner’s regulations. It’s also a good idea to have insurer-related advertising run by experienced lawyers familiar with insurance bad faith to avoid potential problems. Regardless whether a “separate” cause of action exists, experienced insurance bad faith counsel will use the Insurance Code and Insurance Regulations to establish the floor of good faith insurer conduct in insurance bad faith actions, making an ounce of prevention worth a pound of cure in this evolving area of law.

Good Faith Claims Denial? Yes, Virginia, It Is Possible Even In California By Following These 6 Steps

Every time a claim is denied, there is always a concern that the claimant will sue for insurance bad faith. Claims denials should not be taken lightly. Even if it is clear to you that the claim is not covered, I suggest doing the following to make it difficult, if not impossible, for a claimant to prevail in a bad faith claim against your company following your denial. (I cannot say that the following will prevent a bad faith claim; if a monkey pays the requisite filing, that monkey can at least file suit in California. The goal here is to discourage reputable counsel from pursuing bad faith claims, and that’s worth avoiding.)

First, make sure you’ve looked at all the insured’s coverages with your company, not just the policy the insured tendered under. If the insured has other coverages with your company that may cover the claim, advise the insured in writing that the company is still evaluating the claim for coverage. Do not deny the claim out of hand. You are entitled to conduct a reasonable investigation before denying coverage. So conduct a reasonable investigation first.

Second, respond to the claim within 15 days of your receipt of the claim in writing to the insured. California Department of Insurance Regulations regarding liability carriers to advise the insured in writing within 15 days the status of the claims. (10 Calif. Code of Regs., § 10 CCR § 2695.5, subdivision (b).) You don’t have to accept or reject the claim within 15 days, just acknowledge you’ve received the claim and are evaluating. If the insured inquires about the status of the claim, you need to respond within 15 days with what you know about the claim and what you’re doing about, such as evaluating it, investigating, etc. The insurance regulation above notes that you can just make a note in your claims file when the claim came in, but it is a better practice to both note your file and tell the insured in writing that you are considering the claim. Why, because the insured has tendered and is wondering what, if anything, the insurer is doing with the claim, and will be much more patient knowing someone is working on the claim.

Third, provide the claimant any necessary forms, instructions, and reasonable assistance the claimant needs to properly make the claim, which includes telling the insured if there is missing information necessary to make a valid proof a claim. This also required under the same insurance regulation cited above at subdivision (e). Failing to tell the insured what the insured needed to do in order to submit a valid claim will not make the claim go away. It will most likely encourage the insured to get an insurance bad faith lawyer or encourage the insured to complain to the California Department of Insurance—results you are trying to avoid.

Fourth, investigate the claim. Some claimants won’t have counsel. Some claimants who have counsel don’t have legal counsel knowledgeable about insurance practices. You shouldn’t just rely on the insured’s tender to tell you everything you know about a claim. On receipt of a claim, you should verify with the insured that insured and insured’s counsel, if any, have provided you with all information relating to the claim, including copies of any pleadings or discovery. If you know who the attorney representing the party suing the insured, call that attorney and ask for information about the claim. You could also retain coverage counsel to assist with your investigation if necessary. The point is you want to document your file that you made reasonable efforts to gather information about the claim before denying it. In California, an insurer can be liable for insurance bad faith for failing to reasonably investigate a claim. Note too that the same California insurance regulation cited above also requires “any necessary investigation of the claim.” Here, “necessary” and “reasonable” are synonymous. What you want to avoid is having an empty claims file that shows little or no effort went into investigating the insured’s claim. If you deny without conducting a reasonable investigation, you are encouraging an insurance bad faith lawyer to take the claimant’s case.

Fifth, if its close to being a “close call” about whether coverage exists, get a second opinion. Even better two. Run the claim by a more experienced and knowledgeable adjuster at your company, and not your file that you did this. Get an opinion from coverage counsel too, and make sure you note that in your file.

Sixth, when denying the claim, carefully explain to the insured the coverages the insured had, what your understanding of the claim is, and what you did to investigate the claim. Then explain why there is not coverage under the policy for the claim that the insured submitted. Most insureds are not insurance experts and many lawyers do not practice insurance law. A well thought out, thoughtful, and professional denial letter is perhaps the best talisman to ward off bad faith claims. Why? Because the letter should should the good faith consideration the company undertook to evaluate the claim. It would be Exhibit “1” to your company’s defense. The importance of such a letter cannot be understated. If there is something you missed, or if your information is incomplete, you’ve not put the ball in the insured’s court to respond. Even in California, insurers are not liable for mistakes or even ordinary negligence in claims handling.

Following the above six steps creates an evidentiary record showing good faiths claims handling. It will help your defense counsel immensely if you followed these steps, and will both ward off potential bad faith claims or certainly make the resolution of such a claim more favorable for your company.  

It’s a Wrap! Insurance Brokers Have No Duty to Warn Contractors When Their Wrap Policy Insurers Go Insolvent After Placing Policy

By John Armstrong


A “wrap” or Owner Controlled Insurance Programs (OCIP) are a relatively new and popular form of insurance for construction projects. To simplify, imagine an insurer selling a monster insurance policy covering all liability risks that the developer, general contractor, and subcontractor might have for a construction project. The idea is strength in numbers, as all parties may contribute to the purchase of such insurance policy or program and also waive subrogation/indemnity rights against each other. Think economies of scale, like the power of all the States of the United States or the economic power of the Economic Union versus any one individual state or country.


A constant problem in construction related claims is what happens when a liability insurer goes insolvent. Often, there is a complex claims process akin to a bankruptcy. California’s Insurance Guarantee Association may provide some help when the insurer goes insolvent but CIGA’s liability is capped regardless of policy limits and usually cannot be recovered against if there is any other insurance available for a loss. (This can have the added event of barring liability claims against a negligent subcontractor if the subcontractor’s only available policy for a loss is a loss covered by CIGA. Recovery must be had against CIGA or not at all.)


Recently, California’s Fourth District Court of Appeal in San Diego held that an insurance broker, Aon, who placed an OCIP covering a construction project had no legal duty to warn a subcontractor covered under the OCIP issued by Legion, which insurer became insolvent—even though the insurance broker learned that Legion was insolvent before the subcontractor work was completed. The sub argued that had the broker warned the sub that Legion (the OCIP insurer) was insolvent, the sub could have obtained other liability insurance for the eventual third party claim against the sub.
First, the court recognize that insurance brokers do have a legal duty to place insurance initially but do not have, in the absence of a contract, a continuing obligation to report on the insurance placed by the broker.


Second, the court rejected public policy arguments imposing an expanded legal duty on insurance brokers to warn their clients regarding changes in an insurer’s financial condition—especially since the Legislature and California’s Department of Insurance heavily regulated insurers brokers already and because most E&O policies covering brokers would exclude coverage for such claims (in California, courts look at whether insurance is available before expanding one’s common law liability).


Third, the court found that imposing such a legal duty to monitor insurance companies placed by brokers after issuance of a policy created practical difficulty for brokers.


The moral? If you’re insurance broker or if you adjust insurance broker D&O claims, this is a great case for your defense. If you’re a contractor or developer, self-monitor the wrap liability insurer so you can decide if you need additional insurance. Or see if your insurance broker will contractually agree to monitor for you and place other coverage if the wrap insurer goes belly up before construction is completed.  

Hotel Liability For Not Supplying Bath Mats—Lack of Similarity of Past Accidents Supports Summary Judgment

 

By John Armstrong

A recent case out of California’s Fourth District Court of Appeal involving Omni Hotels shows that a good investigation helps support summary judgment—even in California where such summary disposition  of cases are hard to come by.

For adjustors involved in hotel claims, however, it is the last two pages of the opinion that are of interest. The trial court granted summary judgment for defendants that a hotel was not liable for premises liability or under any of the products liability theories advanced for failing to supply bath mats. The trial court however granted plaintiff a motion for new trial on whether the hotel was negligent in either not investigating further or not communicating more widely within the hotel chain the reports of bathtub accidents at Omni hotels. 

The appellate court affirmed the summary judgments, but reversed the trial court’s grant of a new trial to plaintiff based on plaintiff’s evidence of past accidents. The appellate court looked at the hotel incident reports and determined that these did not show the required “substantially similar accidents” and lacked detail about the conditions of or in the bathtubs, and lacked details about the medical conditions of the guests who were reported to have fallen in the hotel’s bathtubs. The court found the reports only provided “speculative or conjectural evidence” that Omni knew or had reason to know of a dangerous condition surrounding its hotel bathtubs.

The court also rejected the argument that hotel’s past reports of bathtub accidents necessarily put on the hotel on a “heightened duty of inquiry” to find out from the bathtub manufacturer, Kohler, if Kohler was aware of similar incidents with its bathtubs. Though the plaintiff alleged he could bring “ample” evidence that Omni had both actual and constructive knowledge that tubs in its hotels were dangerously slippery, he failed to support these claims with anything but his anecdotal witness testimony and opinions. The appellate court found this evidence insufficient to create triable issues of fact.

The lesson? Courts are looking at the foundation of expert declarations mare carefully to see if the evidence relied on is legally sufficient to support having a trial. The appellate court recognized that bathtubs are inherently slippery, meaning that for a plaintiff to impose liability against the hotel, he’d have to prove that either the hotel made dangerously more slippery or was on notice that its tubs were more slippery than other tubs—a very difficult burden. Usually, if there is a clash of expert declarations, most courts will hold a trial and let the jury decide, which is probably why the trial court granted the motion for new trial. The appellate court reversed however because it carefully examined plaintiff’s evidence and found that it was not legally or logically compelling to prove the claim that Omni knew its Kohler tubs were more slippery than other tubs—“even if” the hotel had other reported tub accidents. Implicit in the court’s decision was that it would be likely for any large hotel chain to have tub accidents since they are slippery and since the general public, including persons with a variety of medical conditions, could cause or contribute to causing tub accidents.

The moral? You can get summary judgment granted in California when the plaintiff’s expert’s opinions are based on anecdotal evidence, educated guesses, or are otherwise lacking foundation.  

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Handling Claims Professionally Is Handling Claims In Good Faith—Unprofessional Claims Conduct May Land You With Bad Faith Litigation

By John Armstrong

Claims adjusters today are more competent and better trained than ever. I have had the privilege of lecturing and meeting claims adjusters throughout the U.S., Canada, and Great Britain. Contrary to the opinions of the plaintiff bar, most of them are caring, hard working individuals who want to be fair and do the right thing. So why do we hear so much about insurance “bad faith”? Well…. the professionalism is a mixed bag. Those who have more knowledge, skill, and training, are expected to act like of person of more knowledge, skill, and training. This is especially true if you have “alphabet soup” letters following your name or title regarding all the insurance certifications you’ve obtained.

Let me give you an example to show what I’m talking about. Let’s say you get in a claim. You (especially having read one of my earlier posts) see what coverages the insured has. You determine that the claim is probably not covered under the liability policy but probably is covered under a property policy the insured bought at the same time from your company.

You could deny the claim, but that’s a bad idea for reasons I’ll discuss shortly. Or, you could let the insured know your company is still “reviewing” coverage, and send the claim the company’s property adjuster for review, indicating that you’re inclined to deny under the general liability policy. Why? Because from the insured’s, the court’s, the jury’s, and the rest of the world’s point of you, the tender is to the entire insurance company. This is especially true for insurers insuring insureds in California (say that 3 times fast), since the legal standard is that the insurer is to engage in searching inquiry to find coverage. Put simply, you represent your entire company, not just the kinds of policies the company assigned you to adjust. But don’t panic. You don’t need to be an expert in lines your not certified in. You just need to communicate to the insured that the company is still reviewing coverage until the appropriate lines of coverage that might be affected have all had a chance to review and assess the claim.

Why not deny? Well, besides getting hit with a suit for bad faith—which is going to be difficult to defend if the company did insure the claim but just not under the policy you were examining, the insured may be able to recover pre-tender costs and fees that otherwise would not be recoverable.

California cases hold that an insurer who wrongfully denies a claim that the insurer covered buys the entire loss—even if the insurer decides to later cover the claim. Why? Because the California courts adopt the reasoning that if the insured had tendered immediately, the claim would have been denied then anyway. Thus, you not only avoid a bad faith claim, you also minimize the company’s risk by not outright denying the claim.

And, think about it from the insured’s perspective. If you “find” coverage for the insured, insureds don’t care which policy covers the claim with your company only that the claim is covered. They have a great experience and say good things about your company to others, and business grows. If, for whatever reason, the company were sued for bad faith, don’t you think the judge and jury would be impressed at your zeal to help the insured get coverage? Being professional pays good faith dividends.

Changes to Federal Diversity Law for Liability Insurance Companies Raises Federal Jurisdictional Problems for the Insurance Bar

By John Armstrong

Congress made significant changes to the laws allowing the removal of actions filed in local state courts to be removed to federal court. Two kinds of cases have historically been allowed to proceed in federal court—even if filed and served in state courts, namely, “subject matter jurisdiction” where a federal law or policy is the gravamen of the claim and “diversity jurisdiction” where the dispute involves more than $75,000 and all of the plaintiffs and all of the defendants are residents of different states.

Congress changed what are known as the “removal statutes,” namely Title 28 U.S.C. § 1332 and § 1441. Section 1332 makes every corporate insurer, as a matter of law, a “citizen” of the state in which the insured resides, as well as the state of the insurer’s corporate incorporation, and where the insurer’s principal place of business. This is important because insurers can no longer bring declaratory relief actions against their insurers in federal court, and because insurers can no longer remove insurance bad faith actions to federal courts

Some states, like Louisiana,  allow a tort victim to sue the defendant’s liability insurer directly. In response to a large number of federal suits filed in the federal courts in Louisiana, Congress expanded the definition of “citizenship” for insurance companies. Liability Insurance companies are now a resident of the state in which they are incorporated, where their principal place of business [the corporation’s “nerve center” where its chief executive operations take place], and are deemed a resident of the same state that their insureds reside in if:

1) There is a “direct action” against a liability insurer; and

2) The insured is not joined as a party-defendant.

See the problem? “Direct action” is not defined. If the insured sues the insurance company directly for declaratory relief or for insurance bad faith, does this mean that the insurer can no longer remove to federal court? If the insurer cross-complains against the insured, is the insured now “joined” as a party-defendant? If an insurer sues in federal court first, can the insured move to dismiss for lack of diversity? The answer? Only time will tell. The answer will depend on how each court faced with these issues decides it.

A purely literal interpretation seems to preclude an insurer from removing the insured’s declaratory relief or insurance bad faith action since the insured is not a “party-defendant” at the time of the attempted removal, and the action would be a direct against an insurance company. Though the Congressional history shows that Congress intended to limit victims from suing insurers in federal court, the plain language in the Act does not contain such a limitation.

Oddly, if the insurer sues the insured first, the insured may not be able to dismiss for lack of diversity jurisdiction, since a literal interpretation of the Act only makes a liability insurer a citizen of the same state as its insured when the insured is “not joined as a party-defendant.”

If the changes to the Act are read in view of the Congressional history, a court should interpret the Act as defeating diversity jurisdiction only in actions where state law allows a victim to sue the wrongdoer’s insurer directly, which interpretation is consistent with the text’s reference to applying where insureds are not joined as party-defendants.

It’s worth noting that changes don’t apply to property insurers, i.e., “non-liability” insurers. Or do they? What if a property policy provides a defense or indemnity for a certain kind of liability claim? Would the court look to the type of policy issued or to the insuring provision? Again, only time will tell. Now, the insurance bar is free to argue either way until we get some judicial interpretation of these new changes.

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