California Supreme Court Abolishes Common Law ‘Release Rule’

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By: Lisa D. Angelo

On August 23, 2012, the California Supreme Court ruled that the long standing common law “release rule,” shall no longer be followed in California.

The common law “release rule” provides that if a Plaintiff settles with and releases one joint-tortfeasor from liability then the Plaintiff releases from liability all other tortfeasor. The rationale for the rule is that there can only be 1 (one) compensation for a single injury and because joint tortfeasors are equally liable for all damage under joint and several liability, any joint tortfeasor’s payment of the 1 compensation satisfies Plaintiff’s entire claim. In simplistic terms, the rule is commonly referred to as “release of one is a release of all.”

In March 2003, an infant named Adian Leung was born in Vertigo Hills hospital. Shortly after his birth, Adian began to show signs of jaundice. His parents contacted their pediatrician and were informed that jaundice was common in babies and not to worry. The hospital likewise erroneously downplayed the baby’s condition. As a result, Adian did not receive necessary medical treatment and developed “kernicterus” resulting in severe brain damage.

Adian’s parents sued both his pediatrician and the hospital for negligence. The pediatrician settled with Adian for his insurance policy limit of $1 million. The hospital rejected Plaintiff’s offer to settle for $2.1 million, opting to defend itself at trial. The Plaintiffs prevailed and the jury awarded $15 million against both the doctor and the hospital. The hospital, however, was only deemed to be 40% liable.

On appeal, the hospital argued that under the “release rule” Plaintiff’s settlement with the doctor also released the hospital from liability. The court of appeal agreed. On appeal to the Supreme Court, the hospital presented two arguments: (1) because the trial court determined the doctor’s settlement was not made in good faith, the hospital should be released from liability under the common law “release rule”; and/or (2) the hospital should only be responsible for its proportional liability of 40%.

Reversing the Court of Appeal, the Supreme Court held that the common law “release rule” shall no longer be followed in California. The Court reasoned that a ruling in favor of the hospital would recognize a new exception to the established rule of joint and several liability, limit the damage a Plaintiff could recover, and encourage bad faith settlements. Writing for the majority, Justice Kennard held that application of the “release rule” in the case rendered a harsh and unjust result. As such, the hospital is liable and shall pay the entire jury award of $15 million – less the $1 million paid by the doctor. The hospital may now file suit against the doctor to recover some of its overpayment due to the trial court’s determination that the doctor’s settlement was not made in good faith.

New Supreme Court Case on Long Tail Exposures: State of California v. Continental Insurance (S170560)

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Yesterday the California Supreme Court issued its long-awaited decision in State of California v. Continental Insurance, No. S170560. In its latest ruling, which will affect all long-tail insurance cases, including Environmental, Asbestos and latent injury, and Construction Defect cases, the Court rejected the “pro rata” time on the risk allocation scheme advocated by the insurers and held:

  1. For indemnity relating to “long tail” claims1, the “all sums” language in the Comprehensive General Liability policies obligates a carrier to indemnify up to the policy limits, so long as some portion of the “property damage” that is the subject of the suit occurred during the policy period; and
  2. The insured is entitled to “stack” the limits of successive policies up to the policy limits for indemnity relative to that loss.

The case arose out of the State of California’s claim for indemnity under its excess comprehensive general liability (CGL) policies in connection with a federal court-ordered cleanup of the State’s Stringfellow Acid Pits waste site. The State designed the Stringfellow site, and operated it as an industrial waste disposal facility from 1956 to 1972, when groundwater contamination was discovered. In 1998, a federal court found the State liable for all past and future cleanup costs for the site. Each of the six insurers that were parties to the appeal issued excess CGL policies to the State between 1964 and 1976.

The Stringfellow site, and the resulting insurance litigation, has given rise to several insurance rulings already, including Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 – adopting the continuous injury trigger for defense, and State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008 – holding that the relevant event to determine if there is an “occurrence” is the discharge into the environment from a contained area, and that where there is an indivisible injury, the insured is not obligated to prove the amount of any property damage resulting from any discrete cause.

There are several critical aspects of the Court’s decision.

First, there was no dispute that the environmental damage began shortly after the operation of Stringfellow began, and that it continued throughout the defendant insurers’ policy periods and beyond. According to the opinion, the site was uninsured prior to 1963, and after 1978. The issue, therefore, was whether the State of California could be allocated partial responsibility for the cleanup costs for the amount of property damage occurring in years where it was self insured. This fact pattern – where there is insurance for some but not all of the affected years – is common in “long tail” or “progressive loss” type cases. A carrier with only one year of coverage could potentially be responsible for all damages regardless of the length of time over which the property damage occurred.

However, the second critical aspect of the Court’s decision, and one that may temper its precedent value, is the specific policy language. The Excess Policies at issue utilized older Comprehensive General Liability policy language. The Court observes:

Under the heading “Insuring Agreement,” insurers agreed “[t]o pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of liability imposed by law . . . for damages . . . because of injury to or destruction of property, including loss of use thereof.” Limits on liability in the agreements were stated as a specified dollar amount of the “ultimate net loss [of] each occurrence.” “Occurrence” was defined as meaning “an accident or a continuous or repeated exposure to conditions which result in . . . damage to property during the policy period . . . .” (at pg.4) (emphasis added)

In newer Commercial General Liability policies, the Insuring Agreement reads: “We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies….This insurance applies to “bodily injury” and “property damage” only if…the “bodily injury” or “property damage” occurs during the policy period…” (e.g., ISO form CG 00 01 10 01) (emphasis added)

The State of California Court noted that the “pro rata,” or time on the risk allocation approach advanced by the carriers assigns liability for those years of the continuous progression of property damage to all affected years, including those where the insureds chose not to purchase insurance. The Court determined the “all sums” language of the policies was inconsistent with this result, emphasizing that its holding follows directly from the policy language, rather than any general principal, and is therefore arguably inapplicable to policies using the revised language:

Under the CGL policies here, the plain “all sums” language of the agreement compels the insurers to pay “all sums which the insured shall become obligated to pay . . . for damages . . . because of injury to or destruction of property . . . .” (Ante, at p. 4.) As the State observes, “[t]his grant of coverage does not limit the policies’ promise to pay ‘all sums’ of the policyholder’s liability solely to sums or damage ‘during the policy period.’”

The insurers contend that it would be “objectively unreasonable” to hold them liable for losses that occurred before or after their respective policy periods. But as the State correctly points out, the “during the policy period” language that the insurers rely on to limit coverage, does not appear in the “Insuring Agreement” section of the policy and therefore is neither “logically [n]or grammatically related to the ‘all sums’ language in the insuring agreement.” (emphasis added)

Under later ISO policy forms, the Insuring Agreement requires that property damage occur during the policy period. Accordingly, there are valid arguments — at least for carriers using later versions of the Commercial General Liability policy forms — to distinguish the “all sums” holding by this decision, and that explicit language requiring that property damage occur during the policy period is unambiguous and should be applied. It is therefore an open question whether the allocation approach advanced by the carriers would have been successful with the newer policy forms.

The third critical aspect of the decision is its rejection of FMC Corp. v, Plaisted & Cos. (1998) 61 Cal.App.4th 1132. The Court noted that in this case, like FMC, the policies had no specific prohibition on stacking of policy limits. The Court concludes:

We agree with the Court of Appeal, and find that the policies at issue here, which do not contain antistacking language, allow for its application. In so holding, we disapprove FMC Corp. v. Plaisted & Companies, 61 Cal.App.4th 1132

In conclusion, this decision from the California Supreme Court is significant, because it firmly extends the “all sums” language to indemnity. For policies with the applicable language, if any part of the property damage that is part of a “long tail” case, the carrier will be obligated to pay up to the policy limit, and then seek equitable contribution between other carriers on the risk.

 

     1The kind of property damage associated with the Stringfellow site, often termed a “long-tail” injury, is characterized as a series of indivisible injuries attributable to continuing events without a single unambiguous “cause.” Long-tail injuries produce progressive damage that takes place slowly over years or even decades. (Pg 7-8)

Ninth Circuit Rules that an Insurer Has an Affirmative Duty to “Effectuate a Settlement” Once its Insured’s Liability in Excess of the Policy Limits Becomes “Reasonably Clear”

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On June 11, 2012, the United States Court of Appeal for the Ninth Circuit issued an opinion that has broad implications for insurers faced with claims against its insureds exceeding the policy limits. In those situations, the court held that an insurer, as part of its duties under the covenant of good faith and fair dealing, has a duty to “effectuate a settlement” even in the absence of a settlement demand from the claimant.

In Du v. Allstate Insurance Company, ___ F.3d ___, Deerbrook’s insured, Kim, was involved in an automobile accident with Du. All four occupants of the Du vehicle sustained injuries and submitted claims. The aggregate policy limits were $300,000, with a $100,000 per claim limit. Deerbrook acknowledged that Du’s injuries were severe and accepted its insured’s liability.

In the months following the accident, Deerbrook attempted to secure documentation from the claimants regarding their injuries, but the claimants did not cooperate. Eventually, the attorney representing all four claimants submitted a global demand of $300,000 for all four claimants. The adjuster advised that she was prepared to pay the full $100,000 limits to Du, but did not have enough information to evaluate the remaining claims. The attorney rejected that offer, demanding that all claims had to be settled at the same time. He thereafter rejected the $100,000 offer to Du as being “too little too late.”

Du then filed a lawsuit against the insured and received a jury verdict in excess of $4 million. Deerbrook paid its $100,000 limits to partially satisfy the judgment and the insured assigned his bad faith, “failure to settle” claim to Du in exchange for a covenant not to execute. Du then sued Deerbrook for bad faith, alleging that Deerbrook committed bad faith by failing to affirmatively settle Du’s claim within policy limits after its insured’s liability for a judgment in excess of those limits became clear.

At trial, the district court rejected Du’s proposed jury instruction which would have instructed the jury that it could find Deerbrook liable for bad faith if it concluded that it did not attempt in good faith to reach a prompt, fair and equitable settlement of Du’s claim after the liability of its insured had become reasonably clear. Instead, the trial court instructed that “bad faith” could only be found if Deerbrook had failed to accept a reasonable settlement demand, not for failing to affirmatively effectuate a settlement. Under those instructions, the jury found that Deerbrook did not fail to accept a reasonable settlement demand within policy limits and judgment was entered in favor of Deerbrook.

On appeal, the issue was whether or not an insurer has a duty, “after liability of the insured has become reasonably clear, to attempt to effectuate a settlement in the absence of a demand from the claimant?” Deerbrook argued that no such duty exists, and that instead, the duty of good faith is breached only if the insurer fails to accept a reasonable policy limits demand. Ultimately, the 9th Circuit held that “an insurer has a duty to effectuate settlement where liability is reasonably clear, even in the absence of a settlement demand.” It reached that result by analyzing the rationale behind the insurer’s duty to settle claims against its insured that are likely to exceed the policy limits, as well as statutes and regulations requiring insurers to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear. The sum total of these considerations means that an insurer faced with an excess damages claim against its insured, when liability is clear, cannot simply wait for a policy limits demand to be made – it must instead take affirmative steps to effectuate a settlement. Thus, the District Court’s rejection of Du’s proposed jury instruction was improper.

However, under the facts of this case, the 9th Circuit held that the judgment must be affirmed because there was no factual foundation for imposing the affirmative duty to settle on Deerbrook. There was no dispute that Deerbrook, in fact, offered to settle Du’s claim for the full amount of the policy limits. Du’s argument was that the case would have been settled earlier had Deerbrook initiated earlier settlement negotiations. The court, however, reviewed the factual chronology and held that due to the lack of information about the claim, Deerbrook could not have made a settlement offer any earlier than when it did.

Lastly, the 9th Circuit also addressed the concept of the “genuine dispute” doctrine, which generally holds that an insurer does not act in bad faith when it mistakenly withholds policy benefits, if the mistake is reasonable or is based on a legitimate dispute as to the insurer’s liability. Deerbrook argued that it should not be held in bad faith because its duty to settle was “unsettled.” Even though that argument ultimately had no bearing on the court’s final ruling, the court nevertheless held that the “genuine dispute” doctrine does not apply here. It noted that while that doctrine applies to first party bad faith cases, its application to third party cases is more limited. Specifically, an insurer that refuses to settle a case based on the erroneous belief that there is no coverage does so at its own risk and cannot rely on the “genuine dispute” doctrine as a defense to a bad faith/failure to settle claim.

This case has obvious implications to liability insurers in California. Once liability against the insured is clear and the damages are likely to exceed the policy limits, an insurer cannot simply wait for a policy limits demand to be made. Rather, once the insurer has sufficient information to evaluate the claim, it must take affirmative steps to effectuate a settlement. What those actual steps are remains unclear, i.e., must the insurer leave “no stone unturned” in trying to settle the case (such as scheduling a mediation) is the simple act of communicating a desire to settle and soliciting a demand enough? Regardless, what is clear from this decision is the insurer cannot simply sit back and wait for the claimant to make the first move.

The other noteworthy aspect of this decision is the comment regarding the “genuine dispute” doctrine and third party claims. It has always been the law that when an insurer rejects a policy limits demand based on an erroneous, but “good faith,” belief that there is no coverage for the damages being claimed, that “good faith” belief is not a defense – the insurer is liable for the entire excess judgment. In that regard, this court’s holding is of no great import. Nevertheless, it would seem that the doctrine still applies to other aspects of third party claims. For example, if an insurer, based on a genuine dispute as to coverage, refuses to indemnify an insured after judgment is entered, that genuine dispute may negate bad faith (Dalrymple v. United Services Auto. Assn. (1995) 40 Cal.App.4th 497, 523; Howard v. American National (2010) 187 Cal. App. 4th 498).

CA Eliminates State Paid Court Reporters for Civil Proceedings

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The Los Angeles Superior Court recently announced changes to their policy regarding the availability of official and private court reporters, including the elimination of official court reporters for civil proceedings.

Please click the following link for details on changes to the LASC court reporter policy: LASC Policy Regarding Normal Availability of Official Court Reporters and Privately Arranged Court Reporters.

LA County Announces Courtroom Closures Due to State Funding Crisis

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The Los Angeles Superior Court recently posted a list of courtrooms that will be closed as of June 30, 2012. The LASC is implementing the court closures to address significant reductions in funding.

Please click the following link for the list of court closures: Notice of Courtroom Closures Pursuant to Government Code 68106.

The Duty to Defend “Inextricably Intertwined” Actions

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IADC Insurance and Reinsurance Committee Newsletter

The following is an excerpt from, “The Duty to Defend ‘Inextricably Intertwined’ Actions,” originally published in the April 2012 issue of the IADC Insurance and Reinsurance Committee Newsletter.

In most instances, when an insurer defends its insured against an action seeking damages that are potentially covered under the policy, the defense is relatively straight-forward – the insurer provides a defense to the action and ultimately indemnifies the insured for those portions of any judgment or settlement that are covered under the policy. However, during the course of that defense, the insured may be subjected to a separate action that, while not itself potentially covered under the policy, is related to the defense of the potentially-covered action. Or, it may be that the insured is compelled to file a counterclaim for affirmative relief in conjunction with the defense of the potentially-covered action. In either event, there is typically no coverage under the usual liability insurance policy for these tangential matters. Yet, policyholders have been heard to argue that the insurer should fund these otherwise non-covered actions as part of its defense obligation vis-à-vis its defense of the potentially-covered action. The argument heard in support of that position is the so-called “inextricably intertwined” theory, specifically, that the legal and factual issues to be litigated in the non-covered action are so “inextricably intertwined” with those to be litigated in the covered action that the defense of the former is reasonable and necessary for the defense of the latter.

While the majority of courts would appear to reject such an argument, there are courts in various jurisdictions that have at least entertained the notion that an insurer’s duty to defend may include costs related to “inextricably intertwined” actions. This article will present the decisions on both sides of this issue and note how, if at all, they can be reconciled.

For the full article, please use the following link: The Duty to Defend “Inextricably Intertwined” Actions.

Beware the Pitfalls of Pre-Litigation Investigation and Reliance on the Attorney-Work Product Doctrine

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USLAW Magazine

The following is an excerpt from, “Beware the Pitfalls of Pre-Litigation Investigation and Reliance on the Attorney-Work Product Doctrine,” originally published in the Spring/Summer 2012 issue of USLAW Magazine.

Although it is increasingly becoming the custom of clients and their insurance carriers to engage consultants to obtain facts, assess potential liability, and develop defense theories before or after a lawsuit has been filed, these reports and assessments may be susceptible to discovery in civil litigation. Understanding what is protected by the attorney work product doctrine and what is discoverable is key to structuring pre-litigation investigations. The following hypotheticals illustrate how the attorney work product privilege comes into play.

The first scenario involves an employer and its attorneys who are threatened with a sexual harassment lawsuit based on a hostile work environment theory. The employer and its attorneys conduct a preliminary investigation; the employer takes detailed notes of the interviews with the other employees, reciting verbatim statements made. The former employee then initiates a lawsuit and plaintiff demands production of the investigative file which includes the statements of its employees. Opposing counsel then sends interrogatory requests, asking for all written information relating to the plaintiff. Whether an employer’s counsel invokes the work product privilege when refusing to hand over the employee statements depends on the jurisdiction you are in and what the interview notes contain.

For the full article, please use the following link: Beware the Pitfalls of Pre-Litigation Investigation and Reliance on the Attorney-Work Product Doctrine.

Franchising 101

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By: Steven C. Spronz

GACC Legal & Tax Newsletter

Franchising is big business. In 2007, according to the International Franchise Association, franchised businesses generated nearly 4% of GDP in the United States and employed just over 6% of the non-farm, private sector U.S. labor force. But, what is a franchise, how does it work, what are some of its advantages and disadvantages, and what regulations apply?

In its simplest terms, a franchise is the right to sell the goods or services of the franchisor within a certain territory or location, using the trademarks, trade names, marketing strategy, and operations strategy of the franchisor, with the franchisor controlling the methods by which the business is operated and promoted. The recipient of such rights, the franchisee, is obligated to pay fees to the franchisor for the use of the rights, and is obligated to adhere to the franchisor’s rules of operation. The franchisee hopes that its business will grow quickly as it benefits from the franchisor’s brand awareness, market penetration and purchasing power. The franchisor is interested in maintaining as much control as possible over the franchisee in order to protect its brand.

A “business opportunity” is slightly different from a traditional franchise in that it usually involves a simpler arrangement where the offeror of the opportunity provides the purchaser with a supply of goods in return for payment, and the purchaser then decides how to conduct and promote its business. Both franchises and business opportunities are regulated.

Beginning in 1970, when California adopted a law requiring disclosure of the franchise arrangement terms prior to the sale of a franchise, a few states began to regulate franchise sales. These efforts were followed by the issuance of the Federal Trade Commission’s (“FTC”) 1979 Franchise Disclosure Rule (“Rule”), which requires the written disclosure to prospective franchisees of certain facts regarding the franchisor and the franchise arrangements, and similar facts in the case of business opportunities, in an effort to provide prospective franchisees with enough information to make an informed decision about whether to contract with the franchisor or the owner of the business opportunity. In 1993, the North American Securities Administrators Association (“NASAA”) created the Uniform Franchise Offering Circular (“UFOC”) to help franchisors streamline the process of creating the disclosure document required by the Rule.

In addition to federal regulation, numerous states regulate franchises and business opportunities. Many of these states require franchisors to use the UFOC as the form of the disclosure document. Other states treat franchises as a “security” since they essentially involve an investment where the investor, the franchisee, is relying on the expertise of the franchisor to earn a return on the franchisee’s investment. In those states, the franchisor must file a formal registration document with the state that includes disclosures the state deems pertinent to prospective franchisees.

Only the FTC can enforce and seek penalties for violations of the Rule. However, some states allow private actions for violations of state franchise and business opportunity laws. In a recent decision, the United States Court of Appeals for the Ninth Circuit held that an out of state franchisee can sue under the franchise laws applicable in the home state of the franchisor, thus giving franchisees, especially in states that do not allow private rights of action under their franchise statute, greater opportunity to seek redress against franchisors.

In addition, there are two potential traps for the unwary franchisor, and opportunities for an aggrieved franchisee.

First, some franchisors, in an effort to avoid compliance with an applicable franchise statute, describe their franchises as license arrangements. However, whether an arrangement is a franchise or license is determined by the degree of control the franchisor exercises over the franchisee’s business operations, not by what the relationship is called. If the franchisor can effectively determine how the business operates, then the arrangement is a franchise. Second, different countries have different rules regarding the relationships of franchisors and franchisees. Many countries restrict the ability of franchisors to terminate franchisees.

Franchising offers great opportunities for franchisors to expand their brands, and for franchisees to start a business that may already have had some success. That said, careful attention must be paid to insure not only that the concerns of both parties are addressed, but that the requirements of applicable law are adhered to.

The Problem Of Suspended Corporations In The Present Economic Downturn

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Insurance Thought Leadership

Excerpt from, “The Problem Of Suspended Corporations In The Present Economic Downturn.” For the full article, please visit Insurance Thought Leadership.

Introduction

Corporations that do not pay their state taxes may be suspended in California.1 Once suspended, a corporation effectively finds itself in a legal coma from which it can neither defend nor prosecute civil actions during the pendency of its suspension. In the context of a complex civil lawsuit, the limitations placed on a suspended corporation that is a party to the suit present unique circumstances for all concerned. For example:

  • As to the suspended corporation, it is still a party to the lawsuit, but can neither prosecute its claims, nor defend itself from others;
  • As to the attorney representing the now suspended corporation in the litigation, he or she risks criminal penalty and possible disbarment by continuing to defend or prosecute claims on behalf of the suspended corporation;
  • As to the other parties to the lawsuit,the suspended corporation is still a party, but legally incapacitated; the situation creates strategic risks and opportunities for those other parties;
  • As to insurance carriers for suspended corporations, they face the dificult choice of intervening and becoming parties to the action, or not intervening and possibly being held liable for any judgment entered against the insured; and
  • As to the court, it must be aware that an insurer intervening on behalf of a suspended corporation can alter the character of the lawsuit with respect to how the case is tried under the circumstances.

The purpose of this series is to discuss some of the issues that arise when a suspended corporation is a party to a lawsuit. First, this series will explain what a suspended corporation is, and how suspended status differs from bankruptcy and dissolution. Second, it will discuss the implications of and options for dealing with an entry of default judgment against a suspended corporation. Third, it will address the risks and issues involved in representing a suspended corporation. Fourth, it will address the issues and problems that can arise when a suspended corporation’s insurance carrier intervenes in a lawsuit to which the suspended corporation is a party.

Behind the Privacy Veil, What E-Discovery Are You Entitled To and Developing Useful Strategies When Faced With Propounding Discovery for Essential Electronic Communications

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By: Friedrich W. Seitz

IADC Committee Newsletter, Business Litigation

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The authors report on the fundamentals of how to seek formal written discovery of various types of electronic communication in the ever changing forms of communicating on the web, and other internet-based and mobile communications. This is a useful summary and guide to discovery of electronic communications such as Facebook, Myspace, Google Chat and Twitter.

For the full article, please open the below PDF.

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