Large Insurer Overturns $12M Arbitration Award in New York Appellate Court

Gordon Rees Scully Mansukhani partners Dennis O. Brown and Greil Roberts obtained a significant appeal win in a complex insurance coverage case for a major insurer on October 25, 2018, when a New York state appeals court vacated a nearly $12 Million arbitration award to Allied Capital Corporation.

The appeal arose out of an arbitration that began in 2010.  Allied Capital sought coverage from its insurer for a $10.1 million payment made to settle claims by the federal government arising out of the False Claims Act. The insurer denied coverage, and Allied filed for arbitration under its insurance policies, seeking to be compensated for the $10.1 million settlement payment plus defense costs.

In March 2016, in a 2-1 decision, the arbitration panel said the $10.1 million settlement was not a “Loss” under the policy; thus, Allied could not recover that amount. However, the arbitration panel decided that Allied was entitled to its defense costs, though the arbitration panel reserved the amount of defense costs to be awarded for a subsequent proceeding.

Not long thereafter, Allied sought reconsideration of the March 2016 award on the basis that the majority of the arbitration panel erred in finding that Allied did not suffer a “Loss” under the policy. The arbitration panel, in another 2-1 decision, determined that it was permitted to reconsider the March 2016 award and reversed itself, finding that the $10.1 million amount was a “Loss” under the policy.

The insurance company petitioned in New York state court for an order vacating the reconsidered award as having been rendered in excess of the powers and authority available to the arbitration panel. Specifically, the insurance company argued that the panel exceeded its authority based on the common law doctrine of functus officio. Under functus officio, an arbitrator cannot alter its final award except in limited circumstances.

The insurer argued that the March 2016 partial final award was final in the sense that it determined the extent of the insurer’s liability for Allied’s claim.  The insurance company argued that Allied’s counsel agreed to bifurcation of two issues: (1) the issue of coverage for Allied’s claim to be indemnified for the $10.1 million, and (2) whether Allied was entitled to recover defense costs and, if so, the amount of such recovery. Since the arbitration panel had resolved the first issue completely in the March 2016 award, the arbitration panel had no authority to subsequently alter that award. For its part, Allied argued that there had been no bifurcation, and since the issue of defense costs had not been fully resolved, there was no final award and the arbitration panel was permitted to reconsider its decision.

The state court denied the petition, and the insurance company appealed.  On October 25, 2018, in a 4-1 decision, the Appellate Division of the Supreme Court of New York, First Department, agreed with the insurance company’s position that the panel exceeded its authority and improperly reconsidered the original partial final award:

There is nothing in the record that remotely suggests that the parties or the panel believed that the [March 2016 award] would be anything less than a final determination of such issues and under the functus officio doctrine, it would be improper and in excess of the panel’s authority for such final determination to be revisited.

The mere fact that the amount of defense costs had not been decided, the Court found, did not permit the panel’s reconsideration of the award: “In this case, the panel was functus officio with respect to the [partial final award] and thus, the panel’s reconsideration of the [partial final award] on substantive grounds was improper and exceeded its authority.”

The Court rejected Allied’s argument that, since the arbitration panel itself had found that it was not functus officio, it was entitled to reconsider the March 2016 award. The Court reasoned that, by Allied’s arguments, an arbitrator could avoid exceeding its authority when reconsidering a partial final award as long as the arbitrator stated that the parties did not bifurcate the proceedings or that the arbitrator did not intend for the award to be final as to a particular issue. However, “there is no support for such theory in the relevant case law,” the Court concluded.

SCOTUS Holds That Unaccepted Rule 68 Settlement Offer Doesn’t Moot Consumer Class Action Lawsuit

The U.S. Supreme Court ruled today (January 20, 2016) in Campbell-Ewald Co. v. Gomez (No. 14-857) that an unaccepted Rule 68 offer of judgment for full relief does not moot a consumer lawsuit. Gomez will undoubtedly have far reaching implications for future class action cases, especially those filed under the Telephone Consumer Protection Act (“TCPA”), where damages per violation are set by statute, and are generally easy to quantify. While the decision seems to favor class action plaintiffs by precluding defendants from “picking off” named class representatives, it leaves open the question of whether the result would be different where a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.

The facts of the case are straightforward. The U.S. Navy hired Campbell-Ewald Company (“Campbell”) to assist it with a recruiting campaign. As part of that campaign, Campbell hired a third party to sent text messages to the cell phones of over 100,000 recipients who had supposedly consented to receiving such solicitations. Jose Gomez filed a nationwide class action in the District Court for the Central District of California, alleging that Campbell violated the TCPA by sending him a text message without his consent.

A successful plaintiff in a TCPA action may recover her actual monetary loss or $500 for each violation, whichever is greater, and the penalty can be trebled for a knowing or willful violation. Gomez sought treble damages, costs, attorney’s fees, and an injunction against Campbell.

Prior to the agreed-upon deadline for a class certification motion to be filed, and before Gomez moved for class certification, Campbell made an offer of judgment to Gomez under Rule 68. Specifically, Campbell offered to pay Gomez his costs, excluding attorneys’ fees, and $1,503 per message—thereby satisfying any claim for potential treble damages. Campbell also proposed a stipulated injunction, whereby Campbell would agree to be barred from sending texts in violation of TCPA. However, the proposed injunction denied liability and disclaimed the existence of grounds for such an imposition. Campbell did not offer attorney’s fees as such fees are not available under the TCPA. Gomez did not accept the offer, and it lapsed by operation of time under Rule 68.

Thereafter, Campbell moved to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction. Campbell argued that no Article III case or controversy remained, since its offer mooted Gomez’s individual claim by providing him with complete relief. The District Court denied the motion. The Ninth Circuit agreed, finding that an unaccepted offer of judgment can not moot a class action. The Supreme Court granted certiorari to resolve a split among the Courts of Appeals over whether an unaccepted offer can moot a claim, thereby depriving federal courts of Article III jurisdiction.

On review, opinion author Justice Ginsberg relied heavily on Justice Kagan’s dissenting opinion in Genesis HealthCare. In that case, Justice Kagan wrote that “[a]n unaccepted settlement offer—like any unaccepted contract offer—is a legal nullity, with no operative effect. As every first-year law student learns, the recipient’s rejection of an offer leaves the matter as if no offer had ever been made.” Reasoning that nothing in Rule 68 changed that result, the Court expressly adopted Justice Kagan’s analysis and held that Campbell’s unaccepted offer did nothing to alter the course of his claim. Thus, the Court held that “in accord with Rule 68 of the Federal Rules of Civil Procedure, [] an unaccepted settlement offer has no force. Like other unaccepted contract offers, it creates no lasting right or obligation. With the offer off the table, and the defendant’s continuing denial of liability, adversity between the parties persists.”

The Court distinguished several cases that seemed to go the other way. In each of those cases, the defendants’ payments had fully satisfied the asserted claims. In contrast, even though the offer of judgment appeared to resolve Gomez’s claims, the Court reasoned that his individual claim was not made moot by the expiration of a settlement offer that was never accepted. Once the offer of judgment to Gomez expired, he was left with nothing; his TCPA claim was “wholly unsatisfied.”

The Court seemed to hint at a potentially different result had Campbell admitted liability. Over the course of the relatively short opinion, the court mentioned at least five times that Campbell continued to deny liability despite the offer of judgment. The Court also left open the question of “whether the result would be different if a defendant deposits the full amount of the plaintiff ’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.”

The decision also discussed whether Campbell should be entitled to derivative sovereign immunity, having performed its actions at the direction of the Navy. The Court found that Campbell was not entitled to share such immunity.

Notably, Justice Thomas concurred in the judgment, but rejected the majority’s reliance on modern contract principles and Justice Kagan’s dissent in Genesis HealthCare concerning Rule 68. Instead, Justice Thomas stated that he would rely on the common law history of tenders (that led to Rule 68), which demonstrates that a mere offer of the sum owed is insufficient to eliminate a court’s jurisdiction to decide the case to which the offer related.

Chief Justice Roberts, joined by Justices Scalia and Alito (Justice Alito also wrote separately), sharply dissented. The dissenting Justices found that Campbell offered to pay Gomez the maximum he could recover under the TCPA (e.g., $1500 per text message, plus the costs of filings suit), but that Campbell wanted more – “He wants a federal court to say he is right.” The dissenting Justices stated that the real problem for Gomez is that federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking. They agreed with the majority that Gomez’s rejection of the offer was a legal nullity as a matter of contract law, but that the question is not whether there is a contract, but rather whether there is a case or controversy under Article III. Thus, they argued that because the District Court found that Campbell agreed to fully satisfy Gomez’s claims by giving him everything he asked for, there is no case or controversy to adjudicate and the case is moot.

Policy Exhaustion Can Limit the Duty to Defend Under Connecticut Law

Assessing whether the duty to defend terminates on policy exhaustion can become a complex analysis when a claim involves multiple plaintiffs and exposure unquestionably exceeds the policy limits, yet the insured desires a continuing defense.

A common policy provision provides that an insurer has a duty to “settle or defend” a covered claim but that upon payment of the policy limits for “judgment or settlement” the insurer no longer has an obligation to provide a defense. Connecticut appellate courts have not squarely addressed in what circumstances exhaustion of policy limits will terminate the duty to defend, but at least one Connecticut Superior Court has recognized that exhaustion of policy limits would terminate the duty to defend based on the following policy language in a commercial policy: In Aetna Life & Cas. Co. v. Gentile, No. 0122259, 1995 Conn. Super. LEXIS 3444, 5 (Dec. 12, 1995), the insurer sought a declaratory judgment that it did not have a duty to defend following payment of the policy limits in response to seven separate claims. Id. at 4, 6. The court ultimately concluded that the payment was not the result of a “settlement” because the insurer failed to obtain a full release of the insured for one of the seven claims. Id. at 6-7. Despite its conclusion, the court plainly recognized that “if [the payment was a “settlement”] the policy limits are exhausted and there is no further duty to defend.” Id. at 7. The court concluded that the failure to obtain a release as to one of the claims precluded a finding that the payment was the result of a “settlement.” Id. at 9, 11. Thus, even though the insurer had made a payment in the amount of policy limits, the duty to defend was not terminated. Id.

Though the Gentile court initially acknowledged the potential enforceability of the exhaustion provision to terminate the duty to defend, the fact that the insurer left the insured to face excess exposure resulted in a finding that it had a continuing duty to defend and indemnify. Id. at 13. Notably, the court denied declaratory relief to the insured and awarded attorneys’ fees to the insured for both the underlying action and the declaratory judgment action. Id. at 13, 17.

Another instructive case is Chicago Title Insurance Company v. Kent School Corporation, 361 F. Supp. 2d 4, 7 (D. Conn. 2005). In that case, the United States District Court for the District of Connecticut addressed whether a policy of title insurance permitted the insurer to tender its policy limits to its insured and thereby terminate its duty to defend. The policy provided that the insurer “may terminate its liability hereunder by paying or tendering the full amount of this policy.” Id. at 8. Despite this clause, because the policy provided that “the costs and expenses of defending the title” were in addition to the policy limits and the policy was ambiguous in its failure to define the term “liability,” the court found that the insurer had a continuing duty to defend. Id. at 9-10. In so concluding, however, the court did not rule out a different conclusion based on clearer policy language.

While it does not appear that any Connecticut court has actually applied the rule permitting an insurer to terminate its duty to defend by making full payment of policy limits to enforce such a result, both the Gentile court and Chicago Title court clearly recognize this rule and the enforceability of exhaustion clauses. Gentile, 1995 Conn. Super. LEXIS 3444, 7; Chicago Title, 361 F. Supp. 2d 4, 9. Such recognition is found in other jurisdictions, as well. Further, though such decisions are presently absent from Connecticut jurisprudence, courts in other jurisdictions have allowed an insurer to exhaust limits and terminate its duty to defend.  Seem e.g. In Re: East 51st Street Crane Collapse Litigation, No. 769000/08, 2010 N.Y. Misc. LEXIS 6310 (N.Y. Sup. Ct. Feb. 18, 2010).

For an expanded analysis, click here.

Unraveling Plain Meaning, Extrinsic Evidence And the Doctrine of Contra Proferentem

Gordon & Rees insurance attorneys Regen O’Malley and Greil Roberts published an article in the Insurance Coverage Law Bulletin discussing the slow but steady trend of judges willing to consider extrinsic evidence to assist in the interpretation of insurance policies.  This is a positive development for insurers, who frequently come up against the courts’ strict application of the contra proferentem rule whenever policy language is determined to be ambiguous.

To read the full article, click here.

First Circuit Finds Mutual Rescission of Life Insurance Policy

On June 28, the U.S. Court of Appeals for the First Circuit found that a mutual rescission of a life insurance policy had occurred where a company, which had been granted the policyholder’s power of attorney, cashed a premium refund check.

INS BLOG_insurancepolicyPaul L’Archevesque bought a life insurance policy from Pruco Life Insurance Co. and set up two trusts: one to take out a premium finance loan and another that ultimately would take control of the life insurance policy. Jay L’Archevesque was the sole trustee of one trust. Jay and Wilmington Trust Co. were co-trustees of the other. Together, Paul and Jay gave power of attorney to Coventry, a premium financing company, for purposes of the life insurance policy.

In obtaining the policy, Paul submitted a number of medical records to Pruco that indicated he suffered from dizziness and depression. However, the records did not include a letter that contained a doctor’s diagnosis that Paul likely had mild Alzheimer’s disease and was taking medication for it. Pruco issued a $15 million policy on Paul’s life.

Subsequently, Coventry contacted Pruco to inform it that Paul intended to sell his life insurance policy. Suspicious, Pruco requested Paul’s updated medical records, which revealed information regarding Paul’s mild Alzheimer’s disease.

Please click here for the full article.