Ten Common Mistakes Policyholders Make Re IP Claims
Ten Common Mistakes Policyholders Make Re IP Claims
By David A. Gauntlett[*]
1. IP CLAIMS ARE THE MOST UNDER-TENDERED CLAIMS IN AMERICA
Unless a policyholder knows the claim is not covered and can definitively opine why, it is typically in its interest to promptly give notice of a claim. This is for five reasons:
First, policy provisions require it.
Second, unreported lawsuits allow insurers to claim that subsequent policy applications are inaccurate for failed disclosures.
Third, cancellation for mere claim reporting may be bad faith in many jurisdictions.
Fourth, the mere reporting of the claim is not a loss, and may never be a loss, unless the insurer is required to pay sums owed to the insured under the policy.
Fifth, if insurance is never used, there is little point in having it in place.
If notice can be established, the benefits to pursuit of claims that the insurer was apprized of can be significant. A number of states have written contract statutes of limitations of significant length. The majority of states, including Alabama, Arizona, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Utah, Washington, and Wisconsin, allow six years, while Florida, California, and Texas have four-year statutes.
2. EVEN UNDER A PREJUDICE STANDARD, LATE CLAIMS MAY BE DENIED
As policyholder insurance coverage counsel, we have had to impart bad news to clients that forfeited recovery of pre-tender fees because of the “voluntary payments” provision in their policies. This was true even though there was a clear defense duty under the policy.[2] In some jurisdictions, such as Illinois and Georgia where a draconian late notice rule applies, the consequence of a mere month’s delay in notice may result in the loss of any coverage at all.
Nevertheless, not all policies contain “voluntary payments” provisions, and variant policy provisions available in umbrella policies can give rise to coverage.[3]
3. BROKERS ARE NOT THE FINAL WORD FOR COVERAGE OF IP CLAIMS
Insurance brokers cannot render legal opinions. Even if the broker handles claims activities as well as marketing insurance products, the broker will rarely be knowledgeable about court opinions analyzing coverage. The net effect is that many policyholders may misperceive their prospects for obtaining coverage and, by their non-tender, eliminate any potential coverage that might otherwise arise.
4. COMPANIES FAIL TO THOROUGHLY READ INSURANCE POLICY LANGUAGE
Notice to a broker may not be notice to an insurer or, more critically, to all the insurers who need to receive notice based on when the first alleged wrongful act occurred. Insurers often point out that policies require notice directly to the insurer’s designated agent for service of process at a location reflected in the policy.
5. COMPANIES DO NOT KEEP ALL OF THEIR OLD INSURANCE POLICIES
Intellectual property cases seldom state the precise date of the first alleged wrongful acts. They may include general allegations such as “on or before [date],” “within the last several years,” or “at a time within the applicable statute of limitations for [the claim].” In such circumstances, both brokers and policyholders are ill-equipped to assess how many policies will be triggered or what layers will be implicated for occurrence-based coverage.[4]
While discovery propounded in the underlying action or additional facts that come to light in pleadings may answer these questions, direct communications to the claimant’s counsel may elucidate these issues, even without the need for formal discovery. Once these facts are ascertained, the appropriate policies to be implicated can be identified.[5]
If a policyholder cannot locate earlier insurance policies, one recourse is to hire archeological specialists who seek to produce policies through investigatory techniques honed over years of practical experience. Insurance Archeology Group, www.iagltd.com, (“IAG”) is such a company, as is Risk International, www.riskinternational.com (“RI”). Other techniques include:
· Search of home office and off-site storage facilities, as well as broker records.
· Review of accounting and banking records referencing the purchase of insurance, specifically the policy number, premium, and name of carrier for whom the policy was purchased.
· Consulting proof of insurance records in connection with lease, real estate, goods transportation and employee bonding requirements or tax records and bookkeeping records.
· Direct application to the state insurance commission for certificate of facts or information about policies.[6]
· Contacting executives in charge of the insurance function at the time the alleged bad acts occurred as well as review of prior claims and coverage litigation.
6. ALIGNING GOALS OF LEGAL AND RISK MANAGEMENT IS KEY
Many brokers and risk managers seek to keep premiums in check by not giving notice, This decision is problematic for five reasons.
First, cash flow recognized from defense fee reimbursement in such cases can be significant.
Second, insurance brokers risk exposure for errors & omissions when they do not report claims that may be potentially covered of which they are aware.[7]
Third, neither brokers nor risk managers may have evaluated the correct insurance program at issue since it is often difficult to discern when the first alleged wrongful conduct occurred which might trigger liability.
Fourth, most jurisdictions follow the rule that a narrowing of insurance coverage, not brought to the insured’s attention, may not be effective. Thus, pre-wrongful acts inception policies must also be reviewed.
Fifth, business litigation exposure is but one of the liability risks to be assessed upon renewal. Anecdotal evidence reveals that premium adjustments rarely occur in connection with this claims activity. Broker advice to the contrary is suspect in light of broker conflicts of interest.[8]
7. CHALLENGE LOW PANEL COUNSEL RATES
Under California Civil Code § 2860(c), arbitration of any dispute over the fees payable to their selected defense counsel is required. There is, however, no requirement that a dispute between the insurer and the insured concerning the duty to provide “independent counsel” be resolved in the same manner. Further, the insurer’s obligation to provide “independent counsel” is subject to certain restrictions. “Independent counsel” must meet minimum qualifications, and the insurer is only required to pay “reasonable” fees unless they can show that this rate is far higher than that which prevails in the relevant community.[9]
8. SELECT THE BEST FORUMS FOR RESOLVING COVERAGE DISPUTES
Intellectual property counsel seeking to obtain reimbursement of attorneys’ fees and costs expended in coverage actions must first determine what state’s coverage law will apply. The answer to this question is far from simple. Choices include the following:
· Principal place of business or place of incorporation of the policyholder (or key subsidiary whose conduct is also at issue).
· Insurer’s place of incorporation or principal place of business where it issued the pertinent policy.
· Location of the insurance broker.
· Location of the conduct at issue.
Faced with such a range of choices, assessing the applicable law requires analysis of a range of issues.
9. DEFENSE COUNSEL SHOULD AVOID DISMISSAL OF COVERED COUNTS
Defense counsel should not eliminate coverage by seeking to dismiss potentially covered claims. In Winklevoss Consultants, Inc. v. Federal Insurance Co.,[10] the insured made false statements to steer customers away from Lynchval’s product. Winklevoss’ promotional materials falsely advertised capabilities of its software, drew adverse comparisons to Lynchval’s, and made false comparative statements about their speeds. Such claims satisfied the layman’s definition of “disparagement.” Nevertheless, dismissal of underlying action’s Count for common law product disparagement did not rid the complaint of all allegations which may fit within the covered offense of “disparagement.” Distinct causes of action for “false advertising” that relied, in part, upon disparaging statements triggered a defense duty.
Additionally, litigants can eliminate or create coverage for the party sued.[11]
10. AVOID AD HOC PROCEDURES BY ADOPTING NOTICE PROTOCOLS
Savvy corporate counsel assures that the litigation exposure of their company governs the choice of insurance policies. Many companies have no system in place to assess when litigation triggers their rights to defense or indemnity. One solution is to create an effective protocol that addresses these issues by functioning as an expert system and using customized software to systematically assess whether a new claim should be reported, and if so when, to whom, and what facts should be addressed to secure coverage. The protocol should be as comprehensive as the risks addressed.
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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[2] See Ivan Insua v. Scottsdale Ins. Co., 104 Cal. App. 4th 737, 743 (2002).
[3] See Powerine Oil Co., Inc. v. Superior Court, 37 Cal. 4th 377, 399–400 (2005).
[4] Various courts have included fact allegations with temporal descriptors such as “long standing,” “ongoing,” “recently,” “no earlier than,” or “sometime in” that triggered possible liability under the policy period. See, e.g., Castle & Cooke v. Great Am. Ins. Co., 42 Wn. App. 508, 517 (1986) (“long standing”).
[5] See Dart Indus., Inc. v. Commercial Union Ins. Co., 28 Cal. 4th 1059, 1069–1070 (2002).
[6] See California Insurance Code §§ 12950–12955.
[7] See David A. Gauntlett, Broker Exposure to Intellectual Property and Antitrust Lawsuits, www.gauntlettlaw.com, CGL Reporter Spring 2002 (14) pp. 1400-1-1400-8.
[8] See Friday, October 15, 2004 Wall Street Journal Article “Spitzer Charges Bid Rigging in Insurance.”
[9] Browne George Ross LLP v. Lexington Ins. Co., No. CV 12-2148 SVW (PLA), 2012 U.S. Dist. LEXIS 199489, *4 (C.D. Cal. May 29, 2012).
[10] 11 F. Supp. 2d 995, 998–999 (N.D. Ill. 1998).
[11] See Severin Montres, Ltd. v. Yidah Watch Co., 997 F. Supp. 1262 (C.D. Cal. 1997).