Assuring Coverage Counsel’s Proactive Assistance Requires Early Intervention
/Assuring Coverage Counsel’s Proactive Assistance Requires Early Intervention
By David A. Gauntlett*
Introduction
Currently, eleven states[1] (and the District of Columbia) still adhere to the draconian “eight corners” analysis for the duty to defend. Under this policy, a court can only consider the policy language and the pleadings of the underlying case to determine whether the insurer’s duty is triggered. The modern trend, embraced by the remaining jurisdictions, is to consider additional “extrinsic evidence” in making the determination.[2] Those states are split, however, in whether the duty is determined by facts known to the insurer[3] or facts available to the insurer.[4] The distinction being that the former requires the policyholder to proactively notify the insurer of any facts that implicate the duty to defend before the insurer’s obligations are activated. The burden is on the policyholder to supply the insurer with the information, even if the relevant facts are publicly available.
Even in “Facts Available” Jurisdictions, Delayed Tender May Be Fatal
In Basalite Concrete Products, LLC v. Natl. Union Fire Ins. Co. of Pittsburgh, PA.,[5] the underlying suit included factual allegations that plaintiffs improperly used Keystone's trademarks and patents after breaching licensing agreements which granted plaintiffs the “the right and license to utilize the Know–How, Molds, Patent Rights, and Trademarks to manufacture, market and sell the Products.”[6]
The policyholder first tendered its defense of the underlying matter on November 18, 2011, resolving via settlement on August 13, 2022.[7] It did not, however, send supporting documents that evidenced potential coverage under the policy until August 22, 2012.[8] The court refused to impose any obligation on the insurer since the action concluded before the insurer had access to any evidence that it should be defending the policyholder.
Even assuming that the extrinsic material offered by plaintiffs in support of their tender could give rise to the duty to defend, plaintiffs provided the material after the Keystone Matter terminated. Since the Keystone pleadings did not, on their face, give rise to a duty to defend, and any such duty expired at the conclusion of the Keystone litigation, plaintiffs' tender of extrinsic material after the conclusion of the lawsuit did not trigger a duty to defend.[9]
Although the Basalite court uses language consistent with a “facts known” standard, the imprecise phrasing simply addressed the absence of facts beyond the complaint since the relevant documents were not publicly available.[10] As the insurer had no means of reviewing these facts prior to the policyholder’s second tender, the conclusion was consistent with California’s “facts available” standard.
Policyholders Must Re-Tender Claims as Facts Develop
The “facts available” standard imposes a duty to investigate only the facts knowable at the time of tender.[11] The extent of that investigation can vary according to the facts of the case.[12] No case, however, has yet held that an insurer has a duty to actively monitor the development of a case if it initially determines there is no potential coverage based on the facts available at the time of tender.
Particularly during the discovery phase, the underlying action may generate additional fact allegations that could implicate the insurer’s duty to defend. For this reason, the discovery phase is an opportunity for defense and coverage counsel to work together to acquire clarifications about whether implicit as well as additional claims may trigger potential coverage.[13] It is the policyholder’s burden to alert its insurer when these developments arise.
Defense Counsel That Delays Tender Risks a Malpractice Claim
Many defense counsel wait to retain insurance coverage counsel to assess available coverage options under a client’s policies until the underlying action is resolved. Their singular focus on resolving the underlying action (aided by Mediators who once they learn of an insurer denial of a defense do not think of bringing them to the table again) are can be problematic.
Defense counsel’s focus on securing a prompt resolution of the underlying action with their Client’s resources at stake to avoid greater defense fee and indemnity exposure (while an appropriate concern) is best coordinated with revisitation of the opportunity to clarify the existing claims that evidence a potential for coverage.[14] Clarifications developed after an insurer’s denial of a defense would enhance the prospects for achieving a global settlement in many disputes where viable paths to securing a defense exist.
Furthermore, failure to advise clients to timely tender a claim exposes defense counsel to malpractice liability. In Nichols v. Keller,[15] 15 Cal. App. 4th 1672 (1993), one court rejected a worker’s compensation attorney’s argument that it had no duty to advise its client that the client possessed a valid third-party claim arising from an accident. The statute of limitations barred recovery. A prompt demand for relief would have created a right to recovery which was lost in that claim. The court concluded that, at minimum, the plaintiff should have been advised to consult another attorney re its rights against third parties.[16]
Conclusion
Regardless of the jurisdiction, best practices require defense counsel to advise their clients to tender claims early. Failure to do so may result in malpractice liability if the tender is so late as to create grounds for the insurer to deny an otherwise covered claim. In the states allowing extrinsic evidence (such as California, New York, New Jersey, and Massachusetts), the claim may need to be tendered multiple times as facts develop.
Coverage counsel can assist in a variety of ways. First, they can aid in the tender process. Tender letters can be enhanced by explanations of the insurer’s obligations, avoiding a lengthy struggle to make the insurer accept its duty to defend. Second, even after an initial denial, coverage counsel can work with defense counsel during the discovery phase to develop additional fact allegations that clarify the basis for potential coverage or develop additional claims that explain why a larger settlement payment is required based on the exposure from multiple covered claims.[17]
*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) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Arkansas, Colorado, Delaware, Florida, Idaho, Louisiana, Maine, North Dakota, Oregon, Tennessee, and Wyoming.
[2] See David A. Gauntlett, Insurance Coverage of Intellectual Property Assets, 2d ed., Appendix P (2023) for a full list of states’ approaches to this issue.
[3] See, e.g., Fitzpatrick v. Am. Honda Motor Co., Inc., 78 N.Y.2d 61, 67 (N.Y. 1991) (“We agree with these authorities and hold that, rather than mechanically applying only the “four corners of the complaint” rule in these circumstances, the sounder approach is to require the insurer to provide a defense when it has actual knowledge of facts establishing a reasonable possibility of coverage (see generally, 7C Appleman, op. cit., § 4684.01, at 95).”)
[4] See, e.g., Millennium Labs, Inc. v. Darwin Select Ins. Co., No. 12-cv-2742 BAS (KSC), 2014 U.S. Dist. LEXIS 89746, at *5, 6-7 (S.D. Cal. July 1, 2014) (“All the underlying facts were available and may have been uncovered during a reasonable investigation. It is illogical to permit an insurer to hide its head in the sand and deny its duties because of its own failure to investigate. ‘Hear no evil, see no evil, speak no evil’ is no defense for shirking a cognizable duty.”)
[5] Basalite Concrete Products, LLC v. Natl. Union Fire Ins. Co. of Pittsburgh, PA., No. CIV. 2:12-02814 WBS, 2013 WL 2156582 (E.D. Cal. May 17, 2013), aff'd, 615 F. App’x 894 (9th Cir. (Cal.) 2015).
[6] Id. at *2.
[7] Id. at *9.
[8] Id.
[9] Id.
[10] Id.
[11] Gunderson v. Fire Ins. Exch., 44 Cal. Rptr. 2d 272, 274 (Cal. App. 1st Dist. 1995) (“[Insurer] was entitled to base its determination of whether or not to accept the tender on the facts available to it at that time. Once it determined on the basis of the lawsuit itself and the facts known to it at that time that there was no potential for coverage, it did not have a continuing duty to investigate or monitor the lawsuit to see if the third party later made some new claim, not found in the original lawsuit.”)
[12] Nelson v. W. Am. Ins. Co., No. B143838, 2004 WL 1302500, *7 (Cal. App. 2d Dist. June 14, 2004).
[13] For an example of how that may play out, see David A. Gauntlett, Searching for a Unicorn: Unearthing Buried Trade Dress Claims, https://www.gauntlettlaw.com/news/searching-for-a-unicorn-unearthing-buried-trade-dress-claims (June 23, 2022).
[14] David A. Gauntlett, Arbitrator Rules Delay in Paying Defense Fees Constitutes Bad Faith, https://www.gauntlettlaw.com/news/arbitrator-rules-delay-in-paying-defense-fees-constitutes-bad-faith (Mar. 25, 2022).
[15] Nichols v. Keller, 15 Cal. App. 4th 1672 (1993).
[16] Id. at 1685.
[17] David A. Gauntlett, Insurance Coverage of Intellectual Property Assets, 2d ed., § 21.02 (2023).