Attempt to Avoid State Court Judgment in Federal Court Fails

In In Re: Robert Lodholtz, et al. (2014 U.S. App. LEXIS 19107), insurer Granite State Insurance Company attempted, desperately, to avoid defending and indemnifying its insured, Pulliam Enterprises.  After being denied relief in state court, Granite sought relief in federal court based on the same argument. Lodholtz had brought suit in Indiana state court for injuries he sustained while working at Pulliam’s plant.  Granite declined to defend Pulliam, claiming Lodholtz proper recovery was through workers’ compensation.  Lodholtz moved for default judgment after Pulliam failed to file an answer, but agreed not to execute the judgment in return for Pulliam’s assignment of rights against Granite.  Granite moved to intervene, never changing their argument, but the trial court denied the motion.  The court entered judgment for Lodholtz for nearly $4 million.

Granite quickly filed suit in Indiana federal district court, for a declaratory judgment finding no duty to indemnify Pulliam.  One month later, Granite also appealed the trial court’s denial to intervene.  The court of appeals affirmed the denial, pointing out that Granite wanted to reserve the right to avoid reimbursement by showing no duty to indemnify Pulliam.  Under Indiana law, an insurer cannot control the defense of the insured without acknowledging coverage.

Surprisingly, although based on the same workers’ compensation argument, the federal court agreed with Granite and held that the state court judgment should be disregarded.  Granite then petitioned the Seventh Circuit for permission to appeal the state court order denying intervention, on the grounds that it would resolve the entire litigation.

The Seventh Circuit granted the petition.  The question before the court was whether it could ignore the state court judgment based on the state court lacking jurisdiction.  Under Fed. R. Civ. P. 60(b)(4) and 60(d)(1), a federal district court can relieve a party from final judgment in an independent action if the judgment is void.  The Court held that Granite had the ability to argue the state court lacked jurisdiction and did.  Had they forfeited their reservation of rights, they would have been granted intervention.

The Seventh Circuit reversed the federal court judgment and dismissed Granite’s suit.

Nevada Considers Cumis Counsel Requirement

It appears that it will soon be clear whether Nevada will follow California's requirement that an insurer provide independent counsel to an insured where its reservation of rights creates a conflict of interest between the insurer and its insured.  In Hansen v. State Farm Mut. Auto Ins. Co. (2013 WL 6086663), the U.S. District Court, District of Nevada, certified to the Nevada Supreme Court, the question of whether an insurer is required to provided independent counsel to an insured when a conflict of interest arises between the two (i.e., Cumis counsel). The case originally involved civil claims against State Farm’s insured. A demand to defend was made on State Farm, which agreed to defend under a reservation of rights. Ultimately, the insured signed a settlement agreement and assigned their rights against State Farm to the plaintiffs; State Farm did not approve the settlement before it was signed. State Farm claimed that settling without its consent constituted breach of the insurance policy and moved for summary judgment. The court denied the motion, finding that State Farm's defending under a reservation of rights created a conflict of interest between the insured and insurer. Because State Farm did not provide independent counsel to the insured, State Farm breached the insurance policy, not the insured (or the plaintiffs who were standing in their shoes).

State Farm then moved to reconsider summary judgment denial, interlocutory review of the denial of summary judgment, or certification of the question to the Nevada Supreme Court. Other states like California (in the Cumis case) require an insurer to provide independent counsel to an insured where the insurer's reservation of rights creates a conflict.  Although the requirement of independent counsel is consistent with Nevada case law, the Nevada Supreme Court never expressly adopted or applied Cumis or expressly imposed an independent counsel requirement in those circumstances. The District Court certified two questions to the Nevada Supreme Court:

(1) Does Nevada law require an insurer to provide independent counsel for its insured when a conflict of interest arises between insurer and insured; and

(2) If yes, would the Nevada Supreme Court find that a reservation of rights letter creates a per se conflict of interest?

The Court recognized that the question may be rephrased and also denied State Farm’s motion for reconsideration and interlocutory review.

Untimely Notice - When does it absolve the insurer's duty to defend and indemnify?

In Atlantic Cas. Ins. Co. v. Greytak (2014 WL 2870236), considered whether an insurer seeking to avoid coverage was required to show prejudice under Montana law.  The plaintiff insurer, Atlantic, sought relief from a duty to defend and indemnify an insured that failed to give notice for more than a year.

The case arose out of a dispute between Atlantic’s insured and the defendant, Greytak. The insured sued Greytak for non-payment, and Greytak counterclaimed. More than a year later, the parties reached a purported settlement agreement. It required the insured to notify Atlantic and provided judgment for Greytak if Atlantic failed to indemnify. The insurance policy in dispute contained a clause requiring the insurer to defend any suit seeking damages.  The policy, as is typical, required notice as soon as practicable. Atlantic sought a declaration absolving it of its duty to defend or pay any judgment entered against the insured because the insured failed to provide timely notice.

The issue facing the Court was whether the insurer was required to demonstrate prejudice from untimely notice. Both parties cited the same case. Atlantic argued notice was a condition precedent; the failure to comply with barred recovery. Greytak argued the insurer must demonstrate prejudice. The Ninth Circuit held that no Montana decisions answered the question of whether prejudice must be demonstrated by an insurer to before it is freed of its duties to the insured. The Court thus certified the question to the Montana Supreme Court.  Importantly, the Court declined to find prejudice based solely from the length of the delay and the corresponding inability of the insurer to investigate and gather facts for over one year.

Court of Appeal Answers Important Insurance Coverage Question Regarding Additional Insureds

In Transport Insurance Co. v. Superior Court (http://www.metnews.com/sos.cgi?0114//B249470), the Court of Appeal took on and clarified an important question with respect to insurance coverage.  In that case, the Court addressed an ambiguous term in an insurance policy.  Under California law, ambiguities are generally resolved in favor of the insured's objectively reasonable expectations.  In this case, the named insured on the policy had already prevailed against the insurer on the ambiguous term based on the named insured's reasonable expectations.  An additional insured listed on the policy then sought to use that earlier ruling to prevail under principles of collateral estoppel with respect to the meaning of the policy.  The Court of Appeal reversed the trial court ruling in favor of he additional insured, ruling that the additional insured had to establish its own objectively reasonable expectations in order to prevail.  Thus, the Court held that with respect to additional insureds, in interpreting ambiguous policies, each insured's expectations must be examined.  Accordingly, an ambiguous term could be interpreted differently with respect to different insureds on the very same policy.  Thus, an additional insured and the insurer are not necessarily bound by interpretations procured in litigation between the named insured and the insurance carrier.

Pro-Insured Decision on the Application of the Self-Insured Retention

In American Safety Indem. Co v. Admiral Ins. Co. (http://www.metnews.com/sos.cgi?0913//D061587), the California Court of Appeal issued a pro-insured decision regarding the application of the self-insured retention (SIR) to the duty to defend.  In this case, the insured's policy contained a clear provision stating that the insured had a self-insured retention.  However, the policy did not clearly state that satisfaction of the SIR was a condition precedent to the carrier's duty to defend.  Accordingly, the Court held that the Carrier's duty to defend was triggered without regard to whether the insured satisfied the SIR.  The Court did make clear that, if the policy had stated that satisfaction of the SIR was a condition precedent to the duty to defend, the Court would have enforced that provision.  The upshot of the case is that it is important to review the terms of the SIR and duty to defend provisions.  It may be that the duty to defend is triggered before the SIR is satisfied, which can be a substantial benefit to insureds.