Month: April 2020

An interesting story at Professional Liability Matters regarding an arbitration settlement that was voided because the arbitrator, in this case as judge, did not disclose an affiliation he had with one of the parties.  You can read the article here.  The interesting part comes in the legal theory to determine conflict; from the California Court of Appeals (emphasis added): 

On appeal, the California Court of Appeals noted that the standard for disclosure is not whether the judge was actually biased, but whether a reasonable person “could entertain a doubt that he could be impartial.”  Because the judge included one of the firm’s partners as a reference on his resume, the court determined that this standard was met.  Accordingly, the Court held that the judge had erred in failing to make the disclosure and vacated the arbitration award. 

This touches on a topic that insurance coverage lawyers have been dealing with for years. Namely, that an insured can state that a particular lawyer or firm, in a case where a determination of coverage impacts that insured, has a potential conflict of interest simply because they are panel counsel of the insurance carrier and thus the carrier has sway over their economic likelihood. I.e., it’s theorized a particular law could have an incentive to perform in the insurance carrier’s favor rather than in the insured’s favor.

An example would be a situation where an insured is brought up on potential fraud charges. The theory goes – and mind this is simplified and subject to jurisdictional law – that a carrier’s panel counsel has incentive to steer the decision toward a finding of fraud rather than negligence so that the insurance carrier will not have to pay an award. This would then encourage the carrier to use that particular counsel in the future. c.f. San Diego Navy Federal Credit Union, et al. v. Cumis Insurance Society, Inc.

States handle this matter differently – some state that a conflict doesn’t really exist or, if it does, the professional ethics and requirements put upon lawyers is sufficient to preclude “steering” cases in this manner. While an insured can still hire their own counsel in cases they believe they have conflict, many locales state it’s at their own cost.  However, other jurisdictions do require the carrier to pay for an insured’s independently chosen counsel if there’s a significant conflict.

In jurisdictions where “independent counsel” is mandated (California being one) an interesting question arises when an insurance contract has an arbitration clause. I’ll be honest in saying that I’m not familiar with California policies, but if their arbitration clauses read like others I’ve seen then an insurance contract can require insureds to submit to binding arbitration in matters of dispute. These clauses often specifically define the firm to be used. 

If such is in your contract, it seems like a potential “steering” problem, similar to that exists with lawyers, is created. After all if a state assumes that legal counsel will be influenced by volume of business, why wouldn’t an arbitration firm? I’ll admit it’s probably a harder argument to make, but certain jurisdictions consider a legal counsel conflict to be per se, so if the conflict is automatically presumed, it’s not that big of a stretch to apply it to other scenarios. 

And remember the article above – in the situation of this particular arbiter, all that was needed was for a “reasonable person” to “entertain doubt” of their impartiality. So while perhaps a difficult argument, the obstacles are still pretty low. And it would only take one court case to, essentially, invalidate any arbitration agreement in a particular jurisdiction when the insurance carrier was solely responsible for appointing the arbiter.

This article from Professional Liability Matters summarizes a recent court decision over an action brought by the Cleveland Indians baseball team against an insurance broker for what was essentially failure to provide adequate professional services. The funny part is, this broker was not a person placing coverage for the Cleveland Indians but rather was a broker who had merely added the Cleveland Indians as an Additional Insured to their own client’s policy. 

Long story short is that the Cleveland Indians hired National Pastime Sports, LLC, an entertainment and games provider, to operate festivities before a game; these included an inflatable slide. National Pastime used an independent broker to secure General Liability coverage which included the Cleveland Indians as an “Additional Insured”. The broker did not secure inflatable coverage even though they were specifically told of the use of such beforehand. 

Unfortunately, the inflatable slide collapsed and killed and attendee. The Cleveland Indians sought coverage under National Pastime’s policy as a Additional Insured but, as mentioned, there was no inflatable coverage so they were unable to collect. The Cleveland Indians brought suit against the broker which was upheld upon appeal. The court concluded that simply by virtue of being an Additional Insured on National Pastime’s policy, National Pastime’s broker owed them a certain level of care. 

In short, this means that insurance professionals could owe a duty not only to their clients but (theoretically) any other named party on their client’s policies including Additional Insureds, Mortgagees, etc. 

Without a Lexis Nexis account I can’t comment as to whether the duty owed to these additional interests is the same level of duty owed to direct clients. And, further, this particular case does seem to stand alone. However, we’ve all seen how liability and subsequent litigation always starts with a crack before the dam breaks. 

Following along this path leads to further questions, such as what happens when you have an adversarial relationship between the client and an Additional Interest. For example, it’s (usually) in your client’s best interest to limit the scope of Additional Insured status, say by using a newer “Designated Person or Organization” endorsement which tends to be more restrictive**. Are you obligated to notify the Additional Insured that they could get more comprehensive Additional Insured coverage even though it would (1) cost your client more and (2) mean any losses impact your client’s history? While perhaps it’s a stretch to make that argument, it’s still plausible. 

Note that Law 360 also states this case was denied for appeal.

NOTES: 

* Mortgagee and Loss Payable status usually provide certain benefits not otherwise found in Loss Payee-type clauses. These include promise of notification should the policy cancel or non-renew, as well as the ability to retain coverage when it’s otherwise voided by the Named Insured, such as if the insured commits arson. 

** Older endorsements (e.g. CG 20 10 11 85) don’t limit coverage to just ongoing operations, meaning the endorsement provides Products/Completed-Ops coverage. There are various other restrictions as well.