Acacia Research Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA, No. SACV 05-501 PSG (MLGx), 2008 WL 4179206 (C.D. Cal. Feb. 8, 2008)

Posted on October 1, 2008 by David Gauntlett

The court issued findings of fact and conclusions of law as to the scope of a Directors & Officers policy’s duty to cover reimbursement of defense fees and settlement costs in a patent infringement lawsuit. The court found for the insured.

It awarded plaintiff $31,070,981.62 plus

$310,492.99, the present value of future royalty payments.

The D&O policy was issued from January 22, 1999 to January 22, 2002 on a claims-made basis with $10M policy limits and a SIR of $150,000. The insurer had delayed issuing a coverage opinion which concluded that there was no express exclusion for patent infringement or breach of contract cases. The court reasoned:

       The Court finds that all defense costs incurred by Combimatrix arose out of its indemnification of Montgomery for alleged wrongful acts committed by Montgomery. Specifically, the underlying Nanogen action centered on Nanogen’s accusations that Montgomery stole Nanogen’s technology and brought it to Combimatrix. Accordingly, Combimatrix and Montgomery presented a single and joint defense to the Nanogen suit.

Id. at *10.

The court found that the actions alleged by Nanogen against Montgomery arose from Montgomery’s actions as an officer of Combimatrix.

It was only when Montgomery was an employee at Combimatrix that he could have committed the alleged wrongful acts of revealing Nanogen confidential information or using Nanogen’s confidential information inappropriately.

Id. at *11.

The court reasoned:

       Contrary to Defendant’s position, the Court finds that, in this case, the duty to advance defense costs is broad as the duty to defend. See Hurley v. Columbia Cas. Co., 976 F.Supp. 268, 275 (D.Del.1997) . . . Shapiro v. Am. Home Assurance Co., 616 F.Supp. 906, 913 (D.Mass.1985) (finding that an insurance contract’s “statement of the duty to reimburse costs of defense ... is at least as broad as the duty to defend under traditional insurance provisions.”).

Id. at *11.

Notice was all that was required. No specific advice that a self-insured retention had been exhausted was necessary to trigger the insurer’s immediate obligation to reimburse defense costs.

       Furthermore, the explicit language of the Policy itself required Combimatrix to do no more than it did to notify Defendant of its claim.

Id. at *13.

A settlement was concluded in a manner so as to render it involuntary and in response to defendant’s breach of its duties where the insurer defendant refused to advise further on its insurance coverage position after initially denying a defense. Jamestown Builders, Inc. v. General Star Indemnity Co., 77 Cal. App. 4th 341, 346, 91 Cal. Rptr. 514 (1999). Id. at *13.

The insurer’s conduct in asserting non-coverage of patent infringement claims absent a specific exclusion was a breach of the covenant of good faith and fair dealing.

At trial, Favilla [who handled the claim for NUFI] conceded that the Policy did not contain any exclusions related to breach of contract and patents. Favilla admitted that he gave the coverage opinions to the insured even though he lacked sufficient information to determine whether any exclusions applied.
. . . .
       On November 3, 2003, almost 3 years after receiving notice of the claim, Plunkett [who handled the claim for NUFI following Favilla] wrote a first and final coverage letter to Combimatrix. Plunkett approached the review in a manner that revealed a steadfast determination to deny coverage.
Id. at *16.

Punitive damages were inappropriate, however, because there was no sufficient showing of malice, fraud or oppression.
Tags: , , , , , , , , ,

HLTH Corp. v. Agricultural Excess & Surplus Ins. Co., No. 07C-09-102 RRC, 2008 WL 3413327 (Del. Super. Ct. July 31, 2008) (Cooch)

Posted on September 2, 2008 by David Gauntlett

Where a group of officers and directors were indicted and entered “not guilty” pleas, the court found that a D&O policy was required to defend. The pertinent clause of the Syntec policy stated:

[T]he Insurer shall advance, at the written request of the Insured, Defense Costs prior to the final disposition of a Claim. Such advanced payments by the Insurer shall be repaid to the Insurer by the Insureds or the Company severally according to their respective interests, in the event and to the extent that the Insured or the Company shall not be entitled under the terms and conditions of this policy to payment of such Loss.

Id. at *3.

Since the company was indemnifying the officers and directors, it fell within the provisions of this section in terms of being entitled to immediate reimbursement of defense fees.

The defendants proposed an allocation scheme – 63% to the MMC tower, 23% to the Synetic tower, and 14% to the Emdeon tower – based upon their contentions that “Plaintiffs ‘acquired an entity [i.e. Synetic f/k/a MMC] that was underinsured’ and ‘may not lawfully shift this uninsured liability to other insurance towers’ because the applicable tower of coverage has been exhausted.” Id. at *7.
 

The court noted that the Insurers could have included an allocation requirement in their contracts that would require allocation before any defense fees be paid but that none existed. Each of the cases requiring allocation followed New Jersey law that mandated apportionment between covered and noncovered claims.

Even these authorities, in the court’s view, would not require apportionment based on which overt acts occurred within which of the alleged different towers’ coverage periods, especially as the court noted that the Department of Justice was amending its acquisition chart to identify distinct overt acts though lack of judicial economy in the Insureds’ proposed allocation scheme was manifest.

The court concluded:

[The insured] was entitled to the full benefit of the duty to defend which [the insurer] owed him, and to limit the value of that benefit by reducing the amount which was actually expended in defending the counterclaim [which was covered by insurance], because it overlapped the steps taken in prosecuting the complaint [which was uncovered], would deprive plaintiff of that full benefit.

Id. at *13.

Finding a New York decision on point, it adopted its reasoning, citing The Trustees of Princeton University v. National Union Fire Ins. Co. of Pittsburgh, Pa., 2008 WL 2277830 (N.Y. App. Div. 1st Dept. June 5, 2008) for its view that:

“As the policy obligates [the insurer] to advance all defense costs as they are incurred, subject to a right of recoupment of payment for noncovered costs after the underlying litigation is completed, the court had no obligation at this juncture to rule on the allocation of defense expenses.”

Id. at *14.

A survey of national authority evidences that the majority trend permits reimbursement for fees incurred in connection with prosecution of a complaint where they dove-tail with those essential to defend a counterclaim. See Adobe Systems, Inc. v. St. Paul Fire & Marine Ins. Co., No. C 07-00385 JSW, 2007 WL 3256492, at *9 (N.D. Cal. Nov. 5, 2007).
Tags: , , , , ,

The Role of a Policyholder's Advocate

Posted on April 9, 2008 by David Gauntlett

On occasion people have asked me why I named our firm newsletter “The Policy Holder Advocate”. For a simple reason; there is a ‘missing’ in the equation of insurance product delivery that threatens the rights of policy holders, especially in the context of third party litigation against companies where a range of business tort claims are asserted. Distinctions between various forms of Commercial General Liability Media/Cybernet/Intellectual Property Defense policies are rarely understood by the broker community. There are few resources to distinguish which policies offer the best coverage for the majority of insureds or for the particular insured who is seeking insurance. Underwriters often write policies without appreciating how litigation activity will implicate coverage there under. When information is fed back to underwriters from the claims department, it is often so particularized that the overview to understand the broader complications of the policy language may not readily be appreciated.

Risk management focuses on a range of different topics and the particularized distinctions between various versions of Commercial General Liability Umbrella policy language and how it might intersect with a range of business torts, antitrust, and intellectual property claims and is not a specific focus of the review of policies. While more emphasis is placed on claims made Directors & Officers insurance, which is of keen interest to corporate officers and directors, less attention to the precise language of commercial liability policies tends to be paid. This is unfortunate because such policies often contain opportunities to cover a range of business torts because of the fact allegations in specific complaints, as clarified through discovery responses, may implicate potential coverage triggering at minimum, a duty to defend, or in certain policies, reimbursement of defense fees.

In short, to understand the “true meaning” of policies you have to litigate coverage suits and understand the underlying torts to litigate therein. Since without appreciating how liability can attest, it is hard to gage the potentiality of coverage. The distinctions garnered from coverage litigation as well as also litigation the underlying business tort typically are resources not readily accessible within corporations. While outside counsel may have this knowledge it is often diffused through various sources of attorneys in large law firms and not always brought to bear on a particular issue for coverage analysis.

Recently, I had occasion to assist in the drafting of a high level patent defense excess policy my most significant interaction was between the intellectual property group, risk management, and the insurance broker. Our team found it effective to develop a detailed protocol about what claims would and would not be covered in order to explain the practical impact of proposed charges to policy language. It also provided a far more realistic sense of what would fall within the policy and without was known before its acquisition, and was circulated to the underwriter so that it would be well appraised of what exposure could vest under its policy.

While these exercises would be difficult to orchestrate for standard form Commercial Liability policy renewals, it is a useful exercise to consider when renewing insurance policies with newer forms that have little litigation history to clarify products.

I also had occasion to seek the renewal of our law firm’s Commercial General Liability policy. I was surprised to find it virtually impossible to obtain “advertising injury/personal injury” coverage that did not include a “professional services” exclusion. Lawyer’s Errors & Omissions policies, which traditionally permitted some form of “personal injury” coverage but rarely “advertising injury” coverage, did not fill this gap. Multimedia/cybernet policies offered the best solution but are written on a claims-made, not occurrence basis. I ultimately located an ISO Properties Inc. 2004 BP 00 03 01 03 Policy which contained liability coverage analogous to that in a 1998 ISO CGL policy.

Inspired by this challenge, I crafted an article for the Intellectual Property Owners Association doing a comparative study of cyberspace/multimedia products to assess which might be of interest to a broad range of corporate buyers. I did not, however, find ready access to these tools through my broker or when asking insurers about the nature of their products. The kind of internal advice about when policies should be accessed and contribute to active oversight in litigation where coverage may be clarified by the nature of discovery that occurs in underlying action and can play a role in addressing settlement needs in the underlying case or assuring that if indemnity exposure arises it is more likely to fall within coverage. In short, policy holder coverage expertise, especially that garnered in litigation activity with carriers over complex business issues, represents a valuable asset that can enhance the way policy programs are structured.
Tags: , , , , , , , ,