Law and Insurance

Policyholders Usually Survive 12(b)(6) Motions to Dismiss Based on the Pleadings

Lexington Ins. Co. v. North Am. Interpipe, Inc., #08-3589 (S.D. Tex. June 19, 2009)

The vast majority of insurance coverage disputes are decided either at trial (based on findings of fact --usually by a jury -- and conclusions of law) or by a motion for summary judgment (based on stipulations of fact and conclusions of law).  The judge decides a summary-judgment motion based on paper submissions alone, without live witnesses. This case illustrates a third procedure by which the defendant seeks dismissal of the action simply because the plaintiff has failed to sufficiently allege a claim in the first place.  In federal court, the procedure is called a 12(b)(6) motion for failure to state a claim.  12(b)(6) dismissals are rare in insurance cases because the policyholder can usually find the words to allege, "I bought a policy.  I submitted a covered claim.  My insurance company wrongly denied the claim."

In the Lexington case, the 12(b)(6) motion was actually brought by the insurance agent who procured the policy.  The insured was sued for an allegedly defective pipe casing that leaked and  damaged an underground oil formation.  The insured must have realized that it would lose on coverage (most policies issued to oil patch suppliers exclude damage to underground resources) because it also sued its agent for negligent misrepresentation (i.e., "you told me you got an adequate policy")and breach of fiduciary duty ("you had a ironclad duty to get an adequate policy").  The agent moved for dismissal under 12(b)(6) on two grounds.

First, the agent argued that Texas is a strong duty-to-read jurisdiction.  Even if the agent misrepresented the adequacy of the policy, the insured's failure to read the terms for itself trumps any misdeeds by the agent.  The court refused to dismiss for this reason, noting that Texas courts have long recognized a cause of action for an insurance agent's negligent misrepresentation of coverage.  Besides, the insured alleged that it never received the policy and therefore couldn't read it.

Second, the court did find that the allegations of breach of fiduciary duty were too thin.  Insurance agents do not owe a blanket fiduciary duty to their customers.  Only if a special relationship of trust and confidence has been established over time can an insured prevail on a fiduciary-duty claim.  The court, accordingly, dismissed the fiduciary-duty claim, but allowed the insured 10 days to replead facts that, if proven, might show a special relationship.

Policyholders have a hard time winning this type of claim against their agents.  Even if the duty to read doesn't end the claim, an insured has to prove that it asked the agent to get insurance for a specific risk, the agent mispresented that it got the coverage, and the insured could not discover the failure by reading the policy.  (For a particularly egregious example of an insured getting the shaft, see Omni Metals Decision).   The insured in this case has an uphill fight.  But insureds can, at least, usually get past the pleading stage.

Church Denied the Right to Sue Its Insurer Due To Lapsed Charter

Christi Bay Temple v. Guideone Specialty Mut. Ins. Co., #13-07-537 (Tex. App.--March 31, 2009) see Christi Bay Temple Decision.

I don't usually comment on cases that deal only with court procedure, not the merits of an insurance dispute, but the insurer's slick use of the rules of procedure to avoid an insurance claim merits consideration.  Not a good story for Good Friday.

Christi Bay Temple, a Pentecostal Church of God, submitted property damage claims to its insurer, Guideone, some time before 2004.  The court doesn't say what the claims were or why Guideone refused to honor them.  We must assume that the church in fact purchased the policy and thinks it had legitimate damage claims.  All we know is that the church sued Guideone over coverage in 2004.  During the lengthy discovery process, the insurer asked for certain documents, including the church's title deed to the property.  It was then that the insurer hit upon an important and curious fact.  The case doesn't say, but one infers that the title deed showed ownership by Christi Bay Temple, Inc.

The church had been formed in 1980 as a non-profit corporation but had forfeited its corporate charter in 1983.  The church's attorney indicated at one point that giving up the corporate charter had something to do with the church's decision to affiliate with the Pentecostal Church of God.  It may have some theological basis.  Perhaps all church property must be held in common.  But for whatever reason, the Christi Bay Temple chose to operate under the legal form of an unincorporated association and neglected to properly dissolve its legal existence as a corporation.

So what does this have to do with Guideone's defense in the lawsuit?  Two things:  First, a corporation that forfeits its charter is still a corporation, just one with diminished powers.  Reinstating its charter is merely a matter of paying the back taxes, penalties, and interest required to maintain the charter.  Second, and this is the tour de force, Section 171.251 of the Texas Tax Code provides that a defaulting corporation not only forfeits its charter, it also forfeits other privileges of incorporation, including the right to sue or defend in state court.

So Guideone pulled the procedural strings and filed the motions necessary to get the case dismissed because the church lacked the legal capacity to prosecute its coverage case.  The court was not hasty.  Years went by to allow the church time to cure its defunct corporate status.  However, for whatever reasons, financial or theological, the church failed to do so.  Finally, case dismissed.

The obvious lesson is to keep up with those pesky legal formalities.  Christi Bay Temple is in a hopeless bind.  To properly dissolve the corporation would require payment of of some 25 years of back franchise taxes.  But failing to do so leaves it a corporation with no real rights.  This certainly is not an equitable result for the policyholder.  Guideone sold a policy to what appeared to be an unincorporated association.  The church paid good premium for the policy but now is barred from enforcing its rights to have the coverage issues, whatever they are, adjudicated.  It is easy to feel that Guideone took unfair advantage of the situation.  Nevertheless, the interests of the state to require corporate citizens to live up to their tax obligations appears to outweigh the possible unfairness of letting the insurance get away with avoiding a meritorious insurancee claim.

The only way forward for the church may be to transfer all its property to a new entity and cut the defunct corporation adrift.  But that would mean giving up its claim against Guideone on this one.

Texas Court Finds Agent's "Election-of-Remedies" Defense Problematic

Horizon Offshore Contractors, Inc. v. Aon Risk Services of Texas, Inc., #14-07-00549 (Tex. App. Houston [14th Dist.] March 12, 2009), see Horizon Opinion

How can an insurance agent lose an appeal over a successful motion for summary judgment against a policyholder's claims that the agent negligently procured a marine risk policy with an English venue and choice-of-law clause (as a consequence of which coverage was not what it should have been), when the policyholder had received a copy of the policy, and Texas is a strong duty-to-read-your-own-damn-policy jurisdiction?  Although this case is a little complicated, the reason Aon failed is simple: it relied exclusively on a legal theory that the court characterized as, "a legal weed that judicial gardeners should root out, a legal delusion, an anachronism, a problem child of the law, and a remedy that has no independent viability."  The election-of-remedies defense.

Horizon hired Aon to advise it regarding insurance matters and procure policies to cover its ocean-towing business.  Aon procured two policies to cover some barges towing something flammable (one of them burned) from Texas to Israel.  The policy issued from an English insurer and required that any litigation over coverage must be brought in England under English law.  The insurer denied the claim apparently because it had not received full disclosure of details, also required under the policy, regarding the contents and crew.  Horizon sued in England and ended up settling for about half of the full limits of $28 million.  So horizon sued Aon in Texas to recover the $14 million balance of the claim and $6 million in attorneys' fees and costs.

Horizon alleged that Aon breached agency duties by procuring a crummy policy with an English venue and law-selection clause that imposed more stringent disclosure duties than Texas law would require.  Aon filed a motion for summary judgment to dismiss the case, and here we get to the election-of-remedies (EOR) defense.  The EOR defense bars relief when:

1. a party successfully exercises an informed choice
2. between two or more remedies, rights, or states of fact
3. which are so inconsistent as to
4. constitute manifest injustice

In its motion, Aon asserted that Horizon had argued in the English action that the policy was valid and enforceable because all required disclosures were made, but alleged in this suit that Aon was liable because it procured a policy that was invalid due to Aon's failure to make all required disclosures.

As stated above, the court heaped all kinds of abuse on the defense itself for various reasons.  For starters, parties are generally free to plead in the alternative facts and theories that may be inconsistent.  Also, the EOR defense tends to discourage settlement because you would never want to settle your claim against Peter based on one type of claim if it would jeopardize your claim against Paul on other legal theories or facts. 

In the final analysis, however, the court poured out Aon because Horizon's positions in the two cases were not all that inconsistent.  Horizon wasn't really arguing here that the policy was invalid, just that proving coverage was a harder row to hoe because of Aon's missteps in passing on information and getting a policy with unfavorable conditions.  Motion denied.

Back to the main point.  Does Texas law subject the agent to liability for getting a policy, which the insured accepts, when it contains an English venue and law clause?  Probably not, although I can think of facts that might tip it the other way (like telling your agent, "I hate limey insurers and their limey courts, so don't under any circumstances get me a limey policy!"  Although, even here, a court might say "duty to read").

It is hard to understand why Aon put all its eggs in one basket.  The court noted that Aon had other legal defenses.  However, it seems unlikely that Aon held back its other legal defenses.  On the other hand, this is state court, and the trial court may not require a party to shoot all its bullets in one motion.  In reversing judgment in favor of Aon, the appellate court remanded the case back to the trial court.  So we may see Horizon II in a year or two. 

Good for the Gander II - Texas's 8-Corners Rule Deprives Builder of Coverage

Pine Oaks Builders, Inc. v. Great American Lloyds Ins. Co. , No. 06-0867 (Tex. February 13, 2009) see Pine Oaks Opinion

This is not the first crazy result form Texas's strict 8-corners doctrine that compels judges to determine an insurer's duty to defend by looking only at the 4 corners and the pleading and the 4 corners of the policy, ignoring all other "extrinsic evidence."  In fact, I launched this blog 2 years ago with one of these law-is-ass results: Good for the Gander—Strict “Complaint Allegation” Rule Not Always Beneficial for Policyholders.  Here is another one.

This is another homebuilder construction defect lawsuit that insurance companies denied by the score in the last ten years until the Texas Supreme Court held in Lamar Homes (see my discussion at Texas High Court Allows CGL Coverage of Construction Defects) that CGL policies could cover breach of contract cases alleging faulty workmanship.  So, Great American would have lost this case as well except for one minor pleading sin of omission (or commission).

A standard CGL exclusion bars coverage for damage to the insured's completed work unless the work was perfomed by subconstractors working on the insured's behalf.  There were actually 5 lawsuits against Pine Oaks, four of which alleged what is always the case -- general contractors like Pine Oaks hire subcontractors to do their defective work.  In the case in question, however, the attorney for the homeowner omitted any mention of subcontractors.  Not to worry, said Pine Oaks; here is the sworn testimony of all parties involved that the alleged defective work was performed by subcontractors.

The Court rejected this evidence saying:

Under the eight-corners rule, the duty to defend is determined by the claims alleged in the petition and the coverage provided in the policy.  "If a petition does not allege facts within the scope of coverage, an insurer is not legally required to defend a suit against its insured" (quoting earlier cases).

The Supreme Court adopted the iron 8-corners rule in the Guideone Elite case (197 S.W.3d 305, 308, (Tex. 2006)) in which a church obtained coverage it had no actual right to because the youth minister alleged to have committed sexual abuses for four years actually left the church before the insurance policy began.  The plaintiff's attorney suing the church knew this but falsely alleged a longer period probably to keep the insurer at the settlement table.  The Guideone Elite Court held that the insurer had to pay for the defense.  In adopting the 8-corners rule, the Court held that any exceptions to the otherwise absolute rule would not extend to evidence that was relevant to both coverage and the factual merits of the case as alleged by a third party.

The Pine Oaks Court noted that evidence showing that subcontractors, not Pine Oaks, were responsible for the alleged damage clearly was relevant to the factual merits of the case.  So Great American had no duty to defend the insured.  Good for the gander again.

There are good reasons supporting the 8 corners rule.  It provides a clear basis for determing the duty to defend immediately without potentially lengthy evidentiary coverage hearings that might develop evidence harmful to the defense of the underlying case.  But the rule  in its present form gives too much power to the plaintiff's attorney to draft the pleading into or out of coverage, depending on whether the plaintiff wants to keep a deep-pockets insurer at the settlement table or deprive the defendant of a war chest to fund the defense. 

Both policyholders and insurers would benefit from consideration of some mechanism to avoid obvious manipulations of the pleadings as in this case.

Federal Court Parses "Your Work" Exclusions in Favor of Insured Contractor

Mid-Continent Casualty Co. v. JHP Development, Inc., No. 05-50796 (5th Cir. January 28, 2009) see JHP Decision

This decision marks another skirmish in the continuing battle that insurance companies wage against covering liability for faulty construction.  After the Texas Supreme Court allowed coverage through the front door in Lamar Homes by holding that defective workmanship can constitute a covered "occurrence" causing "property damage" (see my discussion at Texas High Court Allows CGL Coverage of Construction Defects), the fight has shifted to the "business risk" exclusions behind the back door.

"Business risk" exclusions eliminate coverage for damage to the insured's work or products.  JHP was a building contractor hired to build 5 condominiums, one of which was to serve as a model unit.  (JHP appears to have been the general contractor for the project but also performed some of the work itself.)  JHP failed to properly water-seal the exterior of the building allowing water to penetrate the interior structures through walls and ceilings.  The construction fell into two phases: first, basic construction and finish of the model condo; second, finish of each of the other units once they were sold and the new owners had selected a desired finish.  Water damage to interior drywalls, stud framing, electrical wiring, and wood flooring allegedly occured after phase one was completed but before final completion of the project.

Owner sued JHP for $438,466.77 in repairs, and JHP's liability insurer, after timely notice, refused to defend or indemnify.  JHP apparently allowed entry of a default judgment for the amount demanded and then sued its insurer for coverage.  By the time the insurance lawsuit reached the 5th Circuit Court of Appeals, the Lamar Homes decision had forced the insurer to abandon its argument that faulty workmanship was not an "occurrence" that caused "property damage."  Instead, it relied on two business risk exclusions: referred to as j(5) and j(6) in the standard CGL policy.

J(5) excludes damage to "that particular part of real property on which [JHP] or any contractors or subcontractors working directly or indirectly on [JHP's] behalf are performing operations, if the 'property damage' arises out of those operations." 

J(6) excludes property damage to "that particular part of any property that must be restored, repaired or replaced because '[JHP's] work' was incorrectly performed on it." 

J(5) applies only if JHP or its subs "are performing operations"; i.e., during performance of construction operations.  The insurer argued that the exclusion applies at any time before the project is completed, and 4 units remained unfinished.  JHP disagreed and argued that it was not performing operations when the damage occurred because phase 1 was over, and phase 2 had not yet begun.  The court agreed with JHP and found that "[t]he prolonged, open-ended, and complete suspension of construction activities pending purchase of the condominium units does not fall within the ordinary meaning of 'performing operations'."  J(5) does not exclude coverage.

Application of j(6) turned on the meaning of the phrase, "that particular part" of JHP's work.  Mid-Continent argued that the whole project was JHP's work, including the particular part that had to be repaired or replaced.  JHP parsed the language differently.  The particular parts that had to be repaired (the interior dry walls, etc.) were not damaged because of JHP's work on the interior, but rather because of JHP's alleged failure to properly water-seal the exterior.  In other words, j(6) would exclude only damage to the part of the work that was performed improperly, the exterior (or, more precisely, the sealant on the exterior). 

The court again agreed with JHP but only after considering other decisions that appeared to side with Mid-Continent.  An earlier version of the exclusion before the 1980's targeted the insured's work in a broader sense (excluding damage to the named insured's work "or any portion thereof"), and courts construing the broader language had applied the exclusion to all parts of the named insured's work, not just the parts that were defectively built.  So the court distinguished these earlier cases and held that exclusion j(6) also did not apply.  Accordingly, Mid-Continent wrongly refused to defend and indemnify.

Finally, Mid-Continent objected to the default judgment.  The 1996 Gandy case had ruled that insurers who wrongly failed to defend are bound only by judgments following a fully adversarial trial.  Default judgments are entered when the defendant fails to answer the complaint or appear for trial.  Not so, said the appellate court, pointing to the Texas Supreme Court's recent decision in Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008, see Evanston Decision ), which limited Gandy to "sweetheart deals" in which the insured defendant conspires to help the plaintiff obtain a monster judgment and then assigns its insurance claims to the plaintiff.  JHP did not do that, said the court.  Therefore, the result is governed by a pre-Gandy case, Employers Cas. Co. v. Block, 744 S.W.2d 940 (Tex. 1988), holding that an insurer who refuses to defend an insured when it has a duty to do so is bound by the amount of the judgment against the insured.

Choice-of-Law Disputes Can Be Unpredictable - Just Look At This Decision

Sonat Exploration Co. v. Cudd Pressure Control, Inc., # 06-0979 (Tex. November 21, 2008) see Sonat Decision.

I try to steer away from decisions strictly about legal procedure, but this Texas Supreme Court decision illustrates two things: (1) a choice-of-law determination can make or break an insurance or contract-indemnity dispute; (2) the determination of which state's law applies can be shockingly subjective, as shown by this result. So bear with me. 

First, what is choice-of-law?  Unless and until insurance regulation is federalized (see my discussion: Federal Office of Insurance Information), the rules governing the interpretation of insurance polcies often vary from state to state.  In the Sonat case, Texas law would enforce the indemnification agreement at issue; Louisiana's law would not.  "Choice-of-law" is the body of principles and rules for establishing which state's laws apply to particular parties and disputes.  The choice-of-law rules themselves often vary from state to state.  For example, Texas applies complex sets of principles in the Restatement (Second) of Laws - Conflict of Law, published by the American Law Institute, a perpetual society of leading judges, lawyers, and teachers founded in 1923 (see About ALI).  Florida, by contrast, is old fashioned and applies the mostly outdated "place of the contract" (lex loci contractus in Latin) to say which law governs contract disputes.  Luckily, the selection of which choice-of-law rule apply is automatic: a court applies the choice-of-law rule of the state in which it sits.

In Sonat, an oil & gas developer signed a servicing contract with a drilling contractor to develop wells in several states.  The contract required each party to indemnify the other for injuries to the indemnifying party's employees.  An explosion at one of Sonat's Louisiana wells killed four of the the contractor's employees, whose families sued Sonat (they were barred from suing the contractor due to the workers compensation bar preventing negligence lawsuits against the employer).  Sonat sought indemnity from contractor (and its insurer) for a settlement payment of $29 million.

A Louisiana statute (La. RS 9:2780) says indemnification agreements are invalid if the party seeking indemnity was negligent or strictly liable; Texas law provides that such indemnities are OK if backed by insurance, as this was.  So which state's law applied?

Under Texas's rules, in the absence of a choice-of-law clause in the parties' contract, the principles of the Restatement (referred to by the cumbersome name, "Most Significant Relationship Test") are applied:  There are two sets of principles, those applying only to contract disputes, and a set of general, more abstract, principles that apply to all disputes.  To contract disputes only, courts should look to:

• the place of negotiation of the contract,
• the place of performance,
• the place of contracting,
• the location and subject matter of the contract,
• and the domicile, residence, nationality, place of incorporation, and place of business of the parties

The general principles include:

• the needs of the interstate and international systems,
• the relative policies of the forum,
• the relative policies of other interested states and the relative interest of those states in the determination of a particular issue,
• the protection of unjustified expectation,
• the basic policies underlying the particular field of law,
• certainty, practicability, and uniformity or result, and
• ease in the determination and application of the law to be applied.

Both Sonat and contractor, and their operations are all over the place.  Both are incorporated in Delaware, Sonat's headquarters appear to be in Texas, the contract was signed in Texas, the contract operations were in Texas, New Mexico, Louisiana, and perhaps elswhere.  The injuries occurred in Louisiana.  Contractor's president submitted an affidavit that its principal location was Louisiana, but Sonat put into evidence an earlier affidavit submitted by the same officer in an unrelated lawsuit swearing that "nearly all high level decisions were made in Georgia, its main office in is Houston, and most department heads are located in Houston or Louisiana."  The Court concluded, "Suffice it to say [contractor's]  place of business appears to be flexible."

Let's cut to the chase.  The Court went round and round with all the various contacts and principles, rejecting each one as dispositive, until it seized on a provision requiring contractor to add Sonat as an additional insured for the Lousiana work under contractor's insurance policies.  This must be, reasoned the Court, because the parties expected their cross-indemnities might not be enforceable in Louisiana.  "Why insert this special provision applicable only to Louisiana jobs?"  The additional-insured requirement would be superfluous if the parties exepcted the indemities to be enforceable.  So, held the Court, Louisiana applied to this dispute because the parties had Louisiana in mind when the contract was made.

Maybe.  But the parties also had Texas and New Mexico in mind because the contract expressly applied Texas law to Texas operations and New Mexico law to New Mexico operations.  The Court could easily have inferred an intention not to apply Louisiana law because they omitted a specific selection of that law for those operations.  Also, even if the additional-insured requirement applied only to Louisiana operations, the indemnity, which is the disputed provision, appears to apply to the multistate operations.  The arguments could go either way.

This is the point.  Choice-of-law is often a crap shoot.  Be on the look out for choice-of-law traps (or opportunities), because I can assure you that the other side is looking.  Most of the time, the applicable law is not, and could not be, in dispute.  But when it is, the outcome of the case may depend on it.

 

Cost of Cellphone Headsets Is "Damage Because of Bodily Injury" Says Texas High Court

Zurich American Insurance Company v. Nokia, Inc., No. 06-1030 (Tex., August 29, 2008) see Nokia Decision and Dissent.

In this, the second significant Texas Supreme Court insurance coverage decision issued just before Labor Day (there is one more - stay tuned), The High Court held that a number of class actions asserting that radiation emitted from cell phones caused or could cause "biological injury" triggered CGL insurers' duty to defend because the damages sought, i.e., the costs of cellphone headsets, were "damages because of bodily injury," covered under the policies.  This was a long-awaited decision, not just for the parties in this particular dispute, but in the tort and insurance bar and insurance industry in general.  The reason has less to do with interpreting insurance policies as much as defense coverage for very expensive class action litigation.

One of the key limitations of a standard general liability policy is the damages.  As long as the insured's conduct was more or less accidental, any liability is potentially covered as long as the damages sought fall within four categories: "bodily injury," "property damage," "personal and advertising injury."  The issue in Nokia is "bodily injury."  Purchasers alleged that radio frequency radiation from use of cellphones could subtly affect neurological functions in the brain, such as calcium and ion distribution across cell membranes, DNA strand breaks and chromosome damage, skewed enzyme activities, and permeability of the blood brain barrier.  The Court had no trouble recognizing that these were allegations of potential "bodily injury."  But the problem is that none of the plaintiffs sought damages for health expenses, physical impairment, lost work due to sickness.  As stated, the only damages sought were a few dollars per plaintiff for a headset that would prevent such damages.  The insurers protested that this was no more than economic damages not covered by the policies.

So, had the plaintiffs complained of headaches, sleep problems, or other (allegedly) documented adverse health consequences, the insurers would not have disputed their duty to defend, at least for lack of covered damages.  But surprisingly, not a single plaintiff in the class actions sought any remedy other than the cost of a headset.  As the dissent, pointed out, however, this is no surprise due to the nature of class actions.

Class actions are a special type of litigation that allow large numbers of claimants with a common claim to join a single action.  Often, the amount of each individual claim is so small that no one could ever get an attorney to spend the costs necessary even to file the lawsuit.  In this case, the costs of a headset is tiny.  But it is often in society's best interests to force an company or an industry to redress such a widespread problem through litigation.  The class action is tailor-made for this purpose.  But there are several things a class action can't do.  The remedy sought can't vary from one class plaintiff to the next.  10 million people want a headset.  Fine.  But each plaintiff can't also assert a claim for this or that physical ailment.  That would require individualized proof of damages, which would require years to resolve.

As the dissent pointed out, "bodily injury" is not and cannot be asserted in a class action.  "No individual issues of injury exist," says the class plaintiffs in their pleadings, which they must say if they are to achieve class status and continue to pursue the case.  The majority recognized this procedural reality but distinguished between the requirements of class-action procedure and an insurer's duty to defend.  The majority observed, "[a]lleging that there are no individual issues of injury . . . is not the same thing as stating that no individuals have been injured."

The dissent pounced on this statement.  "That is certainly true, but the insurers' duty to defend turns not on whether individuals have been injured, but whether they claim injury.

But the dissent lost the argument.  And this is potentially huge for future class actions over physical injury or damage, where the actual claim is for some one-size-fits-all economic remedy that in itself is not covered.  Courts are now instructed to consider the underlying physical damage that is not alleged in the class action to determine if the CGL insurer has a duty to defend.  And it is no secret that defense costs in a class action is the tail that wags the dog.

Article Asks How To Insure Carbon Capture and Sequestration

A recent article posted by Evan Lehman on Climatewire (see Wanted: 1,000-year Insurance Policy) asks not how to engineer carbon capture and sequestration (CCS), but how to insure the liability risks of such a long-term enterprise.  We all know by now that CCS is the diversion of carbon dioxide from power-plant smokestacks to underground reservoirs, where the greenhouse gas must be stored practically forever.  The press has largely been focused on the front-end questions, how do get the gas under the ground?  How do we pay for it?  But - hey, this is America - it doesn't take long to get to, Who do I sue when the stuff leaks and kills someone or, worse, releases in a day all of the CO2 stored for the last 30 years?  Mr. Lehman asks:

Who will stand ready to compensate for the damage if the vast underground vaults supposed to contain the earth-warming gas leak? Will it be the power company that injects the carbon? Will it be the government?

Good question.  We can be sure, it will be someone.  That's usually where insurance come in. The insurance industry has become more or less adept at underwriting huge risks, like nuclear power plants and space excursions, but the risks associated with these projects are relatively short term.  “I can see this being difficult for insurance companies to get their hands around. How do you quantify a policy over a huge amount of time?” said Christopher Walker, director of the Climate Group, a nonprofit that encourages businesses to reduce their greenhouse gas emissions. “There’s nothing, that I’m aware of, that has a history like that."

If the scientists are right and the only way to achieve the 80% reduction in carbon emissions is through CCS, then finding the right balance for long term risk management of CCS will be essential before anyone will agree to undertake the risk.

Insurance Reserves Are Discoverable in Bad Faith Litigiation

Brothers Petroleum, LLC v. Underwriters at Lloyd's London, CA No. 06-2836, 2008 U.S. Dist LEXIS 51389 (E. D. La. July 2, 2008).

Whenever a claim is submitted to an insurance company for loss or liability, the insurer typically sets a reserve, an estimate of what the claim will cost the insurer.  Many states require insurers to set a reserve.  Of course, claimants would love to be able to discover the amount of reserve set, which,in a claim negotiation with the insurer, is the equivalent of looking at the other guy's poker hand.  Courts ordinarily do not allow discovery of reserve information, primarily because the reserve is simply the insurer's preliminary approximation of the amount of loss, not direct evidence of the damages.  Claimants do not ordinarily need to discover the insurer's reserve to prove up the loss.

This case illustrates a common exception allowed by courts.  When the insured, or another insurer standing in the insured's shoes, sues the insurer for denying or underpaying a claim in bad faith, the reserve may be considered relevant.  In the Brothers case, the policyholder submitted a claim for Katrina-related loss.  Lloyd's appears to have paid part of the claim, and after attempts to resolve the dispute, Brothers sued for additional damages and for bad faith delay under Louisiana law.  In the discovery process, Bothers asked for the insurer's files, including reserve information.

The court noted:

A bad faith claim requires an analysis of whether the failure to pay the amount of a claim within 60 days after receipt of a satisfactory proof of loss was arbitrary, capricious or without probable cause, as determined by the facts and circumstances held by the insurer at the time of refusal. (La. Rev. Stat. 22:1220).  The setting of reserves bears some relationship to the insurer's calculation of potential liability, and have [sic] been found to be discoverable when bad faith is asserted.

In other words, an insurer who refuses or delays in paying a $3 million claim and asserts that the damages are only $2 million, may be acting in bad faith if its own reserve is set at $4 million.  (I say "may be" because the insurer may have a good explanation for its early overestimation of loss.  For example, significant new evidence emerging after setting the reserves may justify a lower valuation come settlement time -- but no insurer wants to have to fight this fight).

Several other courts have taken the same approach and allowed discovery of the reserve when bad faith is alleged.  (See e.g., North River Ins. Co. v Greater New York Mut. Ins. Co., 872 F. Supp. 1411 (E.D. Pa. 1995)).  Courts will likely continue this trend.

Kidnap and Extortion Policy Claim May Proceed For Loss of Insured's Business Due to Uzbekistan Government Shakedown

Interspan Distribution Corp. v. Liberty Ins. Underwriters, Inc., #H-07-CV-1078 (S.D. Tex., March 31, 2008)

If you are planning to open a business in Uzbekistan, think again, or at least don't go there without a good kidnap/ransom and extortion insurance policy, as this case shows.  Interspan operated a profitable tea importation business in Uzbekistan that unfortunately drew the attention of the oldest daughter of Uzbekistan's authoritarian ruler, Islam Karimov (her name is Gulnara Karimova).  It is apparently well known in international circles that Gulnara has a sweet tooth for seizing profitable enterprises through misuse of government power.  Interspan alleged in its complaint against Liberty that in 2006, Gulnara abducted, held hostage and threatened Interspan personnel and their relatives as part of a scheme to obtain control over its business, seize its assets, and force the company out of Uzbekistan.

So what did gentle Gulnara do?  "Hooded men with machine guns" burst into the house of Eskender Kiamilev, father of Interspan's principal owner, and carried him the Uzbeki jail.  Allegedly, the perpetrators were members of the Committee for National Safety, Uzbekistan's version of the CIA.  The same day, armed government agents Interspan's offices and warehouses in Tashkent. 

Here is where kidnap policy comes into play.  Interspan reported the kidnapping to Liberty, which called on Corporate Risk International (CRI), a global crisis-management firm.  Think of CRI as Russel Crowe in the 2000 movie "Proof of Life" (we will get to the Meg Ryan character in a minute, who has the charming name of Natasha Matkarimova, no relation to Gulnara).  CRI slipped into the shadows of Uzbeki night life and emerge with the story that Gulnara had Eskender arrested and the property seized to frighten and intimidate Interspan into surrendering the entire business to her.  However, CRI, with the help of the US Embassy, managed to extract Eskender from jail due to his status as a former Soviet diplomat.

Not to be deterred, Gulnara went after Mikhail Matkarimova, brother-in-law of Interspan's owner, but he had gone underground.  So she arrested Mikhail's wife, Natasha and had her dragged to the dungeon where, CRI reported, torture and rape awaited her unless Mr. Matkarimova turned himself in.  We are left to speculate whether CRI's Russell Crowe and Natasha fell in love while Mikhail spent 6 months in prison and was denied medical care for a bleeding ulcer.  The complaint against Liberty doesn't go there.

So what has all this got to do with law and insurance?  Interspan ended up turning over the business to Gulnara, after which Mikhail was granted amnesty (he had been tried and sentenced to 3 years probation, fined $10,000, and forced to work for the government for 2 years, kicking back 20% of his salary to the government).  Interspan submitted a claim for "Loss" of the entire business.  Although the policy covered Loss caused by kidnap/ransom or extortion, Liberty denied the claim basically on grounds that Interspan could not sufficiently show that its loss of the business was the result of kidnap or extortion.

The case has some interest to lawyers because the court had to wrestle with the US Supreme Court's decision in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007) to raise the pleading standard that a plaintiff must meet to avoid a motion to dismiss under Rule 12(b)6.  The old pleading standard, articulated in 1957 in Conley v. Gibson, was that a complaint should not be dismissed unless it appeared beyond doubt that the plaintiff could prove no set of facts supporting a claim for relief.  The Twombly Court said this standard was too lenient and held that a complaint must show enough facts to move the claim for relief from the merely "speculative" level to the "plausible."  Courts are now trying to figure out just what that means.

In this case, however, the court denied Liberty's motion to dismiss based in no small part of the ample allegations supplied by CRI's report of Gulnara's past seizures of other businesses using the same hard-knuckled tactics and its report to Interspan that the government would back off if Interspan turned over the business.  As the court observed:

An expert analysis by a crisis-management company specializing in kidnapping, ransom, and extortion, stating that those abducted would be released in exchange for payment in the form of relinquishing the business assets is neither "factually neutral" nor a "formulaic recitation of the elements of a cause of action" (quoting Twombly).

We are not told how much Interspan was seeking.  Perhaps Liberty choked on the number.  Perhaps Liberty was just taking its shot at raising the Twombly bar as high as possible.  Whatever the reason, Liberty was bound to lose.  This movie had to have a happy ending.  I am looking for a sequel that hooks up Russell Crowe with Gulnara.