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The Legal Intelligencer: Insurance Companies' Coverage of Damages at Issue

Asher Hawkins, The Legal Intelligencer, 03-23-2006

A Philadelphia jury has returned a defense verdict in a dispute between insurance companies over coverage for a $37 million settlement in a bad faith action originally filed in federal court in Massachusetts.

The eight-member panel's verdict followed a two-week trial before Judge Howland W. Abramson of Philadelphia's Commerce Case Management Program.

In a pre-trial decision filed in August of last year, Abramson, ruling on an issue Pennsylvania's state courts have not yet addressed, held that an insurer seeking to deny coverage under a "claims made" policy does not need to show prejudice when there has been failure to comply with that policy's notice requirements.

Since the late 1970s, it has been the law in Pennsylvania that when an "occurrence" policy's insured provides a late notice, the insurer is relieved of its coverage obligations only if it can demonstrate actual prejudice.

According to court papers in the breach of contract action ACE American Insurance Co. v. Underwriters At Lloyds and Cos., the case stems from a failed project in the mid-1980s to build a trash-to-steam facility in Massachusetts. Those in charge of that project had taken out a $25 million excess "efficacy" insurance policy with CIGNA.

At that time, CIGNA was itself covered by a series of "errors and omission" policies in the event of a bad faith action against it, according to court papers. CIGNA's E&O package, which featured a $15 million deductible, provided coverage up to tens of millions of dollars.

Various Lloyd's underwriters provided the first layer of coverage under CIGNA's E&O package, and ACE America's additional named defendants, Columbia Casualty Co. and Gulf Underwriters Insurance Co., provided the next two layers of coverage, respectively, according to court papers.

According to Abramson's August 2005 decision in ACE America, CIGNA's E&O agreement with the Lloyd's underwriters called for CIGNA to alert the insurers "as soon as practicable" -- or at least within a three-month window -- once a claim was filed with CIGNA that had the potential to wind up implicating the E&O policy.

If the underlying claim filed with CIGNA could be "reasonably likely" to result in bad faith damages of more than $4 million, CIGNA was to alert the Lloyd's group about that specific claim as soon as possible, Abramson wrote, quoting the terms of the CIGNA/Lloyd's E&O policy.

However, for any claims expected to result in losses of less than $4 million, CIGNA was allowed to provide notice of those via itemized memoranda filed quarterly.

In the late 1980s and the early 1990s, according to court papers, CIGNA and the backers of the failed Massachusetts trash-to-steam project were engaged in a back-and-forth over the $25 million policy that CIGNA had written in conjunction with the project.

In addition to the coverage dispute, the leaders of the project also filed a bad faith action against CIGNA.

By the late 1990s, following extensive litigation, CIGNA had paid out the $25 million limits of its efficacy policy for the project, but a judge in federal court in Massachusetts later ordered the insurer to pay the projects' backers an additional $25 million in pre-judgment interest, according to court papers.

It was also in the late 1990s that ACE America acquired CIGNA's property and casualty division.

ACE America, as successor to CIGNA for the purposes of the trash-to-steam project's efficacy policy, chose to settle the bad faith case with the project's heads for roughly $37 million.

But having also succeeded to the rights of CIGNA's E&O policies package, ACE America sought coverage under those policies in conjunction with that settlement. The E&O insurers declined, resulting in the instant Philadelphia litigation.

According to defense attorneys in ACE America, under Massachusetts law, the trash-to-steam project's backers could have been entitled to many times the amount of the underlying policy's limits had the bad faith action against CIGNA/ACE America gone to trial.

Columbia Casualty's lawyer, Robert Bodzin of Kleinbard Bell & Brecker in Philadelphia, said the project's backers had demanded $75 million in that bad faith action.

C. Lawrence Holmes of Dilworth Paxson in Philadelphia, who represented the Lloyd's underwriters in ACE America, said that if the bad faith case had gone to trial, it could have resulted in an award for $150 million.

Seeking summary judgment, ACE America contended in court papers filed in mid-2005 that it did not have any reason to believe the claim filed in conjunction with the trash-to-steam project policy would likely result in any bad faith damages.

ACE America further asserted in its summary judgment motion that it had reported the trash-to-steam project claim to CIGNA by referring to it in an itemized memo -- the procedure called for in the CIGNA/Lloyd's E&O policy when a loss was not expected to exceed $4 million.

In response, the defendants in ACE America wrote in court papers that CIGNA should have recognized the potential value of any award in a bad faith action stemming from CIGNA's coverage dispute with the trash-to-steam project's principals.

Abramson denied ACE America's summary judgment motion in his August 2005 opinion.

"It is clear that notice of any claim under the [Lloyd's] policy was to be provided by June 30, 1999, at the very latest," Abramson wrote. "It is undisputed that ACE reported the [trash-to-steam project] claim by way of [itemized memorandum], at the very latest, as of June 28, 1999. It is likewise undisputed that ACE did not provide more detailed notice of [that] claim until well after June 30, 1999. The question then becomes whether ACE was reasonable in its determination that [that] claim was unlikely to result in a loss exceeding $4 million. If not, ACE was obligated to provide notice in a more detailed manner than by [itemized memo] 'as soon as practicable.' The court finds that these are disputed issues of material fact."

In the same decision, Abramson relied on prior federal court rulings to reach the conclusion that under Pennsylvania law, the "notice-prejudice" rule does not extend to claims made policies, which, in contrast to occurrence policies, typically feature specific notice guidelines that all parties have signed off on.

The Pennsylvania Supreme Court's 1977 decision in Brakeman v. Potomac Insurance Co. established the notice-prejudice rule law in a case that involved an occurrence policy.

According to Bodzin and Holmes, the ACE America case proceeded to trial on March 6 before Abramson and continued over the course of the following two weeks.

On the afternoon of March 17, after roughly five hours' deliberations over the course of two days, the jury, which was not polled, returned with its verdict, the attorneys said.

They said the jurors answered "no" to the two questions it had to answer in the case: whether ACE America had provided its E&O insurers with a timely notice concerning the Massachusetts project claim, and whether CIGNA/ACE America had reasonably evaluated whether the bad faith claim would result in more than $4 million in damages.

Abramson's chambers confirmed the jury had returned a defense verdict.

No experts were called to the witness stand by any of the parties during the trial, the attorneys added.

Holmes would not comment on pre-trial settlement negotiations in the case.

Bodzin said that ACE America had received "significant settlement offers" from both his and Holmes' clients but had rejected them. Bodzin would not say how much those settlement offers were for.

Bodzin also said that prior to trial, named defendant Gulf Underwriters had settled with ACE America for roughly $4.5 million.

Bodzin said his client is considering filing post-trial motions for attorney fees and costs. Holmes would not say whether his clients are thinking about doing so.

ACE America's local counsel in the matter were attorneys from Conrad O'Brien Gellman & Rohn. A call to the firm seeking comment on the matter was referred to lead plaintiff's attorneys J. Randolph Evans and Stefan Passantino of McKenna Long & Aldridge in Atlanta. Neither returned calls seeking comment.

Bodzin represented Columbia Casualty with Samuel Cortes, also of Kleinbard Bell.

Holmes defended the Lloyd's group with fellow Dilworth attorneys James Rodgers and Thomas Vecchio, as well as Theodore Boundas of Boundas Skarzynski Walsh & Black in Chicago, who is national legal counsel for London-based SVB Ltd., the lead underwriter among the Lloyd's group involved in ACE America.

Reprinted courtesy of The Legal Intelligencer.