Commercial Litigation: The Business Suite
Incentive Awards Holding Strong Two Years After Johnson
By Jackie Sitjar
The past few years have been eventful when it comes to class-action incentive awards. As 2022 comes to an end, it is a good time to take stock of the state of the circuit split on incentive awards—in anticipation of what 2023 may bring.
As the Best in Class blog reported in Class-Action Incentive Awards Under Siege?, the Eleventh Circuit, in Johnson v. NPAS Solutions, LLC, 975 F.3d 1244 (11th Cir. 2020), took a stand on incentive awards, holding they are prohibited under Supreme Court caselaw dating back over a century. Two years later, not only does the Eleventh Circuit still stand alone with its stark line in the sand, but the Second, Sixth, and Ninth Circuits have explicitly distinguished themselves from Johnson. However, while every circuit to have weighed in has disavowed Johnson, the Department of Justice, in opposing an incentive award in a recent data-breach class action, has recently embraced it.
A Refresher on Johnson
In Johnson, the Eleventh Circuit relied on two nineteenth-century Supreme Court cases— Trustees v. Greenough, 105 U.S. 527 (1882), and Central Railroad & Banking Co. v. Pettus, 113 U.S. 116 (1885)—to hold that incentive awards are prohibited. The Eleventh Circuit explained that “[a] plaintiff suing on behalf of a class can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation, but he cannot be paid a salary or be reimbursed for his personal expenses.” The Court reasoned that incentive awards are “roughly analogous” to a salary, and therefore prohibited under Supreme Court precedent.
The Eleventh Circuit attributed other circuits’ allowance of incentive awards to “inertia and inattention, not adherence to law.”
This year has seen additional activity in Johnson. In August the Eleventh Circuit denied objector Jenna Dickenson’s petition for en banc review. In November 2022, plaintiff class representative, Charles Johnson, filed a petition for writ of certiorari with the Supreme Court, which remains pending.
Activity in Other Circuits
In the meantime, other circuits have also had the opportunity to weigh in on Johnson—and the Eleventh Circuit’s claims of inertia and inattention. While inertia may still be holding, every other circuit to have given the issue some attention has rejected Johnson’s reasoning.
Sixth Circuit. In Shane Group Inc., et al. v. Blue Cross Blue Shield of Michigan, a pro se serial objector, who challenged an incentive award, unsuccessfully sought a $150,000 payoff to drop his objections. 833 Fed. App’x 430 (6th Cir. 2021). The Sixth Circuit rejected the objector’s argument that service awards “amount to a bounty,” holding that the payments were appropriate and correlated to the substantial amount of time that the plaintiffs spent producing documents and advancing the case.
Second Circuit. In Hyland v. Navient Corporation, objectors argued that Greenough and Pettus prohibited service awards, and that “[a] class representative cannot claim reimbursement from a common-fund settlement for his or her own service on behalf of the class.” 48 F.4th 110 (2d Cir. 2022). The Second Circuit disagreed, noting compelling reasons for compensating the class representatives, which included that they “opened their lives to scrutiny,” “laid bare their financial circumstances, their career choices, and their personal histories,” “suffered personal attacks,” and were ‘subjected to vitriol.”
Ninth Circuit. The most recent circuit opinion on incentive awards is In re Apple Inc. Device Performance Litigation, 50 F.4th 769 (9th Cir. 2022)—a multidistrict class action where the United States District Court for the Northern District of California approved a $310 million class-action settlement.
The Ninth Circuit vacated the district court’s orders approving the settlement because the district court incorrectly applied a presumption that the settlement was fair and reasonable. The proposed settlement contained service awards at issue, which were either $3,500 or $1,500 for each of the named plaintiffs, with the larger amount for the nine named, deposed plaintiffs. Objectors contended that district courts lacked discretion to award any service fees or incentive payments to class representatives.
Despite vacating and remanding, the Ninth Circuit disagreed with the objectors. It explicitly noted that Supreme Court precedent does not foreclose incentive payments to class representatives, specifically discussing the same nineteenth-century cases the Eleventh Circuit discussed in Johnson—Greenough and Pettus. The Ninth Circuit summarized its precedent, noting “we have previously considered this nineteenth century caselaw in the context of incentive awards and found nothing discordant.”
Referencing the same concepts of quasi-contract and restitution mentioned in Greenough and Pettus, the Ninth Circuit focused on whether the incentive awards were “reasonable” under the circumstances. Those circumstances included the named plaintiffs’ actions taken to protect the interests of the class, the degree to which the class had benefited from those actions, the plaintiffs’ time and effort expended in pursuing the litigation, and any financial or reputational risks the plaintiffs faced. The Ninth Circuit concluded its section on incentive awards by stating: “The point is that incentive awards cannot categorically be rejected or approved . . . So long as they are reasonable, they can be awarded.”
The Department of Justice Weighs In
While all other circuits may be in agreement against Johnson’s anti-incentive-award sentiments, the Department of Justice recently has taken a stand in favor. The DOJ laid down this stake in a recent D.C. district court case, addressing class claims arising out of a data security breach.
In In re Office of Personnel Management Data Security Breach Litigation, No. 1:15-mc-01394-ABJ (D.D.C. Oct. 26, 2022), the United States District Court for the District of Columbia approved a settlement of $63 million after seven years of litigation. In this case, class counsel sought $5,000 individual service awards for 36 plaintiffs for their “valuable contributions to the settlement” and their risk of “adverse consequences by filing suit following the theft of their sensitive personal information.”
The DOJ pushed back. It argued against the incentive awards because the named plaintiffs “were not subject to ‘intrusive discovery’ … and were not required to sit for depositions, or to attend court hearings or mediation sessions.” The DOJ also noted, among other things, that the plaintiffs claimed no expenses in prosecuting the suit and did not indicate any risks for bringing the suit.
The district court, seemingly siding against Johnson, recently approved the settlement, including a service award in the amount of $1,000.00 to each of the 36 named plaintiffs.
A circuit split has emerged on incentive awards—one that may see further activity this year with a potential D.C. Circuit appeal In re Office of Personnel Management and/or Supreme Court review in Johnson. Until then, named plaintiffs outside the Eleventh Circuit will likely continue requesting incentive awards.
What does that mean for class-action defendants? If defendants are considering settling a case and class counsel wants to include an incentive award in the settlement, be mindful of factors such as whether the plaintiffs truly have a reputational or financial risk and the extent of their participation in depositions and discovery.
Jackie Sitjar is a litigation associate at Ellis & Winters LLP where her practice focuses on complex commercial litigation and products liability defense. Jackie applies her editorial, legal marketing, and active-duty military experience in representing her clients. Recently making the transition back into the private sector, Jackie looks forward to getting more involved with the Commercial Litigation and Product Liability Committees
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Employment and Labor Law: The Job Description
Documenting Employee Performance Central to Fending Off Potential Lawsuits
By Joseph M. Gagliardo
In Bragg v. Munster Medical Research Foundation Inc., d/b/a Community Hospital, No. 21-2913 (Jan. 17, 2023) N.D. IN., the 7th U.S. Circuit Court of Appeals points out the significant impact documenting performance can have in an employment discrimination case.
After completing a 90-day orientation program for newly licensed nurses, the plaintiff, Catrina Bragg, was denied a full-time position as a registered nurse at Community Hospital, which then transferred her to Hartsfield Village, a related facility, where her pay was lower.
The plaintiff believes that these actions were based on racially discriminatory evaluations of her performance and were retaliatory. She sued the employer under Title VII of the Civil Rights Act of 1964, 42 U.S.C. Sec. 2000e, et seq., but the district court granted summary judgment in favor of the defendants. That decision was affirmed by the 7th Circuit on appeal.
The orientation program that the plaintiff complains about was run by experienced RNs, who served as preceptors and were responsible for training, supervising and evaluating the work of those in the orientation program. As part of that process, the preceptors filled out “Orientee Progress Forms,” in which they graded orientees.
Preceptors and orientees also attended bi-weekly orientation progress meetings, and these meetings were memorialized in forms that documented the orientee’s progress from the perspective of the orientee, the preceptor and the supervisors.
The plaintiff had three different preceptors during her 90-day orientation. She asserts that her first preceptor intentionally race-matched patients, giving Bragg responsibility for one Black and one Latinx patient while removing a white patient from Bragg’s care.
After Bragg objected, she claimed that preceptor 1 began treating her differently. After the plaintiff ’s complaint, she was transferred to preceptor 2, who the plaintiff claims played rap music at the nurses’ station, and she felt this was targeted at her because preceptor 2 connected rap music to Black people. Preceptor 2 played other music when the plaintiff was not around.
In response to the plaintiff ’s claim, the appeals court concluded that the employer had abundant evidence of the plaintiff's substandard performance, documented in the progress meetings and progress forms. The hospital produced four progress forms and records from six progress meetings, dating between Oct. 1 and Dec. 9, 2018, and the fact that the plaintiff ’s signature was on some, but not all, of the reports did not support the plaintiff ’s claim, as she did not appear to dispute the fact that these meetings occurred.
The 7th Circuit also rejected the plaintiff ’s claim that the fact that she was transferred, rather than terminated, was evidence of unlawful pretext. Based on the proof of the plaintiff ’s performance issues, the appeals court accepted the employer’s response that it had concluded that the plaintiff was ill-suited to the pace of acute care and might do better in a long-term care facility such as Hartsfield.
Additionally, the plaintiff ’s evidence of satisfactory performance at Hartsfield did not change the fact that there was no analogous evidence of her satisfactory (or better) performance at Community.
The plaintiff ’s further argument for why Community’s reasoning was pretextual was a direct attack on the substance of the evaluations. On this point, the court concluded that the argument is a nonstarter, in the absence of any evidence indicating that Community had reason to doubt their accuracy.
Finally, the court rejected the plaintiff ’s reference to a white comparator who was scored higher in her evaluations despite having more severe performance deficiencies because that employee also failed the orientation program and was, like the plaintiff, denied a full-time position at Community.
Joseph M. Gagliardo is senior counsel to Laner, Muchin Ltd. He has counseled and represented private and governmental employers in a broad range of employment matters for more than 30 years.
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Insurance Law: Covered Events
Transportation Law Subcommittee Leadership Note
By William Bulfer, Transportation Law SLG Co-Chair
Greetings from the Transportation SLG! It’s been an exciting year with our group and I’m proud to report on our contributions to date. For those of you who aren’t sure who is part of the Transportation SLG, we were the ones with t-shirts at ICPS in New York. On a substantive note, I can share that our group has now authored two articles for The Brief Case and has recorded it’s first two “teaser” episodes of an SLG specific podcast. Our first, substantive episode is anticipated this month! We continue to hold meetings via teams and will continue to do so over the course of the next year. We also are planning an in person gathering in Chicago at ICCI. Our group continues to focus on recruitment and thought leadership. It is heavily reliant on (and grateful for) in-house participation for both. Members such as Jennifer Eubanks and Jeff Chen continue to serve as a compass while our group works to better serve and partner with insurance industry and the various transportation sectors it serves. On the positive side, that means we have a direct line to the needs of those clients we serve and are developing targeted thought leadership based on the same. Our group looks forward to another productive year and would welcome any new members who might be interested in joining us.
William A. Bulfer is a partner in Teague Campbell’s Asheville, North Carolina office, where he co-chairs the Insurance Coverage Services Group. In addition to DRI, Bill is a fellow of the American College of Cover Counsel, a member of the International Association of Defense Counsel, and is a former Council Member of the Insurance Law Section of the North Carolina Bar Association. When he’s not handling coverage matters, Bill serves as County Attorney for Transylvania County, North Carolina.
The Role of Coverage Counsel in Resolving Risk – Trucking Edition
By William Bulfer and Nicole Wilinski
As reptilian tactics have taken root and nuclear verdicts sprouted, defending trucking cases has become more complex than ever. One need only look at the $89.7 million verdict entered by a Houston jury against Werner Enterprises in 2018 or the subsequent $150 million settlement reached by Werner in 2022 to begin to understand the risk associated with litigating commercial transportation matters. According to the American Transportation Research Institute (ATRI), from 2010 to 2018, the average verdict in trucking cases rose from $2.3 million to $22.3 million, an increase of nearly 1000%. https://www.fleetowner.com/operations/article/21254975/nuclear-verdicts-in-trucking-large-fleets-a-target-for-pricey-litigation.
While settlements and verdicts continue to skyrocket, the Federal Motor Carrier Safety Administration has continued to require minimum limits of just $750,000 under the MCS-90. https://www.fmcsa.dot.gov/registration/form-mcs-90-endorsement-motor-carrier-policies-insurance-public-liability-under. This form, and the minimum limits it provides, is designed to address public liability and to provide compensation for the often-significant consequences that come when tractor-trailers and motor vehicles collide. But the pace of trucking verdicts and settlements has greatly outpaced the minimum insurance requirements. Even policies that exceed these minimum requirements often can’t keep up. As a result, the expectations of plaintiffs and the lawyers that represent them are often at odds with the finite availability of monies to settle. For every large scale, otherwise solvent trucking carrier, there are many more individual, otherwise insolvent actors with limited resources to pay in the event of a catastrophic loss. In these circumstances, coverage counsel and their ability to explain the limits of available coverage, can be a significant asset in resolving risk.
There is a fundamental difference between whether a party can prevail and whether it can collect. The question of insurance, how it applies, and who is responsible is often a threshold issue. Understanding the constellation of collectible funds is the key to all parties’ ability to reach a well-reasoned and practical resolution. The most sophisticated plaintiff’s lawyers in the country understand and appreciate the value of insurance and the need to understand its application in cases involving catastrophic loss. Others, lured by the marketing value of a large verdict, blinded by ego, or simply lacking the experience to understand the time-value of effort and resources press on regardless of practical consequences. In these circumstances, coverage counsel, on both sides of the aisle, are often the key to resolving a case. Coverage counsel can help assess what coverage is (and isn’t) available. Perhaps most importantly, they can have direct conversations with both parties as to the likely consequences of continuing to litigate. A bird in the hand, as the saying goes, is worth two in the bush.
With increased frequency, coverage counsel are asked to participate in settlement discussions relating to underlying trucking matters. Such participation, while informative and often useful, can also have unintended pitfalls and unforeseen consequences.
As a threshold issue, every lawyer must consider the ethical considerations in the representation of their respective clients. Model Rule of Professional Conduct Rule 1.3 provides as follows:
- A lawyer shall act with reasonable diligence and promptness in representing a client.
- A lawyer must also act with commitment and dedication to the interests of the client and with zeal in advocacy upon the client's behalf.
- A lawyer is not bound, however, to press for every advantage that might be realized for a client.
Model Rule of Professional Conduct 1.7 provides:
- A lawyer shall not represent a client if the representation involves a concurrent conflict of interest.
- A conflict of interest may exist before representation is undertaken, in which event the representation must be declined, unless the lawyer obtains the informed consent of each client.
- Two types of conflict: directly adverse, and material limitation.
Read collectively, these rules can help to guide coverage counsel when asked to engage in settlement discussion. Coverage counsel must be clear about their role, who they represent, and on whose behalf they are advocating. While the insurer’s interest in reducing the underlying risk is the same as that of the insured, these parties may well be adverse when it comes to the question of coverage. Even in cases where coverage is not “at issue,” the prospect of excess verdicts and pressure to resolve within policy limits, even in the face of viable defenses, can complicate the question of coverage. It is thus imperative that coverage counsel “stay in their lane,” addressing the relevant coverage issues , while leaving the underlying case to liability defense counsel retained for that purpose. In doing so, coverage counsel should pay particular attention to protecting its insurer client from the prospect of bad faith.
Under the general implied covenant of good faith and fair dealing, an insurer has a duty to act in good faith in responding to settlement offers. Courts have expressed this duty as, variously, an obligation to act reasonably in the payment and settlement of claims, a duty to settle claims within the policy limits on objectively reasonable terms, and a duty to do what the average person would do in a similar situation, so that it had a duty of settling if that was a reasonable thing to do. While states vary widely in the application and consequences of claims of bad faith, it is an almost universal truth that the pressure of excess verdicts is giving rise to the prospect of bad faith and the need to carefully consider competing rights and responsibilities in any insurance contract. Examples of this consideration and how Courts have addressed the same are as follows:
Bad faith failure to settle requires a showing that the insurer failed to treat the insured's interests equal to its own, which can be shown by a pattern of behavior evincing a conscious or knowing indifference to the probability that an insured would be held personally accountable for a large judgment if a settlement offer within the policy limits were not accepted. Pinto v. Allstate Ins. Co., 221 F.3d 394, 399 (2d Cir.2000).
The test is whether a prudent insurer without policy limits would have accepted the settlement offer. When the insurer fails to accept a reasonable offer when liability and coverage is clear, then the insurer will be liable for any excess judgment. McDaniel v. GEICO Gen. Ins. Co., 55 F. Supp. 3d 1244, 1253 (E.D. Cal. 2014).
An insurer owes a duty to its insured to act diligently and in good faith in effecting settlements within policy limits, and if necessary to accomplish that purpose, to pay the full amount of the policy. Alford v. Textile Ins. Co., 248 N.C. 224, 229, 103 S.E.2d 8, 12 (1958).
The duty to settle arises when a third party demands settlement within the policy limits, a claim has been made against the insured, and there is a reasonable probability of recovery in excess of policy limits and a reasonable probability of a finding of liability against the insured. Surgery Ctr. at 900 N. Michigan Ave., LLC v. Am. Physicians Assurance Corp., Inc., 922 F.3d 778, 785 (7th Cir. 2019).
While the prospect of a bad faith claim can seem daunting, the use of coverage counsel in considering demands designed to give rise to bad faith will provide both calm and clarity to the insurer’s decision-making process. Coverage counsel can and should advise his/her client as to the consequences of settling and not settling. By thinking creatively, counsel can also work with their clients and the opposition to develop a framework for resolving risk without giving rise to bad faith. Stipulations as to claimed damages within policy limits, high-low agreements, and clear delineation of the source of any coverage dispute can help avoid those situations where a verdict is entered before the coverage question becomes ripe.
As noted above, sophisticated plaintiff’s counsel are interested in the insurance landscape. They want to understand what coverage is available and how it will operate in the event a verdict is entered in favor of his/her client. By providing a clear picture of available coverage early, coverage counsel can help frame the discussion in a way that reduces the inflammatory consequences of a reptilian verdict. Success in this space requires two key elements: integrity and thoroughness.
The practice of law is, by its nature, adversarial. But that dynamic does not have to give way to dishonesty or a perception that one is “hiding the ball.” Addressing the concerns of all involved through a direct, thorough exchange of information will often help to resolve the underlying dispute. Where it doesn’t, such an exchange will at least help to narrow the dispute and make the litigation a more predictable endeavor for all involved. Coverage counsel thus needs to be able to say where the coverage extends to and where it ends. To do this, a robust understanding of all coverage that may come into play is critical.
In a trucking context, where brokered loads, independent drivers, shippers, and more come into play, these questions are often complicated by the existence of multiple policies covering different insureds and different vehicles. The multi-state nature of trucking lends an additional layer of complication with a necessary application of conflicts of law principles to interpret both the underlying tort and the policies that provide protection. Even when policies and conflicts can be addressed, they must still be compared for priority. While states often have nuanced interpretation of the various other-insurance clauses of a particular policy, the basic break down of such clauses, generally, is as follows:
- Excess Clause: Provide coverage only for liability above the maximum coverage of the primary policies.
- Standard Escape Clause: No coverage when there is other valid and collectible insurance.
- Super Escape Clause: Expressly provides that the insurance does not apply to any loss covered by other specified types of insurance, including the excess insurance type.
- Standard Escape v. Excess Clause: The former provides primary coverage and the latter secondary.
- Super Escape v. Excess Clause: The former is absolved from liability.
Where the policy is unambiguous, it must be presumed the parties intended what the language used clearly expresses, and the policy must be construed to mean what on its face it purports to mean. Hartford Acc. & Indemnity Co. v. Hood, 226 N.C. 706, 710, 40 S.E.2d 198, 201 (1946). Where it was impossible to determine which policy is primary, the excess clauses are generally deemed repugnant, with neither clause being given effect. As a result, the claim must be prorated between the two insurers according to their respective policy limits. Integon Nat. Ins. Co. v. Phillips, 212 N.C. App. 623, 630, 712 S.E.2d 381, 386 (2011).
To complicate these cases even further, a situation may arise where priority isn’t determined by the “other insurance” provisions in the policies involved. In general, “other insurance” is insurance that covers the same risks, interests, and subject matter concurrently with another policy. Upjohn Co. v. New Hampshire Ins. Co., 178 Mich. App. 706, 721, 444 N.W.2d 813, 819-20 (1989) rev’d on other grounds 438 Mich. 197. Depending on the jurisdiction, a commercial general liability policy, automobile policy and broker’s contingent liability policy for example, may not be “other insurance” because they don’t cover the same risks, interest or subject matter. In these circumstances coverage counsel should be familiar with the “specific versus general” approach to determining priority of coverage. See e.g. Liberty Mut. Ins. Co. v. Home Ins. Co., 583 F. Supp. 849, 852 (W.D. Pa. 1984).
Under this approach, if two policies cover the same loss, a policy providing more specific coverage must pay up to its limits, before a policy affording more general coverage can be required to pay. Id. This approach has been applied by courts in California, Utah, Missouri, Georgia and New York. See e.g. Gillies v. Michigan Millers Mutual Fire Ins. Co. (1950) 98 Cal.App.2d 743, 747 (the court explained that when two policies provide specific coverage for a risk, then both policies prorate; however, if one policy provides specific coverage and the other only general or floater coverage, then proration is not applied); Caribou Four Corners, Inc. v. Truck Ins. Exchange, (10th Cir. 2002) 443 F.2d 796, 802-803 (applying Utah law to find that a general policy is excess and does not contribute until after the exhaustion of a specific policy); United Services Auto. Ass'n v. U.S. Fidelity & Guaranty Co. (Mo.App.1977) 555 S.W. 2d 38, 43 (applying Missouri law to find that a specific policy provides primary coverage and a general or floater policy provides excess coverage); Mill Factors Corp. v. Ming Toy Dyeing Co. (D.C.N.Y. 1941) 41 F. Supp. 467, 469 (applying New York law to find that a specific policy covering goods at a specific location must bear loss before coverage under a general policy is triggered although both policies contained “other insurance” clauses); Hartford Steam Boiler I. & Ins. Co. v. Cochran P.M. & G. Co. (Ga.App. 1921) 26 Ga.App. 288, 105 S.E. 856 (applying “specific v. general” rule to hold that specific policy provides primary coverage and general policy provides excess coverage). See also Frankenmuth Mut. Ins. Co., Inc v. Con’t Ins. Co., 450 Mich. 429, 438, 537 N.W.2d 879 (1995)(noting “where there is a policy more specifically tailored to the circumstances of the claim, it would be appropriate to designate that policy as the primary insurer….”).
When discussing the application of available coverage, counsel should come prepared to explain both what policies are in place and the priority in which they will operate. Where other insurers are potentially on the risk, counsel should come prepared with an assessment of this additional coverage as well. Armed with this information and a clear and credible explanation of where coverage applies (and where it doesn’t apply), coverage counsel can serve as a valuable resource for resolving risk, protecting insureds, and avoiding extra-contractual exposure.
William A. Bulfer is a partner in Teague Campbell’s Asheville, North Carolina office, where he co-chairs the Insurance Coverage Services Group. In addition to DRI, Bill is a fellow of the American College of Cover Counsel, a member of the International Association of Defense Counsel, and is a former Council Member of the Insurance Law Section of the North Carolina Bar Association. When he’s not handling coverage matters, Bill serves as County Attorney for Transylvania County, North Carolina.
Nicole. E. Wilinski is a shareholder at Collins Einhorn Farrell PC in Michigan, where she co-chairs the firm’s Insurance Coverage practice group. A long-time member of DRI, Nicole is also a past chair of the State Bar of Michigan’s Insurance and Indemnity Section and a past president of the Women’s Bar Association, Oakland Region of the Women’s Lawyers Association of Michigan. She currently serves on the board of the Women Lawyer’s Association of Michigan Foundation.
Interested in joining the Insurance Law Committee? Click here for more information.
Insurance Law: Covered Events (Cont.)
ILC/SIU Fraud Subcommittee Leadership Note
By W. Edward Carlton
Hi everyone! This is my annual opportunity to provide some insight on the ILC SIU/Fraud Subcommittee, and hopefully to annoy some of you by bringing up Tar Heel basketball. Well, as to the later, as I write this, UNC is not ranked. Instead, congrats to Purdue, Houston, Alabama, Arizona, and Texas as the current top five! As to the ILC SIU/Fraud Subcommittee, I am honored to have worked this year with this group of fine hard working DRI lawyers and insurance personnel. Officially, our subcommittee seeks to provide opportunities for DRI insurance professionals and practicing attorneys to address recent trends and current information on emerging areas in insurance fraud and initiatives in the insurance industry to counter such activities. Twice a year, our subcommittee gets the opportunity to author SIU/Fraud articles for The Brief Case. And this year, several of our lawyers stepped up and provided excellent articles! If you missed them, go back and read two articles published in the September edition of The Brief Case: 1. Andrew Wills, “Insurance Fraud Litigation and the Pandemic, Where are the Cases?” and Brian Biggie, “The Use of Ridesharing Apps to Stage Car Accidents.” And do not miss Chris Teske’s article in this current edition, “Selling Shovels in a Legal Gold Rush: Policyholder Advocates Swindle Insurers and Insureds to Cash In.” Not only have these articles been timely and extraordinarily informative, in the past some have led to opportunities for our members to speak at DRI Seminars and to other leadership opportunities in the ILC. So, if your practice involves or you have an interest in SIU/Fraud, there is an opportunity through this subcommittee to get involved with a great group of lawyers and industry professionals and to provide a valuable resource to the insurance industry. We would welcome you! Please join us by contacting Ed Carlton at firstname.lastname@example.org or Isaac Melton at Isaac.email@example.com
W. Edward Carlton is the Special Investigation/Fraud SLG Chair for the Insurance Law Committee.
Selling Shovels in a Legal Gold Rush: Policyholder Advocates Swindle Insurers and Insureds to Cash In
By Christopher Teske
Tricia Franatovich, a schoolteacher in Livingston Parish, Louisiana, likely never expected that her claim against Allied Trust Insurance Company for damage caused by Hurricane Ida would become a centerpiece of the latest legal gold rush. And yet, a February 1, 2023, hearing on two lawsuits that she allegedly filed against Allied Trust illuminates the kind of misrepresentations and fraud that have become common in Louisiana. The latest legal gold rush started in southwestern Louisiana after the area suffered the effects of three storms—Hurricanes Laura, Delta, and Zeta—during the 2020 Atlantic Hurricane season. It has continued with claims from 2021’s Hurricane Ida season, moving east across the state.
Within the past month, the gold rush has resulted in numerous allegations of fraud and ill-practices against policyholder representatives. A federal magistrate in the Eastern District of Louisiana ordered the named partners of a Texas law firm to appear and answer detailed questions about Franatovich’s case and how the firm recruited clients that it represents in hurricane cases filed in the Eastern District of Louisiana. Tricia Rigsby Franatovich v. Allied Trust Ins. Co., C.A. No. 22-2552 c/w 22-4927, Eastern District of Louisiana, R. Doc. No. 33, Jan. 25, 2023. Previously, another federal district judge in the Western District of Louisiana sanctioned the same Texas policyholder law firm for failing to properly address their client’s hurricane Laura claim. Bobby Dyer v. Allied Trust Ins. Co., C.A. No. 5:22-cv-04961, Western District of Louisiana, R. Doc. No. 18, Jan. 17, 2023. Louisiana authorities also arrested a licensed public adjuster on charges that he stole more than $600,000 from his clients in connection with their hurricane claims. Drew Broach, They Hired Him to Settle Their Hurricane Ida Claims. He Kept Their Payouts Police Say, Nola.com, Jan. 12, 2023.
The story of those events highlights how a cast of characters including plaintiffs’ attorneys, public adjusters, engineers, and contractors have tried to cash in on the recent property insurance litigation in Louisiana. It also represents the latest in a series of situations where deceptive and even fraudulent tactics by policyholder representatives have dramatically increased the cost of claims and the defense of policyholder lawsuits against insurers across the United States. Understanding the deceptive—and potentially criminal—tactics employed by policyholder advocates and the conditions that fostered them can help protect both insurance carriers and their insureds.
The Latest Legal Gold Rush
Mark Twain observed, “[D]uring the gold rush it’s a good time to be in the pick and shovel business.” That certainly holds true in modern legal gold rushes. By way of introduction, a legal gold rush occurs when the law substantially creates or expands opportunities to make money by filing civil lawsuits and the plaintiffs’ bar responds by filing many new cases that previously would not have been brought. Evan Stevenson and Kayla Scroggins-Uptigrove, “Just Win, Baby”: The Tenth Circuit Rejects the “Anything Goes” Tactics of the Hail-Litigation Gold Rush, Denver Law Review, Vol. 96:2, 2019, at p. 276. Past legal gold rushes have included lawsuits over silicosis, employment practices in California, corporate fraud, silicone breast implants, asbestos, oil and gas developments, and other subjects. Id.
The latest exploitation of such a gold rush in Louisiana occurred during the February 1, 2023, hearing before United States Magistrate Judge Michael North. Judge North ordered McClenny Moseley & Associates, PLLC’s named partner, J. Zachary Moseley, and the head of the firm’s Louisiana office, William Huye, to appear personally at a hearing on February 1, 2023. The hearing’s ostensible purpose was to determine whether the Court should enforce an appraisal award in Franatovich’s favor that allegedly established the value of her Hurricane Ida claim. In addition to deciding that question, however, Judge North seized the opportunity to explore the relationship between McClenny Moseley, their clients and a third party known as Apex Roofing. See Order dated January 25, 2023, in Tricia Rigsby Franatovich v. Allied Trust Insurance Company, C.A. No. 22-2552, Eastern District of Louisiana at R. Doc. No. 33.
Before the hearing, the evidence strongly suggested that the Plaintiff had never hired—and never intended to hire—McClenny Moseley to represent her in a suit against her insurer. The Plaintiff stated in writing that:
I have never retained McClenny, Moseley and Associates to represent me. When I was looking for a roofer, a company called Apex Roofing said they could help me, so I signed paperwork with them. It was not my intention to hire McClenny, Moseley and Associates through the roofer. Franatovich v. Allied Trust Insurance Company, C.A. No. 22-2552, Eastern District of Louisiana at R. Doc. No. 20-12.
Allied Trust and other carriers say that they see indications of fraud and forgery in McClenny Moseley’s efforts to sign up clients for Louisiana hurricane cases. The Houston-based firm claims to represent plaintiffs in a massive volume of hurricane related cases filed in Louisiana even though it had no presence in the state prior to the 2020 hurricane season. In late 2022 the firm filed about 1,500 cases in the Western District of Louisiana on a single day—just in time to beat the statute of limitations that applies to most first-party insurance claims in the state.
It was immediately apparent at the beginning of the February 1 hearing that something was wrong. Messrs. Huye and Moseley were present in the courtroom, but so were two other plaintiffs’ lawyers: Aaron Broussard and Myles Ranier of Broussard Williamson, a prominent Louisiana plaintiffs’ firm. When the two consolidated cases against Allied Trust were called, Broussard and Ranier announced that they represent Ms. Franatovich in one of the suits; Huye announced that he represented her in the other case. Both suits are about the same claim for damages under the Allied Trust insurance policy.
Judge North called Ms. Franatovich, who was sitting with Broussard and Ranier, to the lectern at the front of his courtroom. She proceeded to tell the court that, to her knowledge, she has never met nor spoken with anyone who works for McClenny Moseley. She explained that she was approached by a representative of Apex Roofing who was driving through her neighborhood and noticed that the roof of her house still had blue tarps on it following Hurricane Ida. Apex’s salesperson offered that they could fix the roof and she agreed to hire them. At the time, she was told that the company also had a lawyer who could represent her if she had an issue with her insurance company. She says she told them that she did not need a lawyer because she was already represented by Broussard and Ranier and their Texas co-counsel at Daly & Black. She then signed a contract with Apex to fix her roof without knowing that it included an Assignment of Benefits (“AOB”) that assigned her right to pursue her claim against Allied Trust to Apex. Sometime later, McClenny Moseley sent her a document which asked her to answer several questions about her claim. She opened it on her phone, answered their questions, and signed it electronically from her phone because she believed that time was running out to make a claim against her insurer ad that they were working with Daly & Black on her claim.
Under questioning by the Magistrate, Ms. Franatovich went on to explain that she never hired or intended to hire McClenny as her lawyers. At some point later in the claim she was sent a law firm election form which she filled out and returned to them specifying that she wanted Daly & Black and Broussard Williamson to be her lawyers.
Magistrate North then called Mr. Huye to the podium. Huye admitted under intense questioning from the judge that the firm’s client at the outset of this case was Apex Roofing, for whom they intended to prosecute the AOB claim. He acknowledged that the firm had never stopped working for Apex and had not told Ms. Franatovich that the firm represented Apex. He also admitted that no one from McClenny had ever told Ms. Franatovich about the potential conflict between her claims under the Allied Trust policy and Apex’s claims under the AOB or warned her that the fees McClenny and Apex charged for resolving her claim could take so much out of a settlement with the insurance company that she would not have enough money to complete repairs to her house. Huye also admitted that, despite their contract to do so, Apex has not fixed the roof of the Plaintiff’s home because “the case hasn’t been settled yet.”
Magistrate North asked Mr. Huye if he knew that the Allied Trust Policy prohibits post-loss AOBs without Allied’s consent. Huye said that he understands that now because he has finally seen a copy of the policy. To that point Judge North responded by demanding that Huye identify any insurance company whose policies allow post-loss AOBs. Huye was unable to do so. The judge also asked both Mr. Huye and Allied Trust’s counsel to explain how the court could possibly enforce the appraisal award when it was the result of a demand for appraisal by someone who did not represent the Plaintiff and had never represented the plaintiff. Huye argued that the appraisal was valid because Ms. Franatovich had voluntarily participated in the process by letting the appraisers into her house to inspect it, but the court was not impressed with that answer. Allied Trust’s lawyers eventually agreed to set aside the appraisal award in favor of a new appraisal and efforts to settle the case with Broussard & Williamson.
During the hearing Huye and Moseley tried to argue that this case represents an isolated incident and that they had taken steps to prevent this situation from happening again. They admitted, however, that they have sent potentially hundreds of letters to insurance companies indicating that they represented insureds in their hurricane claims when that statement is false because they actually represent Apex Roofing by way of an AOB. They also told the Court that every time they settle a case, they send a breakdown of the settlement amount and the fees to Apex and ask Apex to get the insured to sign the breakdown acknowledging the settlement. When the insured does that, it gives McClenny a power of attorney that allows it to negotiate the check for the insurance proceeds on the insured’s behalf and uses that power of attorney to cash the checks and deposit them in McClenny’s Texas bank account. The Court pointed out that, because they delegate responsibility for getting the insured to sign those breakdowns to Apex, McClenny has no way of knowing whether the insured signed it or not. In the Franatovich case a representative of Apex, Tricia Drummond, signed the contract for representation between Franatovich and McClenny on Franatovich’s behalf.
Following the hearing, Judge North issued an Order compelling McClenny Moseley to pay Ms. Franatovich for the time she lost from work to come to the hearing; to pay her actual lawyers from Broussard & Williamson their attorneys’ fees and costs for appearing at the hearing; and to pay Allied Trust’s counsel his attorneys’ fees and costs for appearing. Judge North also ordered McClenny Moseley to produce detailed information about cases that it is handling or could potentially handle in the Eastern District of Louisiana.
Judge North’s hearing with McClenny’s attorneys is not the first time they have encountered trouble in Louisiana Hurricane litigation. United States District Judge David Joseph in the Western District of Louisiana previously ordered the law firm to pay Allied Trust Insurance Company’s attorneys’ fees and costs in the amount of $15,914 as a sanction for ill practices in the litigation of a hurricane claim pending in that court. See Bobby Dyer v. Allied Trust Ins. Co., C.A. No. 5:22-cv-04961, Western District of Louisiana, at R. Doc. No. 18. Judge Joseph explained his ruling by referring to a hearing held in his court on December 28, 2022.
During the hearing in that case the court spoke with the Plaintiff, Bobby Dyer, who was present by telephone. Mr. Dyer told the court that although he had spoken with someone from McClenny Moseley about his claim, he never told them that he was insured by Allied Trust, the named defendant in the suit. Reporter’s Official Transcript of the Hearing Before the Honorable David C. Joseph United States District Judge in Bobby Dyer v. Allied Trust, Ins. Co., December 28, 2023, at p. 10—11. Mr. Dyer explained that his home is insured by Allstate. That is not necessarily a surprise. Judge Joseph and Magistrate Judge North both received evidence indicating that McClenny Moseley never communicated directly with their clients. Instead, they used Apex Roofing or a marketing service known as Velawcity to obtain leads for new clients who might have hurricane claims in Louisiana.
Based on Dyer’s testimony, Judge Joseph concluded that the attorneys from McClenny Moseley had not properly investigated the claim or determined the facts related to their client’s representation before filing suit. He also concluded that they had filed suit against Allied Trust even though they could have discovered that the company never issued a policy to Mr. Dyer. Based on those conclusions Judge Joseph determined that it was appropriate to dismiss the case and order McClenny Moseley to pay Allied Trust’s attorneys’ fees and costs associated with their defense of the case.
Judge James Cain, who presides over most of the 2020 hurricane suits in the Western District of Louisiana’s Lake Charles Division previously grilled one of their lawyers about the firm’s practices for obtaining clients in hurricane-related litigation. During that session, Judge Cain noted that the firm has filed suits alleging property damage caused by various hurricanes in areas of Louisiana that are far from where those storms made landfall or were typically known to cause significant damage.
The questions about McClenny’s cases are so serious that in October Judge Cain stayed all the suits the firm filed in the Western District of Louisiana.
One of McClenny Moseley’s alleged clients, Melvin Addison, told the court that he does not know how he became a client of that firm. He said that he never even realized the firm was working on his behalf, despite a retainer agreement bearing his electronic signature that the firm showed the court during a December 13, 2022, hearing. Addison says he could not have signed the agreement even if he wanted to because his government issued cell phone does not support the technology required to do so. Houston Firm Accused of Forgery in Lake Charles Hurricane Insurance Lawsuits, The Advocate, December 21, 2022.
Addison’s mortgage lender, which was supposed to receive part of the money from Addison’s insurer, also says it never got paid. After McClenny Moseley reached a settlement with the insurer, Allstate cut a check for almost $90,000 payable to the law firm, Addison, and his mortgage lender, Accord Services. Neither Addison nor the mortgage lender ever saw the check. It was stamped by the McClenny firm, claiming power of attorney to negotiate it for both Accord and Addison, a practice that is problematic at best. Id. The way that McClenny obtained the alleged power of attorney from Addison and Accord is similar to the process they described at the Franatovich hearing. It is also likely illegal in Louisiana.
McClenny Moseley’s tactics are hardly an isolated issue. Last month, Louisiana State Police arrested Andrew Mitchell, the head of Mitchell Adjusting International. The State Police were reportedly tipped off about Mitchell’s alleged activities by the Louisiana Department of Insurance. The State Police investigation determined that, following Hurricane Ida, Mitchell began soliciting clients with homeowners claims in parishes across Louisiana. He then allegedly forged his clients’ signatures to obtain funds from their insurance companies, deposited the settlement checks in his own account, and failed to provide the monies to the homeowners.
Mitchell was booked on two counts of theft in St. Charles Parish and State Police reportedly have warrants to arrest him for six counts of theft and forgery in St. John Parish; one count of theft and one count of forgery in New Orleans; and one count of theft and one count of forgery in Tangipahoa Parish. Drew Broach, They Hired Him to Settle Their Hurricane Ida Claims. He Kept Their Payouts Police Say, Nola.com, Jan. 12, 2023.
This is reportedly not Mitchell’s first offense. According to other reports, Mitchell, who is from Clear Lake Shores Texas, has also been accused by the Texas Department of Insurance of a similar scheme in his home state. Texas officials also accuse Mitchell of stealing from clients in Georgia and Minnesota, although Louisiana is the only state where criminal charges have been filed. They filed civil charges in the State Office of Administrative Hearings against him accusing him of stealing $7.6 million from fourteen clients. Mitchell allegedly cashed four insurer payout checks intended for Friendship Missionary Baptist Church in Albany, Georgia that totaled more than $6 million alone. Jim Sams, Louisiana Police Arrest Public Adjuster Accused of Pocketing Clients’ Checks, Claims Journal, January 17, 2023.
The current stories coming from Louisiana are no doubt horrifying. They should be deeply concerning to regulators, insurers, and coverage lawyers in Louisiana and other states where high-volume weather-related property damage claims are common. They are also nothing new. Rather, they are simply the latest wave of abuses and potential fraud committed by policy holder advocates on behalf of their clients. The question is, how did we get here?
A Short History of Fraud by Policyholder Advocates
Robert Heinlein, the Dean of American science fiction, “…the more complicated the law, the more opportunity for scoundrels.” Insurance policy contracts and the laws that govern them are undeniably complicated. Handling property insurance claims takes a certain degree of experience and skill that does not come naturally to many policyholders, even when they are otherwise sophisticated business entities. Policyholder advocates, including attorneys, public adjusters, contractors, and engineers no doubt play an important role in protecting the insured’s interests in these complicated claims. They can, however, also easily become the sort of scoundrels Heinlein referred to by participating in fraudulent or predatory practices directed against an insurance carrier.
Reported decisions implicating a public adjuster in a scheme to defraud the insurance company date back more than a century. See, e.g., Mick v. Royal Exch. Assur., 87 N.J.L. 607, 91 A.102 (N.J. App. 1914); Mick v. Royal Exch. Assur., 87 N.J.L 628, 94 A. 808 (N.J. App. 1915); Bockser v. Dorchester Mut. Fire Ins. Co., 327 Mass. 473, 99 N.E.2d 640, 24 A.L.R.2d 1215 (1951). Those cases provide good examples of some of the lengths public adjusters have gone to to perpetrate insurance fraud for their own benefit or that of the insured.
In Mick, for example, the public adjuster assisted the insured in providing copies of fictitious sales receipts and other information to the insurance company. Mick, 87 N.J.L. 607, 91 A.102 (N.J. App. 1914). The court in that case noted that it could fairly infer from the facts that the insured, the public adjuster, or both had intentionally submitted false documents to augment the amount of the insured’s recovery. See Mick, 91 A.102, 103. The public adjuster’s participation in that scheme raised the question of whether his actions could be imputed to the innocent insured, especially since the insured’s son apparently participated in the attempted fraud.
Other historical cases saw public adjusters act entirely independently of the insured. The public adjuster in Bockser was found guilty of attempted fraud upon the insurer because he submitted two bills for labor and materials that had been marked up by a total of $14,000. The insured testified in that case that it had no knowledge of the two fraudulent bills until after they had been filed with the insurer’s representatives. Despite that testimony, the Bockser court held that the public adjuster’s fraud voided the policies just as it would if the insured had committed the fraud himself. See Bockser, 99 N.E.2d 640, 24 A.L.R.2d 1215 (1951).
At one time the problem appeared limited to a few isolated situations. Richard O’Donnell noted in a 1987 article for the American Bar Association’s Tort and Insurance Law Journal that “[a]s of March 1, 1986, only four cases were discovered which explicitly ruled on the effect of alleged misrepresentation by a public adjuster upon an insured’s recovery.” Imputation of Fraud and Bad Faith: The Role of the Public Adjuster, Co-Insured and Independent Adjuster, 22 Tort & Ins. L.J. 662, 663.
More recently, however, policyholder advocates have dramatically increased their efforts to exploit weaknesses in the laws governing first party insurance claims. In some cases, this amounts to artificially inflating the value of an otherwise legitimate claim. Others cross the threshold into fraud and misrepresentation in the name of profits for the advocates.
Evan Stephenson and Kayla Scroggins-Uptigrove described one evolution of this situation in their article “Just Win, Baby”: The Tenth Circuit Rejects the “Anything Goes” Tactics of the Hail-Litigation Gold Rush. Denver Law Review, Vol. 96:2 2019, p. 267. They noted that hail claims in the United States increased by 84% between 2010 and 2013 according to the National Insurance Crime Bureau. Id. at 269 (citing Des Toups, Hail Claims Up 84% Since 2010, NCIB Says, NASDAQ (July 18, 2013, 5:08 PM), https://www.nasdaq.com/article/hail-claims-up -84-since-2010-ncib-says-cm259263. They also noted that from 2013 to 2015 Colorado generated the second most hail claims in the United States. “Just Win, Baby” Denver Law Review, Vol. 96:2 2019, p. 271.
Along with the substantial increase in hail claims and losses came substantial increases in the number of professionals who make their living from storm damage claims. Id. In Texas, for example, membership in the Texas Association of Public Insurance Adjusters more than doubled between 2012 and 2014. Id. at p. 272. Between 2009 and 2019 Colorado saw the number of licensed public adjusters in that state triple. Id. At the time, Colorado allowed public adjusters to be paid on a contingency fee basis, which helps to explain the attraction to working in that business. See Colo. Rev. Stat. 10-2-103(8.5) (2018). What it does not explain is why the number of hail damage claims increased so dramatically over the past decade.
Stephenson and Scroggins-Uptigrove noted that “[t]he increases in hail claims, litigation, public adjusters, losses, and premiums are too large and sudden to have resulted from changes in the weather, climate change, population density, insurers’ behavior, or bad luck. Their timing and magnitude, as well as other factors, reveal the hail phenomenon’s nature: it is a legal gold rush.” “Just Win, Baby” Denver Law Review, Vol. 96:2 2019, p. 276. Similarly, they noted one Texas commentator’s observation that “the increase in hail damage claims and resulting lawsuits have nothing to do with abnormally large or frequent storms.” Id (citing Steven Badger, The Emerging Hail Risk: What the Hail is Going On?, Ins. J. (May 19, 2014), https://www.insurancejournal.com/magazines/mag-features/2014/05/19/329039.htm). The Texas commentator concluded that the increase in hail claims and litigation in Texas coincided with a lull in hurricane activity that ordinarily supplied the livelihood for public adjusters and policyholder lawyers. Id. at 276-77.
Ultimately, Stephenson and Scroggins-Uptigrove argue, legal changes supplied the best explanation for the hail phenomenon in Colorado and Texas. They noted that tort reform in both states—and a lack of hurricane activity in Texas—resulted in a loss of income for policyholder advocates by making personal injury cases less lucrative and decreasing the number of available hurricane claims. Id. at 278. At the same time, in August 2008 two new Colorado insurance statutes became effective. They permitted policyholders to recover two times the amount of any “owed” “covered benefit” the insurance company delayed or denied without a reasonable basis. In effect the statutes permitted treble recovery plus reasonable attorneys’ fees and costs in nearly every first party insurance case. Id. at 279. Many states enacted similar penalty statutes even though there was no evidence presented to the legislature to support the conclusion that already-existing tools for pursuing property claims were inadequate or that property insurance claims were the subject of widespread abuse by insurers. Id.
Insurance litigation steadily increased in the decade after those Colorado Statutes were enacted. Id. at p. 280. The treble-benefits remedy, plus the availability of attorneys’ fees and costs created a massive incentive for policyholders and their advocates to file suit. Often, in Colorado and other states that employ similar bad faith penalties, the multiplied benefits alone dwarf the initial amount of the coverage dispute. And there is an obvious incentive for policyholder advocates to inflate or exaggerate a claim because of the statutes when each dollar of claim inflation can become three dollars of recovery. Id.
The opportunity for substantial profit in insurance claims leaves little doubt about the origin of abuses like those currently underway in Louisiana. Under current regulations policyholder advocates are given a powerful incentive to push the envelope, inflate or exaggerate claims, and employ questionable tactics to obtain as many clients as they possibly can. Carriers and their lawyers must, therefore, decide how they can best identify and defend against the policyholders’ strategies.
Evolving Defense Strategies
Insurers, the defense bar, courts, and state legislatures have used a variety of different strategies to try to prevent the types of abuse that have proliferated since the early 1990s. Some of those strategies have resulted in a degree of success. Others have failed entirely.
The modern trend in abuses by policyholder advocates along the Gulf Coast began in the wake of Hurricane Katrina. In 2006, the Louisiana State Bar Association sought to enjoin a public adjuster from engaging in the unauthorized practice of law. See Louisiana State Bar Assn. v. Carr & Associates, Inc., 15 So.3d 158 (La. App. 1 Cir. 2009). The association’s argument centered on the fact that allowing a public adjuster to negotiate legal aspects of an insured’s claim against its insurance company in exchange for a contingency fee put the public at risk.
Like more recent commentators in Texas and Colorado the association reasoned that such a scheme could (and would) encourage public adjusters to artificially inflate the amount of the claim for the benefit of their fee, rather than for the benefit of their customer. Without a regulatory means to stop those tactics the public adjusters would put an already unstable insurance market in coastal southern Louisiana at significant risk. At the injunction trial the association presented testimony from an expert in the field of law, ethics, and the unauthorized practice of law. That expert opined that the public adjuster was “acting in the manner of lawyers without the ethical constraints under which lawyers operate.” See id. at 171. The focus of the association’s action, therefore, was to prevent public adjusters from negotiating insurance claims essentially unchecked by any standards that could prevent the insured or the insurer from serious harm or fraud.
The Louisiana court’s decision in Carr & Associates, combined with the enactment of the Louisiana Public Adjuster Act (“LPAA”), La. R.S. 22:1210, which took effect in 2007, were originally expected to afford that protection. The court ruled in Carr that a public adjuster could not negotiate the legal aspects of an insurance claim on behalf of their client. Meanwhile, the LPAA prohibited public adjusters from entering into contingent fee contracts or otherwise taking a financial interest in the outcome of a claim as a way of removing the incentive for public adjusters to inflate or exaggerate the value of their client’s claims.
By the time Hurricane Gustav reached the Louisiana coast in 2008, however, it was apparent that the injunction action and the enactment of the LPAA had done comparatively little to discourage the ill practices they were intended to prevent. Individuals who once might have obtained a public adjuster’s license instead held themselves out as building consultants or obtained a license to operate as a general contractor or home renovation contractor. Building consultants and licensed contractors were not regulated under the LPAA. They were, therefore, essentially free to negotiate any type of fee arrangement they wanted. They partnered with policyholder attorneys to work up claims and present them to the insurance companies to obtain both a recovery for the insured and penalties and attorneys’ fees for the advocates. Their ability to inflate claims and influence the results continues largely unchecked except for a handful of cases in which insurance companies were willing to incur the litigation costs to prove what they were doing.
We can draw a direct line from the failed effort to regulate public adjusters to the abuses that McClenny Moseley and others are currently accused of in Louisiana. Apex Roofing allegedly used its ability to write its own contract provisions to con hundreds of unsuspecting policyholders into hiring Apex’s business partner, McClenny. Policyholders’ inexperience with the adjustment of first party claims encouraged many to turn to public adjusters like Andrew Mitchell.
While there are surely policyholder advocates who have their clients’ best interests at heart, one cannot help but wonder whether even those advocates inflate or exaggerate their client’s claims because of the penalties and attorneys’ fees that bad faith statutes like those at play in Florida, Louisiana, Texas, and Colorado provide. Who can blame them?
“During the Gold Rush, most would be miners lost money, but people who sold them picks, shovels, tents and blue-jeans (Levi Strauss) made a nice profit.” Lynch, Peter. One Up Wall Street: How to Use What You Already Know to Make Money in the Market, p. 14, Simon & Schuster April 3, 2000. Current legal gold rushes are no different. The people who provide services and tools that ostensibly allow insureds (the miners in this story) to better their recovery from their insurance companies are the ones who will ultimately make the only nice profit in the process. They have a strong incentive to inflate and exaggerate claims in service of that profit.
Preventing fraud and abuse in first-party insurance claims is a critical public policy issue. The results of abuses like those described here affect not only insurance carriers, but the insureds that they seek to protect. Unless we take steps to prevent these abuses, large sections of the country will see dramatic increases in insurance premiums or, worse, lose their ability to obtain property insurance entirely. It is up to carriers and their advocates to illuminate the abuses and seek court orders and legislative measures to prevent them.
Christopher R. Teske is a member at the law firm of Pipes Miles Beckman, LLC in New Orleans. Mr. Teske is also an Associate Professor of Trial Advocacy and Co-Director of the Civil Litigation Intersession at Tulane University Law School. His practice focuses on complex disputes involving insurance fraud, professional liability, and coverage for personal injury and property damage claims. Mr. Teske also represents both insurers and insureds at trial in a variety of coverage disputes including the pre-suit investigation of first-party property insurance claims, the trial of catastrophic loss first-party and bad faith claims, and third-party disputes related to construction defects, exposures to and damage from environmental contaminants, and related disputes.
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Insurance Law: Covered Events (Cont.)
Construction Subcommittee Leadership Note
By Kimberly Ramey
The ILC’s Construction Law subcommittee focuses on coverage issues impacting contractors and their insurers. Our members include in house and outside counsel as well as claims professionals, all of whom have their fingers on the pulse of the construction industry. The subcommittee provides its members with opportunities to collaborate, learn and share information as well as opportunities to write for DRI publications and speak at DRI seminars. Our subcommittee is always open to new members who can provide unique insights or perspectives. Whether you live and breathe construction coverage, or you just would like to learn more about this expanding area of insurance law, we encourage you to join. If you are interested in joining Construction Law subcommittee, please contact me at firstname.lastname@example.org.
The Continuous or Progressive Injury or Damage Exclusion: Why “Timing” is Everything
By Kimberly Ramey and Kyle Goss
The “continuous or progressive injury or damage” exclusion works to eliminate coverage for property damage and/or bodily injury that begins prior to the inception of the policy in question, but continues into the policy period. It operates in a manner similar to the standard “anti-Montrose” or “known loss” provisions with one notable exception -- the policyholder’s knowledge of the damage or injury is not required. By contrast, this exclusion is intended to bar coverage for bodily injury or property damage if the injury or damage began to occur prior to the inception of the policy, even if the policyholder had no knowledge of it.
A typical example of the “continuous or progressive injury or damage” exclusion reads as follows:
This insurance does not apply to any "bodily injury" or "property damage":
1. which first existed, or is alleged to have first existed, prior to the inception of this policy. "Property damage" from "your work," or the work of any additional insured, performed prior to policy inception will be deemed to have first existed prior to the policy inception, unless such "property damage" is sudden and accidental and takes place within the policy period [sic]; or
2. which was, or is alleged to have been, in the process of taking place prior to the inception date of this policy, even if such "bodily injury" or "property damage" continued during this policy period; or
3. which is, or is alleged to be of the same general nature or type as a condition, circumstance or construction defect which existed, or resulted in "bodily injury" or "property damage," prior to the inception date of this policy.
This type of exclusion provides several attractive advantages to insurers issuing commercial general liability policies to contractors. Specifically, it can be used to limit coverage which would otherwise be afforded by multiple, consecutive policies to the one policy in effect at the time the injury or damage first commences. In jurisdictions where a continuous trigger rule applies, it can be used to eliminate risk associated with ongoing damage stemming from projects that were completed prior to the inception of the policy. These advantages would seem to inure to the benefit of insurers and policyholders alike, by allowing the insurer to more accurately identify potential exposures and, in turn, assess appropriate premiums for those exposures. But, despite the relatively simplistic and clear language of most of these exclusions, they are not immune from attack.
Attacks on the Validity and Enforceability of the Exclusion
Much debate has been generated regarding the enforceability of the “continuous or progressive injury or damage” exclusion. From the policyholder’s perspective, one argument is that the exclusion is “against public policy” because it strips the policyholder of its right to coverage for ongoing or “continuing” losses, which may span over several years triggering multiple consecutive policies. Another argument is that the exclusion effectively eliminates coverage for completed operations.
In response to these concerns, lawmakers in at least one state have actually banned the exclusion. The Colorado legislature enacted a statute which declares “void and unenforceable” any commercial general liability policy exclusion barring coverage where pre-existing injury or damage was unknown. See Colo.Rev.Stat. 10-4-110.4. The Colorado legislature specifically declared that “[t]he interpretation of insurance policies issued to construction professionals is of vital importance to the economic and social welfare of the citizens of Colorado[.]” Colo.Rev.Stat. 13–20–808(1)(a)(I). This, however, appears to be a minority view, given that a growing number of states have now analyzed similar “continuous or progressive injury or damage” exclusions, finding them to be enforceable as written.
For example, in the case of AMCO Insurance Co. v. Employers Mut. Cas. Co., AMCO asked the South Dakota Supreme Court to declare EMC’s exclusion for unknown progressive or continuous injury or damage as void and in violation of public policy. 845 N.W.2d 918 (S.D. 2014). The exclusion at issue applied to “property damage” that “commenced or ... occurred[ ] prior to the inception or effective date” of policy, whether the damage was “known, unknown, or should have been known” by the insured.” Id. at 923. AMCO opined that the exclusion “[was] antithetical to the nature of insurance, exclude[d] coverage for no purpose other than  profit, and le[ft] EMC’s insureds without indemnity coverage in all cases involving continuous injury beginning before EMC's coverage.” Id. at 921. In reviewing the specific terms of the “continuous or progressive injury or damage” exclusion at issue, the South Dakota Supreme Court concluded that the terms of the exclusion were unambiguous. Id.
The South Dakota Supreme Court then went on to address the issue of whether the exclusion violated public policy. Ultimately, the Court concluded that because the exclusion was neither “prohibited by statute, condemned by judicial decision, nor contrary to any identifiable public morals,” it did not violate any public policy. Id. In doing so, the Court acknowledged that a growing trend in the commercial insurance industry is to narrow coverage for continuous or progressive injuries or damage that occurs on an ongoing basis over a long period of time. Id. at 923. “Concerns over latent and long-festering property damage losses have led the insurance industry to craft policies with manuscript exclusions intended to affect traditional coverage triggers” and limit those triggers to a particular point in time. Id. quoting 4 Philip L. Bruner & Partick J. O'Connor, Jr., Bruner and O'Connor on Construction Law § 11:150 (2013).
In the absence of a statutory or judicial prohibition, endorsements eliminating coverage for continuous or progressive damage do not violate public policy. To the contrary, they are wholly consistent with the fortuity doctrine. These exclusions do nothing more than eliminate coverage for losses that are essentially non-fortuitous because the damage (or defect giving rise to the damage) already existed prior to the inception of the policy.
Applying the Exclusion in the Context of Construction Defect Claims
In addition to disputes regarding the enforceability of “continuous or progressive injury or damage” exclusions, several courts have been tasked with evaluating the applicability of these exclusionary provisions in situations involving construction defect damages spanning over multiple policy periods. In practice, the typical exclusion applies in three distinct scenarios: 1) when the damage occurred, in part, prior to the policy period; 2) when the damage is in progress at policy inception and continues into the policy period; and 3) when the damage stems from a condition that existed prior to the policy period. Accordingly, the cases interpreting and applying the exclusion usually center around nuanced debates regarding the timing of the injury or damage, or the timing of the creation of the condition giving rise to the injury or damage. As a result, the outcomes are largely fact-dependent.
The first two prongs of the typical “continuous or progressive injury or damage exclusion” usually require proof that the injury or damage itself occurred, in whole or in part, prior to the policy period. These prongs are inherently difficult to apply in situations where the date of commencement of the damage is unknown because the defect was latent and the damage was initially hidden (e.g. water intrusion damage). In the best-case scenario, there is undisputed testimony or other evidence establishing a timeline that allows the insurer to pinpoint the date of commencement of the injury or damage. However, in the context of claims stemming from large commercial construction projects, this information is not always readily available. Even when it is available, it is often subject to debate or dispute. See, e.g., Century Surety Co. v. United Specialty Ins. Co., 2018 WL 1989517 (C.D. Cal. April 24, 2018) (the “continuous or progressive injury or damage” applied to claims asserted by some tenants who had lived in the building and therefore suffered continuous injury prior to the policy period, but it did not negate coverage with respect to all fifty-one tenants in the underlying litigation, some of whom first moved into the building after the effective date of the policy).
The last prong of the “continuous or progressive injury or damage” exclusion is more broad. If worded appropriately, this prong of the exclusion applies if the condition giving rise to the injury or damage existed prior to the inception of the policy, regardless of whether any resulting injury or damage occurred prior to the inception of the policy. In theory, this iteration of the exclusion should be the easiest to apply in the context of a construction defect claim because there is no need to establish when the injury or damage at issue actually occurred.
For example, in the case of Mesa Underwriters Specialty Ins. Co., v. First Mercury Ins. Co., the Northern District of California addressed the applicability of a “continuous or progressive injury or damage” exclusion in a case involving “solar carports,” which were allegedly “deficiently designed and constructed” at the time they were installed. 411 F. Supp. 3d 607 (N.D. Cal. 2019). The Mesa Underwriters Surplus Insurance Company (“MUSIC”) policy was in effect at the time the installation work was completed. First Mercury issued the subsequent policy, which contained a “continuous or progressive damage” exclusion for “property damage” caused by “the same condition(s) or defective construction which first existed prior to the inception date” of the First Mercury Policy. Id. at 610.
MUSIC argued that, although the construction work giving rise to the latent defect was completed during the MUSIC policy period, it did not manifest as “property damage” until after the inception of the First Mercury policy. Id. Therefore, MUSIC argued that the initial manifestation of damage during the First Mercury policy period triggered coverage under that policy, notwithstanding the “continuous or progressive injury or damage” exclusion. The Court disagreed, noting that this interpretation ignore[d] the plain language of the exclusion which, at least in part, barred coverage for damage caused by a condition that existed prior to the inception of the policy, irrespective of whether that condition had resulted in any damage prior to the inception of the policy. Id. at 613. The Court reasoned that “although the [underlying] complaint sought coverage for damages arising from wind events that allegedly occurred during the [First] Mercury Policy period, those damages were unambiguously alleged to have been caused by the pre-policy defective construction.” Id. In other words, the exclusion applied because the construction work allegedly contained a latent defect which already existed at the time the First Mercury Policy went into effect. The dates of the wind events that ultimately caused damage and triggered discovery of the alleged pre-existing construction defects were irrelevant to the analysis. Id.
In some cases, the date of completion of the construction work at issue is disputed. See, e.g., Mt. Hawley Ins. Co. v. Aguilar, 2008 WL 11342656 (C.D. Cal. February 29, 2008) (finding genuine issues of fact as to whether damages related to the construction occurred during the applicable policy period, after a building inspection card demonstrated that final inspection of the alleged defective construction occurred during policy period, and denying summary judgment under the “continuous or progressive injury or damage” exclusion). However, when not in dispute, the date of completion often controls for purposes of applying the exclusion.
In the case of Developers Surety and Indemnity Company v. View Point Builders, Inc., the Western District of Washington, was tasked with evaluating the applicability of a “continuous or progressive injury and damage” exclusion provision in the context of a claim involving water leaks. 2020 WL 3303046 (W.D. WA June 17, 2020). The insured contractor was hired to install new roofing, windows, exterior stucco and related weatherproofing at an existing residence. Id. at *1. Developers Surety and Indemnity Company (DSIC) issued a commercial general liability policy to the contractor which was in effect from December 15, 2015, to December 15, 2016. Id. The allegations in the underlying complaint were vague as to when the insured contractor performed its work, but there was no allegation or evidence that the contractor’s work extended beyond 2013. Id. Approximately five or six years after the remodel was complete, the homeowners filed a complaint alleging that the work performed by the insured contractor did not comply with the Washington Building Code and that the improperly installed windows and exterior stucco had resulted in water leaks. Id.
The DSIC policy included a “continuous or progressive injury and damage” exclusion. After receiving notice of the lawsuit filed by the homeowners, DSIC sought a declaration that it was not obligated to defend or indemnify the contractor based on the exclusionary language in the policy. The policy’s “continuous or progressive injury and damage” exclusion expressly excluded “‘property damage’” that “first existed, or was alleged to have first existed, prior to the policy period” even if the damage “continued during the policy period.” Id. at *4. But, it also barred coverage for damage that “was caused by, or was alleged to have been caused by, conditions that existed prior to the policy period.” Id.
DSIC argued that, although the contractor may have at some point returned to repair parts of the defective work, “the repairs were apparently insufficient or unsuccessful,” meaning that the work was defective at the time the contractor finished the remodel. Id. There was no dispute that the work giving rise to the alleged defects was completed, at the latest, in 2013. Because the damage at issue stemmed from an alleged defect that existed prior to the inception of the DSIC policy, the “continuous or progressive injury and damage” exclusion clearly and unequivocally applied to bar coverage.
In certain types of cases, the cause or condition giving rise to the damage at issue may be disputed. See, e.g., Admiral Ins. Co. v. Mt. Hawley Ins. Co., 2014 WL 12160883 (S.D. Cal. January 17, 2014) (denying summary judgment under the “continuous or progressive injury or damage” exclusion when conflicting expert reports were offered as to the cause of the alleged damage). But, if the claimant has identified a condition or defect that necessarily existed at the time the construction work was completed, the exclusion should apply to bar coverage, provided that the policy that is issued after the project is completed.
For example, in Starr Surplus Lines v. Cushing Hosp., the Western District of Oklahoma Court the “continuous or progressive injury or damage” exclusion in the context of a claim involving a pool leak. 527 F. Supp. 3d 1327, 1341 (W.D. Okla. 2021). Specifically, the claim at issue arose from the construction of a hotel and an indoor pool which subsequently sprung a leak, resulting in damage to the concrete slab. Id. at 1330. Construction of the hotel was substantially complete by November 2, 2012, and a certificate of occupancy was issued on December 2, 2012. Id. After the issuance of the certificate of occupancy, one of the hotel owners observed that interior drywall wallcoverings and floor-finishes were cracking, and that the first-floor slab was being pushed upward creating a dome-like effect in the center of each room on the first floor. Id. at 1331. A geotechnical engineer opined that, due to an influx of water from a variety of possible sources, water intrusion was causing the slab to heave upward. Id. It was subsequently determined that the pool leak was the primary source of the water leak that was damaging the slab. Id.
Litigation ensued and a judgment was entered in favor of the hotel against the insured general contractor. Id. at 1333. Starr filed a declaratory judgment action, arguing that the “continuous or progressive injury or damage” exclusion applied to eliminate coverage for the loss. In support of its position, Starr argued that, because its first policy incepted in September of 2012, it had no obligation to provide coverage. Specifically, Starr took the position that all of the damage identified in the underlying litigation had occurred (or was in the process of taking place) prior to the inception of its policies, and, furthermore, the condition (water infiltration under the slab) which resulted in the damage existed prior to the inception of its policies. Id. at 1340-41. In short, Starr argued that the damage at issue in the underlying litigation was excluded under all three (3) prongs of the “continuous or progressive injury or damage” exclusion. Id.
Ruling in Starr’s favor, the court held that there was sufficient evidence to establish that the leak identified in the pool of the hotel had existed prior to the inception dates of the applicable policies, and/or that the damage identified in the underlying litigation was in the process of taking place, prior to the policy periods, even if the damage also continued during the applicable policy periods. Id. The court also concluded that the evidence was sufficient to establish that the same condition (water infiltration under the slab) existed prior to the inception dates of the policy, and that same condition continued to persist through the applicable policy periods. Id. at 1341. At a minimum, this pre-existing defective condition was sufficient to establish that the last prong of the “continuous or progressive injury or damage exclusion” applied. Id. at 1341.
Successfully applying the “continuous or progressive injury or damage exclusion” usually requires some groundwork to gather as much information and detail as possible regarding the timeline of construction, the alleged cause of the damage and, if necessary, the timing of the alleged damage. But, in the end, timing is everything. The date of completion of construction is often key. In the absence of a dispute regarding the date of completion or cause of the damage, the analysis is straightforward: if the exclusion bars coverage for conditions that exist prior to the policy period and the allegedly defective construction work was completed prior to the policy period, the exclusion should apply.Kimberly Ramey is a Partner with Butler Weihmuller Katz Craig, LLP in Tampa, Florida. Her practice is primarily devoted to liability insurance coverage, with a focus on general liability coverage disputes stemming from complex construction defect claims and catastrophic accidents. She has extensive experience handling and litigating third-party claims involving a variety of coverages, including auto liability, commercial general liability, personal/premises liability, professional liability, and excess and umbrella.
Kyle Goss is an Associate Attorney with Butler Weihmuller Katz Craig, LLP in Tampa, Florida. His practice is primarily devoted to liability insurance coverage disputes, with a focus on general liability coverage. He has significant experience defending injury and wrongful death claims as well as handling auto liability, personal/premises liability and other coverage matters.
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Product Liability: An Update from the PLC
Medicare Myth Busting: Mandatory Medicare Reporting Misconceptions & Mistakes: Part I
Civil Monetary Penalties: Who is the Responsible Reporting Entity?
By Barrye Panepinto Miyagi and John Cattie
Executive Summary: This article is intended for entities, insurers, and third-party administrators handling claims where medical expenses are alleged or released via settlements, judgments, and/or other payments. The article focuses on properly identifying the entity responsible for submitting a mandatory Section 111 report. If you have ever dismissed the obligation to evaluate Section 111 reporting obligations because “my insurer or Third-Party Administrator handles these issues,” this article is for you. The authors provide a laymen's discussion of a common misconception about Section 111 reporting: specifically, what entities are responsible for reporting and reporting errors.
In 2007, Congress enacted Medicare Secondary Payer (“MSP”) reporting requirements, often referred to as MMSEA or Section 111. 42 U.S.C. § 1395y(b)(8). The reporting requirements affect liability insurers (including self-insurers), no-fault insurers, and workers’ compensation insurers who are involved in claims where medical expenses are alleged or resolved. Generally, federal law requires a Section 111 report when a payment obligation exists that includes medical expenses with a Medicare beneficiary. Under existing law, Medicare may impose civil monetary penalties (“CMPs”) up to $1,000 per day, per claimant, for failure to submit a Section 111 report.
In 2012, Congress passed the Strengthening Medicare and Repaying Taxpayers Act, (the “SMART Act”). SMART Act of 2012, Pub. L. No. 112-242, 126 Stat. 2380. The SMART Act requires that Medicare clarify when and under what circumstances CMPs may be issued. The Section 111 Proposed Rule is pending with the White House Office of Information and Regulatory Affairs (“OIRA”), with a pending release date on or before February 18, 2024.
Entities who are insured and/or who use a third-party administrator (“TPA”) may believe they have no accountability for Section 111 reporting. Many believe that an insurer or TPA insulates their company from CMPs.
We challenge our readers to review this article and examine the circumstances under which their clients may be responsible for Section 111 reporting. Understanding who is responsible for reporting may save your clients up to $1,000/day per claimant.
An Overview of Section 111 Reporting
Section 111 reports help Medicare properly coordinate health care benefits. The reports include data on settlements, judgments, or other payments and are submitted electronically to the Centers for Medicare & Medicaid Services (“CMS”) through the Section 111 Coordination of Benefits Secure Website. In addition to providing Medicare with information about entities that may be responsible for incident-related medical expenses, the reports provide Medicare with information needed to seek reimbursement from the claimant, the defendant, and/or the defendant’s insurer. Reporting is mandatory under certain circumstances. Only a Responsible Reporting Entity (“RRE”) (usually a defendant and/or its insurer) who has registered with CMS to Section 111 report or an entity or person designated as a reporting agent by the RRE may submit reports.
In general, the law requires reporting when there is a payment obligation to the claimant. RREs must report any payment to a claimant that is (or was) Medicare eligible where medical expenses are claimed and/or released or the settlement, judgment, award or other payment has the effect of releasing medicals. Importantly, the trigger for submitting a Section 111 report is rarely the payment date, and late Section 111 reports may result in CMPs.
Two types of Section 111 reports exist: Total Payment Obligation to the Claimant (referred to as a “TPOC”) and Ongoing Responsibility for Medicals (“ORM”). In some cases, the law requires reporting both a TPOC and ORM.
When resolving claims with Medicare-eligible persons who asserted or released medical expenses, RREs are required to report TPOCs. RREs are required to report ORM in certain workers’ compensation and no-fault claims (such as mandatory medical payments (“Med Pay”) and/or personal injury protection (“PIP”). When reporting ORM, the RRE indicates (in the Section 111 Reporting Portal) that it has assumed ORM. If (and when) ORM may be terminated, the RRE must enter an ORM termination date. Reporting ORM provides CMS with notice that the RRE is paying a claimant’s incident-related medical expenses. When ORM is properly terminated, Medicare resumes payment.
CMS excludes certain TPOCs from Section 111 reporting. The current Section 111 reporting monetary threshold is $750.00, except in exposure, ingestion, and implantation cases. All exposure, ingestion, and implantation claims are reportable regardless of the amount of the resolution. [Settlements and judgments and other payments which fall within the December 5, 1980, policy are also not reportable. The December 5, 1980 policy is not addressed in this article.]
Jimmy James, a Medicare beneficiary, often shopped at the local supermarket (the “Supermarket”). In January of 2022, he inhaled vapors emanating from the Supermarket kitchen as a result of a small fire. He subsequently became ill and treated at a local hospital. Since he was a regular at the Supermarket, he made an informal claim to the manager. Mr. James and the Supermarket agreed that James would accept a $500.00 Supermarket voucher for his damages. Mr. James did not sue the Supermarket, but he did file suit against the Manufacturer of the kitchen equipment which caught fire (the “Manufacturer"). Mr. James settled with the Manufacturer for $100,000 about the same time that he received his voucher from the Supermarket. Protection Insurance (“Protection”) insured the Supermarket, and the policy included a $1,000.00 deductible. Rejection Insurance (“Rejection”) insured the Manufacturer, and the deductible was met.
Because Jimmy accepted a voucher and because the Supermarket was insured, the Supermarket did not submit a Section 111 report. The Supermarket put the risk manager of Protection on notice of the claim, advising that it resolved the claim by issuing a voucher. Protection did not submit a Section 111 report because it issued no payment. The Manufacturer assumed that Rejection Insurance would handle Section 111 reporting for the $100,000 settlement. Rejection did not report because of an exclusion in its policy.
Who was responsible for Section 111 reporting? The Supermarket? Protection? The Manufacturer? Rejection? Who is at risk of CMPs? What if a TPA handled personal injury liability claims asserted against the Supermarket?
Who is the RRE?
Numerous factors determine whether an entity is an RRE, and thus responsible for Section 111 reporting. The mere fact that an entity is insured does not necessarily exclude the entity from RRE status. A company must consider a few fundamental questions when evaluating whether an insurer (or other entity) is the RRE or otherwise responsible for the company’s Section 111 reporting.
The Applicable Plan is responsible for reporting. Ctrs. For Medicare & Medicaid Servs., Dep’t of Health & Human Servs., MMSEA Section 111 Medicare Secondary Payer Mandatory Reporting Liability Insurance (including Self-Insurance), No-Fault Insurance, and Workers’ Compensation User Guide (“NGHP User Guide”), Appendix H. (Version 7.0 Jan. 9, 2023). Applicable Plan is defined broadly at 42 U.S.C. § 1395y(b)(8)(F). The definition of Applicable Plan is somewhat vague and subject to interpretation. In a general sense, the Applicable Plan is the entity that is responsible for paying the claim. Where a company is self-insured for a claim, the company is the RRE. When a company is insured for a claim, the determining factors on whether a company or its insurer is the RRE is the type of insurance the carrier provides and who physically funds the settlement. Other important factors include whether the policy includes a deductible, Self-Insured Retention (“SIR”), or other types of insurance. Consider the following examples:
The Supermarket and Protection – Who’s the RRE?
Example 1: Supermarket deductible not met: Although the Supermarket is insured for the incident, the $1,000.00 deductible has not been met because the claim was resolved with a $500 store voucher. CMS considers the deductible self-insurance. NGHP User Guide, Ch. III § 6.1.3. If we consider this an exposure-related incident (recall Mr. James fell ill after inhaling vapors), there is a Section 111 reporting obligation, and the Supermarket is the RRE. As a practical matter, Protection may agree to submit the Section 111 report on behalf of the Supermarket (even if payment was made to Mr. James with a voucher). However, if there is an error, CMS might choose to impose CMPs against the Supermarket.
Example 2: Supermarket deductible met: Assume the case resolves for $2,500 (over the deductible), and that Protection issues the check to Mr. James. Protection is responsible for reporting both the deductible and any amount in excess of the deductible. NGHP User Guide, Ch. III §6.1.3.
Example 3: Self-Insured Retention: Assume the case resolves for $2,500, there was an SIR of $50,000, and the Supermarket paid the claimant. CMS distinguishes traditional SIR policies from policies where deductibles were met. NGHP User Guide, Ch. III § 6.1. Since the claim resolved under the SIR and the Supermarket paid the claim (with or without a voucher), the Supermarket is the RRE and is responsible for Section 111 reporting. If the SIR had been met and a claim paid, payers should evaluate which entity paid the claimant and/or the claimant’s attorney. This is discussed in greater detail, below.
Example 4: Other types of insurance: Companies may become confused when there are other types of insurance or where an insurer reimbursed it for a claim. If the Supermarket had other types of insurance, the entity that pays the claimant or the claimant’s counsel, is the RRE. NGHP User Guide, Ch. III § 6.1.3. For example, if there is re-insurance, stop-loss insurance, excess insurance or umbrella insurance, the entity that actually paid claimant or claimant’s counsel is the RRE.
Example 5: Reimbursements where the insurer has responsibility beyond a certain limit: Assume the Supermarket pays Mr. James but receives reimbursement from Protection later in the year. In this case, the Supermarket is the RRE. NGHP User Guide, Ch. III § 6.1.3. While Protection may, as a courtesy, submit the Section 111 report, the Supermarket bears the risk for potential CMPs if there are errors or omissions in the report.
Example 6: Failure to notify insurer of claim: Assume the policy between the Supermarket and Protection included a deductible which had been met. Further, assume that the Supermarket never notified Protection of the claim. If Protection was not placed on notice of the claim, the Supermarket is the RRE regardless of whether the claim is within or in excess of the deductible. NGHP User Guide, Ch. III § 6.1.3.
Example 7: Fronting Policies: With “fronting policies,” the insurer ultimately retains no risk under the policy. The insured and the insurer both expect that the insured will retain the ultimate risk for all claims. With a fronting policy, where the Supermarket pays the claim, the Supermarket is the RRE. Where Protection pays the claim, Protection is the RRE. NGHP User Guide, Ch. III § 6.1.5.
The Manufacturer and Rejection
As mentioned in the fact pattern, Rejection denied the claim due to an exclusion in the policy. As a practical matter, entities must consider if they are insured for a claim in the first place.
Example 1: Claim denied: If Rejection denied the claim, the Supermarket is the RRE and responsible for the Section 111 report. Where there is no coverage, there should be no expectation that an insurer is the RRE.
Example 2: Reservation of Rights: Assume Rejection agreed to defend the case under a reservation of rights subject to its review of additional information. In this case, the Supermarket and Rejection should specifically discuss Section 111 reporting obligations to ensure that the proper entity reports correct information.
Identifying the RRE in workers’ compensation claims is similar to the process described above, as long as the applicable law authorizes an employer to purchase insurance from a carrier and the employer does so. However, where the applicable workers’ compensation law or plan establishes an agency with sole responsibility to resolve and pay claims, the established agency is the RRE. NGHP User Guide, Ch. III § 6.1.12.
Where the applicable law or plan authorizes employers to self-insure, purchase insurance, and also establishes a State or Federal agency with sole responsibility to resolve and pay claims, there are numerous factors, that must be considered. Those factors are similar to the examples addressed above in liability cases. NGHP User Guide, Ch. III § 6.1.12.
What if the Supermarket and the Manufacturer entered into a settlement agreement with claimant? May the Manufacturer pay Mr. James and submit a Section 111 report that covers both the Manufacturer and the Supermarket?
The Manufacturer cannot report for the Supermarket. The agreement to have one defendant pay Mr. James and submit a Section 111 report for the total settlement amount does not shift RRE responsibility to the defendant issuing payment. All RREs are responsible for their own reporting. Further, where there is joint and several liability for the payment, each defendant must report the total, not just its share, of the settlement. NGHP User Guide, Ch. III § 6.1.7.
Third Party Administrators
Use of Recovery Agents and Reporting Agents: Many companies hire recovery and/or reporting agents to process and/or report their claims. Although an RRE may contract with a recovery or reporting agent, the RRE may not, by contract or otherwise, limit its reporting responsibility. By way of example, assume Protection hires a TPA to process all of its claims and to Section 111 report. Pursuant to CMS guidance, if Protection is the RRE, Protection is responsible for errors and omissions in reporting. NGHP User Guide, Section 6.2.
Exceptions where Recovery Agent may be an RRE: CMS does acknowledge limited exceptions where a recovery agent may also be the RRE. The NGHP User Guide uses State established “assigned claims funds” as an example. Where a State agency designates an authorized insurance carrier to resolve and pay claims using State-provided funds without State Agency review or approval, the designated insurance carrier is the RRE. If the State agency retains review or approval authority, the State agency is the RRE. Per CMS, this is a rare situation. NGHP User Guide, Section 6.1.10.
Who is Responsible for CMPs?
This answer is simple. The RRE is responsible for CMPs. Companies must understand whether the company or its insurer is the RRE. An incorrect assumption can result in a significant financial risk.
The examples in this article pave the way for additional questions. The authors welcome questions and look forward to drafting the final part of this series when OIRA releases the final regulations addressing CMPs.
Disclaimer: This article is accurate as of February 21, 2023, and is intended for general information purposes only. Information posted is not intended to be legal advice.
Barrye Panepinto Miyagi is a Partner at the law firm of Taylor, Porter, Brookes & Phillips, L.L.P. and the Practice Group Leader for Taylor Porter’s MSP Compliance Group. Barrye is certified as an MSP Fellow, and she works in all areas of MSP compliance. She has over 25 years of litigation experience and over 15 years of experience in the MSP arena. Barrye received her BS and her JD from Louisiana State University.
John Cattie is the Managing Member of Cattie & Gonzalez, P.L.L.C. He focuses his legal practice on Medicare Secondary Payer issues, including mandatory insurer reporting, conditional payment resolution, and future medical exposure/Medicare Set-Asides. He is a past chair of DRI’s MSP Task Force, serving as Executive Editor for DRI’s Defense Practitioner’s Guide to Medicare Secondary Payer Issues. He received his BA from the University of North Carolina and his JD/MBA from Villanova University.
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From the Governmental Liability Committee
By Ryan M. Kunhart
Edited by Stephen Keller
The resilience of our Committee was on display at our annual seminar in Las Vegas, Nevada on January 23-25, 2023. Our Las Vegas seminar was the third annual seminar our committee planned and held within an eighteen-month period, and as always, our committee put on a great program with timely, useful, and diverse topics. Some of the topics included “practical” qualified immunity, cell phone forensics for legal professionals, lessons learned from defending Title IX sexual misconduct claims, and our annual Supreme Court review and analysis. I’d like to thank our Seminar Chair and Vice Chair, Mary Erlingson and Kevin Allen, and the planning committee for all of their hard work putting the seminar together. DRI has announced our 2024 seminar will take place in Phoenix, Arizona on January 17- 19, 2024. Please contact Kevin Allen, the 2024 Seminar Chair, or me if you have any ideas for potential topics or speakers for the 2024 seminar.
Since the Spring of 2021, several of our committee members have served on a Protect and Serve Taskforce comprised of DRI members and stakeholders from other organizations. The purpose of the Taskforce is to discuss and hopefully help find solutions to the hard and important issues surrounding police-community relations, police reforms, and community expectations. The Taskforce is putting the final touches on a Virtual Town Hall that will be held in March 2023 on gun culture. More information regarding this Virtual Town Hall will be available soon.
We are also in the initial stages of planning our fly-in meeting that will likely be held in August 2023 in Chicago. Our fly-in is a great way to meet in-person, strategically plan for the next year, and strengthen our professional connections. More information regarding the fly-in will be available in the coming months.
Finally, I would like to thank Jody Corbett, our immediate past Committee Chair, for all of her hard work and dedication. As Committee Chair, Jody ensured we stayed connected and involved while we navigated through the COVID pandemic. She also oversaw the planning of three annual seminars and provided a lot of leadership, structure and guidance that will make my job as Committee Chair much easier.
As always, if you are interested in volunteering in any way to assist the committee, please contact me or Committee Vice Chair Monte Williams.
Ryan M. Kunhart is Chair of the Governmental Liability Committee.
Second Circuit Case Updates
By Alexandra Calhoun
Edited by Stephen Keller
McKinney v. City of Middletown, 49 F.4th 730 (2d. Cir. 2022)
McKinney was arrested by officers of the Middletown Police Department for attempting to rob a Subway restaurant. Following his arrest, the officers brought McKinney to the Police Department headquarters and placed him in a holding cell. After McKinney displayed concerning behavior, the officers decided to transfer McKinney to a padded call. When the officers attempted the transfer, McKinney threatened and attacked the officers, who used a baton, a police canine, and a taser to subdue him. When the officers secured McKinney in handcuffs, they withdrew the force and arranged for McKinney to be transported to the hospital for treatment of his injuries. McKinney sued the officers under §1983, alleging excessive force in violation of his civil rights.
The Second Circuit held that the defendant officers were entitled to qualified immunity because McKinney did not show that the officers had violated established law by allowing a canine bite to continue until a previously violent suspect can be secured. Further, the Second Circuit, noting that McKinney could have resumed his active resistance once force was withdrawn, held that McKinney did not show that it was a violation of law for police to ensure that a violent suspect had been secured before withdrawing the significant force required to subdue the suspect. The Second Circuit finally noted that the undisputed facts established that the defendant officers escalated the application of force in order to overcome McKinney’s active resistance, precluding any genuine dispute as to whether the officers applied entirely gratuitous and therefore excessive force.
Radwan v. Manuel, 55 F.4th 101 (2d Cir. 2022)
Radwan, a women’s soccer player at the University of Connecticut (UConn) with a one-year athletic scholarship, raised her middle finger during a nationally televised soccer championship. Radwan was ultimately punished by UConn with a mid-year termination of her athletic scholarship. She sued, alleging that UConn had violated her First Amendment and procedural due process rights and that the university had violated Title IX under a selective enforcement theory.
The Second Circuit upheld the district court’s grant of qualified immunity to defendants on Radwan’s First Amendment and Due Process Claims. The Second Circuit further held that Radwan possessed a constitutionally protected property interest in her one-year athletic scholarship. However, the Court upheld qualified immunity on these claims as the right was not clearly established at the time of the scholarship’s termination. Lastly, the Second Circuit held that Radwan had put forth sufficient evidence, including a detailed comparison of her punishment to those issued by UConn for male student athletes found to have engaged in misconduct, to raise a triable issue of fact as to whether she was subjected to a more serious disciplinary sanction because of her gender.
Rodriguez v. Gusman, 2023 WL 219203 (2d. Cir. 2023)
Rodriguez was incarcerated at Eastern Correctional Facility where he complained of a racing heart rate, palpitations, headaches and was diagnosed with elevated blood pressure. In 2012, he suffered a hemorrhagic stroke while exercising and is permanently disabled. Following his stroke, Rodriguez was transferred to a maximum-security prison. A year later (and after he had filed the present suit), he was transferred to a medium security prison where officials strictly enforced a New York State Department of Corrections and Community Supervision directive that limited Rodriguez to one 30-minute attorney “legal” call every 30 days. Rodriguez brought claims that defendants were deliberately indifferent to his serious medical needs in violation of the Eighth Amendment, retaliated against him for filing a lawsuit by transferring him in violation of the First Amendment, and denying him access to the courts in violation of the First Amendment.
The Second Circuit held that no evidence was submitted to reflect a conscious disregard of a substantial risk that Rodriguez would suffer a stroke and that disagreement with Defendant’s medical judgment as to the proper course of treatment did not support a constitutional claim for deliberate indifference. As for retaliatory transfer, Rodriguez failed to adduce sufficient evidence to support the inference that his lawsuit played a substantial part in his transfer between correctional facilities. Defendants testified they were unaware of the lawsuit at the time of the transfer. Lastly, the Second Circuit assumed without deciding that restrictions on an inmate’s telephone use may, in certain circumstances, violate the inmate’s right of access to the courts. However, the Second Circuit held that defendants were entitled to qualified immunity because the Court did not believe that unconditionally enforcing the directive about legal calls had restricted Rodriguez’s access to the courts under the facts presented.
Soule by Stanescu v. Connecticut Association of Schools, Inc., 57 F.4th 43 (2d Cir. 2022)
Four cisgender female high-school student athletes who competed in interscholastic athletic conference track events against transgender female athletes filed suit against defendants alleging that the conference’s transgender participation policy violated Title IX and they sought an injunction to alter race records to remove records achieved by transgender athletes.
Plaintiffs alleged that transgender participation deprived them of a “chance to be champions.” The Second Circuit held that this was not an invasion of a legally protected interest sufficient for injury in fact. Further, the Second Circuit noted that the requested injunction would not redress the alleged deprivation as rewriting the records would not give Plaintiffs a chance to be champions. Plaintiffs failed to show that there was a proper legal framework for invalidating or altering records achieved by student-athletes who competed in conformity with the applicable rules. As for their Title IX claim, Plaintiffs argued their suit for damages under Title IX should proceed even if there was no clear notice that the participation policy violated Title IX because member schools intentionally discriminated against cisgender female athletes. The Second Circuit was not persuaded and held that the participation policy could not be considered intentional conduct that violates the clear terms of Title IX.
Alexandra Calhoun is an associate at Sugarman Law Firm LLP.
Eighth Circuit Case Report
By Rebecca L. Mann
Edited by Stephen Keller
Parada v. Anoka County, 54 F.4th 1016 (8th Cir. 2022).
Myriam Parada was arrested for driving in the U.S. without a license. Anoka County had a policy to contact ICE for any detainees that were born in a foreign country regardless of whether they were U.S. citizens. As such, Anoka County notified ICE prior to releasing Parada because Parada was born in Mexico. Parada filed an Equal Protection Clause claim against the county and alleged that she was discriminated against, inter alia, based upon her country of origin. The 8th Circuit affirmed the District Court, noting that “classifications based on alienage are suspect and subject to strict scrutiny,” and held that Anoka County’s policy was not narrowly tailored.
Furlow v. Belmar, 52 F.4th 393 (8th Cir. 2022).
The St. Louis County Police Department utilized an electronic system that permitted a police officer to seize an individual for questioning pursuant to an electronic “Wanted” notice and prior to review by a neutral magistrate. A police officer determined if there was a probable cause to detain the individual, notified a computer clerk, and then the person’s name was entered into the police department’s database. An individual’s status as a “Wanted” person existed for days or years, depending on the alleged offense. Two individuals arrested under “Wanteds” but without arrest warrants filed a class action alleging violation of their 4th, 5th, and 14th Amendment rights. The 8th Circuit held that the “Wanted” system violated the 4th Amendment because it permitted seizures that were outside the scope of constitutional warrantless arrest exceptions. However, most of the defendant officers were protected by qualified immunity.
Clinton v. Garrett, 49 F.4th 1132 (8th Cir. 2022).
Jared Clinton was stopped due to an issue with a temporary license plate tag and a suspicious look a passenger shared with the law enforcement officer. During the stop, police officers discovered a vape pen and cartridge with THC, but Clinton’s criminal case was dismissed. Clinton filed a civil suit claiming, inter alia, that his 4th Amendment rights were violated. The 8th Circuit affirmed the District Court’s finding that the police officers were not entitled to qualified immunity because their reasonable suspicion regarding a vehicle with temporary tags being driven in a high crime area with a nervous looking passenger was not enough evidence for a proper traffic stop. The stop was determined to be a violation of Clinton’s 4th Amendment rights.
Green v. City of St. Louis, 52 F.4th 734 (8th Cir. 2022).
Plaintiff participated in protests in St. Louis. She sheltered in a synagogue and then headed toward her vehicle to leave. En route to her vehicle, a SWAT BEAR vehicle drove by and sprayed her with pepper spray. Plaintiff sued and alleged that the use of tear gas was “retaliation for her exercising her 1st Amendment right.” The Circuit affirmed the denial of qualified immunity for the officers who were in the BEAR vehicle and deployed the tear gas because there was no evidence Plaintiff was involved in any illegal activity when the tear gas was deployed.
Rebecca Mann is a partner at Gunderson Palmer Nelson Ashmore LLP, licensed to practice in South Dakota, North Dakota, and Montana. She specializes in Workers’ Compensation, Insurance Defense, and Civil Rights/Governmental Tort Liability. Rebecca routinely practices in both state and federal courts as well as administrative tribunals.
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From the Governmental Liability Committee (Cont.)
Sixth Circuit Update
By Dale Conder
Edited by Stephen Keller
Fischer v. Thomas, 52 F.4th 303 (6th Cir. 2022): The Kentucky Judicial Conduct Commission received complaints that two judicial candidates were violating the Commission’s rules governing judicial campaigns. The complaints claimed the candidates’ campaign activity was inconsistent with “the independence, integrity, or impartiality of the judiciary.” The Commission required the candidates to respond in writing to the complaints. The candidates sought injunctive relief, but the district court denied it for lack of standing. The Sixth Circuit reversed. The candidates established standing by showing prior enforcement by the commission, that the Commission had sent warning letters, that the challenged regulation made enforcement easier or more likely, and that the Commission refused to disavow enforcement. The Commission failed to show that the candidates lacked a likelihood of success on the merits. (The Commission also waived this argument.) The candidates showed a likelihood of success on the merits. The Sixth Circuit enjoined the Commission from taking further action against the candidates.
Williams v. City of Detroit, 54 F.4th 895 (6th Cir. 2022): Detroit bans stationary vendors within 300 feet of a sports stadium. The construction of Little Caesar’s Arena displaced three long-time vendors. Then Detroit refused to issue licenses to the vendors because their locations were within the 300-foot zone. The Sixth Circuit held that despite the vendors having occupied their positions for several years, they did not have a property interest in these locations.
Sisters for Life, Inc. v. Louisville-Jefferson County, 56 F.4th 400 (6th Cir. 2022): Louisville-Jefferson County enacted an ordinance that “imposes a prophylactic ten-foot ‘buffer zone’ around the entrance of any ‘healthcare facility’ in the County and forbids any non-exempt individual from ‘knowingly enter[ing]’ or ‘remaining . . . within’ it.” The court held that the government did not narrowly tailor the ordinance to achieve the government’s legitimate purpose. The ordinance extended to a broad category of speech. Therefore, the court reversed the district court’s denial of injunctive relief.
Doe v. Knox County Bd. of Educ., 56 F.4th 1076 (6th Cir. 2023): Doe suffers from a condition making her hypersensitive to everyday sounds of eating or chewing gum. The school she attends leaves it to the teachers whether to allow students to eat or chew gum in class. Doe’s parents asked the school to stop the students from eating or chewing gum in Doe’s classes. The school refused, and Doe’s parents filed suit under the ADA and the Rehabilitation Act. The district court dismissed the case because the parents had not exhausted the IDEA’s administrative process. The Sixth Circuit reversed because the IDEA does not apply in this situation. The IDEA applies to students who need specially designed instruction. A ban on eating or chewing is not “instruction.”
United States v. Loines, 56 F.4th 1099 (6th Cir. 2023): Police suspected Rivers of dealing drugs. After observing Rivers’s house and his activity, the police got a search warrant for the house. Before searching the house, the police looked into the car parked at the house. Based on seeing a “bag of dope,” the police towed the car for an inventory search. Subsequently, a grand jury indicted Loines based on the drugs in the car. The district court denied Loines’s motion to suppress. On appeal, the Sixth Circuit reversed because the car search did not fall within any exception to the warrant requirement. The plain-view exception did not apply because the officer could not tell from looking in that the partially concealed bag was a “bag of dope.”
Grae v. Correctional Corp. of America, 57 F.4th 567 (6th Cir. 2023): Plaintiff sought to intervene in a case to obtain documents provided in discovery that were sealed. The Sixth Circuit held that plaintiff lacked standing because he failed to show that he had suffered injury from the denial of access to the information.Dale Conder is a member of the law firm Rainey, Kizer, Reviere & Bell, P.L.C., with offices in Memphis and Jackson, Tennessee. Mr. Conder is a resident in the firm’s Jackson, Tennessee office. He practices in the areas of general insurance defense, employment law, and defense of municipalities and their employees, particularly police officers in § 1983 litigation. Mr. Conder has published and lectured in the areas of trial practice, civil procedure and civil rights litigation. He is a member of DRI and the Tennessee Defense Lawyers Association.
Eleventh Circuit Case Summaries
By Michael Strasavich
Edited by Stephen Keller
Gundy v. City of Jacksonville, Florida, 50 F.4th 60 (11th Cir. 2022). A local pastor was invited by the City Council to give an invocation prior to the Council meeting. When the invocation strayed into criticism of city government, the chair of the Council corrected the pastor and then eventually cut the feed to the pastor’s microphone when the critical remarks continued. The pastor filed suit against the City of Jacksonville and the Council chair, asserting § 1983 claims for violation of his First Amendment rights under both the Free Exercise Clause and the Free Speech Clause of the United States Constitution. The pastor also brought two claims alleging similar violations of the state constitution. Determinative of these claims, the Eleventh Circuit concluded that the pastor’s invocation before the Council meeting was government speech, not private speech. Accordingly, the Free Speech claim failed as government speech does not enjoy protection under the Free Speech clause. In addition, the Free Exercise claim failed because “when members of a governmental body participate in a prayer for themselves and do not impose it on or prescribe it for the people, the religious liberties secured to the people by the First Amendment are not directly implicated.” Gundy, 50 F.4th at 71. The Eleventh Circuit determined that the invocation was government speech, and not private speech, by analyzing in detail three factors: history, endorsement, and control. All three factors pointed toward a finding of government speech.
L.E., by and through Cavorley v. Superintendent of Cobb County School District, 55 F.4th 1296 (11th Cir. 2022). Parents of students with respiratory disabilities sued a local school district in the wake of the COVID-19 pandemic alleging that the district’s refusal to provide reasonable accommodations or access to in-person schooling for those students violated Title II of the Americans with Disabilities Act (“ADA”) and § 504 of the Rehabilitation Act. The students had sought in the district court an order directing defendants to develop and implement policies and practices following CDC guidelines for COVID-19 prevention in K-12 schools so that plaintiffs could attend in-person school. The students alleged a denial of access to in-person education; however, the district court had mischaracterized plaintiff’s claim as seeking access to education generally. The Eleventh Circuit reversed the district court’s denial of injunctive relief and remanded the case for further proceedings, directing the district court to analyze whether virtual schooling was a reasonable accommodation for in-person schooling and, if not, whether the multi-layered approach to COVID-19 precautions the students sought constituted a reasonable accommodation. The Eleventh Circuit also held that the district court erred in not acknowledging the students’ discriminatory isolation theory, a theory separate and distinct from a disparate treatment or failure to accommodate theory.
Adams, by and through Casper v. School Board of St. John’s County, Florida, 57 F.4th 791 (11th Cir. 2022). Following a bench trial, the district court ruled in favor of a transgender student seeking to have the right to use the school bathroom corresponding to the student’s gender identity (rather than the student’s biological sex). Sitting en banc, the Eleventh Circuit reversed the judgment of the district court. The Eleventh Circuit determined that the school district’s policy of allowing students to use either the restroom utilized by students of the same biological sex, or single-stall, sex-neutral restrooms, did not violate the Equal Protection Clause of the Fourteenth Amendment or Title IX of the Education Amendments Act of 1972. In short, the Eleventh Circuit determined that separating school bathrooms based upon biological sex passed constitutional muster and comported with the requirements of Title IX. The Eleventh Circuit determined that as to the clam of sex discrimination, the bathroom policy cleared the hurdle of intermediate scrutiny. The Eleventh Circuit held that a bathroom policy can lawfully classify on the basis of biological sex without unlawfully discriminating on the basis of transgender status. As to the Title IX claim, the Eleventh Circuit noted the inclusion within the language of Title IX of a carve-out that nothing in Title IX shall be construed to prohibit educational institutions “from maintaining separate living facilities for the different sexes,” with regulations defining “living facilities” to include separate bathroom, locker room, and shower facilities.
Michael D. Strasavich practices with the Mobile, Alabama law firm of Burr & Forman LLP. He represents companies in insurance defense, insurance coverage, ERISA, products, real estate, and bankruptcy litigation. He is a member of DRI and the Alabama Defense Lawyers Association.
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Life, Health & Disability News
Fourth Circuit Finds Beneficiary Not Entitled to Life Insurance Benefits Under Terminated ERISA Plan Where Participant Missed Deadline to Convert Coverage to an Individual Policy
By Scott M. Trager
In Hayes v. Prudential Ins. Co. of Am., - - - F.4th - - -, 2023 WL 2175736 (4th Cir. Feb. 23, 2023), the United States Court of Appeals for the Fourth Circuit addressed whether a beneficiary, Kathy Hayes (“Ms. Hayes”), was entitled to life insurance benefits under a terminated ERISA plan where her husband, Anthony Hayes (“Mr. Hayes”), failed to timely convert his coverage to an individual policy. Mr. Hayes, through his employment with DSM North America, Inc., had an employer-provided life insurance policy with defendant Prudential Insurance Company (“Prudential”), which served as both the insurer and administrator of the plan. The plan conferred upon Prudential discretionary authority to interpret the plan’s terms and to determine benefits eligibility.
In 2015, Mr. Hayes lost his job due to medical issues and his employer-provided life insurance coverage ended. The plan, however, allowed Mr. Hayes to convert his coverage to an individual policy as long as he initiated the conversion “by the later of” 31 days after his employer-provided coverage ended or 15 days after receiving “written notice of the conversion privilege.” Despite the conversion deadline being December 23, 2015, Mr. Hayes did not contact Prudential about converting his life insurance policy until 26 days after the deadline. Mr. Hayes passed away in June 2016.
After Prudential denied Ms. Hayes’ benefits claim and subsequent internal appeal on the grounds the coverage terminated and there was no timely conversion, Ms. Hayes initiated an action under ERISA (29 U.S.C. § 1132(a)(1)(B)) in the United States District Court for the District of South Carolina. The parties each cross-moved for judgment and the district court concluded that Prudential reasonably denied Ms. Hayes’ claim because Mr. Hayes received timely notice of his conversion rights and failed to exercise his conversion rights during the conversion period. The district court further rejected Ms. Hayes’ request to apply the doctrine of equitable tolling and noted that a different statutory provision (29 U.S.C. § 1132(a)(3)) permits plan beneficiaries to seek “other equitable relief.” However, the district court found Ms. Hayes did not sue under that provision and had stipulated that her claim involved only a claim for benefits under § 1132(a)(1)(B).
On appeal, the Fourth Circuit reviewed Prudential’s claims determination for abuse of discretion and held the district court did not err in concluding Ms. Hayes’ claim under § 1132(a)(1)(B) failed as a matter of law. The circuit court found that since § 1132(a)(1)(B) allows suits to recover benefits owed under “the terms of the plan,” it does not permit a court to alter those terms. Ms. Hayes conceded that Mr. Hayes “failed to convert his life insurance coverage in the time set forth in the policy;” therefore, awarding benefits would require the circuit court to modify the plan’s terms in providing a workaround to the conversion deadline. Ms. Hayes, however, argued she was not asserting that the plan terms should be rewritten; rather, she sought the imposition of the doctrine of equitable tolling to allow for an exception to the conversion deadline because Mr. Hayes was incapacitated during the conversion deadline.
The Fourth Circuit, relying on Arellano v. McDonough, 143 S. Ct. 543, 548 (2023) (stating that the presumption in favor of equitable tolling has “only” been applied “to statutes of limitations”), found Prudential did not abuse its discretion in deciding “the terms of the plan” did not provide for equitable tolling. The circuit court further found Lozano v. Montoya Alvares, 572 U.S. 1 (2014), instructive as Lozano held equitable tolling could not extend the one-year period to petition for the return of child under the Hague Convention on the Civil Aspects of International Child Abduction. Section 1132(a)(1)(B) neither addresses the availability of equitable tolling nor purports to alter the terms of the any ERISA plan. The Fourth Circuit, therefore, declined to apply equitable tolling principles that would, in practice, rewrite the terms of the plan.
The Fourth Circuit acknowledged that it, in Gayle v. United Parcel Serv., Inc.., 401 F.3d 222 (4th Cir. 2005), and the Supreme Court, in Heimeshoff v. Hartford Life & Acc. Ins. Co., 571 U.S. 99 (2013), found equitable tolling may be available to delay deadlines for pursuing internal plan remedies or from timely filing suit. However, it noted internal appeal limitations periods in ERISA plans are to be followed as ordinary statutes of limitations and ERISA is focused on the written terms of the plan. The life insurance conversion deadline, however, was not a statute of limitations and no cause of action for benefits accrues when a participant misses a conversion deadline. A participant whose policy has expired, unconverted, has no benefits due under the plan because the participant lacks coverage. Unlike a statute of limitations, a deadline for converting benefits is not triggered by the violation giving rise to the action.
Finally, the Fourth Circuit found it did not need to decide whether Ms. Hayes could have obtained relief under § 1132(a)(3) because she did not sue under that provision and never sought leave to amend her complaint to add such a claim. The court did, however, explain that although a plaintiff who prevails in a claim for benefits under § 1132(a)(1)(B) may not also obtain other relief under § 1132(a)(3), Fed. R. Civ. P. 8(a)(3) specifically permits pleading “in the alternative.” Accordingly, nothing would have prevented Ms. Hayes from suing under both provisions of ERISA.
Scott Trager is a Partner at Funk & Bolton PA. His practice covers a broad spectrum of general litigation matters in the state and federal courts of Maryland and the District of Columbia, as well as the Maryland Insurance Administration and Maryland Office of Administrative Hearings. He focuses his practice on the defense of life, health and disability insurance claims (ERISA and non-ERISA), as well as administrative claims before insurance regulators. He also has extensive experience with policy rescissions and interpleaders. He is the Immediate Past Chair of DRI's Life, Health and Disability Committee, and previously served as Committee Vice-Chair (2018-2020) and Program Chair of the 2017 DRI Life, Health, Disability & ERISA Seminar.
Fourth Circuit Endorses Rule 52 for Resolving ERISA Benefit Claim Cases with Factual Disputes
By Kim Jones and Dona Trnovska
Amid a circuit split, the Fourth Circuit has firmly taken a side as to its treatment of benefit claim denials brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1132(a)(1)(B). In Tekmen v. Reliance Standard Life Insurance Company, 55 F.4th 951 (4th Cir. 2022), the Fourth Circuit endorsed seeking judgment, not via summary judgment or a quasi-summary judgment procedure, but through Federal Rule of Civil Procedure 52 if the case involves de novo review of a benefit claim with factual disputes. Rule 52 allows the court to conduct a “trial on the papers” and thus issue findings of fact and conclusions of law.
In reaching its conclusion, the Fourth Circuit acknowledged that different jurisdictions employ various methods for adjudicating ERISA denial-of-benefits cases: some utilize a version of Rule 56 summary judgment standards, some conduct bench trials, and some create their own methodology. In Tekmen, Reliance Standard asked the Fourth Circuit to adopt a quasi-summary-judgment procedure, where summary judgment was simply a vehicle for deciding the benefit claim on the administrative record, and the non-moving party was not entitled to the usual inferences in its favor. Rejecting this argument, the Fourth Circuit explained that it had never endorsed such an ERISA-specific quasi-summary-judgment procedure and declined to do so now. The Court recognized that the problem with employing summary judgment in ERISA denial-of-benefits cases is that the parties often disagree over key facts about the individual’s impairment, thus resolution of competing factual contentions is required before the court can render a decision. However, Rule 56 summary judgment standards do not permit a court to resolve disputed questions of fact.
This was precisely the issue in Tekmen. The Panel noted that competing factual contentions in the administrative record about the plaintiff’s claimed impairment failed to make the case a candidate for summary judgment at the trial level, especially on de novo review. A district court’s de novo review of an ERISA benefit denial involves the careful examination of the administrative record, as well as credibility determinations and the weighing of evidence presented. In such instances, a district court acts as a finder of fact. The Fourth Circuit explained that such a review procedure is already outlined and endorsed by the Federal Rules of Civil Procedure as a “trial on the papers” under Rule 52. Moreover, the Fourth Circuit saw no reason to deviate from this well-established formula by designing a new procedural hack for ERISA that would yield the same result.
The Fourth Circuit further reasoned that there was nothing unique about de novo review of ERISA benefit cases—as in any other context, district courts should employ the proper procedure under the Federal Rules of Civil Procedure depending on the circumstances of the case. Summary judgment under Rule 56 may be appropriate if there are no genuine disputes of material fact. But where disputed facts do exist—as they did in Tekmen—a Rule 52 trial on the record would be the appropriate mechanism to allow the court to resolve disputes and make factual findings.
The Panel also confirmed that findings of facts under Rule 52(a) are reviewed by the appellate court for clear error. Fed. R. Civ. P. 52(a)(6). Reliance Standard argued that the clear error standard was directly at odds with precedent holding that, absent language granting discretionary authority to a fiduciary, courts must review ERISA benefit decisions under a de novo standard of review. See Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 115 (1989). The Panel explained there was no contradiction--former precedent established only that legal conclusions (i.e. the benefit decision) would be reviewed de novo; it did not suggest that factual findings should be reviewed de novo. Accordingly, maintaining the Rule 52 clear error standard of review for factual findings was not inherently incompatible with Firestone.
Tekmen is no outlier. Recently, in Avenoso v. Reliance Standard Life Ins. Co., 19 F.4th 1020 (8th Cir. 2021), the Eighth Circuit reversed the district court’s grant of summary judgment, finding the trial court engaged in improper fact finding on disputed claims and credibility determinations on key issues—including the severity of the plaintiff’s medical condition. The Eighth Circuit warned against using motions for summary judgment as though a court was ruling in a bench trial.
Avenoso and Tekmen serve as an important reminder to avoid going through the proverbial motions in litigating ERISA benefit claims. Under Avenoso and Tekmen, plans that lack a delegation of discretionary authority should not automatically be resolved on summary judgment. As the Avenoso court reminded, on de novo review, evidence outside the administrative record may be submitted, and the court may need to weigh that evidence, or otherwise make credibility determinations based on conflicting medical opinions in the administrative record, in order to resolve the case. Even if deferential review applies, some cases involving factual disputes around medical and vocational evidence and opinions will also not be candidates for summary judgment.
The impact of both Avenoso and Tekmen is clear and we will likely see similar outcomes in the future. ERISA litigants must carefully consider the appropriate civil procedure mechanism for reaching resolution of their denial-of-benefits cases, as courts are less inclined to force a case under Rule 56 summary judgment procedures when the record is replete with disputed material facts.
Kim Jones is a Partner at Faegre Drinker Biddle & Reath. She advocates for clients in a broad range of ERISA-related matters in federal courts throughout the country. She is co-leader of the firm’s ERISA litigation team, and a member of the benefits and executive compensation practice group.
Dona Trnovska is an associate at Faegre Drinker Biddle & Reath.
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