Planning Ahead: Thoughts on Successful Strategies in Co-Insurer Disputes Greg Taylor Skip Scott Andy Ryan Diamond McCarthy LLP 25 April 2008 Planning Ahead: Thoughts on Successful Strategies in Co-Insurer Disputes Greg Taylor Skip Scott Andy Ryan Diamond McCarthy LLP 25 April 2008

Who We Are  Commercial Litigation Boutique  Offices  Dallas, Houston, & Austin  New York  Litigate throughout North America, Europe, and Asia  Analyze insurance issues routinely  Coverage issues in fiduciary litigation  Subrogation  Bad faith

Creation of an Adversarial Landscape  Systemic Problems in Co-Insurance  Coverage issues are theoretically straightforward  But convoluted in practice  U.S. legal system compounds matters  Expense  Hostile forum  Damage issues  Result: Increasing Number of Co-Insurer Disputes  “Deny first, pay later”  Hold-out carriers take advantage  Freeloading

Recent Case Example  Lloyd’s v. NUFIC  Our initial role: D&O defense counsel  Pressed for subrogation lawsuit against hold-out carrier  Recouped nearly all of market’s loss  Lessons learned: why we’re here

Surveying the Adversarial Landscape  Co-insurer’s “deny first” policy places you in a precarious position  To pay or not to pay?  Potential bad faith exposure  Denying Coverage is Deciding to Litigate  Will it be your decision or theirs?

Possible Options  Option #1: Resolution through coverage counsel  Different Focus  Too entrenched in coverage position  Be mindful of the litigation picture  Must be acutely aware of pitfalls and future strategy

Possible Options  Option #2: Cover and File Suit  Remember: it’s either your litigation decision or theirs  Must protect your claim  Reservation of rights against hold-out carrier  Consistent coverage approach  Allocation issues  Covered v. Uncovered Claims  Covered v. Uncovered Insureds  Offensive v. Defensive Claims  Fees and Loss  Prove Up: Need for Internal Documents

Texas-Sized Pitfalls to Option #2 Three Main Pitfalls under U.S. Law:  Bad Faith Claims: Can a co-insurer bring them?  Statutes of Limitation: How long can you wait to sue?  An Insured Made Whole: Do you have a subrogation or contribution claim?

Pitfall #1: Can You Own Your Insured’s Bad Faith Claim?  Bad faith claim provides tremendous leverage  Bad Publicity  Not re-insured  Policy’s Subrogation Clause  “All Claims” Language Includes Bad Faith  Claim should belong to insurer…

Pitfall #1: Can You Own Your Insured’s Bad Faith Claim?  But, some U.S. courts strike down assignment  See, e.g., GreatAmerican Insurance Co.  Holding: because bad faith claims are personal, they cannot be assigned  Result: Claim reverts back to insured  Pitfall: Paying insurer needs to maintain good relations with its insured

Pitfall #2: When to Sue  How long do you have to sue?  Bad faith– usually 1 or 2 years  Breach of contract– usually 4 or 6 years  What if you wait until the entire loss is paid?  When does the clock start ticking?

Pitfall #2: When to Sue  Does the claim accrue at denial?  Minority view  Or, does the claim accrue once the underlying lawsuit terminates?  Majority view: New York, Maryland, Washington, Alaska, California, Ninth Circuit (Federal)  Rationale: Ongoing Duty to Defend  Texas: On the Fence  Murray v. San Jacinto Agency, Inc.  Compare with All-Tex Roofing, Inc. v. Greenwood Ins. Group (Indemnity Only)

Pitfall #3: An Insured Made Whole  Option #2 requires a paying co-insurer to cover all of the insured’s loss  Result: Paying insurer should have a subrogation or contribution claim against non- paying insurer  Pitfall: New decisions limiting these claims when an insured suffers no damages of its own

Pitfall #3: An Insured Made Whole  Firemen’s Fund (California): “Where there are several policies of insurance on the same risk and the insured has recovered the full amount of its loss from one or more, but not all, of the insurance carriers, the insured has no further rights against the insurers who have not contributed to its recovery. Similarly, the liability of the remaining insurers to the insured ceases, even if they have done nothing to indemnify or defend the insured.”  Liberty Mutual (Texas): Supreme Court opinion adopts this language

Pitfall #3: An Insured Made Whole  Avoiding this pitfall  Focus on Facts  Find Equitable Causes of Action  Subrogation  Equitable contribution (California)

Recommendation: Cover and Sue  Take the battle to the American insurers  More control of the litigation  Denying coverage is inherently defensive: tie favors the insured  Investigate and exhaust all recovery options  Change perception through repetition  Exploit the Market’s institutional advantages  Less bureaucracy & more autonomy  Say you’ll go to trial– and mean it  Build an intelligence network

Conclusion  Questions?  Feel free to contact us Greg Taylor Skip Scott Andy Ryan