Best's Insurance News & Analysis - June 28, 2019 02:43 PM

Jury’s $44 Million Libel Award Against AIG Unit Raises Troubling Questions for Insurers, Observers Say

ELYRIA, Ohio - A $44 million jury award against a Lexington Insurance Co. policyholder underscores the dilemma insurance companies encounter when their policies cover an insured found responsible for the actions that led to the litigation, market observers said.

A jury awarded compensatory and punitive damages to an Ohio bakery against Oberlin College, which purchased a commercial umbrella liability policy from Lexington. Lexington is American International Group Inc.’s excess and surplus lines unit.

The jury found against the college, stemming from a November 2016 shoplifting at the bakery, which led to Oberlin student protests against the business. The protesters alleged the bakery had a history of racial profiling and discriminatory treatment. The bakery owners sued, alleging their reputation had been ruined by the protests and unfair treatment by the college. The jury agreed.

In a motion filed with Judge John Miraldi, of the Lorain County, Ohio Court of Common Pleas, Lexington argued some damages assessed against Oberlin are not covered by the policy the college purchased.

“There are common questions of fact that underpin both the lawsuit and a determination of coverage under the Lexington policy,” according to the motion filed by Lexington attorneys. “In particular, plaintiffs allege defendants intentionally disregarded the truth in making defamatory statements.”

“Further, plaintiffs seek punitive damages for uncovered claims as well as for Oberlin’s purported malicious acts. Damages assessed against Oberlin on either basis are not covered by the Lexington policy,” it said.

Litigation against a policyholder usually poses prickly legal questions for an insurer: defending the insured against the plaintiff’s claims and resolving coverage issues with an adverse court decision, said Peter Kochenburger, deputy director, Insurance Law Center, University of Connecticut School of Law.

“The short answer is there is no one strategy that will work,” Kochenburger told Best’s News Service. “If an insurance company screws up, they may have to pay the entire award.”

Normally, the two issues — defense and coverage — run on parallel tracks.

“The problem for everyone is when there is an insurance coverage question,” Kochenburger said. “From an efficiency point of view, it would be best to put everything on hold and decide the coverage issue.”

“If we don’t have to defend, then we need to know now. That is not how it works. Usually the cases go hand-in-hand,” Kochenburger said.

The twin issues make it difficult for a carrier, said attorney Lawrence P. Ingram, managing partner of the Tampa, Florida, office of Freeborn & Peters LLP and a member of the firm’s Insurance and Reinsurance Industry Team.

“An insurer has two obligations: the duty to defend and the duty to indemnify,” Ingram told Best’s News Service. “The duty to defend is broader than the duty to indemnify and arises in most states from the ‘eight corners’ of the policy and the underlying suit allegations.”

“The duty to indemnify generally is determined at the end of the underlying case based on the facts at trial,” he said. “An insurer should almost always provide a defense under reservation and then, in appropriate circumstances, bring a declaratory judgment action if there are coverage questions.”

Lexington has not filed litigation seeking a declaratory judgment over coverage.

It is obvious the best strategy is winning at the trial stage, which then makes moot a discussion of awards payment.

“An insurer has an obligation to provide competent defense counsel,” he said. “As we know, the outcome of cases is most often determined by the facts and the law.”

Attempts to reach Oberlin College for comment were unsuccessful. Attempts to gain comment from American International Group Inc. were unsuccessful.

In some cases, litigation may pose a reputation risk for a carrier, Ingram said.

“This would go back to underwriting decisions,” Ingram said. “If the insurer chooses to insure a repugnant entity, then the insurer should be prepared to defend a repugnant entity.”

“Repugnant, of course, is not always easy to identify,” he said.

The intentional acts alleged in the Oberlin College case highlight a separate legal issue over coverage. Usually, general liability policies, and most insurance in general, is not meant to cover intentional acts, said attorney Robert M. Baratta Jr., a partner on the Insurance and Reinsurance Industry Team and in the Chicago office of Freeborn & Peters.

“General liability policies provide coverage for an occurrence, usually defined by courts to require some degree of fortuity,” Baratta told Best’s News Service. “These provisions are expressed in the basic policy terms and are best handled in the underwriting phase so that the terms of coverage are defined in the policy.”

“By the time a claim is filed, it is too late to limit coverage not otherwise expressed in the policy,” he said.

Many policies will provide a defense until a judicial determination of a fraudulent, dishonest nature, he said.

“This is true mainly in D&O policies as opposed to the definition of occurrence in a general liability policy,” he said. “In my experience, this may push the insured to settle, but not the insurer if the insurer feels strongly about its defense to coverage.”

“Some insurers will tell their insured up front that they will not pay anything in indemnity based on the claims in the lawsuit and the terms of the policy — in other words, the insured is on its own in settlement discussions,” he said.

When a case is filed, a good strategy is for a carrier to launch a comprehensive overview, Baratta said.

“My first and prime advice is to complete a thorough coverage analysis and promptly tee up the primary issues through a reservation of rights,” Baratta said, “declaratory judgment action, cooperation with defense counsel or intervention in the underlying lawsuit.”

“Insurers don’t control the actions of their insureds, but they can and do limit what they’ll cover,” he said.

Recently, a federal appeals court vacated a $65 million settlement between insurers — including Lexington — and a court-appointed receiver working to resolve claims against a Texas financier serving a 110-year prison term for running a massive Ponzi scheme (Best’s News Service, June 20, 2019).

(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)

BN-NJ-6-28-2019 1443 ET #

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