Declarations and Exclusions

One Enchilada Short of a Discrimination Complaint

In March, reporting on California state appellate Justice Sills takedown  of Proposition 65 "Bounty Hunters", I remarked that the opinion provided "an illustration of how well-intentioned (if overreaching) legislation can be put to less than laudable use in the wrong hands."   Here is another example, this time involving the Americans With Disabilities Act (ADA):

Jerry Doran is disabled, confined to a wheelchair since a 1985 automobile accident left him paralyzed and unable to walk.  Since then, he has become, by his own admission, "a litigious advocate," filing more than 200 lawsuits in state and federal court against restaurants and other public establishments throughout California, alleging insufficient disability access.  He has filed so many suits, in fact, that he has begun to lose track.  That inability to recall the details of each occasion on which he has been wronged by one fast food emporium or another came back to haunt Mr. Doran when he went to trial before U.S. District Court Judge Cormac J. Carney earlier this month on a claim that he had suffered from discrimination based on his disability at Del Taco restaurant #415 in Mission Viejo -- conveniently located a mere 500 miles from his home.

Judge Carney returned judgment in favor of the defendant restaurant, on the ground that Doran had no standing to bring the action.  Although there was no question that Mr. Doran is disabled, Judge Carney was ultimately unable to persuade himself that there was evidence sufficient to prove that Doran had actually sustained any harm at, or had ever actually been to, the Mission Viejo Del Taco.

After describing and praising the purposes of the ADA, Judge Carney's Memorandum Decision [PDF] notes that it is a tool prone to misuse:

Despite the important mission of the ADA, there are those individuals who would abuse its private cause of action provision by filing lawsuits solely with the intent to profit financially.  This potential for abuse of the ADA has been well documented in the Central District of California . . . .  Courts have referred to this proliferation of ADA lawsuits as a 'cottage industry' and have labeled plaintiffs who file these lawsuits 'professional plaintiffs,' 'serial plaintiffs,' and 'professional pawns.'

* * *

The consequences of this abuse of the ADA are severe: businesses and insurers are harmed, the integrity of the bar is called into question, and the public's confidence in the courts is impaired. . . .  Simply put, this litigation abuse of the ADA results in the exact harmful consequences that Congress sought to eradicate by passing the ADA.  As more than one court has observed, the result of this abusive litigation is that 'the means for enforcing the ADA (attorney's fees) have become more important and more desirable than the end (accessibility for disabled individuals).'

Most of the remainder of the opinion focuses on the discrepancies in Doran's responses to interrogatories, his responses to questions in deposition three weeks later, and his testimony at trial, in which key details -- such as how often and when he had actually visited the Mission Viejo Del Taco -- slipped and slid uncontrollably.  Highlights:

• Doran first went to Del Taco #415 in Spring of 2002 or in Spring of 2003, unless his first visit was in 1988.

• Prior to filing suit, he went to the location twice, or perhaps three times, or possibly just once, although he may have gone there on as many as five or six occasions.

• "Mr. Doran's complaint refers to objects -- display racks and vending machines -- which do not even exist at Del Taco restaurant #415."

• "When Mr. Doran stated that he ordered an enchilada to eat during his alleged visit, he must have been testifying about a trip to a Taco Bell restaurant since Taco Bell -- and not Del Taco -- serves enchiladas."

• "When describing the barriers he encountered at Del Taco restaurant #415, Mr. Doran stated that the hand dryers in the restroom were located too high. . . .  Because Del Taco restaurant #415 does not have hand dryers in its restrooms, it is clear that Mr. Doran was testifying about a visit to another restaurant, or place of public accommodation, when asked to identify the barriers he encountered."

• "When asked if there were any fast food chains that Mr. Doran frequented that he had not sued, he replied that he had not sued Kentucky Fried Chicken.  In fact, Mr. Doran has sued Kentucky Fried Chicken.  When asked to try again, Mr. Doran replied that he had not sued Jack in the Box.  Although apparently unbeknownst to him, Mr. Doran has sued Jack in the Box also."

At least Mr. Doran resisted the temptation to respond that "they all look alike to me."

Justice Sills Returns Fire on Prop. 65 "Bounty Hunters"

I am glad that someone around here -- specifically Professor Shaun Martin of California Appellate Report -- has the time to keep up with the newest decisions, because otherwise I might have missed out on Justice Sills' virtuoso performance in Consumer Defense Group v. Rental Housing Industry Members.[PDF]  If anything, Professor Martin is understating the case when he observes: "Rarely have I read something as unceasingly bitter and visceral as this."

The object of visceral bitterness is the law firm of Graham & Martin and the Consumer Defense Group, an organization that Justice Sills concludes is little more than a front for . . . the law firm of Graham & Martin, a self-styled collection of "bounty hunters" aiming to collect large awards of attorneys' fees for obtaining largely meaningless settlements in dubious toxic-substances claims under California's Proposition 65.  The nature of the claims is reflected in the pre-litigation notice served by the firm:

The first notice was literally predicated on only two things:  One, each apartment had . . . parking facilities!  Thus the apartment allegedly 'exposed' tenants and visitors to carcinogens in auto exhaust without giving them a Proposition 65 warning.

Two, each apartment did not prohibit tobacco smoking everywhere on the premises.  Hence somewhere on the property the apartment allegedly 'exposed' its tenants and visitors to second-hand tobacco smoke, again without posting a Proposition 65 warning.

[Emphasis by Justice Sills.]

The meat of the opinion concludes that the settlements under consideration -- nearly all of the proceeds of which went to the attorneys or those closely tied to them -- must be set aside because of the attorneys' failure to give meaningful notice to the offices of the state Attorney General prior to filing suit.  The concluding portion, however, focuses on the reasons why the $540,000+ attorney fee award that arose from the settlements was objectively beyond the pale.  In that segment, Justice Sills provides this valuable, step-by-step guide for attorneys who find themselves with time on their hands and mischief on their minds:

Let’s illustrate . . . just how simple it is for a hypothetical unemployed lawyer, eager to cash in on Proposition 65, to extract money from businesses using the initiative. . . :

First, go on the internet and find some common objects (e.g., furniture, paper, carpeting) which may 'contain' a substance on the regulatory carcinogen list.  As we have just noted, a common place item, like a chair, doesn’t have to contain any significant amount either, even a few molecules will do.  Next, call up a local chemistry professor who will tell you that, at least in sufficient quantities, substances in those common objects will cause cancer, and are in fact on the list. . . .  [I]t will be particularly helpful if your chemistry professor opines that as any substance 'degrades' over time (and it can be a very long time indeed given that Proposition 65 puts the burden on any issue of amounts on the defendant), it will emit a few molecules of its constituents into the air -- that will allow you to claim 'exposure' by inhaling or touching. 

Then, extrapolate your results to some 'target' business.  As we have seen in this case, businesses which are centered around structures make easy targets because at the very least they are going to have paint and furniture inside, and a place to park outside....

Third, develop (as here) a plenary omnibus 'macro' notice form which guarantees that yes, somewhere on the premises, there will be a molecule of a substance listed as carcinogenic.  Then send your notice in the stentorian Wizard-of-Oz- berates-Dorothy legal style of an indictment.  ('You (hereinafter "Violator,") are hereby informed that you have exposed the following [long list of categories of sorts of people who might happen onto your property] to Designated Chemicals'.)  This notice will be intended to frighten all but the most hardy of targets (certainly any small, ma and pa business) into a quick settlement when they get it.

        * * *
Given the ease with which it was brought, and the absolute lack of any real public benefit from telling people that things like dried paint may be slowly emitting lead molecules or that parking lots are places where there might be auto exhaust, instead of $540,000, this legal work merited an award closer to a dollar ninety-eight.

[Italics by Justice Sills; boldface by Decs&Excs.] 

An opinion well worth reading for pure entertainment value, but also as an illustration of how well-intentioned (if overreaching) legislation can be put to less than laudable use in the wrong hands.

You Don't Need a Letterman to Know Which Way the List Goes

The quality of the educational programs at the recent Annual Meeting and Seminars of the CPCU Society was particularly strong.  One of many highlights was a panel offering a "View from the Outside," comments on how the insurance industry's customers view the industry and, in particular, where they tend to find the most fault and what they find most dissatisfying in their interactions with insurers.   

Michael T. Sharkey, a partner with the Washington, D.C., offices of Dickstein Shapiro Morin & Oshinsky LLP, contributed a list of Top Ten Mistakes That Insurers Continue to Make in their handling of transactions and claims with their insureds, i.e., the issues that most commonly lead to aggravation of policyholders, litigation and [horrors!] accusations of "bad faith" and the unpleasant damage awards that go with it.   It is a good general overview of the most common ways in which insurers can get themselves in trouble, and I reproduce it here based on my notes from the session:

Top Ten Mistakes That Insurers Continue to Make

10.  Failure to write in clear language.

9.    Failure to investigate a claim promptly.

8.    Failure to read the policy when making coverage determinations.

7.    Failure to understand the relevant law of the relevant jurisdiction.

6.    Failure to monitor litigation activities of outside counsel.

5.    Unnecessarily 'nitpicking' a claim before settling (especially in 1st party [e.g., property loss] claims).

4.    Taking inconsistent positions in coverage litigation (e.g., insisting that identical policy language means x in Case A and y in Case B).

3,    Claims handlers treating policyholders as "the enemy."

2.    Attempted overuse of the extreme remedy of rescission of the policy.  (It's one thing to deny a single claim, quite another to accuse the insured of deception or dishonesty so as to cancel the entire policy.)

1.    Taking positions that result in the purchase of more insurance yielding less coverage.

Dancin' to the Courthouse Rock

In litigation involving the rock band Third Eye Blind* and its dispute with its former lead guitarist, the 1st District Court of Appeal in San Francisco asks the musical question:

When an insured sues its insurer for coverage and also brings negligence claims against its business manager and insurance broker for failing to advise about a policy exemption and failing to obtain additional coverage, are the negligence claims barred as a matter of law if the court rules in the insured’s favor on the coverage claim?

The Court concludes that the answer is "no."  The broker can still be held liable for its claimed negligence, even though the client eventually obtained coverage from the insurance company.  Among the recoverable damages: the attorney's fees incurred by the insured to obtain that favorable ruling on the coverage dispute.

The background: Third Eye Blind, through its business manager, retained insurance broker Near North Entertainment Insurance Services to obtain liability insurance for the band.  Near North obtained a policy from North American Specialty (NAS).  That policy included a "Field of Entertainment Limitation Endorsement" (FELE) that purported to restrict or eliminate coverage for a variety of claims, including invasion of privacy, infringement on copyright or trademark, defamation, and so on.  It was later claimed that Near North did not call this limitation to the band's attention, or offer to procure additional coverage to protect against the potentially excluded claims.

Creative differences later arose between guitarist Kevin Cadogan and the rest of the band, resulting in Cadogan being fired.  Cadogan fired back with a lawsuit, including claims that the band's continuing use of the name "Third Eye Blind" constituted trademark infringement under the Lanham Act.  The defense to was tendered to NAS,but it declined coverage citing the FELE.  The band defended the suit at its own expense, eventually reaching a settlement with Cadogan.

The band then filed suit against NAS -- alleging that the FELE was ambiguous and unenforceable to bar coverage -- and against Near North -- alleging that it was negligent not to point out the potential problems associated with the FELE and not to recommend obtaining additional errors and omissions insurance to fill the potential gap in coverage.  Ultimately, the trial court agreed that the FELE was ambiguous and ruled that NAS should have defended the band in the Cadogan action.  The band and NAS eventually settled.

Near North then sought judgment in its favor, arguing that it could not be held liable for negligence when the policy it obtained (the NAS policy) was ultimately held to provide the necessary coverage.  The trial court agreed, but the Court of Appeal reversed the judgment in favor of Near North.  The appellate court reasons that the questions of NAS' coverage and of Near North's negligence present independent issues, and that a ruling on one does not resolve the other:

Although the trial court, in ruling on a motion for summary adjudication, concluded NAS had breached its duty because there was a potential for coverage under appellants’ CGL policy, this ruling could not absolve [Near North] of liability for their own alleged negligence in failing to advise [the band] about the need for errors and omissions insurance.

(Italics added.)

While the ultimate finding of coverage might limit the amount of the damage caused by Near North's oversight, it does not eliminate that oversight or reduce the amount of the resulting damage to zero.  Among other things, the band would not have had to incur the cost of suing NAS to obtain coverage if Near North had obtained the additional errors and omissions policy.  Near North remains potentially liable to the extent that its errors contributed to the overall detriment sustained by the band.  Accordingly, the Court of Appeal reverses the judgment in favor of Near North and returns the case to the trial court for further proceedings.

~~~

The decision in Third Eye Blind, Inc. v. Near North Entertainment Insurance Services, LLC (March 29, 2005), Case No. A102803, can be accessed at these links in PDF and Word formats.
[Note: Links expire approximately 120 days following issuance of the opinions; the opinions should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

~~~

*For Further Reading:  In the thumbnail history of Third Eye Blind at Rock On The Net, interested readers can follow the band's success in the late '90s, including their total of 5 weeks with #1 singles ("My Semi-Charmed Life" and "Jumper") in 1997 and 1998.  Intriguing trivia: in 2003, the band appeared on the NBC series American Dreams, portraying . . . The Kinks.  The official Third Eye Blind Web site is 3EB.com.

In Answer to Bob Sargent's Question . . .

The preceding post on agents' and brokers' duties drew a link and comment from Bob Sargent's Specialty Insurance Blog in which Bob poses a few questions:

[A]ssume a producer typically acts as an agent on his business.  However, assume he is in need of a specialty lines product for one piece of a client's program and approaches a wholesaler for this coverage.  Not uncommon in the specialty lines business.  What role does the 'agent' then have with his client?  Does it change for each of the coverages?  The producer is acting as an agent on most of his business, and all the rest of the business for that client, but the producer is defined by contract as a 'broker' to the wholesaler, not an agent.

Lastly, the wholesaler is often a broker (as defined by contract), not an agent, but never communicates with the client.  Does the wholesaler have a 'brokers' duty to the client?

It has taken longer than I would have hoped to pull together this reply, but here are my thoughts (be warned -- they make for pretty dry reading):

When Bob writes that his hypothetical producer "typically acts as an agent," I take that to mean that the producer (we'll call him or her "P") generally is approached by prospective insurance buyers who know that P has an ongoing relationship with a particular insurer, that P places most of the coverage that comes P's way with that insurer, and that P is acting for and compensated by the insurer in those transactions. 

Now, we add a new element to the scenario: one particular customer ("C") wants P to obtain some specialized coverage that P's principal/insurer does not sell.  P agrees to seek out that coverage.  At that point, and for purposes of that transaction, P almost certainly becomes a "broker" acting for and compensated by C, the prospective insured, in the transaction.  As C's "broker," P would owe to C the duties of loyalty and disclosure described in the  earlier post, including whatever disclosure obligations may eventually arise from the proposed regulations discussed there.

So far, so good.  Now, let us suppose with Bob that P, wearing the "broker" designation, approaches an insurance wholesaler ("W") in search of that specialized coverage for C.  What is W's relationship in that transaction and to whom does W owe any direct duties?  In particular, does W owe the same sort of loyalty and disclosure to C that is owed by C's representative, P?

In my view, W is at a sufficient distance from C that a true fiduciary relationship -- such as we could say exists between C and P -- does not arise.  W's direct contractual relationship is only with P, not with C, and it is that contractual relationship that initially establishes the parties' obligations.  Both P and, presumably, W know, however, that C will be the "end user" of whatever insurance W obtains.  C is therefore likely to be deemed an "intended beneficiary" of the contract between P and W, and could arguably make a claim against W if W does not perform on that contract.  C might even have a claim against W if W performs the contract negligently, because C is a foreseeable victim of such negligence.  (The negligence claim would be analogous to cases in which the intended heirs under a will might sue a negligent attorney retained by the deceased testator if the attorney's shoddy draftsmanship deprived those heirs of the inheritance they were meant to receive.  The heirs did not have an attorney-client relationship with the negligent drafter, but many jurisdictions would permit them to sue because preserving their inheritance was the entire point of the work that the attorney undertook for the deceased client.)

Even if W owes duties to C under contract law or ordinary negligence principles, my best informed guess is that W would not owe to C the sort of disclosure obligations that P does, because the relationship between W and C is not a direct one.  While the manner in which W is going to be compensated may be a fact that P could be required to disclose to C as a result of the broker-customer relationship between them, I tend to believe that W would not owe that same direct duty because W lacks the sort of direct relationship with C that P has established.

Bob: I hope those thoughts are responsive to your question.  Other readers: something more interesting is bound to turn up on this weblog at any moment.

[As with every other opinion expressed on this weblog, the foregoing views are tentative and hypothetical.  Actual outcomes may not resemble these opinions at all, and particular real-world cases can only be analyzed based on their particular facts and the law of the jurisdiction(s) involved.]

The Commissioner Sez: “Sentence first -- verdict afterwards!”

Compensation of insurance agents and (particularly) insurance brokers has been in the news for months, largely thanks to the efforts of the ambitious Eliot Spitzer.   Never one to be left out of a high profile policy fracas, California Insurance Commissioner John Garamendi has taken time away from his crusade against "use it and lose it" underwriting [see below] to propose new rules prescribing the sorts of information that agents and brokers should be required to disclose to insurance buyers, particularly concerning the way in which those agents or brokers are going to be paid for placing the coverage.

Unlike the "use it and lose it" proposal, the text of which is still seemingly unavailable online, the latest draft regulation on agent/broker disclosure is readily accessible via the link at the end of this press release or directly, here [PDF].

The National Association of Mutual Insurance Companies [NAMIC] suggests that the Commissioner is getting ahead of himself, offering a solution without first finding a problem.

'The logical construct is that one should establish the existence of a problem before demanding a solution, said NAMIC State Affairs Manager Christian J. Rataj. 'To date, no evidence has been offered by the commissioner to support his conclusion that insurance producers are placing their desire for financial gain above the needs of their clients.'

* * *

The original version of the regulations was released in October of 2004.  NAMIC and PIFC argued that the regulations were unworkable and that the California Department of Insurance (CDI) did not have the legal authority to change existing state law. While the revised proposed regulations are less onerous than the original, NAMIC asserts the fundamental position that the CDI should adopt only those regulations that are specifically tailored to address an 'actual documented' problem.

In the Commissioner's testimony before a U.S. Senate subcommittee [PDF] this past November, he acknowledged that it is not unlawful, in California or in most other jurisdictions, for an insurance broker to receive compensation both from the insurance buyer and from the insurer that issues the policy.  Rather, the question in the Commissioner's mind is whether it should be permissible for a broker to arrange compensation in that way without disclosing the arrangement to the customer:

Let me be clear.  I am not saying that the acceptance of a commission or a contingent commission from an insurer is, by itself, a violation of the law. . . .  [But] if a broker stands to receive more money by placing a client with one particular insurer as opposed to another, that action creates a potential conflict of interest because it gives the broker an incentive to favor that insurer.  Whether this should be made illegal is something that I am certain state legislatures will be considering as a result of this scandal.

But there should be no question that accepting such compensation in secret, or providing a disclosure that does not clearly tell the client what compensation the broker is receiving and from whom, is a violation of the broker’s duty to its client.  And deciding to recommend that a client buy insurance from a particular insurer, not because that insurer offers the best product for the client but because the broker will receive additional compensation, is illegal.

"Illegal?"  Not necessarily, but certainly not particularly ethical: an insurance broker acting on behalf of a prospective insurance buyer is that buyer's "agent" and as such owes fiduciary duties, including a general duty to disclose information relevant to the transaction and to place the interests of the client first.¹  Those general duties militate in favor of the broker revealing to the customer any facts -- such as a commission from one of several possible insurers -- that might affect the broker's judgment in recommending one policy over another.  In other words, the proposed regulations largely compel brokers to make disclosures they arguably ought to be making even without these regulations.

Absent the proposed regulations, a broker who receives undisclosed compensation from a third party only faces some consequence from that action if (1) the client discovers that it occurred and (2) the client can show that some actual damage to the client's interests resulted from the transaction.  Damage would generally be found only if the buyer could have obtained identical insurance coverage more cheaply if a different insurer -- one that was not paying extra compensation to the broker -- had been selected.  In a case of that sort, the measure of damages ought to be the difference between the premium the customer paid and the lower premium that "should have been" offered.²  This is likely to be a modest amount in most cases, though it could be more substantial in the case of a large commercial account. 

The proposed regulations, in contrast, would declare this sort of non-disclosure to be per se unfair or unlawful, effectively "crimininalizing" the conduct and exposing the broker to disciplinary action -- fines, restrictions on or withdrawal of the broker's license -- whether or not any measurable damage was done to the customer in a given case.

The issue boils down to one of regulatory philosophy.  Those who oppose regulation, such as NAMIC, would urge that this sort of conduct should be acted upon only in the particular cases in which it does harm.  Those, such as the Commissioner, of a more crusading bent would counter that the conduct is an evil in itself and should be punishable in every instance, including those in which "no one was hurt" by it.  Take your pick.

[Post title inspired by Lewis Carroll [C. L. Dodgson], Alice's Adventures in Wonderland: Chapter XII. Alice's Evidence.]

~~~

UPDATE [1423 PDT]: 

 Business Insurance reports that proposed legislation on agent/broker disclosure requirements has failed in a state Senate committee:

The committee was originally scheduled to vote on a bill proposed by Sen. Joseph Dunn, D-Santa Ana, that would have imposed specified requirements on agents or brokers with respect to how they make inquiries of insurers, obtain coverage, disclose information to the client and charge fees to the client.  California Insurance Commissioner John Garamendi supported the bill.

Instead, the committee voted on a more limited bill that would have added new disclosure requirements.  It was defeated 5-2.

Information on the bill (SB 938), including the most recent version of the text, is available through the Legislative Counsel, here.  As the Business Insurance story notes, the bill existed independently of the Commissioner's proposed regulations discussed above.  Whether the regulations will be affected by the bill's failure remains to be seen.

~~~

Notes:

¹  The terminology gets slightly confusing here.   An "insurance agent" is usually deemed to represent and to act for the insurer, while an "insurance broker" is usually deemed to represent and act for the prospective insurance buyer.  (That distinction was a major issue in the case discussed here.)  As a representative of the buyer, a "broker" is that buyer's agent in the generic, common law sense: one who acts for another and has the power to bind the client/principal or affect the client/principal's legal interests.  It is from that principal-agent relationship that the duties of loyalty, disclosure, etc., naturally flow.

²  A more serious case can be imagined if the broker, acting under the influence of the promise of extra compensation, placed the coverage with an insurer that later proved to be insolvent or if the coverage provided by the selected policy proved not to cover a loss to which the alternative policy would have responded, but those cases strike me as much less likely to occur than the sort of "I paid too much" claim described in my example.

Safety Tips for Advocates

The Ninth Circuit's decision yesterday in the case of Lasar v. Ford Motor Co. provides an object lesson on the risks of trying to be "clever" in working around a direct order from a judge.

Lawrence Sutter is an attorney from Ohio, representing the Ford Motor Company.  Ford was sued in the U.S. District Court for the District of Montana by Mark Lasar, who was severely injured in a rollover accident involving a Ford pickup.  Ford retained Sutter to represent it in defending the action, and Sutter was admitted to practice in the District of Montana pro hac vice (i.e., for purposes of this case only). 

Safety Tip #1:  Judges mean it when they order you not to mention a subject.

Apparently, there was evidence to suggest that Lasar had consumed a quantity of alcohol on the day of the accident, and that his injuries were further compounded by his failure to wear a seatbelt.  Prior to trial, Lasar's attorney succeeded in obtaining an order prohibiting Sutter, in his representation of Ford, from making any reference at all  to either Lasar's alcohol consumption or the seatbelt issue.  As attorneys will do, Mr. Sutter decided to try to finesse the issue by avoiding any explicit mention of alcohol or seatbelts . . . .

When the trial began, Sutter made two comments during his opening statement that the district court ultimately determined were violations of the pretrial orders.  Initially, Sutter told the jury:

At about 5:00 that morning, Mr. Lasar got out of bed and went hunting for the morning.  Some time in the afternoon, he met up with some of his friends and spent the day playing pool, visiting some local establishments.  Somewhere around 10:00 that night, he made the decision to drive himself home.  He got into his car and he began his way back to his homestead.

Later in his opening statement, Sutter stated:

Now, inside the vehicle, something else was going on; Lasar was what we call a free-floating body.  His body was banting about inside the car as it was rolling over.   And because of what happens during the rollover, something all of us learned in high school and most of us tried to forget, centrifugal force. All that is, is something spinning around like a yo-yo on a string; it wants to keep going outward.

(Italics added.  Folksiness in original.)

Lasar's counsel objected to these remarks.  The trial judge agreed that they were violations of the court's order, and directed a mistrial.  Later, the judge imposed monetary sanctions on Sutter and on Ford, withdrew Sutter's permission to represent Ford in the litigation, and ordered that Sutter may never again be admitted to appear in any case in the District of Montana.  As we were taught to say in law school: "Ouch!" 

Safety Tip #2:  When a Court asks you questions, answer them truthfully.

The Ninth Circuit overturned the blanket ban on Sutter's future appearances in the District of Montana -- in part because pro hac vice admissions are by definition permitted or denied on a case by case basis -- but affirmed all of the other sanctions, including particularly removing Sutter from any further involvement on Ford's behalf in this case. One of the grounds for affirming the disqualification portion of the order was the discovery that Sutter's application to be admitted pro hac vice here had omitted to mention an incident in which Sutter had been ordered to jail by a judge in Ohio. 

Although that order had later been vacated and the judge who imposed the penalty disqualified, the Ninth Circuit agreed that Sutter should have disclosed the Ohio incident in response to a question whether he had "ever been held in contempt [or] otherwise disciplined by any court for disobedience to its orders."  While he had ultimately been vindicated, Sutter had nevertheless been "disciplined" through imposition of jail time, and had himself characterized the Ohio order as one based on a "contempt" (although it appears there was never a formal contempt determination).  In conjunction with the improper opening statement, the Ninth Circuit found that the omission of the Ohio incident provided additional grounds to withdraw Sutter's admission to represent Ford in this case.

~~~

Of related interest: Elsewhere today, Professor Ann Althouse notes an appellate attorney's moment of maximum discomfort.

Shark Bating

At his Notes from the (Legal) Underground, Evan Schaeffer asks: "Why Are Lawyers So Despised?" and suggests one possible answer:

If you ask me, over-the-top advertising has done far more harm to the public image of lawyers than the duty of zealous representation, especially in recent years.

Perhaps he has something like this in mind?

Update:  On the subject of those potentially liable -- and in a position to pay -- for injury and death in the Glendale Metrolink crashes, see also Ted Frank's reports at Overlawyered.

The Man Who Knew Too Much: Insurer's Former Attorney/Consultant Disqualified from Testifying Against Company as Expert Witness

A well known insurance attorney, insurance fraud expert and claims practices consultant has been disqualified from testifying as an expert witness against an insurance company he represented and advised twelve years earlier.

From 1988 to 1991, attorney Barry Zalma defended 21st Century Insurance Company in claims litigation and rendered coverage opinions to the company.  He later formed an education and consulting firm, ClaimSchool, Inc., which also advised 21st Century and provided multi-week training sessions to its claims staff.  In 2001, Helen Brand filed suit against 21st Century, her insurer, claiming breach of the insurance contract and "bad faith" (breach of the insurer's obligations of good faith and fair dealing) in the investigation and adjustment of a mold-related loss to her home.  As trial approached, Brand retained and designated Zalma as an expert witness, to testify concerning the propriety of 21st Century's claims handling practices.  21st Century moved to disqualify Zalma on the ground that he had acquired confidential information during his former representation of the company.  The trial court twice declined to order the disqualification, finding in part that the passage of time (12 years) between Zalma's former engagement by 21st Century and his current engagement as its opponent's expert witness indicated there was no "substantial relationship" between the two matters.  21st Century filed an appeal from the trial court's order, and the Court of Appeal has ordered Zalma's disqualification.

The rule on attorney disqualifications in California is ostensibly a simple one:

An attorney engaged in employment adverse to a former client is subject to disqualification where a 'substantial relationship' exists between the lawyer's current employment and the lawyer's representation of the former client.

Despite the passage of time, the Court of Appeal found that the two engagements had an inescapable connection, giving rise to a presumption that Zalma was in possession of confidential information that he would not be permitted to utilize to the detriment of his former client.

[T]he undisputed evidence before the court in this case establishes the requisite substantial relationship between Zalma’s current and prior engagements to mandate his disqualification as an expert witness against his former client in this litigation. Not only did Zalma personally represent 21st Century as its attorney and supervise associates representing the company between 1988 and 1991, but Zalma’s representation of 21st Century also concerned matters substantially related to the issues in the instant case in which he has been retained to testify against 21st Century.

The two engagements arose in the same context and share numerous factual and legal elements. While an attorney for 21st Century, Zalma rendered “numerous coverage opinions on behalf of 21st Century on a variety of claims issues, including moisture intrusion, rot, and fungal infestation.” Zalma also defended 21st Century in actions by policyholders seeking coverage and/or alleging bad faith in claims handling. . . .

Moreover, using knowledge gained from consultations with 21st Century concerning its claims handling policies and procedures, Zalma taught the company’s claims adjusters how to evaluate claims for coverage under 21st Century’s homeowner’s policy and made suggestions to the company for improving its claims handling procedures. It is thus readily apparent that by virtue of the nature of Zalma’s representation of 21st Century, confidential information material to the current dispute would normally have been imparted to Zalma. As such, Zalma’s knowledge of confidential information must be presumed.

At least as the court describes it, the close ties between the past and current representations are sufficiently clear that one can only ask of Zalma's decision to accept retention as an expert in this case:  "What was he thinking?" (This is the latest in a continuing series of attorneys seemingly believing that their former representations of an insurer pose no obstacle to switching sides.  Click through for two previous  examples of disqualifications of insurers' former attorneys.)

The decision in Brand v. 20th Century Insurance Company (Sept. 1, 2004; ordered published December 1, 2004), Case No. B169913, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Not an "Honest Broker" -- Insurer May Sue Broker Responsible for Falsehoods on Policy Application

As discussed below, an insurance "broker" usually represents -- and owes his or her primary duties to -- the insurance buyer, not the insurance company from which the coverage is obtained.  Can a broker be held liable to the insurance company for fraud or negligence in presenting an application supported by false statements and forged documents?  The Court of Appeal concludes the answer is "yes."

Crosby Insurance was a broker acting for Baroco, a building contractor, and obtained a policy for Baroco from Century Surety.  Baroco was sued for construction defects as the general contractor on a single-family home and demanded that Century defend and pay the claim.  After first accepting the defense, Century discovered that the application for insurance had significantly misrepresented Baroco's past loss history (using a letter forged on the prior insurer's letterhead) and misrepresented the nature of Baroco's business (specifically denying that Baroco ever acted as other than a drywall subcontractor).  The misrepresentations were allegedly traceable to the Crosby Insurance employee who prepared the applications. 

Century withdrew from Baroco's defense; Baroco sued Century; Century counter-sued and also filed suit against Crosby based on theories for fraud and negligence in the presentation of the falsified insurance application.  Crosby obtained a dismissal on the grounds that it could not be held to owe any legal duty to the insurer, since it acted only as the representative of the insured, Baroco.  On appeal, that dismissal has been reversed.

After analyzing current California law, the Court of Appeal ruled that there is no reason why insurance brokers should be "exempt . . . from the consequences of their own fraud."  The Court observed that "it would be an unreasonable, if not perverse, result if the law allowed an insurer no remedy against a broker who has, as is alleged in the cross-complaint, actively forged documents to support an insurance application."

On the issue of negligence, Crosby argued that any duties of care that it owed were owed only to its client, Baroco, and not to the insurer.  The Court disagreed.  Analogizing the case to others in which a professional may owe duties to third parties as well as to the professional's client, and applying the five-step analysis typically used to determine when a duty of care may be owed, the Court concluded that it is reasonable that an insurance broker should owe a duty to prospective insurers not to present knowingly inaccurate information in an insurance application:

First, the transaction of applying for an insurance policy is intended to benefit the insurer as well as the insured and is designed to influence the insurer’s conduct in issuing an insurance policy.  Second, harm from misrepresentations in an insurance application, such as the precise harm alleged to have occurred in this case, is easily foreseeable.  Third, injury is certain in that the insurer incurred costs in defending an insurance claim on a policy that would not have issued but for the misrepresentations in the application.  Fourth the misrepresentations in the application were material to the insurer’s decision to issue the policy and thus were closely connected to the ensuing injury.  Fifth, under the circumstances alleged, the factor of moral blame supports a finding of duty. Finally, imposing liability on insurance brokers for misrepresentations in insurance applications would act as a deterrent in preventing future harm.

The decision in Century Surety Co. v. Crosby Insurance (Nov. 17, 2004), Case No. E033550, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]