October 2012 - International Association of Defense Counsel

Transcription

Defense
Counsel
Journal
October 2012
Volume 79, No. 4
Pages 377-512
International Association of Defense Counsel
303 West Madison
Suite 925
Chicago, IL 60606 USA
Telephone: 312.368.1494
Fax:
312.368.1854
E-mail:
info@iadclaw.org
Web site:
http://www.iadclaw.org
In this issue...
Announcements and Departments
Table of Contents....................................................................................................................377
President’s Page......................................................................................................................379
IADC Tenets of Professionalism.............................................................................................381
IADC Officers and Board of Directors..................................................................................383
Defense Counsel Journal Board and Committee Vice Chairs...............................................384
Calendar of Meetings.............................................................................................................386
Conning the Newsletters.........................................................................................................490
Annual Index Vol. 79..............................................................................................................505
Featured Articles
ADVISABILITY AND PRACTICAL CONSIDERATIONS OF
COURT-IMPOSED TIME LIMITS ON TRIAL...................................................................387
By: Andrew L. Goldman and J. Walter Sinclair
Providing practical advice for when to request, and the costs and benefits for defense counsel
associated with, court-imposed time limits on trial.
SPLITTING THE FILE IN LIABILITY INSURANCE........................................................399
By: Douglas. R. Richmond
Explaining why insurers do not have a legally recognized duty to split files in cases where
coverage is disputed, and considering the challenges that arise when insurers decide to split
files.
THE GLOBAL SUPPLY CHAIN: UNDERSTANDING,
MEASURING, MITIGATING AND MANAGING EXPOSURE
IN A SUPPLY CHAIN DEPENDENT GLOBALIZED MARKET .....................................412
By: Daniel W. Gerber and Brian R. Biggie
Presenting the advantages and weaknesses of the modern global supply chain and exploring
ways for participants in the global economy to minimize or transfer risks resulting from
interruptions in the supply chain.
FENDING OFF THE USE OF A RULE 12(F) MOTION
TO STRIKE AFFIRMATIVE DEFENSES...........................................................................438
By: Peter M. Durney and Jonathan P. Michaud
Addressing potentially effective arguments a defendant may raise when confronted with a
motion to strike affirmative defenses based on Bell Atlantic Co. v. Twombly and Ashcroft v.
Iqbal.
PREDICTABILITY IN PUNITIVE DAMAGES:
CONSIDERING THE USE OF PUNITIVE DAMAGE MULTIPLIERS.............................454
By: Sarah G. Cronan and J. Brittany Cross
Evaluating the possibility of having juries use a punitive damage multiplier to determine
punitive damages in class action or mass tort litigation, and analyzing the context in which
courts have utilized such a multiplier approach.
RAISING THE ROOF: WHAT’S HOT IN
CONSTRUCTION DEFECT LITIGATION..........................................................................465
By: Kathleen J. Maus, Julius F. “Rick” Parker, Jr. and Michael Hamilton
Exploring the various approaches courts have taken in considering whether defective
construction constitues an “occurrence” under commercial liability policies.
Defense Counsel Journal (ISSN: 0895-0016) is published quarterly (January, April, July, October) by the
International Association of Defense Counsel, 303 West Madison, Suite 925, Chicago, IL 60606, telephone
312.368.1494, fax 312.368.1854, e-mail: info@iadclaw.org. Periodical postage paid at Chicago, IL and additional
mailing offices. The subscription price of $90 annually is included in the dues of the members of the IADC. POSTMASTER: Please send address changes to Defense Counsel Journal, 303 West Madison, Suite 925, Chicago, IL 60606. Cite as: 79 DEF. COUNS. J. -- (2012). Copyright © 2012 by the International Association of Defense Counsel. All rights reserved. Defense Counsel Journal is a forum for the publication of topical and scholarly writings on the law, its
development and reform, and on the practice of law, particularly from the viewpoint of the practitioner and
litigator in the civil defense and insurance fields. The opinions and positions stated in signed material are those
of the author and not by the fact of publication necessarily those of the International Association of Defense
Counsel. Material accepted for publication becomes the property of the IADC and will be copyrighted as a work
for hire. Contributing authors are requested and expected to disclose any financial, economic, or professional
interests or affiliations that may have influenced positions taken or advocated in the efforts. Submit manuscripts to the Managing Editor at the above address in hard copy or via e-mail. Defense Counsel
Journal follows The Bluebook: A Uniform System of Citation (18th ed.), and footnotes should be placed at the
end of the article’s text.
President’s Page
IADC 2013: Where Advocacy
Meets Innovation
By Quentin F. Urquhart, Jr.
In his recent biography on Steve Jobs, Walter Iassacson eloquently describes how Jobs was able
to make Apple into an innovative force that transformed entire industries:
He knew that the best way to create value in the twenty-first century was to
connect creativity with technology, so he built a company where leaps of
imagination were combined with remarkable feats of engineering. He and
his colleagues at Apple were able to think differently: They developed not
merely modest product advances based on focus groups, but whole new
devices and services that consumers did not yet know that they needed.
As civil defense lawyers, we have all had to adjust to profound technological changes that have
impacted our profession. Just consider the simple act of sending a written communication to
another lawyer. Twenty-five years ago you dictated a letter to your secretary (that’s what
they were all called back then) who typed it up on an IBM Selectric® typewriter using
triple-form carbon paper. Because the letter could not be stored anywhere, you worked hard
to get it right the first time so that your secretary did not have to re-type it again from the
beginning. Once the letter was physically signed, the original was sent to your firm copy center
where it (along with any enclosures) was “Xeroxed” many times over to cover your service
obligations. The letter was then mailed using the U.S. Postal Service and typically arrived at its
destination two or three business days later. Today, that same process can be completed by a
single lawyer in less than 10 minutes with almost instantaneous speed of transmission, unlimited
enclosure capacity and at virtually no cost. And, not a single tree was harmed along the way.
The development of personal computers and user-friendly software, the growth of the internet
and the creation of wireless networks that allow us to “stay connected” 24/7 have fundamentally
altered the way we practice law. But just as important is the realization that these innovations
have also changed the subject matter of our practices. Twenty-five years ago no one was litigating
the scope of electronic discovery, arguing about the confidentiality of content voluntarily posted
on sites such as Facebook® and MySpace®, advising job applicants on whether they should
reveal their social media passwords as a condition of employment, or asking a judge to approve
the use of predictive coding in document review. Trial lawyers must now consider how their
client’s internet profile may impact juror perception, if they can ethically use social media to
ferret out hidden biases during voir dire, and whether courts can realistically limit juror
access to applications like Twitter® during deliberations. Virtually every legal issue now has a
technological aspect to it that must be considered and addressed by counsel.
While there is no question that technology will continue to impact on our profession, we must
never forget that its primary value is derived from helping us be better legal advocates. By
definition, as “defense” lawyers, we operate in a system where there are winners and losers.
Motions are granted or denied. Trials are won or lost. A lawyer can be the most technologically
Page 380
advanced in the world, yet if he is unable to persuade a judge or jury to see the merits of his
client’s position he will fail. As an organization composed of the best civil defense
lawyers in the world, the IADC is uniquely positioned to explore all the ways we can
embrace technological innovation while remaining true to what we do best as trial counsel.
With that opportunity in mind, I have designated IADC 2013: Where Advocacy Meets
Innovation as the overarching theme for this year. Like Steve Jobs and his colleagues at Apple,
I have challenged my CLE Program Chairs and Substantive Law Committee Chairs to think
differently and envision programming that will teach us all how we can best
utilize technology to enhance what we do as legal advocates. I encourage each and every one of
you to join us on what promises to be an exciting journey.
Page 381
IADC Tenets
of Professionalism
The International Association of Defense Counsel is aware that applicable rules or codes of
professional responsibility generally provide only minimum standards of acceptable conduct.
Since we aspire to the highest ideals of professionalism, we hereby adopt these tenets and agree
to abide by them in the performance of our professional services for clients.
1. We will conduct ourselves before the court in a manner which demonstrates respect for the
law and preserves the decorum and integrity of the judicial process.
2. We recognize that professional courtesy is consistent with zealous advocacy. We will be civil
and courteous to all with whom we come in contact and will endeavor to maintain a collegial
relationship with our adversaries.
3. We will cooperate with opposing counsel when scheduling conflicts arise and calendar
changes become necessary. We will also agree to opposing counsel’s request for reasonable
extensions of time when the legitimate interests of our clients will not be adversely affected.
4. We will keep our clients well-informed and involved in making the decisions that affect their
interests, while, at the same time, avoiding emotional attachment to our clients and their
activities which might impair our ability to render objective and independent advice.
5. We will counsel our clients, in appropriate cases, that initiating or engaging in settlement
discussions is consistent with zealous and effective representation.
6. We will attempt to resolve matters as expeditiously and economically as possible. 7. We will honor all promises or commitments, whether oral or in writing, and strive to build a
reputation for dignity, honesty and integrity.
8. We will not make groundless accusations of impropriety or attribute bad motives to other
attorneys without good cause.
9. We will not engage in discovery practices or any other course of conduct designed to harass
the opposing party or cause needless delay. 10. We will seek sanctions against another attorney only when fully justified by the
circumstances and necessary to protect a client’s lawful interests, and never for mere tactical
advantage.
11. We will not permit business concerns to undermine or corrupt our professional obligations.
12. We will strive to expand our knowledge of the law and to achieve and maintain proficiency
in our areas of practice.
13. We are aware of the need to preserve the image of the legal profession in the eyes of the
public and will support programs and activities that educate the public about the law and the
legal system.
Page 382
Boca
2013 midyear Meeting
February 9 - 14
Raton Club and Resort, Boca Raton, FL USA
2013 annual Meeting
July 7 - 12
Grand Wailea Resort, Maui, HI USA
Page 383
Officers
and Board of Directors
President
Quentin F. Urquhart, Jr., New Orleans, Louisiana USA
President-Elect
Immediate Past President
William J. Perry, London, England
Molly H. Craig, Charleston, South Carolina USA
Vice President of Insurance
Vice President of Corporate
Connie Lewis Lensing, Memphis, Tennessee USA
Vice President of International
Pamela McGovern, Montreal, Quebec Canada
Daniel M. Zureich, Cary, North Carolina USA
Secretary-Treasurer
Joseph E. O’Neil, Philadelphia, Pennsylvania USA
Directors
Terms ending July 2013
Daniel K. Cray
Chicago, Illinois USA
Fred M. (Tripp) Haston, III
Birmingham, Alabama USA
Susan C. Roney
Buffalo, New York USA
Anton G. Maurer
Stuttgart, Germany
Kathleen J. Maus
Tallahassee, Florida USA
W. Thomas Siler, Jr.
Jackson, Mississippi USA
Nancy M. Erfle
Portland, Oregon USA
John T. Lay
Columbia, South Carolina USA
Kenneth R. Meyer
Morristown, New Jersey USA
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Willis Smith
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Charles E. Pledger, Jr.
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Henry B. Alsobrook, Jr.
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Page 384
Defense Counsel Journal
Board and Committee Vice Chairs
Editor and Chair of the Board of Editors
Richard L. Neumeier, Esq., Morrison Mahoney LLP, 250 Summer Street, Boston, MA 02210
Managing Editor
Robert F. Greenlee, Esq., IADC, 303 West Madison, Suite 925, Chicago, IL 60606
Michael F. Aylward
Shaun McParland Baldwin
William T. Barker
Keith N. Bond
Fred E. Bourn, III
David G. Brock
Christopher D. Brown
Michael E. Brown
Charles W. Browning
John G. Browning
D. Jeffrey Campbell
P. Ted Colquett
Gray T. Culbreath
Lynn S. Davies
Peter M. Durney
Jeffrey J. Ellis
Mark Fahleson
Board of Editors
Michael J. Farrell
Fred J. Fresard
Daniel W. Gerber
Leta E. Gorman
Michael J. Holland
Annette Christine Warfield Hughes
Kevin T. Jacobs
Andrew Kopon, Jr.
Mitchell Lee Lathrop
John P. Lavelle, Jr.
James K. Leader
Carl A. Maio
Christopher J. Major
S. Gordon McKee
Nicholas C. Nizamoff
Mark S. Olson
John C. S. Pierce
Richard T. Pledger
Todd Presnell
Walter J. Price, III
Douglas R. Richmond
G. Edward Rudloff, Jr.
Elizabeth Haecker Ryan
Scott W. Sayler
Thomas F. Segalla
Fernando Eduardo Serec
Lawrence D. Smith
Mary Christine Sungaila
Mark R.C. Sutherland
Emilia Sweeney
Robert T. Veon
J. Calhoun Watson
Rebecca J. Wilson
Rachel E. Yarch
Committee Vice Chairs of Journal Articles and Publications
Alternative Dispute Resolution
Joseph P. Esposito
Appellate Practice
John B. Drummy
Business Litigation
Deborah G. Cole
Class Actions and Multi-Party
Litigation
Kara T. Stubbs
Construction Law and Litigation
Tamara L. Boeck
Corporate Counsel
Alfred R. Paliani
Drug, Device and
Biotechnology
Lauren Colton
Employment Law
Mark Fahleson
Environmental and Energy Law
Walter H. Boone
Fidelity and Surety
C. Allen Gibson, Jr.
Insurance and Reinsurance
Gary L. Johnson
International
Paul Lefebvre
Legislative, Judicial and Government
Affairs
Pat Long Weaver
Medical Defense and Health Law
Christopher S. Berdy
Product Liability
Mary G. Pryor
Professional Liability
John B. Drummy
Technology
A. Edwin Stuardi, III
Toxic And Hazardous
Substances Litigation
Linda Kay Barnes Baxter
Transportation Law
Donna L. Burden
Trial Techniques and Tactics Matthew D. Keenan
White Collar Defense and
Investigations
Douglas S. Brooks
Back issues of Defense Counsel Journal are available from William S. Hein & Co., 1285 Main St., Buffalo, N.Y. 14209 ●
Defense Counsel Journal is indexed in Index to Legal Periodicals, published by H.W. Wilson Co., 950 University Ave.,
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Page 385
Corporate Counsel College
April 25 - 26, 2013
The Ritz-Carlton
Chicago, Illinois
For more information, please visit www.iadclaw.org.
Page 386
Calendar
of Meetings
Midyear Meeting
February 9 - 14, 2013
Boca Raton Club and Resort
Boca Raton, Florida USA
Corporate Counsel College
April 25 - 26, 2013
The Ritz-Carlton
Chicago, IL USA
IADC/FDCC Joint Law Firm Management Conference
May 8 - 10, 2013
Embassy Suites O’Hare
Chicago, Illinois USA
Professional Liability Roundtable
May 16, 2013
New York University Law School
New York, New York USA
Annual Meeting
July 7 - 12, 2013
Grand Wailea Resort
Maui, Hawaii USA
41st Annual Trial Academy
July 25 - August 2, 2013
Stanford Law School
Palo Alto, California USA
The full schedule for IADC Regional Meetings
and Webinars is at www.iadclaw.org.
Advisability and Practical Considerations of CourtImposed Time Limits on Trial
By Andrew L. Goldman and
J. Walter Sinclair
W
ith the ever-increasing number of
docket filings, it is becoming more
common for courts to impose time
limits during trial. This should not be
surprising. For decades circuit courts
have imposed page limits on written
briefs. The United States Supreme Court
and virtually all federal and state
appellate courts restrict the length of oral
arguments. And now more than ever,
trial courts are imposing time limits to
speed up the pace of civil trials.
Though it can be challenging at times
to narrow the scope of a complex case,
trial lawyers who have participated in
time-limited trials generally appreciate
the value of being disciplined to
streamline their presentation of evidence.
Carefully planning who will testify, for
how long, and on what subjects promotes
efficiency for the courts, forces the
lawyers to focus on the evidence that
really matters, and helps to keep the
attention of jurors on the most significant
important
witness
testimony
and
documentary evidence.
I.
Time Limitations in Practice
The growing trend of imposing time
limitations at trial is perhaps most evident
in recent bellwether trials that have
occurred in mass tort litigation. For
example, the Honorable Eldon E. Fallon,
a highly regarded judge in the United
States District Court for the Eastern
District of Louisiana utilized such
techniques as the MDL judge in several
Andrew L. Goldman is
partner in the law firm of
Goldman Ismail Tomaselli
Brennan & Baum LLP in
its Chicago, Illinois office.
He
concentrates
on
complex
commercial
litigation matters, with a particular
emphasis on defending pharmaceutical and
medical device companies in products
liability and mass tort litigation. He is a
member of the International Association of
Defense Counsel.
Mr. Goldman has
extensive bench and jury trial experience in
courts throughout the United States
including federal and state courts in
Illinois, Louisiana, New York, Florida,
California and Connecticut.
J. Walter Sinclair is a
partner in the law firm
of Stoel Rives LLP in
its Boise, Idaho and
Seattle,
Washington
offices.
He
concentrates
on
corporate and complex
litigation matters associated with contract
disputes, product liability (including
agricultural product liability), antitrust,
class action and securities litigation. He is
a past president of the International
Association of Defense Counsel and a
fellow in the American College of Trial
Lawyers and the International Academy of
Trial Lawyers. Mr. Sinclair has extensive
bench and jury trial experience in courts
throughout the United States including
federal and state courts in Idaho,
Washington, Oregon, Nevada, Utah,
Arizona, Kansas, Michigan and New York.
Page 388
DEFENSE COUNSEL JOURNAL–October 2012
pharmaceutical product liability mass
torts including In re Propulsid Products
Liability Litigation (MDL 1355) and In re
Vioxx Products Liability Litigation (MDL
1657).1 By the time trials started in the
Vioxx MDL, the parties had taken
hundreds of hours of deposition
testimony, Merck had produced millions
of pages of documents, and many legal
and factual issues remained in dispute.
Nevertheless, in each of the six MDL
bellwether Vioxx trials, Judge Fallon gave
each side a maximum of seven days to
present their case. The six Vioxx
bellwether trials were each tried in less
than three weeks, resulting in one hung
jury, four defense verdicts and one
remittitur. The one Propulsid bellwether
trial was tried in a total of eight days and
resulted in a defense verdict.2
At the outset of these bellwether
trials, Judge Fallon emphasized to the
jury and the lawyers that he appreciates
and values the jury’s time. He would not
and did not tolerate short trial days. In
the Vioxx trials, if the jurors were willing
to work on Saturdays, he expected the
lawyers and witnesses to do so as well.
Judge Fallon required that crossexamination begin even if the direct
ended late in the day. He insisted that the
next witness had to be called after re-redirect regardless of how much time
remained before the next-scheduled break
or the trial day’s end. Judge Fallon did
not tolerate cumulative fact and expert
testimony, and he properly enforced
1
In re Propulsid Prods. Liab. Litig., MDL No.
1355, 2000 WL 35621417 (J.P.M.L. Aug 7,
2000); In re Vioxx Prods. Liab. Litig., 360 F.
Supp.2d 1352 (J.P.M.L. 2005).
2
Diez v. Janssen Pharmaceutica, Inc., No. 002577 (E.D. La. filed Aug. 30, 2000).
evidentiary rules such as necessary
foundation before fact witnesses could be
cross-examined on evidence such as
internal company documents.
Other MDL judges have utilized
similar techniques in bellwether trials,
often resulting in defense verdicts.3
Judge Lynn B. Winmill of the United
States District Court for Idaho allocated
four months to the trial of a bellwether
trial involving 4 of the 110 plaintiff
groups in a mass tort products liability
case filed against multiple defendants
including the United States Bureau of
Land Management and DuPont. This was
after several years of discovery and the
production of millions of pages of
documents and hundreds of depositions.
Following trial, the judge put the
remainder of deposition discovery on a
time allocation, which set forth the total
time the parties could spend for all
depositions to be taken, without
addressing individual time limits, and
allocated six months for the damages
trials of all other plaintiffs. Both the
discovery and trial time was allocated in
minutes assigned by the court. The
bellwether trial ended as determined by
3
For example, in an MDL involving Merck’s
prescription drug Fosamax® (S.D.N.Y., MDL
1789), Judge John F. Keenan has presided
over several trials limiting each side to
approximately six trial days. Maley v. Merck
& Co. Inc., No. 06-cv-4110 (S.D.N.Y.)
(defense verdict); Graves v. Merck & Co.,
Inc., No. 1:06-CV-05513-JFK (S.D.N.Y.)
(defense verdict); Secrest v. Merck & Co.,
Inc., No. 06 MD 1789-JFK (S.D.N.Y.)
(verdict for Merck); Boles v. Merck & Co.,
Inc., No. 1:06-cv-09455-JFK (S.D.N.Y.)
(initially resulted in a mistrial; retrial resulted
in plaintiff verdict, followed by a remitter and
damages retrial set for September 2012).
Page 389
Court-Imposed Time Limits on Trial
the court, as did the discovery, while the
final trial settled just prior to trial.
Judges outside the mass tort products
liability context have also imposed time
limits for trials. Last year, Judge Alvin K.
Hellerstein of the United States District
Court for the Southern District of New
York announced his plan to impose a onemonth time limit for trial in a wrongful
death case filed by the family of Mark
Bavis, a passenger on the second plane to
hit the World Trade Center on September
11, 2001.4 United Airlines and several
other parties were defendants. Had the
case not settled, each side would have had
no more than 50 to 60 hours to present its
evidence. The trial was to be timed in
minutes, not days, much like a chess
match with the clock ticking whenever a
lawyer questions a witness or argues to
the jury. As is often the case, lawyers for
both sides argued that such a time limit
was unrealistic for a case of that
magnitude.
Nevertheless,
Judge
Hellerstein fully intended to impose a
strict time limit to avoid a protracted trial
and to keep the jury focused. The court
reportedly reasoned that “once the jury
gets bored with your presentation, you’ve
lost the significant power of persuasion.”
II. Standards Supporting Time
Limitation
When imposing time limits at trial,
federal district courts rely on various
sources, including FED. R. EVID. Rule
611(a), which provides that:
4
Bavis v. United Air Lines, Inc., No. 02-CV7154-AKH (S.D.N.Y.).
The court should exercise reasonable
control over the mode and order of
examining witnesses and presenting
evidence so as to:
(1) Make those procedures effective
for determining the truth;
(2) Avoid wasting time; and
(3) Protect witnesses from harassment or undue embarrassment.5
State trial courts are afforded similar
discretion under state or local procedure
and/or evidence rules, or common law
principles.6
5
FED. R. EVID. 611(a); see also Gregory P.
Joseph, American Bar Assoc. Princ. for Juries
& Jury Trials, SL 044 ALI-ABA 653 (Oct.
2005) (citing FED. R. CIV. P. 16(c)(4), (c)(15)
(“the court may take appropriate action, with
respect to…an order establishing a reasonable
limit on the time allowed for presentation of
evidence”)); FED. R. EVID. 403, 611(a), 201,
and MANUAL FOR COMPLEX LITIGATION
(THIRD) §§ 21.653, 22.35 (1995) (provides
grounds
for
time
limits);
MCI
Communications v. American Tel. & Tel. Co.,
708 F.2d 1081, 1171 (7th Cir. 1983) (no abuse
of discretion to limit antitrust trial to 26 days
even where parties estimated an eight- to ninemonth trial). See also Duquesne Light Co. v.
Westinghouse Elec. Corp., 66 F.3d 604, 608611 (3rd Cir. 1995); Crabtree v. Nat'l Steel
Corp., 261 F.3d 715, 720-721 (7th Cir. 2001);
Johnson v. Ashby, 808 F.2d 676, 678-679 (8th
Cir. 1987); Gen. Signal Corp. v. MCI
Telecomm. Corp., 66 F.3d 1500, 1508-1509
(9th Cir. 1995).
6
Further evidence of the judiciary’s interest in
promoting efficiency in litigation is the
growing tendency of courts to implement time
restrictions in pretrial proceedings.
For
example, trial courts are issuing more tailored
and aggressive scheduling orders to expedite
discovery and, in some cases, promote prompt
Page 390
While there are numerous cases in
which the appellate court has been critical
of the time limits imposed by the trial
court, no cases have been identified in
which the trial court was actually
reversed because of the time limits
imposed.7 The language used to support
claims against time limits is dicta:
Trepel’s argument is impassioned
but unpersuasive. Although Trepel
cites dicta from three cases
disfavoring
time
limits,
see
Monotype Corp. v. Int’l Typeface
Corp., 43 F.3d 443, 451 (9th Cir.
1994); McKnight v. Gen. Motors
Corp., 908 F.2d 104, 114-115 (7th
Cir. 1990); and Flaminio v. Honda
Motor Co., 733 F.2d 463, 473 (7th
Cir. 1984), in none of these cases
did the imposition of the time limit
lead to a reversal. Similarly, we find
no cause to reverse here.8
imposing rigid time limits did not
constitute reversible error:
Accordingly, we join the Seventh
Circuit in disapproving rigid hour
limits such as those initially
suggested here. [citing Flaminio].
....
[W]e conclude that [Plaintiffs] have
not shown that “there was harm
incurred as a result” of the time
limit. [citing Monotype]. Plaintiffs
objected to the time limitation but
did not specify what evidence they
would have presented if more time
had been allotted, nor did they
request additional time.9
Similarly, in McKnight v. GMC, the
court found that the error associated with
firm limits did not merit reversal:
But there was one error that in a case
as close as this potentially was grave.
That is the hourglass method
employed by the district judge to
limit the length of the trial. . . . By the
time the plaintiff rested, GM had only
49 minutes in which to put on its four
remaining witnesses . . . . It was at
this point that the judge gave General
Motors the extra half hour, but 79
minutes is still a very short time for
four witnesses and we were told at
argument without contradiction that
these witnesses ran to and from the
stand in a desperate effort to complete
their testimony before time was
called.
Even those cases which have been
critical of the trial court’s actions have
not reversed them. In Pierce v. County of
Orange, for example, the court found that
resolution of meritless claims. Depositions
may also be restricted (sometimes even further
than contemplated by the Federal Rules of
Civil Procedure) by limiting the number of
hours for all depositions in a case, or setting a
deadline by which all depositions must be
completed.
7
In Secretary of Labor v. DeSisto, 929 F.2d
789, 794–796 (1st Cir. 1991), the First Circuit
ordered a new trial (despite the fact that
neither side had objected) when the trial court
had limited each side to one witness without a
Rule 403 inquiry, but the decision was based
on a witness limit, not a time limit.
8
Trepel v. Roadway Express, Inc., 40 Fed.
Appx. 104, 108 (6th Cir. 2002).
9
Pierce v. County of Orange, 526 F.3d 1190,
1200 (9th Cir. 2008) (upholding trial court’s
limit of three days per side).
Page 391
Flaminio v. Honda Motor Co., 733
F.2d 463, 473 (7th Cir. 1984),
disapproved the practice of placing
rigid hour limits on a trial, while
recognizing that in this age of
swollen federal caseloads district
judges must manage their trials with
an iron hand -- must scrutinize the
witness list and the exhibit list with
a beady eye and ruthlessly prune
redundant or marginal evidence. We
do not reverse district judges who do
this. Northern Indiana Public
Service Co. v. Carbon County Coal
Co., 799 F.2d 265, 269 (7th Cir.
1986). We commend them. But to
impose arbitrary limitations, enforce
them inflexibly, and by these means
turn a federal trial into a relay race is
to sacrifice too much of one good -accuracy of factual determination -to obtain another -- minimization of
the time and expense of litigation.
If General Motors had preserved the
issue of undue curtailment of trial
time, we would reverse and order a
new trial. But it has not preserved it,
and this time its waiver is fatal. It
asked for an extra hour and was
given thirty minutes, so it must show
what it would have done with the
other thirty minutes if it had been
given them. Id. at 270. Neither in the
district court nor in this court has
General Motors attempted such a
showing. The spectacle of witnesses
running to and from the witness
stand is unseemly, but General
Motors does not argue that the
spectacle was prejudicial to it. We
do not reverse for harmless errors.
Fed. R. Civ. P. 61. McKnight is
entitled to the award of back pay
that the jury gave him.10
Both McKnight and Pierce cite the
Seventh Circuit case of Flaminio v.
Honda Motor Company, in which the
court criticized the imposition of strict
hour limits while ultimately affirming the
judgment of the district court:
Finally, Flaminio argues that the trial
judge
unduly
curtailed
his
opportunity to present his case by
announcing at the outset of the trial
that the trial would be allowed to take
only 33 hours -- 18 for the plaintiffs
and 15 for the defendants. HN15
Although in this era of crowded
district court dockets federal district
judges not only may but must
exercise strict control over the length
of trials, and are therefore entirely
within their rights in setting
reasonable deadlines in advance and
holding the parties to them, see, e.g.,
MCI Communications Corp. v.
American Tel. & Tel. Co., 708 F.2d
1081, 1170-72 (7th Cir. 1983), we
disapprove of the practice of placing
rigid hour limits on a trial. The effect
is to engender an unhealthy
preoccupation with the clock,
evidenced in this case by the
extended discussion between counsel
and the district judge at the outset of
the trial over the precise method of
time-keeping -- a method that made
the computation of time almost as
complicated as in a professional
10
McKnight v. GMC, 908 F.2d 104, 115 (7th
Cir. Wis. 1990) (superseded by statute on
different grounds) (not reversing because issue
was not preserved for appeal).
Page 392
football game. But our disagreement
with the district judge’s method of
economizing on trial time does not
warrant reversal of his judgment.
The 18 hours that the plaintiffs were
given to put in their case were not an
unreasonable period in relation to the
complexity of the issues, and in any
event the plaintiffs have failed to
indicate what evidence they would
have put in, or cross-examination
they would have conducted, if they
had had more time. . . . . We trust,
however, that in the future the able
district judge will not try to slice the
loaf so thinly.11
advance of trial. With respect to
planning
its
case-in-chief,
defense counsel will have to
focus on developing the most
compelling witness testimony,
judiciously allocating subject
matter among expert witnesses,
using summary exhibits or
demonstratives, and introducing
into evidence only a subset of
the most relevant documents
from an inevitably overbroad
exhibit list. By contrast, without
time constraints, defense lawyers
may be tempted to elicit
redundant testimony from all
defense experts. It is rarely the
case, however, that experts are
equally versed in the scientific
and medical literature on
subjects such as general
causation. Exposing unqualified
experts to cross-examination on
such subjects runs the risk of
jeopardizing
the
witness’s
credibility in their true areas of
expertise. In a time-limited trial,
that risk is significantly limited
because defense counsel must
carefully consider and delineate
the scope of testimony well
before the witness takes the
stand.
In short, it is our
experience
that
advanced
planning based on the available
time inevitably leads to a
cleaner, sharper, and better-tried
defense case.
III. The Benefits and Costs of TimeLimited Trials
As with most any trial management
procedure, there are advantages and
disadvantages to time-limited trials. The
following are among the benefits from the
defense perspective:

Time limits force the defense to
focus on w hat’s important.
Time limits necessarily cause
defense lawyers to plan rather
than simply react during trial.
For example, time limits impose
the necessary discipline of a
focused
cross-examination.
Deciding what not to cover on
cross can be at least as important
as deciding what to cover, and
time limits facilitate that
strategic analysis well in

11
Flaminio v. Honda Motor Co., 733 F.2d
463, 473 (7th Cir. Wis. 1984) (emphasis
added).
Time limits ensure the defense
has a fair opportunity to put on
its defense without being
accused of wasting time. Time-
Page 393
limited trials are perhaps the
only way to ensure that the court
reserves a fair amount of time
for the defense to present its
case. Most juries are told at the
outset of a trial that a trial will
last a certain period of time, say
four weeks. A plaintiff that uses
up three weeks in its case-inchief obviously prejudices the
defendant if it were given only
one week to present its defense.
Similarly, jurors may hold it
against the defense if the trial
ends up taking longer than the
promised period of time. Even
where judges attempt to explain
delays
(e.g.,
sidebars
or
arguments during extended
breaks), jurors are likely to
tolerate such delays early in the
trial but their patience will wane
during the defense case as the
trial goes on. If a defendant is
guaranteed a certain amount of
time to present its case, then
defense counsel will be able to
do so by saving necessary time
throughout the trial. Thus, both
on the merits and in terms of
engendering goodwill from
jurors, defendants seem to score
more points by efficiently
presenting their evidence and
then sitting down.

Shorter trials help to ma intain
the jury’s a ttention.
Timelimited trials help keep the jury
focused and engaged. More than
ever, jurors today are used to
getting answers and gathering
information within seconds on
the Internet. They expect to
resolve issues sooner rather than
later. If jurors are forced to sit
through a prolonged trial, their
attention and ability to process
key information inevitably will
fade. In fact, shorter trials limit
the chance that jurors lose focus
as a result of sheer boredom.

Time
limits red uce
the
likelihood of jurors being
excused for hardship during
voir dire or during trial. While
judges have become less
sympathetic to jurors’ pleas to be
excused from jury duty on the
basis of work commitments, if a
case is initially estimated to take
a month or more, it is more
likely that pro-defense jurors
may be released from the panel
because they have a longstanding
family
obligation,
purchased tickets for a business
trip, or are better able to
articulate a legitimate hardship
created by a trial with no end
date in sight. With a predictably
shorter trial, it will be much
harder for pro-defense jurors to
get excused for an alleged
hardship. For those jurors and
alternatives who are impaneled,
a longer trial creates more of a
risk that that they will become ill
or encounter an unforeseen
conflict that may prevent them
from completing their jury
service. Too many dismissed
jurors or alternatives may lead to
a mistrial, wasted expense for
the client, and a retrial where
Page 394
plaintiff’s counsel would be
armed with a roadmap of the
defense’s strategy.


Time limits may hamper the
plaintiff’s ability to meet its
burden of proof and/or crossexamine defense witnesses.
Time limits can create a number
of problems for a plaintiff who
mismanages its clock. In the
extreme case, a plaintiff may
neglect to introduce necessary
evidence or otherwise fail to
address all the elements of its
claims.
More commonly,
plaintiff’s counsel who is not
used to working within time
limits will be inclined to spend
far too much time putting on
certain
witnesses,
laying
foundation for an expert’s
expertise, or simply trying to
introduce the jury to complex
subjects for the very first time.
As long as the court does not
change the rules of the trial
midstream, a defendant will
benefit from plaintiff’s time
mismanagement in a number of
ways, including the fact that
opposing counsel will have less
time to cross-examine defense
witnesses.
Time limits re strict the numb er
of video depositions played at
trial. In the mass tort context in
particular, the playing of video
depositions
of
unavailable
company witnesses during trial
is
becoming
increasingly
common. If left unconstrained,
many plaintiff lawyers would
like nothing more than to play
dozens of hours of deposition
testimony where one witness
after another is asked about the
same emails with the same
inflammatory
language
highlighted for the jury. In a
shorter trial, a plaintiff is not
only forced to narrow the scope
of
proffered
deposition
testimony but also the judge, in
the interest of time, will sustain a
defense objection on the basis of
cumulative evidence.
For
example, a defendant can argue
that each time a video deposition
is played showing the same
allegedly
“bad
company”
documents, the defense must
spend time counter-designating
testimony to put the evidence in
its proper context.

Time limits red uce cumulative
testimony by experts. Just as
timed trials limit redundant
testimony from fact witnesses,
they likewise discourage judges
from
allowing
cumulative
testimony by expert witnesses.
If, for example, the jury has
already heard one expert testify
at length about whether a
medicine causes a certain side
effect or that the defendant
company has violated FDA
regulations, a defendant should
not be required to use up its time
cross-examining another witness
about the same topics. In other
words, a court may be more
willing to restrict cumulative
Page 395
expert testimony in the setting of
a time-limited trial.


Time limits mo tivate judges to
control
evasive adve
rse
witnesses. In our experience,
judges presiding over timerestricted trials are particularly
receptive to control an evasive
and nonresponsive witness.
Even where a judge is not
proactive in controlling the
witness, the cross-examiner
should remind long-winded or
filibustering witnesses about the
need to be responsive given the
time limits in the case. If the
evasiveness continues, counsel
should ask the court to instruct
the witness accordingly. Again,
judges appear to be particularly
receptive to this request in a
time-limited trial. This approach
may well create the impression
that, unlike the plaintiff’s
witness, the defense is mindful
of and respects the jury’s and
judge’s time.
Time limits p rovide clients with
some logistical and budget
certainty. Clients and client
representatives
appreciate
predictability in an otherwise
unpredictable trial environment.
A time-limited trial gives inhouse
counsel
a
better
opportunity
to
plan
and
coordinate with the company’s
trial witnesses. It also helps
outside counsel to coordinate the
schedules of expert witnesses, as
opposed to having to keep them
on “standby” for several weeks
at a time. Even though it is
obviously impossible to predict a
verdict with certainty, a shorter,
time-limited trial can at least
provide the client with the ability
to budget for the cost of trying
the case itself.
Notwithstanding
the
benefits
described above, time limits during trial
can be detrimental to defendants in
certain circumstances, particularly where
the limits are unfair or not properly
enforced by the court.

Inadequate total time li mits
and/or allocation can prejudice
defendants. Time constraints
during trial have the potential to
prejudice defendants if the
overall time is too short or if the
time is unfairly allocated among
the parties. With respect to the
allocation, the unfairness may
arise in a single defendant case
(e.g., 75% to plaintiff and 25%
to defendant) or in a multidefendant case (e.g., 50% to
plaintiff and 50% to be split
among defendants). To prevent
this, the parties should make
every effort to present a realistic
expectation of the time needed to
present their case, and the court
should take into account the
factual complexity of the case
and such factors as the number
of parties, legal claims, and
witnesses per party.
Fairly
allocating time is even more
difficult in cases involving
multiple defendants, particularly
Page 396

if some defendants are adverse
(or could be adverse) to each
other.
For example, one
defendant may be the plaintiff’s
primary target whereas another
is in the case solely to defeat
diversity. In that scenario, it
would be unfair for the court to
split the allocated time evenly
among the defendants. Similarly,
in
cases
with
multiple
defendants, the first defendant to
present has the ability to drive
the direction of the defense for
all other defendants. This can
leave the remaining defendants
at the mercy of the first
defendant’s
decisions
(or
mistakes) as to how best to
present any duplicate or
redundant
witness/evidence.
And the court may, under its
inherent power to control the
presentation of evidence, prevent
duplicate presentations if the
interests of the parties are
deemed to be essentially
identical. This can play real
havoc on defense theories of the
case, especially where there are
multiple defendants who do not
share a common defense theme.
There is no real fix for this
situation, and although it exists
whether or not the parties are on
the clock, the clock seems to
emphasize it due to time
restrictions.
potential problem for defendants
can arise if the pre-established
time limits are not strictly
enforced by the court. Courts
are required to be reasonable in
imposing time limitations and to
be flexible if good cause exists
This
for
an
extension.12
dichotomy presents the risk that
a plaintiff can engage in
gamesmanship by asking the
court for more time during a
defendant’s case-in-chief. If, for
example, a plaintiff uses up all
of its allotted time before the
defense calls its final witness,
and then requests (and is
granted) additional time to crossexamine the defendant’s last
witnesses, this would be unfairly
prejudicial to the defendant who,
unlike the plaintiff, has gauged
its time properly throughout the
trial.
Had defense counsel
known the court would grant
plaintiff additional time, they
might have used additional time
to cross-examine plaintiff’s
witnesses
or
otherwise
approached plaintiff’s case-inchief in a different manner.
Once time limits are set, they
simply must be enforced, or their
use is unfair to the party who
abided by its limits and the
entire process is virtually
meaningless.
Unenforced time limits are
highly prejudicial and defeat
the very purpose
of timerestricted
trials.
Another
12
See, e.g., Gregory P. Joseph, American Car
Assoc. Princ. For Juries & Jury Trials, SL044
ALI-ABA 653 (Oct. 2005); MANUAL FOR
COMPLEX LITIGATION (FOURTH) §§ 11.644,
12.35 (2004).
Page 397












Table 1: Pros & Cons of Time-Limited
Trials for Defendants
arguments, voir dire, etc. will be included
in a party’s time.13
Pros
Focuses case on the most “important”
evidence
Fair opportunity to present defense case
Keeps jury’s attention and fosters efficient
resolution
Protects against pro-defense juror
hardships
May restrict a plaintiff’s ability to cross
witnesses
Less cumulative “bad company” conduct
testimony
Less cumulative expert testimony
Helps to control evasive witnesses on
cross
Provides some logistical and budget
certainty
Cons
Total time can be unreasonably short
Time allocations may be inequitable,
especially in cases involving multiple
defendants
Unenforced time limits are highly
prejudicial
Set Realistic Targets.
During the
pretrial conference, defense counsel
should be realistic and specific when the
court asks for input about the identity of
witnesses, the nature of their testimony,
and the expected duration of their
examinations.
IV. Practical Suggestions
Limited Trials
in
Abide by the Rules. Parties must also
agree that all time limits and procedures
will be strictly enforced, and be prepared
to frequently remind the judge and
preserve the record for appeal if the rules
are not followed.
Table 2: Key Considerations to Limit
Defendants’ Risks of Time-Limited Trials
1. Reach a pre-trial stipulation or agreement
with opposing counsel regarding:
a.
b.
Time
c.
There are, of course, a number of
practical steps defendants should take
before and during trial to limit the
potential downside of time-restricted
trials.
Define the Rules. As indicated in more
detail in Table 2 below, defendants
should ensure that all details pertaining to
the time procedures are spelled out in
writing prior to trial, and that all parties
agree to the time keeping procedures. It
must be determined from the outset
whether opening statements, closing
Total number of hours
Fair allocation of hours among each
party
Time-tracking procedures
i. Everything a party does, from
openings through summation,
should be on the clock. The
clock ticks whenever its lawyer
rises to question a witness or
argue to the jury.
ii. Designated deposition testimony counts against that side’s
allocated time.
1.
13
Thus,
plaintiff’s
affirmative designations
should
count
against
plaintiff, and defendant’s
It is our experience that voir dire is
generally excluded from the parties’ time
limits, but is often subject to its own limit.
Page 398
counter
designations
should
count
against
defendant.
iii. Objections and sidebars are
excluded.
Judges expect
objections in federal court to be
short, and it is simply too
burdensome for the court to
track time during objections.
iv. The clock should be managed
by court personnel who will
inform the parties at the end of
each day how much remaining
time is available per party.
d. Strict enforcement of time limits
i. Include a clear statement that
time limits will be strictly
enforced absent consent by
both parties during trial.
2. During the pretrial conference, parties
should agree on the record that the procedures
are fair, and that all time limits and procedures
will be strictly enforced.
3. Remain cognizant of time limitations
throughout the trial.
4. Remind the judge frequently if the other
side is deviating from the rules and preserve
the record for appeal if the rules are not
followed.
V. Conclusion
With the docketing and time
demands placed on courts, the practice of
trying cases on the clock is increasing
especially in complex cases that would
otherwise result in very lengthy trials.
While it may be a necessary practice, it
requires serious thought and attention by
the court and the parties so that it
accomplishes its goal and is fair to all
involved.
We believe the discipline imposed by
timed trials is a good thing. It is good for
the judges, for juries, for the lawyers, and
for clients. As long as the parties and the
court are careful to set and enforce
reasonable limits, time-restricted trials are
likely to be advantageous to defendants
whose lawyers are well-organized and
know how to present their evidence
clearly and concisely.
Splitting the File in Liability Insurance
By Douglas R. Richmond
L
IABILITY INSURERS owe their
insureds contractual duties of defense
and indemnity. { XE "para:N104CF"
}Both duties are linked to coverage, but
they are different in key respects. { XE
"para:N104E8" }The duty to indemnify
exists as soon as the contract is formed,
but the duty is conditional; the insurer's
duty to pay proceeds is not due and owing
until the insured’s liability is established.1
The duty to defend is not similarly
conditioned; it exists as soon as a claim
potentially within coverage is made,
regardless of whether the law would
impose liability in the circumstances. 2
The fact that an insurer’s duty to defend
arises at the outset of litigation while its
duty to indemnify is determined at the
conclusion of the litigation means { XE
"para:N104FD" }that an insurer may have
to defend an action in which there will be
no duty to indemnify the insured.3 { XE
1
Penn-Star Ins. Co. v. Griffey, 306 S.W.3d
591, 601 (Mo. Ct. App. 2010) (stating that the
duty to indemnify is determined by the facts as
they are established at trial or as they are
finally determined by some other means, such
as summary judgment) (quoting Penn-Am.
Ins. Co. v. The Bar, Inc., 201 S.W.3d 91, 98
(Mo. Ct. App. 2006)).
2
See Trailer Bridge, Inc. v. Ill. Nat’l Ins. Co.,
657 F.3d 1135, 1142 (11th Cir. 2011)
(explaining that the merits of the underlying
suit have “no bearing” on the duty to defend);
Abouzaid v. Mansard Gardens Assocs., LLC,
23 A.3d 338, 347 (N.J. 2011) (stating that
when analyzing the duty to defend, “the
potential merit of the claim is immaterial”).
3
Colony Ins. Co. v. Peachtree Constr., Ltd.,
647 F.3d 248, 254 (5th Cir. 2011) (applying
"para:N104FD" }
In
such cases, insurers
IADC member Douglas
R.
Richmond
is
Managing Director in
the
Professional
Services Group of Aon
Risk
Services
in
Chicago, Illinois. Before joining Aon,
Doug was a partner with Armstrong
Teasdale LLP in Kansas City, Missouri
(1989-2004), where he had a national
trial and appellate practice. He is a coauthor of a leading insurance law
treatise, UNDERSTANDING INSURANCE LAW
(5th ed. 2012).
typically defend insureds under a
reservation of rights.
An
insurer’s
defense
under
reservation of rights sometimes concerns
insureds and courts because of potential
conflicts of interest that can arise.4 There
are essentially three issues: (1) whether
the insurer may defend the case in such a
way as to defeat coverage; (2) whether
the insurer may mount less than a full
defense if it believes it will be able to
later deny coverage or that any ultimate
loss will not be covered; or (3) whether
the insurer will gain access to the
insured’s confidential or privileged
Texas law); ZRZ Realty Co. v. Beneficial Fire
& Cas. Ins. Co., 266 P.3d 61, 66 (Or. 2011).
4
But see Douglas R. Richmond, Independent
Counsel in Insurance, 48 SAN DIEGO L. REV.
857, 859-860 (2011) (explaining that a
reservation of rights creates a conflict of
interest entitling the insured to independent
counsel at the insurer’s expense only if the
manner in which the case is defended can
affect coverage).
Page 400
information which it can then use to its
advantage in coverage litigation.5 To
guard against these possibilities and to
dispel later allegations of bad faith,
liability insurers sometimes “split the
file” in a case defended under reservation
of rights. In such cases, the insurer
establishes one file for the investigation
and defense of the loss and a second file
for the investigation and resolution of
coverage issues, and assigns a different
claims professional to each.6
But insurers do not always split files,
and their failure to do so occasionally
gives rise to bad faith and estoppel
allegations, among other claimed wrongs.
Policyholders’ lawyers insist that insurers
that do not split claim files in appropriate
cases breach their duties to their insureds,
violate industry custom and practice, and
violate state unfair claims settlement
practices acts.7 They base these
arguments on years of case law holding
that insurers cannot employ the same
defense counsel representing the insured
to develop coverage defenses, or use
information wrongfully obtained by a
defense lawyer to deny coverage.8 There
is, however, a material difference
between an insurer inducing a defense
lawyer to violate her duties to her client
or exploiting confidential information
supplied by a careless or unprincipled
defense lawyer to deny coverage and an
insurer making a single adjuster
responsible for evaluating both liability
and coverage. The former types of
conduct may well expose the insurer to
bad faith liability or strip it of coverage
defenses; the latter arrangement, standing
alone, should not. The fact that a single
claims professional is responsible for both
liability and coverage issues in a given
case does not compel the conclusion that
the insurer will be tempted to shortchange
the insured’s defense. Courts’ focus
when evaluating insurer-insured conflicts
in this context therefore must be on the
insurer’s allegedly improper collection or
use of information to the insured’s
detriment, not on the insurer’s internal
organization.9
Although
insurance
companies may opt to split files in
appropriate cases, they have no duty to do
so.10 An insurer’s failure to split a file,
9
5
Armstrong Cleaners, Inc. v. Erie Ins. Exch.,
364 F. Supp.2d 797, 814-815 (S.D. Ind. 2005).
6
Steven Plitt and Steven J. Gross, Splitting
Claim Files: Managing the Concern for
Conflicts of Interest Through Use of Insurance
Company Conflict Screens, 32 INS. LITIG. REP.
151, 151 (2010) (calling this “a common
claims practice”).
7
Brent W. Huber and Angela P. Krahulik,
Bad Faith Coverage Litigation: The In
Covenant of Good Faith and Fair Dealing, 42
TORT TRIAL & INS. PRAC. L.J. 29, 47 (2006).
8
Parsons v. Cont’l Nat’l Am. Group, 550 P.2d
94, 97-100 (Ariz. 1976); Employers Cas. Co.
v. Tilley, 496 S.W.2d 552, 558-561 (Tex.
1973).
See Vt. Mut. Ins. Co. v. Parsons Hill P’ship,
1 A.3d 1016, 1025 (Vt. 2010) (“The issue is
not whether [the] insurance carrier properly
organized its staff and maintained a wall
between coverage counsel and defense
counsel. . . . Instead, the issue is whether its
organization could have had any effect on the
coverage determination.”).
10
Employers Ins. of Wausau v. Albert D.
Seeno Constr. Co., 945 F.2d 284, 286-288 (9th
Cir. 1991) (applying California law); State
Farm Fire & Cas. Co. v. Super. Ct., 265 Cal.
Rptr. 372, 374-375 (Cal. Ct. App. 1989);
also Specialty Surplus Ins. Co. v. Second
Chance, Inc., 412 F. Supp.2d 1152, 1169
(W.D. Wash. 2006) (rejecting the argument
that an insurer had to assign separate adjusters
without more, will not support bad faith
allegations or similar claims.11
This article explains why insurers do
not have a duty to split files in cases in
which coverage is disputed. Part I begins
that analysis with a survey of the limited
case law on the subject. Part II goes
beyond the cases in explaining why
insurers have no duty to split files. Part II
also recognizes that although insurers
clearly have no duty to split files, that fact
alone does not necessarily end the
inquiry. Rather, the next question is
whether insurers arguably should split
files in appropriate cases to preempt
potential bad faith or estoppel arguments
or further the insured’s defense. Part II
identifies several possible reasons for
splitting files that insurers may wish to
consider and briefly identifies some
logistical considerations when splitting
files. Of course, the fact that an insurance
company opts not to split a file in a
particular case evidences nothing other
than a legitimate exercise of business
judgment.
to two insureds’ files in the same matter);
United Servs. Auto. Ass’n v. Bult, 183 S.W.3d
181, 187-188 (Ky. Ct. App. 2003) (concluding
that insurer had no duty to assign two
adjusters where multiple insureds were
involved in a single loss).
11
See, e.g., State Farm Fire & Cas. Co. v.
King Sports, Inc., 827 F. Supp.2d 1364, 1378
(N.D. Ga. 2011) (applying Georgia bad faith
law); Travelers Indem. Co. v. Page & Assocs.
Constr. Co., No. 07-07-0022-CV, 2002 WL
1371065, at *10 (Tex. App. June 25, 2002)
(involving alleged violations of the Texas
Insurance Code and Deceptive Trade Practices
Act and rejecting insurer’s failure to split file
as a basis for liability).
Page 401
I.
Reviewing the Case Law
No reported case has recognized a
duty on an insurer’s part to split a file and
several courts have expressly rejected
calls for such a duty. A few courts have
discussed insurers’ use of information
developed in an insured’s defense to
advance their coverage positions, or
insurers’ decisions to split files or their
methods for doing so, but have always
stopped far short of endorsing a duty to
split a file.
A. Cases Rejecting a Duty to Split
a File
State Farm Fire & Casualty Co. v.
Superior Court12 is one of the first
reported cases to address file-splitting.
State Farm was a bad faith case. In the
underlying action, State Farm defended
its insureds, the Durants, under a
reservation of rights. State Farm also
filed a declaratory judgment action
alleging that it had no duty to defend or
indemnify the Durants under their
homeowners policy. State Farm provided
the Durants with independent counsel—
Cumis counsel, in California parlance—
and retained a separate law firm to
prosecute the declaratory judgment
action.13 A single State Farm adjuster,
12
265 Cal. Rptr. 372 (Cal. Ct. App. 1989).
Although independent counsel are often
described as Cumis counsel, the concept of
independent counsel long preceded the
decision in San Diego Navy Federal Credit
Union v. Cumis Insurance Soc’y, 208 Cal.
Rptr. 494 (Cal. Ct. App. 1984). See, e.g.,
Prashker v. United States Guar. Co., 136
N.E.2d 871, 876 (N.Y. 1956) (offering
independent counsel paid for by insurer as
13
Page 402
Ted Krempa, managed both cases.
Krempa was the company’s sole point of
contact with the Durants’ independent
counsel, Dwight Worden, and also
communicated with the law firm serving
as coverage counsel. Krempa thus
“served in a dual capacity, assisting and
communicating with counsel defending
[the] Durants in the liability case, and at
the same time communicating with and
assisting the State Farm counsel asserting
lack of coverage in the declaratory relief
action.”14 Krempa maintained only one
file.15
In the bad faith case, the Durants
sought production of all documents in
Krempa’s file. Their theory was that an
adjuster handling the defense of a liability
action is the agent of the insured and any
independent counsel, and that an insured
and its lawyer are thus entitled to see
everything in the adjuster’s file. The
Durants argued that since Krempa was
their agent, any communication he had
with coverage counsel waived any
attorney-client privilege that might
otherwise have attached, just as if he had
communicated
directly
with
the
Durants.16 The trial court agreed with the
Durants and State Farm petitioned the
California Court of Appeal for a writ of
prohibition.
The State Farm court began its
analysis by observing that Cumis required
solution to expected conflicts of interest);
Employers Fire Ins. Co. v. Beals, 240 A.2d
397, 403-404 (R.I. 1968) (discussing two
possible approaches to independent counsel),
abrogated on other grounds by Peerless Ins.
Co. v. Viegas, 667 A.2d 785, 785 (R.I. 1995).
14
State Farm, 265 Cal. Rptr. at 374.
15
Id.
16
Id.
“complete independence of counsel” in
cases raising a conflict of interest.17 As
the court saw matters, the Durants were
asking it to add a layer of separation to
this mandate and require “that not only
the counsel involved in the cases but the
adjusters assigned to each case (the
‘liability’ case as distinguished from the
‘coverage’ case) be separate—that the
files on each case be separate and apart—
and indeed . . . that a veritable wall be
erected between the insurance company’s
administration of the two cases.” 18 The
court declined to adopt this approach.
The court recognized that an adjuster
serves as the insured’s agent in the
defense of a liability action and that as a
result, communications with the adjuster
are protected by the attorney-client
privilege. The adjuster is most easily
understood to be the insured’s agent in
cases in which coverage is clear.19 That
does not mean, however, that the adjuster
is the insured’s agent for all purposes or
in all instances. An adjuster is also the
insurer’s agent. Where coverage is at
issue, the adjuster’s loyalties are
“divided” and an insured cannot
reasonably expect the adjuster to be
concerned with only its interests.20 The
independent counsel regime was created
to remedy this problem. Indeed, the court
continued, the presence of independent
counsel adequately protects insureds’
interests in case such as this one.21 The
court concluded that for economic
reasons “it would be unwise to impose yet
17
Id.
Id.
19
Id. at 375.
20
Id.
21
Id.
18
another layer of administration” on
liability insurers.22
The court noted that this was not a
case in which an adjuster took advantage
of misplaced or mistaken confidences.
Worden understood State Farm’s
potential
adversity;
it
was
his
responsibility as independent counsel to
prevent improvident revelations to
Krempa and, through Krempa, to State
Farm.23 Nor was there any evidence of
harm to the Durants stemming from
Krempa’s dual roles.
Although the
Durants alleged that Worden shared
privileged information with Krempa and
that State Farm used this information to
their detriment, there was no proof of
such conduct.24 In fact, it appeared that
the Durants made this allegation solely to
support their argument for waiver of
privilege. In the end, the State Farm
court
concluded
that
Krempa’s
communications with coverage counsel
were privileged. It therefore vacated the
trial court’s contrary order.
State Farm laid the groundwork for
the Ninth Circuit’s decision less than two
years later in Employers Insurance of
Wausau v. Albert D. Seeno Construction
Co.25 Seeno was a residential real estate
developer and builder that faced hundreds
of construction defect claims by
homeowners, some of which were in suit
and others of which were not. Seeno was
insured under a CGL policy issued by
Wausau.
Because Wausau disputed
coverage, it accepted Seeno’s defense
under a reservation of rights. With
respect to the claims already in litigation,
Page 403
Seeno exercised its right to independent
counsel. In contrast, Seno entrusted the
resolution of the unlitigated claims to
Wausau.
Wausau retained the law firm of
Robins, Zelle, Larson & Kaplan to
represent its interests in all liability and
coverage litigation arising out of the
homeowners’ claims. The Robins firm
and Wausau’s own investigators handled
both the unlitigated claims brought by
homeowners and the coverage dispute
with Seeno. Seeno alleged that Wausau
used the investigation and settlement of
the unlitigated claims to gather
information for use in their coverage
dispute.26 When Wausau filed a
declaratory judgment action to determine
coverage, Seeno counterclaimed and
sought an injunction requiring Wausau to
segregate its liability claims handling
from its coverage investigation.27 The
district court denied Seeno’s motion for a
preliminary injunction, observing in the
process that there was no legal authority
to support Seeno’s contention that
Wausau was required to separate its
defense and coverage activities.28 Seeno
immediately appealed to the Ninth
Circuit.
Seeno argued on appeal, as it had
below, that California law and insurance
industry practice required insurers to
segregate their coverage investigations
from their liability claims handling.
Seeno reasoned that this duty flowed
from the fiduciary relationship between
an insurer and an insured, which obligates
the insurer to preserve and promote its
22
Id.
Id.
24
Id.
25
945 F.2d 284 (9th Cir. 1991).
23
26
Id. at 285.
Id.
28
Id.
27
Page 404
insured’s interests above its own and to
avoid
even
the
appearance
of
impropriety.29 Thus, Seeno contended,
when an insurer reserves its rights, “it
must use different people on the liability
side and the coverage side, without
exchange of information between
them.”30 The Ninth Circuit rejected this
argument as contrary to California law
and affirmed the district court’s ruling.
There were three principal bases for
the Seeno court’s decision. First, the
California independent counsel statute,
Civil Code § 2860, did not require the
segregation of liability and coverage files.
In fact, section 2860 affirmatively
required insureds to disclose to their
insurers all unprivileged information
relevant to a coverage dispute. Second,
the decision in State Farm had come
down since the district court denied
Seeno’s motion for a preliminary
injunction. Notably, Seeno had filed an
amicus brief in State Farm and the
California Court of Appeal had rejected
Seeno’s arguments.31 Third, California
courts had never classified the insurerinsured relationship as a fiduciary
relationship as Seeno urged, but had
instead characterized it as a special
relationship.32 Although some California
courts had recognized that the insurerinsured relationship had some fiduciary
aspects or features, it was not an actual
fiduciary relationship. In sum, California
law was clear that the insurer-insured
relationship did not compel insurers to
segregate liability and coverage files. 33
Seeno’s argument that Wausau
should be compelled to segregate its
liability and coverage activities because
other insurers routinely did so fared no
better. Other carriers’ choices or practices
did not create a duty on Wausau’s part. 34
As the court aptly observed, other
insurers’ decisions to segregate their
liability and coverage roles did not
necessarily arise out of any duty to do so,
but perhaps reflected precautions against
later allegations of misconduct leveled by
their insureds.35
Since Seeno was decided, courts have
continued to reject bare allegations that
insurers have a duty to split files. 36 A
Georgia federal case, State Farm Fire &
Casualty v. King Sports,37 is illustrative.
King Sports sold golf clubs over the
Internet. In 2007, Calloway Golf and
Nike sued King Sports for trademark
infringement. In 2009, Cleveland Golf
also sued King Sports for trademark
infringement and other alleged offenses.
State Farm defended all three actions
under reservations of rights and
eventually settled the Calloway Golf and
Nike actions.
The defense of the
Cleveland Golf case, however, was
marred by King Sports’ breach of its duty
to cooperate. In January 2010, State
Farm filed a declaratory judgment action
33
Id. at 288.
Id.
35
Id.
36
See, e.g., Travelers Indem. Co. v. Page &
Assocs. Constr. Co., No. 07-07-0022-CV,
2002 WL 1371065, at *10 (Tex. App. June 25,
2002); Vt. Mut. Ins. Co. v. Parsons Hill
P’ship, 1 A.3d 1016, 1025 (Vt. 2010).
37
827 F. Supp.2d 1364 (N.D. Ga. 2011).
34
29
Id. at 286.
Id.
31
Id.
32
Id. at 287 (quoting Love v. Fire Ins. Exch.,
271 Cal. Rptr. 246, 252 (Cal. Ct. App. 1990)).
30
in which it disclaimed any duty to
indemnify King Sports because (a) there
was no “occurrence”; (b) several
exclusions barred coverage; and (c) King
Sports had failed to cooperate. King
Sports and Cleveland Golf entered into a
huge consent judgment and King Sports
assigned any bad faith claim it might have
against State Farm to Cleveland Golf.
Cleveland Golf then filed a bad faith
counterclaim in the declaratory judgment
action and also alleged a bad faith claim
as a purported third-party beneficiary
under King Sports’ policy with State
Farm. State Farm eventually moved for
summary judgment on its declaratory
judgment claim and on Cleveland Golf’s
bad faith counterclaim.
Cleveland Golf contended that State
Farm’s failure to timely split the file in
the defense of the underlying action
evidenced the insurer’s bad faith. 38 State
Farm had promptly split the file in the
Nike and Calloway Golf suits but waited
approximately three months to do so in
the Cleveland Golf case, and two State
Farm claims professionals testified that
files should be split where coverage is
disputed so that information obtained in
the defense of the case is not used to
invalidate coverage.39 Cleveland Golf
alleged that by not immediately splitting
the file, State Farm enabled information
obtained in the defense of the third-party
action to be used against King Sports in
the declaratory judgment case. The court
was not persuaded.
Although State Farm deviated from
its usual practices in not immediately
splitting the file in the Cleveland Golf
Page 405
case, Cleveland Golf could not articulate
why or how that breakdown evidenced
bad faith.40 Cleveland Golf identified no
sensitive information that the State Farm
adjuster handling its underlying lawsuit
was able to obtain and use against King
Sports as a result of her responsibility for
both liability and coverage issues. For
that matter, “Cleveland Golf cite[d] no
authority to support its argument that
State Farm had a duty to split the file.” 41
The court in King Sports ultimately
granted State Farm summary judgment on
its declaratory judgment claim and on
Cleveland Golf’s counterclaim for bad
faith.
B. Cases Discussing the Actual or
Potential Improper Mixing of
Defense and Coverage
Information
The King Sports court’s dismissive
observation that Cleveland Golf could
muster no authority for its argument that
State Farm’s had a duty to split its file
raises an interesting question: was this a
failure on the part of Cleveland Golf’s
lawyers, or did they offer no supporting
authority because there were none? In
fact, there were (and presently are) no
reported cases favoring Cleveland Golf’s
position. The courts that have either
approvingly discussed file-splitting or
factored the issue into their bad faith or
coverage analyses have not suggested that
such a duty existed.
In Twin City Fire Insurance Co. v.
City of Madison,42 for example, the Fifth
40
38
Id. at 1378.
39
Id.
Id.
Id.
42
309 F.3d 901 (5th Cir. 2002).
41
Page 406
Circuit reversed a grant of summary
judgment for several Hartford Insurance
entities in a coverage and bad faith case.
The defense lawyer’s alleged conflicts of
interest were a central issue in the case, as
were
the
City’s
entitlement
to
independent counsel and whether
Hartford had sufficiently notified the City
of the possible conflict of interest. In
determining that there were genuine
issues of material fact preventing
summary judgment on the City’s bad
faith claims, the court counted among
them (1) whether a Hartford claims
consultant, Kimberly Chabert, was
involved in both claims analysis and
coverage analysis, thereby prejudicing the
City through a conflict of interest; (2)
whether Hartford adequately separated its
liability and coverage activities; (3)
whether Chabert kept silent about the
conflicts of interest while developing
Hartford’s coverage defenses; (4) whether
Chabert induced defense counsel to
provide her with confidential information
detrimental to coverage by concealing her
role and that of a second Hartford claims
consultant,
Michael
Dandini,
in
evaluating coverage; (5) whether Dandini
relied on confidential information from
defense counsel’s reports to formulate
coverage defenses; and (5) whether
Hartford used defense counsel’s activities
to construct coverage defenses.43
If any of those allegations were true,
they would demonstrate the City’s
entitlement to a defense by independent
counsel.
They would also further
evidence Hartford’s bad faith on the basis
that it attempted to take advantage of
defense counsel’s fiduciary relationship
43
Id. at 909.
with the City to perfect coverage
defenses.
That sort of underhanded
conduct by an insurer is clearly out of
bounds.44 Yet all of the alleged bad faith
conduct in Twin City could have occurred
with split files. For example, Chabert’s
and Dandini’s alleged exploitation of
confidential information likely would
have occurred even with split files
inasmuch as they were alleged to have
worked in concert. The Twin City court
was properly focused on Hartford’s
conduct in defending the City and not on
its internal policies or procedures. The
case does not support liability insurers’
alleged duty to split claim files when
coverage is disputed.45
More recently, in Armstrong
Cleaner v. Erie Insurance Exchange,46
an Indiana federal court devoted
respectable attention to Erie’s decision to
split its file and the adequacy of its
procedures for preventing possible flows
of information between the adjuster
responsible for the insured’s defense and
the adjuster responsible for evaluating
coverage.47 The court did so, however,
because Erie argued that its erection of a
44
Parsons v. Cont’l Nat’l Am. Group, 550
P.2d 94, 97-99 (Ariz. 1976).
45
See also, e.g., Specialty Surplus Ins. Co. v.
Second Chance, Inc., No. C03-0927C, 2006
WL 2459092, at **16-17 (W.D. Wash. Aug.
23, 2006) (questioning whether insurer
improperly used information gathered from
two insureds’ claims files in determining
whether to try a case rather than settling it in
the belief that it would ultimately not have to
indemnify one of the insureds because of its
coverage defenses, but refusing to find as a
matter of law that the timing of the insurer’s
decision to split the file was unreasonable).
46
364 F. Supp.2d 797 (S.D. Ind. 2005).
47
Id. at 805, 817.
wall between the adjusters cured any
conflict of interest that would have
necessitated
the
appointment
of
independent counsel to defend the insured
in the underlying action. 48 The Armstrong
Cleaners court rejected Erie’s argument
based in part on the insufficiency of its
screening procedures.49 The court did
not, however, recognize a duty to split the
file.
II. ANALYSIS
There are good reasons, whether
considered individually or together, for
rejecting arguments for a duty to split
files in conflict of interest situations.
First, consider the case in which a
liability insurer receives notice of a loss
before suit is filed. Although no suit has
been filed, it is safe to say that the insurer
would prefer to have the loss fall outside
coverage rather than within. Now, it is
certainly true that an insurer’s interest in
negating coverage is not alone a conflict
of interest.50 At the same time, an
adjuster
conducting
a
pre-suit
investigation may develop information
that will allow the insurer to deny
coverage just as easily as the adjuster will
marshal facts relevant to the insured’s
defense should a third-party sue the
insured. The insurer is entitled to obtain
information from the insured that is
relevant to coverage—at least until the
insurer has good reason to believe that
48
Id. at 817.
Id.
50
Nat’l Cas. Co. v. Forge Indus. Staffing Inc.,
567 F.3d 871, 874 (7th Cir. 2009) (applying
Illinois law).
49
Page 407
coverage may be disputed.51 Even then
the insurer may be able to obtain
information from the insured that bears
on coverage pursuant to the cooperation
clause in its policy.52 Yet, the insurer is
not required at the outset to assign two
adjusters to the loss: one to prepare the
insured’s defense in the event of a claim
or suit, and one to evaluate coverage. It is
perfectly reasonable for a single adjuster
to be responsible for both liability and
coverage when there is no litigation
pending.53
If a liability insurer were to have a
duty to split a file in a case in which
coverage was disputed, then the insurer
would also have a duty to split the file
from the time it received pre-suit notice
of a loss until it confirmed coverage for
the loss. The argument here is
straightforward:
an
insurer
that
undertakes a pre-suit investigation and
waits to split the file only if and when the
adjuster learns of information suggesting
a possible coverage defense has acted
inappropriately because the adjuster will
by then be privy to information the
insurer can use against the insured.
Assigning the original adjuster the
51
See Lloyd’s & Inst. of London Underwriting
Cos. v. Fulton, 2 P.3d 1199, 1204 (Alaska
2000) (stating that an insurer conducting a presuit investigation must notify its insured of a
conflict of interest when the insurer “has good
reason to believe that a coverage dispute may
exist”).
52
1 ALLAN D. WINDT, INSURANCE CLAIMS AND
DISPUTES § 2:6 (5th ed. 2007).
53
Edward Currie, Jr., John G. Farnan and
Laura Faust, Splitting Files: Implications on
Handling Liability and Coverage Claims 5
(July 2011) (paper presented at the annual
meeting of the Federation of Defense &
Corporate Counsel).
Page 408
coverage side of the case going forward
and assigning a second adjuster to handle
the liability portion lessens the potential
risk of harm to the insured but does not
necessarily eliminate it. Thus, the insurer
should have split the file from the
beginning. Of course, this argument must
fail. The law does not require insurers to
split all liability files at the outset. Even
adamant proponents of file-splitting
would not dare suggest that insurers’
duties should reach so far. Carrying
potential conflicts of interest to that
extreme would pose an undue financial
burden on insurers, and would
dramatically slow and complicate claims
processing. That is, however, the logical
extension of imposing a duty to split the
file.
A reasonable response might be that
the duty to split the file does not arise
until the insurer’s duty to defend is
triggered by a claim or suit, because only
then do the insurer’s and insured’s
interests potentially come into conflict. 54
But that is no answer unless those who
might offer it will agree that a duty to
split the file could never exist unless the
manner in which the suit was defended
could affect coverage. In other words, an
insurer’s duty to split a file, if any, could
arise only in a case in which the alleged
conflict of interest entitled the insured to
independent counsel at the insurer’s
expense. That limitation would have
superficial appeal, since it is in such cases
that the insurer’s access to the insured’s
confidential information is potentially
detrimental to the insured. Even then,
however, there are other reasons to
disfavor the recognition of a duty.
54
See id. at 20 (taking this position).
To start, if the insured is entitled to
representation by independent counsel,
the insurer has no right to control the
defense.55 The insurer has lost the right
to control the defense by virtue of the
conflict
of
interest
necessitating
independent counsel. Vesting the insured
with control of its own defense fully
eliminates two of the three risks that filesplitting is intended to guard against. 56
The third—the insurer’s potential ability
to obtain confidential or privileged
information that it can use to its
advantage in a coverage dispute—is
reduced nearly to the point of elimination.
Only if the lawyer serving as the
insured’s independent counsel were to
somehow betray the insured’s confidence
would there be any chance of the third
risk being realized. That possibility seems
remote at best.
If an insured is sued and the insurer
defends under a reservation of rights, it is
reasonable to assume that at some point
someone at the insurance company will
have to decide whether to settle the
case.57 After all, the overwhelming
majority of cases settle and insurers
routinely settle cases defended under a
reservation of rights. This decisionmaker must have access to both liability
55
Long v. Century Indem. Co., 78 Cal.
Rptr.3d 483, 490 (Cal. Ct. App. 2008).
56
These are the risks that (1) the insurer may
defend the case in such a way as to defeat
coverage; and (2) the insurer may mount less
than a full defense if it believes it will be able
to later deny coverage or that any ultimate loss
will not be covered.
57
Philip W. Savrin and Jonathan J. Kandel,
Splitting Claim Files Between Coverage and
Defense, FOR THE DEF., May 2012, at 52, 55;
Plitt and Gross, supra note 6, at 156.
information and coverage information to
make a reasoned decision.58 Even before
circumstances force it to evaluate
potential settlement, the insurer may wish
to consider whether it should waive its
coverage defenses and settle the claim or
suit against the insured.59 This again
requires knowledge of both the coverage
and liability aspects of the case. In any
event, the insurer is entitled to make this
choice and the insured benefits if the
insurer settles on its behalf. Given all
this, the argument that a liability insurer
should have a duty to split a file is not
persuasive.
Once defense counsel is retained in a
particular matter, it becomes even clearer
that a requirement to split the file
unnecessarily burdens the insurer.
Defense lawyers’ ethical obligations
adequately protect the insured against the
risks that file-splitting is designed to
avoid.
If the defense lawyer is the insured’s
independent counsel, the insured is her
sole client and she owes her loyalty
exclusively to the insured.60 Although a
lawyer functioning as independent
counsel must keep the insurer apprised of
developments and facts relevant to the
defense of the third-party action, the
lawyer must filter out information that the
58
Plitt and Gross, supra note 6, at 156.
See, e.g., Flynn’s Lick Cmty. Ctr. &
Volunteer Fire Dep’t v. Burlington Ins. Co.,
No. M2002-00256-COA-R3-CV, 2003 WL
21766244, at *5 (Tenn. Ct. App. July 31,
2003) (“crossing over” from coverage side of
a wall to the liability side to settle claims was
said to be appropriate because insurer was
waiving its coverage defenses by settling
claims).
60
Richmond, supra note 4, at 889.
59
Page 409
insurer might use to defeat or limit
coverage.61 Thus, the presence of
independent counsel alone should provide
sufficient protection for the insured and
eliminate any alleged need for the insurer
to split the file.62 If the defense lawyer
was hired by the insurer and the insured is
her sole client either by agreement or by
operation of law, the situation is the
same.63 If the defense lawyer was hired
by the insurer and the insured and the
insurer are dual clients, the defense
lawyer cannot share with the insurer
information bearing solely on coverage
absent the insured’s consent. Suffice it to
say that such consent is unlikely to be
granted and, for that matter, the lawyer
generally should not seek it. If there is
defense-related information that also
affects coverage, such that the insurer has
a right to receive it, the defense lawyer
probably has a material limitation conflict
of interest that will require her
withdrawal from the case unless the
insured agrees to allow her to furnish the
information to the insurer. 64 Regardless,
the defense lawyer’s ethical duties to the
61
Id. at 890-892.
4 RONALD E. MALLEN AND JEFFREY M.
SMITH, LEGAL MALPRACTICE § 30:21, at 369
(2012 ed.) (citing Employers Ins. of Wausau
v. Albert D. Seeno Constr. Co., 945 F.2d 284
(9th Cir. 1991)).
63
See State Farm Fire & Cas. Co. v. Mabry,
497 S.E.2d 844, 847 (Va. 1998) (“The
attorney employed by the insurer to defend the
insured ‘is bound by the same high standards
which govern all attorneys and owes the
insured the same duty as if he were privately
retained by the insured.’”) (quoting Norman v.
Ins. Co. of N. Am., 239 S.E.2d 902, 907 (Va.
1978)).
64
MODEL RULES OF PROF’L CONDUCT R.
1.7(a)(2) (2011).
62
Page 410
insured are a sturdy barrier against the
sort of information leakage that filesplitting is intended to prevent.
Although there is no duty to split a
file, there are valid reasons for an insurer
to split a file anyway.
First, any
administrative costs or inconvenience that
may accompany the decision to split a file
must be weighed against the possibility of
related allegations of bad faith or estoppel
if the file is not split. An insurer might
therefore conclude that splitting a file is a
reasonable precaution even in a case in
which the perceived need to do so is
doubtful.
Any administrative costs
accompany splitting a file are certain to
be lower than the cost of litigating the
issue somewhere down the line. Second,
splitting a file avoids the alleged
appearance of impropriety. Granted, an
appearance of impropriety is too thin a
reed on which to base allegations of bad
faith or other misconduct against an
insurer, but appearances may nonetheless
matter to an insurer for a variety of
reasons. Third, an insurer may wish to
split a file to give the insured extra
assurance of fair treatment, or to increase
the defense lawyer’s willingness to share
information with the adjuster handling the
liability aspect of the matter and, in doing
so, enhance the insurer’s ability to
successfully defend the case. Finally, if
an insurer anticipates litigation with its
insured, splitting the file may in some
jurisdictions enhance the insurer’s ability
to assert the attorney-client privilege or
work product immunity with respect to
coverage-related communications with
the insurer’s in-house lawyers or outside
coverage counsel.65
65
Savrin and Kandel, supra note 57, at 54-55.
If an insurer opts to split a file, it
must consider at least two logistical
issues. First, who should be screened in
the process? Clearly, the adjusters
responsible for coverage and liability
must be screened from one another, but
how high must the screen go? Should it
extend to the adjusters’ immediate
superiors or higher? The safe answer is
that the screen should extend up to the
person ultimately responsible for deciding
how the claim should be resolved,
whether by way of settlement, trial,
declaratory judgment action, or denial.
How the screen should be implemented
will depend on the insurer’s information
technology
capabilities
and
its
information and records management
systems.
Second,
under
what
circumstances, if any, should the screen
be treated as permeable? In other words,
it is ever appropriate for the coverage and
liability adjusters to communicate about
the matter with one another? If so, for
what purpose? As a practical matter, the
coverage and liability adjusters may need
to communicate about matters that will
benefit the insured or which at least will
not affect the insured’s defense.
Enforcing
an
absolute
ban
on
communications in such situations would
seem to make little sense.
An insurer that opts to split a file
must also consider at least two broader
practical issues. First, and perhaps most
fundamentally, an insurer that opts to split
a file must be prepared to demonstrate
why it employed the screening procedures
it did and further that those procedures
were effective. Insurers that split files
should therefore think carefully about
how they document and enforce their
screening procedures or protocols.
Second, an insurer that establishes a
protocol for splitting files or which has
regular procedures for doing so must be
prepared to follow them uniformly out of
the reasonable concern that the failure to
follow them in any particular case may
become evidence of allegedly improper
conduct.66
III. Conclusion
Defenses under reservation of rights
occasionally raise concerns about
conflicts of interest between the insurer
and insured, including whether (1)
whether the insurer may defend the case
in such a way as to defeat coverage; (2)
whether the insurer may mount less than a
full defense if it believes it will be able to
later deny coverage or that any ultimate
loss will not be covered; or (3) whether
the insurer will gain access to the
insured’s confidential or privileged
information which it can then use to its
advantage in coverage litigation. To
guard against these possibilities and to
dispel later allegations of bad faith or
other claims of misconduct, liability
insurers sometimes “split the file” in a
case defended under reservation of rights.
Although insurers may choose to split
files for several legitimate business
reasons, they have no duty to do so. An
insurer’s failure to split a file should not
support bad faith or estoppel allegations,
nor should it give rise to any other claims
of misconduct by the insurer.
66
Id. at 55 (citing Aetna Cas. & Sur. Co. v.
Mitchell Bros., Inc., 814 So. 2d 191, 199 (Ala.
2001) (Lyons, J., concurring in part and
dissenting in part)).
Page 411
The Global Supply Chain: Understanding,
Measuring, Mitigating and Managing Exposure in a
Supply Chain Dependent Globalized Market
By Daniel W. Gerber and
Brian R. Biggie
“You have to be very rich or very poor to
live without a trade.”1
W
ITH THE evolution of technology
and society, we have seen a drastic
change in the movement of goods and
resources between countries. We have
advanced from the days of trading silk
and spices via ancient land routes to a
global system that sends raw materials
and finished goods across the world by
land, sea and air.
Components are shipped from the
point of manufacture to the point of
assembly and then to the point of sale. A
perfect example of this evolution is the
auto manufacturing industry. The Ford F150, often considered a symbol of the
American truck, while assembled in
Illinois, is largely composed of
component parts manufactured in Mexico
and China.
The importance of maintaining the
safety and predictability of supply routes
is not limited to component parts, but
includes commodities such as wheat or
fruit. The United Kingdom imports 90%
of its fruit and 60% of its vegetables. As a
result, supermarkets were in danger of
running out of these commodities during
the height of the volcanic ash cloud that
interfered with flights during the summer
of 2010.
1
Albert Camus.
Daniel W. Gerber cochairs
Goldberg
Segalla’s
Global
Insurance
Services
Practice Group. He
maintains
an
international practice in
complex insurance coverage and
reinsurance matters, including those
involving supply chain issues. He is the
Chair of the IADC’s Insurance and
Reinsurance Committee and a frequent
author and national lecturer on insurance
and reinsurance issues.
Brian R. Biggie, an
associate at Goldberg
Segalla, concentrates
his practice on complex
insurance
coverage
disputes and analysis
and
professional
liability. His experience includes
preparing coverage opinions and
litigating insurance coverage matters
involving
supply
chain
issues,
employment-related incidents, third-party
coverage, and other issues. He has
written and lectured on insurance
coverage for audiences nationally and
abroad.
Arguably the greatest strength of this
global economy, the relative ease in
moving parts and commodities, is the
basis for its greatest weakness—the
fragility of the system and the concurrent
susceptibility to interruption. This
dichotomy was noted by the recently
created National Strategy For Global
The Global Supply Chain
Supply Chain Security, an articulation of
the United States’ policy to strengthen the
global supply chain. This January 2012
report noted that the global system relies
upon an interconnected web of
transportation
and
infrastructure:
“[W]hile
these
inter-dependencies
promote economic activity they also serve
to propagate risk across a wide
geographic area or industry that arises
from a local or regional disruption.”2
This article presents the advantages and
weaknesses of the modern global supply
chain and explores ways for participants
in the global economy to minimize or
transfer risks resulting from interruptions
in the supply chain.
Part I considers the modern global
supply system and analyzes potential
points of vulnerability. Understanding the
evolution of this modern system and its
points of vulnerability are key to
mitigating risks along the supply chain.
Part II analyzes the need for a participant
in the supply chain to assess its
susceptibility to losses caused by trade
disruption
and
considers
what
contingencies should be addressed. Part
III addresses how a company can shift the
risks of losses due to supply chain
disruptions to third parties. Developing
strategies for transferring risks or
liabilities is critical in limiting a
company’s exposure and losses that can
occur when its supply chain is interrupted
or broken.
Page 413
I.
A. It’s a Small World After All
Over the past 50 years we have
witnessed the growth of the globalized
economy. Global trade has become a
precondition to sustained profits as
opposed to an economic advantage
available to only a certain segment of
companies. Conceivably, the global
economy has reached a tipping point that
renders it unlikely that we will ever see a
retraction in the growth and/or reliance on
the global supply chain system. Today,
more and more companies must manage
their global supply chain in order to stay
competitive in this new market place.
Global supply chain is loosely
defined as an international network of
companies that cooperate to convert ideas
into goods or services for customers.3
Partners in this chain must efficiently
exchange information as raw materials
are transformed to finished goods while
traveling through the network’s physical
infrastructure. Physical facilities include
manufacturers’ warehouses, wholesalers’
distribution centers, retail chains’
warehouses, and retail outlets.4
3
2
Office of the President of the United States
of America, National Strategy For Global
Supply Chain Security, at 2 (January 2012).
The Modern Global Supply System
Barry Cross and Jason Bonin How To
Manage Risk In a Global Supply Chain, IVEY
BUSINESS JOURNAL, November/December
2010.
4
Russ Banham, Reducing Disruption in the
Global Supply Chain, THE WALL STREET
JOURNAL, available at http://online.wsj.
com/ad/article/managingrisk-disruption.
Page 414
Proper management of a company’s
global supply chain is key to maximizing
profits and limiting losses caused by a
disruption. While outsourcing may lead to
cost savings, there is a litany of dangers
and challenges that must be managed in
order to maintain production.
save money.6 This internal structure must
be able to handle all required supply
chain issues flexibly and responsively. If
unable to manage the supply chain in the
absence of a specific peril, a company
will not reap the benefits of cheaper labor
or components residing in other markets.
Determining an internal structure for
managing supply chain is a first step in
safeguarding against losses caused by its
interruption.
In
managing
supply
chain,
companies may choose a traditional
approach and view supply chain
management as a subset of a larger
department or divide management
amongst various departments, such as
“Purchasing” or “Operations.” 7 Such a
hierarchy may look akin to:
5
A company must organize its supply
chain management structure to support its
overall business strategy and design a
system to motivate behaviors that
optimize performance for the company as
a whole. Failing to understand the costs
of importing goods from foreign locations
can lead a company to make a decision
that serves to increase costs rather than
5
Image available at Cerqa, http://www.
cerqa.com/services/supply-chain-management.
aspx.
8
6
Barchi Gillai and Anne-Caroline Vorburger,
Business Value of Global Trade Management
Solutions, Stanford Graduate School of
Business at 4 (March 2007) available at
www.gsb.stanford.edu/sites/default/files/docu
ments/Bus_Value_Global_Trade_Mgmt.pdf.
7
Shoshanna Cohen, The New Supply Chain
Organization PRTM (2006) available at
ments/PRTM_The_New_Supply_Chain_Org.
pdf.
8
Id.
Alternatively,
companies
may
consolidate supply chain management,
wrapping various other departments
under this umbrella. In a sense, links in a
supply chain could be viewed as
“departments” and individuals that are
responsible
for
executing
each
department core process.9 Again, such a
hierarchy may look like:
Page 415
will be compounded by the increased
scope of the chain. As the concept and
real-world application of the global
supply chain remains fluid, so does the
concept and real-world effects of various
threats. To mitigate potential threats to its
supply chain, companies should develop a
framework defining and characterizing
the different perils that may exist to
interrupt or break the supply chain.
To better define potential threats that
exist, commentators have created an
archetype to categorize threats that may
arise as either “internal” or “external”
pressures. The common link among the
perils is that each has the potential to
disrupt the supply chain.11 “Internal”
pressures include:

Processes: Proper execution of
administrative and/or managerial
processes undertaken by the
company.
These
processes
include internal assets and
infrastructure,
such
as
communication
systems,
responsiveness of departments
and leadership structure. If the
internal infrastructure of the
company fails to operate
efficiently,
supply
chain
disruptions may occur.12

Controls: The assumptions,
rules, systems, and procedures
that dictate how a company
10
With the resulting complexity of the
global economy, companies will shift to
the more unified approach with one
supply chain manager overseeing the
supply chain, incorporating departments
such as purchasing, order fulfillment and
manufacturing. Such an arrangement
would increase a company’s flexibility
and responsiveness in managing its
supply chain.
B. Only as Strong as the Weakest
Link
There is no shortage of threats to a
company’s supply chain, and these threats
9
Id.
Id.
10
11
Alan Braithwaite, The Supply Chain Risks
of Global Sourcing (LPC Consulting, July
2009),
available
at
http://www.lcp
consulting.com/files/Supplychain_risks_of_gl
obal%20Sourcing%20_v26%20May2010.pdf.
12
Id.
Page 416
exerts control over the processes.
For supply chain management,
this
could
include
order
quantities, batch sizes, stock
policies, and return policies.
Control risk arises from the
application or misapplication of
internal controls.13

13
Mitigation: It is essential for a
company
to
plan
for
contingencies that may occur.
The failure to prepare a plan to
mitigate
losses
from
an
interruption in supply chain is a
risk in and of itself.14

Supply Chain Confidence:
Different departments such as
sales, customer service or
operations view the viability of a
supply chain differently. As a
result, sales persons may order
more than is required, or hold
stock to avoid a shortage due to
a lack of confidence in the chain.
Operations may be unable to
derive patterns on sales or
trends, layering the existing
inefficiencies.15

Inability to Measure Demand:
Forecasting demand is important
to quantifying units produced
Id.
Id.
15
Martin Christopher and Hau L. Lee, Supply
Chain Confidence: The Key to Effective
Supply Chains Through Improved Visibility
and Reliability, Cranfield Univ. & Stanford
Univ. (November 6, 2001), available at
ments/SC_Confidence_whtppr.pdf.
and shipped. The inability to
properly assess demand or
respond to a change creates
inefficiencies that can disrupt the
supply chain and result of
economic losses. This has been
characterized as the bullwhip
effect,
when
demand
information becomes distorted as
it is transmitted up the demand
chain. This can lead to excessive
inventories, higher operational
costs and lower customer
service.16
A company’s internal infrastructure
must be geared toward efficiently
managing its supply chain. Interruptions
potentially caused by internal risks are
within the control of the company and,
although complex, can be assessed,
amended and improved upon. These risks
are not likely to cause significant
economic losses, result in litigation or be
the types of risks that a company would
transfer to a third party.
External risks, those risks outside the
control of the company, can have a
significant impact on the supply chain
and cause significant economic losses. It
is not difficult to consider the myriad of
external risks that could interrupt a supply
chain. Political instability, natural
disasters, dock strikes, cyber attacks, and
terrorism all could have a devastating
effect on supply chains across the world,
14
16
Id.; see also Calvin B. Lee, Demand Chain
Optimization: Pitfalls and Key Principles,
Evant White Paper Series, (2003), available at
ments/Demand_Chain_Optimization_whtppr.
pdf.
with dire impacts to companies. External
risks are categorized as:

Demand Risk: Potential or
actual disturbances to the flow of
product, information, and cash
emanating from within the
network between the focal firm
and the market.17

Supply Risk: Actual or potential
disturbance of the flow of
product
or
information
emanating within the network,
upstream to the focal firm.18

Geo-political Risk: Natural
and/or political risks that can
occur. This category includes
events such as natural disasters
and political upheaval. This risk
can impact the firm directly or
through suppliers and customers.
The final category is the most unnerving.
While all external risks are, by definition,
outside the control of the company, geopolitical risks pose the greatest threat of
significant disruption or cessation of the
supply chain. A geo-political event could
have devastating effects on the supply
chain system of an unprepared company.
Raw
materials,
supply
routes,
manufacturing and the end marketplace
may be eliminated for an extended period.
II. He Who Fails to Plan, Plans to Fail
To minimize its risks, a company
must fully understand the entirety of its
17
18
See Braithwaite, supra note 11.
Id.
Page 417
supply chain and, more importantly, its
points of vulnerability. Conducting an
objective assessment allows a company to
prepare for interruptions, create flexibility
in its supply chain and be able to respond
in kind to potential disruptions.
Mapping. First, a company should draw
a map of its supply chain and consider
what perils may arise that would interrupt
its supply chain. This may appear simple
and obvious but it is easy to overlook and
easy to make certain assumptions about a
supply chain absent a clear and objective
view of the chain as a whole.
Consider a company that mines
copper in Russia, refines the copper into
tubing in the Middle East and distributes
the finished product throughout the
United States. By mapping the supply
chain and considering the potential perils
that may occur, the company can choose
what risks it will transfer and what risks it
will bear. Because mining and fabricating
are inland, they are unlikely to be affected
by coastal flooding or wind damage. The
location of these activities may be
affected by an earthquake, industrial
accident (Russia) or political unrest
(Middle East).
In the scenario described above, the
company could take additional steps to
mitigate potential disruptions. The
company could position inventory to
buffer against uncertainties of demand or
uncontrollable environmental risks. By
limiting shipment to the refining area
according to demand, the company could
limit the risk of lost materials due to
political unrest. The company could also
shift refining elsewhere without having to
re-direct significant amounts of materials
already in transit.
Page 418
Supplier Management. Companies
should retain multiple suppliers along
each point of the chain at the outset,
where possible. By limiting refining or
mining to a single provider in a single
location, the company described above
risks the loss of materials in the event of a
disruption. This does not mean that each
supplier must be on equal footing or be
expected to produce equally, but that each
should complement each other and exist,
in part, to avoid the cessation of supply in
the event of a loss.19
Information Management. In order to
reduce lead times and achieve greater
coordination across the demand chain,
information must flow seamlessly. This
information must include end-consumer
demand, knowledge of inventory on hand,
product still in transit and overall
capacity.20 Companies should invest in
understanding cultural differences along
the supply chain. The importance of
communication among the players in the
supply chain cannot be overstated, and
the company must obtain a full
understanding of the practical mechanics
of maintaining a successful business
relationship in various countries.21 This is
key to moving product, responding to
changes in demand, and even handling
returns or defective materials. A company
should strive to align the interests of
multiple parts of the supply chain with the
interest of the end seller.
Early warning is also important to
handling and resolving disruptions in the
chain. Considering how far materials
must travel, there is an inherent lag time
between when an item is shipped and
when it is received.22 For example, there
is a 17-23 day window between when
materials leave Asia by boat and reach the
United States. If a company learns of a
problem only when the product arrives in
the United States, this creates a serious
supply-chain problem that could affect
sales and overall customer satisfaction.
Companies should endeavor to maintain
quality control standards along the chain
to avoid such a situation.
A. If it Wasn’t for Lawyers, We
Wouldn’t Need Them
Even the most diligent company
from time to time will experience
uncontrollable losses. A company must
also prepare for the possibility of
litigation and the need to sufficiently
prove damages in the event of a loss due
to such a disruption. No discussion of
risks and loss is complete without
considering legal options available to
limit those risks and protect a company in
the event litigation results.
1.
Choice-of-law Provisions
Given that a company may have
contractual
arrangements
with
manufacturers or suppliers domestically
and abroad, the company should consider
adding choice-of-law and choice-ofvenue provisions to its contracts. While
this assumes the ability to gain
jurisdiction over another the manufacturer
or supplier, such clauses are beneficial
and allow the company to choose the law
19
See Cross and Bonin, supra note 3.
See Lee, supra note 16, at 19.
21
Id. at 17.
20
22
Id. at 13.
and jurisdiction governing any resulting
litigation.
Generally, courts uphold choice-oflaw or choice-of-venue provisions. The
Bremen v. Zapapa Offshore Company is
an early and prominent case addressing
the validity of choice of forum
In The Bremen, the
provisions.23
defendant had contracted with the
plaintiff to tow the plaintiff’s oceangoing, self-elevating drilling rig from
Louisiana to a point off Italy in the
Adriatic Sea. The contract contained a
provision stating, “[a]ny dispute arising
must be treated before the London Court
of Justice.”
A dispute arose after the rig was
damaged, and the plaintiff filed suit in the
United States. The defendant moved to
dismiss citing the choice of forum clause
and asserting the United States court did
not have jurisdiction over the matter. The
central issue before the court was whether
the choice of forum clause was valid. In
upholding the validity of the provisions,
the court stated in part:
Page 419
Columbia and booked passage for a
Caribbean cruise on an Italian vessel.
The plaintiff alleged that while in
international waters, a deck chair
collapsed, causing Mr. Milanovich to
sustain serious injury. Plaintiff filed suit
in the United States District Court for the
District of Columbia.
The defendant argued that the ticket
issued to the plaintiff stated that any
personal injury actions had to be
instituted within one year of the date the
accident occurred and that Italian law was
the “ruling law of this contract.”26 The
court concluded that the determination of
whether the contractual statute of
limitations was valid depended upon the
resolution of governing law. The court
noted that, while some courts view choice
of law provisions as only one factor in
determining the applicable law, this
interpretation mainly reflects the court’s
reluctance to automatically enforce the
terms of such adhesion contracts against
passengers. The court went on to state:
While these concerns warrant
heightened judicial scrutiny of
choice of law provisions in
passage tickets, they do not
sanction their utter disregard,
especially when there are no
countervailing policies of the
forum implicated and what it is
the non-drafting party that
seeks enforcement of the
choice of law provision.27
The choice of that forum was
made in an arms-length
negotiation by experienced and
sophisticated businessmen, and
absent
some
compelling
reason, it should be honored by
the parties and enforced by the
courts.24
A similar result was reached in
Milanovich v. Costa Crociere.25 There,
the plaintiff resided in the District of
In referencing The Bremen, the court
stated:
23
407 U.S. 1 (1972).
Id. at 12.
25
954 F.2d 763 (D.C. Cir. 1992).
24
26
27
Id. at 764.
Id. at 767.
Page 420
Under The Bremen and
Carnival Cruise, then, courts
should honor extra-contractual
choice of law provision in a
passenger ticket unless the
party
challenging
the
enforcement of the provision
can establish that enforcement
would be unreasonable and
unjust, the cause was invalid
with such reasons as fraud or
overreaching or enforcement
would contravene a strong
public policy of the forum in
which suit is brought. 28
In the context of global commerce
and sophisticated business entities, there
is no reason to doubt such provisions
would be upheld. Choice-of-law and
choice-of-venue provisions represent an
initial strategic decision that could have a
strong impact on a resulting litigation.
2.
Except for claims for personal
injury or property damage
which are caused by the failure
of Lilly to observe any of the
terms and conditions of this
agreement and those claims for
personal injury or property
damage which arise from the
gross negligence or willful
misconduct of Lilly, Supplier
Transferring Liability
In addition to provisions governing
choice of law and jurisdiction, the
company should also consider contractual
means to transfer liability for a potential
loss, including the use of indemnity
provisions. This will act to shift resulting
liability to the indemnitor. Understanding
local law, as well as the law governing
the dispute, is key to properly transferring
the risk of a loss by contract. While
transferring risk to a carrier or even a
warehouse may limit the exposure of
damages caused by an accident, the
company will still have to mitigate any
interruptions in the supply chain.
28
Air Freight. Losses in the context of airfreight are generally governed by the
Montreal Convention.29 The Montreal
Convention applies to “all international
carriage of persons, baggage or cargo
performed by aircraft for reward.”30
Courts have construed the treaty as
having a complete preemptive effect over
all claims within its scope. With regard
to indemnity, courts have held, “[W]hile
the Montreal Convention does not create
a cause of action for indemnification or
contribution among carriers, it does not
preclude such actions as may be available
under local law.”31 The Ninth Circuit
continued, “the Montreal Convention
refers to these local law causes of action
for
indemnification,
contribution,
apportionment, or set-off, not as a ‘right
to damages,’ but as ‘a right of
recourse.’”32 The indemnity provision
found in the Eli Lilly v. Air Express
International read:
Id. at 768.
29
Eli Lilly & Co. v. Air Express Int'l USA,
Inc., 615 F.3d 1305, 1307 (11th Cir. 2010).
30
Olaya v. Am. Airlines, Inc., No. 08-CV4853,
2009
U.S.
Dist.
LEXIS
94010 (E.D.N.Y. Oct. 6, 2009).
31
Chubb Ins. Co. of Eur. S.A. v. Menlo
Worldwide Forwarding, Inc., 634 F.3d 1023,
1026 (9th Cir. 2011).
32
Id. at 1027.
Page 421
hereby agrees to indemnify
and hold Lilly harmless against
and from any and all claims
arising from any breach or
default in the performance of
any obligation on Supplier's
part to be performed under the
terms of the agreement, or
arising from any act, neglect,
fault, or omission of Supplier
or of its agents, employees,
visitors, invitees, or licensee
and from and against all costs,
attorney's fees, expenses, and
liabilities incurred in or about
any such claims or any action
against customer by reason of
such claim. Supplier, upon
notice of Lilly, shall defend
same at Supplier's expense.33
goods were loaded in the
condition therein described.” If
the plaintiff presents a prima
facie case, the burden shifts to
the defendants to prove that
they exercised due diligence to
prevent the damage or that the
damage was caused by one of
the exceptions set forth in
section 1304(2) of COGSA,
including “perils, dangers, and
accidents of the sea or other
navigable waters” and “latent
defects not discoverable by
due
diligence.”
If
the
defendants show that the loss
was caused by one of these
exceptions, the burden returns
to the shipper to establish that
the defendants’ negligence
contributed to the damage.
Finally, “if the shipper is able
to
establish
that
the
[defendants'] negligence was a
contributory cause of the
damage, the burden switches
back to the [defendants] to
segregate the portion of the
damage due to the excepted
cause from that portion
resulting from the carrier's own
negligence.”34
Sea Freight. Claims based upon freight
traveling by sea are treated differently.
For losses litigated within the United
States, The Carriage of Goods By Sea Act
governs. The statute provides an avenue
to shift the burden of a loss to the carrier.
The Fifth Circuit described the complex
shifting of burdens of proof:
Initially, the plaintiff must
establish a prima facie case by
demonstrating that the cargo
was loaded in an undamaged
condition and discharged in a
damaged condition. “For the
purpose of determining the
condition of the goods at the
time of receipt by the carrier,
the bill of lading serves as
prima facie evidence that the
To the extent the purchaser can
satisfy its burden of proof and avoid the
application of any exception, the
purchaser will pass the burden of the loss
to the shipper.
A second treaty that may come into
play in the course supply chain disputes is
34
33
Eli Lilly, 615 F.3d at 1314-1315.
Steel Coils, Inc. v. M/V Lake Marion, 331
F.3d 422 (5th Cir. 2003).
Page 422
the United Nations Convention on
Contracts for the International Sale of
Goods (“CISG”). As the Second Circuit
noted, under the CISG, “the seller must
deliver goods which are of the quantity,
quality and description required by the
contract,” and “the goods do not conform
with the contract unless they . . . possess
the qualities of goods which the seller has
held out to the buyer as a sample or
model.”35 The CISG further states that
“the seller is liable in accordance with the
contract and this Convention for any lack
of conformity.”36 As to the damages
available in the event of a breach of
contract, the Treaty states:
Damages for breach of
contract by one party consist of
a sum equal to the loss,
including loss of profit,
suffered by the other party as a
consequence of the breach.
Such damages may not exceed
the loss which the party in
breach foresaw or ought to
have foreseen at the time of the
conclusion of the contract, in
the light of the facts and
matters of which he then knew
or ought to have known, as a
possible consequence of the
breach of contract.37
35
Delchi Carrier Spa v. Rotorex Corp., 71
F.3d 1024, 1028 (2nd Cir. 1995).
36
Id.
37
Article 74, United Nations Convention on
Contracts for the International Sale of Goods,
Vienna, 11 April 1980, S.Treaty Document
Number 98-9 (1984), UN Document Number
A/CONF 97/19, 1489 UNTS 3.
Finally, as with the choice-of-law
provision, companies can always agree by
contract to shift the burden of a loss.
Parties can include indemnification
provisions that specify the extent and
nature of damages the indemnitor is
entitled to in the event of a covered loss.
3.
Damages
Ideally, a contract will be worded
with sufficient strength to avoid litigation.
Too frequently, however, litigation will
still ensue. Once a complaint is file,
companies must think strategically and be
prepared to prove every element of
damages.
Plaintiffs must present evidence
establishing the full extent of damages
and explain the rationale used to reach
their conclusions. Forensic accountants
may be required to sift through records
and calculate actual losses. Simple
statements about expected losses or prior
sales will likely be insufficient. Damage
cannot be speculative, and the claimant
will bear the burden of proof. The failure
to sustain this burden will limit or
preclude recovery regardless of whether
the claim is against a tortfeasor or an
insurer.
In Texpor Traders v. Trust Company
Bank, the plaintiff filed a breach of
contract action against Oxford Industries
based upon the sale of cotton sweatshirts
and the refusal to honor a line of credit.38
Oxford, which had ordered the
sweatshirts, contended the sweatshirts
were defective and counterclaimed for
$61,036.40 paid to Texpor under a letter
38
Texpor Traders, Inc. v. Trust Co. Bank, 720
F. Supp. 1100 (S.D.N.Y. 1989).
of credit for shipment and $163,265.95
for lost profits on confirmed customer
orders and potential customer orders that
Oxford was unable to deliver because of
defects in the merchandise.
The court concluded that the goods
Texpor delivered to Oxford under
purchase orders were materially defective
and not of “first quality” as the contract
specified.39 Turning to the issue of
damages, the court held that Oxford was
entitled to damages for lost profits in the
amount of $111,112.78. The court noted
that Oxford had met is burden of proof in
establishing the damages by providing
computerized
printouts
of
order
confirmations and cancellations, a
summary of confirmed customer orders,
and a tabular analysis of price per item
sold on confirmed customer orders and
acquisition cost of such items. However,
the court declined to award Oxford any
damages for potential orders because,
“Oxford presented no evidence, however,
of such prospective sales, and the court
will not speculate in attempting to assess
them.”40
The obligation to provide evidence
supporting damages applies equally in the
context of a claim for insurance coverage.
An insurer has the right to seek
information relevant to a claim. In
Amerex Group v. Lexington Insurance
Company,41 Amerex was in the business
distributing outerwear in the United
States and acted as an intermediary
between its wholesale customers and
overseas clothing manufacturers. The
company stored clothing in its warehouse
39
Id. at 1106.
Id. at 1108.
41
678 F.3d 193 (2nd Cir. 2012).
40
Page 423
in Avenel, New Jersey. The warehouse
utilized a large rack system that
facilitated
inventory
storage and
organization. This rack subsequently
collapsed, activating the warehouse's
sprinkler system, which flooded the
premises. The water not only damaged
Amerex's merchandise, but also rendered
its computer system inoperable for “one
to three weeks,” and prevented Amerex
from making promised deliveries. The
damages associated with the collapse
included lost merchandise, cancellation of
orders, late charges for orders fulfilled,
and lost business income.
At the time of the loss, Amerex was
insured under three separate policies, a
first primary was issued by Fireman's
Fund Insurance Company in the amount
of $2.5 million and second and third
policies were issued by appellees, and
provided insurance in excess of the
Fireman's Fund policy. Each excess
policy had a liability limit of $5 million,
for a total of $10 million beyond the
coverage provided by Fireman's Fund.
The excess insurance policies contained
substantially identical clauses that
allowed either party to insist in writing on
the appointment of an appraisal panel to
determine the extent of losses associated
with any claim. The appraisal clause did
not specify any time limit for making
such a demand, and instead focused on
the procedure used to appoint the Panel.
Two years after the rack collapse,
Amerex submitted its proof of loss to
Fireman's Fund and the excess insurers,
claiming total damages of $8.8 million.
Fireman's Fund paid the full amount of its
policy; Amerex then sought coverage
from the excess insurers for the remaining
$6.3 million. The excess insurers
Page 424
subsequently rejected Amerex's claim on
three bases: (1) Amerex's failure to
substantiate a number of aspects of its
claims, due to the lack of documentary
evidence; (2) alternative explanations for
the loss of business income that Amerex
reported, including the September 11,
2001
terrorist
attacks,
economic
recession, and the bankruptcies of major
customers; and (3) Amerex's improper
determination of the proper “restoration
period,” the date after which business
losses could no longer be attributed to the
rack collapse or computer failure.
After Amerex filed its complaint, the
excess insurers demanded appraisal and
answered the complaint the next day,
listing the appraisal demand among their
affirmative defenses. The excess insurers
then moved to compel an appraisal.
Amerex rejected the demand and
contested the motion, claiming that the
demand was untimely and was asserted
only to preclude Amerex from
prosecuting its claim and obtaining
discovery. The trial court granted the
motion to compel an appraisal resulting in
a three person panel.
In conducting the appraisal, the panel
reviewed documentary and testimonial
evidence and conducted investigations of
witnesses. After almost two and a half
years of review, the panel issued its
valuation decision and found that
Amerex's
damages
amounted
to
approximately $1.3 million, just more
than half of the value of Amerex's
insurance policy with Fireman's Fund.
In the resulting coverage litigation,
Amerex argued that the appraisal demand
was untimely and the excess insurers
waived the right to make such a demand.
The court noted that “New York
recognizes that the right to require an
appraisal ‘is not indefinite as to time, but
must be exercised within a reasonable
period.’”42 Accordingly, the resulting
inquiry was whether the delay was
“reasonable.” The court applied a threefactor test:
(1) whether the appraisal
sought is
'impractical
or
impossible' (that is, whether
granting an insurer's appraisal
demand would result in
prejudice to the insured party);
(2) whether the parties
engaged
in
good-faith
negotiations over valuation of
the loss prior to the appraisal
demand; and
(3) whether an appraisal is
desirable or necessary under
the circumstances.43
In applying these factors to the case
at hand, the court concluded that the
insurers did not waive the right to demand
an appraisal: “Amerex's challenges of the
Panel's ultimate valuation and the time
taken to reach that valuation are merely
post-hoc criticisms of the appraisal
process and results and do not provide a
reason why the district court should have
anticipated at the time the appraisal was
demanded that the appraisal would
prejudice Amerex.”44
Amerex also argued that the panel
improperly decided issues of law, not
purely the issue of damages. The court
42
Id. at 199, citing Chainless Cycle Mfg. v.
Sec. Ins. Co., 169 N.Y. 304 (N.Y. Ct. App.
1901).
43
Id. at 201.
44
Id. at 202.
noted that the distinction between
coverage and damages is more difficult
when the insured seeks coverage for lost
business income, however the court
concluded nonetheless that the panel did
not decide issues of law in reaching its
decision:
While the present dispute
certainly
included
legal
arguments concerning the
policy's
coverage,
those
disputes were not implicated in
the appraisal's resolution. The
Panel instead focused solely on
determining the extent of the
damages, including calculating
the relevant restoration period,
and did not address whether
the Excess Insurers' policies
covered those damages. Thus,
the Panel did not address
conflicting views of the
applicable policies, but rather
resolved factual questions
regarding claims about the
conflicting causes of the lost
business income.45
Page 425
such damages in a resulting litigation, or
even receive reimbursement from an
insurer.
4.
A company seeking damages in the
form of lost profits, increased costs or
replacement value, must pay careful
attention to proper bookkeeping prior to
the event. It is equally important to retain
the necessary expert to meet the burden of
proof in establishing damages. Courts
will not accept a witness as an expert
unless the proponent meets its burden of
establishing that the witness possesses
sufficient knowledge, experience, training
or education to qualify him as an expert.
Testimony cannot be vague or
unsubstantiated and often, the scope of an
expert’s testimony must be limited to his
area of expertise.46
Under the Rule 702 of the Federal
Rules of Evidence, an expert may be
permitted to offer testimony:
If scientific, technical, or other
specialized knowledge will
assist the trier of fact to
understand the evidence or to
determine a fact in issue, a
witness qualified as an expert .
. . may testify thereto . . . if (1)
the testimony is based upon
sufficient facts or data, (2) the
testimony is the product of
reliable
principles
and
methods, and (3) the witness
has applied the principles and
methods reliably to the facts of
the case.
The party seeking damages must
provide sufficient evidence to sustain its
burden of proof. Expected profits based
upon a continuing relationship or
promises of additional order may be
evident to a company, but absent actual
evidence, it is unlikely a judge or jury
will award damages. Companies that
sustain losses as a result of defective
goods or a breakdown in its supply chain
must be able to present evidence of lost
profits or other damages in order recover
46
45
Id. at 205.
Experts
See Hernandez v. Lutheran Medical Center,
46 A.D.3d 517 (N.Y. Sup. Ct. 2007).
Page 426
Application of this rule relies upon a
three-prong analysis: (1) whether the
expert is properly qualified; (2) whether
the testimony's reasoning or methodology
is scientifically reliable; and (3) whether
the testimony assists the trier of fact in
understanding
the
evidence
or
determining a fact.47 “[T]o be admissible
under Rule 702, the expert's opinion must
offer more than a ‘bottom line.’ The
expert must explain the methodology and
principles supporting the opinion.”48
The failure to retain the appropriate
expert or establish requisite knowledge
can result in a party’s disclosed expert
being precluded. In Tamraz v. Lincoln
Electric, plaintiff filed suit alleging that
the fumes from several welding supply
products produced by the defendants
caused him to develop manganisminduced Parkinsons.49 The plaintiff
intended to rely on the expert testimony
of Dr. Carlini in support of his claims.
The doctor, “hypothesized that Tamraz
might have a genetic predisposition to
Parkinson's Disease, and that manganese
in lower levels than necessary to cause
manganism might nevertheless ‘trigger’
the symptoms of Parkinson's Disease, like
‘the straw that broke the camel's back.’”50
The doctor concluded the plaintiff “did
not believe Tamraz has Parkinson's
Disease in the strict sense--that
manganese in his view caused the disease
meant by definition it could not be
‘idiopathic’ Parkinson's Disease--but
47
See Quad/Graphics, Inc. v. One2One
Communs., LLC, No. 09-CV-99, 2011 U.S.
Dist. Lexis 108969 (E.D. Wis. Sept. 23, 2011).
48
Minix v. Canarecci, 597 F.3d 824 (7th Cir.
2010) (citations omitted).
49
620 F.3d 665 (6th Cir. 2010).
50
Id. at 669.
believed it to be otherwise identical to
Parkinson's Disease.”51
Defendants argued that the purported
expert’s testimony should have been
precluded. On this point, the court noted
that “[N]o matter how good ‘experts'
credentials’ may be, they are not
permitted to speculate.”52 The court
characterized the expert’s testimony as a
“leap”, stating:
The problem here is that, when
Dr.
Carlini
testified
that
manganese exposure caused
Tamraz's condition, he went
beyond the boundaries of
allowable testimony under Rule
702.
In
the
video-taped
deposition played at trial, Dr.
Carlini opined that Tamraz has
“manganese-induced
parkinsonism”
“with
a
reasonable degree of medical
certainty.” But the etiological
component of this conclusion-the “manganese-induced” part-was at most a working
hypothesis,
not
admissible
scientific “knowledge.” Because
the “knowledge” requirement of
Rule requires “more than
subjective belief or unsupported
speculation,”
the
testimony
should have been excluded.53
In Turrentine v. Bell Canada, the
plaintiff filed suit alleging negligence and
product liability claims for a repetitive
51
Id.
Id. citing Goebel v. Denver & Rio Grande
W.R.R. Co., 215 F.3d 1083 (10th Cir. 2000).
53
Id. at 669-670.
52
Page 427
stress injury.54 The plaintiff relied upon
expert opinions of testimony in support of
her claims. The trial court concluded that
while plaintiff’s expert was qualified to
provide an expert opinion, his deposition
testimony failed to establish that he could
render a reliable expert opinion as to the
cause of the plaintiff's injury.
On appeal, the Second Circuit noted
that expert testimony was only admissible
where it was both relevant and reliable. In
upholding the decision of the trial court,
the court stated, “given the paucity of
detail explaining what methodology
[expert] employed in reaching his
conclusion that Turrentine's keyboard
usage was a substantial factor in causing
her symptoms, it was not an abuse of
discretion for the district court to exclude
his testimony as to causation.”55
III. Shifting the
Disruption
Risks
of
Trade
A. Mechanisms to Transfer Risk
Traditionally,
companies
have
attempted to lower their risk or exposure
of supply chain interruptions by procuring
Business Interruption (BI) coverage or
Contingent
Business
Interruption
coverage (CBI). BI coverage is generally
contingent upon actual physical damage
to the commodity or cargo. CBI provides
similar coverage to the extent the loss is
caused by a covered peril.
BI coverage is not responsive to the
variety of perils that can affect the global
supply chain system. The following brief
54
No. 98-7942, 1999 U.S. App. LEXIS
7765 (2nd Cir. Apr. 13, 1999).
55
Id.
scenario illustrates gaps that may exist in
BI coverage:
Pear Inc. is an American company
that manufactures cell phones. The
phones are assembled in Mexico and use
various components manufactured in
China, Thailand and Vietnam. A typhoon
causes serious flooding in Vietnam,
washing out critical roadways. As a
result, the components made in Vietnam
sit in the plant, undamaged, but unable to
be shipped until the roadways are
repaired. In order to maintain production
and sales, Pear, Inc. finds a replacement
manufacturer to obtain the required
component, increasing costs by 30%.
In this hypothetical, the actual
component did not sustain any physical
damage. The plant could continue to
operate and manufacture the required
part, but the flood damage prevented, or
significantly delayed, the ability to ship
the part for use in assembling the phone
for eventual sale. Under the typical BI
provision, the lack of “physical damage”
would preclude coverage for Pear’s
economic losses.
For Pear, the fact that there was no
physical damage certainly does mean it
has not sustained a significant loss. Still,
the absence of such actual physical
damage would preclude coverage under a
typical contingent BI from being
triggered. In this situation, Pear was
unable to transfer this risk and must bear
the subsequent losses. Of course, to the
extent the flooding actually caused
damage to Pear’s components, this
analysis would change. Dependent upon
the language of the policy, the resulting
losses would be covered and the risk of
this loss properly transferred to the
insurer. The resulting question is what
Page 428
opportunity exists for a company to
transfer the risk of financial losses that do
not arise from a physical loss.
B. Bridging the Gap
In light of the emerging global
supply chain system, there is clearly a
market for transferring the risk of
financial losses that result from an
interruption of the supply chain that do
not result from physical loss. As a result,
carriers have begun underwriting Trade
Disruption Insurance (TDI) coverage.
TDI provides coverage for economic
damages that result from a disruption of
the global supply chain. The intent is to
transfer the risk of financial losses
sustained by the policyholder in the event
of delay, or outright break, in the supply
chain. While BI or even CBI coverage are
generally triggered by an actual physical
loss, coverage under TDI is triggered by
the occurrence of a named peril.
Pear Inc., who as a result of a flood
in Vietnam was required to find another
manufacturer to maintain production and
sales, incurred increased production costs
for the twelve months it took to repair the
roads to and from the Vietnam plant.
Under
TDI,
Pear
could
seek
reimbursement of these increased costs
and any resulting lost profits to the extent
this peril was covered under the policy.
C. The Interplay Between BI and
TDI
Understanding the interplay between
BI and TDI is key to properly assessing
vulnerability to an interruption in the
global supply system and properly
transferring risk. Consider some recent
examples:
Country
Japan
Ivory Coast
Ukraine
Egypt/Libya
Iceland
Peril
Chiba
Refinery Fire
– loss of oil
BI
Yes
TDI
No
SemiConductor
Plant
Damaged –
loss of
manufactured
products
Sony –
inability to
ship products
subsequent to
earthquake
Port closure
– Sendai
Sanctions on
cocoa crops
Grain
embargo
Political
upheaval –
inability to
work and
emergency
evacuations
Closure of air
space –
volcanic
cloud
Yes
No
No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
No
Yes
A further example of the interplay
between BI and TDI arises from
Hurricane Mitch, which struck Central
America in 1998 causing significant
damage. At that time, a multi-billion
dollar fresh fruit and vegetable marketer’s
sources for fresh goods were interrupted
due to damage caused by the hurricane.
As the most powerful storm that year,
Hurricane
Mitch
damaged
the
infrastructure of Honduras, Guatemala,
and Nicaragua.
As a result, the marketer lost sales
and incurred increased costs in finding
alternative sources. The marketer
discovered that its competitors had
contingency plans that were more
advanced and the competitors were able
to secure alternative supplies. The
marketer could not recover the economic
damages under a property policy as the
physical damage was to non-owned
assets. That said, the TDI policy covered
the lost revenues and increased costs due
to the break in the supply chain.
D. Interpretation of Coverage
Options
To develop an insurance portfolio
and those coverages required to properly
transfer risk to an insurer, one must also
consider how these policies have been
interpreted.
1.
Business Interruption
Insurance
Courts have held the “[t]he purpose
of business interruption insurance is to
indemnify the insured against losses
arising from inability to continue normal
business operation and functions due to
the damage sustained as a result of the
hazard insured against. . . . In other
Page 429
words, the goal is to preserve the
continuity of the insured’s earnings.”56
Courts have made a distinction
between a partial shutdown and a mere
slowdown or loss of productivity; the
former is generally covered, while the
latter is not. In Howard Stores v.
Foremost, the insurer denied coverage for
a business interruption claim that arose
out of water damage because there was no
The
suspension
of
business.57
policyholder
manufactured
men’s
clothing and sold the clothing at various
retail stores it owned. One of the stores
sustained water damage. The property
damage claim was not disputed and was
paid by the insurer.
The policyholder also submitted a
claim for business interruption. The
insurer denied the claim on the basis that
there was no business interruption
because the policyholder continued to do
business.
The policyholder then
reformulated its claim and asserted that
since it had to divert inventories from
some of its other retail stores, the
policyholder failed to meet projected
sales in all three stores. The court held
that recovery was properly denied
because there was no suspension of
business and an alleged adverse effect on
continuing sales did not constitute
business interruption.58
Similarly, in Quality Oilfields, the
court held “[I]n sum, after considering the
policy as a whole and persuasive
56
Howard Stores Corp. v. Foremost Ins. Co.,
82 A.D.2d 398, 400-401 (N.Y. Sup. Ct. 1981);
see also Quality Oilfield Prods. v. Michigan
Mut. Ins. Co., 971 S.W.2d 635 (Mich. App Ct.
1998).
57
See Howard Stores, 82 A.D.2d at 676.
58
Id.
Page 430
authority from other jurisdictions, we find
that ‘interruption of business’ is an
unambiguous term meaning ‘cessation or
suspension of business.’ Therefore,
Quality was not entitled to business
interruption coverage for the work
slowdown it experienced, and we find the
trial court did not err in granting
Michigan's
motion
for
summary
judgment.”59
The burden rests with the
policyholder to prove that it is entitled to
coverage and the amount of that
entitlement.60 In Fold-Pak Corp. v.
Liberty Mut. Fire Ins. Co., the plaintiff
manufactured and sold various types of
folding food containers.61 Nearly one-half
of the plaintiff’s business was the sale of
so-called “food pails” typically used in
Chinese restaurants to package takeout
food. On April 9, 1989, a fire at the
plaintiff’s plant destroyed “flexology
equipment” which was used to
manufacture the food pails.62 As a result,
plaintiff had to use a more expensive
process to make food pails. The defendant
insurer paid the plaintiff for the loss of
the Flexo machine, and advanced
$250,000 towards its claimed losses.
Subsequently, the plaintiff submitted a
claim for $4,081,471, claiming its
damages were recoverable under the
Business Interruption coverage provided
by the policy. Of this amount, the plaintiff
designated $1,479,940 as “Loss of
Production” and $2,601,531 as “Extra
Expenses.” The “Extra Expense” claim
consisted of $2,077,984 in “Increased
59
Quality Oilfields, 971 S.W.2d at 639.
Cora Pub. Inc. v. Continental Cas. Co., 619
F.2d 482 (5th Cir. 1980).
61
784 F. Supp. 49 (W.D.N.Y. 1992).
62
Id. at 51.
Cost of Production,” $200,250 in
“Management Expediting Expenses” and
various other extra expenses. The
defendant did not pay these full amounts,
resulting in the coverage action. The
plaintiff sought $4,000,000 in damages.
With regard to the loss of production
claim, the plaintiff determined that, but
for the fire, it would have produced
274,444,000 food pails at its plant. This
was 35 percent more food pails than it
produced during that same period in the
previous year. Moreover, the plaintiff
estimated that the fire prevented it from
producing 84,568,000 more pails than it
actually produced during the relevant
period. Questioning the plaintiff’s figures,
the court stated, “Despite plaintiff's
calculation of lost profits, I find that
plaintiff has failed to show that this
alleged 84,568,000 pail shortfall, even if
it was caused by the fire, caused any loss
of income.”63 The court continued, “Thus,
even if plaintiff had produced the pails,
nobody was standing in line to buy them.
There is no evidence that plaintiff was
unable to produce food pails in sufficient
quantity to meet its customers'
demands.”64 The court held that given the
complete absence of supporting evidence
in favor of the plaintiff the court was
required to grant summary judgment to
the insurer.
Business Interruption coverage can
be an important risk shifting option for a
company, however coverage remains
dependent upon a physical loss to the
insured. Coverage may not be applicable
to a break in the supply chain where the
insured does not suffer a physical loss,
60
63
64
Id. at 53.
Id. at 54.
but rather an integral supplied does,
causing the insured to lose income.
2.
Contingent Business
Interruption Coverage
Contingent business interruption
insurance protects a company with
income that is contingent on the flow of
the goods or services between the insured
and another business. The loss must be
caused by damage to a separate business
entity’s property as a result of a covered
peril.
Contingent business insurance
coverage insures against the insured’s
loss resulting from damage to property
that it does not own, operate or control.
An important question to consider in
either Business Interruption or Contingent
Business Interruption claims is the extent
of time an insured can claim damages.
This issue was analyzed in Pennbarr
Corp. v. Ins. Co. of N. America.65 There,
the insured sold electromechanical
typewriters. The parent company
collected royalties on the sale and
production of the typewriters. The
insured’s subsidiaries included two
wholly-owned subsidiaries in Holland
and Italy.
The Italian company
manufactured all typewriters sold in the
insured’s North American market. The
Holland company produced typewriters
for sale in the insured’s other markets.
Both foreign subsidiaries were listed in
the policy as “contributing properties.”66
The policy, in pertinent part, provided,
II. COVERAGE 1. Subject to all
of its provisions and stipulations,
65
66
976 F.2d 145 (3d Cir. 1992).
Id. at 147.
Page 431
this policy covers only against
loss resulting directly from
necessary
interruption
of
business conducted by/or through
the
insureds'
U.S.
sales
operations caused by damage to
or destruction of any of the real
or personal property (including
finished
stock)
hereinafter
described and referred to as
contributing properties (and/ or
arising out of inability of one
contributing property to produce
due to destruction/damage/loss to
or at another contributing
property) by the perils insured
against by the terms of this
policy which wholly or partially
prevents the delivery of materials
(including finished stock) to the
insured or to others for the
account of the insured and results
directly
in
the
necessary
interruption of the insureds'
business.
The insured asserted a business
interruption loss related to two
earthquakes in Italy in November 1980
and January 1981.
The earthquakes
damaged the Italian subsidiary and
production ceased for a period of time
after each earthquake. The insured’s U.S.
companies and the foreign subsidiaries all
filed for bankruptcy between March and
November of 1981. After the bankruptcy
of the foreign subsidiaries, the insured
was not able to locate alternate typewriter
production facilities. As a result, the
insured “went into a passive marketing
mode in an effort to stretch its inventory
until it could switch to an alternative
Page 432
product.”67 The insured sold the
typewriters from its inventory and
purchased typewriters from another
source from September to November
1981 to meet its sales demands in the
time during and after the interruptions at
the Italian plant. The insured reorganized
in December 1981 and changed to
producing electronic typewriters.
During the interruption, the insured
met its sales obligations. After resuming
operations, the insured lost sales due to its
depleted
inventory.
After
its
reorganization, the insured filed a claim
under its business interruption insurance
policy for the recovery of lost profits and
royalties suffered as a result of the two
Italian earthquakes.
Specifically, the
insured claimed that it incurred a loss
after restoration when it could have sold
more typewriters had the operations in
Italy not been suspended as a result of the
earthquakes.
The central question in Pennbarr was
whether
a
contingent
business
interruption loss for lost sales sustained
after the period of restoration was
covered under the policy. The insurer
denied coverage for the loss because the
losses occurred after the period of
restoration. The Third Circuit agreed with
the insurer and held that the insured could
only recover for loss of sales that
occurred simultaneously with the
interruption of production caused by the
earthquakes and that the policy did not
compensate the insured for losses
incurred after the damaged property is
restored.68 The court found that this result
was “consistent with the purpose of
business interruption insurance: to return
to the insured that amount of profit that
would have been earned during the period
of interruption had a casualty not
occurred . . . . This policy is not designed
to compensate for losses sustained
beyond the period of restoration.”69 The
court was also concerned that “[w]ithout
some cut-off date for the bringing of
claims under the policy, ‘claims would be
open to a degree of speculation which
would be absurd.’”70
It is interesting to note that the claim
for business interruption was made almost
one year after the initial earthquake and
shortly after the insured reorganized.
These factors may have influenced the
Third Circuit’s decision, particularly
given the court’s concern about openended and speculative claims.
Because
contingent
business
interruption coverage is dependent upon
damage to a third-party for a coverage
peril, one must pay attention to how thirdparties are defined and how these
categories are interpreted. In ArcherDaniels-Midland v. Phoenix Assurance,71
the insured suffered losses from
“unprecedented
flooding”
of
the
Mississippi River in 1993 that affected
nine states.
The insured and its
subsidiaries are farm-product processors
and sustained substantial extra expenses
and losses of income because of increases
in both transportation costs and the cost
of raw materials. The insurer paid a
portion of the losses sustained by the
insured, and the insured brought a breach
of contract action against the insurer for
69
67
Id. at 148.
68
Id. at 154.
Id. at 154-155.
Id. at 153.
71
936 F. Supp. 534 (S.D. Ill. 1996).
70
the remainder of the claim. At issue was
the meaning of the “Extra Expense
Coverage” (“EEC”) and the “Contingent
Business Interruption and Extra Expense
Coverage” (“CBI”) in the Difference-inConditions (“DIC”) policies.
Regarding Extra Expense Coverage,
the court held that the physical damage
requirement in the policy did not require
damage to the insured’s property or
scheduled locations and that damage to
the property of suppliers of goods and
services was covered.72
With respect to CBI coverage, the
dispute concerned whether or not
Midwest farmers and the United States
Government, through (1) the Army Corps
of Engineers (“Corps”) (which operates
and maintains the Mississippi River
system), and (2) the United States Coast
Guard (which “maintains systems of
marine aids to navigation consisting of
visual, audible, and electronic signals
which are designed to assist the prudent
mariner in the process of navigation”), are
suppliers of goods and services under the
policies.
The court noted that a substantial part
of the insured’s raw materials “travel by
barge in the Mississippi River and its
tributaries. When barge traffic was halted
because of the flooding, [the insured] had
to arrange alternate– and more
expensive– transportation by rail....[The
insured] argues that the plain language of
Section 13 (Q) supports its assertion that
its costs for alternate transportation are
recoverable under the policies.” Section
13 (Q) is set forth below.
This policy covers against loss of
earnings and necessary extra
72
Id. at 538.
Page 433
expense resulting from necessary
interruption of business of the
insured caused by damage to or
destruction of real or personal
property, by the perils insured
against under this policy, of any
supplier of goods or services
which results in the inability of
such supplier to supply an
insured locations [sic].
The court agreed with the insured’s
argument and found that the Corps and
the Coast Guard are “suppliers of goods
and services” under the policies.73 In this
regard, the court noted that “Government
entities have been recognized as playing a
dual role in commerce, that of ‘regulator’
and that of ‘market participant.’”74 The
court also held that coverage under the
policies is not limited to principal
suppliers or suppliers with the insured
under a written contract. The policy
applies to “any supplier.”
3.
Trade Disruption Insurance
Trade Disruption Insurance is
relatively new to the marketplace. There
is no developed line of reported cases
interpreting coverage under such policies.
As with all areas of insurance coverage,
disputes and resulting litigations, are only
a matter of time. One recent case, Tamko
Building Products v. Factory Mutual
Insurance, is instructive.75 In that case,
the plaintiff manufactured roofing
materials, including various types of
73
Id. at 542.
Id. at 543.
75
No. 4:10CV89, 2012 U.S. Dist. LEXIS
117622 (E.D. Mo. Aug. 21, 2012).
74
Page 434
asphalt shingles. Tamko purchased
coating grade asphalt from its supplier,
Bitumar USA, Inc. Coating grade asphalt
is produced with a product call asphalt
flux, which was purchased from Irving
Oil, which operates an oil refinery in New
Brunswick, Canada.
Irving Oil’s operations consist of a
three-room monobuoy located in the Bay
of Fundy, to which ships dock while
unloading oil and a pipeline system
connecting the monobuoy to onshore
storage tanks. Collectively, the monobuoy
and subsea pipeline is referred to as a
“single point mooring” (SPM) system.
In August 2008 Irving Oil was forced
to shut down its pipeline because of
damage to its pipeline. Due to the
shutdown, Bitumar was unable to obtain
asphalt flux from Irving Oil and Tamko
was unable to receive coating grade
asphalt
from
Bitumar.
Tamko’s
operations slowed and eventually stopped
completely in September and did not
resume until October 2008.
Factory Mutual had issued a
Commercial Property Insurance Policy.
Tamko submitted a claim for its loss in
the amount of $12 million. The Factory
Mutual insurance provided “dependent
time element” coverage, which was
described as, “cover[ing] the Actual Loss
Sustained and EXTRA EXPENSE
incurred by the Insured during the
PERIOD OF LIABILITY directly
resulting from physical loss or damage of
the type insured to property of the type
insured at Dependent Time Element
Locations
located
within
the
TERRITORY of this Policy.”
The policy defined a “dependent time
element location as:
(i) Any Location:
(a) of a direct customer,
supplier,
contract
manufacturer or contract
service provider to the
Insured.
(b) of any company
under a royalty, licensing
fee
or
commission
agreement
with
the
Insured.
(ii) Any Location of a
company that is a direct
or indirect customer,
supplier,
contract
manufacturer or contract
service provider to a
Location described in
a)(i) above.
The policy's Declarations broadly
defines an “Insured Location” under the
policy as:
A. The coverages under this
Policy apply to an
Insured Location unless
otherwise
provided.
Insured Location is a
location:
1) listed on a
Schedule
of
Locations, Appendix
A attached to this
Policy.
2) covered as
Miscellaneous
a
Unnamed
Page 435
Location.
waterways, each
not less than fifty
feet wide. Any
bridge or tunnel
crossing
such
street, space or
waterway
will
render
such
separation
inoperative for the
purpose of this
Reference
and
Application.76
3) covered under the
terms and conditions
of the Automatic
Coverage or Errors
and
Omissions
provisions.
B. References
and
Application.
The
following
term(s)
wherever used in this
Policy means:
1)
Miscellaneous
Unnamed Location:
A Location owned,
leased or rented by
the Insured but not
specified
in
the
Schedule
of
Locations.
2) Location:
a) as specified in
the Schedule of
Locations, or
b) if not specified
in the Schedule of
Locations,
a
Location
is
a
building,
yard,
dock, wharf, pier
or bulkhead (or
any group of the
foregoing)
bounded on all
sides by public
streets, clear land
space or open
The court characterized the coverage
dispute as whether the damage to Irving
Oil’s pipeline occurred at a covered
“dependent time element” and a covered
“dependent time element” (DTE)
location. It was undisputed that under the
terms of the policy, Irving Oil was a
supplier to Tamko, and any of its
“locations” suffering physical loss or
damage would be covered under the
policy. The policy defined “location” as a
“building, yard, dock, wharf, pier or
bulkhead (or any group of the
foregoing).” These terms were not
separately defined in the policy.
Tamko argued that the SPM system
fit within the ordinary meaning of the
terms dock, wharf, and building. The
court cited Merriam-Webster's Collegiate
Dictionary, which defined “dock” as “a
place (as a wharf or platform) for the
loading or unloading of materials.”77
Similarly, the term “wharf” was defined
as “a structure built along or at an angle
from the shore of navigable waters so that
76
Id. at *8-*9.
Id. at *11 (citing Merriam-Webster's
Collegiate Dictionary 341 (10th ed. 2002)).
77
Page 436
ships may lie alongside to receive and
discharge cargo and passengers.”78 The
resulting inquiry was whether the damage
to the monobuoy, the three-room building
where ships would dock and unload oil,
would be covered under the terms of the
policy.
The court concluded that “the
monobuoy and pipeline system does fit
within the policy's list of covered
locations.” The court held that the
monobuoy constituted a building given
that it was composed of walls and a roof,
and workers occupied the space for
several hours at a time. In addition the
monobuoy also met the definition of a
wharf, as it was built to allow ships to
dock alongside the buoy to unload oil,
and it constitutes a dock because it is a
place to discharge cargo.
The court flatly rejected Factory
Mutual's argument that the “monobuoy”
was not covered solely because that
precise term was not contained in the list
of locations, concluding such an
argument was “not a reasonable
construction of the policy.” The court
held:
Rather, the policy, when read
as a whole, is broad and
inclusive, providing coverage
for all “locations” of the
insured's suppliers and the
suppliers'
suppliers,
even
without listing those suppliers
in the policy itself. Such a
broad and inclusive policy is
not subject to such a narrow
construction of a particular
phrase, analyzed in isolation. I
78
Id.
conclude that the monobuoy
itself is a covered location
under the policy, such that
Tamko's loss from the damage
to the pipeline is covered.79
Clearly, Tamko is fact specific, and it
is difficult to extrapolate any overarching
guidelines regarding trade disruption
insurance and potential coverage disputes
beyond the concept that while TDI
coverage is new to the marketplace it
remains insurance, no more, no less. The
same rules of underwriting, policy
construction, and scope of coverage
apply. Claims for coverage, as with any
insurance dispute, will be governed by the
terms and conditions of the policy.
Insureds, insurers and counsel must be
cognizant that, while this market is new
and expanding, the same rules still apply.
E. Getting Coverage - What
Insurers Will Want To Know
Insurers underwriting coverage for
TDI will need to fully understand the
potential policyholder’s supply chain. An
insurer will also want to gain insight into
the
policyholder’s
supply
chain
management system and will ask
questions like: Have contingencies been
considered for each point on the supply
chain? Has there been an estimate of cost
for each contingency? Can the
policyholder bear the costs of an
interruption?
A full picture of the supply chain,
points of weakness and the ability of the
policyholder to prepare for, and react to,
79
Id. at *12.
contingencies is integral in assessing the
risk and determining the resulting
premium.
V. Conclusion
As the global economy continues to
evolve and becomes more intertwined,
more and more companies will be forced
to consider the ramifications of
interruptions in the global supply chain.
As with most risks, a company that
foresees potential threats and acts to
mitigate those risks will be in the best
position to weather any resulting storms.
There is little likelihood that the global
economy will revert to a locally driven
system of supply and demand.
Accordingly, a wise company will
identify potential perils and act to
mitigate against the potential threat.
Properly managing a global supply
chain requires consideration of internal
inefficiencies and threats, as well as those
threats that are external and beyond the
control of the company. In today’s
marketplace, there are opportunities to
transfer certain risks to third parties.
Achieving the proper balance of risks that
are transferred with those borne by the
company is key to navigating the high
seas of global commerce.
Page 437
Fending off the Use of a Rule 12(f) Motion to Strike
Affirmative Defenses
By Peter M. Durney and
Jonathan P. Michaud
T
HIS ARTICLE addresses potentially
effective arguments a defendant may
raise when confronted with a motion to
strike affirmative defenses based upon the
Supreme Court’s decisions in Bell
Atlantic Co. v. Twombly1 and Ashcroft v.
Iqbal.2 As most litigators by now know,
in Twombly, the Supreme Court held that
in order to withstand a motion to dismiss,
a plaintiff must plead sufficient facts in a
complaint to allege “a plausible
entitlement to relief.”3 Plaintiffs have
since argued, with some success, that this
heightened pleading standard applies with
equal force to a defendant’s affirmative
defenses. Facing such a motion early on
in litigation can present myriad problems
for a defendant. Upon being properly
served with a Summons and Complaint,
without the benefit of discovery and with
only twenty-one days to file an answer in
federal court, defendants to a large extent
must anticipate the proof and raise
appropriate defenses in somewhat of a
vacuum.
Yet, should an aggressive
opponent immediately challenge some of
those defenses, the very real prospect
looms of possibly losing otherwise valid
affirmative defenses, should an offense
motion be successful. This article
discusses the various rationales used by
federal district courts in deciding such
motions and considers how a defendant
1
550 U.S. 544 (2007).
556 U.S. 662 (2009).
3
550 U.S. at 559.
2
Peter M. Durney has
been a partner at Cornell
& Gollub in Boston since
1987. He has represented
hundreds of domestic and
foreign corporations in
the state and federal
courts in each of the New
England states and elsewhere in the U.S.
His
broad
litigation
experience
encompasses personal injury, products
liability, medical device, automotive,
marine and commercial litigation,
professional malpractice and appellate
work.
Jonathan P Michaud is an
associate in the products
liability and toxic tort
practice group at Cetrulo
& Capone LLP in Boston,
Massachusetts. In that
capacity, he is part of a
team of attorneys that
defend and advise clients on a local,
regional and national level and act as
defense liaison counsel for asbestos
actions in Massachusetts and Rhode
Island.
may best fend off such an attack to ensure
that its affirmative defenses are preserved
at least until adjudicated on the merits.
I.
The Heightened Pleading
Standard under Twombly/Iqbal
In Twombly, the Supreme Court
considered
the
pleading
standard
sufficient to satisfy the requirement that a
plaintiff make “a short and plain
Fending off the Use of a Rule 12(f)
statement of the claim that the pleader is
entitled to relief.”4 The Supreme Court
held that in order to survive a motion to
dismiss pursuant to Federal Rule of Civil
Procedure 12(b)(6), a plaintiff must plead
sufficient facts “to raise a right to relief
above the speculative level.”5 This
standard “requires more than labels and
conclusions,” such that “a formulaic
recitation of the elements of a cause of
action will not do.”6 Thus, the Twombly
court expressly retired the long
established standard established set forth
in Conley v. Gibson,7 which held that a
pleading should not be dismissed “unless
it appears beyond doubt that the plaintiff
can prove no set of facts in support of his
claim which would entitle him to relief.”8
The new heightened pleading
standard subsequently was clarified in
Iqbal, as the Supreme Court reiterated
that a plaintiff’s “complaint must contain
sufficient factual matter, accepted as true,
‘to state a claim to relief that is plausible
on its face.’”9 The Iqbal court further
outlined the two underlying principles of
Twombly. First, in evaluating the
sufficiency of a complaint, bare legal
conclusions that do nothing more than
recite the elements of a cause of action
are not entitled to an assumption of
truth.10 Second, a complaint must contain
sufficient factual allegations to allow a
court to infer that it states a “plausible
4
Id. at 557; FED.R.CIV.P. 8(a)(2).
Twombly, 550 U.S. at 555.
6
Id. at 556.
7
355 U.S. 41, 45-46 (1957).
8
Twombly, 550 U.S. at 563 (citing Conley).
9
Iqbal, 556 U.S. at 1949 (quoting Twombly,
550 U.S. at 563).
10
Id. at 1940 (citing Twombly, 550 U.S. at
555).
5
Page 439
claim for relief.”11 Courts considering a
motion to dismiss were thereby directed
to engage in a two-pronged analysis: (1)
to identify legal conclusions that are not
entitled to an assumption of truth; and (2)
to identify factual allegations and
determine if, taken as true, “they
plausibly give rise to an entitlement to
relief.”12 The Circuit Courts of Appeal
have not ruled on whether the heightened
pleading standard of Twombly/Iqbal
applies to the pleading of affirmative
defenses, and there is fairly even
disagreement between, and even within,
the United States district courts.13
II. Affirmative Defenses
Federal Rule of Civil Procedure
8(b)(1)(A) requires a party responding to
a pleading to “state in short and plain
terms its defenses to each claim asserted
against it.”14 Rule 8(c)(1) states that a
defendant “must affirmatively state any
avoidance or affirmative defense,” and
provides a list of nineteen affirmative
defenses.15 However, this list of
11
Id. at 1950.
Id.
13
See, e.g., Cottle v. Falcon Holdings
Management, LLC, No. 2:11-CV-95-PRC,
2012 WL 266968, *1 (N.D. Ind. January 30,
2012) (noting split among district courts on
issue).
14
Rule 9(b) provides that certain defenses,
fraud, mistake, and condition of the mind,
must be plead with particularity.
15
Those affirmative defenses are “accord and
satisfaction; arbitration and award; assumption
of risk; contributory negligence; discharge in
bankruptcy; duress; estoppel; failure of
consideration; fraud; illegality; injury by
fellow servant; laches; license; payment;
release; res judicata; statute of frauds; statute
12
Page 440
affirmative defenses “is not intended to
be exhaustive.”16
“Affirmative defenses plead matters
extraneous to the plaintiff's prima facie
case, which deny plaintiff's right to
recover, even if the allegations of the
complaint are true.”17 The burden of
proving an affirmative defense rests with
the party asserting it.18 Such a defense
must be proven by a preponderance of
credible evidence.19 If proven by a
preponderance of the evidence, “[a]n
affirmative defense will defeat the
plaintiff’s claim.”20 Federal courts have
consistently held that the failure by a
defendant to plead an affirmative defense
in their answer generally results in waiver
and exclusion from the action.21
Rule 12(f) of the Federal Rules of
Civil Procedure permits a party, or the
court acting sua sponte, to “strike from a
pleading an insufficient defense or any
redundant, immaterial, impertinent, or
scandalous matter.” This provides a
mechanism to “‘clean up the pleadings,
of limitations; and waiver.” FED.R.CIV.P.
8(c)(1).
16
5 CHARLES ALLEN WRIGHT AND ARTHUR R.
MILLER, FEDERAL PRACTICE AND PROCEDURE,
§ 1271 (3d ed. 2011).
17
Fed. Deposit Ins. Corp. v. Main Hurdman,
655 F. Supp. 259, 262 (E.D. Cal. 1987).
18
Jones v. Taber, 648 F.2d 1201, 1203 (9th
Cir. 1981).
19
Martin v. Weaver, 666 F.2d 1013, 1019 (6th
Cir. 1981).
20
5 WRIGHT AND MILLER, supra note 17, at §
1270.
21
See, e.g., FDIC v. Ramirez Rivera, 869 F.2d
624, 626 (1st Cir. 1989); Ingraham v. U.S.,
808 F.2d 1075, 1078 (5th Cir. 1987);
Stephenson v. Davenport Community School
Dist., 110 F.3d 1303, 1305 n. 3 (8th Cir.
1997).
streamline
unnecessary
matters.’”22
litigation,
and
avoid
forays into immaterial
III. Traditional Standard of Review
Traditionally,
courts
applied
Conley’s “no set of facts” standard to
pleadings that were challenged by a Rule
12(b)(6) or Rule 12(f) motion. Under that
standard, an affirmative defense was held
valid as long as it provided “fair notice”
to the plaintiff of the defense.23 Thus, an
affirmative defense was generally
immune from a motion to strike “unless it
appear[ed] with certainty that plaintiffs
would succeed despite any state of facts
which could be proved in support of the
defenses.”24
Even when there were no disputed
questions of fact or law, courts often were
reluctant to strike an affirmative defense
from an action when no discovery yet had
taken place. As the First Circuit Court of
Appeals noted in Salcer, “even when the
defense presents a purely legal question,
the courts are very reluctant to determine
disputed or substantial issues of law on a
motion to strike; these questions quite
22
Sun Microsytems, Inc. v. Versata
Enterprises, Inc., 630 F. Supp.2d 395, 402 (D.
Del. 2009) (quoting McInerney v. Moyer
Lumber & Hardware, Inc., 244 F. Supp.2d
393, 402 (E.D. Pa. 2002)).
23
See Lawrence v. Chabot, 182 Fed. Appx.
442, 456 (6th Cir. 2006); see also Clem v.
Corbeau, 98 Fed. Appx. 197, 203 (4th Cir.
2004).
24
See William Z. Salcer, Panfeld, Edelman v.
Envicon Equities Corp., 744 F.2d 935, 939 (2d
Cir. 1984), vacated on other grounds, 478 U.S.
1015, 106 S.Ct. 3324, 92 L.Ed.2d 731; see
also Tyco Fire Products LP v. Victaulic Co.,
777 F. Supp.2d 893, 897 (E.D. Pa. 2011).
properly are viewed as determinable only
after discovery and a hearing on the
merits.”25
In that same vein, when considering
a motion to strike an affirmative defense,
courts would consider whether the
defense was “legally sufficient under any
set of facts which may be inferred from
the allegations of the pleading.”26
Generally, courts would only grant a
motion to strike an affirmative defense
under Rule 12(f) upon a finding that (1)
there was no question of fact or law that
might allow the challenged defense to
succeed; (2) under no set of
circumstances could the defense succeed,
regardless of what evidence could be
marshaled to support it; and (3) prejudice
would result from the defense remaining
in the case.27
Given the low bar set by the “no set
of facts” standard of Conley v. Gibson,
rarely were plaintiffs inclined to file
motions to strike affirmative defenses. At
the same time, wary of waiver, defense
counsel would routinely draft long lists of
25
Salcer, 744 F.2d at 939; see also EEOC v.
Kelley Drye & Warren, LLP, No.10-CV-655LTS, 2011 WL 3163443, *1-2 (S.D.N.Y. July
25, 2011).
26
Glenside West Corp. v. Exxon Co. USA,
761 F. Supp. 1100, 1115 (D. N.J. 1991).
27
See SEC v. Sands, 902 F. Supp. 1149, 11651166 (C.D. Cal. 1995), aff'd sub nom. SEC v.
First Pac. Bancorp, 142 F.3d 1186 (9th Cir.
1998). See also Augustus v. Bd. of Public
Instruction, 306 F.2d 862, 868 (5th Cir. 1962);
Johnson v. Chrysler Corp., 187 F.R.D. 440,
441 (D. Me. 1999); Microsoft Corp. v. PTI
(USA), No. 1-CV-2018, 2003 WL 21406291,
*1 (E.D.N.Y. Mar. 14, 2003) (setting forth
same three-part test); Texas 1845 LLC v. Wu
Air Corp., No. 11-CV-1825, 2012 WL
382828, *6 (E.D.N.Y. Feb. 6, 2012).
Page 441
affirmative defenses in their responsive
pleadings, often in “boiler plate” fashion.
Historically, courts would generally
accept this practice.28 In short, there was
a general acceptance of the status quo.
Not so after Twombly and Iqbal, when
suddenly plaintiffs began to ask courts to
apply the heightened pleading standard to
affirmative defenses, creating “a frenzy of
district court opinions reexamining this
position.”29 Alas, some federal district
courts have been receptive to plaintiffs’
position, which should be a “wake-up”
call for the astute practitioner.
IV. Rationales of District Courts That
Have Applied the Heightened
Pleading Standard to Affirmative
Defenses
Federal district courts applying the
heightened
pleading
standard
of
Twombly/Iqbal to affirmative defenses
have justified doing so on a number of
grounds, including (1) fairness to the
parties; (2) a textual reading of the
Federal Rules of Civil Procedure; and (3)
efficiency and judicial economy.30 We
take those grounds one at a time.
28
See Shinew v. Wszola, No. 08-14256, 2009
WL 1076279, *2 (E.D. Mich. Apr. 21, 2009)
(noting that a “grocery list” of affirmative
defenses with no facts to support them “has
been widely employed (and tolerated) as a
form of notice pleading.”).
29
Paducah River Painting, Inc. v. McNational
Inc., No. 5-CV-00135-R, 2011 WL 5525938,
*2 (W.D. Ky. Nov. 14, 2011).
30
Recent district court decisions applying the
heightened
pleading
standard
of
Twombly/Iqbal to affirmative defenses
include: Smithville 169 v. Citizens Bank &
Trust Co., No. 4:11-CV-0872-DGK, 2012 WL
13677 (W.D. Mo. Jan. 4, 2012); Barnes &
Page 442
(1) Fairness to the Parties
In essence, this simplistic rationale is
based upon common sense. Some courts
have stated that it would be inequitable to
hold plaintiffs to a higher pleading
standard than defendants. Such a rationale
arguably is grounded in Twombly’s
Noble, Inc. v. LSI Corp., No. C-11-2709
EMC, 2012 WL 359713 (N.D. Cal. Feb. 2,
2012); Schlief v. Nu-Source, Inc., No. 104477, 2011 WL 1560672 (D. Minn. Apr. 25,
2011); Dion v. Fulton Friedman & Gullace
LLP, No. 11-2727 SC, 2012 WL 160221
(N.D. Cal. Jan. 17, 2012); Smith v. Mustang,
Independent School District No. I-69, No.
CIV-11-1146-M, 2012 WL 10848 (W.D.
Okla. Jan. 3, 2012); Haley Paint Co. v. E.I.
DuPont De Nemours and Co., 279 F.R.D. 331,
336 (D. Md. 2012); Puryear v. Indiana Pallet
Co., No. 2:11-CV-12-PRC, 2011 WL 5553697
(N.D. Ind. Nov. 15, 2011); Aguilar v. City
Lights of China Restaurant, Inc., No., DKC
11-2416, 2011 WL 5118325 (D. Md. Oct. 24,
2011); Microsoft Corp. v. Lutian, No. 1:10
CV 1373, 2011 WL 4496531 (N.D. Ohio Sept.
27, 2011); Cassetica Software, Inc. v.
Computer Sciences Corp., No. 11 C 2187,
2011 WL 4431031 (N.D. Ill. Sept. 22, 2011);
J&J Sports Productions, Inc. v. Martinez, No.
CV-F-11-00676-LJO-SMS,
2011
WL
4373960 (E.D. Cal. Sept. 19, 2011); Barry v.
EMC Mortg., No. DKC 10-3120, 2011 WL
4352104 (D. Md. Sept. 15, 2011); Gessele v.
Jack in the Box, Inc., No. 3:10-cv-960-ST,
2011 WL 3881039 (D. Ore. Sept. 2, 2011);
Bottoni v. Sallie Mae, Inc., No. C10-03602
LB, 2011 WL 3678878 (N.D. Cal. Aug. 22,
2011); Lucas v. Jerusalem Café, LLC, No.
4:10-CV-00582-DGK, 2011 WL 3511059
(W.D. Mo. Aug. 10, 2011); Barnett v.
Uniformed Services University of the Health
Sciences, No. DKC 10-2681, 2011 WL
3511049 (D. Md. Aug. 9, 2011); Francisco v.
Verizon South, Inc., No. 3:09cv737, 2010 WL
2990159 (E.D. Va. July 29, 2010).
acknowledgment of “the need for fair
notice” in a plaintiff’s Complaint, and
that such a concern should be equally
applied to defendants.31 The reasoning is
simple. Just as a defendant faced with a
factually deficient Complaint, a plaintiff
should not have to respond to defenses
that lack factual support.32
In U.S. v. Quadrini, the district court
reasoned that the same pleading standards
must apply to defendants and plaintiffs
“otherwise a court could not make a Rule
12(f) determination on whether an
affirmative defense is adequately pleaded
under Rules 8 and/or 9 and could not
determine whether the affirmative
defense would withstand a Rule 12(b)(6)
challenge.”33 Accordingly, “[l]ike the
plaintiff, a defendant also must plead
sufficient facts to demonstrate a plausible
affirmative defense, or one that has a
‘reasonably founded hope’ of success.”34
(2) Textual Consistency
Application of the same pleading
standard to defendants and plaintiffs,
alike, is also found by a textual
comparison of the relevant pleading rules.
Courts using the textual approach reason
that because both Rule 8(a)(2) and Rule
8(b) of the Federal Rules of Civil
Procedure require a “short and plain”
statement in the pleading of claims and
31
See LSI, 2012 WL 359713 (“[g]iving fair
notice to the opposing party would seem to
apply as well to affirmative defenses given the
purpose of Rule 8(b)’s requirements for
defenses.”).
32
See Francisco, 2010 WL 2990159 at *6.
33
No. 2:07-CV-13227, 2007 WL 4303213
(E.D. Mich. Dec. 6, 2007).
34
Id.
affirmative defenses, it follows that both
plaintiffs and defendants must plead
sufficient facts to put the other side on
notice of the basis of their defenses and
claims.35 Such an approach requires a
defendant to plead sufficient facts in
support of its defenses as “both its nonconclusory factual content and the
reasonable inferences from that content,
must plausibly suggest a cognizable
defense available to the defendant.”36
For example, in Aguilar v. City
Lights of China Restaurant, the court
noted that while Rules 8(a) and 8(b) were
“not identical,” they contained “important
textual overlap, with both subsections
requiring a ‘short and plain’ statement of
the claim or defense.”37 In addition, the
court noted that Form 30, which is
appended to the Federal Rules pursuant to
Rule 84, “strongly suggests that barebones assertions of at least some
affirmative defenses will not suffice, as
the Form’s illustration of a statute of
limitations’ defense sets forth not only the
name of the affirmative defense, but also
facts in support of it.”38 Similarly, in
Hayne v. Green Ford Sales, the district
court similarly applied Twombly to
affirmative defenses, in part because Rule
8(b)(1)(A), which governs pleading
defenses generally, contains the same
35
See Barnes v. AT&T Pension Ben. PlanNonbargained Program, 718 F. Supp.2d 1167,
1171 (N.D. Cal. 2010) (applying Twombly to
affirmative defenses and equating Rule 8(a)(1)
and Rule 8(b)(1)).
36
Haley Paint Co., 279 F.R.D. at 336.
37
No. DKC 11-2416, 2011 WL 5118325, *3
(D. Md. Oct. 24, 2011).
38
Id.
Page 443
“short and plain” statement that is
required of plaintiffs.39
(3) Preservation of Resources
Other courts have adopted the
heightened pleading standard to help
streamline more complex factual disputes
to the issues capable of being reasonably
supported at the earliest stage. In the view
of such courts, applying the heightened
pleading standard to affirmative defenses
serves the policy goals of Twombly/Iqbal
in promoting litigation efficiency, in
erasing boilerplate affirmative defenses,
and in eliminating or at least limiting
unnecessary discovery.40 In applying a
heightened
pleading
standard
to
affirmative defenses, the district court in
HCRI TRS Acquirer v. Iwer noted that
Twombly and Iqbal were “designed to
eliminate the potential high costs of
discovery associated with meritless
claims,”
and
that
“[b]oilerplate
affirmative defenses that provide little or
no factual support can have the same
detrimental effect on the cost of litigation
as poorly worded complaints.”41 By
reducing the number of affirmative
defenses to only those with factual
support, courts may believe that they are
narrowing the issues for the parties and
fulfilling the policy goals of Twombly and
Iqbal. Of course, eliminating a practice
that has survived for so long is never that
simple. In many defendants’ view, the
39
263 F.R.D. 647, 650 (D. Kan. 2009).
See HCRI TRS Acquirer, LLC v. Iwer, 708
F. Supp.2d 687, 691 (N.D. Ohio. 2010).
41
Id.; see also Barnes, 718 F. Supp.2d at 1172
(applying heightened pleading standard
weeded out boilerplate listing of affirmative
defenses).
40
Page 444
premature elimination of defenses is akin
to throwing the baby out with the bath
water. More to the point, the harsh result
of having one’s defenses stricken cannot
possibly be justified in the absence of
meaningful discovery.
So say the
defendants, in any case.
(4) Harsh Results
Clearly, applying the heightened
can lead to harsh results for a defendant.
In Aguilar v. City Lights of China
Restaurant, the court struck five
affirmative
defenses:
accord
and
satisfaction,
estoppel,
laches,
payment/offset, and fraud.42 As to the
first four defenses, the court held that
they were “conclusory legal statements
wholly devoid of any supporting factual
content.”43 Similarly, in Puryear v.
Indiana Pallet Co.,44 the district court
struck the affirmative defenses of failure
to state a claim upon which relief can be
granted and the applicable statute of
limitations, finding the former defense a
“bare bones assertion,” insufficient to
survive
the
heightened
pleading
standard.45 The court also found that the
statute of limitations defense was
insufficient as it “fail[ed] to cite to the
applicable statute of limitations, the time
limits in the statute, or the manner in
which the statute bars Plaintiff’s case.”46
This sets up the proverbial situation
of being “stuck between a rock and a hard
42
Aguilar, 2011 WL 5118325 at *4.
Id.
44
No. 2:11-CV-12-PRC, 2011 WL 5553697
(N.D. Ind. Nov. 15, 2011).
45
Id. at *1.
46
Id.
43
place.”
If the heightened pleading
standard applies to affirmative defenses,
then a defendant may be caught between
risking waiver by failing to plead an
affirmative defense, and the court
potentially finding that an affirmative
defense with no apparent factual support
should be stricken. Thankfully, a number
of persuasive arguments can be made in
support of the position that Twombly and
Iqbal do not apply to the pleading of
affirmative defenses.
V. The Defendants’ Opposition
An increasing number of district
courts have declined to apply the
heightened
pleading
standard
of
Iqbal/Twombly
to
a
defendant’s
affirmative defenses.47 Accordingly, a
47
Recent district court decisions declining to
apply the heightened pleading standard of
Twombly/Iqbal to affirmative defenses include
the following: Meas v. CVS Pharmacy, Inc.,
No.11cv0823 JM(JMA), 2011 WL 2837432
(S.D. Cal. July 14, 2011); Holdbrook, 2010
WL 865380; Michaud v. Greenberg & Sada,
P.C., No. 11-cv-01015-RPM-MEH, 2011 WL
2885952 (D. Colo. July 18, 2011); Ioselev v.
Schilling, No. 3:10-cv-1091-J-34MCR, 2011
WL 5855342 (M.D. Fla. Nov. 22, 2011);
Cottle, 2012 WL 266968; Bayer Cropscience
AG v. Dow Agrosciences, LLC, No. 10-1045
RMB/JS, 2011 WL 6934557 (D. Del. Dec. 30,
2011); United States v. Center for Diagnostic
Imaging, Inc., No. C05-00558RSL, 2011 WL
6300174 (W.D. Wash. Dec. 16, 2011);
Whitserve, LLC v. GoDaddy.com, Inc., No.
3:11-CV-948 (JCH), 2011 WL 5825712 (D.
Conn. Nov. 17, 2011); Brossart v.
DIRECTTV, No. 11-786 (DWF/JJK), 2011
WL 5374446 (D. Minn. Nov. 4, 2011); Aros
v. United Rentals, Inc., No. 3:10-CV-73
(JCH), 2011 WL 5238829 (D. Conn. Oct. 31,
2011); Sony/ATV Music Pub. LLC v. D.J.
defendant faced with a motion to strike
brought under Rule 12(f) should focus on
some core rationales that those courts
have used to deny such motions.
(1) Motions to Strike are
Disfavored
As a preliminary matter, defendants
should emphasize that motions to strike
pursuant to Rule 12(f) are disfavored. The
Fourth Circuit Court of Appeals has noted
that such motions are disfavored,
“because striking of a pleading is a drastic
remedy and because it is often sought by
Miller Distributors, Inc., No. 3:09-cv-01098,
2011 WL 4729807 (M.D. Tenn. Oct. 7, 2011);
Bank of Beaver City v. Southwest Feeders,
L.L.C., No. 4:10CV3209, 2011 WL 4632887
(D. Neb. Oct. 4, 2011); Leon v. Jacobson
Transp. Co., Inc., No. 10 C 4939, 2010 WL
4810600 (N.D. Ill. Nov. 19, 2010); Vurimindi
v. Fuqua School of Business, No. 10-234,
2011 WL 3803668 (E.D. Pa. Aug. 29, 2011);
Ash Grove Cement Co. v. MMR Constructors,
Inc., No. 4:10-CV-04069, 2011 WL 3811445
(W.D. Ark. Aug. 29, 2011); Baroness Small
Estates, Inc. v. BJ’s Restaurants, Inc., No.
SACV 11-00468-JST (Ex), 2011 WL 3438873
(C.D. Cal. Aug. 5, 2011); Security Life of
Denver Ins. Co. v. Shah, No. CV411-008,
2011 WL 3300320 (S.D. Ga. Aug. 1, 2011);
InvestmentSignals, LLC v. Irrisoft, Inc., No.
10-cv-600-SM, 2011 WL 3320525 (D. N.H.
Aug. 1, 2011); Tyco Fire Products LP v.
Victaulic Co., 777 F. Supp.2d 893 (E.D. Pa.
2011); GE Capital Commercial, Inc. v.
Worthington Nat’l. Bank, No. 3:09-CV-572-L,
2011 WL 5025153 (N.D. Tex. Oct. 20, 2011);
Chiancone v. City of Akron, No. 5:11CV337,
2011 WL 4436587 (N.D. Ohio Sept. 23,
2011); Chevron Intellectual Property LLC v.
Alborz Petroleum Inc., No. 11cv0889 IEG
(CAB), 2011 WL 3515929 (S.D. Cal. Aug. 11,
2011).
Page 445
the movant simply as a dilatory tactic.”48
Not surprisingly, then, Rule 12(f) motions
to strike are “often not granted unless
there is a showing of prejudice to the
moving party.”49 In light of the disfavored
status of Rule 12(f) motions as vehicles
for determining questions of fact or law
before discovery has taken place, a
defendant should stress that it would be
inappropriate for a court to strike
pleadings prior to any discovery.50 Thus,
the argument goes that applying the
heightened pleading standard to a
48
See Waste Mgmt. Holdings, Inc. v. Gilmore,
252 F.3d 316, 347 (4th Cir. 2001); see also
Treece v. Winston-Wood, No. 3:10-2354DCN-JRM, 2011 WL 6780132, *2 (D. S.C.
Dec. 27, 2011); Maupin v. Howard County
Public School System, No. L-10-2659, 2012
WL 401071, *7 (D. Md. Feb. 7, 2012) (noting
motions to strike as a “drastic remedy”); SEC
v. Gendarme Capital Corp., No. CIV S-110053 KJM-KJN, 2012 WL 346457, *1 (E.D.
Cal. Jan. 31, 2012) (“motions to strike are
disfavored and infrequently granted.”); FDIC
v. Gladstone, 44 F. Supp.2d 81, 84-85 (D.
Mass. 1999) (motions to strike affirmative
defenses are generally “disfavored”); Kaiser
Found. Hospitals v. California Nurses Ass’n,
No. 11-5588 SC, 2012 WL 440634, *4 (N.D.
Cal. February 10, 2012) (“Motions to Strike
‘are generally disfavored because they are
often used as a delaying tactics and because of
the limited importance of pleadings in federal
practice.’”) (quoting Rosales v. Citibank, 133
F. Supp.2d 1177, 1180 (N.D. Cal. Feb. 14,
2001)).
49
WRIGHT AND MILLER, FEDERAL PRACTICE
AND PROCEDURE, § 1381 (3d ed. 2011).
50
See EEOC v. Kelley Drye & Warren, 2011
WL 3163443 at *5; see also Holdbrook, 2010
WL 865380 at *2 (declining to apply Twombly
to pleading of affirmative defenses,
“particularly in light of the disfavored status
of motions to strike.”).
Page 446
defendant’s affirmative defenses would
only encourage motions to strike, which
is entirely counter to the well-established
standard that such motions are strongly
disfavored.
given the split in the district courts, the
question as to whether to apply Twombly
“is best resolved by reference to the text
of the Federal Rules.”53 In reading the
federal pleading rules, the court held that:
… the sub-parts of the rule
appear to demand more from a
party stating a claim for relief,
i.e., the party stating a claim
must show he or she is entitled
to relief. In contrast, a party
stating a defense need not
show he or she is entitled to
relief, but need only state any
defense, and state each defense
in short and plain terms.54
(2) Textual Support
Whether textual support or tea
leaves, the cases of Twombly and Iqbal
may be read differently by different
people. The simple truth is that neither
Twombly nor Iqbal addressed the
pleading of affirmative defenses. The
holdings of Twombly and Iqbal applied to
the pleading requirements of a plaintiff’s
Complaint under the “short and plain
statement” requirement of Federal Rule
8(a)(1), when attacked by a Rule 12(b)(6)
motion to dismiss. Both cases were silent
as to whether the ruling extended to
affirmative defenses.51 One might
logically argue, then, that since Twombly
and Iqbal did not address the pleading
standards of affirmative defenses
pursuant to Rule 8(c), “Iqbal and
Twombly have no application to the
pleading requirements of Rule 8(c).”52
In comparing the relevant federal
rules, courts have found a distinction
between Rule 8(a)(2), which requires the
pleader to show entitlement to relief, and
Rule 8(b)(1), which only requires a
statement of affirmative defenses “in
short and plain terms.” In Enough for
Everyone. v. Provo Craft & Novelty, the
district court held that, in the absence of
guidance from any Court of Appeals, and
51
See Davis v. Indiana State Police, 541 F.3d
760, 763-764 (7th Cir. 2008) (noting that
Twombly did not address affirmative
defenses).
52
See Chiancone, 2011 WL 4436587 at *4.
Given this distinction, the court
concluded that the Twombly/Iqbal
heightened pleading standard did not
apply to affirmative defenses.55 This
retreat to the fair notice standard of years
53
SA CV 11-1161 DOC, 2012 WL 177576,
*2 (C.D. Cal. Jan. 20, 2012).
54
Id. (emphasis in original).
55
Id. See also Schlief, 2011 WL 1560672 at
*9 (declining to apply Twombly to affirmative
defenses and noting that “language in
FED.R.CIV.P. 8(a) that provided the basis for
the Supreme Court’s decisions does not appear
in Rule 8(b) or 8(c), which govern defenses”);
Unicredit Bank AG v. Bucheli, No. 10-2436JWL, 2011 WL 4036466, *5 (D. Kan. Sept.
12, 2011) (comparing Rule 8(a)(2), Rule 8(b)
and Rule 8(c) and finding differences “provide
a textual basis for a less rigorous pleading
standard.”); Meas, 2011 WL 2837432 (finding
that neither Rule 8(a) or Rule 8(b) contained
“language that precisely corresponds to Rule
8(a)’s language requiring the pleader ‘show’
that he is entitled to relief”).
Page 447
gone by sounded a comforting note to
defendants.56
the existence of the issue for
trial. Providing knowledge that
the issue exists, not precisely
how the issue is implicated under
the facts of a given case, is the
purpose of requiring averments
of affirmative defenses. Thus, the
Court will only strike defenses
challenged
on
sufficiency
grounds if they do not meet this
low standard.58
(3) Fair Notice, Not Plausibility
Prior to Twombly and Iqbal, courts
have held that the pleading of affirmative
defenses requires only “fair notice” of the
defense.57 That only “fair notice,” rather
than “plausibility,” be provided by the
defendant is grounded in a textual reading
of the Federal Rules of Civil Procedure
8(a) and 8(c), and should continue to
apply even after Twombly and Iqbal. The
district court explained this rationale in
Tyco Fire Products v. Victaulic
Company:
In light of the differences
between Rules 8(a) and 8(c) in
text and purpose, the Court
concludes that Twombly and
Iqbal do not apply to affirmative
defenses. An affirmative defense
need not be plausible to survive;
it must merely provide fair notice
of the issue involved. . . . [T]he
requisite notice is provided
where the affirmative defense in
question alerts the adversary to
56
Baroness Small Estates, 2011 WL 3438873
at *5–6 (defendant notified plaintiff of its
affirmative defenses, which, while boilerplate,
sufficed at the outset of the case).
57
See Wyshak v. City Nat’l Bank, 607 F.2d
824, 827 (9th Cir. 1979) (“[t]he key to
pleading an affirmative defense is to give the
plaintiff fair notice of the defense.”); see also
Davis v. Sun Oil Co., 148 F.3d 606, 612 (6th
Cir. 1998) (holding that sufficient notice of
defense was provided by simple statement that
“plaintiffs’ claims are barred by the doctrine
of res judicata”).
Consistent with this position, a
number of courts have held that fair
notice in pleading affirmative defenses
and the heightened pleading standards
articulated in Twombly and Iqbal do not
apply to affirmative defenses.59 These
courts have held that affirmative
defenses, when read in conjunction with
the Complaint, provide the plaintiff with
sufficient notice required by the rule.
“The affirmative defense must provide
enough information such that the plaintiff
is given ‘fair notice of what … the claim
is and the grounds upon which it rests.’”60
58
777 F. Supp.2d at 900-901.
See, e.g., Center for Diagnostic Imaging,
2011 WL 6300174 at *2 (citing cases).
60
See Puryear, 2011 WL 5553697 (quoting
Twombly, 550 U.S. at 555); see also
Kaufmann v. Prudential Ins. Co. of America,
No. 09-10239-RGS, 2009 WL 2449872, *1
(D. Mass. Aug. 6, 2009) (“[w]ith the
exception of fraud, the designation of a listed
defense is sufficient notice to a plaintiff of its
basic thrust.”); Barnhart v. American Home
Mortg. Servicing, Inc., No. 2:11-cv-569-FtM99SPC, 2012 WL 366930, *2 (M.D. Fla. Feb.
3, 2012) (stating that Rule 8 obligates a
defendant to provide “fair notice” rather than
“detailed factual allegations” in his affirmative
defenses); Ioselev, 2011 WL 5855342 at *2
(holding that the statement that a claim “is
59
Page 448
These principles were applied in U.S.
ex rel. Smith v. Boeing.61 In that case, the
plaintiff moved to strike the defendant’s
affirmative defenses pursuant to Federal
Rule 12(f) and Twombly, alleging that the
affirmative defenses “are asserted in
‘shot-gun’ style with no supporting
facts.”62 The court noted that “[a] defense
is considered insufficient if it cannot
succeed, as a matter of law, under any
circumstances.”63 In denying plaintiff’s
motion to strike, the court held that the
defendant’s affirmative defenses as plead
had not deprived the plaintiff of fair
notice, and that “a motion to strike an
affirmative defense as insufficient is
disfavored as a drastic remedy, and the
court ‘should decline to strike material
from a pleading unless that material has
no possible relation to the controversy
and may prejudice the opposing party.’”64
Requiring “factual plausibility” from
affirmative defenses, rather than “fair
notice,” also would seem to run counter
to certain appellate decisions that have
discussed issues of waiver and notice.
Circuit courts of appeal have made it
clear that the key to affirmative defenses
is fair notice, even going so far as to hold
that a party may raise a defense at trial
that was not even pleaded as an
affirmative defense, as long as the
plaintiff had notice of that defense at
barred by the statute of limitations” sufficient
to put the party on notice as to the defense).
61
No. 05-1073-WEB, 2009 U.S. Dist. LEXIS
71625 (D. Kan. Aug. 13, 2009).
62
Id. at *6.
63
Id. at *7 (citing Wilhelm v. TLC Law Care,
Inc., No. 07-2465-KHV, 2008 WL 474265, *2
(D. Kan 2008)).
64
Id. at *9 (quoting Wilhelm, 2008 WL
474265, * 2) (internal citations omitted).
some point during the litigation.65 In
Williams v. Ashland Engineering, the
First Circuit Court of Appeals examined
whether the defense of preemption had
been waived by a party’s failure to
include it as an affirmative defense in its
answer.66 The First Circuit held that
where defense counsel had written to
plaintiff’s counsel before the close of
discovery raising the preemption defense
and both parties had briefed the issue, “no
ambush occurred.”67 The court also
eschewed a hyper-technical analysis of
the pleading rules, and made “a practical,
commonsense assessment about whether
Rule 8(c)’s core purposeto act as a
safeguard against surprise and unfair
prejudice—has
been
vindicated.”68
Courts have continued to rely on this
exception to the harsh application of a
waiver rule even after Twombly and
Iqbal.69 If a defense given fair notice of
can be pursued at trial without it ever
having been formally plead, then it would
make little sense to strike affirmative
65
See, e.g., Hassan v. U.S. Postal Service, 842
F.2d 260, 263 (11th Cir. 1988); Hewitt v.
Mobile Restaurant Technology, Inc., 285 Fed.
Appx. 694, 696 (11th Cir. 2008); Brinkley v.
Harbour Recreation Club, 180 F.3d 598, 612
(4th Cir. 1999) (“[a]bsent unfair surprise or
prejudice to the plaintiff, a defendant’s
affirmative defense is not waived when it is
raised in a pre-trial dispositive motion.”);
Williams v. Ashland Engineering Co., Inc., 45
F.3d 588, 592 (1st Cir. 1995).
66
45 F.3d at 592-593.
67
Id. at 593.
68
Id.
69
See Massachusetts Asset Financing Corp. v.
MB Valuation Services, Inc., 248 F.R.D. 359
(D. Mass. 2008); see also Roush v. Stone, No.
2:08-cv-141, 2010 WL 3037003, *3 (S.D.
Ohio. Aug. 2, 2010).
defenses pleaded at the outset, prior to
meaningful discovery.
(4) Concerns of Twombly Not
Implicated
It also is important to educate the
court on the potential waste of judicial
resources that may result from the
application of Twombly’s heightened
pleading standard to affirmative defenses.
Some courts have expressed a concern
that the failure to apply the heightened
will result in delay and waste of the
court’s and the parties’ resources.
However, in raising the pleading standard
in Twombly and Iqbal, the Supreme Court
intended to prevent unfounded cases from
proceeding to costly discovery. The
Supreme Court specifically noted the time
and expense of allowing an action to
proceed to discovery, and stated that
when a plaintiff fails to plead sufficient
facts in a Complaint to show a plausible
entitlement to relief, “this basic
deficiency should … be exposed at the
point of minimum expenditure of time
and money by the parties and the court.”70
The District Court, in Leon v.
Jacobson
Transportation Company,
explained the rationale for not apply
heightened
pleading
standard
to
affirmative defenses as follows:
the
driving
force
behind
Twombly and Iqbal was to make
it more difficult to use a barebones complaint to open the
70
Twombly, 550 U.S. at 558 (quoting 5
WRIGHT AND MILLER, § 1216) (internal
quotation marks omitted).
Page 449
gates to expensive discovery and
force an extortionate settlement.
The point was to reduce nuisance
suits filed solely to obtain a
nuisance settlement. The Court,
though, has never once lost sleep
worrying about defendants filing
nuisance affirmative defenses
and considers the risk that
defendants would file nuisance
defenses sufficiently small so as
not to warrant extending
Twombly and Iqbal.71
The concerns of Twombly simply are
not implicated by affirmative defenses.72
Other courts have stated that
applying the heightened pleading
standard to affirmative defenses almost
certainly guarantees the waste that
Twombly and Iqbal sought to eradicate.
One District Court noted the following:
To permit Plaintiffs to prevail on
this motion would create two
unacceptable results: 1) Plaintiffs
would be encouraged to continue
to file Motions to Strike in
virtually every case where a
defendant had pleaded an
affirmative defense even when
the plaintiff could easily discern
the bases for the defense; 2)
Defendants would necessarily
delay filing answers until
71
No. 10 C 4939, 2010 WL 4810600, *1
(N.D. Ill. Nov. 19, 2010).
72
See id.; see also Lane v. Page, 272 F.R.D.
581, 596 (D. N.M. 2011) (“[D]eciding
whether a complaint survives a motion to
dismiss may determine whether discovery will
occur at all, whereas an affirmative defense at
most affects the scope of discovery.”).
Page 450
discovery had permitted the
factual pleading sought by
plaintiffs. In the alternative, those
defendants would continually
seek leave to amend and the
Court’s and parties’ resources
would be wasted. This course
would also necessitate additional
discovery and likely lengthen the
time until a matter could be
brought to trial. That result is
simply untenable.73
One recent District Court decision
considering a Rule 12(f) motion to strike
openly wondered “how much energy and
expense was invested in the filing of, and
opposition to, the instant Motion, which
energy and expense could better be put to
matters that would advance the
determination of the merits of the case.”74
Thus, for any court interested in
minimizing potential disputes and
conserving resources, it would be unwise
to apply the heightened pleading standard
to affirmative defenses.
Forcing a defendant to add
affirmative defenses in a piecemeal
fashion as discovery progresses would
require numerous motions to amend,
which plaintiffs likely would oppose. The
argument flows, then, that applying the
73
Schlottman v. Unit Drilling Co., LLC, No.
Civ-08-1275-C, 2009 WL 1764855, *2 (W.D.
Okla. June 18, 2009); see also Brossart, 2011
WL 5374446 at *2 (citing Wells Fargo & Co.
v. United States, 750 F. Supp.2d 1049, 1052
(D. Minn. 2010)) (applying the heightened
“would significantly change federal practice
and would likely increase the burden on the
federal courts”).
74
See Aros, 2011 WL 5238829 at *3 n.3.
heightened
pleading
standard
to
affirmative defenses almost certainly
guarantees discovery disputes and motion
practice, increasing the potential for
discovery and trial dates to be delayed,
with attendant increases in time, money,
and effort:
Applying Iqbal and Twombly to
affirmative defenses would force
defendants to plead fewer
affirmative defenses and then,
after taking discovery, to move
the Court for permission to
amend their answers to add
affirmative defenses. Plaintiffs
would often resist those motions
on the grounds that the proposed
affirmative defenses would be
futile. Thus, another round of
motion practice would be added
to many cases, increasing the
burdens on the federal courts,
and adding expense and delay for
the parties.75
As a practical matter, even when a
defendant lists a large number of
affirmative defenses, those that are
clearly not viable later on simply will not
be pursued.76 Parties are generally aware
of the viability of listed defenses as
discovery progresses, and there is little to
be gained by striking defenses even if
they are technically inappropriate.77 Not
75
Wells Fargo, 750 F. Supp.2d at 1052.
See id. at 1051-1052 (“In a typical case, it
quickly becomes apparent that most of the
affirmative defenses are not viable, and the
parties simply ignore them. No judicial
intervention is necessary.”).
77
See Cassetica Software, Inc. v. Computer
Sciences Corp., No. 11 C 2187, 2011 WL
76
to be overlooked is that additional
defenses may arise over the course of
litigation, and to “preclude defendants
from challenging those claims, or [to]
require an amended answer before
permitting a challenge would result in an
undue waste of the Court and the parties’
resources.”78
In any event, even where affirmative
defenses may be stricken, a defendant
will normally be granted to leave to
amend.79 The usual remedy simply
creates “increased motions practice with
little practical impact on the case’s
forward progression.”80
In the final analysis, applying a
heightened
pleading
standard
to
affirmative defenses simply encourages
the filing of motions to strike, more
motion practice, and delays.
When
discovery is delayed, cases often cannot
be timely resolved. The discovery process
inevitably acts to whittle down viable
4431031, *5 (N.D. Ill. Sept. 22, 2011) (noting
that striking affirmative defenses “is not worth
the time and expense it takes for the parties
and the Court to brief and rule on such a
motion”).
78
See Schlottman, 2009 WL 1764855 at *1
(noting that “failure to exhaust administrative
remedies” invariably arises as a defense in
employment discrimination cases).
79
See Banks v. Realty Mgmt. Serv., No.
1:10cv14 (JCC/TCB), 2010 WL 420037, *1
(E.D. Va. Jan. 29, 2010); see also Smithville
169, 2012 WL 13677 at *2 (finding that party
had failed to meet Twombly pleading standard
for twelve affirmative defenses, but ordering
filing of amended answer rather than striking
defenses).
80
See Falley v. Friends University, 787 F.
Supp.2d 1255, 1259 (D. Kan. 2011) (citing
Hayne v. Green Ford Sales, Inc., 263 F.R.D.
647, 652 (D. Kan. 2009)).
Page 451
claims and defenses. Motions for
summary judgment further act to
streamline issues before trial.
The
Federal Rules of Civil Procedure already
place limits on discovery, and the courts
are not without the means to control
discovery as it progresses. To encourage
what many courts view as an exercise in
futility would accomplish little other than
to cause delay and further expense,
directly counter to the Court’s concerns in
Twombly and Iqbal.
(5) It Cannot Be Said that
Plaintiffs and Defendants Are
Similarly Situated
Many courts have held that it is
inequitable to apply the heightened
pleading standard to defendants as they
are not similarly situated to plaintiffs at
the commencement of litigation. Simply
put, because a plaintiff has time to
investigate his or her case, limited only
by the statute of limitations, he or she
should be held to a higher pleading
standard. On the other hand, a defendant
has a limited number of days in which to
file an answer, and is in far less of a
position to conduct a reasonable
investigation in that time period.81 Indeed,
81
See Brossart, 2011 WL 5374446 at *2
(declining to apply Twombly to affirmative
defenses in part because defendant only had
21 days to file an answer and “is therefore in a
much different position from that of
plaintiff”); Wells Fargo, 750 F. Supp.2d at
1051 (refusing to extend Twombly to
affirmative defenses as parties are in “much
different positions . . . a plaintiff has months -- often years --- to investigate a claim before
pleading that claim in federal court.”);
Schlottman, 2009 WL 1764855 at *1 (“[I]t is
Page 452
as a practical matter, it is common for a
defendant’s first notice of an incident to
be actual service of a complaint.
That affirmative defenses should be
treated differently from allegations in a
Complaint also is logical given that
failure to raise an affirmative defense in
an answer can result in waiver. It is only
after discovery has taken place that a
defendant can properly flesh out the
factual basis of an affirmative defense.
Rather than forcing a defendant to plead
facts that may or may not be apparent at
the beginning of a case, the better and
more economical route would be to allow
the parties to develop support for their
defenses through discovery.82
(6) No Prejudice to Plaintiffs
Whether or not they would willingly
concede the point, because plaintiffs have
had time to investigate the facts and
circumstances of an action before filing,
they also may become aware of and
anticipate the factual bases for many
affirmative defenses. Indeed, the facts
establishing an affirmative defense can
sometimes be established on the face of
the plaintiff’s complaint. Therefore, the
sufficiency of affirmative defenses “must
be compared and considered in
connection with the complaint itself.”83 It
likely that an answer, with or without
affirmative defenses, will contain fewer
factual assertions than a complaint and still be
sufficient.).
82
See Hanzlik v. Birach, No. 1:09cv221, 2009
WL 2147845, at *4 (E.D. Va. July 14, 2009)
(noting its preference for the parties to develop
factual support for affirmative defenses
through discovery).
83
Schlottman, 2009 WL 1764855 at *1.
is difficult for the plaintiff to show
prejudice, when the allegations contained
in plaintiff’s complaint provide the
necessary notice for the basis of an
affirmative defense.
Likewise, while a defendant may not
have any facts within its knowledge to
support a particular defense between
service of the Complaint and filing of its
answer, plaintiffs are generally on notice
that certain defenses will be raised
without fail in certain actions. For
example, a plaintiff in a product liability
action usually can anticipate that issues of
comparative
negligence,
plaintiff’s
possible misuse of the product and timely
notice of the claim will be raised. It
would be hard for a plaintiff to show
prejudice even from the bare assertion of
an affirmative defense when plaintiff is
likely aware of its factual applicability.
One court noted the futile exercise of
requiring a party to plead facts in support
of its affirmative defenses by stating
“[t]he factual allegations contained in the
complaint and answer are necessarily
incorporated into a defendant’s recitation
of affirmative defenses,” rendering it
“absurd to require a defendant to re-plead
every fact relevant to an affirmative
defense.”84
Accordingly, some courts have
argued that plaintiffs simply are not
prejudiced by the boilerplate assertion of
affirmative defenses. A defendant is
required to plead affirmative defenses in
order “to avoid surprise and undue
84
See Baum v. Faith Techs., Inc., No.10-CV0144-CVE-TLW, 2010 WL 2365451, *3
(N.D. Okla. June 9, 2010); LSI, 2012 WL
359713 at 11 (“Re-pleading facts the opposing
party has already plead is not necessary to put
[a party] on notice of [] defenses.”).
prejudice by providing the plaintiff with
notice and the opportunity to demonstrate
why the affirmative defense should not
succeed.”85 Where a defendant has
pleaded an affirmative defense, he has put
the plaintiff on notice, and avoided
prejudice.86
In denying plaintiff’s motion to strike
affirmative defenses in Ailey v. Midland
Funding, LLC, the district court stated
that plaintiff had failed to show how
prejudice would result from leaving the
defenses in the pleadings, especially in
light of the fact that the defendant had the
burden of proof, and that “there can be no
harm in letting them remain in the
pleadings if, as the plaintiff contends,
they are inapplicable.”87 Therefore, a
reviewing court must exercise common
sense and practicality in any Rule 12(f)
motion and consider if there is any
prejudice to the moving party.88
Where the basis for an affirmative
defense is readily apparent, there is no
prejudice shown, and only further
discovery can determine whether an
affirmative defense is valid. All that
85
Robinson v. Johnson, 313 F.3d 128, 134135 (3rd Cir. 2002).
86
See Haley Paint Co., 279 F.R.D. at 337
(noting that plaintiffs “have articulated no
prejudice that would result from a denial of
their motion [to strike affirmative defenses]”).
87
No. 3:11-CV-77, 2011 WL 3049283, *4
(E.D. Tenn. July 25, 2011) (quoting
Conocophillips Co. v. Shafer, No. 3:05 CV
7131, 2005 WL 2280393, *2 (N.D. Ohio.
Sept. 19, 2005)).
88
See WRIGHT AND MILLER, FEDERAL
PRACTICE & PROCEDURE, § 1381 (3d. ed.
2009) (“even when technically appropriate and
well-founded, Rule 12(f) motions often are not
granted in the absence of a showing of
prejudice to the moving party”).
Page 453
should be required is that the affirmative
defense “provid[e] knowledge that the
issue exists, not precisely how the issue is
implicated under the facts of a given
case.”89 The fact that a plaintiff may
claim that they are unaware of which
affirmative defenses apply to which
claims is a matter to be settled in
discovery, rather than a reason to
prematurely strike the entire defense.90
The favored course should not be to strike
affirmative defenses prematurely, but
rather to allow a clearly plead affirmative
defense to stand, pending discovery.
VI. CONCLUSION
Fair notice has long been the test of
affirmative
defenses,
and
neither
Twombly nor Iqbal has expressly altered
that standard. Both textual and practical
realities of pleading lend support to the
position expressed herein, that the
heightened plausibility standard should
not be applied to affirmative defenses.
89
90
See Victaulic, 777 F. Supp.2d at 901.
Id.
Predictability in Punitive Damages: Considering
The Use of Punitive Damage Multipliers
By Sarah G. Cronan and
J. Brittany Cross
D
EBATE ABOUT the various issues
arising from the award of punitive
damages, particularly in the context of
mass tort and complex litigation, has
raged for decades in courtrooms,
classrooms, and the media. Faced with a
class action lawsuit, or a multitude of
lawsuits from hundreds to thousands of
plaintiffs seeking compensatory and
punitive damages, courts and counsel
struggle to handle the issues surrounding
punitive awards in the most economic and
efficient manner that meets constitutional
muster. For defendants in these lawsuits,
the potential of being subjected to
multiple punitive damage awards in
different amounts—and the economic
uncertainty that necessarily follows—
presents an especially vexing situation.
Defendants in mass tort, multidistrict, and class action litigation often
face lawsuits from numerous plaintiffs,
each of whom is entitled to assert a claim
for and potentially obtain an individual
award of punitive damages for a single,
allegedly egregious act.1 While these
multiple punitive awards may range from
de minimus to an award that exceeds
constitutional
boundaries,
in
the
aggregate, the cost to a defendant can be
1
For a full discussion on the ability of
multiple plaintiffs to recover multiple punitive
damage awards from a single company for one
allegedly wrongful act, see JOHN J. KIRCHER
AND CHRISTINE M. WISEMAN, PUNITIVE
DAMAGES: LAW AND PRACTICE § 5.26 (2nd ed.
2000).
Sarah Grider Cronan
is a Member at Stites
& Harbison, PLLC.
Drawing
on
her
twenty-plus
years’
experience,
Sarah
offers creative and
strategic
approaches
to
complex
problems confronting her clients.
Sarah’s practice focuses on the defense of
product liability, toxic tort, insurance
coverage, bad faith, environmental, and
commercial disputes in state and federal
courts nationwide. She is knowledgeable
about multi-district litigation and the
management of mass and class actions.
Brittany Cross is an
Associate in Stites &
Harbison's Louisville
office where she is a
member of the Torts
and
Insurance
practice
service
group. The authors also wish to
acknowledge the contributions of Holly
N. Lankster in relation to this article.
catastrophic, ultimately bankrupting a
defendant and leaving future plaintiffs
without recourse for their actual damages.
One solution to this problem may be
the punitive damage multiplier. Rather
than awarding a single punitive damage
award in each case, under the multiplier
approach, a jury sets a mathematical
relationship between punitive and
compensatory damages by establishing a
dollar-for-dollar ratio after hearing
evidence of the reprehensibility of the
defendant’s
conduct,
including
Predictability In Punitive Damages
consideration of the harm to nonparties.2
Over the past decade, the U.S. Supreme
Court has made numerous attempts to
provide more clarity to the calculation of
punitive damage awards. Significantly,
the Supreme Court suggested in Exxon
Shipping Co. v. Baker that a multiplier
approach may be the best way to decrease
the unpredictability of punitive damage
awards.3
Although the idea of a punitive
damage multiplier has not yet been
widely recognized, various courts and
commentators have considered the use of
a multiplier to increase the efficiency of
complex litigation. This article examines
the possibility of having juries use a
punitive damage multiplier to determine
punitive damages in class action or mass
tort litigation, paying particular attention
to the advantages and disadvantages of its
use. In addition, this article will also
analyze the context in which courts have
utilized a multiplier approach and the
common arguments presented by parties
in favor of and opposed to punitive
damage multipliers.
I.
Recent U.S. Supreme Court
Punitive Damage Jurisprudence
The most often cited rationale
underlying punitive damage awards is the
public function they serve: to punish and
deter
behavior
society
deems
objectionable, similar to the function of
In order to
criminal punishments.4
2
Phillip Morris USA v. Williams, 549 U.S.
346, 357 (2007).
3
Exxon Shipping Co. v. Baker, 554 U.S. 471
(2008).
4
See Jill Wieber Lens, Punishing for the
Injury: Tort Law’s Influence in Defining the
Page 455
achieve this goal, however, courts must
provide for some predictability in
punitive awards.5 Research on punitive
damage awards has revealed that a major
source of unpredictability in how juries
decide punitive damage awards “comes
from the fact that people do not know
how to ‘translate’ their moral judgments
into dollar amounts.”6 In response, the
U.S. Supreme Court has attempted to
provide guidance in calculating a punitive
award that both meets the requirements of
Due Process and provides the necessary
predictability for the award to fairly and
adequately fulfill its function.
In 2007, the Supreme Court
considered the Constitution’s Due
Process limitations with respect to
awarding punitive damages in Phillip
Morris U.S.A. v. Williams.7 In Phillip
Morris, the Court concluded that the Due
Process Clause forbids a state from
awarding punitive damages to punish a
defendant for injuries to nonparties
because such awards threaten punishment
for conduct against which the defendant
Constitutional Limitations on Punitive
Damage Awards, 39 HOFSTRA L. REV. 595,
613-622 (2011) (discussing the United States
Supreme Court’s emphasis on the state’s
interest in punitive damages and the
similarities between punitive damages and
criminal punishments); see also Exxon
Shipping Co., 554 U.S. at 492 (“[T]he
consensus today is that punitives are aimed
not at compensation but principally at
retribution and deterring harmful conduct.”).
5
Exxon Shipping Co., 554 U.S. at 499-500
(declaring that “the real problem, it seems, is
the stark unpredictability of punitive awards”).
6
CASS R. SUNSTEIN, ET AL., PUNITIVE
DAMAGES, HOW JURIES DECIDE, 29 (2002).
7
Philip Morris, 549 U.S. 346 (2007).
Page 456
has no opportunity to defend.8 While
punitive damages cannot be awarded as
punishment for injuries suffered by
nonparties, juries are allowed to consider
the harm to nonparties in determining a
defendant’s reprehensibility.9 Thus, the
Due Process Clause requires states to
provide juries with adequate legal
guidance, and to use procedural tools that
ensure juries are accounting for the harm
caused to nonparties to determine
reprehensibility only, and not to punish
the defendant for such harm to
nonparties.10 The Court offered little
guidance on how states should provide
these safeguards, providing only that
“[a]lthough the states have some
flexibility to determine what kind of
procedures they will implement, federal
constitutional law obligates them to
provide some form of protection in
appropriate cases.”11 With this decision,
the Supreme Court challenged courts to
develop procedures that ensure juries
engage in appropriate inquiries and reach
punitive damage awards that account for
the reprehensibility of defendants’
conduct without punishing them based on
harm to nonparties.
The Supreme Court spoke again on
the issue of punitive damages in June
2008 in Exxon Shipping Co. v. Baker.12
That case considered the validity of a $5
million punitive damage award against
Exxon arising out of 1989 Exxon Valdez
oil spill. The Court reduced the punitive
damages verdict by half, and limited the
ratio of compensatory to punitive
damages to 1:1 in maritime cases.13
Although the holding is limited to
maritime law, the opinion offers
interesting commentary on the problems
of punitive damage awards and some
solutions that have been formulated to
address those problems.
The Exxon Court noted that, despite
states’ efforts to limit damages awards by
setting statutory limits and maximum
ratios on punitive to compensatory
damages, punitive damage awards are
“higher and more frequent in the United
States than they are anywhere else.”14
The Court noted that the “real problem
[of punitive damages] is the stark
unpredictability of punitive awards.”15
“Courts of law are concerned with
fairness [and] consistency,” but the
evidence illustrates that factually similar
cases often result in inconsistent punitive
awards.16 For example, in two cases with
“strikingly similar facts,” the juries
awarded
comparable
compensatory
damages, but one jury awarded $4 million
in punitive damages and the other did not
award any punitive damages.17 In the
Exxon Court’s discussion of how to
eliminate this unpredictability, the Court
suggested
“pegging
punitive
to
compensatory damages using a ratio or
maximum multiple” as an alternative to
hard dollar caps, which do not account
well for inflation.18 This suggestion
focuses on the injury of the plaintiffs by
tying the amount of punishment to the
13
Id. at 515.
Id. at 496.
15
Id. at 499.
16
Id.
17
BMW of N. Am. v. Gore, 517 U.S. 559, 565
n. 8 (1996).
18
Exxon Shipping, 554 U.S. at 506.
14
8
Id at 353.
Id. at 357.
10
Id. at 355.
11
Id. at 357 (emphasis in original).
12
Exxon Shipping Co., 554 U.S. 471 (2008).
9
level of injury. At least one commentator
has argued that the Court’s suggestion
greatly diminishes the importance of the
previously
dominant
factor
in
determining the proper amount of a
punitive award – the reprehensibility of
the defendant’s actions.19
When faced with the possibility of
multiple lawsuits in a legal system that
will also allow a multitude of varying
punitive damage awards determined by
different juries, the potential for
unpredictability is particularly alarming.
The Supreme Court’s suggestion of a
multiplier as a potential solution provides
an interesting method of reigning in
unpredictable jury awards.
II. The Pros and Cons of Punitive
Damage Multipliers
Much has been written on the
dangers of punitive damage awards,
including Due Process violations,
discouraging individuals and companies
from engaging in socially beneficial
activities, and depriving later plaintiffs of
the funds to cover their actual damages.
Punitive
damage
multipliers
can
positively affect each of these concerns
by providing increased predictability and
equality in the distribution of punitive
awards among plaintiffs. The use of a
punitive damage multiplier also increases
administrative convenience and promotes
judicial efficiency by providing “a
method by which defendants will not be
subject to repeated individual trials where
punitive [damages] are litigated. In one
unitary proceeding as to the entire class
tried their punitive damages liability can
19
See Lens, supra note 4, at 633-634.
Page 457
be resolved for all.”20 A multiplier may
be used at the outset to determine a
consistent punitive damage award for an
entire group of plaintiffs versus running
the risk of multiple, and potentially
inconsistent awards, for the same
conduct.
The use of a multiplier, like punitive
damages generally, creates the potential
to jeopardize the claims of future
plaintiffs.21 A high multiplier, when
applied to high compensatory awards for
numerous plaintiffs, may lead to payouts
that leave a defendant bankrupt.22 Thus,
the multiplier may not be prudent if the
possibility of excessive punitive damage
awards
threaten
the
defendant’s
solvency.23 Using a multiplier at the
outset may also raise the risk of
subsequent plaintiffs inflating their
compensatory damages in hopes of
increasing their eventual payout should
punitive damages apply in their cases. If
compensatory damages are predicted to
be low and remain low, a multiplier may
be used to keep the ultimate payouts to
plaintiffs within that lower range. This
could eliminate the risk of earlier
plaintiffs getting a greater piece of the
punitive pie despite having de minimus
compensatory damages.
Another concern about the use of a
punitive damage multiplier is that the
multiplier will decrease the likelihood
20
ALBA CONTE AND HERBERT B. NEWBERG, 5
NEWBERG ON CLASS ACTIONS, MASS TORTS
§17:33 (4th ed.) (West 2008); see also David
G. Owen, A Punitive Damages Overview:
Functions, Problems and Reform, 39 VILL. L.
REV. 363, 395 (1994).
21
Owen, supra note 20, at 395.
22
Id.
23
Id.
Page 458
that compensatory and punitive damages
bear a reasonable relationship to one
another as required by the U.S. Supreme
Court in State Farm v. Campbell.24 One
commentator has suggested that “[h]aving
a jury set a single, abstract punitive
damage multiplier deprives the jury of the
opportunity to consider the facts and
circumstances
of
each
individual
plaintiff’s case and to determine what
amount of punitive damages, if any is
appropriate for each plaintiff.”25
A small multiplier is less likely to be
attacked on the grounds of excessiveness
or that it lacks a reasonable relationship to
actual damages awarded,26 and this
concern may also be addressed through a
creative trial plan. If all claims are
consolidated for trial, and the punitive
damage multiplier is based on a
representative group of plaintiffs’
evidence of compensatory damages, a
multiplier may be assessed for its
reasonableness
based
on
the
representative group’s damages following
24
State Farm v. Campbell, 538 U.S. 408, 426
(2003).
25
Sheila N. Birnbaum, Punitive Damages and
Due Process: How Much is Too Much,
Benjamin N. Cardozo Lecture, THE RECORD,
61 No. 2 165, 180 (2006). See also Laura J.
Hines, Engle v. R.J. Reynolds Tobacco Co.:
Lessons in State Class Actions, Punitive
Damages,
and
Jury
Decision-Making
Obstacles to Determining Punitive Damages
in Class Actions, 36 WAKE FOREST L. REV.
889, 940 (in the context of a mass tort case,
where varying facts and state laws may be
involved, the use of a punitive damage
multiplier may not satisfy the reasonable
relationship test, as a multiplier may not be
able to measure the true scope of harm to
absent class members).
26
Hines, supra note 25, at 939-940.
that initial trial. Because the multiplier is
tied to evidence supporting compensatory
damages of a representative group of
plaintiffs, this may address concerns
about the reasonable relationship between
the punitive and compensatory awards.
Though there is very little
scholarship on the relative merits of a
multiplier approach in comparison to a
lump sum award, one scholar has argued
that the multiplier approach provides a
method of assessing punitive damages
that reflects both the reprehensibility of a
defendant’s conduct and the varying
degrees of harm that individual plaintiffs
suffer.27 By applying a multiplier to
every dollar of compensatory damages,
“individuals awarded high amounts of
compensatory damages will receive
proportionately higher awards of punitive
damages.”28 The author qualifies this
benefit by stating that proportionality can
also be achieved utilizing a lump sum
method that distributes punitive damages
in proportion to the plaintiffs’ harm,
rather than on a per capita basis.29 Also,
at least one court has rejected the use of a
multiplier despite its benefit of
proportionality,
stating
that
such
treatment does not “satisfy the state’s
interest in making sure that punitive
damage awards ‘are appropriate in
specific relation to differing amounts of –
and reasons for – actual damages.’”30
27
Id. at 925.
Id.; see also Arthur R. Miller and Price
Ainsworth, Resolving the Asbestos PersonalInjury Litigation Crisis, 10 REV. LITIG. 419,
443-444 (1991) (advocating for a multiplier
approach).
29
Id.
30
Id. at 931 (citing Phillip Morris, Inc. v.
Angeletti, 752 A.2d 200, 249 (Md. 2000)).
28
Commentators have also debated the
concept of general fairness with respect to
the use of a multiplier. Looking at an
award from the standpoint of the ratio, the
multiplier may be seen as promoting a
fair and balanced approach to damages
distribution by assuring that plaintiffs
receive equal treatment in relation to one
another, and in cases with multiple
defendants, to each defendant.31 Yet from
the perspective of the actual punitive
awards assessed, the method may still be
unfair because it provides different
awards to different plaintiffs, even though
the defendant’s conduct was the same
with respect to them all.32 Under this
latter view, the multiplier is thought to
operate as an award or windfall to certain
plaintiffs, rather than as punishment to
defendants.33
The use of a multiplier in the context
of “reverse bifurcation” trials, where
punitive damages are determined prior to
any finding of liability, has also been
subject
to
substantial
criticism.34
Defendants may be prejudiced by this
approach, as they suffer loss of arguments
or defenses with respect to underlying
elements and become subject to damage
awards by juries who are predisposed to
the idea of liability.35 In addition, by
considering punitive damages prior to
hearing issues of causation and damages,
the jury does not know how many victims
31
Owen, supra note 20, at 395.
Hines, supra note 25, at 924.
33
Id.
34
Victor E. Schwartz, Putting the Cart Before
The Horse: The Prejudicial Practice of A
“Reverse Bifurcation” Approach to Punitive
Damages, 2 CHARLESTON L. REV 375, 383387 (2008).
35
Id. at 385.
32
Page 459
potentially exist, the severity of their
injuries, or how their injuries occurred.36
III. Punitive Damage Multipliers In
Practice
Courts in the Fifth Circuit, West
Virginia, and Maryland have considered
the utility of using a multiplier approach
in the class action or mass tort context.
These cases provide insight into how a
multiplier works in practice, the variety of
ways that courts have evaluated the
multiplier approach, and the arguments
counsel will likely face in advocating for,
or challenging, its use.
A. The Fifth Circuit
Jenkins v. Raymark Industries was a
class-action suit involving asbestos
related claims.37 Despite the credit it
receives for pioneering the idea of a
multiplier in the Fifth Circuit, the court in
Jenkins did not apply or consider the
multiplier approach in any detail. Rather,
the court indirectly endorsed the use of a
multiplier, stating only that, as an
alternative to awarding aggregate
damages, “the jury could be allowed to
award an amount of money that each
class member should receive for each
dollar of actual damages awarded.”38
Purportedly taking its lead from Jenkins,
the trial court in Cimino v. Raymark
Industries fashioned a three-phase trial
plan, which included the use of a
In phase I, “the jury
multiplier.39
36
Id. at 400-401.
702 F.2d 468, 469 (5th Cir. 1986).
38
Id. at 475.
39
Cimino v. Raymark, 751 F. Supp. 649, 657658 (E.D. Tex. 1990).
37
Page 460
assessed a punitive damage multiplier ‘for
each $1.00 of actual damages,’” in
varying amounts for the different
defendants involved.40 Ultimately, the
judgments in the trial court were
The latter proceedings,
vacated.41
however, did not attack the use of a
multiplier. Rather, the appeals court took
issue with the lower court’s use of
statistical methods to extrapolate awards
for class members based on awards
determined for sample plaintiffs.42
The Fifth Circuit considered the use
of a punitive damage multiplier again in
Watson v. Shell Oil Co.43 Although
Watson was later reversed en banc,44 the
case provides further insight into the use
of a punitive damage multiplier in a mass
tort action. Watson arose out of an
explosion at a manufacturing facility that
caused extensive damage throughout the
plant and surrounding communities.45
The court posited that where the
defendant’s culpability is determined in
connection with one single event in a
mass-disaster context, there is likely to be
less variance between punitive damage
awards with respect to different plaintiffs
and, therefore, a multiplier approach to
determine punitive damages for the entire
class may be appropriate.46 The court
went on to note that to the extent that
plaintiffs’ claims for punitive damages
40
Id.
See generally Cimino v. Raymark, 151 F.3d
297, 335 (5th Cir. 1998).
42
Id.
43
Watson v. Shell Oil. Co., 979 F. 2d 1014,
1016-17 (5th Cir. 1992), reversed en banc, 53
F.3d 663 (5th Cir. 1994).
44
Id.
45
Id. at 1016-1017.
46
Id. at 1019.
41
differ, a phased trial plan that utilizes a
multiplier can be refined by setting
different ratios or multipliers for different
types of claims, rather than casting aside
A refined
the method altogether.47
approach using different multipliers for
different types of claims presumably
would allow the defendants an
opportunity to present defenses tailored to
the specific categories of claims without
requiring individual determination of
punitive damages with respect to every
plaintiff. The refined approach would be
more fair to the defendants, less likely to
deny defendants an opportunity to present
a defense, and would still increase
judicial efficiency.
B. West Virginia
The Supreme Court of Appeals of
West Virginia discussed the use of a
punitive damage multiplier in the context
of a mass tobacco litigation involving
consolidation of 1,100 individual claims
by smokers against tobacco companies.48
The court considered whether a bifurcated
trial, where liability and a punitive
damage multiplier are determined in
phase I, prior to a finding of
compensatory damages for each plaintiff
in phase II, violates the Due Process
Clause as interpreted by the U.S.
Supreme Court in State Farm v.
Campbell.49
The defendant tobacco companies
objected to the bifurcated trial plan, and
the determination of a punitive damage
47
Id. 1019 n.19.
In re Tobacco Litigation, 624 S.E.2d 738
(W.Va. 2005).
49
538 U.S. 408 (2003).
48
multiplier
prior
to
individual
compensatory damages, on two grounds:
(1) the plan failed to ensure that punitive
damages would be proportionate to the
injury caused to individual plaintiffs; and
(2) the plan failed to ensure a proper ratio
between punitive and compensatory
damages.50 The trial court rejected these
arguments
stating
that
individual
compensatory damages would be
determined in phase II, based on
individual evidence, and then the
multiplier from phase I would be applied
to determine the punitive damage
award.51 Furthermore, the court would
have the ability to review individual
punitive and compensatory damages once
they were determined to ensure that the
awards do not violate State Farm and
other relevant case law.52 The appellate
court in In re Tobacco Litigation,
however, did not rule on the use of a
multiplier, and made no judgment as to
whether the proposed trial plan was the
Rather, the
best way to proceed.53
appellate court narrowly held that the
Supreme Court’s decision in State Farm
“does not preclude the bifurcation of a
trial into two phases wherein certain
elements of liability and punitive damage
multiplier are determined in the first
phase and compensatory damages and
50
In re Tobacco Litigation, 624 S.E.2d at 742743.
51
Id. at 742; see also State of West Virginia
Ex. Rel. Chemtall Inc, et al. v. Madden, 655
S.E.2d 161, 166-167 (W.V. Sup. Ct. of App.
2007) (affirming a two-phase trial in which
punitive damages multipliers were considered
prior to the determination of individual
causation and compensatory damages).
52
Id. at 743.
53
Id.
Page 461
punitive damages, based on a punitive
damage multiplier, are determined for
each individual plaintiff in the second
phase.”54
The concurring opinion in In re
Tobacco
Litigation
highlights
an
additional argument asserted by the
defendants and provides insight into the
benefits of a punitive damage multiplier
approach. Defendants argued that they
had a due process right to try the issue of
punitive damages one case at a time in
order to allow the jury to assess the
defendant’s culpability with respect to
The
each individual plaintiff.55
concurring judge pointed out that if the
majority had accepted such an argument,
it would effectively mean that the
defendant would have a right to
thousands of trials, which would result in
administrative gridlock in the court
system, and would deny individual
By
plaintiffs their day in court.56
contrast, having the jury determine a
punitive
damage
multiplier
that
“establishes a numerical relationship
between the potential harm of the
defendant’s conduct and the plaintiff’s
compensatory damages” allows plaintiffs
their day in court, and permits the
defendants to contest a claim for punitive
damages in one proceeding.57 If such a
process were utilized, plaintiffs and
defendants would have a “just, speedy,
and inexpensive determination of every
action.”58
A federal court in West Virginia also
has addressed the issue of punitive
54
Id.
Id. at 748 (Starcher, J., concurring).
56
Id. at 749.
57
Id.
58
Id.
55
Page 462
damage multipliers, although only
tangentially. In Loudermilk Services, Inc.
v. Marathon Petroleum Company LLC,59
the Southern District of West Virginia
reviewed the proposed trial plans of a
comprehensive claim with 654 plaintiffs.
In discussing the use of a punitive
damage multiplier, the court stated the
following:
Using the multiplier, a jury could
make a determination of
reprehensibility on a class-wide
basis and decide on a number
which reflects this degree of
reprehensibility. That number
would then be applied later to
individual plaintiffs, once an
individual class member’s claim
is adjudicated and he is found to
have suffered harm from the
conduct
upon
which
the
multiplier is based.60
The court held that because the
multiplier was a direct ratio between
punitive and compensatory damages, it
“ensure[d] a consistent and logic[al]
relationship between punitive damages
and actual harm.”61 While the court
accepted and embraced the punitive
damage multiplier, it did prohibit its use
to punish a defendant directly on harms
that it allegedly inflicted on nonparties.62
59
No: 3-04-0966, 2008 U.S. Dist. LEXIS
67866 (S.D.W.Va. Sept. 5, 2008).
60
Id. at *13.
61
Id. at *14.
62
Id. at *14 (citing Philip Morris, 549 U.S.
346 (2007)).
C. Maryland
Maryland’s high court considered the
viability of using a punitive damage
multiplier in class action litigation that
involved claims against several tobacco
manufacturers in Phillip Morris, Inc. v.
successfully
Angeletti.63 Defendants
petitioned the Maryland Court of Appeals
to vacate the circuit court’s certification
of two classes, asserting that the circuit
court grossly abused its discretion in
certifying classes that did not meet the
requirements for a class action suit.64 The
defendants also argued that the circuit
court violated their state and federal
constitutional
rights
by
splitting
interrelated issues of liability and
causation, and impermissibly separating
punitive
damages
from
liability
Class
action
determinations.65
representatives rebutted
with
three
arguments: (1) bifurcation of common
liability from damages or causation was
not constitutionally infirm; (2) the circuit
court properly concluded that a punitive
damage multiplier could be determined as
a common issue separate from findings of
liability and actual damages; and (3) the
circuit court was correct in determining
that a claim for medical monitoring was
appropriate for class certification. 66
The court of appeals provided a
summary of its previous opinions
highlighting
Maryland’s
“essential
features underlying an award of punitive
damages.”67 The court of appeals began
63
Philip Morris Inc., v. Angeletti, 752 A.2d
200 (Md. 2000).
64
Id. at 208.
65
Id.
66
Id. at 209.
67
Id. at 246.
with the principle that “a jury must find
compensatory damages as a foundation
before it may award punitive damages.”68
Next, the court noted that even where
punitive damages may be appropriate, the
decision to award such damages is within
the discretion of the trier of fact.69
Finally, the court concluded its overview
by stating that it is well settled under
Maryland law that punitive damages
cannot be decided in a vacuum, and
compensatory or actual damages must be
found first in order to support an award
for punitive damages.70
Recognizing
that
punitive
damages are meant to be a measure of the
defendant’s culpability, the court
nevertheless rejected
the
class
representatives’ argument that punitive
damages could be determined without
regard to liability to any particular class
member.71 The court then reiterated that
there is “clearly established” law in
Maryland prohibiting a punitive damage
award without regard to an actual
Ultimately,
compensatory award.72
although the court acknowledged the use
of punitive damage multipliers in other
jurisdictions, it concluded that the use of
a multiplier in this context would not
enable the jury to assess appropriate
punitive damages relative to actual
damages and would be contrary to
Maryland law.73
68
Id.
Id. at 246-247.
70
Id. at 247.
71
Id.
72
Id.
73
Id. at 246-249.
69
Page 463
IV. Conclusion
Using a multiplier in determining
punitive damage awards provides a
method for courts to avoid overdeterrence through multiple punitive
awards, increase the predictability and
economic efficiency of punitive awards,
and improve the overall efficiency in
mass tort and complex litigation cases.
Despite these benefits, opponents argue
that the multiplier approach deprives
defendants of an opportunity to present
all of their defenses, as it does not allow
for individual determinations of punitive
damages for individual plaintiffs. Many
of the arguments against the use of a
punitive damage multiplier arise in cases
in which plaintiffs are seeking a
determination as to punitive damages for
an entire class before trying issues of
causation and compensatory damages.
This negative view of multipliers is often
linked to bifurcated trial plans that are
objectionable on other grounds.
Courts and scholars that have
addressed
the
advantages
and
disadvantages of the punitive damage
multiplier have done so primarily within
the class action context. The question yet
to be addressed is whether a punitive
damage multiplier has a place in the
world of complex litigation beyond class
actions. Where mass tort actions are not
certified as a class, they are often
consolidated for purposes of discovery
and trial. A punitive damage multiplier
may be useful in this context, particularly
where multiple parties’ actions are
consolidated for trial and representative
plaintiffs’ claims are presented to a jury
to allow for a punitive damage
determination. Regardless, the punitive
Page 464
damage multiplier is a solution that has
yet to be fully explored and may hold
future potential in helping courts and
counsel develop an economical and
efficient resolution of unpredictable
punitive damage awards that withstands
constitutional scrutiny.
Raising The Roof: What’s Hot In Construction
Defect Litigation
By Kathleen J. Maus,
Julius F. “Rick” Parker III
and Michael Hamilton
T
HE PERIOD spanning from the mid1990's to the crash of the real estate
market in 2007 saw an unprecedented
explosion of new construction throughout
the United States, particularly in the Sun
Belt. As with any boom, the frenzy of
ever-increasing real estate prices tempted
many of the players involved to cut
corners and increase profits. Thus, the
term “value engineering” took on a new
meaning in the construction field. The
basic tenet of “value engineering” is to
increase the ratio of function to cost. This
can be done either by increasing
functionality or decreasing cost. The fast
buck artists chose the latter with obvious
consequences.
Unfortunately for the purchasers of
“value engineered” projects, the reduction
of cost generally resulted in a decrease in
function.
However, the decreased
function generally did not make itself
evident until years after the developer had
packed up and left town. Just like
Sylvester McMonkey McBean in Dr.
Seuss’s The Sneetches, “... when every
last cent of their money was spent, [t]he
fix-it-up Chappie packed up. And he
went.”1 Years after construction was
completed, owners of properties, riddled
with defects, sued the developer, builder
and /or subcontractor(s) to recover the
1
THEODOR S. GEISEL, THE SNEETCHES,
(Random House, 1961).
Kathleen Maus is a
partner
with
Butler
Pappas Weihmuller Katz
Craig LLP, having joined
the firm in 1991. Julius
F. “Rick” Parker III is a
senior associate with the
firm, having joined the firm in 2004. Ms.
Maus and Mr. Parker
both practice in the
firm’s
Tallahassee
office and focus their
practices on first and
third
party
extracontractual
litigation
defense,
casualty litigation and first and thirdparty coverage matters. Ms. Maus serves
on IADC’s Board of Directors. She also
serves on DRI’s Insurance Law
Committee Steering Committee and is a
past member of DRI’s Board of Directors.
Michael
Hamilton
chairs Nelson, Levine,
de Luca & Hamilton's
National
Insurance
Coverage Group. He
concentrates
his
practice in the areas of
insurance
coverage
disputes, bad faith defense and
commercial litigation. Mr. Hamilton is a
member of DRI, the IADC, the
Pennsylvania Bar Association, the New
Jersey Bar Association, Insurance Law
Section, the American Bar Association,
Tort and Insurance Practice Sections, the
Pennsylvania Defense Institute, and the
Philadelphia Association of Defense
Counsel.
Page 466
cost
of
repairing
the
defective
construction.
Ever eager to share the misery, the
sued entities then turned to their general
liability insurers, claiming the defective
construction was an “accident” and
therefore covered under their general
liability policies. Not since asbestos
litigation has any one coverage issue
spawned so much litigation. As of the
date of this article, only seven states have
escaped addressing whether defective
construction meets the definition of an
“accident” and therefore constitutes a
covered “occurrence” within the meaning
of the I.S.O. general liability policy in use
since 1986.2 This article explores the
various approaches courts have taken on
the issue. It then presents other issues
that are beginning to be addressed by
courts who have found defective
construction to be an “occurrence.” In
addition, state legislatures in at least four
states have addressed the issue, spurred
by decisions purportedly unfavorable to
insureds in those jurisdictions.
I.
Is Defective Construction an
“Occurrence?”
The broad form general liability
policy widely in use since the 1960's
grants the following coverage:
We will pay those sums that the
insured becomes legally obligated to
pay as damages because of “bodily
injury” or “property damage” to
which this insurance applies. ...
b. This insurance applies to “bodily
injury” and “property damage”
only if:
(1) The “bodily injury” or
“property damage” is caused
by an “occurrence” that
takes place in the “coverage
territory”; and
(2) The “bodily injury” or
“property damage” occurs
during the policy period.3
From this language, it is clear that in
order to trigger the coverage agreement in
the first instance, there must be “property
damage ... caused by an ‘occurrence.’”
What then is an “occurrence?” The I.S.O.
policy defines an “occurrence” as “an
accident, including continuous or
repeated exposure to substantially the
same general harmful conditions.”4 Enter
the fortuity principle—that which is
accidental is necessarily fortuitous. The
policy is obviously intended only to cover
fortuitous events—those which are
foreseeable, but not within the insured’s
control. Arguably, if the resultant defect
was “accidental” then the loss was an
“occurrence.”
Other courts have reached the same
result looking instead to policy exclusions
to justify their decisions. Comprehensive
General Liability (“CGL”) policies
contain a number of exclusions, which
might apply to bar coverage even where
the court finds the defective construction
3
2
See Appendix I.
Insurance Services Office, Form CG 00 01
12 04, available at http://www.ramsgate.
com/forms/CG0001.pdf.
4
See United States Fire Ins. Co. v J.S.U.B.,
Inc., 979 So.2d 871 (Fla. 2007).
Raising the Roof
to be an occurrence. The I.S.O. broad
form general liability policy currently in
use contains three exclusions, generally
referred to collectively as the “business
risk exclusions,” as follows:
This insurance does not apply to:
j.
Damage to Property
“Property damage” to:
(5) That particular part of real
property on which you or any
contractors or subcontractors
working directly or indirectly on
your behalf are performing
operations, if the “property
damage” arises out of those
operations; or
(6) That particular part of any
property that must be restored,
repaired or replaced because
“your work” was incorrectly
performed on it.
Paragraph (6) of this exclusion does
not apply to “property damage”
included in the “products-completed
operations hazard”.
Page 467
This exclusion does not apply if the
damaged work or the work out of
which the damage arises was
performed on your behalf by a
subcontractor.
The policy then defines the
“products-completed operations hazard”
as:
all “bodily injury” and “property
damage” occurring away from
premises you own or rent and arising
out of “your product” or “your work”
except:
(1) Products that are still in your
physical possession; or
(2) Work that has not yet been
completed or abandoned. However,
“your work” will be deemed
completed at the earliest of the
following times:
(a) When all of the work called for
in your contract has been completed.
(b) When all of the work to be done
at the job site has been completed if
your contract calls for work at more
than one job site.
k. Damage to Your Product
“Property damage” to “your product”
arising out of it or any part of it.
l.
Damage to Your Work
“Property damage” to “your work”
arising out of it or any part of it and
included in the “products-completed
operations hazard”.
(c) When that part of the work done
at a job site has been put to its
intended use by any person or
organization other than another
contractor or subcontractor working
on the same project.
Work that may need service,
maintenance, correction, repair or
Page 468
replacement, but which is otherwise
complete, will be treated as completed.5
A state-by-state review of the
decisions on this subject reveals a broad
spectrum of interpretations spanning the
gap from those which find that defective
construction is never an “occurrence”
(therefore, regardless of the extent of
damage beyond the insured’s own work
product, the claim is not covered), to
those which find not only that defective
construction is an “occurrence” but that
the business risk exclusions are
ambiguous and do not bar coverage for
repair and replacement of the insured’s
own work product. Those positions define
the extremes, while the overwhelming
majority of decisions within the two
extremes may be harmonized into a
distinct set of broad principles.
The true majority rule as to
construction defects is that claims of
defective construction, standing alone, do
not meet the element of fortuity necessary
to constitute an accident and are therefore
not covered. However, where the work in
question was performed by the insured’s
subcontractor, the damage is either
considered
“accidental
from
the
standpoint of the insured” or fits within
the subcontractor exception to the “your
work” exclusions. Similarly, to the extent
the insured’s defective work results in
damage to other property not the subject
of the insured’s work, that damage is also
generally covered. Leading decisions of
each state are summarized in Appendix I
following this article.
A. Defective Construction is
Never an “Occurrence”
The Supreme Court of New Jersey
first recognized the requirement of a
fortuity analysis as a bedrock principle of
insurance law in 1979 in what was and
remains a landmark case, Weedo v. StoneE-Brick.6 Weedo involved a contractor
who installed stucco on the side of its
customer’s house. The stucco later
cracked and peeled. The homeowners
sued the contractor, Stone-E-Brick, for
the cost of removing and replacing the
defective stucco. The New Jersey
Supreme Court was thus faced with the
question
of
whether
defective
construction, standing alone, constitutes
an “occurrence.” The court held that it
did not.
The Weedo court distinguished
between the kinds of risks faced by a
typical contractor, namely: 1) the risk that
his work will not meet the customer’s
expectation, thereby exposing him to
liability in contract; and 2) the risk that
some mistake on his part may result in
bodily injury or property damage to a
third party. In this regard, the court
noted:
While it may be true that the
same neglectful craftsmanship
can be the cause of both a
business expense of repair and a
loss represented by damage to
persons and property, the two
consequences are vastly different
in relation to sharing the cost of
5
12 04.
6
405 A.2d 788 (N.J. 1979).
Raising the Roof
such risks as a matter
insurance underwriting.7
Page 469
of
giving rise to insurable liability.
When a craftsman applies stucco
to an exterior wall of a home in a
faulty manner and discoloration,
peeling and chipping result, the
poorly-performed work will
perforce have to be replaced or
repaired by the tradesman or by a
surety. On the other hand, should
the stucco peel and fall from the
wall, and thereby cause injury to
the homeowner or his neighbor
standing below or to a passing
automobile, an occurrence of
harm arises which is the proper
subject of risk-sharing as
provided by the type of policy
before us in this case.8
Quoting Dean Roger Henderson,
who espoused the principle in the
Nebraska Law Review, the court noted:
The risk intended to be insured is
the possibility that the goods,
products or work of the insured,
once relinquished or completed,
will cause bodily injury or
damage to property other than to
the product or completed work
itself, and for which the insured
may be found liable. The insured,
as a source of goods or services,
may be liable as a matter of
contract law to make good on
products or work which is
defective or otherwise unsuitable
because it is lacking in some
capacity. This may even extend
to an obligation to completely
replace or rebuild the deficient
product or work. This liability,
however, is not what the
coverages in question are
designed to protect against. The
coverage is for tort liability for
physical damages to others and
not for contractual liability of the
insured for economic loss
because the product or completed
work is not that for which the
damaged person bargained.
An
illustration
of
this
fundamental point may serve to
mark the boundaries between
“business risks” and occurrences
7
Weedo, 405 A.2d at 791.
Another prime example of the
extreme on the “occurrence” spectrum is
the recent decision of the Kentucky
Supreme Court in Cincinnati Insurance v.
In
Motorists
Mutual
Insurance.9
Motorists Mutual, the Court considered a
claim against the insured general
contractor brought by a couple which
purchased a home built by the insured
(the decision is silent regarding whether
the contractor used subcontractors to
perform any of the work). Relying on the
fortuity principle, the Court held simply:
Inherent in the plain meaning of
“accident” is the doctrine of
fortuity. Indeed, “[t]he fortuity
principle is central to the notion
of what constitutes insurance....”
8
Roger Henderson, Insurance Protection for
Products Liability and Completed Operations,
What Every Lawyer Should Know, 50 NEB. L.
REV. 415, 441 (1971).
9
306 S.W.3d 69 (Ky. 2010).
Page 470
Although we have used the term
fortuity in the past, we have not
fully explored its breadth and
scope. In short, fortuity consists
of two central aspects: intent,
which we have discussed in
earlier opinions, and control,
which we have not previously
discussed.10
Obviously, intent is relevant in
determining fortuity. That which is
intended is, by definition, not accidental.
The applicability of the second concept,
control, is less obvious but equally
compelling. A general liability policy is
not intended to provide coverage for
those risks which are within the insured’s
control, such as the selection of
competent subcontractors and the
furnishing of quality building materials
properly installed to provide protection
from the elements. Since the quality of
construction is always within the control
of the contractor, whether the work is
performed by a subcontractor or the
contractor’s own employees, any loss
which results from poor workmanship
cannot possibly be considered fortuitous.
No fortuity, no accident, no occurrence,
no coverage.
In Hawkeye-Security Insurance v.
Davis, the Missouri Court of Appeals
followed this rationale in concluding that
a claim against a builder for building a
defective home was not covered even
though much of the work was performed
by subcontractors.11 The court simply
held that the construction was entirely
10
Motorists Mutual, 306 S.W.3d at 74
(internal footnote omitted).
11
See Hawkeye-Security Ins. Co. v. Davis, 6
S.W.3d 419 (Mo. Ct. App. 1999).
within the insured’s control and therefore
any damage resulting therefrom could not
be fortuitous. The Court also chose to
rest its decision on the distinction
between tort and contract theories:
These uncontroverted facts
establish that Appellants’
losses stem solely from
Davis’s breach of his
contractual
obligations,
breach of his express
warranties, or breach of
implied
warranties
in
connection
with
this
construction.
However,
“breach
of
a
defined
contractual duty cannot fall
within the term ‘accident.’”
[American Stats Ins. Co. v.]
Mathis, 974 S.W.2d 647, 650
[(Mo. Ct. App. 1998)]. As
the Mathis court explained:
“Performance
of
[the]
contract according to the
terms specified therein was
within
[the
insured
contractor’s] control and
management and its failure to
perform cannot be described
as
an
undesigned
or
unexpected event.”12
B. Defective Construction,
Standing Alone, is not an
“Occurrence”
The next position on the spectrum is
well illustrated by the decision of the
Nebraska Supreme Court in Auto-Owners
Insurance Company v. Home Pride
12
Id.
Raising the Roof
Page 471
Companies.13 In Home Pride, the court
considered a claim against a contractor
who replaced a number of roofs in an
apartment complex.
The insured
contractor used a subcontractor to
perform the work. Following completion
of the work, the shingles began to fall off
the roofs and they leaked, resulting in
damage to portions of the buildings other
than the roofs themselves. The court
drew a distinction between damage to the
roofs (the insured’s work) and damage to
the buildings resulting from water
intrusion (other property):
work product of the insured itself is
inherently
non-fortuitous.
Dean
Henderson drew this precise distinction in
the context of the defective stucco wall:
Important here, although faulty
workmanship standing alone, is
not an occurrence under a CGL
policy, an accident caused by
faulty workmanship is a covered
occurrence. ... Stated otherwise,
although a standard CGL policy
does not provide coverage for
faulty
workmanship
that
damages only the resulting work
product, if faulty workmanship
causes bodily injury or property
damage to something other than
the insured’s work product, an
unintended and unexpected event
has occurred, and coverage
exists.14
In Home Pride, the damage to
property resulting from water intrusion is
a perfect analogue to the damage to the
passing automobile referenced above.
The only difference (and it is truly a
difference without a distinction) is that
the passing automobile is not connected
to the work of the insured. It is logically
much easier to understand why that
damage to the other property is covered,
whereas the damage to the roof itself is
not. The fact that the property damaged
by the insured’s faulty work happens to
be connected to the work product of the
insured should not be treated differently
than the passing automobile; it is damage
to property other than the insured’s work
which was damaged as a result of the
insured’s work. Like the passing
automobile, the water intrusion damage is
covered.
This approach seems entirely
reasonable and consistent with Dean
Henderson’s statements quoted in Weedo.
Since the insured has full control over the
quality of its work, whether it uses
subcontractors or not any damage to the
[S]hould the stucco peel and fall
from the wall, and thereby cause
injury to the homeowner or his
neighbor standing below or to a
passing
automobile,
an
occurrence of harm arises which
is the proper subject of risksharing as provided by the type
of policy before us in this case.15
13
684 N.W.2d 571 (Neb. 2004).
Home Pride, 684 N.W.2d at 577-578
(internal citations omitted) (emphasis in
original).
14
15
See Henderson, supra note 8, at 441.
Page 472
C. Defective Construction is an
“Occurrence” but the Business
Risk Exclusions Apply
The next line along the spectrum
consists of those courts who have found
that defective construction is an
“occurrence” (or the courts who skipped
that analysis completely), but that the
business risk exclusions apply to bar
coverage entirely. This viewpoint is
illustrated by the decision of the
Massachusetts Supreme Judicial Court in
Commerce Insurance v. Betty Caplette
Builders.16 In Betty Caplette, the insured
was a general contractor who was sued
based upon defective septic systems
installed by subcontractors. The court
skipped the “occurrence” analysis and
instead interpreted the business risk
exclusions. After referring to Weedo and
quoting Dean Henderson, the court took a
novel approach and held that the houses
were the insured’s “product” and the
claims were therefore excluded by
exclusion (k) of the broad form general
liability policy. (The exclusion at issue in
Betty Caplette was actually numbered (n),
but it was the identical “your product”
exclusion to exclusion (k) in the current
broad form policy.)
Since the court applied the “your
product” exclusion, the fact that the septic
systems were installed by subcontractors
was irrelevant. The court considered the
insured’s contention that the home was
more properly characterized as “your
work,” such that the subcontractor
exception to the exclusion would apply.
It rejected that argument, relying on
precedent which held that the entire house
16
647 N.E.2d 1211 (Mass. 1995).
is a builder’s “product.”17 Many of the
cases relied upon by the court have since
been superseded by opinions considering
the post-1986 I.S.O. coverage form
(although in only one was the result at all
different18). The end result in these cases
seems to be dictated more by policy than
interpretation.
Ironically, a builder who uses
subcontractors in Massachusetts will
enjoy the same coverage as the same
builder in Nebraska despite the fact that
in Massachusetts defective construction is
considered an “occurrence.” Obviously,
different approaches to the same question
can yield the same result. This approach,
which was originally described by the
Massachusetts Supreme Judicial Court as
the majority approach, is now the
approach of only a single court—
Massachusetts.
D. Defective Construction is an
“Occurrence” and the
Business Risk Exclusions Do
Not Apply
Finally, at the most liberal end of the
spectrum, we find decisions that have
made builders very happy, such as the
17
See Gary L. Shaw Builders, Inc. v. State
Automobile Mutual Ins. Co., 355 S.E.2d 130
(Ga. 1987); Indiana Ins. Co. v. DeZutti, 408
N.E.2d 1275 (Ind. 1980); Owings v. Gifford,
697 P.2d 864 (Kan. 1985); Allen v. Lawton &
Moore Builders, Inc., 535 So. 2d 779 (La. Ct.
App. 1988); Gene & Harvey Builders, Inc. v.
Pennsylvania Mf’r Ass’n Ins. Co., 517 A.2d
910 (Pa. 1986).
18
See Lee Builders, Inc. v. Farm Bureau
Mutual Ins. Co., 137 P.3d 486 (Kan. 2006)
(holding that defective construction was an
“occurrence” but not considering the business
risk exclusions).
Raising the Roof
Florida Supreme Court’s decision in
J.S.U.B., which followed the same
rationale as that of the Texas Supreme
Court in Lamar Homes v. MidContinent
Casualty Company.19
In J.S.U.B., the builder built several
homes under contract. After delivery of
the homes, the homeowners began
discovering cracks in the ceilings, drywall
and concrete slabs of the homes.
Investigation revealed that the cracking
was a result of differential settlement
caused by poor soil compaction and
failure to remove loose organic material
by the site preparation contractors. When
sued by the homeowners, the builder
sought coverage under its policy with
U.S. Fire. This insurer, relying on a prior
decision of the Florida Supreme Court,
LaMarche v. Shelby Mutual Ins. Co.,20
denied coverage for anything other than
personal property of the homeowners
damaged by the settlement.
J.S.U.B. repaired the homes and filed
suit against U.S. Fire to determine
coverage. On appeal, the intermediate
court held that LaMarche did not apply
and found coverage for all of the damages
sought by the homeowners. The Florida
Supreme Court agreed with the
intermediate court and issued a lengthy
decision in an attempt to justify the
wholesale abandonment of decades of
precedent.
First, the Court considered the
“occurrence” issue. Putting the cart well
before the horse, the Court engaged in a
lengthy exposé of the history of the “your
work” exclusion in the broad form
19
See J.S.U.B. 979 So. 2d 871 (Fla. 2007);
Lamar Homes, Inc. v. Mid-Continent Casualty
Co., 242 S.W.3d 1 (Tex. 2007).
20
390 So. 2d 325 (Fla. 1980).
Page 473
general liability policy. Putting aside its
own rule that exclusionary clauses cannot
be relied upon to create coverage, it chose
instead to read the policy “as a whole” to
determine whether work performed by a
subcontractor came within the definition
of an “occurrence.” The Court found that
the subcontractor exception to the “your
work” exclusion indicated that work
performed by a subcontractor was meant
to be covered in the first instance.
In doing so, the Court explained that
its prior decision in LaMarche was based
not on whether defective construction was
an “occurrence,” but whether the business
risk exclusions were ambiguous. From
that unremarkable proposition, the Court
concluded that consideration of the “your
work” exclusion was a proper method of
determining whether the defective work
constituted an “occurrence” in the first
instance. Its justification was as follows:
We conclude that the holding in
LaMarche, which relied on
Weedo and involved the issue of
whether there was coverage for
the contractor’s own defective
work, was dependent on the
policy language of pre-1986
CGL policies, including the
relevant insuring provisions and
applicable exclusions. . . .
Because LaMarche involved a
claim of faulty workmanship by
the contractor, rather than a claim
of
faulty
work
by
the
subcontractor, and because the
policy being interpreted involved
distinct
exclusions
and
exceptions, we do not regard
Page 474
LaMarche as binding precedent
in this case.21
The problem with this transparent
justification is that it fails to explain how
considering the language of an exclusion
can aid in the determination of the
insuring agreement. In LaMarche, the
coverage grant was identical to that at
issue in J.S.U.B., requiring
an
“occurrence” resulting in “property
damage.” The exclusion at issue in
LaMarche was the former exclusion (o),
which equates to the current exclusion (l),
or the damage to “your work” exclusion.
The former provision stated that the
insurance did not apply:
So, the newer provision removes
work performed on the insured’s behalf
from the exclusion, whereas the older
version
expressly
included
work
performed on the insured’s behalf.
Having recited the foregoing
differences, the Court then resumed its
analysis of whether defective construction
constituted an “occurrence.” After citing
to several other state decisions which
found
that
such
defects
were
“occurrences,” it then completely omitted
any analysis of the issue and simply put
forth the bold proposition that:
If U.S. Fire intended to preclude
coverage based on the cause of
action asserted, it was incumbent
on U.S. Fire to include clear
language to accomplish this
result. ... In fact, there is a
breach of contract endorsement
exclusion, not present in the CGL
policies at issue in this case, that
excludes coverage for breach of
contract claims. ...23
to property damage to work
performed by or on behalf of the
named insured arising out of the
work or any portion thereof, or
out of materials, parts or
equipment
furnished
in
connection therewith.22
By contrast, the current exclusion (l),
excludes coverage for:
“Property damage” to “your
work” arising out of it or any part
of it and included in the
“products-completed operations
hazard”.
This exclusion does not apply if the
damaged work or the work out of which
the damage arises was performed on your
behalf by a subcontractor.
21
22
J.S.U.B., 979 So. 2d at 882.
LaMarche, 390 So. 2d at 326.
Of course, the court did not explain
why U.S. Fire needed to include an
endorsement to exclude coverage which
the Florida Supreme Court had already
announced did not exist. Analyzing
whether the insuring agreement of the
policy is triggered in the first instance is
certainly different from analyzing
whether the exclusions bar coverage
which otherwise exists. In other words,
the Court put the proverbial cart before
the horse by concluding that U.S. Fire
failed to use clear language to preclude
coverage.
23
J.S.U.B., 979 So. 2d at 884.
Raising the Roof
The question of whether defective
construction is an “occurrence” asks
whether the loss itself is the type
contemplated by the policy. Only if the
answer to that question is “Yes” is there
any need to consider whether any other
provision of the policy precludes that
coverage. Therefore, the Court’s reliance
on U.S. Fire’s failure to use clear
preclusionary language in support of its
conclusion that defective construction
constitutes
an
“occurrence”
is
nonsensical. Its analysis demonstrates
that the Court never really analyzed
whether defective construction is
accidental or fortuitous. Rather, it simply
cited to changes in the relevant exclusions
to justify its departure from decades of
settled precedent.
E. Harmonization of the
Decisions
Despite what appear to be a fairly
significant divergence of views on the
scope of coverage under the broad form
general liability policy, the reality is that
only in a few states will builders have the
equivalent of performance bond coverage
(but without the insurer’s concomitant
right to recoup any payments thereunder
from the insured). Obviously, contractors
in Florida and Texas and the other states
which apply their rationale (see Appendix
I) will enjoy broad coverage. Even in
those states, it is fair to assume that work
done by the contractor itself will not be
covered. In J.S.U.B., the contractor subcontracted all of the work on the home.
Therefore, all of the property damage was
covered. But even the J.S.U.B. decision
makes it fairly clear that defective work
Page 475
that is performed by the contractor itself
will not be covered.
As a result, we discern a broad theme
running through the great majority of
decisions, such that several broad
principles of law can be said to be the
overwhelming majority rule. First, claims
of defective construction, standing alone,
do not meet the element of fortuity
necessary to constitute an accident and
are therefore not covered. Second, where
the work in question was performed by a
subcontractor, the damage is either
considered accidental from the standpoint
of the insured or fits within the
subcontractor exception to the “your
work” exclusion. Third, to the extent the
insured’s defective work results in
damage to other property not the subject
of the insured’s work, that damage is
likely covered. In essence, after fortytwo years of litigation, we end up at the
same place Dean Henderson described in
1971.24
II. Other Issues
In the aftermath of the construction
defect litigation explosion, insurers,
claims professionals and attorneys
continue to struggle with other issues.
While it is simple to say that damage to
the insured’s work is not covered,
application of that principle is more
difficult, particularly in the context of the
all-too-common water intrusion claim
that seems to define much of the current
litigation. In the event the stucco is
defective, resulting in rotting of structural
framing members and damage to drywall,
how do we parse the cost of removing
24
See supra note 8.
Page 476
and replacing the stucco (which may or
may not be covered, depending on
whether it was performed by a
subcontractor) from the cost of repairing
the damaged structural elements (alleged
“other property”)?
This issue becomes more complex on
close examination. For example, a wise
insured will argue that it is not possible to
access the framing members without
removing the stucco. Therefore, for
argument’s sake, even if the water
intrusion resulted from a different cause,
even non-defective stucco would have to
be removed and replaced as part of the
cost of repairing the damaged structural
elements. The players involved are just
beginning, relatively speaking, to address
that kind of issue, sometimes referred to
as “rip and tear” damages.
In addition, as a result of the
subcontractor exception, which is almost
universally
recognized,
contractors
simply use subcontractors for all work on
a project. Clearly, had the builder in
J.S.U.B. done its own site preparation, it
would have deprived itself of coverage
which it otherwise enjoyed. Of course,
subcontractors purchasing the same form
CGL policy usually do not have that
option.
There are also the ever-present issues
of
indemnity,
subrogation
and
contribution. The builder who utilized
subcontractors and/or its insurer will have
an excellent argument that the entire
liability should be passed down the line to
the subcontractors. Certainly, U.S. Fire
should have a right of subrogation to
pursue the site preparation contractor for
indemnity since the builder cannot have
contributed to the loss. In that case, is the
subcontractor’s insurer in any better
position to deny coverage than the
builder’s insurer would have been since
the subcontractor exception should not
apply? That question is debatable given
the “rationale” used by the Florida
Supreme Court to conclude that defective
construction is an “occurrence.” One
could certainly cite that decision for the
proposition that defective construction is
only an “occurrence” when the work is
performed by a subcontractor. For the
subcontractor then, is there no
“occurrence” because the subcontractor
did not use a sub-subcontractor? That is a
question which will also likely be
litigated in the coming years.
III. Legislating Coverage
In states where the courts’ decisions
have been unfavorable to policyholders,
policyholders have turned to lobbyists,
the plaintiffs’ bar and state legislatures to
enact change.
For example, recent
legislation reversed a decision by the
South Carolina Supreme Court in
Crossmann Communities of North
Carolina
v.
Harleysville
Mutual
The court (which later
Insurance.25
withdrew the opinion and reversed itself),
held that damages resulting from faulty
workmanship were the “natural and
probable cause” of the faulty work and, as
such, did not qualify as an “occurrence.”
In response, the South Carolina
Legislature passed a statute providing:
Commercial general liability
insurance policies shall contain
or be deemed to contain a
25
No. 26909, 2011 W.L. 93716 (S.C. Jan 7,
2011).
Raising the Roof
definition of “occurrence” that
includes:
(1) an accident, including
continuous re repeated
exposure
to
substantially the same
general
harmful
conditions; and
(2) property damage or
bodily injury resulting
from
faulty
workmanship, exclusive
of
the
faulty
workmanship itself.26
The statute, which applies to any
pending or future disputes, makes clear
that any damage flowing from faulty
workmanship constitutes a covered
“occurrence” under CGL policies.
In Hawaii, the legislature enacted
Hawaii Revised Statutes 431:1-217,
attempting to preserve the meaning of
“occurrence” that existed prior to a Court
of Appeals decision in Group Builders v.
Admiral Ins. Co.,27 which was not
favorable to insureds. The Hawaii statute
provides that “For purpose of a liability
insurance policy that covers occurrences
of damage or injury during the policy
period and insures a construction
professional for liability arising from
construction related work, the meaning of
the term ‘occurrence’ shall be construed
in accordance with the law as it existed at
the time that the insurance policy was
issued.”28
Page 477
In
addition,
Colorado29
and
30
have recently adopted
Arkansas
legislation regarding coverage under CGL
policies for construction defects. The
Colorado statute requires courts to
presume that work resulting in property
damage is an accident under a CGL
policy unless the damage was intended
and expected by the insured. The statute
only applies to policies expiring after
May 21, 2010.31 The Arkansas statute,
while expressly not intended to limit
exclusionary language, provides that all
CGL policies must include a definition of
occurrence that includes “property
damage or bodily injury resulting from
faulty workmanship.”
IV. New Endorsements
As a result of the flood of
construction defect litigation concerning
the I.S.O. broad form general liability
policy, the industry has developed several
new endorsements, which may be added
to the general liability policy (presumably
for a reduced premium). The first is the
Breach of Contract Endorsement,
referenced in the J.S.U.B. decision, which
states:
This insurance does not apply to
claims for breach of contract,
whether express or oral, nor
claims for breach of an implied
in law or implied in fact contract,
whether
“bodily
injury,”
“property damage,” “advertising
injury,” “personal injury” or an
26
29
27
30
S.C. CODE ANN. Sec. 38-61-70 (2011).
123 Haw. 142, 231 P.3d 67 (Haw. Ct. App.
2010).
28
H.R.S. 431:1-217.
COLO. REV. STAT.13-20-808 (2011).
ARK. CODE, 23-79-155 (2011).
31
See TCD, Inc. v. American Family Mut. Ins.
Co., 2012 COA 65 (Col. Ct. App. 2012).
Page 478
“occurrence” or damages of any
type is alleged; this exclusion
also applies to any additional
insureds under this policy.
Furthermore, no obligation to defend
will arise or be provided by us for such
excluded claims.32
In addition, I.S.O. has made available
two endorsements which have the effect
of deleting the subcontractor exception to
the “your work” exclusion.
That
endorsement simply provides:
Schedule of this endorsement,
Exclusion I. of Section I –
Coverage A – Bodily Injury And
Property Damage Liability is
replaced by the following:
2.
l.
Exclusions
l.
Damage To Your Work
“Property Damage” to “your
work” arising out of it or any
part of it and included in the
hazard”.33
Contractors will likely be offered
policies with one or more of the foregoing
endorsements included automatically.
Presumably, the endorsements could be
removed for an additional premium.
While these endorsements appear to
provide a simple solution to a complex
problem, even these endorsements are
likely to engender further litigation as
courts grapple with their interpretation.
V.
Finally, I.S.O. has created a sitespecific endorsement for deleting the
work” exclusion.
That endorsement
states:
With respect to those sites or
operations designated in the
32
Insurance Services Office, Form
IC0238099. See also Insurance Services
Office, Form IC02381006.
33
10 01.
Damage To Your Work
“Property Damage” to “your
work” arising out of it or any
part of it and included in the
hazard”.34
Exclusion I. of Section I – Coverage A –
Bodily Injury And Property Damage
Liability is replaced by the following:
2.
Exclusions
Conclusion
Have forty-two years of litigation
really changed anything?
On the
judicially conservative end of the
spectrum, things are as Dean Henderson
described them in 1971. Builders who
build shoddy buildings will have to bear
the cost of replacement of their own
shoddy work. This is, of course, the way
34
10 01.
Raising the Roof
it should be. Perhaps the real point of
demarcation should be the distinction
between tort liability and contract
liability.
Without saying so, Dean
Henderson’s example certainly drew the
line there. For the person injured by the
falling stucco wall or the passing car
damaged by that same falling stucco, the
only remedy against the person
responsible is in tort. While it is true that,
but for the contract between the builder
and the stucco contractor, there would be
no liability for the injured person or the
passing car. But that does not mean that
the liability arises out of contract.
The problem arises when the damage
becomes internal. When the insured’s
work damages only itself, there is no
coverage even in Florida and Texas. But
when the insured’s faulty work damages
“other property,” it is likely covered by
the builder’s general liability policy. Is it
a coincidence that these principles seem
to mirror those of the economic loss rule
before it became whittled away by
exceptions? Under that rule, a defective
product which damages only itself gives
rise to a cause of action in contract only.
Only when the product damages “other
property” does the breach of contract (the
defect) become actionable in tort.
Perhaps the erosion of the economic
loss rule runs parallel to the erosion of the
concept that insurance is meant to cover
accidents, not business risks. Certainly in
Dean Henderson’s time, a complaint
against a builder based on negligence
would have been summarily dismissed
under the economic loss rule. Today, it
might well stand based upon the many
exceptions courts have created to what
was otherwise a bright-line rule. Just as
the line between tort and contract is
Page 479
blurring, so too is the line between
accidents and business risks.
Page 480
Insured’s work covered? No.
APPENDIX I
STATE BY STATE INDEX
Arkansas: Lexicon v. ACE American Ins.
Co., 634 F.3d 423 (8th Cir. 2010).
Alabama: Town and Country Prop., LLC
v. Amerisure Ins. Co., No. 1100009, 2011
WL 5009777 (Ala. Oct. 21, 2011).
Occurrence?
Yes.
Defective
construction can be an “occurrence”
if it subjects personal property or
other parts of the structure to
“continuous or repeated exposure” to
harmful conditions resulting in
damage.
Insured’s
business
coverage
insured’s
damage
covered.
work covered? No. The
risk exclusions preclude
for the repair of the
defective product. Only
to “other property” is
Occurrence? Damage to work itself
is not occurrence while collateral
damage caused by faulty work is an
occurrence.
Defective workmanship standing
alone is not an occurrence.35
California: Standard Fire Ins. Co. v.
Spectrum
Community
Ass’n,
46
Cal.Rptr.3d 804 (Cal. Ct. App. 2006).
Occurrence?
Yes,
implicitly.
California courts seem to have
glossed over this question. There are
a number of opinions like Standard
Fire that address the question of
whether a defect which occurs over
time triggers multiple policies.
However, none of the decisions
actually addresses the threshold issue
of whether such defects constitute an
“occurrence” in the first instance.
Alaska: Fejes v. Alaska Ins. Co., Inc.,
984 P.2d 519 (Alaska 1999).
Occurrence? Yes.
Defective
construction can be an “occurrence”
where the insured did not expect or
intend the result of the defective
construction.
Insured’s work covered? Yes, if
performed by a subcontractor. No, if
performed by the insured.
Arizona: United States Fidelity &
Guaranty Corp. v. Advance Roofing &
Supply Co., Inc., 788 P.2d 1227 (Ariz. Ct.
App. 1989).
Occurrence? No.
Insured’s work covered? Yes,
implicitly, based upon the same
rationale.
Colorado: General Security Indemnity
Co. of Arizona v. Mountain States Mut.
Casualty Co., 205 P.2d 529 (Colo. Ct.
App. 2009).
35
Essex Ins. Co. v. Holder, 261 S.W.2d 456
(Ark. 2008).
Raising the Roof
Page 481
Occurrence?
No.
Defective
construction lacks the fortuity
implicit in the concept of an accident.
Connecticut: Travelers Prop. Casualty
Co. of Am. v. Laticrete, Int’l, Inc.,
CV044002006S, 2006 WL 2349079
(Conn. Super. Ct. July 27, 2006).
Occurrence? Yes, implicitly. Like
the California court in Standard Fire,
the court glossed over the initial
“occurrence” analysis and analyzed
when property damage occurred for
trigger purposes.
Insured’s work
implicitly.
covered?
Yes,
general contractor and is therefore an
“accident.”
Insured’s work covered? Yes, if the
work was performed by a
subcontractor.
No, if it was
performed by the insured. However,
damage to work other than the
insured’s work is covered regardless.
Georgia: American Empire Surplus Line
Ins. Co. v. Hathaway Development Co.,
Inc., 707 S.E.2d 369 (Ga. 2011).
Occurrence?
Yes.
Faulty
workmanship causing damage to
neighboring property constitutes an
accident.
Insured’s work covered? No.36
Delaware: Charles E. Brohawn & Bros,
Inc. v. Employers Commercial Union Ins.
Co., 409 A.2d 1055 (Del. 1979).
Hawaii: Group Builders, Inc. v. Admiral
Ins. Co., 231 P.3d 67 (Haw. Ct. App.
2010).
Occurrence? Yes, implicitly. The
court assumed that defective
construction constituted property
damage caused by an occurrence and
decided the case based upon the
“sistership” exclusion.
Occurrence? No. Whether couched
as contractual or tort-based claims,
claims of defective construction do
not constitute an “occurrence.”
Insured’s work covered? Possibly,
depending upon the applicability of a
“sistership” or other exclusion.
Florida: United States Fire Ins. Co. v.
J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007).
Occurrence? Yes. Defective work
performed by a subcontractor was
not expected or intended by the
Idaho: Undecided.
Illinois: Country Mutual Ins. Co. v. Carr,
867 N.E.2d 1157 (Ill. Ct. App. 2007).
Occurrence? Yes. If the insured did
not intend or expect damage to result
36
See Custom Planning & Development v.
American National Fire Ins. Co., 606 S.E.2d
39 (Ga. 2004).
Page 482
from his work, then the resulting
damage is accidental and therefore an
“occurrence.”
Kansas: Lee Builders, Inc. v. Farm
Bureau Mutual Ins. Co., 137 P.3d 486
(Kan. 2006).
Insured’s work covered? Unknown.
Since the business risk exclusions
were not addressed in the trial court,
the appeals court remanded for the
trial court to consider the exclusions in
the first instance.
Occurrence? Yes. As long as the
damage resulting from defective
construction was unforeseen and
unintended by the insured, it is
accidental
and
therefore
an
“occurrence.”
Indiana: Sheehan Const. Co., Inc. v.
Continental Casualty Co., 935 N.E.2d
160 (Ind. 2010).
Insured’s work covered? Yes,
implicitly. The Lee Builders court
could have considered the business
risk exclusions, but did not, choosing
instead to hold simply that the
defective construction was an
“occurrence” and therefore covered.
resulting damage is an event that
occurs without expectation or
foresight, defective construction can
constitute an accident and therefore
an “occurrence.”
Kentucky: Cincinnati Ins. Co. v.
Motorists Mutual Ins. Co., 306 S.W.3d 69
(Ky. 2010).
Insured’s work covered? No. Only
damage to property other than the
insured’s work is covered. The
business risk exclusions clearly
exclude coverage for damage to the
insured’s work.
Occurrence? No.
Although an
insured would almost never have
intended to perform substandard
work, the concept of fortuity has a
second aspect: control.
For the
defective construction to be an
accident, it must be a chance event,
beyond the insured’s control.
Iowa: Pursell Const., Inc. v. Hawkeye
Security Ins. Co., 596 N.W.2d 67 (Iowa
1999).
Occurrence? No. Defective work
standing alone is not an accident and
therefore not an “occurrence.”
Louisiana: Joe Banks Drywall &
Acoustics, Inc. v. Transcontinental Ins.
Co., 753 So.2d 980 (La. Ct. App. 2000).
Insured’s work covered? No, but
insured’s work would presumably be
covered.
complaint does not allege that the
37
See McBride v. Acuity, No. 5:10-CV-173,
2011 WL 6130922 (W.D. Ky. Dec. 11, 2011).
Raising the Roof
insured intended the damage, the
defective construction was accidental
and therefore an “occurrence.”
Insured’s work covered? No. The
business risk exclusions clearly apply
to bar coverage for damage to the
insured’s work. Damage to other
property would presumably be
covered.
Maine: Massachusetts Bay Ins. Co. v.
Ferraiolo Construction Co., 584 A.2d
608 (Me. 1990); Peerless Insurance Co.
v. Brennon, 564 A.2d 383 (Me. 1989).
Occurrence? Yes. Comprehensive
general liability insurance is intended
to cover occurrence of harm risks,
but not business risks. Occurrence of
harm risks are those involving harm
to others due to faulty work or
products, while business risks are
those involving business expenses
incurred by the insured for repair or
replacement of unsatisfactory work.
Page 483
work” exclusion).
Massachusetts: Commerce Ins. Co. v.
Betty Caplette Builders, Inc., 647 N.E.2d
1211 (Mass. 1995).
Occurrence? Yes.
The court
appeared to gloss over this question
since the insurer did not dispute that
the claims would be covered in the
absence of the “your work”
exclusions.
court rejected the applicability of the
“your work” exclusion and its
subcontractor exception, choosing
instead to hold that the entire house
was the insured’s “product.” Thus,
the “your product” exclusion applies
to bar coverage entirely.
Michigan: Auto Owners Ins. Co. v.
Long’s Tri-County Mobile Home, Inc.,
No. 252580, 2005 WL 1522169 (Mich.
Ct. App. June 28, 2005).
Maryland: French v. Assurance Co. of
Am., 448 F.3d 693 (4th Cir. 2006)
(applying Maryland law).
Occurrence? No.
The defective
performance of work can never be an
accident and therefore is not an
“occurrence.”
Insured’s work covered? No, unless
the damage was to non-defective
work of the insured which resulted
from defective work performed by a
subcontractor
(under
the
Occurrence? No, unless the defective
construction causes damage to
property other than the insured’s
work.38
insured’s work is covered.
38
See also Kent Companies v. Wausau Ins.
Co., No. 295237, 2011 WL 1687676 (Mich.
App. May 3, 2011).
Page 484
Minnesota: Bor-Son Bldg. Corp. v.
Employers Commercial Union Ins. Co.,
323 N.W.2d 58 (Minn. 1982).
Occurrence? No, in concept. A
general liability policy is intended to
cover tort risks, not contractual risks
which are within the insured’s
control.
However, damage to
property other than the insured’s
work is caused by an “occurrence”
and therefore covered.39
Mississippi: Architex Ass’n., Inc. v.
Scottsdale Ins. Co., 27 So.3d 1148 (Miss.
2010).
Occurrence?
Yes,
in
certain
instances. The court distinguished
between intentional and negligent
acts by the insured and its
subcontractors, holding that the
question of whether the damage was
accidental from the standpoint of the
insured will govern the question of
whether there was an “occurrence.”
Insured’s work covered? Possibly. If
the insured negligently performed its
work, then presumably the damage to
the insured’s work would be covered.
Work performed by a subcontractor
would presumably be covered since
the damage would not be intended or
expected from the standpoint of the
insured.
39
See Integrity Mutual Ins. Co. v. Klampe,
A08-0443, 2008 WL 5335690 (Minn. Ct. App.
Dec. 23, 2008).
Missouri: Hawkeye-Security Ins. Co. v.
Davis, 6 S.W.3d 419 (Mo. Ct. App.
1999).
Occurrence? No. A builder’s breach
of contract and warranty is inherently
not an accident and therefore not an
“occurrence.”
Montana: Story v. Hawkeye-Security
Ins. Co., No. DV-99-38, 2001 WL
35735573 (Mont. Ct. App. May 24,
2001).
court simply applied the business risk
exclusions as being unambiguous to
negate coverage for construction
defects, even where the work was
performed by a subcontractor.
business risk exclusions clearly bar
coverage for any damage to the
insured’s work or arising out that
work.
Nebraska: Auto-Owners Ins. Co. v.
Home Pride Co’s, Inc., 684 N.W.2d 571
(Neb. 2004).
Occurrence?
No.
Faulty
workmanship, standing alone, is not
an “occurrence” because the element
of fortuity is lacking. However,
faulty workmanship which causes an
accident is an “occurrence.”
However, damage to property other
than the insured’s work is covered.
Raising the Roof
Page 485
Nevada: United States Fidelity &
Guaranty Co. v. Nevada Cement Co., 561
P.2d 1335 (Nev. 1977).
Occurrence? Yes. While the court
did not directly address the issue, its
conclusion is implicit in its holding
that the “your product” exclusions do
not otherwise bar coverage.
risk exclusions because they were not
considered by the trial court.
New Jersey: Firemen’s Insurance Co. of
Newark v. Nat’l Union Fire Ins. Co., 904
A.2d 754 (N.J. 2006).40
Occurrence? No. The court followed
the Weedo v. Stone-E-Brick logic that
mere defective work, standing alone,
is not an “occurrence.” However,
damage to other property can be
covered as an “occurrence.”41 The
court applied the familiar distinction
between sub-standard work which
must be removed and replaced (not
an “occurrence”) and sub-standard
work which results in accidental
damage to other property (an
“occurrence”), which came from the
Weedo opinion.
Insured’s work covered? Yes.
Where the insured’s defective
product is incorporated into another
structure and weakens that structure,
property damage has occurred, which
is covered by a general liability
policy.
New
Hampshire:
High
Country
Associates v. New Hampshire Ins. Co.,
648 A.2d 474 (N.H. 1994).
Occurrence? Yes. The court found
the term “occurrence” to be
ambiguous and therefore interpreted
it to encompass events which were
not expected or intended by the
insured.
Insured’s work covered? Possibly.
The court distinguished between an
“occurrence
of
negligent
construction”
and
“negligent
construction which causes an
occurrence.” This ethereal language
presumably distinguishes between
coverage for the insured’s work
(occurrence
of
negligent
construction) and damage to other
property (negligent construction
which causes an occurrence). The
court did not consider the business
New Mexico: Undecided.
New York: Pavarini Construction Co. v.
Continental Insurance Co., 759 N.Y.S.2d
56 (N.Y. App. Div. 2003); George A.
Fuller Co. v. U.S. Fid. & Guaranty Co.,
613 N.Y.S.2d 152 (N.Y. App. Div. 1994).
Occurrence?
No.
Defective
construction which results only in
damage to the insured’s work
product lacks the element of fortuity
necessary
to
constitute
an
“occurrence.” However, defective
work which results in consequential
40
See also Pennsylvania Nat’l Mutual Ins. Co.
v. Parkshore Development, Inc., 403 Fed.
Appx. 770 (3d Cir. 2010).
41
405 A.2d 788 (N.J. 1979).
Page 486
damage to other property which is
not the subject of the insured’s work
is covered as an “occurrence.”
North Carolina: Production Systems,
Inc. v. Amerisure Ins. Co., 605 S.E.2d
663 (N.C. Ct. App. 2004).
court decided the case based upon the
lack of property damage and appears
to have assumed the existence of an
“occurrence.”
Damages resulting from the insured’s
defective construction are not
“property damage” but instead the
cost to repair the defects in the
insured’s own work product.
North Dakota: Acuity v. Burd & Smith
Const., Inc., 721 N.W.2d 33 (N.D. 2006).
Occurrence?
Yes.
Faulty
workmanship which causes damage
to property other than the insured’s
work is an accidental “occurrence.”
Damage to the insured’s work is
excluded by the business risk
exclusions. Only damage to other
property is covered.
damage to property which is not the
subject of the insured’s work is
covered.
Oklahoma: Undecided.
Oregon: Oak Crest Const. Co. v. Austin
Mutual Ins. Co., 998 P.2d 1254 (Ore.
2000).
Occurrence? No. Damage which is
redressable under pure contract
principles cannot be an accident and
therefore is not an “occurrence.”
However, damage to other property
as a result of the insured’s breach of
contract may be covered.
Pennsylvania: Kvaerner Metals Div. of
Kvaerner U.S., Inc. v. Commercial Union
Ins. Co., 908 A.2d 888 (Pa. 2006).
Occurrence? No. Defective work
standing alone lacks the element of
fortuity necessary to constitute an
accident.
Rhode Island: Undecided.
Ohio: Heile v. Herrmann, 736 N.E.2d
566 (Ohio Ct. App. 1999).
Occurrence?
No.
Faulty
workmanship standing alone lacks
fortuity and therefore is not an
accident, and not an “occurrence.”
42
See Nationwide Mutual Ins. Co. v. CPB
International, Inc., 562 F.3d 591 (3d Cir.
2009); Millers Capital Ins. Co. v. Gambone
Brothers Development Co., 941 A.2d 706 (Pa.
Super. 2007).
Raising the Roof
South
Carolina:
Crossmann
Communities of North Carolina, Inc. v.
Harleysville Mutual Ins. Co., No. 26909,
2011 WL 3667598 (S.C. Jan. 7, 2011).
Occurrence?
No.
Defective
construction, which only results in
damage to the insured’s work, is not
a claim for “property damage” and
However, if the insured’s defective
work results in damage to other
property, that damage is a covered
“occurrence.”43
South Dakota: Corner Const. Co. v.
United States Fidelity & Guaranty Co.,
638 N.W.2d 887 (S.D. 2002).
Occurrence? Yes. To the extent a
subcontractor’s work results in
damage to the insured’s work, it is
the result of an “occurrence,”
because it was not expected or
intended by the insured.
Insured’s work covered? Yes, but
only if it is the result of a
subcontractor’s faulty work. If the
damage to the insured’s work is a
result of the insured’s faulty work,
there is no “occurrence.”
Tennessee: Travelers Indemnity Co. of
Am. v. Moore & Assoc., Inc., 216 S.W.3d
302 (Tenn. 2007).
43
See L-J, Inc. v. Bituminous Fire & Marine
Ins. Co., 621 S.E.2d 33 (S.C. 2004).
Page 487
Occurrence? Yes. Where damage to
the insured’s work was caused by a
subcontractor’s defective work, the
damage was accidental from the
insured’s standpoint and therefore an
“occurrence.”
Insured’s work covered? Yes, but
only if it is the result of a
subcontractor’s faulty work. If the
damage to the insured’s work is a
result of the insured’s faulty work,
there is no “property damage.”
Texas: Lamar Homes, Inc. v. MidContinent Casualty Co., 242 S.W.3d 1
(Tex. 2007).
damage in question results from an
accident, i.e., negligence by the
insured, and is not intentional, the
damage resulted from a covered
“occurrence.” There is no logical
basis to determine whether the
damage was accidental based simply
on whether the property damaged
was the work product of the insured
or some other property.
Insured’s work covered? Yes, as long
as the work was done by a
subcontractor. The court held that
the subcontractor exception to the
“your work” exclusion resurrected
coverage which would otherwise be
barred.
Page 488
Utah: Great Am. Ins. Co. v. Woodside
Homes Corp., 448 F. Supp.2d 1275 (D.
Utah 2006) (applying Utah law).
Occurrence? Yes.
Defective
construction
performed
by
a
subcontractor is accidental from the
standpoint of the insured and
therefore a covered “occurrence.”
Defective work performed by the
insured itself is not accidental and
Vermont: Undecided.
Virginia: Nationwide Mutual Ins. Co. v.
Wenger, 278 S.E.2d 874 (Va. 1981).
court simply considered the business
risk exclusions and concluded that
they unambiguously barred coverage
for the insured’s own defective
work.44
business risk exclusions bar coverage
for the insured’s own faulty work.
Washington: Yakima Cement Products
Co. v. Great Am. Ins. Co., 608 P.2d 254
(Wash. 1980) (en banc).
44
See also Stanley Martin Cos., Inc. v. Ohio
Cas. Group, 313 Fed. Appx. 609 (4th Cir.
2009) (applying Virginia law) (damage that
subcontractor’s defective work caused to
general contractor’s non-defective work
constituted an “occurrence” under CGL
policy).
Occurrence? Yes.
The insured
would almost never be seen to have
wrongly constructed a building or
portion
thereof
on
purpose.
Therefore, even from the insured’s
perspective, defects in the insured’s
own work product are accidental and
therefore an “occurrence.”
Insured’s work covered? No. Even
when the insured’s defective work is
incorporated into other non-defective
work, there is no “property damage”
within the meaning of the policy.
West Virginia: Corder v. William W.
Smith Excavating Co., 556 S.E.2d 77 (W.
Va. 2001).
Occurrence? No. Damage to the
insured’s work product based on
defective
construction
is
not
accidental and therefore not an
“occurrence.”
However, if the
defective work results in damage to
other property, that damage is
accidental
and
therefore
an
“occurrence.”
Wisconsin: Am. Family Mutual Ins. Co.
v. Am. Girl, Inc., 673 N.W.2d 65 (Wis.
2004).
Occurrence? Yes. Regardless of
whether the damage is actionable in
tort
or
contract,
defective
construction will rarely be intended
or expected by the insured,
particularly where the defective work
is performed by a subcontractor.
Raising the Roof
Insured’s work covered? Yes, if
performed by a subcontractor.
Implicit in the court’s decision is the
recognition that if the work is
performed by the insured, the
defective construction would be
excluded by the business risk
exclusions.
Wyoming: Great Divide Ins. Co. v.
Bitterroot Timberframes of Wyoming,
LLC, No. 06-CV-020, 2006 WL 3933078
(D. Wyo. Oct. 20, 2006).
Occurrence?
No.
Defendant's
inadequate
preparation
and
installation of the siding on the resort
was not an “accident” since
defendant intended to perform in
compliance with the contract, but
allegedly failed to do so. Defendant
could
foresee
the
natural
consequences of any negligence or
poor workmanship, thus, any
resulting damage is not considered an
“accident”
triggering
an
“occurrence” under the Policy.
Page 489
CONNING
Conning the
IADC Newsletters
Committee members prepare newsletters on a
monthly basis that contain a wide range of
practical and helpful material. This section of the
Defense Counsel Journal is dedicated to
highlighting interesting topics covered in recent
newsletters so that other readers can benefit from
committee specific articles.
POTENTIAL LIABILITY FOR
ATTORNEYS ENGAGING COCOUNSEL AND REFERRALS
By: John T. Lay and
Childs Cantey Thrasher
This article originally appeared in the
July
2012
Professional
Liability
Committee Newsletter.
Professional liability claims against
attorneys using outside counsel are being
filed more frequently than ever before.
However, there are ways to avoid such
actions. The purpose of this article is to
provide an overview of the issues
surrounding professional liability in legal
malpractice claims arising when one
lawyer or law firm associates with or
refers a case to another lawyer or law
firm.
John T. Lay is a
shareholder
in
Gallivan, White &
Boyd, P.A.'s Columbia,
South Carolina office.
With over 20 years of
experience managing
complex, high-stakes
litigation for clients, his practice focuses
on business litigation, professional
malpractice, insurance bad faith and
coverage, financial services litigation,
and product liability. Mr. Lay was
recently elected to serve on the IADC’s
Board of Directors and served as Chair
of the IADC's Business Litigation
Committee for the past year. Childs
Cantey Thrasher is an associate in
Gallivan, White &
Boyd, P.A.'s Columbia,
South Carolina office.
Her practice focuses on
business and commercial law, environmental
law,
and
litigation
including
products liability, professional liability
and internet law. Prior to joining GWB,
she served as an Assistant Attorney
General in both the civil and criminal
divisions of the South Carolina Attorney
General's Office, where she prosecuted
criminal matters and represented the
State in civil disputes such as the SC vs.
NC Catawba River Water suit in the
United States Supreme Court.
Newsletters
Joint Ventures and Sub-agency
In general, "a firm is not liable for
the acts or omissions of a lawyer outside
the firm who is working with firm
lawyers as co-counsel or in a similar
arrangement."1 The outside lawyer is
usually an independent agent of the client
over whom the firm has no control. He is
not an agent or a contractor of the firm.
However, there are primarily two
instances when this is not the case: joint
venturers and sub-agents. Whether or not
a joint venture is created by a referral is a
fact-specific question. Two cases can
shed some light on when such a
relationship may be found to exist.
In In Re Fox, the South Carolina
Supreme Court found that "where an
attorney retained on a contingent fee to
prosecute a claim engages another lawyer
to assist in the litigation, upon an
agreement to share the fee in case of
success . . . [the attorneys] become joint
venturers."2 The Court went on to say that
"relations among joint venturers are
governed by partnership law."3 As such,
one partner may be held liable for the
misconduct of another depending on the
specific fact scenario.
In W.B. Duggins, Jr. v. Guardianship
of Washington, the Supreme Court of
Mississippi rejected attorney Duggins'
argument that the associated attorney,
Barfield, was an independent contractor
because Duggins and Barfield divided the
Page 491
responsibilities for preparing the case and
split the fees equally.4 Accordingly, "each
attorney [had] an equal stake in the
outcome of the case and . . . joint control
of the case."5 Thus, the Court found that
Duggins and Barfield were joint
venturers.6 If Barfield were an
independent contractor, he would have
been compensated under a fixed fee
arrangement rather than a contingency fee
arrangement. The Court further reasoned
that fraud committed by a partner acting
within the scope of his actual or apparent
authority could be imputed to the
partnership.7
The ABA Model Code of
Professional Conduct requires that the
division of fees between lawyers is proper
only if the division of fees is
proportionate to the services performed
and the responsibility assumed by each
lawyer and the total fee is reasonable.8
Additionally, a firm can subject itself
to vicarious liability if the representation
is structured so that the referred-to firm or
outside counsel has no direct relationship
with the client. This creates a sub-agency
relationship, making the referred-to firm a
sub-agent of the law firm that hired it. In
that situation, the outside counsel is
acting as the firm's sub-agent and,
therefore, vicarious liability is transferred
to the initial firm or lawyer. In Alice
Whalen v. DeGraff, Foy, Conway, HoltHarris & Mealey, the New York
4
1
RESTATEMENT (THIRD) OF THE LAW
GOVERNING LAWYERS, § 58, Comment e.
2
In Re Fox, 490 S.E.2d 265, 271 (S.C. 1997)
(citing 46 Am.Jur. 2d Joint Ventures § 54
(1994)).
3
Id. (citing Tiger, Inc. v. Fisher Agro, Inc.,
391 S.E2d 538, 543 (S.C. 1989)).
W.B. Duggins, Jr. v. Guardianship of
Washington, 632 So.2nd 420, 427 (Miss.
1993).
5
Id.
6
Id. at 429, n. 12.
7
Id. at 430.
8
ABA MOD. CODE OF PROF. COND., Ethical
Consideration 2-22.
Page 492
Appellate Division found that because the
client had no contact with outside
counsel, Bailey, and completely relied on
her own counsel, DeGraff, to satisfy her
judgment, DeGraff "assumed the
responsibility to [the client] . . . and
Bailey became [DeGraff's] sub-agent.
Therefore [DeGraff] had a duty to
supervise Bailey's actions."9
Negligent Referrals
Negligent referrals can create another
professional liability cause of action.
When lawyers arrange for co-counsel to
represent a client, they are serving as their
client's agent and, accordingly, owe the
client a duty of care in the process.10 An
agent, here the initial law firm or lawyer,
who is authorized to employ other agents,
here co-counsel, to handle his client's
affairs, is under a duty to select
competent and otherwise proper agents.11
In Rainey v. Davenport, the Bankruptcy
Court of the Southern District of Texas
found that "bringing an incompetent
attorney on board" would violate a
lawyer's fiduciary duty to his client.12 The
lawyer's duty relates to the referral itself,
regardless of whether the original
attorney cedes responsibility for the
matter after making the referral or retains
9
Alice Whalen v. DeGraff, Foy, Conway,
Holt-Harris & Mealey, 53 A.D.3d 912, 915
(N.Y. App. Div. 2008).
10
RONALD E. MALLEN AND JEFFERY M. SMITH,
LEGAL MALPRACTICE, § 5:9, at 679-681 (2009
ed.).
11
RESTATEMENT (SECOND) OF AGENCY §
405(2).
12
Rainey v. Davenport, 353 B.R. 150 (Bankr.
S.D. Tex. 2006).
some level of responsibility in
cooperation with referred-to co-counsel.
Additionally, collecting a referral fee
may cause a problem under local Rules of
Professional Conduct.
Practice Tips
How can you protect you or your law
firm from being found liable for the
actions (or inactions) of another firm with
whom you are working on a case? There
are ways to protect yourself and your
firm. First and foremost, avoid the subagency problem by having your client
directly engage the other law firm. That
is, the agreement should not be between
your law firm and local counsel, but
between the client and local counsel.
Moreover, the engagement letter should
be signed by local counsel and the client,
and you should verify that such an
engagement
agreement
has
been
executed. The agreement should include
a clear division of labor.
Alternatively, if you are local counsel
serving in a litigation support role with
national
counsel
assuming
full
responsibility
for
trial
strategy,
examination of witnesses, etc., it is
imperative that your engagement letter
reflect with specificity your role and
responsibilities as local counsel.
Do not accept a referral fee.
Make sure that referrals are made to
competent attorneys. Do not rely on
social acquaintances.
Use reputable
sources to verify competence. There are
many sources for such confirmation. The
IADC membership list, made up of peer
reviewed, vetted members, is a good
place to start. Additionally, MartindaleHubble, Lexis-Nexis, Westlaw, or other
Newsletters
Page 493
peer-reviewed sources can help. Do an
internet search. Seek recommendations
from other members of the jurisdiction in
question's bar, as well as other leaders in
that particular area of law.
Include a disclaimer in your
engagement contract.
Make sure the referral has legal
malpractice insurance. Ask. You will be
surprised how many attorneys are not
keeping up with premiums.
While these cases may be showing
up more frequently than in the past, there
are ways to protect yourself and your
firm. Ultimately, choosing the right
attorneys to work with can be the best
way to prevent professional liability
claims. As the old saying goes, a good
offense is the best defense.
***
Newsletters
TEXAS STATE COURT JUDGE
RECOGNIZES
POTENTIAL
APPLICATION
OF
“PUBLIC
TRUST” DOCTRINE TO REDRESS
CLIMATE CHANGE
By: Richard O. Faulk and
John Gray
August 2012 Environmental and Energy
Law Committee Newsletter.
In statements that, to some, may
represent a “shot heard ‘round the world”
in climate change litigation, a Texas state
trial judge recently recognized that the
“public trust” doctrine potentially
required the Texas Commission on
Environmental Quality (“TCEQ”) to take
action to regulate greenhouse gas
emissions. Despite the novelty of the
court’s remarks, serious questions remain
unanswered before the environmental
movement has legitimate reasons to
celebrate.
In the underlying lawsuit, the Texas
Environmental Law Center sued the
TCEQ on behalf of a group of children
and young adults. The Center asserted
that the State of Texas had a fiduciary
duty to reduce the emissions as the
common law trustee of a “public trust”
responsible for the air and atmosphere.1
Similarly to Massachusetts v. EPA–2 a
proceeding which successfully challenged
1
Bonser-Lain v Texas Commission on
Environmental Quality, Case No. D-1-GN-11002194 (201st Dist. Ct. Travis County,
Texas).
2
549 U.S. 497 (2007).
Page 494
Richard O. Faulk
chairs the firm-wide
Litigation Department
of Gardere Wynne
Sewell LLP in Dallas,
Houston, Austin and
Mexico City. He also
leads
the
firm’s
environmental
practice. John Gray
is a partner in the
environmental
practice group of
Gardere
Wynne
Sewell
LLP
in
Houston, Texas.
the EPA’s refusal to regulate greenhouse
gases – the Texas lawsuit was brought
after the TCEQ denied Plaintiffs’ petition
for rulemaking related to greenhouse gas
regulations.
Plaintiffs then sought
judicial review to force the TCEQ to
regulate the emissions. They argued that
the atmosphere is a “public trust” under
the common law; a “fundamental natural
resource necessarily entrusted to the care
of our federal government … for its
preservation and protection as a common
property interest.”
Bonser-Lain is not a solitary lawsuit.
According to a press release by one of the
groups backing the plaintiffs, the Oregonbased nonprofit Our Children’s Trust,
“The lawsuit is part of a campaign of
legal actions – in both state and federal
courts – being filed Alaska, Arizona,
California, Colorado, Iowa, Minnesota,
Montana, New Jersey, New Mexico,
Oregon, Texas and Washington.”
According to Our Children’s Trust, these
suits are being brought “on behalf of
youth to compel reductions of CO2
Newsletters
emissions that will counter the negative
impacts of climate change.”
The “public trust” doctrine is a legal
principle derived from English Common
Law. Traditionally applied to water
resources, it recognizes that the waters of
the state are a public resource owned by
and available to all citizens equally for
the purposes of navigation, conducting
commerce, fishing, recreation and similar
uses.
Such a “public trust” is not
invalidated by private ownership of the
underlying land – instead, it serves to
limit the owner’s land use to those that
will not interfere with the public’s use
and interest in resources covered by the
trust. Generally, the public trustee –
usually the state – must act to maintain
and enhance the trust’s resources for the
benefit of future generations.
Historically, American courts have
applied the doctrine primarily to
submerged lands on the shores of the
ocean, lakes, substantial rivers and
stream, to the waters above them,
groundwater, and to parklands. Although
some decisions have extended protection
to wildlife found in public areas,
migratory fowl and to dry sand beaches
just above the high tide water mark,
others have refused to expand the
doctrine beyond its traditional scope.
Despite the narrowness of the
doctrine, environmental groups hope to
use the elasticity of the “common law” to
expand its application beyond its historic
limitations. They argue that, like water,
the atmosphere, which comprises the air
we breathe, is a legitimate “public trust” –
one which imposes fiduciary obligations
upon the state as the trustee of the
atmosphere for the public good. In many
respects, these cases mark the “second
Page 495
wave” of climate change litigation. The
“first wave” sought – so far
unsuccessfully – to regulate emissions or
obtain damages caused by greenhouse gas
emissions using the ancient common law
tort of public nuisance.3
Many legal experts have been unsure
whether an “atmospheric trust” can be
created and used successfully to combat
“atmospheric” problems, such as climate
change caused by greenhouse gas
emissions. Overall, courts have been
unwilling to expand the public trust
doctrine to impose public trust duties
except in conjunction with a federal
statute or as required by a statute itself.
Not surprisingly then, courts in several
states, including Colorado, Oregon,
Arizona, Washington, Arkansas, and
Minnesota have dismissed these types of
cases early on, finding no basis for an
“atmospheric trust” under state common
law.
The United States Supreme Court has
raised even greater obstacles to the
doctrine’s expansion. Even if a court is
willing to consider expanding the “public
trust” doctrine to address climate change,
it must address the “displacement” or
preemption of common law remedies
recognized in American Electric Power
In that
Company v. Connecticut.4
decision, the Supreme Court held that the
Clean Air Act and EPA’s implementation
of the Act displaced any federal commonlaw right to seek abatement of carbon
dioxide emissions from fossil-fuel fired
3
See generally, Richard O. Faulk, Uncommon
Law: Ruminations on Public Nuisance, 18
MO. ENVTL. L. & POL’Y REV. 1, 13-22 (2011)
(analyzing the propriety of public nuisance to
redress climate change claims).
4
564 U.S. ___ (2011).
Page 496
power plants. The High Court then
remanded the suit to the Second Circuit to
consider whether the complaining parties’
remedies under state law were preempted
by the same federal statutes and
regulations.5
Notwithstanding
the
Supreme
Court’s decision, the Texas District Judge
presiding over the Bonser-Lain case made
a number of troubling statements in a
letter ruling on July 9, 2012. Although
the court ultimately followed the Supreme
Court’s precedent – by deferring to the
TCEQ’s denial of the Plaintiffs’ petition
for rulemaking while State is pursuing
litigation over the Federal greenhouse gas
regulations – the court flatly disagreed
with TCEQ’s position that the public trust
doctrine is limited to water. In its letter
ruling, the court found that TCEQ’s
“conclusion that the public trust doctrine
is exclusively limited to the conservation
of water, was legally invalid.” Moreover,
the court stated that “[t]he doctrine
includes all natural resources of the
State.” In reaching this decision, the court
expressly stated that the public trust
doctrine “is not simply a common law
doctrine” but is incorporated into the
Texas Constitution, which (1) protects
“the conservation and development of all
the resources of the State,” (2) declares
conservation of those resources “public
rights and duties,” and (3) directs the
Legislature to pass appropriate laws to
protect these resources. The court also
relied upon the Texas Clean Air Act as an
additional ground of the TCEQ’s
5
See Richard O. Faulk and John S. Gray,
Defendants Win “Round One” of Climate
Change Litigation in United States Supreme
Court, 32 WESTLAW ENVTL. J. 1 (August 17,
2011).
authority to act “to protect against
adverse
effects,
including
global
warming.”
Not surprisingly, environmental
activists are hailing the court’s expansive
dicta regarding the “public trust”
doctrine’s inclusion of air and all other
natural resources. They believe that, if
accepted elsewhere, this decision can
effect environmental policy decision in all
50 states. Although the court’s dicta have
no true value as precedent, the court’s
endorsement of the Plaintiffs’ reasoning
will probably encourage further litigation.
Until this reasoning is disapproved by an
authoritative appellate court, the BonserLain court’s dicta will probably be cited
in climate change litigation cases around
the country.
Although a New Mexico court
recently allowed a similar case to go
forward, the Bonser-Lain court is the first
tribunal to support the possibility that the
“public trust” doctrine may justify the
creation of an atmospheric trust.
According to Adam Abrams, one of the
attorneys arguing the case against TCEQ,
“I think it’s huge that we got a judge to
acknowledge that the atmosphere is a
public trust asset and the air is a public
trust asset. It’s the first time we’ve had
verbage like this come out of one of these
cases.”
This decision highlights the creativity
of environmentalists to create new
grounds for natural resource protection –
and the potential diversity of the “public
trust” doctrine. Although the BonserLain court probably will not order the
TCEQ to set limits on greenhouse gas
emissions, the ruling illustrates the
continuing resolve of the environmental
movement to invoke and advocate
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Page 497
“common law” solutions to problems that
face strong political opposition – such as
the
continuing
controversy
over
greenhouse gas regulations.
Even if most state courts are unlikely
to expressly recognize atmospheric trusts
under common law, it appears that some
judges might be willing to push the
boundaries of ancient doctrines to address
newly perceived harms. For the time
being – at least until the preemption
issues raised by the Supreme Court’s
remand of American Electric Power
Company v. Connecticut are resolved – it
would be unwise to underestimate the
environmental movement’s pursuit of
state common law, statutes, and
constitutional provisions to combat
climate change.
***
Page 498
NATIONWIDE FLUX: MENSING’S
IMPACT ON STATE TORT CLAIM
PRE-EMPTION AND GENERIC
PHARMACEUTICALS
By: Debra M. Perry and
Sara F. Merin
August 2012 Drug, Device and
Biotechnology Committee Newsletter.
Since the United States Supreme
Court’s holding in PLIVA v. Mensing1
that federal regulations governing
generic pharmaceuticals pre-empt state
law failure-to-warn tort claims, the law
governing pre-emption in regard to
generic pharmaceuticals has been in
flux within United States courts. This
article addresses Mensing itself, lower
court decisions interpreting Mensing,
and recent legislation proposed as a
response to Mensing, which would
change the framework of the U.S. Food
and Drug Administration’s (FDA)
regulation of generic pharmaceutical
manufacturers.
Mensing was the consolidation of
two cases in which plaintiffs alleged
state law failure to warn claims against
generic pharmaceutical manufacturers.2
Each plaintiff claimed that her longterm use of metoclopramide “caused her
tardive dyskinesia and that the [generic
manufacturers of the metoclopramide]
were liable under state law (specifically
that of Minnesota and Louisiana) for
Debra M. Perry is a
Partner at McCarter &
English, LLP in the
firm’s Newark, New
Jersey office. Her
practice
focuses
primarily on the area
of products liability
litigation with an emphasis on the
national defense of pharmaceutical
products and the coordination of mass
tort products liability litigation
involving occupational exposures. Sara
F. Merin is an
associate at McCarter
& English, LLP in the
firm’s Newark, New
Jersey office.
She
concentrates
her
practice in product
liability litigation at
the trial and appellate levels and also
handles other complex civil litigation
matters ranging from two-party
disputes to complex class actions,
including multidistrict litigation.
failing
to
provide
adequate
warning labels.”3 They argued that the
generic drug manufacturers should have
and failed to change their labels in light
of “mounting evidence” showing that
tardive dyskinesia was a larger risk than
was stated on the metoclopramide
label.4 The generic manufacturer
defendants argued that plaintiffs’ state
law tort claims were pre-empted by
federal statutes and FDA regulations
that “required them to use the same
safety and efficacy labeling as their
1
__ U.S. __, 131 S. Ct. 2567, 180 L. Ed. 2d
580 (2011).
2
Id. at 2573.
3
4
Id.
Id.
Newsletters
brand-name counterparts and that it was
impossible to simultaneously comply
with both federal law and any state tortlaw duty that required them to use a
different label.”5
In an opinion delivered by Justice
Thomas, the Supreme Court held that
“federal drug regulations applicable to
generic pharmaceutical manufacturers
directly conflict with, and thus preempt,” state law failure to warn claims.6
Pre-emption occurs where “it is
‘impossible for a private party to
comply with both state and federal
requirements.’”7 As discussed below,
there remains uncertainty as to the
breadth of the holding in Mensing,
namely whether it is limited to failure to
warn claims or if it causes state law
design defect product liability claims to
be pre-empted as well.
The pre-emption question in
Mensing was framed as applying to
only, because regulations governing
labeling for brand-name and generic
manufacturers differ.8 “A brand-name
manufacturer seeking new drug
approval is responsible for the accuracy
“A
and adequacy of its label.”9
Page 499
manufacturer seeking generic drug
approval, on the other hand, is
responsible for ensuring that its warning
label is the same as the brand name’s.”10
Thus, federal regulations prevent
“from independently changing their
generic drugs’ safety labels.”11
The conflict in Mensing arose
because, despite the federal regulations,
the state tort law at issue (which has
corollaries throughout the country)
“place[d] a duty directly on all drug
manufactures to adequately and safely
label their products.”12 As a result, it
was impossible for the generic
pharmaceutical manufacturer defendant
to comply with both federal and state
law:
If the [generic pharmaceutical
m]anufacturers had independently
changed their labels to satisfy their
state law duty, they would have
violated federal law. . . . [S]tate law
imposed
on
the
[generic
pharmaceutical m]anufacturers a
duty to attach a safer label to their
generic [pharmaceutical at issue].
Federal law, however, demanded
that generic drug labels be the same
at all times as the corresponding
brand-name drug labels. See, e.g.,
21 C.F.R. § 314.510(b)(10). Thus,
it was impossible for the generic
pharmaceutical manufacturers to
comply with both their state-law
duty to change the label and their
5
Id.
Id. at 2572.
7
Mensing, 131 S. Ct. at 2577 (quoting
Freightliner Corp. v. Myrick, 514 U.S. 230,
287, 115 S. Ct. 1483, 131 L. Ed. 2d 385
(1995)).
8
Id. at 2574 (citations omitted); see also id.
at 2581 (explaining how the state tort failure
to warn claim in Wyeth v. Levine, 555 U.S.
555, 559-560, 129 S. Ct. 1187, 173 L. Ed.
2d 41 (2009), differed because a brand-name
pharmaceutical manufacturer could comply
with both federal and state law).
9
Id. at 2574 (citations omitted).
6
10
Id. at 2574 (citations omitted).
Id. at 2577.
12
Id. at 2577.
11
Page 500
federal law duty to keep the label
the same.13
In so finding, the Court explained
that, “[w]hen the ‘ordinary meaning’ of
federal law blocks a private party from
independently accomplishing what state
law requires, that party has established
pre-emption[,]” rejecting an argument
that the generic pharmaceutical
manufacturers had the ability to work
with the FDA to have the brand-name
product’s (and thus the generic
product’s) label changed. 14 Specific to
the situation of generic pharmaceutical
manufacturers, the Court stated
that“[b]efore
the
[generic
pharmaceutical m]anufacturers could
satisfy the state law, the FDA – a
federal agency – had to undertake a
special effort permitting them to do so.
To decide these cases, it is enough to
hold that when a party cannot satisfy its
state duties without the Federal
Government’s special permission and
assistance, which is dependent on the
exercise of judgment by a federal
agency, that party cannot independently
satisfy those state duties for preemption purposes.”15
The
Court
recognized
the
divergence between its decision in
Mensing and its 2009 holding in Wyeth
v. Levine that found no pre-emption for
brand-name pharmaceuticals.
In
expressly pointing out the different
treatment accorded to what are
chemically the same products, the Court
recognized that its holding in Mensing
13
Id. at 2578.
Id. at 2580.
15
Mensing, 131 S. Ct. at 2580-2581.
14
may “make[] little sense” to Plaintiffs.16
The Court explained that the different
outcomes were based on the different
regulatory treatment of the two
categories of pharmaceuticals, which
resulted from the legislative choice to
regulate generic drugs differently to
“bring[] more drugs more quickly and
cheaply to the public.”17 The Supreme
Court has not addressed pre-emption
and generic pharmaceuticals since.
The application of Mensing by
lower courts has not been consistent.
Most notably, lower courts are divided
on whether Mensing strictly applies to
failure to warn claims or if it extends to
cause the pre-emption of design defect
claims against manufacturers of
generics, and that split continues to
develop. For example, the First Circuit
in Bartlett v. Mutual Pharmacy, found
that design defect claims were not
preempted, reasoning that the generic
pharmaceutical manufacturer had a
choice not to make the product at all: “a
generic maker can avoid defective
warning lawsuits as well as design
defect lawsuits by not making the drug;
and while PLIVA is itself a limited
departure from a general rule of Wyeth,
an extension of PLIVA to design defect
claims would comprise a general rule
for generics (although not one PLIVA
expressly adopted).”18 In so finding,
the court stated that only the Supreme
Court can decide whether the Mensing
16
Id. at 2582.
Id. at 2582.
18
Bartlett v. Mutual Pharm. Co., Inc., 678
F.3d 30, 38 (1st Cir. 2012). On July 31,
2012, Mutual Pharmaceutical Company
petitioned the Supreme Court for a writ of
certiorari.
17
Newsletters
pre-emption exception for failure to
warn claims extends to design defect
claims and noted the split among
courts.19 Other courts have echoed that
this is an “open question of law” and
explained that design and warning
defect cases raise different questions for
However,
pre-emption purposes.20
Bartlett’s reasoning was expressly
rejected by the United States District
Court for the Eastern District of
Kentucky in In re Darvocet, Darvon &
Propoxyphene
Products
Liability
Litigation,21 when it dismissed all
remaining claims against generic
pharmaceutical defendants in that
MDL.22 Similarly, the United States
District Court for the District of
Vermont dismissed design defect claims
as pre-empted after finding that “[t]he
Generic Defendants’ ‘federal duty of
sameness,’ [] therefore applies to the
design or composition of the drug as
well as to its labeling. Applying the
Mensing holding requires dismissal of
19
Id. at 37-38.
See, e.g., Halperin v. Merck Sharp &
Dohme Corp., Docket No. No. 11 C 9076,
2012 U.S. Dist. LEXIS 50549, *11-*12
(N.D. Ill. Apr. 10, 2012) (“Illinois law does
not base [the wholesale drug distributor’s]
potential liability on any failure to comply
with a state law duty, like the affirmative
duty to warn at issue in Mensing” and noting
that the wholesale drug distributor is being
sued for its place in the chain of commerce,
not “for violating a state law duty to design
safe pharmaceuticals and, thus, no conflict
arises”).
21
MDL Docket No. 2226, 2012 U.S. Dist.
LEXIS 89994 (E.D. Ky. June 22, 2012).
22
Id. at *38-*39.
20
Page 501
the Lymans’ design claims as well.”23
The Lyman court is not alone in so
holding; other courts have similarly
found that “the ‘federal duty of
‘sameness,’’ [] also applies in the
context of generic drug design, and
federal law preempts state laws
imposing a duty to change a drug’s
design
on
generic
drug
manufacturers.”24
Courts are also addressing other
questions raised by Mensing, including
what constitutes a generic manufacturer
under Mensing. As an example, a
federal district court in New Jersey
found that Mensing extends to bar
failure to warn claims against
authorized distributors of a branded
product due to the authorized distributor
having no power to change the
pharmaceutical’s labeling.25
In a departure from what is
developing into a rule of general
23
Lyman v. Pfizer, Inc., No. 2:09-cv-262,
2012 U.S. Dist. LEXIS 13185, *12 (D. Vt.
Feb. 3, 2012) (citations omitted).
24
In re Pamidronate Prods. Liab. Litig.,
Docket No. 09-MD-2120, 2012 U.S. Dist.
LEXIS 10901, *11 (E.D.N.Y. Jan. 30,
2012); see also, e.g., In re Darvocet, Darvon
& Propoxyphene Prods. Liab. Litig., MDL
No. 2226, 2012 U.S. Dist. LEXIS 30593,
*106-*107 (D. Ky. Mar. 5, 2012)
(dismissing “wrongful marketing” claims
“based on strict liability design defect,
negligent design, negligent marketing, and
breach of implied warranty” after reasoning
that they “are all based on the allegedly
defective design of the drug” and preempted under the reasoning of Mensing).
25
In re Fosamax (Alendronate Sodium)
Prods. Liab. Litig., MDL No. 2243, Docket
No. 08-cv-0008, 2012 U.S. Dist. LEXIS
5817, *26-*27 (D.N.J. Jan. 17, 2012).
Page 502
divergence, courts appear to be
consistently
rejecting
plaintiffs’
attempts to use Mensing as a means of
causing brand-name manufacturers to
be liable for other companies’ generic
pharmaceutical products, which would
result in a reversal of courts’ general
rejection of innovator liability.26 As the
26
E.g., Smith v. Wyeth, Inc., 657 F.3d 420,
423-424 (6th Cir. 2011); Phelps v. Wyeth,
Inc., No. 09-CV-6168, 2011 U.S. Dist.
LEXIS 154631, *4-*8 (D. Or. Nov. 11,
2011) (Mensing does not change Oregon law
that a manufacturer cannot be held liable for
injuries caused by its generic competitor’s
products); Metz v. Wyeth LLC, No. 8:10cv-2658, 2011 U.S. Dist. LEXIS 135667,
*6-*7 (M.D. Fla. Nov. 18, 2011) (explaining
that the Fourth Circuit’s decision in Foster v.
American Home Products Corp., 29 F.3d
165 (4th Cir. 1994), remains good law
following Mensing, and that Florida law
provides that, “irrespective of whether
consumers could recover from generic drug
manufacturers, a brand name manufacturer
simply had no duty of care to individual
consumers that did not use the named brand
manufacturer’s product”); Coundouris v.
Wyeth, ATL-L-1940-10 6-7 (N.J. Super.
Law Div. June 26, 2012) (slip op. 6-7)
(applying New Jersey law wherein “an
essential element of a plaintiff’s prima facie
products liability action case is proof that
the manufacturer actually produced the
product which gave rise to the plaintiff’s
injury[,]” to dismiss claims against brandname manufacturers of the generic
pharmaceuticals ingested by plaintiffs
stating that, “Mensing did not address or
impact . . . whether a brand-name
manufacturer owes a duty to a patient who
ingested a drug that the brand-name
manufacturer did not make or sell. Because
Mensing did not alter New Jersey law, the
[New Jersey Product Liability Act] and case
law continue to govern”).
Sixth Circuit plainly stated in Smith v.
Wyeth, “[a]s have the majority of courts
to address this question, we reject the
argument that a name-brand drug
manufacturer owes a duty of care to
individuals who have never taken the
drug actually manufactured by that
company.”27
While the courts continue to
address the changed landscape caused
by Mensing, a bill has been presented in
both houses of Congress that would
legislatively un-do the pre-emption
found by the Supreme Court.28 The
Patient Safety and Generic Labeling
Improvement Act was filed in the
Senate by Patrick Leahy of Vermont
and a corollary was introduced by
Representative Christopher Van Hollen
of Maryland in the House of
Representatives.
The bill proposes
amending Section 505(j) of the federal
Food, Drug, and Cosmetic Act29 to add
an additional section that expands the
labeling
abilities
of
generic
pharmaceutical manufacturers to permit
them to change the labeling of a
pharmaceutical. The bill proposing
adding the following language to the
statute:
(11)(A) Notwithstanding any other
provision of this Act, the holder of
an approved application under this
subsection may change the
labeling of a drug so approved in
the same manner authorized by
regulation for the holder of an
27
Smith, 657 F.3d at 423-424.
See 158 CONG. REC. No. 56, S2498 (daily
ed. Apr. 18, 2012).
29
21 U.S.C. 355(j).
28
Newsletters
approved new drug application
under subsection (b).
(B) In the event of a labeling
change made under subparagraph
(A), the Secretary may order
conforming changes to the labeling
of the equivalent listed drug and
each drug approved under this
subsection that corresponds to
such listed drug.30
Thus, the bill authorizes generic
pharmaceutical manufacturers to act on
the information that they are presently
required to gather regarding their
products to change labels when
necessary.31 The generic manufacturer
would be required to use the same
methods as the original manufacturer to
implement a labeling change, namely
the “Changes Being Effected” process,
which allows a change to be
implemented while the proposal for that
change is still undergoing FDA
review.32 Additionally, after the change
is made, the bill authorizes the FDA to
“order conforming changes across
equivalent drugs to ensure consistent
As a
labeling among products.”33
result, for a period of time at a
minimum, the generic label could be
different from that of the brand-name
product.34
30
S. 2295; H.R. 4384.
See S. 2295; 158 CONG. REC. No. 56, at
S2498.
32
S2498.
33
S2498.
34
See 158 CONG. REC. No. 56, at S2498.
31
Page 503
The bill is framed as a consumer
protection effort, with Senator Leahy
explaining in his introduction of the bill
on the Senate floor that it is a direct
response to Mensing’s creating “a
troubling inconsistency in the law
governing
prescription
drugs[.]”35
Senator Leahy explained Mensing’s
effect as:
If a consumer takes the brandname version of drug, she can sue
the manufacturer for inadequate
warnings.
If the pharmacy
happens to give her the generic
version . . . she is unable to seek
compensation for her injuries. The
result is a two-track system that
penalizes consumers of generic
drugs
even
though
many
consumers have no control over
which drug they take, because
their health insurance plan or state
laws require them to take generics
if they are available.36
Both bills were introduced on April
18, 2012 and have been referred to
committee. No action has been taken.
The sponsor and all seven co-sponsors
of the Senate bill are Democrats, as are
the sponsor and the co-sponsor of the
While the partisan
House bill.37
sponsorship of the bill gives pause as to
its likelihood of passage, it has strong
support outside of Congress. Notably,
the Attorney Generals of 41 states have
come out in support of the bill along
35
Id.
Id.
37
S. 2295; H.R. 4384.
36
Page 504
with the powerful interest groups,
including the AARP.38
In summary, the full impact of
Mensing remains undetermined. Absent
the unlikely enactment of the Patient
Safety
and
Generic
Labeling
Improvement Act, the success of other
not-yet-proposed Congressional action,
or the Supreme Court’s granting
certiorari on a case that clarifies
Mensing’s scope, courts will likely to
continue to divergently apply the
doctrine of pre-emption to state law tort
claims
involving
generic
pharmaceuticals.
The most likely
outcome is that the still nascent
development of case law within the
Courts of Appeals will likely provide
different guidelines based on the Circuit
within which a case is pending.
***
38
Letter from the National Association of
Attorneys General to Senator Patrick J.
Leahy and Senator Al Franken (May 11,
2012) (signed by 41 Attorneys General),
available
at
http://www.naag.org/signon_archive.php; Letter from Joyce A.
Rogers, Senior Vice President, Government
Affairs of AARP to Senator Patrick J. Leahy
(Mar. 30, 2012),in 158 CONG. REC. No. 56,
at S2498-99; Letter from Alliance for
Justice, Consumer Action, Consumer
Federation of America, Consumers Union,
Consumer Watchdog, National Association
of Consumer Advocates, and US PIRG to
Senator Patrick J. Leahy (April 17, 2012), in
158 CONG. REC. No. 56, at S2499; Allison
M. Zieve, Director, Public Citizen Litigation
Group and Sidney M. Wolfe, MD, Director,
Public Citizen Health Research Group to
Senator Patrick J. Leahy (April 18, 2012), in
158 CONG. REC. No. 56, at S2499.
Defense Counsel Journal
Annual Index
Volume 79 (2012)
This index covers the four issues of
Defense Counsel Journal published in
2012 – Volume 79, including: January
2012, April 2012, July 2012 and October
2012.
Defense Counsel Journal was published
under the title Insurance Counsel Journal
from 1934 (Volume 1) through 1986
(Volume 53) by the International
Association of Insurance Counsel. The
name of the organization was changed
effective in 1987 to International
Association of Defense Counsel and the
name of the publication to Defense
Counsel Journal. There was no change in
the volume numbering system.
General and cumulative indexes have
been published as follows:
Yearbooks, 1928-33
Volumes 1-26 (1934-1959)
Volumes 27-31 (1960-1964)
Volumes 32-36 (1965-1969)
Volumes 37-42 (1970-1975)
Volumes 43-47 (1976-1980)
Volumes 48-57 (1981-1990)
Volumes 58-62 (1991-1995)
Volumes 63-67 (1996-2000)
Volumes 68-73 (2001-2006)
Volumes 74-78 (2007-2011)
SUBJECT MATTER
Attorney-Client Privilege
Legal Professional Privilege: Comparing
Different Approaches Within the United
States and the European Union
By: Paul Lefebvre, David J. Rosenberg,
Matthew R. Zwick and Chloe Vialard
January 2012 at page 49.
The Perils of Oversharing: Can the
Attorney-Client Privilege be Broadly
Waived by Partially Disclosing Attorney
Communications During Negotiations?
By: Andrew Kopon, Jr. and MaryChristine Sungaila
July 2012 at page 265.
Aviation
Proving the Details of the 9/11 Attacks:
The Admissibility of the Kean
Commission Findings
By: Richard P. Campbell, Christopher R.
Howe and Kathleen M. Guilfoyle
Class Actions
International Class Actions in the
Canadian Context:
Understanding,
Funding, Enforceability and Trial
By: Glenn M. Zakaib and Jeremy M.
Martin
Page 506
Federal Multidistrict Litigation:
Background, Basics, Global Settlements,
and Bellwether Trials
By: Jeffrey R. Johnson and Tami Becker
Gomez
Insurance Law
Raising the Roof:
What’s Hot in
Construction Defect Litigation
By: Kathleen J. Maus, Julius P. “Rick”
Parker, Jr. and Michael Hamilton
October 2012 at page 465.
Drug, Device and Biotechnology
Manning the Daubert Gate: A Defense
Primer in Response to Milward v. Acuity
Specialty Products
By: Eric Lasker
April 2012 at page 128.
Employment Law
The ADA Amendments Act of 2008:
Practical Implications for Employers in
2012 and Beyond
By: Molly Hughes Cherry and Lawrence
D. Smith
Environmental Law
Defending Marcellus Shale Groundwater
Contamination Claims: The Case against
Class Actions and Other Theories of
Liability
By: Raymond G. Mullady, Jr., Sandra J.
Doyle, Charles A. Fitzpatrick IV and
Angela M. Guarino
Health Care Law
New Healthcare Lien Recovery Theories
by Third-Party Payors: Strategies and
Tactics for the Defense
By: Matthew Keenan and Christopher J.
Kaufman
By: Douglas R. Richmond
The
Global
Supply
Chain:
Understanding, Measuring, Mitigating
and Managing Exposure in a Supply
Chain Dependent Globalized Market
By: Daniel W. Gerber and Brian R.
Biggie
International Law
Is There Still Room for the Coexistence
of Legal Systems in Today’s Global
Economy?
By: Guy Canivert
Products Liability
A Legal Guessing Game: Does U.S.
Common Law Require Manufacturers
and Suppliers of Consumer Products to
Warn in Languages Other than English
By: Douglas J. Chumbley and David L.
Luck
Defense Counsel Journal Annual Index
The Stabilization of Product Liability
Law by Statute: Mississippi as a Case
Study
By: Stephanie M. Rippee and Everett E.
White
Procedure
Advisability and Practical Considerations
of Court-Imposed Time Limits on Trial
By: Andrew M. Goldman and J. Walter
Sinclair
A New Argument Supporting Removal of
Diversity Cases Prior to Service
By: Zach Hughes
Despite the Evidence, I Swear that the
Facts I Allege are True: Confronting a
Plaintiff’s Uncorroborated Testimony on
a Factual Issue When Removing a Case
based on Fraudulent Joinder.
By: Todd P. Davis and Geoffrey M.
Drake
Motion to Strike Affirmative Defenses
By: Peter M. Durney and Jonathan P.
Michaud
Where Do I Fit In? Citizenship Claims
and the § 1332 Diversity Statute in
Underwriters at Lloyd’s v. OstingSchwinn
By: Terri K. Benton
Page 507
Torts
The Enhanced Injury Doctrine: How the
Theory of Liability is Addressed in a
Comparative Fault World
By: Shane T. Costello and Charles E.
Reynolds
Predictability in Punitive Damages:
Considering The Use of Punitive Damage
Multipliers
By: Sarah G. Cronan and J. Brittany
Cross
White Collar/Criminal Defense
Environmental Prosecutions: Criminal
Liability without Mens Rea and Exposure
Under
the
Responsible
Criminal
Corporate Officer Doctrine
By: Douglas S. Brooks and Thomas C.
Frongillo
AUTHORS
Benton, Terri K.
Where Do I Fit In? Citizenship Claims
and the § 1332 Diversity Statute in
Underwriters at Lloyd’s v. OstingSchwinn
Biggie, Brian R.
The
Global
Supply
Chain:
With Daniel W. Gerber
Page 508
Brooks, Douglas S.
Under
the
Responsible
Criminal
With
Thomas C. Frongillo
Campbell, Richard P.
Commission Findings
With Christopher R. Howe and Kathleen
M. Guilfoyle
Canivet, Guy
Is There Still Room for the Coexistence
of Legal Systems in Today’s Global
Economy?
Cherry, Molly Hughes
2012 and Beyond
With Lawrence D. Smith
Chumbley, Douglas J.
With David L. Luck
Costello, Shane T.
With Charles E. Reynolds
Cronan, Sarah G.
Considering the Use of Punitive Damage
Multipliers
With J. Brittany Cross
Cross, J. Brittany
Considering The Use of Punitive Damage
Multipliers
With Sarah G. Cronan
Davis, Todd P.
With Geoffrey M. Drake
Drake, Geoffrey M.
With Todd P. Davis
Doyle, Sandra J.
Liability
With Raymond G. Mullady, Jr., Charles
A. Fitzpatrick IV and Angela M. Guarino
Durney, Peter M.
With Jonathan P. Michaud
Fitzpatrick, Charles A. IV
Liability
With Raymond G. Mullady, Jr., Sandra J.
Doyle and Angela M. Guarino
Frongillo, Thomas C.
Under
the
Responsible
Criminal
With Douglas S. Brooks
Gerber, Daniel W.
The
Global
Supply
Chain:
With Brian R. Biggie
Page 509
Guarino, Angela M.
Liability
With Raymond G. Mullady, Jr., Doyle,
Sandra J and Charles A. Fitzpatrick IV
Guilfoyle, Kathleen M.
Commission Findings
With Richard P. Campbell and
Christopher R. Howe
Hamilton, Michael
Raising the Roof:
What’s Hot in
With Kathleen J. Maus and Julius P.
“Rick” Parker, Jr.
Howe, Christopher R.
Commission Findings
With Richard P. Campbell and Kathleen
M. Guilfoyle
Goldman, Andrew M.
With J. Walter Sinclair
Hughes, Zach
A New Argument Supporting Removal of
Diversity Cases Prior to Service
Gomez, Tami Becker
With Jeffrey R. Johnson
Johnson, Jeffrey R.
With Tami Becker Gomez
Page 510
Kaufman, Christopher J.
With Matthew Keenan
Martin, Jeremy M.
Canadian
Context:
Understanding,
With Glenn M. Zakaib
Keenan, Matthew
With Christopher J. Kaufman
Maus, Kathleen J.
Raising the Roof:
What’s Hot in
With Michael Hamilton and Julius P.
“Rick” Parker, Jr.
Kopon, Andrew Jr.
With Mary-Christine Sungaila
Michaud, Jonathan P.
With Peter M. Durney
Lasker, Eric
Manning the Daubert Gate: A Defense
Primer in Response to Milward v. Acuity
Specialty Products
Lefebvre, Paul
With David J. Rosenberg, Matthew R.
Zwick and Chloe Vialard
Luck, David L.
With Douglas J. Chumbley
Mullady, Raymond G Jr.
Liability
With Sandra J. Doyle, Charles A.
Fitzpatrick IV and Angela M. Guarino
Parker, Julius P. “Rick” Jr.
Raising the Roof:
What’s Hot in
With Kathleen J. Maus and Michael
Hamilton
Reynolds, Charles E.
With Shane T. Costello
Richmond, Douglas R.
Rippee, Stephanie M.
Study
With Everett E. White
Sinclair, J. Walter
With Andrew M. Goldman
Smith, Lawrence D.
2012 and Beyond
With Molly Hughes Cherry
Rosenberg, David J.
With
Paul Lefebvre, Matthew R.
Zwick and Chloe Vialard
Sungaila, Mary-Christine
With Andrew Kopon Jr.
Page 511
White, Everett E.
Study
With Stephanie M. Rippee
Vialard, Chloe
With Paul Lefebvre, David J. Rosenberg
and Matthew R. Zwick
Zakaib, Glenn M.
Canadian Context:
Understanding,
With Jeremy M. Martin
Zwick, Matthew R.
With Paul Lefebvre, David J. Rosenberg,
and Chloe Vialard
U.S. Postal Service Statement of Ownership, Management, and Circulation (required by 39 U.S.C. 3685) 1. Publication title: Defense Counsel Journal. 2. Publication number: 0895‐0016. 3. Filing date: October 1, 2012. 4. Issue frequency: Quarterly (January, April, July, October). 5. Number of issues published annually: Four. 6. Annual subscription price: $90.00. 7. Complete mailing address: 303 West Madison, Suite 925, Chicago, IL 60606. Contact person: Robert Greenlee, Managing Editor. Telephone 312.368.3809. 8. Complete mailing address of headquarters or general business office of publisher (not printer): Same as above. 9. Publisher: International Association of Defense Counsel, 303 West Madison, Suite 925, Chicago, IL 60606. Managing Editor: Robert Greenlee, 303 West Madison, Suite 925, Chicago, IL 60606. 10. Owner: International Association of Defense Counsel, 303 West Madison, Suite 925, Chicago, IL 60606. 11. Known bondholders: None. 12. Tax status: The purpose, function, and nonprofit status of this organization and the exempt status for federal income tax purposes has not changed during the preceding 12 months. 13. Publication title: Defense Counsel Journal. 14. Issue date of circulation data below: October, 2012. 15. Nature and extent of circulation: (a) Total number of copies (net press run): Average number of copies each issue during preceding 12 months: 2800; Actual number of copies of single issue published nearest to filing date: 2700. 15(b)(1): Paid/requested outside county mail subscriptions stated on Form 3541: Average 12 months: 2736; Actual nearest filing date: 2650. 15(b)(2): Paid in‐county subscriptions: None. 15(b)(3): Sales through dealers and carriers, street vendors, counter sales, and other non‐USPS paid distribution: None. 15(b)(4): Other classes mailed through the USPS: Average number of copies each issue during preceding 12 months: 20; Actual number of copies of single issue published nearest to filing date: 10. 15(c): Total paid and/or requested circulation: Average 12 months: 2756; Actual nearest filing date: 2660. 15(d)(1): Free Distribution by Mail: Outside‐county as stated on Form 3541: Average 12 months: 20; Actual nearest filing date: 20. 15(d)(2): Free Distribution by Mail: In‐county as stated on Form 3541: None. 15(d)(3): Free Distribution by Mail: Other classes mailed through the USPS: None. 15(d)(4): Free Distribution Outside the Mail: None. 15(e): Total Free Distribution: Average 12 months: 20; Actual nearest filing date: 20. 15(f): Total Distribution: Average 12 months: 2776; Actual nearest filing date: 2680. 15(g): Copies not distributed: Average 12 months: 24; Actual nearest filing date: 20. 15(h): Total: Average 12 months: 2800; Actual nearest filing date: 2700. 15(j): Percent paid and/or requested circulation: Average 12 months: 99; Actual nearest filing date: 99. 16. Publication of statement of ownership will be printed in the October 2012 issue of this publication. 17. Signature and title of publisher, business manager, or owner: Robert Greenlee, Managing Editor

October 2012 - International Association of Defense Counsel

Transcription

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