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< Previous8 CLM MAGAZINE MAY 2023 W hen the value of a liability claim clearly exceeds the primary insurance limit, but the excess insurer is not quite ready or willing to settle, tensions can arise as to how long the primary insurer must incur defense costs when it is prepared to pay its own limit. Typically, the law prohibits a primary insurer from paying its own limits to “cut and run” if the overall claim against the policyholder remains unsettled. However, certain states expressly allow such a primary insurer to use its limits toward a “partial settlement” with the claimant, thereby keeping the claim alive against both the excess and primary insurer as well as the policyholder (although the policyholder’s personal assets become protected). The extent to which a primary insurer can avail itself of this law—and the recourse an excess insurer may have against the primary, if any— is highly fact- and state-dependent. WHAT IS A PARTIAL RELEASE? A partial release allows a primary insurer to pay some or all of its limit of liability in exchange for a “partial settlement” that releases the primary Full Clarity on Partial Releases How to Navigate a Primary Insurer’s Duty of Good Faith By Lindsey D. Dean and Christopher Morrison Lindsey D. Dean is an attorney at BatesCarey LLP. ldean@batescarey.com Christopher Morrison is the head of casualty claims North America for Swiss Re Corporate Solutions America Holding Corp. christopher_morrison@swissre.com EXTRA-CONTRACTUAL 10 CLM MAGAZINE MAY 2023 insurer and releases all claims against the policyholder’s personal assets. In other words, the claimant’s suit can continue, but damages are only collectible against the excess insurer. While a primary insurer is generally not permitted to “partially” settle a case and leave an excess insurer fully on the hook, some courts— including those in New Jersey, Indiana, Louisiana and Washington—have recognized the validity of partial releases. Why? The theory is that partial releases serve the public policy of encouraging settlement and protecting the insured from personal liability. The terms of such releases, though, are governed by state law and can vary from state to state. For example, in Louisiana, a partial release—commonly known as a Gasquet release in reference to Gasquet v. Commercial Union Ins. Co.—must include a credit for the full amount of the primary limits in order for the claimant to then pursue the defendant’s excess insurer, although the primary insurer does not have to actually pay its full limits. In contrast, Washington requires the primary insurer to actually pay its full limit of liability before the claimant can pursue the excess carrier, as settled in Rees v. Viking Ins. Co . Thus, a prudent primary insurer contemplating a partial release must carefully review and comply with the law of the applicable jurisdiction. PARTIAL RELEASE APPLICABILITY If a primary insurer is obligated to pay defense costs outside its policy limit, those costs can of course reach multiples of the indemnity limit, with no cap in sight. In a case where the primary insurer believes the value of the claim may be well beyond its limits, the primary insurer is highly motivated to pursue a partial settlement to protect the insured and to eliminate the primary insurer’s defense spending. Where the claim exposure could potentially run through all layers of insurance, or when part of the claim may not be covered, a policyholder faces the threat of personal liability. The primary insurer that negotiates a partial settlement can extinguish this exposure for its policyholder. For example, if a potential judgment could include uncovered punitive damages or fines and penalties, a policyholder may advocate for a partial release to protect their personal assets from exposure. AVOID PARTIAL RELEASE PITFALLS A partial release serves the interests of the primary insurer by insulating it from bad-faith accusations related to the failure to settle the claim and potentially cutting off defense costs. But it also serves the interests of the insured since it protects their assets from exposure. This may sound like a win/win for the primary insurer and the insured. There is, however, the excess carrier to consider. Specifically, a prudent primary insurer that is considering a partial settlement with the claimant and the insured should attempt to include the excess carrier in the settlement negotiations. Otherwise, the excess insurer left exposed may later claim that the primary insurer breached its obligations to the excess insurer by failing to adequately notify the excess insurer of potential exposure to its excess limits. The excess carrier may also argue that the primary carrier improperly placed its own interests ahead of the excess carrier’s interests, exposing the excess carrier to damages by excluding it from the settlement negotiations. On the other hand, a primary insurer likely can proceed with a partial release without risking a bad-faith claim when the excess carrier has disclaimed coverage and declined to participate in any settlement. In Deblon v. Beaton , the New Jersey Superior Court upheld a partial release where an excess carrier declined to negotiate in settlement discussions, finding that the excess insurer could not complain about the partial settlement “after disclaiming and refusing to negotiate at all.” The proper procedure is less clear when, for example, the excess insurer has reserved rights but not declined coverage. Given that many states have not explicitly approved the use of partial releases, it is unclear whether a primary insurer’s effort to protect its insured’s personal assets and transfer its defense obligations to an excess insurer would be permitted in a state that has not specifically approved such tactics. In fact, many excess policies contain contractual terms that could prohibit such unilateral shifting of defense obligations. Therefore, although a partial settlement may be a judicially created or statutory settlement tool in some states, in others such an effort to reach a settlement that carves out the excess layers may violate the very terms of the insurance contract. Partial releases may offer primary carriers that are hamstrung by endless defense costs in high-value cases some relief. Insurers, however, should be wary of the strict requirements in certain states, as well as the potential for bad- faith accusations should the primary insurer not involve the excess insurers in settlement discussions. As a matter of practice, an insurer considering a partial settlement should always advise any excess insurers of the settlement discussions and give the excess insurer an opportunity to participate. K A prudent primary insurer that is considering a partial settlement with the claimant and the insured should attempt to include the excess carrier in the settlement negotiations. EXTRA-CONTRACTUAL 12 CLM MAGAZINE MAY 2023 R esolution at mediation can be a challenge for anyone in the industry, but it can be especially difficult for young professionals during their initial mediation sessions as they learn which techniques are successful and which ones lead to impasses. One hurdle that newer professionals often encounter in mediation is the anticipation of a “number-swapping” event and are sometimes surprised by the degree of technique and agility required for success, including best practice steps to take prior to the mediation date. Fortunately, there are five key strategies that can position a mediation for success. If learned from tenured colleagues and applied early in a career, these tactics can expedite the learning curve, setting up new professionals for success, which can build upon itself. To illustrate these points, let’s explore a conversation not uncommon in our industry between a tenured professional and a newer colleague that demonstrates how a casual conversation can be used for impactful knowledge-sharing. Zoe: Hi Brian and Millie. I’m so excited for my first mediation tomorrow, I cannot wait to just settle the case. It should be exciting and easy. Brian: Wait, Zoe. Mediations are exciting, but let’s not get too carried away about just settling, as it may not be that easy. Millie: Yes, Brian is right, you want to go into mediation with a plan. There Five Strategies for Early Mediation Success Tips for Young Professionals Who Are Facing Their First Mediations By Kelley Inman and Brad A. Markvart Kelley Inman is senior claims specialist at Hudson Insurance Group. kinman@hudsoninsgroup.com Brad A. Markvart, J.D., is litigation counsel at The General Insurance. bmarkvart@thegeneral.com ADRTHECLM.ORG/MAGAZINE CLM MAGAZINE 13 are many reasons to mediate. Of course, you want to settle the case, but sometimes the most fruitful mediations don’t end in an immediate resolution. Brian: Having a plan is very important. Have you received a pre- mediation report from counsel and had a call with them to discuss your plan? You may want to review your company’s guidelines to see whether your supervisor will need to be on the call with counsel, too. Zoe: I received a pre-mediation report and have a call set up with counsel today. What kind of plan should I discuss with counsel? Brian: You should discuss your initial offer with counsel and why you plan to make it in this range. For example, if there is a lien, you may want to talk about how that plays into your initial offer. You will want to figure out how much money the plaintiff could walk away with from the mediation after the liens and attorney’s fees are subtracted, because this is the amount that will usually drive the negotiations. Millie: You should also talk about the liability and damage arguments you want to discuss with the other side and the mediator. Sometimes the mediator asks for opening statements from both sides; other times the mediator just breaks each party into separate rooms. Brian: If your arguments aren’t gaining traction with the mediator, sometimes it’s helpful to discuss with counsel who will play “bad cop” if the mediation is an appropriate setting for that tactic. The “good cop’s” position then resonates as more reasonable by comparison. DISCUSSING AUTHORITY, RESERVES, AND RESOLUTION Zoe: OK, I see what you mean about having a strategy. I can tell counsel what my top authority is because they’re on my side, right? Millie: You don’t want to give counsel your full authority at the beginning of the mediation, and perhaps not at all. If you do, it may pressure you to negotiate higher and your ceiling becomes a floor. Zoe: If I cannot tell counsel my top number, I can tell the mediator the reserve on the file, right? That will help get the case settled, won’t it? Brian: Most of the time, you don’t want the mediator to know your full authority, either. It can result in an inflated settlement. Zoe: What do I do if the plaintiff’s demand remains inflated and we are not at all close to settling? Can I end the mediation and go to lunch? Brian: Often, you should continue negotiating. You will likely close the gap and you will be closer to a potential resolution. You may be able to find out what the plaintiff’s bottom line number is. Millie: Maybe there is a reason that the plaintiff is looking for a settlement in a certain range. Perhaps, there is a non- monetary way to achieve that goal. Zoe: What happens if the plaintiff’s demand remains very high and it looks like settlement cannot be achieved? What’s the point of mediation if I don’t settle the case? Millie: You might learn something about the plaintiff’s case, such as potential witness testimony or theories of liability. This can help you plan for trial, should you not be able to resolve the case otherwise. Brian: In addition, you are sending a clear message to the plaintiff on where you value the case and why. The plaintiff has now heard your defenses and heard a third party’s perspective on their case. THE USE OF BRACKETS IN NEGOTIATIONS Zoe: Someone mentioned brackets— what does that mean? Millie: Brackets are a negotiating tactic that can often be helpful in narrowing down the settlement range. Brian: When negotiating with brackets, one side will propose a low end and a high end. For instance, the plaintiff may say, “I’ll come down to $500,000 if the defendant comes up to $250,000.” Defense counsel could respond by saying, “The defendant will come to $150,000 if the plaintiff comes to $400,000.” Millie: It’s a way of testing certain settlement ranges without making an official offer. Brian: However, be aware that the other side may make assumptions that you are willing to offer the low end of the bracket. Millie: Also, the other side may presume that you will settle in the middle of the agreed-upon range. If that is not something you are comfortable with, you can either decline the proposed bracket, or you can make clear to the mediator that you are not indicating you will ever agree to the middle of the range. MEDIATOR’S PROPOSAL Millie: Another thing you can do if it doesn’t look like the case will settle is request a mediator’s proposal. This is when the mediator proposes a number to all parties as a “take it or leave it” number. No party knows another party’s response unless all parties accept the proposal. Often, the mediator’s proposal will remain open for several days to give each party time to evaluate the proposal. Zoe: Wow, thanks, this was really helpful. I feel ready for my first mediation. For any level of experience, but especially for newer litigation and claims professionals, these techniques can set up many cases for success. The momentum can be continued with future cases through ongoing application and incorporation of additional strategies developed during one’s learning curve. For now, Zoe is off to a successful mediation, and we anticipate the same for litigation professionals of any tenure who utilize these strategies. K You want to settle the case, but sometimes the most fruitful mediations don’t end in an immediate resolution.14 CLM MAGAZINE MAY 2023 C yber breaches are becoming more prevalent, substantial, and increasingly expensive, making cyber liability insurance essential for the survival of many companies. When cyber events are covered and losses paid, the financial burden is transferred to cyber insurance carriers. In addition to more robust underwriting strategies on the front end, cyber insurance carriers are increasingly turning to subrogation on the back end to offset the financial risks caused by cyber losses. In this article, two experts discuss cyber liability risks and the potential use of subrogation to limit losses. WHAT IS SUBROGATION AND HOW ARE CYBER INSURANCE CARRIERS USING IT TO MITIGATE OR LIMIT LOSSES CAUSED BY THEIR INSUREDS’ THIRD-PARTY SERVICE PROVIDERS AND VENDORS? PERLA HEADY: Subrogation is an insurance carrier’s right to legally pursue a third party responsible for an insured’s insurance loss. Subrogation can limit losses for insurance companies, impacting a carrier’s bottom line. Given the ever-rising expense of responding to a covered cyber incident, I have seen, and expect to see more, cyber carriers pursue actions against responsible parties. JEAN M. LAWLER: As a mediator, I see insurers actively seeking reimbursement of ransom payments and other incurred expenses from their insured’s service providers and vendors arising out of cyber incidents. The typical situation is where “bad guys” (i.e., threat actors) gained access to the insured’s computer network allegedly due to a failure by the vendor and for which the insured or its insurer paid a ransom and incurred other damages. These cases often come to mediation at the pre-suit or early-suit stages. The insured’s policy may be a cyber policy while the vendor’s policy could be a management liability or professional liability policy. Money, Money, Money Pursuing Cyber Liability Subrogation Claims Against Third-Party Service Providers Perla C. Heady is assistant vice president and claims counsel for cyber, technology & media liability claims at Sompo International Insurance. pheady@sompo-intl.com Jean M. Lawler is an attorney and commercial and insurance mediator and arbitrator at Lawler ADR Services, LLC. jlawler@lawleradr.com SUBROGATIONTHECLM.ORG/MAGAZINE CLM MAGAZINE 15 WHAT ARE SOME EXAMPLES OF WHERE SUBROGATION MIGHT BE PURSUED BY AN INSURANCE CARRIER IN THE CYBER LIABILITY RISK SPACE? HEADY: One example could be a company that engages an IT vendor to install a new firewall. The IT vendor commits an error during the installation, resulting in unauthorized access to personally identifiable information (PII) maintained on the company’s server. The breach results in millions of dollars in incident response and ensuing lawsuit defense fees and costs. The company’s cyber policy covers the loss. When the matter concludes, the company’s insurance carrier seeks recovery of all monies paid from the IT vendor. LAWLER: Here is another example. A company enters into an agreement with a managed service provider (MSP) to maintain the security and integrity of the company’s network and digital systems. The company suffers a ransomware attack, which results in significant incident response and business interruption costs. The company’s cyber policy covers the loss. The investigation determines that the ransomware attack occurred due to the MSP’s negligence in maintaining the security and integrity of the company’s network and digital systems. The company’s insurance carrier seeks recovery from the MSP of all monies paid. WHAT ARE SOME OF THE DIFFICULTIES WITH SUBROGATION IN THE CYBER LIABILITY RISK SPACE? HEADY: Determining the cause of a cyber incident is often difficult. Threat actors are often ahead of the game, devising better techniques for gaining access and remaining undetected. Forensic reports that can be helpful in determining a cause or responsible party are not always drafted and, when they are, such reports are inaccessible to carriers for legal privilege reasons. Further, a subrogation clause will only provide an insurer with the same rights an insured has against a third party causing a cyber loss. Insurers will often face contractual limitations that some vendors might include in their service contracts, impairing the insurer’s recourse against a responsible vendor. Finally, legal precedent involving subrogation in the cyber liability risk space is limited. It is still unclear how subrogation laws will be interpreted within this area. LAWLER: Service providers and vendors will usually have multiple clients who have been harmed by the same cyber incident or data breach, meaning the vendor will generally not agree to exhaust its policy limits in settlement, leaving uninsured exposures. The insured and its insurer will each have unique damages they may want to recover, such that the insured and its insurer will need to agree on how to divide the recovery. There may also be coverage issues that the insured and vendor are dealing with, with their own insurers. Insureds and service providers who are professionals may have additional issues regarding the release of privileged documents, or documents subject to privacy laws such as HIPAA. The vendor’s policy may have burning limits or be claims-made. DO YOU THINK THE STATE PRIVACY LAWS THAT HAVE RECENTLY GONE INTO EFFECT WILL INFLUENCE THESE CLAIMS? HEADY: Privacy laws expanding legal recourse to parties who may not have had such rights in the past will unequivocally lead to an uptick in what is often costly privacy litigation. Insureds will turn to their insurance carriers for coverage and insurance carriers will be looking to minimize their financial risk for amounts paid to defend insureds. LAWLER: Absolutely. Even if an insured is compliant with the law, a vendor’s activities affect the insured. Note that the recent $1.2 million Sephora California Attorney General settlement for California Consumer Privacy Act of 2018 (CCPA) violations required Sephora to: “…Conform its service provider agreements to the CCPA’s requirements; and provide reports to the Attorney General relating to…the status of its service provider relationships….” DO YOU HAVE ANY SUGGESTIONS FOR BEST PRACTICES REGARDING THESE TYPES OF CLAIMS? HEADY: Once a matter is submitted for coverage, it is important to flag potential areas of subrogation as early as possible and preserve any potentially relevant evidence. Additionally, it is important to always consider the cost of pursuing subrogation against any potential recovery. Where a subrogation target is uninsured or insolvent, pursuing subrogation may not be the most practical option. LAWLER: Best practices start with good risk management. Know their vendors and service providers, their computer systems and practices, as well as the business activities they are to undertake. Ensure that they have appropriate insurance. After a breach, document damages and retain subrogation counsel early in the process. Share damage documentation with the vendor and its insurer early, as they will need time to evaluate the claim. The insured and its insurer should work together as partners to do what needs to be done to contain the effects of the attack and to recover available damages from the liable party and its insurer. These cases are excellent candidates for early resolution. K Cyber insurance carriers are increasingly turning to subrogation on the back end to offset the financial risks caused by cyber losses.16 CLM MAGAZINE MAY 2023 THE RISE OF E-COMMERCE AND DELIVERY SERVICES HAS LED TO AN INCREASE IN THE NUMBER OF COMMERCIAL VEHICLES ON THE ROAD. HOW IS THIS IMPACTING CLAIMS AND LITIGATION? JAMES A. FOSTER, CASSIDAY SCHADE, LLP: Although there may be more commercial vehicles on the road, the one constant in defending transportation claims is the importance of communication with the driver, who is the face of the company. Defense counsel should establish a rapport with the driver beginning on the day an accident occurs, and maintain contact to prepare the driver for deposition, where cases are won or lost. This communication should be maintained through trial and is even more important if the driver no longer works for the trucking company. SANDY MCCLURE, FLEET RESPONSE: Post-COVID-19 created an even greater shortage of experienced drivers in the trucking industry, which required motor carriers to hire less-experienced drivers. This also increased the risk of accident claims that could lead to an increase in litigation claims. Because e-commerce has increased the demand for more delivery vehicles on city streets and roadways, particularly in residential areas, it could increase the risk of vehicle accidents, property damage claims, and probable litigation. MARC CHAPMAN, RESOLVE- MEDICAL CLAIMS RESOLUTION: Certainly, the rise in transportation- related casualties directly increases claims and litigation. Our job is to help clients avoid grossly overpaying the medical charges associated with those injuries. THE FMCSA RECENTLY UPDATED ITS SAFETY MEASUREMENT SYSTEM, A RISK-BASED SAFETY PROGRAM THAT USES DATA TO IDENTIFY AND TARGET HIGH-RISK MOTOR CARRIERS FOR ENFORCEMENT. IS THIS PROGRAM HELPFUL? WITH THAT IN MIND, WHAT ARE SOME WAYS YOU “PREDICT AND PREVENT” TRANSPORTATION-RELATED CLAIMS, AND IS IT HAVING AN IMPACT ON LITIGATION? SANDY MCCLURE, FLEET RESPONSE: Yes, because each motor carrier has a compliance safety accountability score that tells them if they are maintaining on-road driver safety. The score is calculated on a 0-100 scale, with higher numbers indicating a lower safety level, affecting the motor carrier and the driver. Seven roadside inspection basics can help predict and prevent probable transportation accident-related claims: • Observable unsafe driving behaviors, including speeding, reckless driving, improper lane changes, inattention, and not wearing seatbelts. • History of crash involvement. • Noncompliance with hours of service/ logbooks. • Observable vehicle maintenance, such as brakes, light defects, and failure to make repairs. • Use or possession of controlled substances/alcohol. • Hazardous materials compliance, such as leaking containers, improper packaging, and/or placarding. LEADING OUT LOUD TRANSPORTATION SPONSORED CONTENT HOW HAS THE RISE OF E-COMMERCE AFFECTED CLAIMS AND LITIGATION? WHAT TRENDS IN FRAUD HAVE EMERGED? AND FINALLY, WHAT ARE SOME OF THE BIGGEST CHALLENGES AND OPPORTUNITIES FACING THE TRANSPORTATION INDUSTRY TODAY? Photo by Dan Kitwood/Getty ImagesTHECLM.ORG/MAGAZINE CLM MAGAZINE 17 • Driver fitness questions, such as having an invalid license or being medically unfit to operate a CMV. Motor carriers/drivers that have high scores will predictably be at high risk for accidents and probable litigation claims. WHAT KINDS OF SCAMS OR FRAUDULENT ACTIVITY HAVE YOU SEEN IN THE COMMERCIAL AUTO ARENA? HOW ARE YOU COMBATTING IT? JAMES A. FOSTER, CASSIDAY SCHADE, LLP: The defense is fighting against plaintiffs’ scams and fraudulent activity in trucking cases, as evidenced by the defense’s response to staged accidents in New Orleans. Trucking companies and defense attorneys are working together on a united front, and there have been approximately 50 criminal convictions of those involved in staged crashes with trucks. The importance of securing dashcam, bodycam, and surveillance from the scene cannot be overstated to combat these frivolous claims. MARC CHAPMAN, RESOLVE- MEDICAL CLAIMS RESOLUTION: In our business, we do not deal with fraud. However, we have heard some of the most egregious medical charges referred to as “fraudulent” simply because no one pays the total amount being billed when charges are that inflated. To determine fairness in charges, we utilize a precise methodology of evaluation that includes the use of our extensive database encompassing over 20 years of financial data from every hospital in the U.S. Our methodology and reports accurately define what the charges in question should be, often 70-80% less than what it is. This information can be used in mediation, arbitration, or in negotiating settlements. WHEN YOU LOOK AHEAD TO THE NEXT FIVE YEARS, WHAT ARE SOME OF THE BIGGEST OPPORTUNITIES OR CHALLENGES YOU SEE IN TRANSPORTATION CLAIMS AND LITIGATION? MARC CHAPMAN, RESOLVE- MEDICAL CLAIMS RESOLUTION: The biggest challenge we help our clients address is the exponential rise in health care charges. Facilities’ cost-to-charge ratios continue to spread wider year over year regardless of governmental attempts to rein in charges or create transparency. This creates a large problem for claims teams that certainly do not want to overpay medical charges, but they do not know where to turn for affordable evaluations and support. When medical charges are marked up over 1,000%, agreeing to settle a claim at a 30% discount is obviously not a good deal. Increased claims volume poses additional challenges for claims teams. Sorting through 140-page demand letters is time-consuming and arduous even for highly skilled adjusters. Resolve’s technology solves these challenges, saving both time and money for claims teams and allowing them to manage larger workloads with accuracy and efficiency while gaining far fairer results. JAMES A. FOSTER, CASSIDAY SCHADE, LLP: Hopefully, more states (like Florida) will enact tort reform for judicial fairness and level the playing field for the defense bar in both discovery and at trial. There may also be a reduction in the number of nuclear verdicts with the development of Level 4 autonomous trucks, which operate without a driver, as aggravating factors like driver impairment, fatigue, and cellphone usage will not be aspects of the case. SANDY MCCLURE, FLEET RESPONSE: Opportunities and challenges with transportation claims and litigation in the next five years include correcting the driver shortage concerns; mitigating risk in the transportation industry regarding vehicle accidents, workplace injuries, workers’ compensation claims, workplace violence, and sexual harassment; creating and maintaining a sustainable safety culture; cybersecurity attacks in the transportation industry; and coexistence with our ecosystem to prevent global warming. K SPONSORED CONTENT MARC CHAPMAN is president and founder of Resolve - Medical Claims Resolution (a division of Chapman Consulting, LLC). mchapman@resolveclaims.co SANDY MCCLURE is safety director at Fleet Response. smcclure@fleetresponse.com JAMES A. FOSTER is a partner at Cassiday Schade, LLP. jfoster@cassiday.comNext >