NYDOCS1-449390.

1
11/16/11 11:58 AM


THE AMERICAN CONFERENCE INSTITUTE
FAIRMONT HOTEL, MARCH 23-24, 1998
SAN FRANCISCO, CALIFORNIA


BAD FAITH AND PUNITIVE DAMAGES


THE POLICYHOLDER`S GUIDE TO BAD FAITH INSURANCE
COVERAGE LITIGATION: UNDERSTANDING THE
RECOVERY TOOLS AVAILABLE TO POLICYHOLDERS


BY EUGENE R. ANDERSON
1ORDAN S. STANZLER
1AMES 1. FOURNIER

ANDERSON KILL & OLICK, P.C.
1251 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020-1182
(212) 2781000

http://www.andersonkill.com

CITICORP CENTER
ONE SANSOME STREET
SUITE 1020
SAN FRANCISCO, CA 94104
(415) 677-1450

SUITE 7500
2000 PENNSYLVANIA AVE., N.W.
WASHINGTON, DC 20006
(202) 278-3100
1600 MARKET STREET
32
ND
FLOOR
PHILADELPHIA, PA 19103
SUITE 901
ONE GATEWAY CENTER
NEWARK, N1 07102
(973) 642-5858

SUITE 1825
22 N. STONE AVENUE
TUCSON, AZ 85701
(520) 882-9299
1 RENAISSANCE SQUARE
2 NORTH CENTRAL
SUITE 1910
PHOENIX, AZ 85004-2393
(602) 252-0002

Copyright in 1997 Anderson Kill and Olick, P.C.

Eugene R. Anderson and Jordan S. Stanzler are partners in the New York oIIice oI Anderson Kill and
Olick, P.C. James J. Fournier is a member oI the New York bar and Director oI Insurance Coverage
Projects at the same Iirm. The Iirm has oIIices in New York, NY; Newark, NJ; Washington, D.C.;
Philadelphia, PA; San Franciso, CA; and Tucson and Phoenix, AZ. The Iirm regularly represents
policyholders in insurance coverage disputes.

NYDOCS1-449390.1
11/16/11 11:58 AM
-1-


THE POLICYHOLDER`S GUIDE TO BAD FAITH INSURANCE COVERAGE
LITIGATION - UNDERSTANDING THE AVAILABLE RECOVERY TOOLS
By Eugene R. Anderson, Jordan S. Stanzler and James J. Fournier
PART IInsurance Lore
PART II
Bad Lore
PART III
What Makes Insurance Different
The nature oI the insurance industry makes insurance diIIerent than any other
product sold in America. To win a bad Iaith claim against an insurance company, these
diIIerences, sometimes more appropriately viewed as inherent inequities between policyholders
and insurance companies, must be clearly understood.
With these diIIerences in mind, this paper sets Iorth some oI the issues and
techniques which lawyers and policyholders should consider when prosecuting a bad Iaith claim
against an insurance company.
Insurance is diIIerent. Once an insured Iiles a claim, the insurer
has a strong incentive to conserve its Iinancial resources balanced
against the eIIect on its reputation oI a `hard-ball` approach.
Insurance contracts are also unique in another respect . . . In a
typical contract, the non-breaching party can replace the
perIormance oI the breaching party by paying the then-prevailing
market price Ior the counter-perIormance. With insurance this is
simply not possible. This Ieature oI insurance contracts
distinguishes them Irom other contracts and justiIies the
availability oI punitive damages Ior breach in limited
circumstances.
1


1
E.I. du Pont de Nemours & Co. v. Pressman, 679 A.2d 436, 447 (Del. 1996).

NYDOCS1-449390.1
11/16/11 11:58 AM
-2-


An insurance policy is diIIerent Irom other products because oI the 'special
relationship between the insurance company and the policyholder.
2
The special relationship
consists oI a several diIIerent elements, including:
(1) the duty oI good Iaith and Iair dealing inherent in every insurance policy and between
insurance companies and their policyholders.
3

(2) the Iiduciary duties insurance companies owe to their policyholders;
(3) the public service nature oI insurance;
(4) the imbalanced bargaining position between an insurance company and its policyholder;
(5) the inIormation imbalance between insurance companies and their policyholders;
(6) the present payment oI money in exchange Ior a promise to pay the costs oI a Iuture
event which may or may not occur, and;
(7) the Iinancial motivation Ior the insurance company to delay or deny delivery oI its
promise.
The policyholder purchases an insurance policy, pays premiums up Iront and expects insurance
coverage when a claim is made.
4

A. Insurance Products And Contract Law: Apples and Oranges?
Traditional contract law provides an incentive Ior insurance companies to breach
the insurance policies they sell to policyholders:

2
See 2 EUGENE R. ANDERSON, ET AL., INSURANCE COVERAGE LITIGATION 11, at 2 (1st ed. 1997)
Ior a discussion oI the special relationship and public trust accorded to insurance companies. 11 oI this
text provides a comprehensive discussion oI modern bad Iaith law. For a discussion oI the historical
origins and development oI the duty oI good Iaith, see Kenneth S. Abraham, %he Natural History of the
Insurers Liability For Bad Faith, 72 TEX L. REV. 1295 (May 1994); Robert H. Jerry, II, THE WRONG
SIDE OF THE MOUNTAIN: A COMMENT ON BAD FAITH`S UNNATURAL HISTORY, 72 TEX. L. REV. 1317
(May 1994).
3
Pro-insurance industry commentators acknowledge that insurance companies owe their
policyholders a duty oI good Iaith and Iair dealing. See, e.g, BARRY R. OSTRAGER & THOMAS R.
NEWMAN, HANDBOOK ON INSURANCE COVERAGE DISPUTES 429 (5th ed. 1992). Ostrager and Newman
are attorneys who regularly represent insurance companies in insurance coverage disputes.

NYDOCS1-449390.1
11/16/11 11:58 AM
-3-


The traditional goal oI the law oI contract remedies has not been
compulsion oI the promisor |e.g. the insurance company| to
perIorm but compensation oI the promisee |e.g. the policyholder|
Ior the loss resulting Irom the breach.
5

But insurance is diIIerent. The Supreme Court oI Delaware recently explained:
Unlike other contracts, the insured has no ability to cover` iI the
insurer reIuses without justiIication to pay a claim. Insurance
contracts are like many other contracts in that one party (the
insured) renders perIormance Iirst (by paying premiums) and then
awaits the counter-perIormance in the event oI a claim. Insurance
is diIIerent, however, iI the insurer breaches by reIusing to render
the counter-perIormance. In a typical contract, the non-breaching
party can replace the perIormance oI the breaching party by paying
the then-prevailing market price Ior the counter-perIormance. With
insurance this is simply not possible. This Ieature oI insurance
contracts distinguishes them Irom other contracts. . . .
6

Under contract law, an opportunistic breach '|is| eIIicient when it creates
suIIicient beneIit such that promisor |the insurance company| can compensate promisee |the
policyholder| Iully and still be better oII by breaching than by perIorming and leaving one party
better oII and no one worse oII.
7
This is never true in cases involving a wrongIul denial oI
insurance coverage. Commentators have recognized that opportunistic breach by insurance
companies against their policyholders is especially inappropriate, because contract law remedies
cannot truly 'make whole a policyholder wrongIully denied insurance coverage:
The law wishes to prevent what Richard Posner calls
opportunistic breach` or breach designed to take advantage oI the

4
The Supreme Court oI West Virginia noted that policyholders buy insurance --not a lot oI
vexatious, time consuming, expensive litigation with |the insurance company|. Hayseeds, Inc. v. State
Farm Fire & Cas., 352 S.E.2d 73, 79 (W. Va. 1986).
5
RESTATEMENT (SECOND) OF CONTRACTS, Introductory note, Ch. 16, p.100 (1979).
6
E.I. du Pont de Nemours & Co. v. Pressman, 679 A.2d 436, 447 (Del. 1996). The court also
noted that these diIIerences justiIied 'the availability oI punitive damages Ior breach in limited
circumstances. Id.
7
See David W. Barnes, The Meaning oI Value in Contract Damages And Contract Theory, 46 AM.
U.L. REV. 1, 3 (Oct. 1996).

NYDOCS1-449390.1
11/16/11 11:58 AM
-4-


vulnerable promisee. . . . Ordinarily the law limits recovery to
expectation damages in order to Ioster eIIicient breaches. But
insurance contracts are perceived diIIerently. Insurance is Iar Irom
the market ideals oI complete inIormation and no transaction costs.
Opportunistic breaches are especially likely, and traditional
damage rules do not suIIiciently deter them. Additionally, it is the
very nature oI the insurance contract that payment is to be made
automatically without the need Ior a lawsuit. As one court
summarized it:
The beneIit contracted Ior by an insured under the terms oI a
policy is the availability oI money promptly upon the occurrence
oI a particular event. When an insurer reIuses unreasonably to
make a payment oI the beneIit due, or when the insurer does not
pay promptly, it deprives the insured oI the essence oI the bargain.
The insured bargained Ior prompt payment, not a right oI action
against the insurer.`
8

Also consider that insurance transactions are completed sequentially, with the policyholder Iirst
paying the premium, in exchange Ior the insurance company`s promise to provide insurance
coverage in the Iuture.
Sequencing has many advantages, but it creates an unIortunate
incentive. Having received its beneIit Irom the bargain, the party
who is to perIorm last may be tempted to renege on its obligations.
Law and economics scholars oIten describe the conduct oI a
reneging party in these situations as opportunistic.` The reneging
party, perceiving an opportunity to increase its gain, yields to
temptation and reIuses to perIorm.
9

Insurance companies owe their policyholders a long term obligation. UnIortunately, contract
damage rules create incentives Ior parties to breach when the subject matter oI the contract can
be devoted to a more valuable use.

8
Mark Pennington, Punitive Damages For Breach of Contract. A Core Sample From %he Last %en
Years, 42 ARK. L. REV. 31, 54 (1989). The second portion oI the quote above is taken Irom a decision
which was later vacated. Kanne v. Connecticut Gen. LiIe Ins. Co., 607 F. Supp. 899, 907 (C.D. Cal.
1985), aII`d in part and rev`d in part, 819 F.2d 204 (9th Cir. 1986), op. withdrawn, reh`g granted, 823
F.2d 284 (1987), vacated, 859 F.2d (1988), cert. denied, 492 U.S. 906 (1989).

NYDOCS1-449390.1
11/16/11 11:58 AM
-5-


The leading text in law and economics deIines the economic value oI something
as 'how much someone is willing to pay Ior it or, iI he has it already, how much money he
demands Ior parting with it.
10
Opportunistic breach, however, is wholly inconsistent with the
purposes oI insurance. Unlike a contract, to a policyholder, an insurance policy is not a widget
and it is not simply a contract to pay money. It is a product.
11
It is peace oI mind and an

9
G. Richard Bell, Opportunism and %rust in the Negotiation of Commercial Contracts. %oward A
New Cause of Action, 44 VAND. L. REV. 221, 222 (Mar. 1991)(Iootnote omitted). See also E.I. DuPont
de Nemours & Co. v. Pressman, 679 A.2d 436, 447 (Del. 1996) Ior judicial recognition oI this principle.
10
See David W. Barnes, %he Meaning of Jalue in Contract Damages And Contract %heory, 46 AM.
U.L. REV. 1, 2 (Oct. 1996) quoting RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 31 (4th ed.
1992).
11
An insurance policy is a product, not a mere contract right. Courts and insurance companies have
reIerred to insurance policies as products. See, e.g., U.S. Healthcare v. Blue Cross, 898 F.2d 914, 917 (3d
Cir. 1990); Omega Nat`l Ins. Co. v. Marquardt, 799 P.2d 235 (Wash. 1990) (upholding state insurance
commissioner`s rule aimed at 'banishing certain oIIensive insurance products Irom the state marketplace
because the policies were 'inherently unIair to insurance purchasers); State Farm Mut. Auto. Ins. Co. v.
Wyoming Ins. Dep`t, 793 P.2d 1008, 1016 (Wyo. 1990) (insurance policyholders are 'purchasers oI the
product); New Mexico LiIe Ins. Guar. Ass`n v. Quinn & Co., 809 P.2d 1278, 1284 (N.M. 1991);
National Claims Assoc. v. Division oI Employment, 786 P.2d 495, 498 (Colo. Ct. App. 1989); C & J
Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169, 178 (Iowa 1975); Batton v Tennessee Farmers
Mut. Ins. Co., 736 P.2d 2, 5-6 (Ariz. 1987) (en banc). See also Letter Irom Allstate agent to policyholder
(Apr. 24, 1995)(on Iile with the authors); Special Notice Irom Aetna LiIe & Casualty to Aetna
policyholders (ed. 11-88)(on Iile with the authors); Should Your Insurance Company Have a Specialty
Niche Insurance Product Development Department, INSURANCE AND REINSURANCE TRENDS, Dec. 1994,
at 10.
Because insurance policies are products, courts have also recognized implied warranties in the
sale oI an insurance policy. See, e.g., Carper v. State Farm Mut. Ins. Co., 758 F.2d 337 (8th Cir. 1985)
(theory oI implied warranty Ior a particular purpose Iocuses on the circumstances present at the time the
insurance policy is sold). The Supreme Court oI Iowa has held that a standard Iorm insurance policy was
subject to the implied warranty oI Iitness Ior its intended purpose. C & J Fertilizer, above. Similarly, the
Supreme Court oI Arizona has held that selling an insurance policy is no diIIerent than selling a product.
Batton, above. The recognition oI an implied warranty oI Iitness in the sale oI an insurance policy was
summarized by a Missouri court as Iollows:
Although implied warranties oI Iitness Ior intended purpose have
traditionally been attached only to sales oI tangible products, there
is no reason why they should not be attached to 'sales oI promises
as well. Whether a product is tangible or intangible, its creator
ordinarily has reason to know oI the purposes Ior which the buyer
intends to use it, and buyers ordinarily rely on the creator`s skill or
judgment in Iurnishing it.

NYDOCS1-449390.1
11/16/11 11:58 AM
-6-


expectation that the policyholder is protected. It is an obligation backed by a Iiduciary duty and
a duty oI good Iaith by the insurance company which sold the policyholder the insurance
coverage.
12
All oI these concepts are promoted by insurance companies.
An insurance company who breaches its promise to provide insurance coverage
can only leave a policyholder worse oII than iI the promise were IulIilled. A policyholder can
never win when an insurance company opts Ior an opportunistic breach.
13
Moreover, unlike an
insurance company, it is impossible Ior a policyholder to opt Ior an opportunistic breach. The
policyholder has nothing tangible only a promise Irom the insurance company that it will
provide insurance coverage and an assurance oI peace oI mind. The insurance company
already has the policyholder`s premium dollars. II the premium is not paid, the insurance is
cancelled.
Unlike other products, or contracts generally, breach oI an insurance policy does
not involve a third party vying Ior what the insurance company has already promised to sell to
the policyholder the policyholder`s insurance coverage. Rather, the insurance company
merely wants to hold onto the policyholder`s money Ior as long as it can.
14


Estrin Constr. Co. v. Aetna Cas. & Sur. Co., 612 S.W.2d 413, 424 n.10 (Mo. Ct. App. 1981), (quoting
Irom W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84
HARV. L. REV. 529, 546-47 (1971)).
12
U.S. v. Brennon cite holds that an insurance company is not a Iiduciary| For an argument that
insurance companies do not owe policyholders a Iiduciary duty, see William T. Barker et al., Is an
Insurer a Fiduciary to Its Insureds?, 25 TORT & INS. L.J. 1 (1989); William T. Barker, Fiduciary Duty,
R.I.P., 6 BAD FAITH L. REV. 107 (1990). Mr. Barker regularly represents insurance companies.
13
See, e.g., West Am. Ins. Co. v. Freeman, 46 Cal. App. 4th 1476 (1st Dist. 1995), rev. granted, 907
P.2d 1323 (Cal. 1995), rev. dismissed, 927 P.2d 1172 (1996), rev. denied, No. S049306, 1997 Cal. LEXIS
649 (Cal. Feb. 5, 1997), cert. denied, -- U.S. --, 117 S. Ct. 1695 (U.S. 1997). (Note that the appellate
decision was superseded by the CaliIornia Supreme Court`s grant oI review and that publication has not
been reinstated. See Cal. Rules oI Court 976, 977).
14
See Mark Pennington, Punitive Damages For Breach of Contract. A Core Sample From %he Last %en
Years, 42 ARK. L. REV. 31, 54 (1989):

NYDOCS1-449390.1
11/16/11 11:58 AM
-7-


Opportunistic breach should have absolutely no place in insurance law.
UnIortunately, contract law promotes, not discourages, opportunistic breach.
15
Combined with
insurance companies litigation abilities, strict enIorcement oI contract law nearly guarantees an
insurance company victory. The reasonable expectations doctrine, by going beyond traditional
contract analysis and the language oI the policy, enables courts to Iully compensate a
policyholder Ior all oI the damage caused by a wrongIul denial oI insurance coverage. The tort
duty oI good Iaith and Iair dealing 'Iills the void created by the parties` disparity oI bargaining
power and the insurer`s exclusive control over claim processing.
16

Contract law is in evolution.
17


With regard to claims Ior small amounts oI money, the insurance
company has some incentive to reIuse payment because little
likelihood exists that the claimant will pursue the claim. As Ior
large claims, the insurance company may Iind it proIitable to delay
payment as long as possible to keep Ior itselI the time value oI the
amount due. Finally, prolonged delays in payment may make the
insured more willing to settle Ior less than the amount due,
particularly iI the insured is Iinancially desperate.
15
David W. Barnes, The Meaning oI Value in Contract Damages And Contract Theory, 46 AM.
U.L. REV. 1, 2 (Oct. 1996).
16
Douglas R. Richmond, An Overview of Insurance Bad Faith Law and Litigation, 25 SETON HALL
L. REV. 74, 79 (providing an excellent review oI the issues involved in bad Iaith litigation, including the
development oI the duty oI good Iaith and Iair dealing, diIIerences between third-party and Iirst party
insurance, the duty to deIend, the duty to indemniIy, the duty to settle, comparative bad Iaith and reverse
bad Iaith).
17
See Sons oI Thunder, Inc. v. Borden, Inc., 148 N.J. 396, 690 A.2d 575 (1997). In a non-
insurance case, the New Jersey Supreme Court held that a company can be liable Ior bad Iaith damages
even though the company had complied with the terms oI the contract. The Court reinstated a jury award
oI approximately one years worth oI additional proIits Ior the breach oI the implied covenant oI good
Iaith, reversing the lower court Iinding that the right to terminate the contract could not be eliminated by
an implied covenant oI good Iaith and Iair dealing. See also Dean Starkman, Award of $738,000 is
Upheld in Claims Case, WALL ST. J., Mar. 13, 1997, at B13.

NYDOCS1-449390.1
11/16/11 11:58 AM
-8-


B. Systemic Imbalances Must Be Called To the Court`s Attention
1. The Information Imbalance
Insurance companies take advantage oI policyholder ignorance. Policyholders do
not understand how the insurance industry works. Only the insurance companies and some oI
the state insurance departments have a relatively complete understanding oI the industry.
'Insurance is Iar Irom the market ideals oI complete inIormation, the Supreme
Court oI Delaware said in a recent case.
18
The insurance industry is not competitive because
Congress exempted the industry Irom Iederal anti-trust regulation by the McCarran-Ferguson
Act. The move towards insurance industry exemption Irom anti-trust regulation began in 1944,
when the United States Supreme Court rejected insurance company arguments that insurance
was not commerce. The Court held that Congress could properly apply Iederal antitrust statutes
to the insurance industry.
19
As one noted commentator tells it:
This decision sent shivers down the spines oI insurance company
executives, who Ieared the prospect oI Iederal agencies,
particularly the Federal Trade Commission, interIering with the
insurers` cozy relationships with the state insurance
commissioners. The insurance industry devised an ingenious plan
to head oII Iederal regulation. It persuaded Congress to introduce
legislation, known as the McCarran-Ferguson Act, which provided
a three year moratorium on Iederal regulation oI the insurance
industry. At the expiration oI the moratorium the Iederal
regulators could then assert their authority only over those aspects
oI the insurance industry not regulated by the states. This
moratorium gave the insurance commissioners the opportunity,
through the National Association oI Insurance Commissioners
(NAIC), to draIt model legislation intended to preempt the entire
Iield oI insurance industry regulation and thus protect the

18
E.I. du Pont De Nemours & Co. v. Pressman, 679 A.2d 436 (Del. 1996) (quoting Mark
Pennington, Punitive Damages for Breach of Contract. A Core Sample from the Decisions of the Last %en
Years, 42 ARK. L. REV. 31, 54 (1989)).
19
See STEPHEN S. ASHLEY, BAD FAITH ACTIONS: LIABILITY AND DAMAGES 9:02 at 4 (1996).
The United States Supreme Court decision was United States v. South-Eastern Underwriters Ass`n, 322
U.S. 533 (1944).

NYDOCS1-449390.1
11/16/11 11:58 AM
-9-


commissioners` turI Irom Federal Trade Commission
encroachment. (Iootnotes omitted)
20

The 'ingenious plan has crippled policyholders ever since and represented a
powerIul victory Ior the insurance industry. The insurance industry`s exemption Irom Iederal
anti-trust regulation gives insurance companies a tremendous litigation and organizational
advantage. Exemption Irom anti-trust regulation allows insurance companies to exchange vast
amounts oI allegedly conIidential insurance industry inIormation and documents. Policyholders
are deprived oI this same inIormation and those same documents.
The inIormation imbalance impacts the decisions oI state regulatory agencies.
For example, the New York State Insurance Department currently makes decisions and rulings
Irom inIormation provided solely by the insurance industry. Even iI given the opportunity,
policyholders do not have the resources to present a Iull actuarial or legal case to the New York
State Insurance Department. There is no advocate Ior policyholders beIore the state insurance
departments.
21
Insurance companies, on the other hand, can and do hire staIIs oI attorneys,
economists, researchers, and actuaries. In Iact, insurance companies hire more attorneys than
any other industry in the United States.
22
According to one inIluential insurance industry source:

20
Id.
21
Texas is the only state with a pro-policyholder watchdog; The OIIice oI Public Insurance Counsel
oI the State oI Texas (OPIC).
22
See Zan Hale, Want a Job? Call An Insurance Company; Insurers Dominate The List Again,
CORP. LEGAL TIMES, Aug. 1995, at 1. See also, Angela Ward, The Big Just Keep Getting Bigger; Doing
More With. . . More, CORP. LEGAL TIMES, Aug. 1996, at 1.

NYDOCS1-449390.1
11/16/11 11:58 AM
-10-


OI course, the insurance industry is Iortunate in having at its
disposal a veritable army oI qualiIied experts in a dizzying number
oI disciplines.
23

Policyholders are not so Iortunate.
Equally concerning to policyholders is that most state insurance commissioners
come Irom the insurance industry and leave their government oIIice in order to return to the
industry (by accepting an oIIer oI high-level employment with an insurance company at a much
higher salary).
24
Insurance companies can play a hand in determining who the insurance
department should single out Ior regulatory scrutiny.
25
When insurance companies want their
way, they usually get it.
26


23
Bill Thorness, %he Explosive Nature of Evidence, CLAIMS, June 1997, at 8. Mr. Thorness is the
editor oI CLAIMS.
24
See Walter Updegrave, Stacking the Deck, MONEY, Aug. 1996, at 50, 52 (characterizing this unIortunate
phenomenon as a revolving door to the insurance industry); L.H. Otis, Pa. Regulator Named, NAT`L UNDERWRITER
P/C ed., Aug. 4, 1997, at 7 (reporting that Pennsylvania`s insurance commissioner was returning to Reliance
Insurance Company, her Iormer employer, and that she was to be replaced by the vice-president and general counsel
oI Provident Mutual LiIe Insurance Company). The 'revolving door at the top at state insurance departments
widens the inIormation imbalance between the insurance companies and its policyholders by seriously questioning
whether protecting policyholders` or a potential employer is the primary concern oI the state insurance department.
See, e.g., Robert H. Gettlin, An Elder Statesman Moves On, BEST`S REV. P/C ed., Sept. 1997, at 16:
Insurance commissioners live in two worlds. They`re charged with
protecting consumer interests, but they`re also responsible Ior
maintaining a healthy insurance market and keeping proIitable
companies in the state. Commissioners tack back and Iorth
between these twin duties. A state regulator may promote one role
over the other, but can never Iully escape the natural tensions oI
the job.
The article goes on to note that Maine`s retiring superintendent oI insurance, who had held his post Ior
Iive years, was 'one oI the grizzled veterans oI the proIession. Id. According to the article, oI the IiIty-
Iive sitting commissioners, only six had been at their posts longer. As oI September 1997, ten insurance
commissioners had resigned in 1997. Id.
25
See, e.g, Peter S. Canellos, Insurance Fraud Case Attacks Mass. System, BOSTON GLOBE, Jan. 11, 1998, at
A1. According to the article, while the investigative bureaus oI some states accept contributions Irom industries to
oIIset the cost oI prosecuting their cases, those states allegedly 'keep their investigative bureaus under the control oI
public oIIicials -- not industry representatives.

NYDOCS1-449390.1
11/16/11 11:58 AM
-11-


2. The Imbalance In Money and Litigation Resources
For policyholders making a claim Ior insurance coverage, the cooperation to be
expected Irom a Iiduciary entrusted with a duty oI good Iaith and Iair dealing is oIten simply not
there. Instead, the policyholder may be conIronted by a Iinancial colossus with unmatched
expertise and resources in insurance coverage litigation. Indeed, as Liberty Mutual Insurance
Company recognized:
|the policyholder| is likely not as Iamiliar with litigation and
claims evaluation and disposition as is the insurance company
. . . |T|he insurer is a proIessional deIender oI lawsuits . . . Unlike
the insured, an |insurance company| is not a novice as to matters
involving litigation.
27

Indeed, the disparity in bargaining power, knowledge and resources has led courts
to recognize 'the unique nature oI contracts oI insurance and to Iurther hold that 'judicial
regulation oI insurance contracts is essential in order to prevent overreaching and injustice.
28
It
Iollows Irom the disparity in bargaining power that policyholders possess Iar less inIormation

Massachusetts` Insurance Fraud Bureau is Iunded by the industry and privately run, allowing
insurance companies to 'buy themselves a special Division oI |the attorney general`s| oIIice -- thereby
directing more attention toward cases oI special interest to them. Id. This argument was made by the
attorney Ior a law oIIice Iacing an insurance Iraud prosecution. The deIendants argued that the state
attorney general had 'surrendered part oI his prosecutorial discretion by accepting more than $1 million
Irom insurance industry sources to Iund the state`s insurance Iraud division.
26
Industry eIIorts to clip the wings oI their regulators are Iront page news. See Scot J. Paltrow,
How Insurance Firms Beat Back an Effort for Stricter Controls, WALL ST. J., Feb 5. 1998, at 1
(discussing how the insurance companies curbed the National Association oI Insurance Commissioners
eIIorts to regulate areas which were 'getting short shriIt in the underIunded state insurance departments.
Relatedly, see Scot J. Paltrow, Indianas Regulators Have Little Budget or Clout, Conflicts at the Capitol,
WALL ST. J., Jan. 14, 1998, at 1 (describing the bond between state insurance regulators and the insurance
industry and the dangerous eIIects oI chronic underIunding at Indiana`s Insurance Department).
27
Liberty Mutual Insurance Company`s Memorandum in Support oI Motion Ior Partial Summary
Judgment at 7, Iiled July 5, 1988, National Union Ins. Co. v. Liberty Mut. Ins. Co., 696 F. Supp. 1099
(E.D. La. 1988)(No. 86-2000). Liberty Mutual has been sanctioned Ior being a 'major league team in
the game oI 'hardball litigation. See Adolph Coors Co. v. American Ins. Co., 164 F.R.D. 507, 509 (D.
Colo. 1993).
28
Sparks v. St. Paul Ins. Co., 495 A.2d 406, 414 (N.J. 1985).

NYDOCS1-449390.1
11/16/11 11:58 AM
-12-


than insurance companies and thus are at a distinct disadvantage in establishing their entitlement
to insurance coverage. As recently acknowledged by the Supreme Court oI Delaware,
'Insurance is Iar Irom the market ideals oI complete inIormation.
Litigation is the bread and butter oI liability insurance companies and they are
comIortable with it. Franklin W. Nutter, Iormer president oI the Alliance oI American Insurers,
wrote, 'The liability system is Iuel Ior the insurance engine.
29
Insurance companies now admit
that they are waging a 'war against policyholders.
30
In this 'war, insurance companies are
'institutional litigants. Insurance companies boast that they have Iiled 'tens oI thousands oI
brieIs across the country in a number oI courts and in a vast variety oI contexts against their
policyholders.
31
Claims exceeding ten million dollars are seldom resolved without litigation.
32

The insurance industry has admitted that it spends one billion dollars a year in so-called
coverage litigation,`
33
typically in the Iorm oI declaratory judgment actions. As the Chairman

29
Franklin W. Nutter, Search Ior Stability: Industry Must Solve Problems that Undermine a Stable
Market, BUS. INS., June 17, 1985, at 21.
30
See, e.g., Memorandum oI Law oI CNA in Support oI Motion To Strike Amended
Counterclaims, Cross-Claims and Third-Party Complaint oI General Battery at 1, Iiled Feb. 2, 1996,
Continental Cas. Co. v. General Battery Corp., No. 93C-11-008, (Del. Super. Ct., New Castle County).
The CNA Insurance Group is compromised oI approximately Iorty-seven insurance companies. See
BEST`S INSURANCE REPORTS: PROPERTY-CASUALTY UNITED STATES (1997 ed.).
31
See BrieI and Appendix oI Amicus Curiae Insurance Environmental Litigation Association
(IELA) in Support oI Continental Insurance Company, Aetna Casualty and Surety Company and
Fireman`s Fund Insurance Company oI Newark, N.J. at 25, n.21, Iiled Aug. 24, 1992, County oI
Columbia v. Continental Ins. Co., 595 N.Y.S.2d 988 (App. Div. 3d Dep`t 1993)(No. 65588).
32
See Richard A. Archer, Preparing for a Mega-Loss, BUS. INS., Oct. 10, 1994, at 23. Mr. Archer
is the retired deputy chairman oI Jardine Insurance Brokers, Inc. See also L. Brenner, %he Polluted Open
Box, CORP. FINANCE, June/July 1995, at 34, 35 ('No matter what the policy language, iI there is a
signiIicant seven-digit claim, its not going to be covered |by the policyholder`s insurance company|.)
33
See BrieI oI Amicus Curiae American Insurance Association, at 3, AIIiliated FM Ins. Co. v.
Constitution Reinsurance Corp., 416 Mass. 839, 626 N.E.2d 878 (1994)(No. SJC-06165); Leslie Scism,
%ight-Fisted Insurers Fight %heir Customers %o Limit Big Awards, WALL ST. J., Oct. 15, 1996, at 1;
Miller v. Fluharty, No. 23993, 1997 W. Va. LEXIS 289, at *21, n.10 (W. Va. Dec. 16, 1997)(noting that
the disparity in bargaining power between an insurance company and its policyholder 'is apparent in the
Iact that insurance companies spend over $1 billion annually in litigation battles against policyholders,
citing Eugene R. Anderson & Joshua Gold, Recoverability of Corporate Counsel Fees in Insurance

NYDOCS1-449390.1
11/16/11 11:58 AM
-13-


oI Dow Chemical Company has lamented, 'it has become standard procedure Ior some insurance
companies to procrastinate and dispute rather than honor policies with companies that become
embroiled in litigation.
34
Against an individual policyholder, litigating perhaps its Iirst
insurance coverage claim, insurance companies possess overwhelming advantages in resources,
experience, and previously-written brieIs on similar issues. Policyholders, on the other hand,
must constantly reinvent the wheel. One insurance company put it this way: 'Unlike the insured,
|an insurance company| is not a novice as to matters involving litigation.
35

It does not take a Iinancial genius to Iigure out that an insurance company can
make more money by collecting premiums and NOT paying claims than the insurance company
can make by collecting premiums and paying claims. Even the pro-industry press has picked up
on this.
36

A careIul analysis oI insurance company Iinancial statements Irequently will
disclose just when the insurance company changed its 'claims paying philosophy and under
what circumstances the change was made. 'Claims paying philosophy are insurance industry
code words. They are used to distinguish those insurance companies that pay claims Irom those
that do not. Ultimately, the 'claims paying philosophy will determine when, how, and iI claims

Coverage Disputes, 20 AM.J.TR.ADV. 1, 3 n.5 (1996). Moreover, the $1 billion Iigure includes only what
the insurance industry spends on property and casualty insurance litigation. When liIe and health
insurance litigation expenditures are added, 'the legal costs oI coverage battles with policyholders may
Iar exceed $1 billion|.| Robert H. Gettlin, Fighting the Client, BEST`S REV. P/C, Feb. 1997, at 49;
34
Richard Hazleton, %he %ort Monster %hat Ate Dow Corning, WALL ST. J., May 17, 1995, at A21.
35
Liberty Mutual Insurance Company`s Memorandum in Support oI Motion Ior Partial Summary
Judgment at 7, Iiled July 5, 1988, National Union Ins. Co. v. Liberty Mut. Ins. Co., 696 F. Supp. 1099
(E.D. La. 1988(No. 86-2000).
36
See Leslie Scism, %ight-Fisted Insurers Fight %heir Customers %o Limit Big Awards, WALL ST.
J., Oct. 15, 1996, at 1; Robert H. Gettlin, Fighting %he Client, BEST`S REVIEW P/C, Feb. 1997, at 49, 50
(noting that insurance companies spend over $1 billion a year litigating against their policyholders). See
also Charles E. Schmidt, Jr., Industry Executives Receive New Marching Orders, BEST`S REV. P/C, Feb.

NYDOCS1-449390.1
11/16/11 11:58 AM
-14-


get paid. The 'claims handling philosophy, however, is an intangible which cannot be Iound in
the insurance policy.
37
Financial inIormation about the insurance company can sometimes
provide indicators oI how an insurance company handles claims. For example, a decrease in the
written premiums could Iorce an insurance company to tighten its grip on claim payments.
Another indicator is a historical tendency oI the insurance company to litigate disputes with
policyholders.
38
A broker should also be able to provide inIormation about claims handling
reputation, but most brokers are very reluctant to make negative comments about their
'markets.
3. The Imbalance in Bargaining Power Between the Insurance Company and
the Policyholder
Many courts have recognized that 'the bargaining power oI an insurance carrier
vis-a-vis the bargaining power oI the policyholder is disparate in the extreme.
39
As noted by the
Supreme Court oI CaliIornia:
|T|he relationship oI insurer and insured is inherently unbalanced;
the adhesive nature oI insurance contracts places the insurer in a
superior bargaining position. The availability oI punitive damages
is thus compatible with recognition oI insurers` underlying public
obligations and reIlects an attempt to restore balance in the
contractual relationship.
40


1996, at 40 (discussing the industry-wide imperative to stay 'sharply Iocused on bottom-line results and
capital justiIication).
37
See Anthony J. Falkowski, %he Risk Managers Pivotal Role in D&O, RISK MGMT., Apr. 1993, at
57; Kirk L. Jensen & SanIord Victor, Update on D&O Coverage, J. OF CORP. BD., July/Aug. 1995.
38
See Stephen Sills, Shopping the D&O Market: Directors and OIIicers Liability Insurance, RISK
MGMT., July 1995, at 65.
39
Hayseeds, Inc. v. State Farm Fire & Cas., 352 S.E.2d 73, 77 (W. Va. 1986).
40
Egan v. Mutual oI Omaha Ins. Co., 620 P.2d 141, 146 (Cal. 1979), cert. denied, 445 U.S. 912
(1980)(citations omitted). See also McCullough v. Golden Rule Ins. Co., 789 P.2d 855, 856 (Wyo.
1990).

NYDOCS1-449390.1
11/16/11 11:58 AM
-15-


The Supreme Court oI Oklahoma held:
OI particular importance is the delicate position oI the insured aIter
a loss is incurred: `The very risks insured against presuppose that iI
and when a claim is made, the insured will be disabled and in strait
Iinancial circumstances and, thereIore, particularly vulnerable to
oppressive tactics on the part oI an economically powerIul
entity.`
41

Similarly, the Supreme Court oI Arizona stated:
The special nature oI an insurance contract has been recognized by
courts and legislatures Ior many years . . . . An insurance policy is
not obtained Ior commercial advantage; it is obtained as protection
against calamity. In securing the reasonable expectations oI the
insured under the insurance policy there is usually an unequal
bargaining position between the insured and the insurance
company. . . . OIten the insured is in an especially vulnerable
economic position when such a calamity loss occurs. The whole
purpose oI insurance is deIeated iI an insurance company can
reIuse or Iail, without justiIication, to pay a valid claim.
42

The West Virginia Supreme Court oI Appeals in arrett v. E. L. Harper & Son,
Inc.
43
succinctly noted that:
Insurance is diIIerent Irom any other business. II a man goes into a
butcher shop, asks Ior two pounds oI ground meat, and tenders
$2.89 in payment, he will expect his meat to be Iorthcoming Irom
the grinder. Imagine the scene were the customer to ask Ior his
meat, and be answered that the butcher has no intention to deliver
the same. 'Where is my meat? the customer would reply,
possibly in other than dulcet tones. 'I won`t give you any meat,
replies the butcher Iirmly. 'Then give me back my $2.89 and I
shall go elsewhere, says the customer. 'I won`t give you the
$2.89 either, replies the butcher, 'Ior you must bring a lawsuit to
get it Irom me. Sock! Pow! Blam! And much property damage
oI a diIIerent sort.
. . .

41
Buzzard v. Farmers Ins. Co., 824 P.2d 1105, 1108 (Okla. 1991) (quoting Fletcher v. Western
Nat`l LiIe Ins., 10 Cal. App. 3d 376 (1970).
42
Noble v. National Am. LiIe Ins. Co., 624 P.2d 866, 867-68 (Ariz. 1981).
43
Jarrett v. E. L. Harper & Son, Inc., 160 W. Va. 399, 235 S.E.2d 362 (1977).

NYDOCS1-449390.1
11/16/11 11:58 AM
-16-


Yet such a colloquy proceeds with regularity in the area oI
insurance. The case oI Iire insurance leaps instantly to mind when
companies Irequently deny liability under contracts with their own
insureds. Furthermore, iI a man`s car is damaged negligently by
another party, the tort-Ieasors insurance carrier, recognizing Iull
well the liability, may well decline to pay Iorthwith, relying instead
upon its ability to wear the injured victim down with legal
expenses and the cost oI stamps Ior the exchange oI meaningless
correspondence.
44

One CaliIornia court captured the essence oI what motivates all too many
insurance companies to deny insurance coverage:
'|A| lot oI people who regarded themselves as rather powerIul got
together and |rode| roughshod over |the policyholder| because they
viewed him as someone who was powerless and unable to Iight
back.
45

4. Insurance Companies Profit From Litigation
Insurance companies may improperly deny insurance coverage Ior purely
Iinancial reasons. This is because insurance companies proIit by prolonging a coverage dispute
rather than paying a claim even when they know the claim is valid. This Iinancial reality was
explained by no less than a standard textbook oI the insurance industry:
'When an insurance company Iails to pay claims it owes or
engages in other wrongIul practices, contractual damages are
inadequate. It is hardly a penalty to require an insurer to pay the
insured what it owed all along.
46

The quoted textbook is part oI the required materials Ior students preparing to obtain the
proIessional designation oI Chartered Property and Casualty Underwriters ('CPCU). Thus,

44
160 W. Va. at 405, 235 S.E.2d at 366 (Neely, J., concurring).
45
See West Am. Ins. Co. v. Freeman, 46 Cal. App. 4th 1476 (1st Dist. 1995), rev. granted, 907 P.2d
1323 (Cal. 1995), rev. dismissed, 927 P.2d 1172 (1996), rev. denied, No. S049306 1997 Cal. LEXIS 649
(Cal. Feb. 5, 1997), cert. denied, 117 S. Ct. 1695 (U.S. 1997).
46
JAMES J. MARKHAM, ET AL., THE CLAIMS ENVIRONMENT 274 (1993) (this is a comprehensive
text used to train insurance company personnel in claims handling practices).

NYDOCS1-449390.1
11/16/11 11:58 AM
-17-


candidates Ior the highest proIessional status in the business oI insurance are taught that
contractual damages alone are inadequate.
UnIortunately, the stark reality is that '|a|ll that an insurance company has to sell
is its promise to pay. Yet, all other things being equal, the better an insurance company is at
avoiding that promise, the more money it makes.
47
The essence oI what motivates all too many
insurance companies to deny insurance coverage was captured by one CaliIornia court:
'|A|lot oI people who regarded themselves as rather powerIul got
together and |rode| roughshod over |the policyholder| because they
viewed him as someone who was powerless and unable to Iight
back.
48

The practicalities and economics oI denying insurance coverage weigh heavily in
Iavor oI insurance companies.
49
First, insurance companies earn investment income a proIit
during an insurance coverage dispute with a policyholder. This is done by continuing to
invest the policyholder`s premiums and the reserves Ior the duration oI the dispute. Second,
insurance companies are bulk purchasers oI legal services; they incur proportionately lower
litigation costs than their policyholders, and can reuse work product Irom case to case. This is
particularly true in the property and casualty insurance industry, where the twenty largest
insurance companies have banded together to Iorm the Insurance Environmental Litigation
Association ('IELA). These Iactors, combined with the insurance industry`s tremendous

47
Tom Baker, Symposium on the Law oI Bad Faith in Contract and Insurance Agreements: Theory:
Constructing the Insurance Relationship; Sales Stories, Claim Stories, and Insurance Contract Damages,
72 TEX. L. REV. 1395, 1401 (1994).
48
See West Am. Ins. Co. v. Freeman, 46 Cal. App. 4
th
1476 (1
st
Dist. 1995), rev. granted, 907 P.2d
1323 (Cal. 1995), rev. dismissed, 927 P.2d 1172 (1996), rev. denied, No. S049306, 1997 Cal. LEXIS 649
(Cal. Feb. 5, 1997), cert. denied, 117 S. St. 1695 (U.S. 1997). Note that the appellate decision was
superseded by the CaliIornia Supreme Court`s grant oI review and that publication has not been
reinstated. See Cal. Rules oI Court 976, 977.

NYDOCS1-449390.1
11/16/11 11:58 AM
-18-


collective resources and litigation experience, allow insurance companies to wage wars oI
attrition against individual policyholders who litigate an insurance dispute once in a liIetime.
This war-making ability, along with a policyholder`s oIten critical need Ior money aIter a loss,
drives policyholders to settle cases Ior less than their merit. Thus:
the money-Ior-promise arrangement makes delay a powerIul
strategic tool insurance companies can use against claimants, a tool
that under the prevailing application oI contract damages doctrine
is nearly cost Iree. In a state adhering to traditional insurance
contract damages limitations and an intent-based bad Iaith
standard, an insurance company with a weak, but colorable,
deIense to a claim will almost never have to pay more in real
dollars than was owed at the time the claim was presented.
50

The sad truth is that unless an insurance company is conIronted with the prospect
oI damages well in excess oI the policy limits,
51
it may have no incentive to honor its obligations
under the insurance policy:

49
See Eugene R. Anderson, et al., Insurance NulliIication By Litigation, RISK MGMT., Apr. 1994, at
46; Eugene R. Anderson, Is Something Wrong With Claims Handling? PlaintiII: Insurers ProIit From
Delay, Litigation, CLAIMS, Apr. 1995, at 33.
50
See Tom Baker, Symposium on the Law oI Bad Faith in Contract and Insurance Agreements:
Theory: Constructing the Insurance Relationship; Sales Stories, Claim Stories, and Insurance Contract
Damages, 72 TEX. L. REV. 1395, 1430 (1994)(citation omitted)(emphasis added). See also Garnett v.
Transamerica Ins. Servs., 800 P.2d 656, 666 (Idaho 1990).
51
Even insurance companies recognize that punitive damages should be used to deter insurance company bad
Iaith:
Punitive damages must be awarded to deter this type oI action in
the Iuture. A simple judicial test will serve this purpose: II the
court Iinds that an insurer made a determination not to settle within
the policy limits based on its own selI-interest, punitive damages
will be awarded.
Civil Action--Cross Petition Ior CertiIication and BrieI in Opposition to DeIendant-Appellant Petition Ior
CertiIication, at 13, 16, Iiled Dec. 7, 1976, Fireman`s Fund Ins. Co. v. Security Ins. Co. oI HartIord, 367
A.2d 864 (N.J. 1976).
The same insurance company, Fireman`s Fund, also argued:
Insurance companies must realize the importance oI settlement
within policy limits and should realize the impact their decisions
must have upon their insured. This court should establish the rule

NYDOCS1-449390.1
11/16/11 11:58 AM
-19-


Unlike most other commercial actors Iighting Ior supremacy in a
world where possession is nine-tenths oI the law, insurers always
have the nine-tenths advantage: They hold the money.
Consequently, insurers always get to 'play the Iloat in any
dispute. Even where the judicial system acts rapidly and
eIIiciently to provide compensation to wronged policyholders, the
carrier may Iind it made money by delaying payment oI the claim.
II its investments have been good, it may even have made enough
to cover any prejudgment interest, costs, or consequential damage
award, or counsel Iees collected by the policyholder.
52

Policyholders have attempted to level the playing Iield by making it less proIitable and Iar riskier
Ior insurance companies to breach their insurance policies by seeking, and getting, punitive
damages. The threat oI punitive damages adds an element oI unpredictability to the insurance

that punitive damages are to be awarded whenever the court Iinds
that an insurance company made its decision regarding settlement
based on its own interest as opposed to the interests oI its insured.
Id. at 13.
Lawyers who regularly represent insurance companies have also recognized that without punitive
damages, insurance companies 'had nothing to lose by wrongIully denying claims or coercing unIair
settlements. James A. McGuire & Kristin Dodge McMahon, Issues For Excess Insurer Counsel In Bad
Faith And Excess Liability Cases, 62 DEFENSE COUNS. J. 337 (1995). See also James A. McGuire &
Kristin Dodge McMahon, Bad Faith, Excess Liability And Extracontractual Damages. Counsel For %he
Excess Carrier Looks At %he Issues, 72 U. DET. MERCY L. REV. 49 (1994).
The Iinancial realities oI insurance coverage and the need Ior punitive damages was explained by no less
than a standard textbook oI the insurance industry:
'When an insurance company Iails to pay claims it owes or
engages in other wrongIul practices, contractual damages are
inadequate. It is hardly a penalty to require an insurer to pay the
insured what it owed all along.
JAMES J. MARKHAM, ET AL., THE CLAIMS ENVIRONMENT 274 (1993). The quoted textbook is a
comprehensive text used to train insurance company personnel in claims handling practices and is part oI
the required materials Ior students preparing to obtain the proIessional designation oI Chartered Property
and Casualty Underwriter ('CPCU). Thus, candidates Ior the highest proIessional status in the business
oI insurance are taught that contractual damages alone are inadequate.
The consensus among policyholders, insurance companies and insurance company lawyers is
clear: The nature oI the relationship between policyholders and insurance company makes it all too easy
Ior insurance companies to simply say 'NO. Awarding punitive damages, in addition to enIorcing the
policyholder`s reasonable expectations oI insurance coverage, is an additional means to curb insurance
company opportunistic breach.

NYDOCS1-449390.1
11/16/11 11:58 AM
-20-


company`s potential liability. But while greater risk and unpredictability may deter some
insurance companies, the status quo is still clear: 'The insurance company is in no hurry. It has
the money. It has your premium. It has an army oI lawyers.
53
Ironically, the possibility oI
damages in excess oI the policy limits most oIten arises in litigation between insurance
companies, not policyholders.
54

5. Other Contributors to the Information Imbalance
a. The Public Relations Campaign
The imbalance in inIormation and resources between insurance companies and
policyholders creates a disparity in the abilities oI each side to organize eIIectively. For
example, two oI the largest trade associations representing insurance companies, the American
Insurance Association ('AIA) and the Alliance oI American Insurers ('AAI), both regularly
Iile 'Iriend oI the court brieIs on behalI oI insurance companies in insurance litigation cases.
Two other groups, the Insurance Services OIIice, Inc. ('ISO)
55
and the National Association oI

52
JeIIrey W. Stempel, Interpretation oI Insurance Contracts: Law and Strategy Ior Insurers and
Policyholders 19.3, at 466-67 (1994).
53
Herb Denenberg, How Insurance Companies Avoid Payment of Claims, READING EAGLE, May
26, 1995, at A12 (Mr. Denenberg is a Iormer Commissioner oI Insurance Ior Pennsylvania and ProIessor
oI Insurance at the Wharton School oI the University oI Pennsylvania).
54
See generally, PATRICK MAGARICK, EXCESS LIABILITY, 17.02, 17.06 (1996). In particular,
insurance companies which have sold a policyholder excess liability coverage attempt to reduce their
ultimate costs by settling a policyholder`s claim aIter the primary insurance company has reIused to do
so. The policyholder then assigns its rights under the primary policy to the excess insurance company.
By stepping into the shoes oI the policyholder, excess insurance companies can bring a bad Iaith claim
against primary insurance companies which wrongIully reIuse to settle a claim and expose the
policyholder or excess insurance company to a judgment exceeding the primary policy`s limits.
55
The Insurance Services OIIice, Inc. ('ISO) is a national non-proIit corporation that gathers,
stores and disseminates statistical inIormation to insurance regulators as required by law and to insurance
companies Ior their use. ISO draIts and assists insurance companies in implementing insurance coverage
programs and deIining insurance coverage risks Iaced by policyholders. ISO also distributes industry-
wide advisories regarding insurance rates and rules to participating property and casualty insurance
companies. See 'Insurance Services OIIice In a Competitive Marketplace: ISO`s Role Within the
Property/Casualty Insurance Industry, Insurance Services OIIice, Inc., June 1987, at 2, 3. ISO draIted
the 1985 revisions to the Comprehensive General Liability policy, including the so-called absolute`

NYDOCS1-449390.1
11/16/11 11:58 AM
-21-


Independent Insurers ('NAII) gather and analyze inIormation Ior the insurance industry. The
inIormation provided by ISO and the NAII is available to insurance companies, but not to
policyholders or the public. Members oI the insurance industry are able to hone their skills
through a myriad oI advanced training and educational seminars.
56
Policyholders, who have
not made a career out oI insurance, seldom have the time or even the opportunity to become even
remotely Iamiliar with the most basic tricks and techniques oI the insurance industry.
There is no organization speciIically devoted to representing policyholders`
interests in insurance coverage actions.
57
Yet there are major national organizations speciIically

pollution exclusion. Predecessors oI ISO include the Mutual Insurance Rating Bureau (MIRB); the
National Bureau oI Casualty Underwriters (NBCU), and the Insurance Rating Board (IRB)(NBCU`s
successor). These groups jointly draIted the 1965 and 1973 revisions to the occurrence based
Comprehensive General Liability policies and the sudden and accidental` polluter`s exclusion introduced
in 1970. See John A. MacDonald, Decades of Deceit. %he Insurance Industry Incursion into the
Regulatory and udicial Systems, COVERAGE, Nov./Dec. 1997, at 2 and n.3.
56
See Mikel M. Benton, Adfusters See Moderate Progress In New RPA Program, CLAIMS, Feb.
1998, at 58 (discussing a newly designated program designed 'to enhance the knowledge, stature and
reputation oI people working in the claims handling industry.); V.P. 'Champ Codding Jr., State-By-
State Requirements For Adfusters and Appraisers, Charting Credentials For Handling Claims. Charting
Credentials For Handling Claims, CLAIMS, Feb. 1998, at 42, 44 (discussing the various licensing
requirements oI adjusters and appraisers employed by insurance companies or independently and noting
that several states require continuing educational training); Ninth Annual Directory of Education
Resources, CLAIMS, Feb. 1998, at 50 (listing over 40 schools which provide insurance training oI every
sort Ior members oI the insurance industry).
57
One policyholder organization is United Policyholders. United Policyholders is a non-proIit corporation
dedicated to educating policyholders on their rights and duties under their insurance policies. SpeciIically, United
Policyholders engages in charitable and educational activities by promoting greater public understanding oI
insurance issues and policyholder rights. United Policyholders` activities include distributing written materials,
Iiling amicus brieIs and responding to requests Ior inIormation Irom individuals, elected oIIicials, and governmental
entities.
United Policyholders was Iounded in 1991 as a 501(c)(3) non-proIit corporation organized under
the laws oI the State oI CaliIornia, Iunded by donations and grants and staIIed exclusively by volunteers.
United Policyholders` Iirst major project was working with over a thousand victims oI a devastating
October 1991 Iirestorm in the Oakland/Berkeley, CaliIornia hills, to help them understand their policies
and receive prompt, Iair insurance claim settlements. Since that time, United Policyholders has
conducted educational meetings and workshops on insurance issues in Florida, Texas, and throughout
CaliIornia. Much oI United Policyholders` work takes place in communities that have been hit by natural
disasters, such as hurricanes, wildIires, earthquakes, and Iloods, which give rise to large numbers oI
insurance claims and resulting consumer conIusion and Irustration. United Policyholders receives
Irequent invitations to testiIy at legislative and other public hearings, and to participate in regulatory
proceedings on rate and policy issues.

NYDOCS1-449390.1
11/16/11 11:58 AM
-22-


devoted to the legal deIense oI insurance companies: the American Insurance Association, the
Alliance oI American Insurers, the DeIense Research Institute, the Insurance Environmental
Litigation Association and the Federation oI Insurance and Corporate Counsel. While the
American Bar Association has two committees largely committed to insurance coverage matters,
both are overwhelmingly dominated by insurance company lawyers. By contrast, policyholders
aside Irom the FBI and the Justice Department, neither oI which particularly 'caters to
policyholders have virtually none.
Further, the National Association oI Insurance Commissioners ('NAIC)
generally excludes policyholders Irom its meetings and studies. At NAIC conventions, there are
thousands oI insurance brokers and insurance company representatives but only Iour or Iive
consumer-policyholder representatives. It is virtually impossible Ior a policyholder
representative to get into an NAIC convention. The revolving door between the insurance
industry and state insurance departments, and the ability oI the insurance industry to inIluence
legislators, worsens the inIormation imbalance between policyholders and insurance companies
and Iurthers the insurance industry public relations campaign.
58

b. Buying And Lying
A signiIicant Iorce in perpetuating the inIormation imbalance is the ability oI
insurance companies to simply buy away adverse legal decisions one oI the best examples oI
the insurance industry`s tremendous inIluence over the development oI insurance law and the
courts.
59
Through the Irequent use oI vacatur,
60
insurance companies have paid big money to

58
See Walter L. Updegrave, Stacking %he Deck, MONEY, Aug. 1996, at 57-63.
59
See Eugene R. Anderson & James J. Fournier, Insurance Companies Buy Legal Decisions -- and
Then Lie To Courts and Policyholders About It, THE ADVOCATE, Sept./Oct. 1997, at 22.
60
Although the legal term Ior this practice is 'vacatur, the practice is also known by another name
-- 'buying and lying. Buying and lying reIers to a common practice oI insurance companies oI vacating

NYDOCS1-449390.1
11/16/11 11:58 AM
-23-


wipe out case law contrary to their interests.
61
In this way, insurance companies are able to erase
the bad` decisions while retaining the good` ones. The insurance companies then relitigate the
same issues with a deck increasingly stacked in their Iavor. Insurance companies repeatedly
oIIer settlements with policyholders conditioned upon the courts vacating and withdrawing
earlier rulings.
62
These mechanisms eradicate pro-policyholder case law and enables insurance
companies to shape insurance law even aIter losing important cases.
According to one insurance industry source, IiIty percent oI the pro-policyholder
judicial decisions are wiped oII the law books by the insurance industry.
63
Contrary to insurance
company assertions, the true 'majority oI the courts is not on the law books.
64
Reported court
decisions do not accurately reIlect insurance law:

and depublishing undesirable decisions by oIIering claimants attractive settlements -- aIter the insurance
company has litigated and oIten aIter the court has written its opinion. The practice oI buying and lying
operates by preventing the creation oI 'bad law Ior the insurance industry or preventing policyholders
Irom appealing decisions Iavorable to the insurance industry. The practice is Iirmly established. See Jill
E. Fisch, %he Janishing Precedent. Eduardo Meets Jacatur, 70 NOTRE DAME L. REV. 325, 356 and
n.135 (1994).
61
See Eva M. Rodriguez, Legal Sleight of Hand. Jacatur Policy Challenged In Supreme Court
Appeal, TEXAS LAW., May 17, 1993, at 1, 34. See also Saundra Torry, Its Magical History %our At
`Jacatur Center,` WASH. POST, Mar. 10, 1997, at 7; Susan Dominus, Reviving Dead Rulings On %he
Web, AMLAW TECH, Spring 1997, at 24.
62
See, e.g., Round Rock Plaza Venture v. Maryland Ins. Co., No. 03-95-00108-CV, 1996 Tex. App.
LEXIS 581 (Tex. Ct. App. Feb. 14, 1996); Circle 'C Ranch Co. v. St. Paul Fire & Marine Ins. Co., No.
3-91-388-CV, 1993 Tex. App. LEXIS 1291 (Tex. Ct. App. May 5, 1993), op. withdrawn, 1993 Tex. App.
LEXIS 1827 (Tex. Ct. App. May 19, 1993); Bankers Trust Co. v. HartIord Accident & Indem. Co., 518 F.
Supp. 371 (S.D.N.Y. 1981), order vacated by 621 F. Supp. 685 (1981).
63
Carrizosa, Making the Law Disappear: Appellate Lawyers Are Learning to Exploit the Supreme
Court`s Willingness to Depublish Opinions, CAL. LAW., Sept. 1989, at 65. See also Wendy R. Leibowitz,
Dog` Cases Get Around on the Net, NAT`L L.J., Oct. 14, 1996, at A11; Paul M. Barrett, Critics Say that
Deep-Pocketed Clients BeneIit From Vacated Court Judgments, WALL ST. J., Sept. 24, 1996, at B15
(securities Iraud judgment vacated).
64
Id.; see also Oklahoma Radio Assocs. v. Federal Deposit Ins. Corp., 3 F.3d 1436, 1444 (10th Cir.
1993) ('A policy permitting litigants to use the settlement process as a means oI obtaining the withdrawal
oI Iavorable precedents is Iraught with the potential Ior abuse.); National Union Fire Ins. Co. v. SeaIirst
Corp., 891 F.2d 762 (9th Cir. 1989) (denying joint post-settlement motion to vacate where vacatur would
have preclusive eIIect on other parties involved in the litigation); Memorial Hosp. oI Iowa County v.
United States Dept. oI Health & Human Servs., 862 F.2d 1299, 1300 (7th Cir. 1988) (explaining why the

NYDOCS1-449390.1
11/16/11 11:58 AM
-24-


|V|acatur becomes an important litigation tool, particularly Ior
institutional litigators who must return to court many times with
the same arguments. When a court rejects the arguments oI
institutional litigators such as |the deIendant|, an insurance
company, the institutions are dealt a crippling blow not only in the
case at bar but in Iuture litigation. Vacatur allows disappointed
litigators eIIectively to rewrite history. Vacatur allows them to
control the direction and content oI the jurisprudence to weed
out the negative precedent and preserve the positive and create
an artiIicially weighty and one-sided estimate oI what comprises
'the case law.
65

Insurance companies also settle with policyholders when insurance companies
win. This is done to prevent policyholders Irom appealing a decision Iavorable to the insurance
company, thereby Ioreclosing any chance oI reversal and allowing the entire insurance industry
to cite the decision as positive precedent.
66


Seventh Circuit routinely rejects requests to vacate opinions: '|A|n opinion is a public act oI the
government, which may not be expunged by private agreement. History cannot be rewritten. There is no
common law writ oI erasure.); Aetna Cas. & Sur. Co. v. Home Ins. Co., 882 F. Supp. 1355, 1356
(S.D.N.Y. 1995), quoting ManuIacturers Hanover Trust Co. v. Yanakas, 11 F.3d 381 (2d Cir. 1993)
('|V|acatur . . . would allow a party with a deep pocket to eliminate an unreviewable precedent it dislikes
simply by agreeing to a suIIiciently lucrative settlement to obtain its adversary`s cooperation in a motion
to vacate. We do not consider this a proper use oI the judicial system.); Benavides v. Jackson Nat`l LiIe
Ins. Co., 820 F. Supp. 1284, 1289 (D. Colo. 1993) (noting that Iailure to acknowledge genuine legal
precedents in insurance law means that '|t|he case law becomes what the party with the greatest resources
wishes it to be. Economic prowess purchases more persuasive power than the marketplace oI ideas and
sound reasoning combined. Vacatur allows wealthy litigants to become, in eIIect, editors oI their own
treatises on the subjects which concern them. We have no kind words Ior such a practice. We can
imagine Iew practices condoned by the judicial system that would have a less salutary eIIect on both the
reality |and| the perception oI its integrity.).
65
Benavides v. Jackson Nat`l LiIe Ins. Co., 820 F. Supp. 1284, 1289 (D. Colo. 1993).
66
This happened in Travelers Insurance Co. v. Ross Electric oI Washington, Inc. ('Ross Electric),
a case involving the critically contested issue oI whether CERCLA mandated environmental cleanup
costs are damages covered under a standard CGL policy. Travelers Ins. Co. v. Ross Elec. oI Wash., Inc.,
685 F. Supp. 742 (W.D. Wash. 1988), overruled by Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wash. 2d.
869, 784 P.2d 507 (1991). The Iederal district court Ior the Western District oI Washington ruled in Iavor
oI the insurance company and Iound that cleanup costs were not covered as damages under the CGL
policy. Yet at the time Travelers and Ross Electric entered the settlement agreement, Travelers knew that
two Washington state trial level judges had ruled the other way in two unpublished opinions. See Roger
ParloII, Rigging the Common Law, AM. LAW., Mar. 1992, at 74, 77. Moreover, the judge in Ross
Electric had told the parties that he wished to reconsider his opinion in light oI those decisions. See
ParloII, at 77. According to the attorney Ior Ross Electric, Iollowing these developments, Travelers
decided to pay 'a substantial amount to Ireeze the decision as precedent. Id. It was not until two years

NYDOCS1-449390.1
11/16/11 11:58 AM
-25-


Attorneys representing the insurance industry claim that vacatur supports
settlement.
67
Nothing could be Iurther Irom the truth. As many courts and commentators have
been quick to point out, an insurance company which wishes to avoid an adverse precedent need
only settle beIore a decision is rendered.
68
Vacating judgments at the appellate court level does
not Ioster settlement at the trial court level it does the opposite.
69
'Vacatur is simply not
eIIicient judicial resource management.
70
Or perhaps even more to the point: '|W|hen the
proposed savings can be realized only at the cost oI increasing the vulnerability oI the judicial
system to manipulation, we view the investment as unsound.
71
Parties which litigate only to
negotiate on appeal and then vacate an adverse decision are only seeking an 'advisory opinion

later that the Washington Supreme Court in Boeing Co. v. Aetna Casualty & Surety Co. ('Boeing)
halted insurance company deIendants Irom 'primarily relying on the Ross Electric decision. The Boeing
court rejected the case, holding that the Ross Electric decision had incorrectly applied Washington law
and had been decided without the beneIit oI the reasoning oI the only Washington court to have addressed
the issue in question. Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wash. 2d. 869, 885, 784 P.2d 507, 515
(1990)(discussing how the deIendant insurance companies` primary reliance on Travelers Insurance Co.
v. Ross Electric oI Washington, Inc. was erroneous based on Travelers misapplication oI Washington
law). Nonetheless, the strategy was an insurance industry success while it lasted: Until Ross Electric was
rejected by Boeing, the decision was cited at least a dozen times by other courts. See Payoffs by Insurance
Companies %o Make Court Decisions Disappear %hwarted By Law Firms Website, PR NEWSWIRE
ASS`N, Apr. 17, 1997.
67
See Saundra Torry, When Decisions Are Written In Disappearing Ink, WASH. POST, July 25,
1994, at F7.
68
Memorial Hosp. oI Iowa County v. United States Dep`t oI Health & Human Servs., 862 F.2d
1299, 1302 (7th Cir. 1988).
69
Stolz v. American Int`l LiIe Assurance Co., 922 F. Supp. 435, 437 (W.D. Wash. 1996).
70
Benavides v. Jackson Nat`l LiIe Ins. Co., 820 F. Supp. 1284, 1288 (D. Colo. 1993). (noting that
post-settlement vacatur provides 'no incentive Ior early settlement, encourages litigants to 'roll the dice
and Iinding the view that vacatur encourages settlement 'empirically unsupported and contrary to the
court`s experience).
71
ManuIacturers Hanover Trust Co. v. Yanakas, 11 F.3d 381, 385 (2d Cir. 1993).

NYDOCS1-449390.1
11/16/11 11:58 AM
-26-


Irom the court, wasting precious judicial resources in the process.
72
'The public`s interest is in
settlement beIore all the work is done.
73

The power to routinely vacate decisions is tremendous. In insurance coverage
litigation, legal precedents are worth Iar more than the sum in dispute. This is because most
insurance policies sold in the United States Iollow a nearly universally standardized Iormat
dictated by the insurance industry. Thus, the same issues tend to re-emerge. The result is that
almost every state court decision, though binding only in one state, adds to the 'weight oI
authority concerning the interpretation oI insurance policies. This circumstance gives the
insurance industry a very strong interest in erasing pro-policyholder insurance coverage
decisions.
74

The classic 'sale oI pro-policyholder case law occurred in 1981 when HartIord
Accident & Indemnity Company ('HartIord), a member oI the HartIord Insurance Group, paid
$200,000 to expunge Irom the case books the decision oI United States District Court Judge
Morris Lasker in Bankers %rust Co. v. Hartford Accident & Indemnity Co.
75
In Bankers %rust,
Judge Lasker granted Bankers Trust`s motion Ior summary judgment, holding that it was entitled
to insurance coverage Irom HartIord Ior cleanup costs incurred in removing oil Irom its property.
Nearly Iour months later, Judge Lasker signed an order vacating his earlier decision. Judge
Lasker indicated that he took this action to allow HartIord to submit additional materials to the

72
Stolz v. American Int`l LiIe Assurance Co., 922 F. Supp. 435, 436 (W.D. Wash. 1996).
73
Mancinelli v. Int`l Bus. Machs. Corp., 95 F.3d 799, 800-801 (9th Cir. 1996)(KleinIeld, J.,
dissenting).
74
Anderson Kill has a Web-site devoted to the publication oI judicial decisions that have been
wiped oII the law books. Enter www.andersonkill.com.
75
Bankers Trust Co. v. HartIord Accident & Indem. Co., 518 F. Supp. 371 (S.D.N.Y.), order
vacated by 621 F. Supp. 685 (1981). See also Roger ParloII, Rigging the Common Law, AM. LAW., Mar.
1992 at 74, 78.

NYDOCS1-449390.1
11/16/11 11:58 AM
-27-


court, aIter which Judge Lasker would 'determine Bankers` motion Ior summary judgment de
novo. But HartIord had actually reached a settlement with Bankers Trust whereby HartIord
would pay Bankers Trust $2.3 million about $200,000 more than the amount Bankers Trust
had sought in its complaint with the provision that Judge Lasker vacate his earlier opinion.
76

Similarly, in Circle 'C` Ranch Co. v. St. Paul Fire & Marine Insurance Co., a
Texas appellate court decided in Iavor oI the policyholder on a long-awaited decision
interpreting the polluter`s exclusion in a standard-Iorm general liability policy.
77
The decision
was the Iirst time a Texas appellate court had addressed the issue. Pursuant to a settlement
agreement, however, St. Paul paid Circle 'C $300,000, and both parties requested the court to
vacate its decision. The decision was vacated within two weeks. Although Circle 'C received
$300,000, the indemnity amount due Irom St. Paul had been only $5,000, which together with
the $81,000 in attorneys Iees, gave Circle 'C a total claim oI $86,000. Thus, the price Ior the
decision in Circle 'C was about the same as it was in Bankers Trust $200,000.
In U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18 (1994)
('Bonner Mall`), the United States Supreme Court held that vacatur is an 'extraordinary
remedy which must take account oI the public interest:

76
It is telling that HartIord`s arrangement` did not come to light until 7 years later when it surIaced
in another case involving HartIord. In Intel v. HartIord Accident & Indemnity Co., 692 F. Supp. 1171,
1192 (N.D. Cal. 1988), aII`d in part, rev`d in part, 952 F.2d 1551 (9th Cir. 1991), HartIord tried to use the
very same arguments that had been rejected by Judge Lasker 7 years prior, arguing that Bankers Trust had
no application to the present Iacts since it had been vacated. HartIord`s duplicity was exposed when Intel
produced an aIIidavit Irom an attorney involved in the Bankers Trust which revealed the real story in
Bankers Trust. The court in Intel took notice oI the sound guiding analysis` oI Banker`s Trust and
upheld insurance coverage Ior Intel`s environmental liability. See 692 F. Supp. at 1192.
77
Circle 'C Ranch Co. v. St. Paul Fire & Marine Ins. Co., No. 3-91-388-CV, 1993 Tex. App.
LEXIS 1291 (Tex. Ct. App. May 5, 1993), op. withdrawn, 1993 Tex. App. LEXIS 1827 (Tex. Ct. App.
May 19, 1993). See also Janet Elliott, For 300K, Environmental %est Case Evaporates, TEX. LAW., May
31, 1993, at 1.

NYDOCS1-449390.1
11/16/11 11:58 AM
-28-


Judicial precedents are presumptively correct and valuable to the
legal community as a whole. They are not merely the property oI
private litigants and should stand unless a court concludes that the
public interest would be served by a vacatur.
78

Nor was it lost on the Court that:
|W|hile the availability oI vacatur may Iacilitate settlement aIter
the judgment . . . it may deter settlement at an earlier stage. Some
litigants, at least, may think it worthwhile to roll the dice rather
than settle . . . iI, but only iI, an unIavorable outcome can be
washed away by a settlement-related vacatur.
Id. Thus, the Court held that absent 'exceptional circumstances, 'settlement does not justiIy
vacatur oI a judgment under review. Id. at 244. Moreover, the Court held that exceptional
circumstances does not include the mere Iact that a settlement agreement provides Ior vacatur.
But make no mistake the insurance company campaign continues. Despite the
seeming precision oI the language in Bonner Mall, litigants routinely seek to avoid the Supreme
Court`s edict and state courts continue to legitimize buying and lying.
79
Judges are simply
unable to contend with the insurance industry practice oI wiping the common law oII the books.
In one recent example, a Texas court imposed a $2 million sanction on AIG Ior its 'systematic
and pervasive discovery abuses, Iinding that AIG had violated two court orders requiring the
insurance company to produce (1) claims Iiles; (2) claims manuals; (3) policy Iorms; (4) draIting
history; (5) 'lost insurance policies; (6) diaries and notes oI claims handlers, and; (7) company

78
130 L. Ed. 2d at 243, quoting Izumi Seimitsu Kogyo Kabushiki Kaisha v. U.S. Philips Corp., 510
U.S. 27, 40 (1993)(Stevens, J., dissenting Irom dismissal oI certiorari as improvidently granted).
79
At least one state court has held that Bonner Mall 'is not binding precedent because the issue
decided was one oI Iederal procedural law and as such 'does not apply to state courts` application oI
state procedural law. See Panterra Corp. v. American Dairy Queen, 908 S.W.2d 300, 301 (Tex. Ct. App.
1995).

NYDOCS1-449390.1
11/16/11 11:58 AM
-29-


produced training manuals.
80
One week later, the order was vacated, Iorever erasing any trace oI
AIG`s misconduct.
81
In another variation oI buying and lying, the same insurance company,
AIG, was Iound liable Ior punitive damages Ior Iailing to pay its deIense counsel aIter a case had
been settled:
By threatening unwarranted Iee disputes, carriers such as National
Union try Iirst to pressure law Iirms to violate their duty oI
undivided loyalty to their clients, the insureds, and thus to interIere
with the insureds right to control the litigation. Whether or not that
works, such carriers build up payables to the law Iirms, knowing
the Iirms cannot reasonably withdraw, and then, using economic
leverage and the indemniIy the client` device, seek to get a big
discount.
82

Cases can disappear even beIore a decision has been rendered or a settlement has
been reached. In a case which could be reIerred to as a 'disappearing docket case involving
Gold Medal Insurance Co. (a captive insurance company), and National Union Fire Insurance
Company, the entire docket seemingly vanished. Although a business journal reported that
National Union had Iiled a declaratory judgment action, and that U.S. District Court Judge John

80
Bristol-Myers Squibb v. AIU Ins. Co., No. A-0145,672 (Tex. Dist. Ct. Apr. 29, 1997)(order
granting plaintiIIs` motion Ior sanctions). See also Dan Lonkevich, %exas udge Hits AIG With $2M
Sanction, NAT`L UNDERWRITER, May 12, 1997, at 41.
81
See Bristol-Myers Squibb v. AIU Ins. Co., No. A-0145,672 (Tex. Dist. Ct. May 7, 1997)(order
vacating sanctions), reported in MEALEY`S LITIG. REP.: INS., May 20, 1997, at G-1.
82
See In re: The Arbitration oI Seltzer Caplan Wilkins & McMahon, P.C. v. Shapell, No. 684799,
at 44 (Cal. Sup. Ct. Nov. 25, 1996). The arbitrator Iound that punitive damages were required because
National Union acted in 'conscious disregard oI the law Iirm`s rights by denying their claim, while,
among other things, (1) never reviewing the case Iile; (2) never reading any report accompanying the
billing statements at issue; (3) never communicating with the law Iirm regarding their work in the case;
(4) 'completely ignoring the National Union Claims Manual; and (5) similarly creating Iee disputes with
other law Iirms. Id. at 42-3. In sum, '|t|his type oI conduct by National Union . . . is a deliberate and
calculated invasion oI the attorney-client relationship . . . . Public policy requires a message be sent to the
industry. The message is punitive damages. Id. at 44-5. See also David Rubenstein, Insurer Pays Plenty
For Haggling Over Legal Bills, CORP. LEG. TIMES, June 1997, at 1. The insurance company reIusing to
pay its lawyers, National Union Fire Insurance Company is one oI the AIG companies.

NYDOCS1-449390.1
11/16/11 11:58 AM
-30-


F. Keenan had denied a General Mills motion to move the case,
83
a search oI the public records
turned up nothing. Why? The case now appears on the oIIicial court docket as 'A.B.C. v.
D.E.F.
84
Clearly, National Union is aIraid that policyholders will discover positions it takes on
the interpretation oI standard-Iorm insurance policy language and use them against it in
subsequent litigation.
Needless to say, lawyers and policyholders should not rely on exclusively on the
lawbooks when prosecuting any insurance coverage action.
c. Arbitration
The inIormation imbalance is Iurther worsened by the insurance industry
preIerence to arbitrate insurance coverage disputes. Because arbitrations are closed proceedings
(unlike court cases, which, Ior the most part, are public) the insurance companies are able to
exchange inIormation about arbitration proceedings with each other. The policyholder has no
such ability to do so.
85
In court cases as well, insurance companies Irequently request, and
obtain, secrecy orders.

83
David Rubenstein, Why General Mills is Suing Its Own Captive Insurance Co., U.S. BUS. LITIG.,
Feb. 1997, at 1.
84
A.B.C. v. D.E.F., No. 96-CV-1950 (S.D.N.Y. Iiled Mar. 18, 1996). Interestingly, the lawyers
representing the captive insurance company are lawyers who also regularly represent National Union Fire
Insurance Co. and other American International Group insurance companies.
85
Arbitration holds numerous potential pitIalls Ior the policyholder. As the Supreme Court oI CaliIornia
noted with regard to a mandatory arbitration provision:
|Kaiser`s| arbitration program is designed, written, mandated and
administered by Kaiser. In regard to the latter, Kaiser collects
Iunds Irom claimants and holds and disburses them as necessary to
pay the neutral arbitrator. It monitors administrative matters
pertinent to the progress oI each case including, Ior example, the
identity and dates oI appointment oI arbitrators. It does not,
however, employ or contract with any independent person or entity
to provide such administrative services, or any oversight or
evaluation oI the arbitration program or its perIormance. Rather,

NYDOCS1-449390.1
11/16/11 11:58 AM
-31-


Insurance companies, but not policyholders, can keep track oI arbitrators`
decisions and arbitrators know it. The insurance companies know about an umpire`s past
calls and a pro-policyholder arbitrator can easily be 'blackballed by insurance companies.
Arbitrators are in the business oI arbitrating. They know that the insurance industry is their
major source oI business. To keep the business coming, arbitrators must maintain a pro-
insurance company position a high percentage oI the time.
86


administrative Iunctions are perIormed by outside counsel retained
to deIend Kaiser in an adversarial capacity. The Iact that Kaiser
has designed and administers its arbitration program Irom an
adversarial perspective is not disclosed to Kaiser members or
subscribers.
Engalla v. Permanente Medical Group, 15 Cal. 4th 951, 938 P.2d 903, 909, modiIed, 16 Cal. 4th 283a
(1997).
* * *
|Further,| the selection |oI the so-called 'neutral arbitrator| is
made by deIense counsel aIter consultation with the Kaiser
medical-legal department. Kaiser has never relinquished control
over this selection.
Id. at 911.
86
One article summarized these problems in the context oI securities arbitration, another industry-wide,
industry-dominated arbitration system very similar to the system established Ior insurance arbitration:
The industry asserts that it is better Ior the customer to have an
individual knowledgeable about the workings oI the market sitting
in judgment oI Iraud claims. But the public suspects that an
industry arbitrator will have diIIiculty determining impartially
whether another Iirm engaged in Iraudulent activity . . . And will
that industry arbitrator have the courage to render a multimillion-
dollar award, including punitive damages, against another member
oI the Wall Street Club? An industry arbitrator who does that risks
being blackballed by the industry in his career and in Iuture cases.
See Madelaine Eppenstein & Theodore G. Eppenstein, An Arbitration Albatross, N.Y. TIMES, June 8,
1997, at F12.
A Massachusetts Iederal district court decision has held that a securities brokerage Iirm could not
Iorce a Iormer employee to arbitrate her sexual harassment claim against the brokerage Iirm. The court
expressed that it was 'deeply troubled by the 'structural bias in the New York Stock Exchange`s

NYDOCS1-449390.1
11/16/11 11:58 AM
-32-


Most courts hold that arbitration provisions are usually enIorceable -P even those
contained in contracts oI adhesion such as insurance policies.
87
Many states strongly Iavor
arbitration as a matter oI public policy, typically holding that 'contracts providing Ior . . .
arbitration|| are valid, enIorceable and irrevocable, save upon such grounds as exist in law or in
equity Ior the revocation oI any other type oI contract.
88

Very Iew recent cases have broken away Irom the near universal enIorcement oI
arbitration clauses. The CaliIornia Court oI Appeals recently held that an arbitration clause, in a
'contract oI adhesion was unconscionable and unenIorceable.
89
The court`s holding is quite
Iavorable to the proposition that arbitration clauses contained in contracts oI adhesion, such as
insurance policies, should not be enIorced. Another CaliIornia appellate court recently held that

arbitration system. See udge Finds Merrill Lynch Cant Force Ex-Consultant to Arbitrate Bias Claim,
WALL ST. J., Jan. 27, 1998, at B8.
87
See Worldwide Ins. Group v. Klopp, 603 A.2d 788 (Del. 1992).
88
Brennan v. General Accident Fire & LiIe Assurance Corp., 574 A.2d 580 (Pa. 1990); Ice City, Inc. v.
Insurance Co. oI N. Am., 314 A.2d 236 (Pa. 1974). See also Moses H. Cone Mem`l Hospital v. Mercury Const.
Corp., 460 U.S. 1, 24-25 (1983); Travelers Indem. Co. v. GreenIield, No. 88-6845, 1990 U.S. Dist. LEXIS 498
(E.D. Pa. Jan. 18, 1990); Johnson v. Pennsylvania Nat`l Ins. Cos., 527 Pa. 504, 510, 594 A.2d 296, 299-300 (1991);
Federal Kemper Ins. Co. v. Reager, 810 F. Supp. 150 (E.D. Pa. 1992); Continental Cas. Co. v. Gezon, No. 94-1767,
1994 U.S. Dist. LEXIS 7190 (E.D. Pa. May 26, 1994). As an example oI the power oI 'public policy preIerences,
the court in Johnson held that although arbitration is a creature oI contract, and although the third party beneIiciary
had signed no contract with the deIendant insurance company, the third party beneIiciary was still bound by the
arbitration clause contained in the insurance policy which she sought to enIorce. Johnson v. Pennsylvania Nat`l Ins.
Cos., 527 Pa. 504, 509, 594 A.2d 296, 299 (1991). See also WILLIAM E. KNEPPER & DAN A. BAILEY, LIABILITY OF
CORPORATE OFFICERS AND DIRECTORS 19-13, at 328 (5th ed. 1996 Supp.); SchaeIer v. Allstate Ins. Co., 63 Ohio
St. 3d 708, 711-12, 590 N.E.2d 1242 (1992)(noting the Ohio Supreme Court`s 'strong public policy Iavoring
arbitration, listing cases and providing in depth discussion oI the 'meaning oI arbitration; prohibiting any
agreement between parties to non-binding arbitration). But see Nationwide Mut. Ins. Co. v. Marsh, 15 Ohio St. 3d
107, 110-11, 472 N.E.2d 1061, 1063-64 (1984)(Sweeney, J., concurring)(cited by SchaeIer, 63 Ohio St. at 717;
noting that endorsement in insurance policy binder which allows insurance company to escape binding result in
arbitration is contrary to public policy strongly Iavoring Iinal and binding arbitration).
Some states 'limit the availability oI arbitration to knowledgeable commercial parties. See, e.g.,
Copley v. NCR Corp., 183 W. Va. 152, 156, 394 S.E.2d 751 (1990); Rashid v. Schenck Constr. Co., 190
W. Va. 363, 367, 438 S.E.2d 543 (1993); Barber v. Union Carbide Corp., 172 W. Va. 199, 202-04, 304
S.E.2d 353, 356-58 (1983); Board oI Educ. v. Miller, 160 W. Va. 473, 236 S.E.2d 439 (1977).
89
See Stirlen v. Supercuts, Inc., 51 Cal. App. 4th 1519, 60 Cal. Rptr. 138 (1st Dist. 1997), review
denied, No. S059176, 1997 Cal. LEXIS 1973 (Cal. Apr. 16, 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-33-


a decision in a private nonjudicial arbitration cannot be used to collaterally estop a party to the
arbitration Irom relitigating the issue in a subsequent action.
90

In %hiokol Corporation v. Certain Underwriters at Lloyds of London, a Utah
Iederal district court reIused to enIorce the arbitration clause Iound in a Lloyds policy.
91
The
court held that the arbitration clause conIlicted with a service oI suit clause within the same
policy which required the underwriters to submit to any jurisdiction oI the policyholder`s
choosing in the United States. The court Iound the arbitration clause ambiguous and resolved the
conIlict by enIorcing the more speciIic service oI suit clause, which allows policyholders to Iile
claims in courts oI law in the United States.
92

The Missouri Court oI Appeals recently came to the same conclusion oI the
%hiokol Court in %ransit Casualty Co. v. Certain Underwriters at Lloyds of London,
93
holding
that the receivers oI an insolvent insurance company were not required to arbitrate a dispute with
the insolvent insurance company`s reinsurance companies because the reinsurance agreements
contained both a service oI suit clause and an arbitration clause. The court rejected insurance
company arguments Ior arbitration, and applied the rule oI contract construction that a more
speciIic clause (here the service oI suit clause) nulliIies a more general clause. The court also
based its holding on the principle that ambiguous clauses are to be construed against the draIter.

90
See Vandenberg v. Superior Court (Centennial Ins. Co.), No. S067115, on appeal, reported in
MEALEY`S INS. SUPPLEMENT, Feb. 20, 1998, at 7.
91
Thiokol Corp. v. Certain Underwriters at Lloyds oI London, No. 1:96-CV-028 B, slip op. (N.D.
Utah May 6, 1997). Anderson Kill served as co-counsel to the Thiokol Corporation with the Iirm oI
Wood Quinn and Crapo, L.C. The decision is on Iile with the authors.
92
Id., slip op. at *7-8.
93
Transit Cas. Co. v. Certain Underwriters at Lloyds oI London, No. WD 53230, 1998 Mo. App.
LEXIS 70 (Mo. Ct. App. Jan 20, 1998).

NYDOCS1-449390.1
11/16/11 11:58 AM
-34-


Arbitration, in general, is a very unIavorable Iorum Ior policyholders.
94

C. 1udges
A conservative judiciary may be Irustrated because it cannot legislate tort reIorm.
Instead, judges work indirectly toward that goal by reIusing to permit injured parties to collect
insurance. This philosophy ignores what several representatives oI the insurance industry have
proudly proclaimed: That '|r|ightly so, the insurance industry has been called the banker oI the
tort system.
95
A good example oI judicial tort reIorm is evidenced by a recent insurance
coverage case in Texas. The Texas Supreme Court held that mental suIIering was not bodily
injury.
96
To mental health proIessionals, this probably reeks oI the Middle Ages.
The anti-policyholder and anti-claimant attitude oI the insurance companies
results in a Gresham`s Law
97
oI the insurance industry: Bad Insurance Companies Drive Good
Insurance Companies Out OI Business. Another way oI describing the reason insurance
companies sink to the lowest common denominator with respect to 'claims paying philosophy

94
See Barry Meier, In Fine Print, Customers Lose Ability %o Sue, N.Y. TIMES, Mar. 10, 1997, at
A1; David GarIield Roland, Arbitration--A Good Idea %hat Does Not Work, INS. ADVOCATE, June 8,
1996, at 23; Roger ParloII, Kaiser Arbitration. Waiting For udge Godot?, AM. LAW., July 1996, at 84;
Lorelie S. Masters, Arbitration Clauses In Liability Policies. A %icket %o Ride?, JOHN LINER REV.,
Winter 1996, at 33; Margaret A. Jacobs, Policies Requiring Arbitration Challenged, WALL ST. J., Oct. 16,
1995, at B5; Eugene R. Anderson & Paul Liben, %he Perfect Insurance Or %he Perfect Crime, METRO.
CORP. COUNS., Jan. 1995; Editorials. Surprise Packages, N.J. LAW., Apr. 7, 1997, at 6.
95
See BrieI oI the American Insurance Association, the National Association oI Independent
Insurers, Farmers Insurance Exchange, Fire Insurance Exchange, the State Farm Insurance Companies,
and Truck Insurance Exchange as Amici Curiae in Support oI Appellant at 3, n.1, Iiled Aug. 2, 1985,
Aetna LiIe Ins. Co. v. LaVoie, 475 U.S. 813 (1986).
96
See Trinity Universal Ins. Co. v. Cowan, No. 95-1160, 1997 Tex. LEXIS 45, at *1 (Tex. May 16,
1997)(holding that 'absent an allegation oI physical maniIestation oI mental anguish, a claim oI mental
anguish is not a bodily injury as deIined in the policy Ior purposes oI invoking the duty to deIend).
97
Gresham`s Law is 'the theory that when two or more kinds oI money oI equal denomination but
unequal intrinsic value are in circulation at the same time, the one oI greater value will tend to be hoarded
or exported. It is 'the principle that bad money will drive good money out oI circulation. See
WEBSTER`S NEW TWENTIETH CENTURY DICTIONARY (unabridged ed. 1979) at 800. See also Friedman,
Will Insurance Fraud be the S&L Scandal of 1993?, RISK MGMT., Dec. 1993, at 22.

NYDOCS1-449390.1
11/16/11 11:58 AM
-35-


is the herd mentality. Caught in the middle, the victims oI judicial tort reIorm are the
policyholders. Policyholders pay premiums Ior protection against tort liability and then they pay
Ior their alleged torts. Insurance companies are the clear winners.
Judges need insurance companies to settle cases. The Iriendly Great BeneIit
Insurance Company
98
adjuster is a key player in clearing court dockets. Whether saints or
sinners, adjusters must be coddled by judges. Woe be unto the judge who crosses the adjuster.
For a lawyer an insurance coverage case is another case. For the insurance company, it is a holy
crusade against insurance Iraud. For the judge it is another case to get oII the docket, something
which can only be done with the cooperation oI the insurance company.
D. The Insurance Industry Code of Conduct and Insurance Fraud: Is Insurance A
Defective Product?
Insurance industry employees and executives are indoctrinated with the
philosophy that insurance is good and that policyholders, claimants and lawyers are bad.
According to the insurance industry, nearly 50 oI policyholders are actual or potential crooks.
99


98
Made Iamous by John Grisham in 'The Rainmaker.
99
See BrieI on the Merits oI Amicus Curiae American Council oI LiIe Insurance in Supports oI
Petitioner at 13, n.4, dated April 2, 1996, West Am. Ins. Co. v. Freeman, 46 Cal. App. 4th 1476 (1st Dist.
1995), rev. granted, 907 P.2d 1323 (Cal. 1995), rev. dismissed, 927 P.2d 1172 (1996), rev. denied, No
S049306, 1997 Cal. LEXIS 649 (Cal. Feb. 5, 1997), cert. denied, 117 S. Ct. 1695 (U.S. 1997). The
American Council oI LiIe Insurance states:
Although Iraud by the insured is not an issue in this case, it is oI
great concern to Iirst-party insurers such as liIe and property-
casualty insurance companies. Shockingly, nearly halI oI the
individuals who responded to a recent survey reported that they
were willing to engage in insurance Iraud.
See also Foppert, Waging War Against Fraud, BEST`S REV. P/C, Mar. 1, 1994, at 44; Brian Cox,
Michigan Bill Would Crack Down On Insurance Crime, NAT`L UNDERWRITER, May 15, 1995, at 7;
Insurance Crime Is Big Money Industry, INS. ADVOCATE, Nov. 12, 1994, at 12 (executive Ior American
Alliance oI Insurers noting the 'public`s seeming tolerance and indiIIerence towards insurance Iraud);
Phil Zinkewicz, %he Signs And Smells Of Insurance Fraud, INS. ADVOCATE, Jan. 21, 1995, at 6.

NYDOCS1-449390.1
11/16/11 11:58 AM
-36-


One recent article, written by the President oI the Insurance InIormation Institute,
100
Iinds that
the perpetrators oI insurance Iraud are. . . 'Ior the most part, the people we live and work among
our neighbors. . . .
101
Moreover, the 'rampant corruption oI otherwise honest, 'seemingly
law-abiding people is something that those in the insurance industry 'have known Ior
sometime.
102
Insurance company claims adjusters view themselves as underpaid, overworked
vigilantes protecting an unappreciative American public Irom a horde oI thieving, conniving
robbers intent on pillage and plunder.
In order to deal with the insurance system, one must accept the Iact that insurance
company adjusters believe what they say they believe. They may be wrong, but they think they
are right and must be dealt with on that basis. It goes without saying that there are crooked
policyholders and crooked claimants and there are crooked lawyers,
103
but there are also crooked
insurance companies.
104


100
The Insurance InIormation Institute is one oI the insurance industry associations involved in the
Iight against insurance Iraud.
101
Gordon Stewart, Criminals Arent %o Blame For All Insurance Crime, BEST`S REV., June 1997,
at 94.
102
Id.
103
An insurance company anti-policyholder litigation association recently argued to the New Jersey
Supreme Court that New Jersey automobile insurance policyholders should get less insurance coverage
than policyholders in other states because a 'gang oI lawyers in CaliIornia ran an insurance scam. See
BrieI oI the Insurance Environmental Litigation Association As Amicus Curiae, at 13, undated, Trustees
oI Princeton Univ. v. Aetna Cas. & Sur. Co., 293 N.J. Super 296, 680 A.2d 783 (App. Div. 1996), appeal
granted, 147 N.J. 574, 688 A.2d 1050 (1997). This case settled pending appeal.
104
See United States v. Brennan, 938 F. Supp. 1111 (E.D.N.Y. 1996); Michael Schachner, USAU,
Exec Found Guilty Of Fraud In Allocation, BUS. INS., July 8, 1996, at 1; Big Aviation Insurer, Former
Head Brennan Convicted Of Fraud, WALL ST. J., July 2, 1996, at B2; Adam Bryant & Barry Meier,
%aking A Hard Line Amid %he Wreckage, N.Y. TIMES, Oct. 6, 1996, 3, at 1.
See also Moleski v. Molin, No. 2ND 1995 (Commw. Ct., Harrisburg, Pa.). In this case, a
Pennsylvania judge Iound the CEO oI Corporate LiIe Insurance Company liable Ior $139.7 million in
compensatory damages and $1 million in punitive damages Ior looting the company`s assets over the
course oI three years, pushing the company $210 million into the red. See Jerdicts and Settlements,
NAT`L L.J., Apr. 21, 1997, at A8.

NYDOCS1-449390.1
11/16/11 11:58 AM
-37-


There are very Iew organizations or associations, other than the FBI and the
Justice Department`s National Level Insurance Fraud Working Group, to combat Iraud
perpetrated by insurance companies against their policyholders. Contrast that with the numerous
associations and organizations created -P primarily by the insurance industry -P at the national
and state levels to combat insurance Iraud by policyholders, claimants and others.
105
As is

Larry P. SchiIIer & Vanessa L. Sutter, If You Cant Pay the Fine, Dont Do. . ., BEST`S REV. P/C
ed., Dec. 1997, at 73 (discussing how the Federal Insurance Crimes Act, passed by Congress in 1994, is
being used to prosecute wrongdoing by insurance companies and insurance company executives. A
conviction under the Federal Insurance Crimes Act, as with any other Iederal criminal statute, requires
that the sentencing judge Iollow the Federal Sentencing Guidelines Manual. Id. at 74).
105
Following is a list oI insurance industry associations and organizations which assist in the Iight
against insurance Iraud by policyholders and other claimants:
1. Alliance oI American Insurers (draIter a model state insurance Iraud statute);
2. American Insurance Association (AIA);
3. American Insurance Services Group (AISG) (compiles data on claims to create
comprehensive Iraud database);
4. Coalition To Reduce Auto Fraud And TheIt (CRAFT);
5. Independent Insurance Agents oI America (IIAA);
6. Insurance Committee For Arson Control;
7. Insurance Fraud Bureau oI Massachusetts ('industry backed) (Fraud Investigators See Rise
In Staged Accidents, J. OF COMMERCE, June 21, 1994, at 7A);
8. Insurance Fraud Investigation and Management Committee (serves insurance industry claims
management and managers oI anti-Iraud programs);
9. Insurance InIormation Institute (III);
10. Insurance Institute oI America (IIA);
11. Insurance Research Council (IRC);
12. Insurance Services OIIice, Inc. (ISO);
13. International Association oI Arson Investigators (IAAI);
14. International Association oI Auto TheIt Investigators (IAATI);
15. International Association oI DeIense Counsel;
16. International Association oI Insurance Fraud Agencies, Inc.;
17. International Association oI Insurance Fraud Bureaus (IAIFB);
18. International Association oI Special Investigative Units (IASIU) (See Appendix A Ior the
IASIU Code oI Ethics);
19. International Claim Association (ICA);

NYDOCS1-449390.1
11/16/11 11:58 AM
-38-


known so Iar, there are no insurance industry sponsored Iraud units designated to Ierret out Iraud
committed by insurance companies against policyholders. Contrast this with the many insurance
companies which have set up within their ranks special insurance Iraud investigation unit,
commonly reIerred to as Special Investigation Units or SIUs.
106


20. Loss Executives Association (LEA);
21. National Association oI Independent Insurance Adjustors (NAIIA)
22. National Association oI Independent Insurance Brokers (NAIIB);
23. National Association oI Independent Insurers (NAII);
24. National Association oI Insurance Commissioners (working group is looking into a model to
stop insurance agents Irom making ridiculous promises regarding insurance policies (mainly
liIe insurance policies));
25. National Association oI Mutual Insurance Companies (NAMIC);
26. National Council Against Health Fraud (NCAHF);
27. National Council On Compensation Insurance (NCCI);
28. National Crime InIormation Center (NCIC);
29. National Fire Protection Association (NFPA);
30. National Fraud Advisory Council ('launched by NCCI, Inc. (National Council On
Compensation Insurance, Inc.));
31. National Health-Care Anti-Fraud Association;
32. National Insurance Crime Bureau (NICB);
33. New York Board OI Fire Underwriters (NYBFU);
34. Special Investigations Academy (set up by NICB to train Iraud investigation techniques to
SIU investigators, claims adjustors and managers Irom NICB member companies), and;
35. Workers Compensation Research Institute (WCRI).
106
CNA, Royal Ins. Co., Zurich and Fireman`s Fund set up special claims service groups to
investigate complex and potentially Iraudulent claims. These companies will also sell their services to
other insurance companies. See Robert G. Knowles, Fraud Cant Be Stopped, But It Can Be Contained,
NAT`L UNDERWRITER, Sept. 11, 1995, at 15. Royal & Sun Alliance Insurance Group, PLC has
established Investigative Resources Global oI Charlotte, N.C. and USF&G has established Nemax Claim
Services, Inc., both SIUs. See Anne Colden, Small Insurers %hat Need Gumshoes %o Fight Fraud %urn
%o Bigger Rivals, WALL ST. J., Feb. 24, 1997, at B9C.

NYDOCS1-449390.1
11/16/11 11:58 AM
-39-


One conclusion Irom all oI this crime and corruption is that insurance is a
deIective product. 'We have actually designed an industry Ior the purpose oI a con man.
107

Most oI the problem is with the insurance product and not with the customer. But
rather than take responsibility Ior a deIective product, many insurance companies have decided
to blame the Irequent victims oI insurance Iraud -P their policyholders. John G. DiLiberto,
president and chieI executive oIIicer oI the National Insurance Crime Bureau, warned insurance
companies that they are 'in a shootout with the con men.
108
This says that the people who pay
the premiums and who are the beneIiciaries oI insurance are evil.
Many observers have recognized the business oI insurance to be a perIect vehicle
Ior Iraud. One FBI agent has commented that:
|I|nsurance is attractive to con artists because it is based on a
simple premise: Pay me now and I promise to pay you later. The
Iraud oIten goes undetected longest with hard-to-place risks
because the premiums are high and liabilities long-tailed.
109

A study on insurance company insolvencies conducted by the FBI discovered that:
|t|he business oI insurance is uniquely suited to abuse by
mismanagement and Iraud. The very nature oI insurance, which
involves the payment oI money in the present in exchange Ior a
promise to pay costs associated with some Iuture event which may
or may not occur, is a con artist`s dream.
110


107
Statement by Trevor H. Jones, chairman oI Insurance Security Services, Ltd., a London-based
insurance consulting company. Deborah Shalowitz Cowans, Insurance Fraud By Design, BUS. INS., Sept.
25, 1995, at 24.
108
Stephanie D. Esters, Insurers Urged to Unite in 'Shootout With Con Men`, NAT`L
UNDERWRITER, Sept. 16, 1996, at 6.
109
Marilyn Ostermiller, Paper Chase, BEST`S REV. P/C, Sept. 1997, at 40, 41.
110
Economic Crimes Unit White-Collar Crimes Section, Federal Bureau oI Investigation, Insurance
Company Insolvency Study (1991). See AlIred G. Haggerty, FBI Steps Up Campaign Against Insurance
Fraud, NAT`L UNDERWRITER, Oct. 11, 1993, at 1.

NYDOCS1-449390.1
11/16/11 11:58 AM
-40-


According to one assistant United States Attorney, 'dishonest people are moving
Irom other industries into the insurance industry.
111
The National Association oI Insurance
Commissioners has also recognized that insurance is 'uniquely suited Ior abuse and that
'insurance lends itselI all too readily to Iraud:
112

The business oI insurance is uniquely suited to abuse by
mismanagement and Iraud. Making believable promises is a stock
item in every con man`s bag oI tricks. The prepayment oI large,
oIten vast, sums oI money with Iew restrictions lends itselI
naturally to monumental wasting oI assets through greed,
incompetence, and dereliction oI duty. This combination oI easy
money based on easy promises makes the insurance industry an
irresistible target Ior Iinancial knaves and buccaneers.
113

Given the potential Ior Iraud and abuse acknowledged by law enIorcement agencies and
insurance companies themselves, contract remedies are insuIIicient to protect policyholders Irom
unscrupulous conduct in an alien, and potentially hostile, business environment.
Part oI the answer to this calumny would be greater insurance company respect
Ior the well established rule that an insurance company is required to 'know their customers.
114


111
Haggerty, at 1.
112
BrieI oI Amicus Curiae National Association oI Insurance Commissioners Supporting
Respondent, at 1, Iiled Oct. 12, 1995, Prometheus Funding Corp. v. Merchants Home Delivery Servs.,
Inc., 50 F.3d 1486 (9th Cir.), cert. denied, 116 S. Ct. 418 (U.S. 1995).
113
Id. at 4, quoting 'Failed Promises: Insurance Company Insolvencies, StaII oI House Committee
on Energy and Commerce, 101st Cong. 2d Sess., (Comm. Print 101-P 1990).
114
Lord MansIield, the Iather oI insurance law, wrote many years ago:
Every under-writer is presumed to be acquainted with the practice
oI the trade he insures, and that whether it is recently established,
or not. II he does not know it, he ought to inIorm himselI. It is no
matter iI the usage has only been Ior a year.
Noble v. Kennoway, 2 Doug. 511, 513 (K.B. 1780), United Kingdom. The principle that the insurance
company is presumed to know the business oI its policyholder is well established and was adopted by the
United States Supreme Court in Buck & Hedrick v. Chesapeake Insurance Co., 26 U.S. (1 Pet.) 151
(1828):

NYDOCS1-449390.1
11/16/11 11:58 AM
-41-


The insurance industry`s damning indictment oI its policyholders and
beneIiciaries can be analyzed in a diIIerent way. Is the insurance industry selling matches to
arsonists? FiIty percent oI the people who go to church do not steal Irom the collection plate and
50 oI the people who go to the market do not shopliIt. The Iault may not be with the premium-
paying policyholders. The Iault may be with the insurance product. Any other product which
turned its customers into anti-social cheats and thieves would be condemned and banned Irom
the market.
The insurance product damages policyholders and others in many ways. First, iI
the insurance industry is to be believed, insurance corrupts. Second, this corruption then justiIies
corruption on the part oI insurance company adjusters who engage in corrupt claims-handling
tactics. When insurance executives, underwriters, adjusters and insurance lawyers believe that
their policyholders and beneIiciaries are cheats, the entire insurance mechanism is askew.

|A| knowledge . . . oI the course and incidents oI the trade on
which they insure, and the established import oI the terms, used in
their contract; must necessarily be imputed to underwriters.
Id. citing Pelly v. Royal Exchange, &c., 1 Burr. 341 (1757) (MansIield, C.J.). See also Hazard`s Adm`r
v. New England Marine Ins. Co., 33 U.S. (8 Pet.) 557, 582 (1834)('The underwriters are presumed to
know the usages oI Ioreign ports to which insured vessels are destined; also the usages oI trade, and the
political condition oI Ioreign nations.); Clark v. ManuIacturer`s Ins. Co., 49 U.S. (8 How.) 235, 248, 12
L.Ed. 106 (1850) ('The insurer must be presumed to know what is material in the course oI any particular
trade.); Globe & Rutgers Fire Ins. Co. v. Indiana Reduction Co., 113 N.E. 425, 429 (Ill. App. Ct. 1916)
('The law charges insurance companies with the duty oI inIorming themselves as to the usages oI the
particular business issues and a knowledge oI such usage on the part oI such company will be
presumed); Hazelton v. Manhattan Insurance Co., 12 F. 159, 162 (N.D. Ill. 1882), quoting Lord
MansIield in Pelly v. Royal Exch. Ass`n Co., 1 Burr. 341 (1757)('The underwriter must adjust himselI to
the custom oI the trade which he insured . . . . |a|nd in general what is usually done . . . |in such trade| is
understood to be reIerred to by every policy, and to make a part oI it as much as iI it was expressed.`'
For recent examples, see Contractors Realty Co., Inc. v. Insurance Co. OI N. Am., 469 F. Supp. 1287,
1295 (S.D.N.Y. 1979), (insurance companies were 'charged with knowledge oI 'the course and
incidents oI the policyholders trade); Anne Quinn Corp. v. American MIrs. Mut. Ins. Co., 369 F. Supp.
1312, 1315 (S.D.N.Y. 1973), aII`d, 505 F.2d 727 (2d Cir. 1974), ('no misrepresentation or breach oI duty
oI good Iaith where plaintiII Iailed to disclose a trade practice that was equally open to |the knowledge oI|
both parties); Compagnie de Reassurance d`Ile de France v. New England Reins. Corp., 57 F.3d 56, 76-
77 (1st Cir.), cert. denied, 116 S. Ct. 564 (U.S. 1995) (reinsurance companies presumed to know the
business oI their policyholder).

NYDOCS1-449390.1
11/16/11 11:58 AM
-42-


Forcing policyholders to cheat or to be treated as cheats is counterculture in the United States.
The insurance system brings out the worst in people involved in insurance claims handling; the
system encourages and may even demand 'padding by policyholders and other beneIiciaries.
Insurance company vigilantes do battle against the dishonest hordes and in the process develop a
mentality that permits a 'little deception and a little dishonesty. Since the end is nobel, the
means can be ignoble.
115

The insurance product sold to policyholders to protect policyholders and the
public is not the same product sold by the insurance company to the courts. Broad promises are
made at the point oI sale and Iine print is delivered when a loss happens. Nearly every word in
every insurance policy has a precise meaning. But all too oIten, the plain meaning oI those
words, whether common or technical, is Iar aIield Irom the meaning attributed to them by
insurance companies in insurance coverage disputes. Compounding the injury (and expense) are
the legal theories spun by insurance law proIessors, insurance company lawyers, industry
representatives and judges which complicate what should otherwise be a straightIorward issue: II
tens oI thousands oI automobile tires exploded, every judge in the United States would know the
tires were deIective and would not listen to any nonsense Irom law proIessors about the
economics and theory oI automobile tires and the automobile industry. A new car which

115
Policyholders and claimants are alleged to steal $120 billion a year Irom insurance companies.
See Insurance Fraud: The Quiet Catastrophe, 1996, at 8 (a report prepared by Conning Insurance
Research & Publications). Given the insurance companies sophistication, it seems reasonable to assume
that insurance companies steal at least that much Irom the public. See also %he 'Other Cost of Fraud,
CLAIMS, Nov. 1997, at 10 (discussing a report Irom the Insurance Research Council in Wheaton, Illinois).
According to the Insurance Research Council report, insurance companies spent $650 million in anti-
Iraud eIIorts, up Irom $200 million spent in 1992. Id. The IRC researchers noted that the $650 million
Iigure was probably low because it did not include indirect internal expenses and assessments paid to state
Iraud bureaus. Id. The IRC study also Iound that 76 oI insurance companies have special investigation
units (SIU`s). Id. Another article noted that 32 states have insurance Iraud bureaus and that 13 other
states are considering measures to establish or strengthen an existing Iraud bureau. See Coalition Reports
Legislative Fraud Bureau Action, WORKERS` COMP. EXECUTIVE, June 25, 1997.

NYDOCS1-449390.1
11/16/11 11:58 AM
-43-


requires judicial intervention is, by deIinition, deIective. Automobile manuIacturers are not
permitted to sell lemonade and deliver lemons. Policyholders buy protection, not a ticket to the
courthouse. The massive amount oI insurance coverage litigation indicates that something is
terribly wrong with the insurance product and that it has yet to be Iixed.
E. Claims Handling
Most bad Iaith conduct occurs during the claims handling process.
116
Some
insurance companies are notorious Ior reIusing to provide insurance coverage and Ior engaging
in sloppy, slow or deliberately bad claims handling.
117

For liIe insurance coverage, insurance company misconduct, iI any, typically
takes place at the point oI sale.
118
For property and casualty insurance coverage, bad Iaith
problems would typically occur at the point oI delivery (that is, when the policyholder or
claimant makes a claim which is denied).
119
Arguably, with some property and casualty claims,

116
See generally Lia B. Royle, Insuring Good Faith, ABA J., Oct. 1996, at 86.
117
See Joseph Segal, Sluggish Claim Process Can Cause Insured Business` Demise, CLAIMS, Feb.
1995, at 86; Jim Urban, Take It Or Leave It, EXEC. REP., Aug. 1996, at 18; Leslie Scism, Disputed
Claims, Tight-Fisted Insurers Fight Their Customers To Limit Big Awards, WALL ST. J., Oct. 15, 1996, at
A1.
118
Certain liIe insurance sales tactics have drawn scrutiny and litigation Irom policyholders and
regulators. See, e.g., Leslie Scism, Profit Is Posted By Prudential Insurance for 95, WALL ST. J., Mar. 4,
1996, at C20. See also Melody Petersen, %he Eye On Prudential, N.Y. TIMES, Feb. 16, 1997, 1, at 1.
119
The same is true Ior managed care ('HMO) bad Iaith. In one recent case, a woman diagnosed
with breast cancer was advised that she needed a bone marrow transplant. The HMO reIused to pay Ior
the procedure. When the patient`s Iamily sued the HMO to Iorce it to pay, the patient`s doctor provided
the Iamily with a sworn declaration advocating the bone marrow transplant procedure. AIter the HMO
called the doctor`s superior, and Iollowing a heated discussion between the superior and treating doctor,
the doctor altered his declaration. See HMO May Appeal Big Award, BUS. INS., Nov. 27, 1995, at 36. An
arbitration panel concluded that the HMO`s complaint to the treating doctor`s superior was 'designed and
intended to interIere with an existing doctor-patient relationship . . . undertaken with reckless disregard oI
the probability oI causing severe emotional distress. Such cases have become all too common. See Brent
J. Graber, Managed Care Discontent Growing, BUS. INS., May 6, 1996, at 39 (discussing cases oI
egregious misconduct); Kerri Y. Capell (ed.), When Your HMO Says No Way, BUS. WEEK, May 19,
1997, at 140.

NYDOCS1-449390.1
11/16/11 11:58 AM
-44-


the bad Iaith occurs much earlier, because some insurance companies have no intention oI ever
paying sizeable claims.
120

Another serious question is whether claims handlers are rewarded Ior minimizing
how much they pay out in claims.
121
This situation has already been addressed by the courts on
several occasions, usually with claims involving liIe and death` misconduct by HMO`s.
122

PART IV
Insurance Companies` Fiduciary Duties and Duty of Good Faith and Fair Dealing
A. Insurance Companies Are Fiduciaries
1. Insurance Company Admissions
Insurance companies are Iiduciaries.
123
Who says?
Fireman`s Fund:
An insurer stands in a Iiduciary relationship to its insured; when an
insurer chooses his interest over the interests oI his insured his
actions are indeed intentional and deliberate` . . . and when a case
can be settled with no personal liability to said insured, |Iailure to
do so| has the character oI outrage Irequently associated with
crime`.
124


120
See Eugene R. Anderson et al., Insurance Nullification By Litigation, RISK MGMT., Apr. 1994, at
46; Richard A. Archer, Preparing For A `Mega-Loss, BUS. INS., Oct. 10, 1994, at 23. See also Eugene
R. Anderson & Paul Liben, %he Perfect Insurance or %he Perfect Crime?, METROPOLITAN CORP.
COUNS., Jan. 1995.
121
See Michael Larrick, Gain Sharing and PerIormance Guarantee Arrangements: Can They Be
UseIul For TPAs & Casualty Claim Organizations?, CLAIMS, May 1997, at 67.
122
See e.g. Shea v. Esensten, 107 F.3d 625 (8th Cir. 1997). (holding that an HMO`s Iailure to
disclose Iinancial incentives and penalties designed to minimize reIerrals by doctor`s Ior specialized
treatment violated the Iiduciary duty owed to the patient. '|A| Iinancial incentive scheme put in place to
inIluence a treating doctor`s reIerral practices when the patient needs specialized care is certainly a
material piece oI inIormation).
123
See BLACK`S LAW DICTIONARY (6th ed. 1990) (Iiduciary reIers to a person 'having duties
involving good Iaith, trust, special conIidence, and candor towards another).
124
Civil Action--Cross Petition Ior CertiIication and BrieI in Opposition to DeIendant-Appellant
Petition Ior CertiIication, at 13, 16, Iiled Mar. 4, 1975, Fireman`s Fund Ins. Co. v. Security Ins. Co. oI
HartIord, 367 A.2d 864, 866 (N.J. 1976)(court Iinding that the insurance company acted 'in disregard to
its acknowledged Iiduciary duty to its insured).

NYDOCS1-449390.1
11/16/11 11:58 AM
-45-


Continental Casualty
It has been held that an insurer who issues a |comprehensive
general liability policy| is under a Iiduciary duty to look aIter the
interests oI the insured as well as its own interests.
125

Continental Insurance Company
Representing the insured is clearly a Iiduciary` situation,
especially in view oI the Iact that improper conduct by the insurer
could expose the insured to liability beyond the amount oI his
insurance protection.
126

National Union
Underlying all Iorms oI insurance is a Iiduciary duty to some
extent simply because oI the insurer`s expertise in the area oI its
business. In the public liability area the Iiduciary duties are
heavier because the insurance company is an expert in the
litigation arena in all parts oI the country since it has thousands oI
cases nationwide and trained personnel to handle them.
127

National Union, again:
|L|egal authorities have declared the relation oI insured and insurer
to be Iiduciary and to require oI the parties the utmost good Iaith in
their dealings . . . Whenever a contract is in its essential nature
intrinsically Iiduciary, the utmost good Iaith and Iullest disclosure
oI material Iacts are required Irom the parties

125
Continental Casualty Company`s Memorandum oI Law For Trial, at 27, Iiled Sept. 11, 1990,
Continental Cas. Co. v. Great Am. Ins. Co., No. 86-C-3938, 1990 U.S. Dist LEXIS 12807 (N.D. Ill. Sept.
28, 1990). See also Continental Cas. Co. v. Great Am. Ins. Co., 711 F. Supp. 1475, 1481 (N.D. Ill.
1989)(in an earlier related decision, court rejected Great American`s request Ior summary judgment on
the issue oI the duty oI good Iaith and Iair dealing; issue oI bad Iaith departure Irom company or industry
custom was question Ior jury in light oI evidence that Great American had previously involved itselI in
deIense and settlement oI claims, though not contractually obligated to do so.
126
Memorandum in Opposition to PlaintiII`s Cross-motion to Dismiss DeIendants` First and Second
DeIenses and PlaintiII`s Request For Leave to Further Amend its Amended Complaint, at 9-10, submitted
Apr. 5, 1993, New York Univ. v. Continental Ins. Co., 209 A.D.2d 231 (N.Y. 1st Dep`t 1994)(No.
11627/92), rev`d, 89 N.Y.2d 308 (1995)(No. 302).
127
Memorandum in Opposition To Columbia Casualty Company`s Motion For Summary Judgment,
at 18-19, dated Dec. 16, 1989, Columbia Cas. Co. v. Nat`l Union Fire Ins. Co., (E.D. Pa.)(No. 89-3506).

NYDOCS1-449390.1
11/16/11 11:58 AM
-46-


. . . Any concealment oI a material Iact known to a party would
necessarily be Iraudulent. The most Iamiliar and illustrative oI
such contracts is that oI insurance.
128

Home
|A|n insurer is in a Iiduciary relationship to its insured.
129

Liberty Mutual
|T|he cases have readily acknowledged that the insurer-insured
relationship gives rise to a Iiduciary duty.
130

St. Paul Fire and Casualty
St. Paul owes a Iiduciary duty to |the plaintiII|. We don`t contest
that . . . We owe a Iiduciary duty to every one oI our policyholders
. . . .
131

HartIord
The standard which attaches to the insurer-insured relationship is
Iiduciary in nature. . . .
|G|reat weight must be placed upon the character oI an insurance
policy as a contract oI adhesion . . . which the insurer, as the
dominant party, must honor as a Iiduciary . . . .
132

It is very telling that insurance companies oIten argue Ior a Iiduciary duty when
suing their insurance company, e.g. an excess, umbrella or co-insurance company.
133
In the
process, the insurance company may make two points. For example:

128
DeIendant National Union Fire Ins. Co. oI Pittsburgh, Pa`s Reply Memorandum in Support oI its
Motion Ior Summary Judgment, at 23, dated Oct. 20, 1995, In re: Cardinal Industries, Inc., (S.D.
Ohio)(No. C-2-94-254)(internal quotations and citation omitted).
129
DeIendant`s Requested Jury Instructions, DeIendant`s Proposed Instruction No. 2, dated Sept. 8,
1988, Georgetown Realty, Inc. v. Home Ins. Co., No. A8708-05098 (Oregon Cir. Ct., Multnomah Cty.).
130
Memorandum oI Law in Support oI PlaintiII`s Response, at 6, dated July 13, 1993, Liberty Mut.
Ins. Co. v. Paper MIrs. Co., 753 F. Supp. 156 (E.D. Pa. 1990)(No. 90-3787).
131
Motion For Summary Judgment Hearing, Transcript, at 24, dated Jan. 18, 1994, Richland Valley
Prods. v. St. Paul Fire & Cas. Co., (Wis. Cir. Ct.)(No. 92CV149), rev`d, 548 N.W.2d 127 (Wis. Ct. App.
1996)(No. 94-1837).
132
BrieI and Volume I oI Appendix oI PlaintiII-Appellant, HartIord Accident & Indemnity
Company, at 11-12, Iiled May 12, 1983, HartIord Accident & Indem. Co. v. Aetna LiIe & Cas. Ins. Co.,
(N.J. Super. Ct. App. Div.)(No. A-1595-82T2), aII`d, 483 A.2d 402 (N.J. 1984)(No. A-22).

NYDOCS1-449390.1
11/16/11 11:58 AM
-47-


American Centennial
The primary carrier owes to the excess carrier the same Iiduciary
obligation which the primary insurer owes to its insured.
134

Here is HartIord, again, arguing that its insurance company owes it a Iiduciary duty:
The primary carrier owes the excess carrier the same Iiduciary
obligation which the primary insurer owes its insured, namely, a
duty to proceed in good Iaith and in the exercise oI honest
discretion, the violation oI which exposes the primary carrier to
liability beyond its policy limits (citations omitted).
135

Here is Liberty Mutual, again, making the same argument against its insurance company:
When determining whether an insurer breached its duty to its
insured . . . the appropriate standards to employ are described by
cases involving the very issue at hand, i.e., the Iiduciary duty oI an

133
See, e.g., BrieI oI PlaintiII-Respondent, at 11, Iiled Feb. 8, 1984, HartIord Accident & Indem. Co.
v. Michigan Mut. Ins. Co., 61 N.Y.2d 569 (N.Y. 1984); Civil Action--Cross Appellant Petition Ior
CertiIication, at 5, Iiled Apr. 13, 1977, Fireman`s Fund Ins. Co. v. Security Ins. Co. oI HartIord, 367 A.2d
864 (N.J. 1976); Initial BrieI oI Appellant United States Fire Insurance Company, at 17-18, Iiled May 3,
1990, United States Fire Ins. Co. v. Caulkins Indiantown Citrus Co., (Fla. Dist. App. Ct. 1990)(No. 89-
3791); Reply BrieI Ior DeIendant-Appellant Executive LiIe Insurance Company, at 4, Iiled Sept. 26,
1989, United States Fidelity & Guar. Co. v. Executive LiIe Ins. Co., (2d Cir. 1990)(No. 89-7955); BrieI in
Support oI PlaintiII`s Motion Ior Summary and Other RelieI, at 87, Iiled Aug. 8, 1989, Christiania
General Ins. Corp. oI New York v. Great Am. Ins. Co., 745 F. Supp. 150 (S.D.N.Y. 1990)(No. 87 Civ.
8310); BrieI oI Appellant Centennial Insurance Company, at 36, Iiled Jan. 19, 1990, Aetna Cas. & Sur.
Co. v. Great Am. Ins. Co., et al., 1991 U.S. App. Lexis 3334 (9th Cir. Feb. 28, 1991)(No. 89-55811);
Continental Insurance Company`s BrieI, Iiled Sept. 11, 1990, Continental Cas. Co. v. Great Am. Ins. Co.,
1990 U.S. Dist. Lexis 12807 (N.D. Ill. Feb. 28, 1990)(No. 86C-3839); Motion Ior Rehearing and Request
Ior Motion Ior Rehearing En Banc, at 4, Iiled July 31, 1987, Morrison Assurance Co. v. United States
Fire Ins. Co., 515 So. 2d 995 (Fla. Dist. Ct. App. 1987)(No. BR-226); Response oI Prudential
Reinsurance Co. and Gibraltar Casualty Company in Opposition to PlaintiII`s Motion Ior Protective
Order Regarding Certain Depositions, at 5-6, Iiled June 15, 1992, Hoechst Celanese Corp. v. National
Union Fire Ins. Co., No. 89C-SE-35-1-CV, 1992 Del. Super. LEXIS 305 (Del. Super. Ct. 1992).
134
Application Ior Writ oI Error oI American Centennial Insurance Company and First State
Insurance Company, at 19, Iiled July 9, 1991, American Centennial Ins. Co. v. Canal Ins. Co., 843
S.W.2d 480 (Tex. 1992)(No. D-1213).
135
BrieI oI PlaintiII-Respondent, at 11, HartIord Accident & Indem. Co. v. Michigan Mut. Ins. Co.,
61 N.Y.2d 569, 574 (1984)(primary insurance company owes its excess insurance company the same duty
to act in good Iaith which it owes to its own policyholders; whether primary insurance company acted in
its own or policyholders` interests was a question Ior trial, not summary judgment).

NYDOCS1-449390.1
11/16/11 11:58 AM
-48-


insurer to act with the utmost good Iaith in its handling oI the
claims against the insured.
136

One oI the great ironies oI bad Iaith litigation is that it most Irequently occurs between insurance
companies, not policyholder versus insurance company.
137

Hartford Steam Boiler perhaps best explained the reasoning behind recognizing a
Iiduciary duty:
The essence oI a Iiduciary relationship is that the Iiduciary agrees
to act as his principal`s alter ego rather than to assume the standard
arm`s length stance oI traders in a market. Hence the principal is
not armed with the usual wariness that one has in dealing with
strangers; he trusts the Iiduciary to deal with him as Irankly as
though he would deal with himselI he has bought candor.
138

These are but a Iew examples. They are not sporadically made assertions. Insurance companies
clearly understand that a Iiduciary duty is owed to their policyholders. So do the
139
and
commentators.
140


136
Appellant`s Reply BrieI, at 10-11, Iiled Oct. 23, 1991, General Star National Ins. Co. v. Liberty
Mut. Ins. Co., 960 F.2d 377 (3d Cir. 1992)(No. 91-1497)(contrary to excess insurance company`s
arguments, Iinding no evidence oI dishonesty by primary insurance company to policyholder).
137
See generally PATRICK MAGARICK, EXCESS LIABILITY, 17.02, 17.06 (1996). In particular,
insurance companies which have sold a policyholder excess liability coverage attempt to reduce their
ultimate costs by settling a policyholder`s claim aIter the primary insurance company has reIused to do
so. The policyholder then assigns its rights under the primary policy to the excess insurance company.
By stepping into the shoes oI the policyholder, excess insurance companies can bring a bad Iaith claim
against primary insurance companies which wrongIully reIuse to settle a claim and expose the
policyholder or excess insurance company to a judgment exceeding the primary policy`s limits.
138
Memorandum oI Law Re Motion to Compel, at 64, Iiled Nov. 29, 1994, (quoting United States v.
Dial, 757 F.2d 163, 168 (7th Cir. 1985), HartIord Steam Boiler Inspection & Ins. Co. v. Industrial Risk
Insurers, No. CV-94-705105, 1994 Conn. Super LEXIS 3088, at *1-*2 (Conn. Super. Ct. Dec. 7,
1994)(Iinding that 'a Iiduciary relationship oI some sort existed between primary and reinsurance
companies regarding selection oI arbitrators to arbitrate dispute). See also HartIord Steam Boiler
Inspection & Ins. Co. v. Industrial Risk Insurers, No. CV-94-705105, 1995 Conn. Super LEXIS 3013, at
*6 (Conn. Super. Ct. Oct. 7, 1995)('assuming Iiduciary duty but Iinding no breach oI the duty).
139
See 2 EUGENE R. ANDERSON, ET AL., INSURANCE COVERAGE LITIGATION 11.6, at
16-18 (1
ST
ed. 1997); contra, Randy Papetti, Note, %he Insurers Duty of Good Faith in the Context of
Litigation, 60 GEO. WASH. L. REV. 1931, 1933 at n.10 (1992)(listing cases. Note that Mr. Papetti
supports positions regularly advocated by the insurance industry); Gibson v. Western Fire Ins. Co., 682

NYDOCS1-449390.1
11/16/11 11:58 AM
-49-



P.2d 725, 730 (Mont. 1984) (citation omitted); Stetler v. Fosha, 809 F. Supp. 1409, 1422 (D. Kan. 1992),
aII`d without op., 7 F.3d 1045 (10
th
Cir. 1993); Village oI Morrisville Water & Light Dep`t v. United
States Fidelity & Guar. Co., 775 F. Supp. 718, 734 (D. Vt. 1991); Corrado Bros. V. Twin City Fire Ins.
Co., 562 A.2d 1188, 1192 (Del. 1989) (insurance company-policyholder relationship is analogous to
Iiduciary relationship); Florida Farm Bureau Mut. Ins. Co. v. Rice, 393 So. 2d 552, 555 (Fla. Dist. Ct.
App. 1980); Illinois Masonic Med. Ctr. V. Turegum Ins. Co., 522 N.E.2d 611, 613 (Ill. App. Ct. 1988);
Pareti v. Sentry Indem. Co., 536 So. 2d 417, 423 (La. 1988); Fireman`s Fund Ins. Co. v. Continental Ins.
Co., 519 A.2d 202, 204 (Md. 1987); Lisiewski v. Countrywide Ins. Co., 255 N.W.2d 714,717 (Mich. Ct.
App. 1977); Varnal v. Weathers, 619 S.W.2d 825, 828 (Mo. Ct. App. 1981); Rova Farms Resort, Inc. v.
Investors Ins. Co. oI am., 323 A.2d 495, 504 (N.J. 1974). But see Rawlings v. Apodaca, 726 P.2d 565,
571 (Ariz. 1985) ('|A|though the insured is entitled to expect that the insurer will be `on his side`. we
do not go so Iar as to hold that the insurer is a Iiduciary.).
In the claims handling environment, it is very clear that insurance companies owe their
policyholders a Iiduciary duty. Allstate Ins. Co. v. American Transit Ins. Co., 977 F. Supp. 197
(E.D.N.Y. 1997)(primary insurance company owes Iiduciary duties to an excess insurance
company); HartIord Accident & Indem. Co. v. Commercial Union Ins. Co., 772 F. Supp. 741
(E.D.N.Y. 1991)(same); Emloyers Mut. Cas. Co. v. Key Pharms., No. 91 Civ. 1630, 1992 U.S. Dist.
LEXIS 11091 (S.D.N.Y. July, 27 1992)(excess insurance company could not withhold Irom the
policyholder documents regarding the underlying litigation and settlement; issue was not 'privity or the
lack oI privity, but deIendants' Iiduciary obligations'); Highlands Ins. Co. v. National Union Fire Ins. Co.,
27 F.3d 1027 (5th Cir. 1994)(insurance company which sold primary policy owed its excess insurance
company the same Iiduciary obligation it owed its policyholders): Royal Globe Ins. Co. v. Chock Full O'
Nuts Corp., 86 A.D. 315, 449 N.Y.S.2d 740, 742 (1st Dep't 1982) (policyholder allowed to maintain
breach oI Iiduciary duty counterclaim Ior alleged breach oI contract and negligence in handling claims
under workers' compensation and employers liability policies); United Nat'l Ins. Co. v. WaterIront N.Y.
Realty, 948 F. Supp. 263 (S.D.N.Y. 1996)(insurance company's Iiduciary duty to the policyholder
requires that the insurance company's loyalty be undivided); New York v. Blank, No. 88-CV-163, 1991
U.S. Dist. LEXIS 14582 (N.D.N.Y. Oct. 10, 1991), at *27, aII`d in relevant part, 27 F.3d 783 (2d Cir.
1994)(court agreed with policyholders' observation that 'the Insurers' eIIorts in these summary judgment
motions to in eIIect prove its insureds' liability in the underlying action may be a breach oI their Iiduciary
obligations to their insureds, citing HartIord Accident & Indem. v. Michigan Mut. Ins. Co., 93 A.D.2d
337, 340-41, 462 N.Y.S.2d 175, 178 (1st Dep't 1983), aII`d, 61 N. Y.2d 569, 463 N. E.2d 608, 475 N.Y.
S.2d 267 (1984); Fireman's Fund Ins. Co. v. Security Ins. Co., 72 N.J. 63, 367 A.2d 864 (1976)(holding
that primary insurance company's Iailure to settle was in 'disregard oI its acknowledged Iiduciary duty to
its insured); Dornberger v. Metropplitan & LiIe Ins. Co., 961 F. Supp. 506 (S.D.N.Y. 1997)(basis Ior the
Iiduciary obligation is quite clear in the litigation context and that under the right circumstances, the
relationship between the insurance company and policyholder in non-litigation environment may be
imbued with elements oI trust and conIidence to create a Iiduciary duty); Zurich Ins. Co. v. State Farm
Mut. Auto. Ins, Co., 137 A.D.2d 401, 524 N.Y.S.2d 202 (1st Dep't 1988)(primary insurance company
owes the same Iiduciary obligation to its excess insurance company as it owes to its policyholder);
Arzonaut Ins. Co. v. HartIord Accident & Indem. Ins. Co., 687 F. Supp. 911 (S.D.N.Y. 1988)(same);
Myers v. Ambassador Ins. Co., Inc., 146 Vt. 552, 508 A.2d 689, 691 (1986)("|t|he insurer's Iiduciary duty
to act in good Iaith when handling a claim against the insured obligates it to take the insured's interests
into account.); Ampower Semiconductor Corp. v. American Motorists Ins. Co., 159 A.D.2d 268, 522
N.Y.S.2d 269 (1st Dep't 1990)(by breaching its Iiduciary duty to deal with its policyholder with the
utmost good Iaith, insurance company could not take advantage oI its own wrongdoing); But see Goshen
v. Mutual LiIe Ins. Co., No. 600466/95-006, 1997 N.Y. Misc. LEXIS 486 (N.Y. Sup. Ct. N.Y. County
Oct. 24, 1997)(Although a Iiduciary relationship may exist between an insurance company and its
insured once the insurer is called upon to provide a deIense to its insured in the context oI a liability claim
. . ., in general, a contract oI insurance does not otherwise create a Iiduciary relationship between the

NYDOCS1-449390.1
11/16/11 11:58 AM
-50-


2. Insurance Companies Trumpet Their Fiduciary Duties For Marketing and
Litigation Purposes
Insurance companies use their Iiduciary status as a litigation tactic and a
marketing tool.
Insurance companies are quick to argue the tell-tale mark oI a Iiduciary duty a
'relationship oI trust and conIidence when policyholders in litigation against them request
documents or interrogatories. In a litigation tactic designed to shield their Iiles Irom discovery,
insurance companies routinely deny requests Ior documents by claiming that disclosure would
violate the trust or conIidences oI their policyholders.
141

Insurance companies` advertisements contribute to the Iiduciary relationship
between the insurance company and the policyholder.

parties.(citations omitted)

140
See, e.g., Willis Park Rokes, J.D., Ph.D, Agressive Good Faith and SuccessIul Claims Handling
26 (Insurance Institute oI America, 1st ed. 1987)
The nature oI the insurance contract, where the insured turns over
his or her Iinancial interests to the insurance company, dictates that
the insurer has no right to sacriIice those oI the insured in order to
save money. The relationship between the insured and the insurer
under the contract closely approximates that oI principal and agent,
or beneIiciary and trustee, and indeed, some courts have held that
the insurer occupies a Iiduciary position.
141
See, e.g., Commercial Union Insurance Company`s BrieI In Opposition To PlaintiII`s Motion To
Compel Discovery at, 2, 23, dated June 16, 1989, Minnesota Mining & MIg. v. Commercial Union Ins.
Co., (D.N.J.)(No. 88-325)('discovery . . . concerning other insureds and claims would compromise
conIidential and proprietary inIormation oI other insureds);
Aetna Casualty and Surety Company`s Memorandum oI law In Opposition to Textron Inc`s Motion To
Compel, at, 4, 12, 21, Iiled Aug. 21, 1989, Textron, Inc. v. Aetna Cas. & Sur. Co., (R.I. Super Ct.)(No.
87-3497)(disclosure oI inIormation concerning other insureds 'threatens to breach |the insurance
company`s| conIidential relationship with its other policyholders; 'The very nature oI the relationship
between insurer and insured imparts a reasonable expectation oI privacy);
Memorandum oI DeIendant Employers Insurance oI Wausau in Opposition to Motion to Compel
Answers to Interrogatories at, 4, 14-17, Iiled Aug. 21, 1989, Avco Corp. v. Aetna Cas. & Sur. Co.,(R.I.

NYDOCS1-449390.1
11/16/11 11:58 AM
-51-


Older decisions which reIused to recognize a Iiduciary relationship
between the insurance company and its policyholder are 'out oI
step with current concepts . . . |and| particularly
. . . outmoded when television advertising repeatedly reIers to the
good hands` oI the insurer or how it is like a good neighbor`,
implying an ability to place trust and reliance upon the broad
shoulders oI the kindly company.
142

Courts around the country have Iound that insurance company advertisements tell
people what to expect Irom insurance:
Allstate`s slogan 'You`re in Good Hands, Travelers` motto oI
protection 'Under the Umbrella, and Fireman`s Fund symbolic
protection beneath the 'Fireman`s Hat, exempliIy the industry`s
own eIIorts to portray itselI as a repository oI the public trust . . . It
is noteworthy that the insurance company involved in this appeal
promotes itselI in national advertisements with the slogan, 'Like a
good neighbor, State Farm is there.
143

The unIortunate truth is that insurance companies oIten do the opposite oI what they promised in
their marketing eIIorts:
The insurer`s promise to the insured to simpliIy his liIe,` to put
him in good hands,` to back him with a piece oI the rock` or to be
on his side` hardly suggest that the insurer will abandon the
insured in his time oI need.
144


Super. Ct.)(No. 87-3497)(producing documents pertaining to other policyholders would 'result in
disclosure oI highly sensitive conIidential inIormation).
142
See Dornberger v. Metropolitan LiIe Ins. Co., 967 F. Supp. 506, 547 n.39 (S.D.N.Y. 1997), citing
12 J. APPLEMAN, INSURANCE LAW & PRACTICE 7004 (1981).
143
State Farm Fire & Cas. Co. v. Nicholson, 777 P.2d 1152, 1156 n.6 (Alaska 1989)(quoting
McMains, Bad Faith Claims Handling -- New Frontiers. A Multi-state Cause of Action in Search of a
Home, 53 J. AIR L. & COM. 901, 904 (1988)(recognizing the insurance company duty oI good Iaith in
Iirst-party cases).
144
D`Ambrosio v. Pennsylvania Nat`l Mut. Cas. Ins. Co., 494 Pa. 501, 512-13, 431 A.2d 966, 972
(1981)(Larsen, J., dissenting), superseded by statute, Romano v. Nationwide Mut. Fire Ins. Co., 646 A.2d
1228 (Pa. Super. Ct. 1994), superseded by statute, Continental Cas. Co. v. DiversiIied Indus., 884 F.
Supp. 937 (E.D. Pa. 1995). See also Irion v. Prudential Ins. Co., 765 F. Supp. 337, 338 n.2 (N.D. Tex.
1991), rev`d, 964 F.2d 463 (5th Cir. 1992)('PlaintiII, at the inducement oI Prudential, got herselI a piece
oI the rock,` and now that its time Ior the insurance company to pay, Prudential wants to take its rocks

NYDOCS1-449390.1
11/16/11 11:58 AM
-52-


Abandon the policyholder in his time oI need is exactly what insurance companies Irequently do.
When this happens, an insurance policy is not a shield, a saIe hand, a kindly neighbor or a rock.
Not only does this abandonment violate the insurance company`s Iiduciary duty, it violates the
policyholder`s Iundamental expectation oI peace oI mind which insurance is meant to provide:
That insurers sell their product as being not only an agreement to
indemniIy the insured Ior certain kinds oI loss but also to relieve
the purchaser Irom anxiety concerning all aspects oI claims is
readily apparent in our society. On cannot watch televised
entertainment Ior very long without being exposed to commercials
Ior the sale oI insurance which, Ior example, indicate that the
purchaser will be in good hands,` that he will have the assistance
oI a troop oI mounted cavalry, that he |will have| a piece oI the
rock,` or like a good neighbor` the insurer will be there. As such
advertisements reIlect, the relationship between insurer and insured
does not merely concern indemnity Ior money loss.
145

Insurance company advertising reveals that the insurance industry itselI 'recognizes that the
insurance relationship is more than the company`s promise to pay certain claims when Iorced to
do so:
Advertising programs portraying customers as being in good
hands` or dealing with a good neighbor` emphasize a special type
oI relationship between the insured and insurer one in which
trust, conIidence and peace oI mind have some part . . . . We hold
thereIore that one oI the beneIits that Ilow Irom the insurance
contract is the insured`s expectation that his insurance company
will not wrongIully deprive him oI the very security Ior which he
bargained or expose him to catastrophe Irom which he sought
protection.
146


and go home.); Tom Baker, Constructing the Insurance Relationship, Sales Stories, Claim Stories, and
Insurance Contract Damages, 72 TEX. L. REV. 1395, 1396-97 (1994).
145
Andrew Jackson LiIe Ins. Co. v. Williams, 566 So. 2d 1172, 1175 n.5 (Miss. 1990) quoting Farris
v. United States Fidelity & Guar. Co., 284 Or. 453, 479 n.4, 587 P.2d 1015, 1028 n.4 (1978)(Lent, J.,
dissenting).
146
Rawlings v. Apodaca, 151 Ariz. 149, 154-55, 726 P.2d 565, 570-71 (1986), citing Egan v. Mutual
oI Omaha Ins. Co., 620 P.2d 141, 145-46 (Cal. 1979), cert. denied, 445 U.S. 912 (1980).

NYDOCS1-449390.1
11/16/11 11:58 AM
-53-


As the present debate has made all too clear, 'the insurance company`s Iiduciary role lies in
perpetual conIlict with its proIit-making role as a business, ultimately creating an 'inherent
conIlict oI interest between an insurance company`s Iiduciary duties and Iinancial interests.
147

Insurance companies do not merely acknowledge their Iiduciary duties they openly tout them
and use the principle to their advantage. By acknowledging, and exploiting, their Iiduciary
duties to policyholders, insurance companies recognize that their responsibilities to policyholders
go Iar beyond the letter oI the policy.
In any bad Iaith action, it should be called to the courts attention that insurance
companies oIten do the opposite oI what they promised when they cultivated the policyholder`s
trust and expectations oI insurance coverage. The purpose oI insurance is to insure and provide
peace oI mind.
148

3. FIDUCIARY DUTY OF INSURANCE COMPANIES
a. The Bad
In United States v. Brennan, 183 F.3d 139 (2nd Cir. 1999)the Second Circuit,
aIter extensive brieIing and consideration by the District Court, and in dicta, criticized the
government's case on the issues oI insurance company's Iiduciary duties. The Court noted:
The Government has pointed to no precedent Ior criminal
liability based on disclosures to sophisticated corporations in arm-
length contractual insurance relationships, in circumstances like
those presented here. Indeed, there was substantial reason Ior one

147
See Kekis v. Blue Cross & Blue Shield, 815 F. Supp. 571, 583 (N.D.N.Y. 1993), quoting Wilson
v. Group Hospitalization & Med. Servs., Inc., 791 F. Supp. 309, 312 (D.D.C. 1992); Brown v. Blue Cross
& Blue Shield, 898 F.2d 1556 (11th Cir. 1990). It should be noted that while the perpetual conIlict oI
interest between an insurance company`s Iiduciary duties and Iinancial interests is a simple matter oI Iact,
within the Second Circuit, arbitrary and capricious` conduct is the appropriate standard oI review to
determine whether a plan administrator has breached their Iiduciary duty. See Whitney v. Empire Blue
Cross & Blue Shield, 106 F.3d 475, 476-77 (2d Cir. 1997).
148
13 J. Appleman, Insurance Law & Practice, 7403, at 302-03 (1981).

NYDOCS1-449390.1
11/16/11 11:58 AM
-54-


in deIendants position to conclude that the relationships at issue
were not Iiduciary under New York law or otherwise. (citations
omitted). Id. at 1999 WL 459368 at *10.
b. The Good
Warren BuIIett has written:
The insurance business is a fiduciary business. You get access to other
people`s money under conditions where in many cases the other people have
very little knowledge or control of where the money`s going.
149


Justice Cardozo said:
Many Iorms oI conduct permissible in a workaday world Ior those acting at arm`s length, are
Iorbidden to those bound by Iiduciary ties. A trustee is held to something stricter than the morals
oI the market place. Not honesty alone, but the punctilio oI an honor the most sensitive, is then
the standard oI behavior.
150

The root oI the word 'Iiduciary is fides, meaning Iaith, conIidence, reliance,
trust, and belieI. Fides, or conIidence, is described in Cicero as:
The command oI conIidence can be secured . . |Iirst|. iI people
think us possessed oI practical wisdom combined with a sense oI
justice. For we have conIidence in those who we think have more
understanding than ourselves, who, we believe, have better insight
into the Iuture, and who, when an emergency arises and a crisis
comes, can clear away the diIIiculties and reach a saIe decision
according to the exigencies oI the occasion; Ior that kind oI
wisdom the world accounts genuine and practical. |Second|,
conIidence is reposed in men who are just and true. . . Justice
combined with practical wisdom will command all the conIidence
we can desire; justice without wisdom will not be able to do much;
wisdom without justice will be oI no avail at all.
151


149
Warren BuIIett, 1992 Annual Report oI Berkshire Hathaway, Iiled with the United States
Securities and Exchange Commission.
150
Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928).
151
De OIIiciis II, IX, at 203 1.33 (Walter Miller trans., 1943), quoted in Scott FitzGibbon, Fiduciary
Relationships are Not Contracts, 82 MARQ. L. REV. 303, 339 n.126 (1999).

NYDOCS1-449390.1
11/16/11 11:58 AM
-55-


A modern deIinition oI 'Iiduciary states that a Iiduciary is 'one . . .that holds a
Iiduciary relation or acts in a Iiduciary capacity to another
152
And a 'Iiduciary relation is one
which exists when 'good conscience requires one to act at all times Ior the sole beneIit and
interests oI another with loyalty to those interests.
153

In the insurance world, there are Iewer categories oI 'Iiduciary. Rather, a
'Iiduciary is 'a person who occupies a position oI trust.
154
'Fiduciary describes
'relationships oI high trust and conIidence.
155

A book published by the Insurance Institute oI America used to train insurance
industry personnel notes that the relationship oI an insurance company and its policyholder
approximates the relationship between a beneIiciary and a trustee reasoning:
The nature oI the insurance contract, where the insured turns over
his or her Iinancial interests to the insurance company, dictates that
the insurer has no right to sacriIice those oI the insured in order to
save money. The relationship between the insured and the insurer
under the contract closely approximates that oI principal and agent,
or beneIiciary and trustee, and indeed, some courts have held that
the insurer occupies a Iiduciary position.
156

Insurance Companies Communicate That They Are Fiduciaries
4. Communication in Court
The instances oI insurance companies telling courts that they are Iiduciaries are
legion. Here a just a Iew:

152
I Webster`s Third New International Dictionary oI the English Language Unabridged 845 (1986).
153
Id.
154
Insurance Words and Their Meanings 55 (Rough Notes 15th ed. 1996).
155
LEWIS E. DAVIDS, DICTIONARY OF INSURANCE 185 (Rowman & LittleIield Publishers 7th ed.
1990).
156
Willis Park Rokes, Aggressive Good Faith and SuccessIul Claims Handling 26 (Insurance
Institute oI America 1987).

NYDOCS1-449390.1
11/16/11 11:58 AM
-56-


Fireman`s Fund Insurance Company:
An insurer stands in a Iiduciary relationship to its insured; when an
insurer chooses his interest over the interests oI his insured his
actions are indeed intentional and deliberate` . . . and when a case
can be settled with no personal liability to said insured, |Iailure to
do so| has the character oI outrage Irequently associated with
crime`.
157

Continental Casualty Company:
It has been held that an insurer who issues a |comprehensive
general liability policy| is under a Iiduciary duty to look aIter the
interests oI the insured as well as its own interests.
158

Continental Insurance Company:
Representing the insured is clearly a Iiduciary` situation,
especially in view oI the Iact that improper conduct by the insurer
could expose the insured to liability beyond the amount oI his
insurance protection.
159

National Union Fire Insurance Company:
Underlying all Iorms oI insurance is a Iiduciary duty to some
extent simply because oI the insurer`s expertise in the area oI its
business. In the public liability area the Iiduciary duties are
heavier because the insurance company is an expert in the
litigation arena in all parts oI the country since it has thousands oI
cases nationwide and trained personnel to handle them.
160


157
Civil Action--Cross Petition Ior CertiIication and BrieI in Opposition to DeIendant-Appellant
Petition Ior CertiIication, at 13 (Iiled Mar. 4, 1975), Fireman`s Fund Ins. Co. v. Security Ins. Co. oI
HartIord, No. 1, 223 (N.J.) (Fireman`s Fund arguing that the primary insurance company, Security, owed
a Iiduciary duty to its policyholder).
158
Continental Casualty Company`s Memorandum oI Law For Trial at 27 (Iiled Sept. 11, 1990),
Continental Casualty Co. v. Great Am. Ins. Co., No. 86-C-3938 (N.D. Ill.).
159
Memorandum in Opposition to PlaintiII`s Cross-motion to Dismiss DeIendants` First and Second
DeIenses and PlaintiII`s Request For Leave to Further Amend its Amended Complaint at 9-10 (submitted
Apr. 5, 1993), New York Univ. v. Continental Ins. Co., No. 11627/92 (N.Y. Sup. Ct.).
160
Memorandum in Opposition To Columbia Casualty Company`s Motion For Summary Judgment
at 18-19 (dated Dec. 16, 1989), Columbia Casualty Co. v. National Union Fire Ins. Co., No. 89-3506
(E.D. Pa.).

NYDOCS1-449390.1
11/16/11 11:58 AM
-57-


|L|egal authorities have declared the relation oI insured and insurer
to be Iiduciary. . ..
161

Home Insurance Company:
Under Oregon law an insurer is in a Iiduciary relationship to its
insured. A Iiduciary is one who is in a position oI trust and
conIidence with another, usually called a principal, while acting
Ior and on behalI oI the other.
162

Liberty Mutual Insurance Company:
|T|he cases have readily acknowledged that the insurer-insured
relationship gives rise to a Iiduciary duty.
163

St. Paul Fire and Casualty:
St. Paul owes a Iiduciary duty to |the plaintiII|. We don`t contest
that . . . We owe a Iiduciary duty to every one oI our policyholders
. . . .
164

HartIord Accident and Indemnity Company:
The standard which attaches to the insurer-insured relationship is
Iiduciary in nature. . . .|G|reat weight must be placed upon the
character oI an insurance policy as a contract oI adhesion . . .
which the insurer, as the dominant party, must honor as a Iiduciary
. . . .
165


161
DeIendant National Union Fire Insurance Co. oI Pittsburgh, PA`s Reply Memorandum in Support
oI its Motion Ior Summary Judgment at 23 (dated Oct. 20, 1995), In re: Cardinal Industries, Inc., No. C-2-
94-254 (S.D. Ohio).
162
DeIendant`s |Home Insurance Company`s| Requested Jury Instructions, DeIendant`s Proposed
Instruction No. 2 (submitted on Sept. 8, 1988), Georgetown Realty, Inc. v. Home Ins. Co., No. A8708-
05098 (Oregon Cir. Ct., Multnomah Cty.).
163
Memorandum oI Law in Support oI PlaintiII`s Response at 6, (dated July 13, 1993), Liberty Mut.
Ins. Co. v. Paper MIrs. Co., No. 90-3787 (E.D. Pa. 1990).
164
Motion For Summary Judgment Hearing, Transcript at 24 (dated Jan. 18, 1994), Richland Valley
Prods. v. St. Paul Fire & Cas. Co., No. 92CV149 (Wis. Cir. Ct.).
165
BrieI and Volume I oI Appendix oI PlaintiII-Appellant, HartIord Accident & Indemnity
Company at 11-12 (Iiled May 12, 1983), HartIord Accident & Indem. Co. v. Aetna LiIe & Casualty Ins.
Co., No. A-1595-82T2 (N.J. Super. Ct. App. Div.).

NYDOCS1-449390.1
11/16/11 11:58 AM
-58-


Frequently, insurance companies tell courts that the insurance companies that
provide them with insurance coverage are Iiduciaries.
166
In the process, the insurance company
may make two points: its insurance company is a Iiduciary and it, as an insurance company, is a
Iiduciary Ior the policyholder. For example, American Centennial Insurance Company told a
court: 'The primary carrier owes to the excess carrier the same Iiduciary obligation which the
primary insurer owes to its insured.
167
HartIord Accident and Indemnity Company also made
these two points when it, as an excess insurance company, argued that the primary insurance
company owed a Iiduciary duty to the excess insurance company. HartIord told a court:
The primary carrier owes the excess carrier the same Iiduciary
obligation which the primary insurer owes its insured, namely, a
duty to proceed in good Iaith and in the exercise oI honest
discretion, the violation oI which exposes the primary carrier to
liability beyond its policy limits.
168

General Star National Insurance Company during a dispute with Liberty Mutual
Insurance Company told the court:

166
See, e.g., Reply BrieI Ior DeIendant-Appellant Executive LiIe Insurance Company at 4 (Iiled
Sept. 26, 1989), United States Fidelity & Guar. Co. v. Executive LiIe Ins. Co., No. 89-7955 (2d Cir.);
BrieI oI Appellant Centennial Insurance Company at 36 (Iiled Jan. 19, 1990), Aetna Casualty & Surety
Co. v. Great Am. Ins. Co., No. 89-55811 (9th Cir.); BrieI in Support oI PlaintiII`s Motion Ior Summary
and Other RelieI at 87 (Iiled Aug. 8, 1989), Christiania General Ins. Corp. oI New York v. Great Am. Ins.
Co., No. 87 Civ. 8310 (S.D.N.Y.); Response oI Prudential Reinsurance Co. and Gibraltar Casualty
Company in Opposition to PlaintiII`s Motion Ior Protective Order Regarding Certain Depositions at 5-6,
(Iiled June 15, 1992), Hoechst Celanese Corp. v. National Union Fire Ins. Co., No. 89C-SE-35-1-CV
(Del. Super. Ct.); Initial BrieI oI Appellant United States Fire Insurance Company, at 17-18 (Iiled May 3,
1990), United States Fire Ins. Co. v. Caulkins Indiantown Citrus Co., No. 89-3791 (Fla. Dist. App. Ct.);
Motion Ior Rehearing and Request Ior Motion Ior Rehearing En Banc at 4 (Iiled July 31, 1987), Morrison
Assurance Co. v. United States Fire Ins. Co., No. BR-226 (Fla. Dist. Ct. App.). See generally Eugene R.
Anderson and James J. Fournier, Why Courts Enforce Insurance Policyholders Obfectively Reasonable
Expectations of Insurance Coverage, 5 CONN. INS. L.J. 335, 387 (1998-1999).
167
Application Ior Writ oI Error oI American Centennial Insurance Company and First State
Insurance Company, at 19, Iiled July 9, 1991, American Centennial Ins. Co. v. Canal Ins. Co., 843
S.W.2d 480 (Tex. 1992)(No. D-1213).
168
BrieI oI PlaintiII-Respondent at 11 (dated Feb. 8, 1984), HartIord Accident & Indem. Co. v.
Michigan Mut. Ins. Co., 61 N.Y.2d 569 (1984).

NYDOCS1-449390.1
11/16/11 11:58 AM
-59-


When determining whether an insurer breached its duty to its
insured . . . the appropriate standards to employ are described by
cases involving the very issue at hand, i.e., the Iiduciary duty oI an
insurer to act with the utmost good Iaith in its handling oI the
claims against the insured.
169

One insurance company has explained why a Iiduciary relationship exists between
primary and reinsurance companies. HartIord Steam Boiler Inspection and Insurance Company
said:
The essence oI a Iiduciary relationship is that the Iiduciary agrees
to act as his principal`s alter ego rather than to assume the standard
arm`s length stance oI traders in a market. Hence the principal is
not armed with the usual wariness that one has in dealing with
strangers; he trusts the Iiduciary to deal with him as Irankly as
though he would deal with himselI he has bought candor.
170

Insurance companies are Iiduciaries because they have Irequently represented in
court that they are Iiduciaries. In order to prevent inconsistencies in litigation,
171
insurance
companies should be considered Iiduciaries at all times. As the CaliIornia Court oI Appeal once
told an insurance company, a litigant 'may not alter |its| argument as the chameleon does his
color, to suit whatever terrain |it| inhabits at the moment.
172


169
Appellant`s Reply BrieI at 9-101 (Iiled Oct. 23, 1991), General Star National Ins. Co. v. Liberty
Mut. Ins. Co., No. 91-1497 (3d Cir.).
170
Memorandum oI Law Re Motion to Compel at 64 (Iiled Nov. 29, 1994), HartIord Steam Boiler
Inspection & Ins. Co. v. Industrial Risk Insurers, No. CV-94-705105 (Conn. Super. Ct., J.D.
HartIord/New Britain at HartIord) (quoting United States v. Dial, 757 F.2d 163, 168 (7th Cir. 1985).
171
For an exhaustive discussion oI the methods used by courts to prevent inconsistencies in litigation
see Eugene R. Anderson & Nadia V. Holober, Preventing Inconsistencies in Litigation With a Spotlight
on Insurance Coverage Litigation. %he Doctrines of udicial Estoppel, Equitable Estoppel, Quasi-
Estoppel, Collateral Estoppel, 'Mend the Hold,` 'Fraud on the Court` and udicial and Evidentiary
Admissions, 4 CONN. INS. L.J. 589 (1997-98).
172
Aerojet-General Corp. v. Superior Court, 258 Cal. Rptr. 684, 686 (Cal. Ct. App. 1989), review
denied, No. A042785 (Cal. Aug. 10, 1989).

NYDOCS1-449390.1
11/16/11 11:58 AM
-60-


5. Communication Via Litigation Tactics
Insurance companies assert that they are Iiduciaries and use this status as a
litigation tactic. Insurance companies are quick to argue the tell-tale mark oI a Iiduciary duty
a 'relationship oI trust and conIidence when policyholders in litigation against them request
documents or interrogatories. In a litigation tactic designed to shield their Iiles Irom discovery,
insurance companies routinely deny requests Ior documents by claiming that disclosure would
violate the trust or conIidences oI their policyholders.
173

6. Communication in the Marketplace
Insurance companies are some oI the largest volume advertisers in the United
States.
174
In those advertisements, the insurance companies Irequently portray themselves as
Iiduciaries. Allstate Insurance Company`s 'good hands advertisements clearly communicate
that Allstate wants the policyholder to place trust and conIidence in Aetna. Travelers Insurance
Company`s 'taking care oI one another and State Farm`s 'good neighbor advertisements
encourage the public to trust them.

173
See, e.g., Commercial Union Insurance Company`s BrieI In Opposition To PlaintiII`s Motion To
Compel Discovery at 2, 23 (dated June 16, 1989), Minnesota Mining & MIg. v. Commercial Union Ins.
Co., No. 88-325 (D.N.J.) ('discovery . . . concerning other insureds and claims would compromise
conIidential and proprietary inIormation oI other insureds); Aetna Casualty and Surety Company`s
Memorandum oI Law In Opposition to Textron Inc`s Motion To Compel, at 4, 12, 21 (Iiled Aug. 21,
1989), Textron, Inc. v. Aetna Cas. & Sur. Co., No. 87-3497 (R.I. Super Ct.)(disclosure oI inIormation
concerning other insureds 'threatens to breach |the insurance company`s| conIidential relationship with
its other policyholders; 'The very nature oI the relationship between insurer and insured imparts a
reasonable expectation oI privacy.); Memorandum oI DeIendant Employers Insurance oI Wausau in
Opposition to Motion to Compel Answers to Interrogatories at 4, 14-17 (Iiled Aug. 21, 1989), Avco Corp.
v. Aetna Casualty & Sur. Co., (No. 87-3497) (R.I. Super. Ct.)(producing documents pertaining to other
policyholders would 'result in disclosure oI highly sensitive conIidential inIormation).
174
See Kate Fitzgerald, A New Policy: LiIe Insurers Tout Strength Amid Bad Press, ADVERTISING
AGE, Sept. 2, 1991, at 3 cited in Tom Baker, Constructing the Insurance Relationship: Sales Stories,
Claim Stories, and Insurance Contract Damages, 72 Tex. L. Rev. 1395, 1404 n.24 (1994).

NYDOCS1-449390.1
11/16/11 11:58 AM
-61-


The Iiduciary aspect oI insurance company advertisements can be seen in
advertising campaigns by UNUM and Mutual oI Omaha.
175
UNUM Corporation advertised that
'|L|eadership is more than just providing a handIul oI policies and a promise to be there. .
|Leadership is| tailoring coverage to Iit people`s lives . . .|and| making sure every conceivable
aspect oI a disability plan is taken care oI.
176
Mutual oI Omaha used the advertising theme
'Protecting you in ways no one ever thought oI beIore.
177
Both these advertising campaigns
emphasize that the insurance companies are leaders, worthy oI the trust and conIidence oI the
public. Both campaigns communicate the impression that the insurance companies are
Iiduciaries.
Since courts have considered an insurance company`s marketing materials when
deciding issues involving insurance coverage,
178
advertisements and other marketing materials
used by insurance companies should be considered when determining that an insurance company
is a Iiduciary.
Legal commentators noted almost twenty years ago that insurance company
advertising that encourages trust and reliance may impose a Iiduciary relationship:
Particularly is the approach |'dog eat cat| outmoded when
television advertising repeatedly reIers to 'the good hands oI the
insurer or how it is 'like a good neighbor, implying an ability to
place trust and reliance upon the broad shoulders oI the kindly

175
Tom Baker, Constructing the Insurance Relationship: Sales Stories, Claim Stories, and Insurance
Contract Damages, 72 Tex. L. Rev. 1395, 1406 (1994).
176
Id. (citing SPORTS ILLUSTRATED, July 12, 1993, at 55 (advertisement)).
177
Id. (citing NAT`L GEOGRAPHIC, Sept. 1992, at 145 (advertisement)).
178
Alice E. Graham, Use of Advertising Materials to Determine Insurance Coverage, DEF. COUNS.
J., July 1990, at 332 (surveying court decisions involving insurance company advertisements and
brochures when deciding issues relating to reliance and reasonable expectations).

NYDOCS1-449390.1
11/16/11 11:58 AM
-62-


company. Some |court| decisions impose a Iiduciary relationship;
others disagree.
179

One court in 1997, quoting that observation, recognized that:
Older decisions which reIused to recognize a Iiduciary relationship between the
insurance company and its policyholder are 'out oI step with current concepts . . .
|and| particularly. . . outmoded when television advertising repeatedly reIers to
the good hands` oI the insurer or how it is like a good neighbor`, implying an
ability to place trust and reliance upon the broad shoulders oI the kindly
company.
180

As one court observed, insurance company advertisements tell people what to
expect Irom insurance:
Allstate`s slogan 'You`re in Good Hands, Travelers` motto oI
protection 'Under the Umbrella, and Fireman`s Fund symbolic
protection beneath the 'Fireman`s Hat, exempliIy the industry`s
own eIIorts to portray itselI as a repository oI the public trust.
181

Insurance company advertisements encourage the policyholder to place trust and
conIidence in the insurance company. 'As such advertisements reIlect, the relationship between
insurer and insured does not merely concern indemnity Ior money loss.
182

Insurance company advertising reveals that the insurance industry itselI
'recognizes that the insurance relationship is more than the company`s promise to pay certain
claims when Iorced to do so:

179
12 John Alan Appleman & Jean Appleman, Insurance Law & Practice 7004 at 52 (1981)
(citations omitted).
180
Dornberger v. Metropolitan LiIe Ins. Co., 967 F. Supp. 506, 547 n.39 (S.D.N.Y. 1997) (citing 12
J. APPLEMAN, INSURANCE LAW & PRACTICE 7004 (1981)).
181
State Farm Fire & Casualty Co. v. Nicholson, 777 P.2d 1152, 1156 n.6 (Alaska 1989)(quoting
Russell H. McMains, Bad Faith Claims Handling -- New Frontiers. A Multi-state Cause of Action in
Search of a Home, 53 J. AIR L. & COM. 901, 904 (1988)). See also White v. Unigard Mut. Ins. Co., 730
P.2d 1014, 1019 (Idaho 1986).
182
Andrew Jackson LiIe Ins. Co. v. Williams, 566 So. 2d 1172, 1175 n.5 (Miss. 1990) quoting Farris
v. United States Fidelity & Guar. Co., 284 Or. 453, 479 n.4, 587 P.2d 1015, 1028 n.4 (1978)(Lent, J.,
dissenting).

NYDOCS1-449390.1
11/16/11 11:58 AM
-63-


Advertising programs portraying customers as being in good hands` or dealing
with a good neighbor` emphasize a special type oI relationship between the insured and insurer
one in which trust, conIidence and peace oI mind have some part . . . . We hold thereIore that
one oI the beneIits that Ilow Irom the insurance contract is the insured`s expectation that his
insurance company will not wrongIully deprive him oI the very security Ior which he bargained
or expose him to catastrophe Irom which he sought protection.
183

The insurance industry has acknowledged that it is in a unique position because oI
the public service nature oI insurance. In 1981, the then Chairman oI the American Insurance
Association noted that the insurance industry is 'imbued with the public interest
184
and that
'|w|e convince others oI the leading role insurance plays in society. We encourage them to
expect superior perIormance Irom us.
185

In a September 22, 1970 speech entitled 'There`s Got To Be A Better Way, the
then President oI Crum and Forster Insurance Company noted:
II studied even casually, the history oI our business proves that in
the United States, as nowhere else in the world, insurance has
Iunctioned to set men`s minds Iree Irom economic worry so they
could think about more constructive things; it has Iunctioned to
maintain productive enterprise so that more people could enjoy the
Iruits oI our enterprise system; it has provided the means to rebuild
burned and shattered cities and towns to replace property
both private and public that has been destroyed, damaged, or

183
Rawlings v. Apodaca, 151 Ariz. 149, 154-55, 726 P.2d 565, 570-71 (1986) (citing Egan v.
Mutual oI Omaha Ins. Co., 620 P.2d 141, 145-46 (Cal. 1979), cert. denied, 445 U.S. 912 (1980)).
184
Remarks oI Jack Moseley, Chairman, American Insurance Association, in 'The Burgeoning oI
Litigation, Proceedings oI American Insurance Association Annual Meeting, New York, New York,
May 28-29, 1981 at 62.
185
Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-64-


wrongIully taken away; to relieve physical pain as well as
economic distress.
186

Standard textbooks used to train members oI the insurance industry acknowledge
the beneIits oI insurance and the special duties that insurance companies have because oI the
unique nature oI insurance. One such textbook emphasized the need to monitor and enIorce the
special duties oI insurance companies:
Notwithstanding the oIten stated opinion that the insurance
contract is aIIected with a public interest, insurers oIten view their
policies as simple contractual obligations between parties. While
an insurance policy does represent a contractual commitment, the
attitudes oI the general public, the legislatures, and the courts make
clear that the insurance agreement is viewed as having broader
ramiIications than a mere contract. The public has a deIinite
interest in the reliability oI the insurance product. Insurance
involves an obligation that aIIects the public interest as well as the
policyholder and thereIore is necessarily subject to certain
restrictions.
187

One insurance company told a court that '|t|he business oI insurance is one
aIIected by the public interest, requiring that all persons be actuated by good Iaith, abstain Irom
deception, and practice honesty and equity in all insurance matters.
188

The unique, public interest nature oI insurance,
189
leads to the conclusion that
insurance companies are Iiduciaries. For example, one commentator noted:

186
Speech by B.P. Russell, the President oI Crum and Forster Insurance Company, delivered at the
Annual Convention oI the National Association oI Insurance Agents at Miami, FL, Sept. 22, 1970.
7
1 JAMES J. LORIMER ET AL., THE LEGAL ENVIRONMENT OF INSURANCE 37-38 (3d ed. 1987).
A later edition oI the same text phrases it more IorceIully:
Insurance contracts are diIIerent Irom other commercial contracts because insurance is more a necessity
than a matter oI choice. ThereIore, insurance is a business affected with a public interest, as reIlected in
legislative and judicial decisions.
1 James J. Lorimer et al., The Legal Environment oI Insurance 179 (4th ed. 1993) (emphasis in original).
188
Appellant`s BrieI at 19 (undated), Century Indem. Co. v. Truck Ins. Exch. oI the Farmers Ins.
Group, No. 13141-6-III (Wash. Ct. App.).

NYDOCS1-449390.1
11/16/11 11:58 AM
-65-


The insurers` obligations are . . . rooted in their status as purveyors
oI a vital service labeled quasi-public in nature. Suppliers oI
services aIIected with a public interest must take the public`s
interest seriously, where necessary placing it beIore their interest in
maximizing gains and limiting disbursements. . . . |A|s a supplier
oI a public service rather than a manuIactured product, the
obligations oI good Iaith and Iair dealing encompass qualities oI
decency and humanity inherent in the responsibilities oI a
Iiduciary. Insurers hold themselves out as Iiduciaries, and with the
public`s trust must go private responsibility consonant with that
trust.
190

Warren BuIIett, the principal stockholder oI Allstate and General Reinsurance has
concluded that: 'The insurance business is a Iiduciary business. You get access to other people`s
money under conditions where in many cases the other people have very little knowledge or
control oI where the money`s going.
191

Insurance companies are Iiduciaries, not only because oI their unique, special
relationship with their policyholder, but also because insurance is an integral part oI society,
protecting the injured, neighbors, creditors, and employees.
192
Insurance, oIIered by insurance
companies, beneIits society. A textbook published by the Insurance Institute oI America,
acknowledged this beneIit: 'in addition to eliminating or reducing the Iinancial uncertainty oI

189
See Dolan v. Aid Ins. Co., 431 N.W.2d 790, 791-792 (Iowa 1988) ('The bad Iaith tort is justiIied
because oI the nature oI the insurance industry, which is imbued with the public interest. . . An insured is
oIten suIIering Irom physical injury or economic loss when bargaining with the insurance company` and
hence the vulnerable position justiIies the additional remedy oI a bad Iaith cause oI action.`') See also
Best Place, Inc. v. Penn American Ins. Co., 920 P.2d 334, 340 (Hawaii 1996) ('insurance industry aIIects
the public interest (citing Haw. Rev. Stat. 431:1-102 (1993)); Braesch v. Union Ins. Co., 464 N.W.2d
769, 774 (Neb. 1991) ('The public interest in insurance contracts, the nature oI insurance contracts, and
the inequity in bargaining power between the insurer and the policyholder all serve to distinguish
insurance contracts Irom other types oI contracts.).
190
William M. Goodman & Thom G. Seaton, Foreword: Ripe Ior Decision, Internal Workings and
Current Concerns oI the CaliIornia Supreme Court, 62 CAL. L. REV. 309, 346-347 (1974).
191
1992 Annual Report oI Berkshire Hathaway, Iiled with the United States Securities and Exchange
Commission.
192
Eugene R. Anderson et al. Draconian Forfeitures of Insurance. Commonplace, Indefensible, And
Unnecessary, 65 FORDHAM L. REV. 825, 829 (1996) (citing Charles A. McAlear, %he Emperors Old
Clothes, BEST`S REV., Feb. 1989, at 22-23).

NYDOCS1-449390.1
11/16/11 11:58 AM
-66-


risks to individuals and businesses, insurance beneIits society by paying Ior losses, providing
Iunds Ior investments, controlling losses, supporting credit, allocating resources, and satisIying
legal and business requirements.
193

The Iiduciary aspect oI the insurance company`s role in society is clearly
demonstrated by the large amount oI money controlled by insurance companies. In a case
involving the solvency oI insurance companies, the United States Supreme Court recognized that
insurance companies were essentially trustees over a Iund oI assurance and credit:
The contracts oI insurance may be said to be interdependent. They
cannot be regarded singly, or isolatedly, and the eIIect oI their
relation is to create a Iund oI assurance and credit, the companies
becoming the depositories oI the money oI the insured, possessing
great power thereby, and charged with great responsibility.
194

The public service nature oI insurance and the public`s reliance on insurance
companies are but two reasons why insurance is regulated. The United States Supreme Court
has said that insurance 'is so Iar aIIected with a public interest that the State may regulate the
rates and likewise the relations oI those engaged in the business.
195
Automobile insurance
coverage and workers` compensation insurance coverage are required by most states.
196

The public service nature oI insurance and the special position oI the insurance
company have long been recognized. Dean Roscoe Pound, more than 50 years ago in THE SPIRIT
OF THE COMMON LAW (1929), noted:
|W|e have taken the law oI insurance practically out oI the
category oI contract, and we have established that the duties oI

193
James J. Markham et al. The Claims Environment 2 (1st ed. 1993).
194
German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 414 (1914).
195
O`Gorman & Young, Inc. v. HartIord Fire Ins. Co., 282 U.S. 251, 257 (1931).
196
See, e.g., N.Y. Veh. & TraI. Law 310-321 (McKinney 1995). See generally, Arthur Larson,
LAW OF WORKMEN`S COMPENSATION (1995).

NYDOCS1-449390.1
11/16/11 11:58 AM
-67-


public service companies are not contractual, as the nineteenth
century sought to make them, but are instead relational; they do not
Ilow Irom agreements which the public servant may make as he
chooses, they Ilow Irom the calling in which he has engaged and
his consequent relation to the public.
The public service nature oI insurance places the insurance company in the
position oI a Iiduciary, similar to the manner in which a guardian is a Iiduciary Ior a ward. The
insurance company, like the guardian, is responsible Ior the vulnerable policyholder (and the
public in general). Judge Richard Posner has written:
The common law imposes |a Iiduciary| duty when the disparity
between the parties in knowledge or power relevant to the
perIormance oI an undertaking is so vast that it is a reasonable
inIerence that had the parties in advance negotiated expressly over
the issue they would have agreed that the agent owed the principal
the high duty that we have described, because otherwise the
principal would be placing himselI at the agent`s mercy. An
example is the relation between a guardian and his minor ward, or
a lawyer and his client. The ward, the client, is in no position to
supervise or control the actions oI his principal on his behalI; he
must take those actions on trust; the Iiduciary principle is designed
to prevent that trust Irom being misplaced.
197

Insurance companies, as providers oI a public service with vast power over the
public and control over vast Iinancial assets, are Iiduciaries.
7. Case law:
In Egan v. Mutual of Omaha,
198
the CaliIornia Supreme Court Iound that it is the
public nature oI the service provided by the insurance company that gives rise to a Iiduciary
relationship:
Suppliers oI services aIIected with a public interest must take the public`s interest
seriously, where necessary placing it beIore their own interest in maximizing gains and limiting

197
Burdett v. Miller, 957 F.2d 1375, 1381 (7th Cir. 1992) (quoted in Scott FitzGibbon, Fiduciary
Relationships Are Not Contracts, 82 MARQ. L. REV. 303, 322-323 (1999)).

NYDOCS1-449390.1
11/16/11 11:58 AM
-68-


disbursements . . |A|s a supplier oI a public service rather than a manuIactured product, the
obligations oI insurers go beyond meeting reasonable expectations oI coverage. The obligations
oI good Iaith an The Dornberger court`s view that there is no per se rule that insurance
companies are not Iiduciaries has been Iollowed in at least two recent decisions.
199
In Force v.
I%% Hartford Life & Annuity Insurance Co.,
200
the court reIused to dismiss a claim alleging
breach oI Iiduciary duty brought by a class oI purchasers oI liIe insurance policies sold by ITT
HartIord. The court, applying Florida law, noted that basic Florida law holds that the existence
oI a Iiduciary relationship is a question oI Iact.
201
Finding that the reasoning oI the court in
Dornberger was 'instructive, the court in Force denied ITT HartIord`s motion to dismiss.
In Parkhill v. Minnesota Mutual Life Insurance Co.,
202
the court also reIerred to
Dornberger and, as in Force, decided that the existence oI a Iiduciary relationship is a question
oI Iact.
203
The deIendant insurance company in Parkhill argued that there was a per se rule that
precluded the existence oI a Iiduciary relationship between an insurance company and a
policyholder, but, the court said:
|A|n old case . . . best reIutes deIendant`s argument:
Courts oI equity have careIully reIrained Irom deIining the
particular instances oI Iiduciary relations in such a manner that
other and perhaps new cases might be excluded. It is settled by an
overwhelming weight oI authority that the principle extends to
every possible case in which a Iiduciary relation as a Iact exists, in
which conIidence is reposed on one side and there is resulting

198
24 Cal. 3d 809, 620 P.2d 141, 169 Cal. Rptr. 691 (1979).
199
Parkhill v. Minnesota Mut. LiIe Ins. Co., 995 F. Supp. 983 (D. Minn. 1998); Force v. ITT
HartIord LiIe & Annuity Ins. Co., 4 F. Supp. 2d 843 (D. Minn. 1998).
200
4 F. Supp. 2d 843 (D. Minn. 1998).
201
Id. at 853 (citing Capital Bank v. MVB, Inc., 644 So. 2d 515, 518 (Fla. Dist. Ct. App. 1994)).
202
995 F. Supp. 983 (D. Minn. 1998).
203
Id. at 992.

NYDOCS1-449390.1
11/16/11 11:58 AM
-69-


superiority and inIluence on the capital, and the relation and duties
involved in it need not be legal, but may be moral, social,
domestic, or merely personal.
Dale, 107 So. at 179. Indeed, the changing nature oI the insurance industry gives
new vigor to this Iact-speciIic analysis.
204
d Iair dealing encompass qualities oI decency and
humanity inherent in the responsibilities oI a Iiduciary.
205

Courts, in deciding insurance cases, have been applying a Iiduciary duty to third-
party liability insurance. Many New York courts as well as many other courts in other
jurisdictions have applied such a duty on insurance companies. It is these cases which support
the District Court's jury instruction on Iiduciary relationships and prove the Second Circuits
comments regarding Iiduciary duty are misplaced.
The Second Circuit Court in the Brennan Case Iailed to discuss or even
cite any oI the cases cited by the lower court regarding this issue, principally HartIord Accident
& Indemnity Co. v. Michigan Mutual Insurance Co., 93 A.D.2d 337, 462 N.Y.S.2d 175, 178
(N.Y. App. Div. 1983), aII'd 61 N.Y.2d 569, 475 N.Y.S.2d 267 (1984), the principal authority in
New York Ior the Iiduciary obligations oI insurance companies.
In Michigan Mutual the Court in making a determination regarding a Michigan
Mutual Insurance Co.'s, the primary insurance carrier, Iiduciary duty to HartIord Accident &
Indemnity Co., the excess carrier it noted that the Iiduciary duty owed by Michigan Mutual to
HartIord was the same as Michigan Mutual's Iiduciary duty owed to its own policyholder. The
Court held:

204
Id. at 991 (quoting Dale v. Jennings, 90 Fla. 234, 107 So. 175, 179 (Fla. 1925)).
205
Id. at 820, 620 P.2d at 146, 169 Cal. Rptr. at 696 (citations omitted). See EUGENE R. ANDERSON
ET AL., 2 INSURANCE COVERAGE LITIGATION 11.6 (1997). See also Frommoethelydo v. Fire Ins. Exch.,
42 Cal. 3d 208, 721 P.2d 41, 228 Cal. Rptr. 160 (1986).

NYDOCS1-449390.1
11/16/11 11:58 AM
-70-


It is well established that, as between an insurer and its assured, a
Iiduciary relationship does exist, requiring utmost good Iaith by the
carrier in its dealings with its insured. In deIending a claim, an
insurer is obligated to act with undivided loyalty; it may not place
its own interest above those oI its assured. Similarly, it has been
recognized in this and other States, as well as in the Federal courts,
that the primary carrier owes to the excess insurer the same
Iiduciary obligation which the primary insurer owes to its insured,
namely a duty to proceed in good Iaith and in the exercise oI
honest discretion, the violation oI which exposes the primary
carrier to liability beyond its policy limits. (extensive citations
omitted) Id. at 340-341.
It is this ruling which has set the stage Ior numerous other pro-policyholder decisions in New
York, State and Federal.
206

In Dornberger v. Metropolitan LiIe Ins. Co., 961 F. Supp. 506 (S.D.N.Y. 1997).
Dornberger brought this action onbehalI oI herselI and others who had purchased policies sold
by MetLiIe to Americans living in Europe. MetLiIe Iailed to disclose that these policies were
sold in violation oI European laws and allegedly misrepresented that local representatives in
Europe would be available to service the polices, collected Irom policyholders payments Ior a
New York Iranchise tax which was never paid, and misrepresented that the policies were
protected by the New York insurance law and guaranty Iund. When MetLiIe Iailed to provide
assurances as to the legality oI the policies and to clariIy the other misrepresentations,
Dornberger ceased paying premium payments and her policies lapsed. Dornberger then Iiled her
complaint alleging several causes oI action, including breach oI Iiduciary duty. Id. at 514-15.
The court noted the "ancient vintage" oI the cases cited by MetLiIe Ior the
proposition that there was no Iiduciary duty and that a leading treatise stated that those cases

206.
In aIIirming this ruling, the Court oI Appeals oI New York held:
Michigan Mutual as the primary liability insurer owed to HartIord as the excess carrier
the same duty to act in good Iaith which Michigan owed to its own insureds. Id. at 574.

NYDOCS1-449390.1
11/16/11 11:58 AM
-71-


might now be "out oI step with current concepts."
207
The court cited United Sates v. Brennan,
938 F. Supp. 1111 (E.D.N.Y. 1996), rev'd on other grounds 183 F.3d 139 (2d Cir. 1999) and
HartIord Accident & Indem. v. Michigan Mut. Ins. Co., 93 A.D.2d 337, 462 N.Y.S.2d 175, 178
(N.Y. App. Div. 1983), aII'd 61 N.Y.2d 569, 475 N.Y.S.2d 267 (1984) to conclude that:
The basis Ior the Iiduciary obligation is quite clear in the litigation
context, Ior the insurer is undertaking to represent the insured's
interest. Whether the recognition oI a Iiduciary obligation in the
litigation context opens the door to the recognition oI such an
obligation in other contexts is not eminently clear.
The court noted that at least one New York case, Meagher v. Metropolitan LiIe Ins. Co., 119
Misc.2d 615, 463 N.Y.S.2d 727 (N.Y. Sup. Ct. 1983), had recognized the possibility oI a broader
Iiduciary duty. The court recognized that the cases cited by MetLiIe held that the relationship
between the policyholder and the insurance company is only arm's-length. It held, however, that:
under the right circumstances, the relationship between insurer and
insured may be imbued with elements oI trust and conIidence
which render the relationship more than a mere arm's-length
association. PlaintiII here alleges several Iacts Irom which the
existence oI a relationship oI trust and conIidence can be inIerred .
. . . Such indications oI a relationship closer than arm's-length were
apparently absent in the aIorementioned decisions which reIused to
recognize a Iiduciary relationship between insurers and insureds . .
. . In light oI Meagher, we believe that New York courts do not
Iollow a per se rule prohibiting the recognition oI a Iiduciary
relationship in the insurance context -- rather, New York courts
will permit a jury to assess the circumstances oI the relationship to
determine iI it is one oI trust and conIidence.
Id. at 546-47.

207.
Id. at 547 n.39 (citing 12 JOHN ALAN APPLEMAN & JEAN APPLEMAN, INSURANCE LAW AND
PRACTICE 7004 (1981)).

NYDOCS1-449390.1
11/16/11 11:58 AM
-72-


The court cited 12 Appleman, Insurance Law and Practice 7004 (1981) Ior the
proposition that the older decisions simply do not reIlect New York law or the modern day
insurance industry:
A leading treatise states that older decisions which reIused to
recognize a Iiduciary relationship between insurer and insured may
now be 'out oI step with current concepts.' The treatise notes that
'particularly is this approach outmoded when television advertising
repeatedly reIers to 'the good hands' oI the insurer or how it is 'like
a good neighbor', implying an ability to place trust and reliance
upon the broad shoulders oI the kindly company.
Id. at 547 n.39 (citation omitted).
Another Federal Court in New York has also Iound a insurance company owes
Iiduciary duties. In Allstate Ins. Co. v. American Transit Ins. Co., 977 F. Supp. 197 (E.D.N.Y.
1997) Allstate and Federal Insurance Co., both excess carriers, alleged that American Transit, the
primary, had breached is Iiduciary duty and that the law Iirm hired by American Transit had
committed malpractice by Iailing to disclose a potential conIlict oI interest. Quoting extensively
Irom HartIord Accident & Indem. v. Michigan Mut. Ins. Co., 61 N.Y.2d 569, 475 N.Y.S.2d 267,
269 (1984), the court held that the "New York Court oI Appeals has recognized that a primary
insurer owes Iiduciary duties to an excess insurer." The court rejected American Transit's eIIorts
to characterize Allstate's claims as ones Ior contribution (Iorbidden under NY Gen. Obs. Law
15-108(c). Rather, "|g|iven Allstate's and Federal's allegations that American Transit breached
its Iiduciary duties, both parties have stated a claim against American Transit."
Similarly, in HartIord Accident & Indem. Co. v. Commercial Union Ins. Co., 772
F. Supp. 741 (E.D.N.Y. 1991), HartIord, the excess carrier, Iiled a claim against Commercial
Union Ior breach oI Iiduciary duty Ior Iailing to deIend the policyholder in the underlying case.
Commercial Union recognized that the court in HartIord v. Michigan Mutual "upheld the right oI

NYDOCS1-449390.1
11/16/11 11:58 AM
-73-


the excess insurer to recover Irom the primary insurer based upon a direct duty owed by the
primary insurer to the excess insurer," but argued that the decision was limited to (1) a duty to
exercise good Iaith in handling the deIense oI claims, and (2) a duty to not place the interests oI
the primary carrier above those oI the excess carrier. Id. at 743-44. The court disagreed, holding
that the rule oI HartIord v. Michigan Mut. applied.
In Zurich Ins. Co. v. State Farm Mut. Auto. Ins. Co., 137 A.D.2d 401, 524
N.Y.S.2d 202 (N.Y. App. Div. 1988). Zurich, the excess carrier, Iiled a claim against State
Farm, the primary, Ior bad Iaith Iailure to settle a claim against Zurich's policyholder. Held that:
the primary carrier owes the same Iiduciary obligation to the
excess insurer which the primary insurer owes to its insured.
Where it is alleged that the insurer has breached that duty to its
insured, the insurer may not use the attorney-client or work
product privilege as a shield to prevent disclosure which is relevant
to the insured's bad Iaith action. Thus, the same principle obtains
in a bad Iaith action between the excess insurer and the primary
insurer.
524 N.Y.S.2d at 203, citing HartIord Accident & Indem. v. Michigan Mut. Ins. Co., 93 A.D.2d
337, 462 N.Y.S.2d 175 (N.Y. App. Div. 1983), aII'd 61 N.Y.2d 569, 475 N.Y.S.2d 267 (1984)
and Colbert v. Home Indem. Co., 24 A.D.2d 1080 (N.Y. App. Div. 1965).
In Continental Cas. Co. v. Pullman, Comley, Bradley & Reeves, 929 F.2d 103
(2nd Cir. 1991) the Second Circuit, interpreting Connecticut law, held that there is a duty owed
to the excess carrier by the primary. The court stated:
In the context oI primary and excess insurance, it has been noted
that the 'bulk oI the well-reasoned authority . . . supports the
existence oI a duty owed by a primary to an excess carrier.'
Id. at 106-07, citing Continental Cas. Co. v. Reserve Ins. Co., 307 Minn. 5, 10 and HartIord
Accident & Indem. v. Michigan Mut. Ins. Co., 61 N.Y.2d 569, 475 N.Y.S.2d 267, 269 (1984)
and Zurich Ins. Co. v. State Farm Mut. Auto. Ins. Co., 137 A.D.2d 401, 524 N.Y.S.2d 202, 203
(N.Y. App. Div. 1988)(other citations omitted).

NYDOCS1-449390.1
11/16/11 11:58 AM
-74-


Argonaut Ins. Co. v. HartIord Accident & Indem. Ins. Co., 687 F. Supp. 911
(S.D.N.Y. 1988). Excess carrier U.S. Fire alleged a civil conspiracy between HartIord, the
primary carrier, and Argonaut, another excess carrier, asserting a claim oI breach oI contract and
breach oI Iiduciary duty owed to an excess insurer. The Court Held:
HartIord's duty, however, to exercise the utmost good Iaith in its
dealings with U.S. Fire, its excess insurer, is well established in the
case law. New York courts have held that a primary insurer owes
a Iiduciary duty directly to its excess insurer to exercise good Iaith
in handling the deIense oI claims and to saIeguard the rights and
interests oI the excess insurer.
Id. at 914, citing HartIord Accident & Indem. v. Michigan Mut. Ins. Co., 61 N.Y.2d 569, 475
N.Y.S.2d 267, 269 (1984) and Zurich Ins. Co. v. State Farm Mut. Auto. Ins. Co., 137 A.D.2d
401, 524 N.Y.S.2d 202, 203 (N.Y. App. Div. 1988).
One common thread in all oI these opinions is the citation to HartIord Accident &
Indemnity v. Michigan Mutual Insurance Co., 93 A.D.2d 337, 462 N.Y.S.2d 175 (N.Y. App.
Div. 1983), aII'd 61 N.Y.2d 569, 475 N.Y.S.2d 267 (1984) Ior their support Ior insurance
companies Iiduciary duty. The Brennan Court, which was interpreting New York law, did not
cite to Michigan Mutual, but rather cited to cases which by there nature were not applicable.
Another New York opinion which does not cite to Michigan Mutual, but still
Iinds a Iiduciary duty owed to an insurance companies policyholder is Ampower Semiconductor
Corp. v. American Motorists Insurance Co., 159 A.D.2d 268, 522 N.Y.S.2d 269 (N.Y. App. Div.
1990).
In 1976, the policyholder purchased a "comprehensive policy" which provided
Iire loss and business interruption insurance coverage. The comprehensive policy was
accompanied by a booklet stating a two-year limitation oI suit clause. The policyholder had also
purchased water damage insurance coverage in a series oI Iorms (the HPR materials). The HPR

NYDOCS1-449390.1
11/16/11 11:58 AM
-75-


materials stated that there was a one year limitation oI suit clause Ior losses caused by water
damage.
In 1978, the policyholder suIIered a Ilood, contacted his insurance agent, and was
told that he was covered. Although the insurance company claims representative was aware oI
the additional coverage under the HPR Iorms, the policyholder was never advised oI this and the
claim was reported to the insurance company under the "comprehensive policy" only. An
accountant Ior the deIendant told the claims representative that the policyholder's claim was
grossly understated because the policyholder had calculated his losses at cost rather than the
selling price oI the damaged goods. The claims representative did not inIorm the policyholder oI
this, and instead told the policyholder that he had suIIered no losses as a result oI water damage.
The policyholder, with outside assistance, later prepared a loss calculation based
on the selling price oI the goods. The insurance company Iailed to make a settlement oIIer, and
the policyholder Iiled suit in December 1979. AIter Iiling suit, the policyholder discovered the
additional insurance coverage under the HPR Iorms and sought to amend his complaint to allege
that the HPR Iorms be deemed part oI the "comprehensive policy." The court granted this
motion.
The insurance then argued that the policyholder's entire claim was barred Ior
Iailure to institute the action within one year. The court disagreed, holding that the two year
statute oI limitations applied and that the deIendant had:
breached its implied covenant to the insured to reIrain Irom taking
any action which would have the eIIect oI destroying its rights to
receive the beneIits oI the contract. By breaching its Iiduciary duty
to deal with its insured with the utmost good Iaith, deIendant
cannot now take advantage oI its own wrongdoing.

NYDOCS1-449390.1
11/16/11 11:58 AM
-76-


Even other New York Iederal courts have Iound Iiduciary duties in third-party
insurance policies. In United National Ins. Co. v. WaterIront N.Y. Realty, 948 F. Supp. 263
(S.D.N.Y. 1996). WaterIront, a realty company, was an additional insured under a policy sold by
United National to WaterIront's tenant, a dance club. WaterIront and the dance club were named
as deIendants in a case alleging a rape in the dance club. WaterIront was also covered by a CGL
policy issued by AIG. Counsel Ior AIG inIormed United National that it was required to deIend
WaterIront as an additional insured. United National eventually undertook WaterIront's deIense
under a reservation oI rights, but did not appoint independent counsel Ior WaterIront. The law
Iirm hired by United National, now representing the dance club and WaterIront, Iailed to comply
with several discovery orders, and the court granted a motion the strike the deIendant's answer.
The case was settled the next day Ior $1,050,000, with United National paying $500,000 towards
the settlement. Subsequent to the settlement, an appellate court reversed a lower court ruling and
held that United National's policy excluded insurance coverage Ior rape.
United National now argues that it is entitled to a complete return oI all Iunds it
paid on behalI oI WaterIront. WaterIront counters that United National created a conIlict oI
interest by appointing the same counsel to represent it and the dance club, and that this conIlict
oI interest was the reason United National was Iorced to incur settlement costs on behalI oI
WaterIront in the Iirst place.
The court held that the United National policy did not provide insurance coverage
Ior rape. However, the court also Iound that iI United National had breached its Iiduciary duty to
WaterIront in the course oI deIending it, even though coverage was later determined not to exist,
United National was not entitled to a return oI the Iunds advance to WaterIront:

NYDOCS1-449390.1
11/16/11 11:58 AM
-77-


Neither a valid reservation oI rights nor a subsequent
determination oI lack oI coverage relieves the insurer oI the duty to
conduct the deIense oI the insured with due care and good Iaith.
Cornwell v. SaIeco Ins. Co. oI Am., 42 A.D.2d 127, 346 N.Y.S.2d
59, 69 (N.Y. App. Div. 1974). Implicit in this duty is the
appointment oI counsel that is competent as well as Iree oI
conIlicts or divided loyalties. HartIord Accident & Indem. v.
Michigan Mut. Ins. Co., 93 A.D.2d 337, 462 N.Y.S.2d 175, 178
(N.Y. App. Div. 1983), aII'd 61 N.Y.2d 569, 475 N.Y.S.2d 267
(1984). The insurer's Iiduciary duty to the insured requires that the
insurer's loyalty be undivided. Id. at 268-69.
Furthermore:
United National disputes that it had a duty to deIend WaterIront
because the Policy was later determined to exclude coverage oI the
Ortiz claim. However, once United National undertook
WaterIront's deIense, it had a duty to conduct that deIense with due
care and good Iaith until a judgment was issued on the coverage oI
the Ortiz claim. Id. at n.3.
The court denied United National's motion Ior summary judgment, holding that
United National may have breached "its duty" to WaterIront by Iailing to appoint separate
counsel or giving WaterIront the opportunity to select independent counsel at United National's
expense. Id. at 269.
As mentioned above Courts in other jurisdictions have Iound a Iiduciary duty in
insurance policies. In Myers v. Ambassador Ins. Co., Inc., 146 Vt. 552, 508 A.2d 689 (1986),
the Supreme Court oI Vermont Iound there was a Iiduciary duty owed to the insurance
company's policyholder.
In an action by the policyholder against the insurance company alleging a bad
Iaith Iailure to settle within the policy limits, the court held that "|t|he insurer's Iiduciary duty to
act in good Iaith when handling a claim against the insured obligates it to take the insured's
interests into account." 508 A.2d at 691. The court Iurther held that the policyholder must be

NYDOCS1-449390.1
11/16/11 11:58 AM
-78-


inIormed oI any potential Ior excess liability and that the primary carrier must convey any
demands Ior settlement which have been made. Id.
Even iI the one looks at the Iirst-party property cases, there is a deIinite trend in
cases imposing a Iiduciary relationship on insurance companies. Recently, the Supreme Court oI
Nevada in Williams R. Powers v. United Services Automobile Association et al., Supreme Court
oI Nevada, No. 26794, 1999 Nev. LEXIS 13 (Apr. 2, 1999), held "the duty owed by an insurance
company to an insured is Iiduciary in nature."
In Powers the Court, which denied a Petition by the insurance company Ior
rehearing, reiterates "that an |insurance company|'s duty to its Policyholder is, |as the insurance
company| concedes, "akin" to a Iiduciary relationship." 1999 Nev. LEXIS at * 6. This decision
bears Iurther supports the proposition that there is a Iiduciary relationship between an insurance
company and the policyholder.
The Court stated that the jury instruction given by the district court on breach oI a
Iiduciary relationship was not error.
The Powers Court noted:
A Iiduciary relationship exists when one has the right to except
trust and conIidence in the integrity and Iidelity oI another.
This special relationship exists in part because, as insurers are well
aware, consumers contact Ior insurance to again protection, peace
oI mind and security against calamity.
1999 Nev. LEXIS at * 5-6.
Similarly, in a neighboring jurisdiction, the Colorado Supreme Court in Lira v.
Shelter Insurance Co., 913 P.2d 514 (1996), commented on the insurance companies Iiduciary
obligations by stating:

NYDOCS1-449390.1
11/16/11 11:58 AM
-79-


An insurer's tort liability Ior breach oI its implied duty oI good
Iaith and Iair dealing derives Irom the nature oI the insurance
contract and the relationship between the insured and insurer.
Farmer Group,Inc. v. Trimble, 691 P.2d 1138, 1141 (Colo. 1984).
This tort liability is based on the quasi-Iiduciary nature oI the
insurance relationship and is predicated on the parties contractual
responsibilities. Trimble, 691 P.2d at 1142; Bailey v. Allstate Ins.
Co., 844 P.2d 1336, 1339-40 (Colo App. 1992).
Id. at 516.
In Fireman's Fund Ins. Co. v. Continental Ins. Co., 519 A.2d 202, 308 Md. 315
(1987). Fireman's, the excess carrier, sued Continental, the primary carrier, Ior negligent and
bad Iaith Iailure to settle a claim within the primary policy limits.
Fireman's argued that Continental owed it a duty oI good Iaith and Iair dealing.
The court explained that the duty oI good Iaith and Iair dealing arises because:
standard insurance policies give the insurer the exclusive control oI
the investigation, settlement, and deIense oI claims against its
insureds. These provisions create the potential Ior conIlicts oI
interest between insured and insurer and thus, impose a Iiduciary
duty on the insurance company.
Id. at 204.
B. The Public Service Nature Of Insurance
The special public nature oI insurance invests insurance companies with a unique
position oI trust with respect to their policyholders and the public. The public nature oI
insurance complements the insurance companies` Iiduciary duties. In a case involving the
solvency oI insurance companies, the United States Supreme Court recognized that insurance
companies were essentially trustees over a Iund oI assurance and credit:
The contracts oI insurance may be said to be interdependent. They
cannot be regarded singly, or isolatedly, and the eIIect oI their
relation is to create a Iund oI assurance and credit, the companies

NYDOCS1-449390.1
11/16/11 11:58 AM
-80-


becoming the depositories oI the money oI the insured, possessing
great power thereby, and charged with great responsibility.
208

Subsequent U.S. Supreme Court decisions reemphasized the 'specialness oI the insurance
industry and oI the persons who work within it.
209

Indeed, the insurance industry itselI has repeatedly acknowledged the special
public nature oI insurance. In 1981, the then-Chairman oI the American Insurance Association
stated:
Insurance leaders are Iond oI saying, without exaggeration, that the
insurance industry is imbued with the public interest that
insurance is essential to commercial activity and necessary to daily
living.
We Iocus the spotlight on ourselves. We convince others oI the
leading role insurance plays in society. We encourage them to
expect superior perIormance Irom us.
210

As Iar back as 1944, in an address on comprehensive general liability insurance, an attorney Ior
the National Bureau oI Casualty Underwriters acknowledged that those 'in the business oI
insurance 'are the trustees oI the public interest. One insurance company recently noted:
The business oI insurance is one aIIected by the public interest,
requiring that all persons be actuated by good Iaith, abstain Irom

208
German Alliance Ins. Co. v. Lewis, 233 U.S. 389, 414 (1914).
209
See, e.g., La Tourette v. McMaster, 248 U.S. 465, 467 (1919) ('|A|s insurance is aIIected with a
public interest, those engaged in it or who bring about its consummation are aIIected with the same
interest and subject to regulation as it is.); O`Gorman & Young, Inc. v. HartIord Fire Ins. Co., 282 U.S.
251, 257 (1931) ('The business oI insurance is so Iar aIIected with a public interest that the State may
regulate the rates and likewise the relations oI those engaged in the business.); Osborn v. Ozlin, 310 U.S.
53, 65 (1940) ('Government has always had a special relation to insurance.); United States v. South-
Eastern Underwriters Assn., 322 U.S. 533 (1944); Robertson v. CaliIornia, 328 U.S. 440, 447 (1946)
('evils in the sale oI insurance 'vitally aIIect the public interest); Prudential Ins. Co. v. Benjamin, 328
U.S. 408, 415-16 (1946) ('|insurance| business aIIected with a vast public interest); CaliIornia State
Auto. Ass`n Inter-Ins. Bureau v. Maloney, 341 U.S. 105, 109-10 (1951) (insurance has always had special
relation to government).
210
'The Burgeoning oI Litigation, Proceedings oI American Insurance Association Annual
Meeting, New York City, May 28-29, 1981, at 29.

NYDOCS1-449390.1
11/16/11 11:58 AM
-81-


deception, and practice honesty and equity in all insurance
matters.
211

In a February 1985 letter to shareholders, Chairman Warren BuIIet oI Berkshire
Hathaway, Inc., the corporate parent oI several insurance companies, stated:
The buyer oI insurance receives only a promise in exchange Ior his
cash. The value oI that promise should be appraised against the
possibility oI adversity, not prosperity. At a minimum, the
promise should appear able to withstand a prolonged combination
oI depressed Iinancial markets and exceptionally unIavorable
underwriting results.
212

In a September 22, 1970 speech entitled 'There`s Got To Be A Better Way, the
then President oI Crum and Forster Insurance Company noted:
II studied even casually, the history oI our business proves that in
the United States, as nowhere else in the world, insurance has
Iunctioned to set men`s minds Iree Irom economic worry so they
could think about more constructive things; it has Iunctioned to
maintain productive enterprise so that more people could enjoy the
Iruits oI our enterprise system; it has provided the means to rebuild
burned and shattered cities and towns to replace property
both private and public that has been destroyed, damaged, or
wrongIully taken away; to relieve physical pain as well as
economic distress.
213

The specialness oI insurance company relationships with its policyholders and the
public has also been long recognized by insurance industry outsiders. Dean Roscoe Pound, more
than 50 years ago in THE SPIRIT OF THE COMMON LAW (1929), noted:
|W|e have taken the law oI insurance practically out oI the
category oI contract, and we have established that the duties oI
public service companies are not contractual, as the nineteenth

211
Appellant`s BrieI, at 19, Century Indem. Co. v. Truck Ins. Exch. oI the Farmers Ins. Group, 887
P.2d 455 (Wash. Ct. App. 1995)(No. 13141-6-III).
212
Letter dated Feb 25, 1985 Irom Warren BuIIet, Chairman oI Berkshire Hathaway Inc., to the
shareholders oI Berkshire Hathaway Inc., at 9 (on Iile with the authors).
213
Speech by B.P. Russell, the President oI Crum and Forster Insurance Company, delivered Sept.
22, 1970.

NYDOCS1-449390.1
11/16/11 11:58 AM
-82-


century sought to make them, but are instead relational; they do not
Ilow Irom agreements which the public servant may make as he
chooses, they Ilow Irom the calling in which he has engaged and
his consequent relation to the public.
Another commentator has noted:
The insurers` obligations are . . . rooted in their status as purveyors
oI a vital service labeled quasi-public in nature. Suppliers oI
services aIIected with a public interest must take the public`s
interest seriously, where necessary placing it beIore their interest in
maximizing gains and limiting disbursements. . . . |A|s a supplier
oI a public service rather than a manuIactured product, the
obligations oI good Iaith and Iair dealing encompass qualities oI
decency and humanity inherent in the responsibilities oI a
Iiduciary. Insurers hold themselves out as Iiduciaries, and with the
public`s trust must go private responsibility consonant with that
trust.
214

No less than a textbook used to train insurance company personnel has
emphasized the need to monitor and enIorce the special duties oI insurance companies:
Notwithstanding the oIten stated opinion that the insurance
contract is aIIected with a public interest, insurers oIten view their
policies as simple contractual obligations between parties. While
an insurance policy does represent a contractual commitment, the
attitudes oI the general public, the legislatures, and the courts make
clear that the insurance agreement is viewed as having broader
ramiIications than a mere contract. The public has a deIinite
interest in the reliability oI the insurance product. Insurance
involves an obligation that aIIects the public interest as well as the
policyholder and thereIore is necessarily subject to certain
restrictions.
215

Policyholders have only the courts to rely upon Ior relieI when their insurance
sellers 'run Ior cover rather than coverage or when their conduct has Iollowed a calculated
course undermining the 'test oI the integrity oI the insurance industry.
216
The judiciary is an

214
Goodman & Seaton, Ripe Ior Decision, Internal Workings and Current Concerns oI the CaliIornia
Supreme Court, 62 CAL. L. REV. 309, 346-47 (1974).
215
1 Lorimer et al., The Legal Environment oI Insurance 37-38 (3d ed. 1987) (emphasis added).
216
Sandoz, Inc. v. Employers Liab. Assurance Corp., 554 F. Supp. 257, 258-59 (D.N.J. 1983).

NYDOCS1-449390.1
11/16/11 11:58 AM
-83-


especially important gatekeeper in a society where the decision to buy insurance is no longer a
voluntary action. Commercial insurance coverage aIIects a broad spectrum oI individual and
corporate interests.
217
Insurance protects not only policyholders, but also injured parties,
neighbors, the community, creditors and employees.
218
Another insurance textbook, published
by no less than the Insurance Institute oI America, described the beneIits oI insurance like this:
|I|n addition to eliminating or reducing the Iinancial uncertainty oI
risks to individuals and businesses, insurance beneIits society by
paying Ior losses, providing Iunds Ior investments, controlling
losses, supporting credit, allocating resources, and satisIying legal
and business requirements.
219

By acknowledging that insurance protects the public-at-large as well as the policyholder, the
insurance industry implicitly recognizes that the Iailure oI insurance to insure also eIIects many
more than the policyholder who purchased the policy. That Iailure is an ever present threat.
The 'public interest nature oI insurance is maniIest in the myriad oI state laws
governing insurance. For example, automobile insurance coverage and workers` compensation
insurance coverage are required by most states.
220
Another text used to train insurance company
claims personnel notes that statutes concerning the conduct oI insurance companies 'have been
enacted by state legislatures in order to control the activities oI the insurance companies and their

217
See James R. Stirn, Environmental Risks Challenge Re Capabilities, NAT`L UNDERWRITER, June
19, 1989, at 45.
218
Eugene R. Anderson et al. Draconian Forfeitures of Insurance. Commonplace, Indefensible, And
Unnecessary, 65 FORDHAM L. REV. 825, 829 (1996), citing Charles A. McAlear, %he Emperors Old
Clothes, BEST`S REV., Feb. 1989, at 22-23.
219
James J. Markham et al. The Claims Environment 2 (1st ed. 1993).
220
See, e.g., N.Y. Veh. & TraI. Law 310-321 (McKinney 1995). See generally, Arthur Larson,
LAW OF WORKMEN`S COMPENSATION (1995).

NYDOCS1-449390.1
11/16/11 11:58 AM
-84-


relationships with policyholders.
221
Yet another text used to train insurance industry
proIessionals states:
Insurance contracts are diIIerent Irom other commercial contracts
because insurance is more a necessity than a matter oI choice.
ThereIore, insurance is a business affected with a public interest, as
reIlected in legislative and judicial decisions.
222

In any bad Iaith insurance coverage litigation, emphasize that the Iiduciary duties
oI insurance companies and the public interest nature oI insurance explains why insurance
companies must place policyholders` interests beIore their own.
223

C. The Duty Of Good Faith And Fair Dealing
1. Insurance Company Admissions Of The Duty Of Good Faith And Fair
Dealing
In every contract there is an implied covenant oI good Iaith and
Iair dealing that neither party will do anything which impairs the
right oI the other to receive the beneIits oI the agreement. This
principle is applicable to policies oI insurance.
224


221
James J. Markham et al., The Claims Environment 347 (1993).
222
1 James J. Lorimer, et al., The Legal Environment oI Insurance 179 (4th ed. 1993)(emphasis in
original).
223
See Goodman & Seaton, Ripe Ior Decision, Internal Workings and Current Concerns oI the
CaliIornia Supreme Court, 62 CAL. L. REV. 309, 346-47 (1974).
224
Liberty Mut. Ins. Co. v. AltIillisch Contr. Co., 70 Cal. App. 3d 789 (1977). See also James
Graham Brown Foundation, Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 280 (Ky.
1991),('When dealing with its insured, the insurance company has the obligation to exercise the utmost
good Iaith), modiIied and reh`g denied, 1991 Ky. Lexis 149 (Ky. Sept. 26, 1991); J. APPLEMAN,
INSURANCE LAW AND PRACTICES, (2nd ed. 1981) 8878 (1994 Pocket Part), at 12:
'Implicit in the duty oI good Iaith and Iair dealing is the insurer`s
obligation to be Iair and honest with its insured and to give equal
consideration to the insured`s interests.
The duty oI good Iaith and Iair dealing that an insurer owes an
insured obligates the insurer to reIrain Irom (1) engaging in
unIounded reIusal to pay policy proceeds, (2) causing unIounded
delay in making payment, (3) deceiving the insured, and (4)
exercising any unIair advantage to pressure an insured into
settlement oI the insured`s claim.

NYDOCS1-449390.1
11/16/11 11:58 AM
-85-


The duty owed to the policyholder by the insurance company, commonly
described as a 'Iiduciary duty even by insurance companies, has been the subject oI much
litigation. Some central truths are apparent.
The duty oI good Iaith and Iair dealing implicitly requires insurance companies to
be Iair and honest with their policyholders:
225

The duty oI good Iaith and Iair dealing that an insurer owes an
insured obligates the insurer to reIrain Irom (1) engaging in
unIounded reIusals to pay policy proceeds, (2) causing unIounded
delay in making payment, (3) deceiving the insured, and (4)
exercising any unIair advantage to pressure an insured into
settlement oI the insured`s claim.
226

At least one insurance company has echoed these points in its internal claims manual, stating the
'most positive way to |meet the duty oI good Iaith| is to look Ior coverage in . . . policies, and
not to look Ior ways to deny coverage.
227
Thus:
|I|n considering coverage questions, the policyholder should be
given the beneIit oI any reasonable doubt. Our goal is to Iind
coverage wherever possible, not ways to avoid our obligations.
Our dealings with claimants must be conducted Iairly, courteously,
and honestly.
228

Insurance companies do not dispute that policyholders are owed an implied duty
oI good Iaith and Iair dealing under any insurance policy.
229
In Iact, some oI the most succinct

225
Appleman, Insurance Law and Practices 8878 (1994 Pocket Part), at 12.
226
Id.
227
Travelers Liability Coverage Manual 16.0. See also JAMES J. MARKHAM, ET AL., THE CLAIMS
ENVIRONMENT 274 (1993).
228
Claim Department, Travelers Insurance Companies, Property Claims: I-General InIormation
(1987).
229
See Barry R. Ostrager & Barry R. Newman, Handbook on Insurance Coverage Disputes 429 (5th
ed. 1992).

NYDOCS1-449390.1
11/16/11 11:58 AM
-86-


deIinitions oI good Iaith come not Irom the courts or Irom learned treatises,
230
but Irom the
insurance companies themselves. For example, Continental Casualty has stated:
Insurance is an agreement whereby parties give valuable
consideration Ior protection Irom and indemniIication against loss,
damage, injury, or liability. As servants oI the public, insurance
companies are held to the universally high standard oI `good
Iaith.`
231

Continental Iurther explained:
II the insurer is motivated by selIish purpose or by the desire to
protect its own interests at the expense oI its insured`s interest, bad
Iaith exists, even though the insurer`s actions were not actually
dishonest or Iraudulent.
232

Similarly, Century Indemnity has stated:
Good conscience and Iair dealing require that the insurer not
pursue a course which is advantageous to itselI while
disadvantageous to its policyholder.
233

Aetna has also long acknowledged the insurance industry`s duty oI good Iaith and Iair dealing:
Over-riding all policy provisions is the insurance relationship
existing by reason oI the liability contract which imposes upon the
company the obligation to act in good Iaith and in the interests oI
the insured in the deIense and settlement oI claims.
234

HartIord probably said it best:
|O|ur Supreme Court has recently and emphatically held an insurer
to the high standards oI a Iiduciary: In approaching the inquiry,

230
See Appendix C Ior additional deIinitions oI good Iaith Irom legal treatises, dictionaries, legal
pleadings and reIerence texts.
231
PlaintiII`s Memorandum oI Law For Trial at 1, Iiled Sept. 11, 1990, Continental Cas. Co. v. Great
Am. Ins. Co., No. 86-C-3839, 1990 U.S. Dist. LEXIS 12807 (N.D. Ill. Sept. 28, 1990).
232
Id. at 13.
233
Appellant`s Reply BrieI at 20, Century Indem. Co. v. Truck Ins. Exch. oI the Farmers Ins. Group,
887 P.2d 455 (Wash. Ct. App. 1995)(No. 13141-6-III).
234
See statement oI George W. Katz, Secretary, Aetna LiIe & Casualty Co. (Oct. 8, 1966): See also
Lia B. Royle, Insurance Company Bad Faith Refusal %o Settle, MEALEY`S LITIG. REP.: BAD FAITH, Feb.
15, 1996, at 1.

NYDOCS1-449390.1
11/16/11 11:58 AM
-87-


great weight must be placed upon the character oI an insurance
policy as a contract oI adhesion. It is equally important to
emphasize that `|a|n insurance contract is preeminently one oI the
utmost good Iaith.`
235

HartIord has been steadIast in its acknowledgement oI the duty oI good Iaith and Iair dealing.:
|I|nsurance contracts require the highest degree oI good Iaith and
Iair dealing with both parties to the contract
236

HartIord does not dispute that insurance companies owe their
policyholders a duty oI good Iaith and Iair dealing
237

Bad Iaith has also been deIined by insurance industry sources and insurance companies
238
:
Bad Iaith. Generally implying or involving actual or constructive
Iraud, or a design to mislead or deceive another, or a neglect or a
reIusal to IulIill some duty or some contractual obligation; not
prompted by an honest mistake as to one`s rights or duties, but by
some interested or sinister motive. It diIIers Irom the negative idea
oI negligence in that it contemplates a state oI mind aIIirmatively
operating within a Iurtive design or some motive oI interest or ill
will.
239


235
BrieI and Volume I oI Appendix oI PlaintiII-Appellant HartIord Accident & Indem. Co., at 7,
Iiled Dec. 20, 1983, HartIord Accident & Indem. Co. v. Aetna LiIe & Cas. Ins. Co., No. A-1595-82T2
(N.J. Super. Ct. App. Div. 1992).
236
Letter BrieI In Opposition To PlaintiII`s Motion For Partial Summary Judgment With Regard To
The Insurance Company`s Duty oI Good Faith and Fair Dealing at 2 n.1, dated May 16, 1994, Colonial
Foods, Inc. v. Aetna Cas. and Sur. Co., No. MON-L-0392-93 (N.J. Super Ct. Law Div.).
237
BrieI in Opposition to PlaintiII, Colonial Foods` Cross-Motion Ior Partial Summary Judgment, at
14, dated May 15, 1995, Colonial Foods, Inc. v. Aetna Cas. and Sur. Co., No. MON-L-0392-93 (N.J.
Super Ct. Law Div.). See also BrieI in Opposition to PlaintiII`s Motion For Partial Summary Judgment
and in Support oI DeIendant HartIord Accident & Indemnity Company`s Cross-Motion For Summary
Judgment, at 40, dated Nov. 15, 1995, Biddle Sawyer Corp. v. Fireman`s Fund Ins. Co., No. MON-L-
5219-91 (N.J. Super. Ct. Law. Div.)(identical quotation).
238
See Allstate Insurance Company 'Extracontractual Liability Form No. C2225 attached at
Appendix D.
239
James H. Donaldson, Casualty Claims Practice 973-74 (4th ed. 1984), quoted in Willis Park
Rokes, J.D., Ph.D, Agressive Good Faith and SuccessIul Claims Handling 26 (1st ed. 1987).

NYDOCS1-449390.1
11/16/11 11:58 AM
-88-


An implied covenant oI good Iaith and Iair dealing exists in every insurance policy
240
Iirst
party and third party, and to retrospectively rated premium policies.
241
First party bad Iaith as a
theory oI recovery against an insurance company was Iirst recognized by the CaliIornia Supreme
Court in Gruenberg v. Aetna Ins. Co. in 1973.
242
Third party bad Iaith theories are much older

240
Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973); Egan v. Mutual oI Omaha Ins. Co., 598
P.2d 452 (1979), cert. denied, 445 U.S. 912 (1980).
241
Several courts have held that in the context oI retrospective premium policy, the insurance
company has an inherent conIlict oI interest, since an improperly handled claim may directly increase the
policyholder`s costs and Iuture premiums, but increase the insurance company`s proIits. The Iollowing
jurisdictions have Iound that a policyholder may properly allege a bad Iaith cause oI action Ior improperly
handling a claim under a retrospective rated premium:
CaliIornia: Security OIIicers Service, Inc. v. State Compensation Ins. Fund, 17 Cal.
App. 4th. 887, 21 Cal. Rptr. 653 (1993);
Delaware: Corrado Bros., Inc. v. Twin City Fire Ins. Co., 562 A.2d 1188 (Del. 1989);
Georgia: Benton Express, Inc. v. Royal Ins. Co. oI America, 217 Ga. App. 331, 457
S.E.2d 566 (1995);
Illinois: National Sur. Corp. v. Fast Motor Service, Inc., 213 Ill. App. 3d 500, 572
N.E.2d 1083 (1991);
Kansas: Transit Cas. Co. v. Topeka Trans. Co., 8 Kan. App. 2d 597, 663 P.2d 308
(1983);
Louisiana: Insurance Co. oI North America v. Binnings Construction Co., Inc., 288
So. 2d 359 (La. Ct. App. 1974);
Maryland: Port East TransIer, Inc. v. Liberty Mut. Ins. Co., 330 Md. 376, 624 A.2d
520 (Md. App. 1993);
Massachusetts: DeerIield Plastics Co., Inc. v. The HartIord Ins. Co., 404 Mass. 484, 536
N.E.2d 322 (1989);
Minnesota: Transport Indem. Co. v. Dahlen Transport, Inc., 281 Minn. 253, 161
N.W.2d 546 (1968);
New Jersey: Liberty Mut. Ins. Co. v. President Container, Inc., 297 N.J. Super. 24, 687
A.2d 760 (App. Div. 1997);
Pennsylvania: Liberty Mut. Ins. Co. v. Marty`s Express, Inc., 910 F. Supp. 221 (E.D. Pa.
1996);
Tennessee: The Austin Co. v. Royal Ins. Co., 842 S.W.2d 608 (Tenn. App. 1992);
Virginia: National Union Fire Ins. Co. v. Roubin & Janeiro, Inc., 34 Va. Cir. 344
(1994).
242
Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973).

NYDOCS1-449390.1
11/16/11 11:58 AM
-89-


and date back to the beginning oI this century.
243
The revisionist history oI insurance law is that
third party bad Iaith was just invented. That is incorrect.
2. 1udicial Recognition
Most states recognize that insurance companies owe their policyholders a duty oI
good Iaith and Iair dealing. These states recognize that policyholders possess a common law
private right oI action Ior breach oI that duty.
244
The standard Ior determining whether punitive
damages apply to a breach oI good Iaith, oI course, varies Irom state to state.
245


243
See, e.g., Brown & McCabe Stevedores, Inc. v. London Guar. & Acc. Co., 232 F. 298 (D. Or.
1915). See generally, Kent D. Syverud, %he Duty %o Settle, 76 VA. L. REV. 1113, 1116 n.4 (1990).
244
The Iollowing jurisdictions recognize a common law private right oI action Ior the breach oI the
duty oI good Iaith in insurance coverage litigation:
Alabama: Turner v. State Farm Fire & Cas. Cos., 614 So. 2d 1029 (Ala. 1993); Chavers v. National Sec.
Fire & Cas. Co., 405 So. 2d 1, 6 (Ala. 1981);
Alaska: State Farm Fire & Cas. Co. v. Nicholson, 777 P.2d 1152 (Alaska 1989);
Arizona: Noble v. National Am. LiIe Ins. Co., 624 P.2d 866 (Ariz. 1981); Sparks v. Republic Nat`l LiIe
Ins. Co., 647 P.2d 1127 (Ariz.), cert. denied, 459 U.S. 1070 (1982), overruled in part by Ariz. Rev. Stat.
Ann. 20-461(C)(1994);
Arkansas: Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 664 S.W.2d 463 (Ark. 1984); Findley v. Time
Ins. Co., 573 S.W.2d 908 (Ark. 1978);
CaliIornia: Gruenberg v. Aetna Ins. Co., 510 P.2d 1032 (Cal. 1973); Crisci v. Security Ins. Co., 426 P.2d
173 (Cal. 1967);
Colorado: Travelers Ins. Co. v. Savio, 706 P.2d 1258 (Colo. 1985); Farmers Group, Inc. v. Trimble, 691
P.2d 1138 (Colo. 1984);
Connecticut: Buckman v. People Express, Inc., 530 A.2d 596 (Conn. 1987); Grand Sheet Metal Prods.
Co. v. Protection Mut. Ins. Co., 375 A.2d 428, 429-30 (Conn. 1977);
Delaware: E.I. du Pont de Nemours & Co. v. Admiral Ins. Co., No. 89C-AU-99, 1994 Del. Super. Ct.
LEXIS 346 (Del. Super. Ct. Aug. 3, 1994); Casson v. Nationwide Ins. Co., 455 A.2d 361 (Del. Super. Ct.
1982);
District oI Columbia: Washington v. Group Hospitalization Inc., 585 F. Supp. 517 (D.C. 1984);
Hawaii: Best Place, Inc. v. Penn Am. Ins. Co., 920 P.2d 334, 337-38 (Haw. 1996);
Idaho: White v. Unigard Mut. Ins. Co., 730 P.2d 1014 (Idaho 1986);
Illinois: Emerson v. Am. Bankers Ins. Co., 585 N.E.2d 1315 (Ill. App. Ct. 5th Dist. 1992);
Indiana: Erie Ins. Co. v. Hickman, 622 N.E.2d 515 (Ind. 1993);

NYDOCS1-449390.1
11/16/11 11:58 AM
-90-



Iowa: Dolan v. Aid Ins. Co., 431 N.W.2d 790, 794 (Iowa 1988); Higgins v. Blue Cross oI Western Iowa
& South Dakota, 319 N.W.2d 232 (Iowa 1982);
Kentucky: Curry v. Fireman`s Fund Ins. Co., 784 S.W.2d 176 (Ky. 1989); James Graham Brown Found.,
Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 280 (Ky. 1991), modiIied and reh`g denied, 1991
Ky. LEXIS 149 (Ky. Sept. 26, 1991);
Maine: Marquis v. Farm Family Mut. Ins. Co., 628 A.2d 644 (Me. 1993);
Maryland: Allstate Ins. Co. v. Campbell, 639 A.2d 652 (Md. 1994); Johnson v. Federal Kemper Ins. Co.,
536 A.2d 1211, cert. denied, 542 A.2d 844 (Md. 1988);
Massachusetts: HartIord Cas. Ins. Co. v. New Hampshire Ins. Co., 628 N.E.2d 14 (Mass. 1994);
Minnesota: Fette v. Columbia Cas. Co., No. C0-96-242, 1993 Minn. App. LEXIS 954 (Minn. Ct. App.
1993); Haagenson v. National Farmers Union Prop. & Cas. Co., 277 N.W.2d 648 (Minn. 1979); Short v.
Dairyland Ins. Co., 334 N.W.2d 384 (Minn. 1983);
Mississippi: HartIord Accident & Indem. Co. v. Foster, 528 So. 2d 255 (Miss. 1988);
Missouri: Young v. United States Fidelity & Guar., 588 S.W.2d 46 (Mo. Ct. App. 1979);
Montana: Lipinski v. Title Ins. Co., 655 P.2d 970 (Mont. 1982);
Nebraska: Braesch v. Union Ins. Co., 464 N.W.2d 769 (Neb. 1991);
Nevada: United States Fidelity & Guar. Co. v. Peterson, 540 P.2d 1070 (Nev. 1975);
New Hampshire: Lawton v. Great Southwest Fire Ins. Co., 392 A.2d 576 (N.H. 1978); Conductron Corp.
v. American Employers` Ins. Co., Nos. 93-E-149, 93-C-599, slip op. (N.H. Super. Ct., Apr. 9, 1997);
New Jersey: Pickett v. Lloyd`s & Peerless Ins. Agency, 621 A.2d 445 (N.J. 1993); Di Salvatore v. Aetna
Cas. & Sur. Co., 624 F. Supp 541 (D.N.J. 1986);
New Mexico: Chavez v. Chenoweth, 553 P.2d 703 (N.M. Ct. App. 1976); American Employers Ins. Co.
v. CrawIord, 533 P.2d 1203 (N.M. 1975);
New York: Rocanova v. Equitable LiIe Assurance Soc`y oI the United States, 634 N.E.2d 940 (N.Y.
1994);
North Dakota: Corwin Chrysler-Plymouth, Inc. v. Westchester Fire Ins. Co., 279 N.W.2d 638 (N.D.
1979);
Ohio: Hoskins v. Aetna LiIe Ins. Co., 452 N.E.2d 1315 (Ohio 1983);
Oklahoma: Christian v. American Home Assurance Co., 577 P.2d 899 (Okla. 1977); American Fidelity &
Cas. Co. v. L.C. Jones Trucking Co., 321 P.2d 685 (Okla. 1957);
Pennsylvania: Romano v. Nationwide Mut. Fire Ins. Co., 435 Pa. Super. 545, 646 A.2d 1228, 1231
(1994)(citing Fedas v. Insurance Co. oI Pa., 300 Pa. 555, 558, 151 A. 285, 286 (1930); Dercoli v.
Pennsylvania Nat`l Mut. Ins. Co., 520 Pa. 471, 554 A.2d 906 (1989); Cowden v. Aetna Cas. and Sur. Co.,
389 Pa. 459, 134 A.2d 223 (1957).
Rhode Island: Bibeault v. Hanover Ins. Co., 417 A.2d 313 (R.I. 1980);
South Carolina: Nichols v. State Farm Mut. Auto Ins. Co., 306 S.E.2d 616 (S.C. 1983);
South Dakota: In re: CertiIication oI Question oI Law From U.S. Dist. Court, 399 N.W.2d 320 (S.D.
1987);
Texas: Aranda v. Insurance Co. oI N. Am., 748 S.W.2d 210 (Tex. 1988); Arnold v. National County Mut.
Fire Ins. Co., 725 S.W.2d 165 (Tex. 1987);

NYDOCS1-449390.1
11/16/11 11:58 AM
-91-


3. Statutory Recognition
In addition, at least 48 states have passed UnIair Claims Settlement Practices
statutes which prohibit insurance companies Irom breaching their duty oI good Iaith and Iair
dealing.
246
Some states also allow a bad Iaith claim against an insurance company under its
Consumer Protection Act.
Many oI these statutes do not provide a policyholder with a private right oI action.
In jurisdictions which do not permit policyholders a private right oI action, complaints under the
statute can only be made by the state insurance commissioner.
247
In these jurisdictions, unIair
claim settlement practices statutes are rendered a nearly worthless saIeguard. Insurance
commissioners have 'rarely exercised their authority under these statutes to protect
policyholders Irom insurance company misconduct.
248


Utah: Beck v. Farmers Ins. Exch., 701 P.2d 795 (Utah 1985);
Vermont: Phillips v. Aetna LiIe Ins. Co., 473 F. Supp. 984 (D. Vermont 1979);
Washington: Escalante v. Sentry Ins. Co., 743 P.2d 832 (Wash. App. Ct. 1987); Tank v. State Farm Fire
& Cas. Co., 715 P.2d 1133 (Wash. 1986);
Wisconsin: Anderson v. Continental Ins. Co., 271 N.W.2d 368 (Wis. 1978);
Wyoming: McCullough v. Golden Rule Ins. Co., 789 P.2d 855 (Wyo. 1990); Hatch v. State Farm Fire &
Cas. Co., 842 P.2d 1089 (Wyo. 1992).
245
See RICHARD L. BLATT, ET AL., PUNITIVE DAMAGES; A STATE-BY-STATE GUIDE TO LAW AND
PRACTICE 8.2 (1991) and supplement (1996). At the time oI this writing, only 4 states, Michigan,
Nebraska, New Hampshire and Washington do not allow punitive damages. States which do allow
punitive damages apply diIIering standards to evaluate the misconduct, including malice, conduct
exceeding gross negligence but not malice, or gross negligence. Other states have statutes which control
applicable limits Ior punitive damages.
246
See STEPHEN S. ASHLEY, BAD FAITH ACTIONS: LIABILITY AND DAMAGES 9:01-02, 9:14
(1996). UnIair Claims Settlement Practices statutes are adopted Irom the Model Act Relating To UnIair
Methods oI Competition and UnIair and Deceptive Acts in Practices in the Business oI Insurance. The
model act was sponsored by National Association oI Insurance Commissioners, a pro-insurance industry
group. In 1990, the model act was renamed the UnIair Trade Practices Act, and a separate UnIair Claims
Settlement Practices Model Regulation was created. The new Model UnIair Claims Settlement Practices
Act expressly rejects any interpretation oI a private right oI action.
247
See ASHLEY at 9:03.
248
See Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-92-


Nonetheless, the punishment provided under these statutes can be severe. For
example, under most states` UnIair Insurance Practices Act or UnIair Claims Settlement
Practices Act, an insurance company which violates its duty oI good Iaith and Iair dealing can
have their license to operate suspended or revoked.
249
Despite the statutory authority permitting
administrative sanctions, insurance companies are rarely, iI ever, punished Ior wrongIul claims
practices.
However, states which have adopted statutory penalties as harsh as a revocation
oI authority to operate do not take insurance company bad Iaith lightly. As the United States
Supreme Court made clear in BMW of North America v. Gore, an award oI punitive damages
must be compared to the maximum civil or criminal penalties that could be imposed in
comparable cases.
250
The revocation oI an insurance company`s license to sell insurance within
the state is a much more severe punishment than almost any award oI punitive damages. Indeed,
lesser punishments negate the very purpose oI punitive damages to deter Iuture misconduct.
Whether or not policyholders have a private right oI action under statutes prohibiting insurance
company misconduct, these statutes provide very important measures to determine the
permissible limits oI bad Iaith awards under BMW.
The prime importance oI these statutes is to establish minimum codes oI
insurance company conduct. Even though most states do not allow policyholders to assert a

249
See, e.g., CaliIornia Insurance Code 704; Kentucky Revised Statute 304.99-010; 40
Pennsylvania Statutes 1171.4. 40 Pa.S. 1171.5 deIines the 'unIair methods oI competition and
'unIair or deceptive acts or practices covered by the Act; Ohio UnIair and Deceptive Practices,
3901.22 (state insurance commissioner may suspend or revoke license to engage in the business oI
insurance); West Virginia Code 33-11-6 (same).
250
BMW v. Gore, 116 S. Ct. 1589, 1603 (1996) (emphasis added).

NYDOCS1-449390.1
11/16/11 11:58 AM
-93-


private right oI action or a breach oI these statutes evidence oI breach can be used to establish
breach oI other rights and bad motive.
251

These statutes are oI major signiIicance even though they do not give rise to an
independent claim or Ior relieI. This should mean that the insurance law provisions can be
submitted to the jury as an evidencing exhibit.
Juries in bad Iaith cases should be made aware oI this important consideration
when Iixing an award oI punitive damages.
4. The Duty of Good Faith Continues Through Insurance Coverage Litigation
Q: Does the |insurance company`s| duty oI good Iaith and Iair
dealing continue aIter a claim is denied?
A: It always continues Irom the carrier`s perspective.
Q: Does it ever end?
A: Never ends.
The above testimony was given in an Oklahoma case by the general counsel oI
the Travelers Insurance Company, one oI the largest insurance conglomerates in the country.
252


251
See, e.g. Cramer v. Insurance Exch. Agency, 174 Ill. 2d 513, 519, 675 N.E.2d 897, 900 (1996).
In Cramer, the Illinois Supreme Court held that although 155 oI Illinois` Insurance Code barred
recognizing the tort oI bad Iaith as a separate and independent tort, 155 did not bar other a policyholder
Irom bringing other separate and independent tort claims against an insurance company:
In summary, an insurer`s conduct may give rise to both a breach oI
contract action and a separate and independent tort action . . . In
cases where a plaintiII actually alleges and proves the elements oI
a separate tort, a plaintiII may bring an independent tort action,
such as common law Iraud, Ior insurer misconduct.
Id. at 675 N.E.2d at 904. Thus, the Illinois Supreme Court has said that insurance companies are liable
Ior tortious breach oI contract.
252
The testimony was given in an action brought by the Oklahoma City Urban Renewal Authority
against GulI Insurance Company arising out oI GulI`s bad Iaith conduct and denial oI a claim under a
directors and oIIicers liability policy. Oklahoma City Urban Renewal Auth. v. GulI Ins. Co., Case No.
CIV-94-1760-M (W.D. Okla.). Along with the Oklahoma City Iirm oI Batchelor & Powers, the authors
oI this article were counsel to the policyholder in that action.

NYDOCS1-449390.1
11/16/11 11:58 AM
-94-


The testimony accurately states insurance industry custom and practice. Articles written in
support oI the insurance industry acknowledge that the duty oI good Iaith and Iair dealing
extends through litigation.
253

One insurance company adopted the Restatement (Second) oI Contracts:
The obligation oI good Iaith and Iair dealing extends to the
assertion, settlement and litigation oI contract claims and deIenses.
. . The obligation is violated by dishonest conduct such as
conjuring up a pretended dispute, asserting an interpretation
contrary to one`s own understanding, or IalsiIication oI Iacts.
254

Another insurance company has acknowledged that:
|I|I the controversy is based on a Irivolous contention as to
noncoverage, the insurer in bringing the action is breaching its
duties to its insured under the policy, . . . subject|ing| the insurer to
liability.
255

Like the insurance companies, the majority oI courts to consider the issue have
held that the duty oI good Iaith between an insurance company and its policyholder continues

253
See Randy Papetti, Note, The Insurer`s Duty oI Good Faith in the Context oI Litigation, 60 GEO.
WASH. L. REV. 1931, 1933 (1992).
In Iact, several insurance companies have even argued that the policyholder owes the insurance
company a duty oI good Iaith which continues through litigation:
|C|onduct in pursuing its claims in this litigation has violated |an|
implied duty oI good Iaith and Iair dealing under its insurance
contracts. White v. Western Title Ins. Co., 40 Cal. 3d 870 (1985).
Insurer Opposition (Iiled by Plaisted and others) at 121, Iiled Sept. 3, 1993, Union Oil Co. oI Ca.
v. Allianz Versicherungs, Nos. BC 028270, BC 028271, BC 031367, BC 033114, C 514463 (Cal. Super.
Ct.). Lloyds` and the other insurance companies had argued that the policyholder had a continuing duty
oI good Iaith by citing White v. Western Title Insurance Co., 40 Cal. 3d 870, 710 P.2d 309, (Cal. 1985),
modiIied on other grounds, Maler v. Superior Court, 220 Cal. App. 3d 1592 (1990)(See Cal. Ins. Code
790.0(h). White holds that the duty oI the insurance companies continues into the courthouse, not that
policyholders have such a duty.
254
Emphasis added. RESTATEMENT (SECOND) OF CONTRACTS 205, Comment e (1981).
255
Appellee`s BrieI at 35, American Family LiIe Assurance Co. oI Columbus, Georgia v. United
States Fire Ins. Co., 885 F.2d 826 (11th Cir. 1989) (No. 88-8755).

NYDOCS1-449390.1
11/16/11 11:58 AM
-95-


through litigation over insurance coverage.
256
To do otherwise renders the duty too easily
avoidable:

256
See e.g. Central Armature Works Inc. v. American Motorists Ins. Co., 520 F. Supp. 283, 295
(D.D.C. 1980)(applying D.C. law; evidence oI insurance company`s incorrect answers to interrogatories
may indicate bad Iaith); KauIIman v. Aetna Cas. & Sur. Co., 794 F. Supp. 137, 140-42 (E.D. Pa. 1992)
(the insurance company argued that bad Iaith under the insurance policy could only occur during the
course oI insurance coverage litigation); Rottmund v. Continental Assurance Co., 813 F. Supp. 1104,
1109-10 (E.D. Pa. 1992)(concealment oI evidence by an insurance company was bad Iaith); Smith v.
American Family Mut. Ins. Co., 294 N.W.2d 751, 764 (N.D. 1980)(letter Irom insurance company to
deIense counsel in declaratory judgment action was admissible regarding potential counterclaim against
the policyholder`s attorney); Fassola v. Montgomery Ward Ins. Co., 433 N.E.2d 378, 383 (Ill. App. Ct.
1982); SpadaIore v. Blue Shield, 486 N.E.2d 1201, 1203-1204 (Ohio Ct. App. 1985)('evidence oI the
breach oI the insurer`s duty to exercise good Iaith occurring aIter the time oI Iiling suit is relevant so long
as the evidence related to the bad Iaith or handling or reIusal to pay the claim.); T.D.S. Inc. v. Shelby
Mut. Ins. Co., 760 F.2d 1520, 1527 (11th Cir.) (applying Florida law), modiIied, 769 F.2d 1485 (1985);
White v. Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309, (1985)(insurance company must act in
good Iaith in Iiling coverage action), modiIied on other grounds, Maler v. Superior Court, 220 Cal. App.
3d 1592 (1990); Kyriss v. Aetna LiIe & Cas. Co., 624 F. Supp. 1130, 1133 (D. Mont. 1986)(applying
Montana law); Mohr v. Dix Mut. County Fire Ins. Co., 493 N.E.2d 638, 645 (Ill. App. Ct. 1986); SaIeco
Ins. Co. v. Ellinghouse, 725 P.2d 217, 225 (Mont. 1986); Sentry Ins. v. Siurek, 748 S.W.2d 104, 107
(Tex. Ct. App. 1987); Southerland v. Argonaut Ins. Co., 794 P.2d 1102, 1106 (Colo. Ct. App. 1990);
Norman v. American Nat`l Fire Ins. Co., 555 N.E.2d 1087, 1109-1110 (Ill. App. Ct. 1990); Home Ins. Co.
v. Owens, 573 So. 2d 343, 344 (Fla. Dist. Ct. App. 1990)(evidence oI insurance company`s amended
answer denying bad Iaith liability and a request Ior admission denying insurance coverage were evidence
oI bad Iaith; both were otherwise inadmissible); Claussen v. Aetna Cas. & Sur. Co., 754 F. Supp. 1576,
1583 (S.D. Ga. 1990)(applying Georgia law); Gregory v. Continental Ins. Co., 575 So. 2d 534, 541-542
(Miss. 1990); Journal Publ`g Co. v. American Home Assurance. Co., 771 F. Supp. 632, 635-636
(S.D.N.Y. 1991)(applying New Mexico law; evidence oI insurance company`s during discovery may
indicate bad Iaith); Myrda v. Coronet Ins. Co., 582 N.E.2d 274, 279, 281 (Ill. App. Ct. 1991); Harris v.
Fontenot, 606 So. 2d 72, 74 (La. Ct. App. 1992); Minnesota Mut. LiIe Ins. Co. v. Elswood, No. A055590
(Cal. Ct. App. 1993), reported in MEALEY`S LITIG. REP.: BAD FAITH, Apr. 1, 1993; Nestle Foods Corp. v.
Aetna Cas. & Sur. Co., 842 F. Supp. 125 (D.N.J. 1993)(applying New Jersey law); Palmer v. Farmers Ins.
Exch., 861 P.2d 895 (Mont. 1993); UTI Corp. v. Fireman`s Fund Ins. Co., 896 F. Supp. 362 (D.N.J.
1995)(applying Pennsylvania law)('an insurer has a continuing obligation to act in good Iaith toward its
insured, which obligation extends through litigation.); Tucson Airport Auth. v. Certain Underwriters at
Lloyd`s, London, 918 P.2d 1063 (Ariz. Ct. App. 1996); Atlas Assurance Co. v. McCombs Corp., 146 Cal.
App. 3d 135, 150, 194 Cal. Rptr. 66, 74 (3d Dist. 1983); (An insurer`s declaratory judgment action can
constitute an act oI bad Iaith when the insurer has 'otherwise abandoned, compromised or rejected the
insured`s claim.); Insurer Opposition Iiled by Lloyd`s and others, dated Sept. 3, 1993 Union Oil Co. oI
Cal. v. Allianz Versicherings, No. BC 028270 (Cal. Super. Ct.); Argonaut Ins. Co. v. HGO, Inc., No. 96-
1115, 1996 U.S. Dist. LEXIS 10892 (E.D. Pa. July 26, 1996); Nies v. National Auto. & Cas. Ins. Co., 199
Cal. App. 3d 1192, 245 Cal. Rptr. 518, 524-25 (1988); Orthman v. Globe Indem. Co., 759 F.2d 1458,
1467 n.11 (9th Cir. 1985)(evidence oI insurance company`s disinterest in claim related misconduct aIter
lawsuit is Iiled may constitute evidence oI bad Iaith), overruled on other grounds by Bryany v. Ford
Motor. Co., 832 F.2d 1080 (9th Cir. 1987); Fields v. State Farm Mut. Auto. Ins. Co., No. C93-0062-
BG(H), slip op. (W.D. Ky. May 17, 1994).

NYDOCS1-449390.1
11/16/11 11:58 AM
-96-


|I|t is not unusual Ior an insurance company to provide policy
beneIits, such as the deIense oI a litigation, while itselI instituting
suit to determine whether and to what extent it must provide those
beneIits. It could not reasonably be argued under such
circumstances either that the insurer no longer owes any
contractual duties to the insured, or that it need not perIorm those
duties Iairly and in good Iaith.
257

In jurisdictions which recognize that the duty oI good Iaith and Iair dealing
continues into litigation, policyholders bringing a bad Iaith claim are oIten allowed to review
insurance company litigation practices, including settlement oIIers and attorney behavior.
258

Simply put, 'that the contractual duties oI the parties to an insurance contract do
not `terminate with commencement oI litigation`. . . is not particularly controversial.
259


257
White v. Western Title Ins. Co., 710 P.2d 309, 317 (Cal. 1985), modiIied on other grounds in
Maler v. Superior Court oI Los Angeles County, 220 Cal. App. 3d 1592 (2d Dist. 1990)(See Cal. Ins.
Code 790.0(h)).
Practitioners should note that there exists a minority position. See Timberlake Constr. Co. v. U.S.
Fidelity & Guar. Co., 71 F.3d 335 (10th Cir. 1995) (holding that an insurance company`s duty to its
policyholder was limited to the circumstances surrounding the insurance coverage determination). CI.
Stewart Title Guar. Co. v. Aiello, 941 S.W.2d 68 (Tex. 1997) (stating that duty oI good Iaith and Iair
dealing does not extend beyond settlement and agreed judgment oI insurance coverage litigation).
258
See Papetti at 1943 (noting that nearly all oI the growing number oI cases to address the issue oI
post-Iiling conduct appear to conclude that an insurer`s duty oI good Iaith continues through trial).
259
This admission comes Irom an insurance industry article intended to counter the case law
supporting the admissibility oI insurance company litigation practices. See Robert F. Cusumano, 'Spy vs.
Spy. Coverage Litigation as its Own %ort, MEALEY`S LITIG. REP.: INS., Apr. 12, 1994.

NYDOCS1-449390.1
11/16/11 11:58 AM
-97-


5. Examples of Bad Faith
260


260
The Iollowing review oI cases lists examples oI insurance company misconduct which courts
have Iound to be in bad Iaith. See also 'Bad Faith Cases oI Selected States listed in Appendix B under
Pennsylvania section and section on the duty oI good Iaith and Iair dealing continuing through litigation.
I. Claims Based on Bad-Faith Investigation
1. Unreasonable delay in conducting investigation or paying claim.
Authority: Rawlins v. Apodaca, 151 Ariz. 149, 156, 726 P.2d 565, 572 (1986); Robinson
v. North Carolina Farm Bur. Ins. Co., 86 N.C. App. 44, 356 S.E.2d 392 (1987);
McCormick v. Sentinel LiIe Ins. Co., 153 Cal. App. 3d 1030, 200 Cal. Rptr. 732 (2d Dist.
1984); Clark v. BelleIonte Ins. Co., 113 Cal. App. 3d 326, 169 Cal. Rptr. 832 (1st Dist.
1986); Ill. Ins. Code, 155; Buzzard v. Farmers Ins. Co., Inc., 824 P.2d 1105 (Okla. 1991).
2. Failure to disclose Iacts or theories supporting coverage.
Authority: Dercoli v. Pennsylvania Nat. Mut. Ins., 520 Pa. 471, 554 A.2d 906 (1989).
3. Claims Harassment.
Examples: Asking Ior substantially the same inIormation twice; requiring policyholder to
provide Iar more inIormation than reasonably necessary to decide claim; unreasonably
reIusing to investigate or decide claim until inIormation is provided in a particular way by
policyholder.
Authority: McCormick v. Sentinel LiIe Ins. Co., 153 Cal. App. 3d 1030, 200 Cal. Rptr.
732 (2d Dist. 1984); Hatch v. State Farm Fire & Cas., 842 P.2d 1089 (Wyo. 1992); Filasky
v. PreIerred Mut. Ins. Co., 152 Ariz. 591, 734 P.2d 76 (1987).
4. Claims 'Extortion -- Accusing policyholder, without reasonable basis, oI wrongdoing
(e.g., arson); use oI abusive or coercive practices to compel compromise oI claim;
exploiting the policyholder`s vulnerable Iinancial position aIter a covered loss.
Authority: Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 510 P.2d 1032 (1973); Mustachio
v. Ohio Farmers Ins. Co., 44 Cal. App. 3d 358, 118 Cal. Rptr. 581 (2d Dist. 1975); Neal v.
Farmers Ins. Exch., 21 Cal. 3d 910, 923, 582 P.2d 980, 987 (1978).
5. Spoliation oI Evidence.
Example: Reckless or intentional destruction oI insurance policies.
Authority: Upthegrove Hardware, Inc. v. Penn. Lumbermans Mutual Ins. Co., 146 Wis. 2d
470, 431 N.W.2d 689 (Ct. App. 1988).
Destroying evidence which the insurance company knows or should know is important to
the claim, lying about the results oI the claims investigation, and knowing that there is no
reasonable basis Ior opposing the policyholder`s claim.
Authority: |St. Paul Fire and Casualty Company| Appellate Response BrieI, at 29, dated
Dec. 27, 1994, Richland, citing Upthegrove Hardware Inc. v. Penna. Lumbermans Mut. Ins.
Co., 146 Wis. 2d 470, 476-77, 482-83, 431 N.W.2d 689 (Ct. App. 1988).
6. Unscrupulous Conduct.
Example: FalsiIication oI sworn statement, surreptitious copying oI conIidential
government records, misrepresentation oI identity oI investigation, and discouraging
policyholder Irom securing legal counsel.

NYDOCS1-449390.1
11/16/11 11:58 AM
-98-



Authority: Timmons v. Royal Globe Ins. Co., 653 P.2d 907 (Okla. 1982); Industrial
Indemnity All Lines Claim Technical Manual, Investigation, Nov. 14, 1980, at page 05.07
('Witnesses should not be interviewed under any pretext or Ialse pretenses.); Id., UnIair
Claim Practices, Oct. 30, 1989, at page 05.08 (Claims personnel '|m|ust avoid any
statement which could be construed as advising a claimant not to obtain the services oI an
attorney).
7. Inadequate Investigation or Failure to Investigate.
Authority: Egan v. Mutual oI Omaha Ins. Co., 24 Cal. 3d 809, 598 P.2d 452 (1979);
Zieman MIg. Co. v. St. Paul Fire & Marine Ins. Co.,, 724 F.2d 1343 (9th Cir. 1983);
Buzzard v. Farmers Ins. Co., 824 P.2d 1105 (Okla. 1991); Appellate BrieI oI DeIendant-
Appellant- Cross-Respondent St. Paul Fire & Casualty Company, dated Oct. 24, 1994, in
Richland Valley Products Inc. v. St. Paul Fire & Cas. Co., No. 94-1837 (Wis. Ct. App.)
(hereaIter St. Paul Appellate BrieI in Richland) at 30 (Persistent Iailure to obtain and
evaluate readily available inIormation) citing, Benke v. Mukwonago-Vernon Mut. Ins. Co.,
110 Wis. 2d 356, 362-64, 329 N.W.2d 243 (Ct. App. 1982).
8. Failure to investigate claim with objectivity.
Example: Conducting investigation solely to uncover additional grounds Ior denial.
Authority: Colonial Foods, Inc. v. Aetna Cas. & Sur. Co., No. Mon-L-0392-93 (N.J. Super.
Ct. Law Div. Apr. 21, 1995), reported in MEALEY`S LITIG. REP.: INS., May 9, 1995, at 10,
leave to appeal denied, (N.J. Super. Ct. App. Div. June 20, 1995) (hereaIter 'Colonial
Foods). State Farm Fire & Cas. v. Simmons, 857 S.W.2d 126 (Tex. Ct. App.)('Outcome-
oriented investigation oI Iire, which ignored evidence Iavorable to policyholder,
constitutes a breach oI the insurance company`s duty oI good Iaith), aII`d in part, rev`d in
part, No. D-4095, 1998 Tex. LEXIS 30 (Tex. Feb. 13, 1998); PlaintiII State Mutual`s
Supplemental Memorandum in Support oI Its Motion Ior Summary Judgment and In
Opposition to DeIendant`s Cross-Motion Ior Summary Judgment, at 12, Iiled July 25,
1994, State Mut. Assurance Co. oI Am. v. Lumbermens Mut. Cas. Co., No. 90-12505-PBS
(D. Mass.) ('Lumbermens` ReIusal to DeIend State Mutual, Solely On The Basis oI Its
Own Constricted Reading oI The Hancock Complaint and Without Investigating The
Factual Basis For The Claims, Constituted An UnIair Settlement Practice in Violation oI
Mass. Gen. L. Ch. 176D And An UnIair And Deceptive Trade Practice In Violation oI
Mass. Gen. L. Ch. 93A).
9. ReIusal by an insurance company to settle an underlying claim within the policy limits.
Authority: Oppel v. Empire Mut. Ins. Co., 517 F. Supp. 1305 (S.D.N.Y. 1981).
10. Failure to inIorm the policyholder immediately oI a settlement oIIer in an underlying claim.
Authority: Oppel v. Empire Mut. Ins. Co., 517 F. Supp. 1305 (S.D.N.Y. 1981).
11. Failure to assert deIenses available to 'additional insureds in an underlying action.
Authority: Cornwell v. SaIeco Ins. Co., 42 A.D.2d 127, 346 N.Y.S.2d 59 (4th Dep`t 1973).
12. Failure on the part oI the insurance company to be aware oI the amount oI its coverage on
the eve oI trial in an underlying action.
Authority: Fredericks v. Home Indem. Co., 101 A.D.2d 614, 474 N.Y.S.2d 870 (3d Dep`t
1984).
13. Allowing the risk oI unIavorable results to greatly exceed the chances oI a Iavorable
outcome (in the settlement context) in an underlying action.

NYDOCS1-449390.1
11/16/11 11:58 AM
-99-



Authority: United States Fire Ins. Co. v. Royal Ins. Co., 759 F.2d 306 (3d Cir. 1985).
14. Failure to explore settlement possibilities in an underlying claim.
Authority: Rova Farms Resort Inc. v. Investors Ins. Co. oI Am., 65 N.J. 474, 323 A.2d 495
(1974).
15. Exposing the policyholder to unreasonable risk in an underlying claim because an oIIer was
rejected only because oI policy limits.
Authority: Wierck v. Grinwell Mut. Reins. Co., 456 N.W.2d 191 (Iowa 1990).
16. Delay in delivering a settlement draIt in an underlying claim.
Authority: Higgs v. Industrial Fire & Cas. Ins. Co., 501 So. 2d 644 (Fla. Dist. Ct. App.
1986).
17. ReIusal to settle an underlying claim in excess oI policy limits aIter liability already had
been determined.
Authority: St. Paul Fire & Marine Ins. Co. v. United States Fidelity & Guar. Co., 43 N.Y.2d
977, 375 N.E.2d 733, 404 N.Y.S.2d 552 (1978).
18. ReIusal by an insurance company to pay the diIIerence between an appraiser`s estimate oI
the cost oI repair and the amount the insurance company was willing to pay.
Authority: Chodos v. Insurance Co. oI N. Am., 126 Cal. App. 3d 81, 178 Cal. Rptr. 829
(2d Dist. 1981).
19. Providing an inadequate deIense in an underlying claim. Improper handling oI the
policyholder`s deIense in an underlying claim.
Authority: Travelers` Ins. v. Lesher, 187 Cal. App. 3d 169, 231 Cal. Rptr. 791 (1st Dist.
1986).
20. Making grossly insuIIicient settlement oIIers in an underlying action. Relying upon an
untested legal theory in an underlying action.
Authority: Gourley v. State Farm Mut. Auto. Ins. Co., 217 Cal. App. 3d 1111, (4th Dist.),
rev. granted and op. superseded by 268 Cal. Rptr. 541, 789 P.2d 374 (Cal.), reversed on
other grounds, 53 Cal. 3d 121 (1991) This case may not be cited pursuant to Cal. Rules oI
Court 976, 977 and 979.
21. Disregarding medical inIormation contained in an insurance company`s own Iiles so as to
mischaracterize disability and thereby avoid liability on a claim.
Authority: Fletcher v. Western Nat. Ins. Co., 10 Cal. App. 3d 376, 89 Cal. Rptr. 78 (4th
Dist. 1970).
22. Making an oIIer to settle an underlying claim too late. Failure to make eIIorts to respond to
settlement demands in a timely manner.
Authority: Ashbrook v. Kowalisk, 332 F. Supp. 78 (E.D. Pa. 1971), aII`d without op., 474
F.2d 1338 (3d Cir. 1973).
23. Attempting to coerce or obtain an involuntary contribution Irom the policyholder in order
to settle an underlying action within the policy limits.
Authority: Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 426 Mich. 127, 393
N.W.2d 161 (1986).

NYDOCS1-449390.1
11/16/11 11:58 AM
-100-



24. ReIusal to compromise claims until suit is threatened or commenced.
Authority: United Serv. Auto Ass`n v. Wesley, 526 P.2d 28 (Alaska 1974); Richardson v.
Employers Liab. Assurance Corp., 25 Cal. App. 3d 232, 102 Cal. Rptr. 547 (2d Dist. 1972)
25. Expert 'Shopping where previous experts have made it clear that coverage exists.
Authority: St. Paul Appellate BrieI in Richland, at 30, citing Benke v. Mukwonago-Vernon
Mut. Ins. Co., 110 Wis. 2d at 362-64.
26. Repeated low-ball settlement oIIers, even aIter basis Ior denial is shown to be weak or a
long-shot.
Authority: Republic Ins. Co. v. Hires, 107 Nev. 317, 810 P.2d 790 (1990) (Practice oI
setting 'ceiling on low and middle-income policyholder claims oI 65 oI appraised value
oI property justiIies punitive damages).
27. Deliberately trying to negotiate a settlement Ior less than the conceded value oI the claim
where the insurance company does not seriously dispute liability and the amount oI
damages.
Authority: BrieI oI DeIendant-Appellant-Cross-Respondent St. Paul Fire & Casualty
Insurance Company, at 28, dated Dec. 27, 1994, Richland Valley Products, Inc. v. St. Paul
Fire & Casualty Co., No. 94-1837 (Wis. Ct. App.), citing Davis v. Allstate Ins. Co., 101
Wis. 2d 1, 8-10, 303 N.W.2d 596 (1981).
28. Forcing policyholder to litigate.
Authority: United Serv. Auto Ass`n v. Wesley, 526 P.2d 28 (Alaska 1974); Richardson v.
Employers Liab. Assurance Corp., 25 Cal. App. 3d 232, 102 Cal. Rptr. 547 (2d Dist. 1972).
29. Abusing Subrogation Rights.
Example: Pursuing underlying claim, aIter settling coverage claim with other PRP, in order
to show that damage was 'expected or intended.
Authority: Crum & Forster, Inc. v. Monsanto, 887 S.W.2d 103 (Tex. App. 1994), vacated
pursuant to settlement, No. 06-92-00100-CV, 1995 Tex. App. LEXIS 3673 (Tex. App.
Mar. 9, 1995).
Example: ReIusal to consent to settlement oI claim where insurance company`s
subrogation rights are speculative or worthless.
Authority: Brunet vs. American Ins. Co., 660 F. Supp. 843 (D. Vt. 1987).
30. ReIusal to pay reasonable deIense costs.; reIusal to pay any deIense costs where amount oI
costs is in dispute.
Authority: Nationwide Mutual Ins. Co. v. LaIarge Corp., No. H-90-2390 (D. Md. Aug. 21,
1995), reported in MEALEY`S LITIG. REP.: INS., Nov. 11, 1995, at A-1.
31. Failure to pay Iull value oI claim; conditioning payment oI the undisputed portion oI the
claim on the settlement oI the disputed portion.
Authority: Vernon Fire & Cas. Co. v. Sharp, 264 Ind. 599, 349 N.E.2d 173 (1976);
Travelers Indem. Co. v. Weatherbee, 368 So. 2d 829 (Miss. 1979).
32. Retaliatory rescission or cancellation oI policy aIter claim is made; retaliatory increase in
premiums.

NYDOCS1-449390.1
11/16/11 11:58 AM
-101-



Authority: Rawlings v. Apodaca, 151 Ariz. 149, 726 P.2d 565 (1986); Herbert v.
Guastella, 409 So. 2d 375 (La. Ct. App. 1982); Spindle v. Travelers Ins. Co., 66 Cal. App.
3d 951, 135 Cal. Rptr. 404 (2d Dist. 1977).
33. Attempting to coerce or obtain an involuntary contribution Irom the policyholder in order
to settle and underlying action within policy limits; unreasonable demand that the
policyholder contribute to a settlement.
Authority: Commercial Union Ins. Co. v. Liberty Mut. Ins. Co., 426 Mich. 127, 393
N.W.2d 161 (1986); Coe v. State Farm Mut. Auto. Ins. Co., 66 Cal. App. 3d 981, 136 Cal.
Rptr. 331 (1st Dist. 1977).
34. Making grossly insuIIicient settlement oIIers in an underlying action; relying upon an
untested legal theory in the underlying action. Failure to explore settlement opportunities
in an underlying action.
Authority: Gourley v. State Farm Mut. Auto. Ins. Co., 217 Cal. App. 3d 1111, (4th Dist.),
rev. granted and op. superseded by 268 Cal. Rptr. 541, 789 P.2d 374 (Cal.), reversed on
other grounds, 53 Cal. 3d 121 (1991) This case may not be cited pursuant to Cal. Rules oI
Court 976, 977 and 979; Rova Farms Resort Inc. v. Investors Ins. Co. oI America, 65 N.J.
474, 323 A.2d 495 (1974); Clayton v. United Servs. Auto. Assoc., 54 Cal. App. 4th 1158,
63 Cal. Rptr. 2d 419 (1st Dist.), review denied, No. S062134, 1997 Cal. LEXIS 4826 (Cal.
July 30, 1997).
35. Failure to settle even though retained counsel believed underlying plaintiII`s demand was
reasonable.
Authority: Insurance Co. oI N. Am. v. Medical Protective Co., 768 F.2d 315 (10th Cir.
1985); Royal Transit v. Central Sur. & Ins. Corp., 168 F.2d 345 (7th Cir. 1948).
36. Failure to respond to policyholder`s request Ior clariIication oI rights.
Authority: Carolina Bank & Trust Co. v. St. Paul Fire & Marine Co., 279 S.C. 576, 310
S.E.2d 163 (Ct. App. 1983).
37. Exploiting vulnerability oI insured.
Authority: Drop Anchor Realty Trust v. HartIord Fire Ins. Co., 126 N.H. 674, 496 A.2d
339 (1985) (Insurance company may not use knowledge oI policyholder`s vulnerable
Iinancial position to Iorce policyholder into accepting less than a reasonable amount in
settlement oI the claim); Mohr v. Dix Mut. County Fire Ins. Co., 143 Ill. App. 3d 989, 493
N.E.2d 639 (1986) (Insurance company acted in bad Iaith in delaying settlement oI claim
with the hope that policyholder`s Iinancial condition would Iorce him to settle Ior a lesser
amount); Buzzard v. Farmers Ins. Co., Inc., 824 P.2d 1105 (Okla. 1991) (Repeated delay in
paying claim, which resulted in 'marital striIe, justiIied submission oI punitive damage
claim to jury).
38. Failure to advise the policyholder oI a right to arbitration.
Authority: Sarchett v. Blue Shield oI Ca., 43 Cal. 3d 1, 729 P.2d 267 (Cal. 1987).
II. Bad-Faith Denial
1. Bad-Iaith denial oI coverage without reasonably colorable basis; denial without
investigation.
Authority: Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 510 P.2d 1032 (1973);
Supplemental Memorandum oI Points and Authorities In Support oI PlaintiII`s Motion Ior

NYDOCS1-449390.1
11/16/11 11:58 AM
-102-



Summary Judgment at 9, Iiled Feb. 21, 1986, Aetna Cas. & Sur. Co. v. Great American Ins.
Co., No. CV 84-2995 (WPG), (C.D. Cal.); Perry v. USF&G Co., 49 Tenn. App. 662, 675-
76, 359 S.W.2d 1, 7 (1962) (Unreasonable delays, Iailure to investigate and inadequate
investigation all are evidence oI bad Iaith).
2. Bad Iaith denial even where cause oI loss in unknown.
Authority: Fireman`s Fund Ins. Cos. v. Alaskan Pride Partnership, 106 F.3d 1146 (9th Cir.
1997)(Iailure oI both the policyholder and the insurance company to deIinitely prove how a
loss occurred (a ship which sunk) did not preclude a Iinding oI insurance coverage and bad
Iaith).
3. Conscious disregard oI successor corporation`s rights to coverage under predecessor`s
policy.
Authority: Chemstar Inc. v. Liberty Mut. Ins. Co., 41 F.3d 429 (9th Cir. 1994).
4. Claims discrimination: denial oI coverage or deIense in circumstances where insurance
company provided coverage or deIense to other policyholders.
Authority: Liberty Mutual Insurance Company, 'A Statement oI Claims and Coverage
Principles, at 4, dated May, 1967 ('We will not reIuse to pay legitimate claims simply
because they are small and unproIitable Ior a claimant to prosecute; 'Our claims policy is
the same regardless oI whether or not the claimant has retained a lawyer.
5. Post-claim underwriting.
Example: Failing to secure inIormation in underwriting process, despite opportunity to do
so, which then is relied upon aIter development in claims investigation, to seek rescission
or to deny claim.
Authority: See, e.g., W.M. SHERNOFF, ET AL. INSURANCE BAD FAITH Litigation, 5.22|2|,
at 40-40.1 (1987).
6. Denial oI coverage despite knowledge oI contrary judicial decisions in the applicable
jurisdiction; misrepresentation oI controlling case law in order to deny claim.
Authority: Hanover Ins. Co. v. Jennings, 172 Ga. App. 559, 323 S.E.2d 863 (1984); Sur-
Reply Memorandum oI The Travelers Insurance Company in Further Opposition to
DeIendants` Motions Ior Summary Judgment, at 10-11, Iiled Oct. 18, 1988, Travelers Ins.
Co. v. BuIIalo Reinsurance Co., No. 86 Civ. 3369 (JMC), (S.D.N.Y.); Household MIg.,
Inc. v. Liberty Mut. Ins. Co., No. 85 C 8519, 1987 Dist. LEXIS 1008 (N.D. Ill. Feb. 11,
1987).
7. Intentional misrepresentation or misinterpretation oI records (e.g., denial oI policy
issuance) or policy terms; use oI improper standards to deny a claim.
Authority: Fletcher v. Western Nat`l LiIe Ins. Co., 10 Cal. App. 3d 376, 395-96, 89 Cal.
Rptr. 78, 89 (4th Dist. 1970).
8. Unwarranted oIIsets.
Authority: Silberg v. CaliIornia LiIe Ins. Co., 11 Cal. 3d 452, 521 P.2d 1103 (1974).
9. Disregarding inIormation in insurance company`s own Iiles so as to mischaracterize nature
oI claim.
Authority: Colonial Foods, supra; Fletcher v. Western Nat. Ins. Co., 106 Cal. App. 3d 376,
90 Cal. Rptr. 78 (4th Dist. 1970).

NYDOCS1-449390.1
11/16/11 11:58 AM
-103-



10. Adopting coverage position inconsistent with prior understanding oI scope oI coverage.
Authority: BrieI Ior DeIendant-Appellee, at 45, Iiled July 31, 1991, Unigard Security Ins.
Co. v. North River Ins. Co., No. 91-7534 (2d Cir.) ('In the circumstances presented,
Unigard`s position is 180 degrees contrary to what Mr. Hutt and Unigard understood the
Iacultative certiIicate to provide. Unigard`s reIusal to pay is thereIore an act oI bad faith,
and violates basic contract values under New York law:
|A| covenant oI good Iaith and Iair dealing 'precludes each party Irom engaging in
conduct that will deprive the other party oI the beneIits oI their agreement. Any eIIort by
|the deIendant| to beneIit by making a disingenuous determination that would create a
windIall Ior him to the detriment oI |the plaintiII| would not be an act oI good Iaith or
Iairness, and thus would violate the contract.`');
Fireman`s Fund Insurance Companies Claims Manual, dated Mar. 15, 1977, at 13-15
(Misrepresenting pertinent Iacts or insurance policy provisions relating to coverages at
issue is unIair trade practice); June 8, 1994 letter Irom Aetna Cas. & Sur. Co. counsel Brian
R. Ade, Esq. oI Harwood Lloyd, to the Hon. Robert E. Francis, in Aetna Cas. & Sur. Co. v.
Morton Intern`l, Inc., No. L-2568-93 ('The obligation oI good Iaith and Iair dealing is very
basic; it is an obligation to be Iair and honest. The RESTATEMENT is clear in stating that it
is unIair and dishonest Ior a party seeking enIorcement oI a contract to assert an
interpretation that is contrary to that party`s preenIorcement understanding. Whether the
asserted interpretation is supported by evolving case law, learned treatises, or other
authorities is irrelevant to the Iundamental issues oI Iairness and honesty. A party cannot
Iairly or honestly use the beneIit oI 20/20 hindsight to excuse the unconscionability oI
asserting an argument that is entirely inconsistent with the actual Iact oI its own
understanding oI a contract. The violation oI the covenant oI good Iaith and Iair dealing
comes not Irom claiming 'the beneIit oI legal rulings Irom the courts, but Irom the basic
unIairness and dishonesty inherent in a contracting party`s assertion oI a legal position
contrary to its Iactual understanding. It is just not right.) RESTATEMENT (SECOND) OF
CONTRACTS 2105, comment (e) (1981) (Asserting 'an interpretation contrary to one`s own
understanding constitutes bad Iaith).
11. Asserting clearly Irivolous policy deIenses and relying on testimony which the insurer
knows or show knew is clearly Ialse.
Authority: St. Paul Appellate Response BrieI at 28, Iiled in Richland, supra, citing Poling
v. Wisconsin Physicians Serv. Co., 120 Wis. 2d 603, 607-08, 357 N.W.2d 293 (1984).
III. Bad Faith Litigation
A. Forum Shopping.
Authority: PlaintiII`s Memorandum oI Law in Support oI Motion to Remand, Iiled Dec.
16, 1991, Travelers Ins. Co. v. Richard John RatcliIIe Keeling |Lloyd`s|, No. 91 Civ. 7753
(JFK), (S.D.N.Y.).
B. Egregious deIense tactics designed to make litigation prohibitively expensive.
Authority: T.D.S. Inc. v. Shelby Mut. Ins. Co., 760 F.2d 1520, 1527 (11th Cir.) modiIied
in part, 769 F.2d 1485 (1985) (Litigation conduct admissible to show bad Iaith); Norman v.
American Nat`l Fire Ins. Co., 198 Ill. App. 3d 268, 555 N.E.2d 1087 (1990) (Liability Ior
bad Iaith imposed based, inter alia, upon evidence oI delay caused by the discovery and
trial tactics oI insurance company); Downey Savings & Loan Ass`n v. Ohio Casualty Ins.
Co., 234 Cal. Rptr. 835, 849-51 (2d Dist. 1987) ('Invidious practices, including use oI

NYDOCS1-449390.1
11/16/11 11:58 AM
-104-


6. Reverse Bad Faith
Claims handling practices and litigation tactics oIten contradict with the insurance
companies proIessed belieIs in the duty oI good Iaith and in upholding their Iiduciary duties.
261

For instance, insurance companies have brought bad Iaith claims against their own policyholders.
These actions are commonly known as reverse bad Iaith claims.
262
Every court to have

depositions 'to cause harassment, embarrassment, inconvenience or expense, would have
justiIied punitive damages award).
C. Interposition and continued assertion oI meritless aIIirmative deIenses; pursuit oI appeal
with little or no chance oI success.
Note: In some states, pleadings with boilerplate deIenses and low-ball settlement oIIers are
admissible to show bad Iaith.
Authority: Home Ins. Co. v. Owens, 573 So. 2d 343 (Fla. Dist. Ct. App. 1990); White v.
Western Title Ins. Co., 40 Cal. 3d 870, 710 P.2d 309 (1985); Kyriss v. Aetna LiIe & Cas.
Co., 624 F. Supp. 1130, 1131-33 (D. Mont. 1986).
D. Raising legal deIenses at trial that have only minimal or no chance Ior success.
Authority: Gourley v. State Farm Mut. Auto Ins. Co., 217 Cal. App. 3d 1111, 265 Cal.
Rptr. 634, 638-9, (4th Dist.), rev. granted and op. superseded by 268 Cal. Rptr. 541, 789
P.2d 374 (Cal.), reversed on other grounds, 53 Cal. 3d 121 (1991) This case may not be
cited pursuant to Cal. Rules oI Court 976, 977 and 979.
E. Prosecution oI meritless appeal to delay paying claim.
Authority: Myrda v. Coronet Ins. Co., 221 Ill. App. 3d 482, 582 N.E.2d 274, 279-81
(1991).
F. Appealing arbitration award to compel settlement.
Authority: Rios v. Allstate Ins. Co., 68 Cal. App. 3d 811, 137 Cal. Rptr. 441 (4th Dist.
1977).
G. Failure to respond to policyholder request or claim while suit on previous claim is pending.
Authority: Minnesota Mut. LiIe Ins. Co. v. Elswood, No. A055590 (Cal. App. Mar. 9,
1993).
261
This is merely one oI many areas in which insurance companies have taken contradictory
positions. See Eugene R. Anderson & Joan L. Lewis, Abate, Dont Wait. New Lead Disclosure Rules
Point %o Insurance Coverage, TENN. BAR J., Mar./Apr. 1997 (discussing the contradictory positions oI
insurance companies in the context oI loss mitigation issues).
262
See, e.g., Biddle Sawyer v. Fireman`s Fund Ins. Co., No. MON-L-5219 (N.J. Super. Ct. Law Div.
July 24, 1992). See also Marjie D. Barrows, Reverse Bad Faith, BRIEF, Summer 1996, at 17 (discussing
speciIic 'reverse bad Iaith lawsuits).

NYDOCS1-449390.1
11/16/11 11:58 AM
-105-


considered the issue has rejected it.
263
To do otherwise would exploit the already weak
bargaining position oI policyholders seeking insurance coverage:
As the holder oI the purse strings, the insurer has a certain built-in
protection Irom such evils. On the other hand, the insured, who
oIten Iinds himselI in dire Iinancial straits aIter the loss, must have
the equal Iooting which is provided by the ability to sue the insurer
Ior bad Iaith. There are other avenues Ior the insurer to pursue in
the event that an insured submits a Iraudulent claim. An insurer
draIts the policy, can reIuse the insurers claim, and could assert a
cause oI action against the insured Ior Iraud.
264

Reverse bad Iaith is an aIIirmative claim by the insurance company against a
policyholder. But courts recognize that insurance companies can pursue alleged misconduct by
policyholders through other means. This is not usually the case Ior policyholders:
We decline to adopt a tort oI reverse bad Iaith. |The insurance
company| argues that insurers should have a remedy other than
abuse oI process because abuse oI process requires an element oI a
wrongIul or illegal primary purpose. It asserts insurers should not
be limited to such a narrow remedy . . . We believe sanctions
under Iowa Rule oI Civil Procedure 80(a) |the Iowa equivalent to
Fed.R.Civ.P. 11| provides and adequate remedy to insurance
companies when an insured Iiles a Irivolous bad Iaith suit.
265

7. Comparative Bad Faith
Unlike reverse bad Iaith, comparative bad Iaith is an aIIirmative deIense. Reverse
bad Iaith is generally raised in an insurance company`s complaint or counterclaim.
266


263
See Barrows at 19.
264
Tokles & Son, Inc. v. Midwestern Indem. Co., 605 N.E.2d 936 (Ohio 1992).
265
Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203 (Iowa 1995). See also Tokles & Son,
Inc. v. Midwestern Indem. Co., 605 N.E.2d 936, 945 (Ohio 1992)(holding that '|t|here are other avenues
Ior the insurer to pursue in the event that an insured submits a Iraudulent claim. An insurer . . . can reIuse
the insured`s claim, and could assert a cause oI action against the insured Ior Iraud.).
266
See, e.g., Tokles & Son, Inc. v. Midwestern Indem. Co., 55 Ohio St.3d 621, 605 N.E.2d 936
(1992)(insurance company alleged comparative bad Iaith in counterclaim against policyholder; court
rejected); Johnson v. Farm Bureau Mut. Ins. Co., 533 N.W.2d 203 (Iowa 1995)(same).

NYDOCS1-449390.1
11/16/11 11:58 AM
-106-


Comparative bad Iaith in the context oI insurance coverage litigation works as it
does in other civil litigation; by allowing tort recovery Ior harm caused by the tortious conduct oI
another, but reducing the damages a party may recover to the extent they are due to that party`s
own conduct.
Comparative bad Iaith attempts to distract the trier oI Iact Irom the issue at hand
the insurance company`s breach oI Iiduciary duty and the duty oI good Iaith and Iair dealing.
As the Supreme Court oI Oklahoma observed:
In this action to recover Ior the insurer`s bad Iaith reIusal to pay a
part oI the loss to be indemniIied under the policies provisions, the
deIense based on the insured`s claimed Iailure timely to
supplement its initial notice by providing critical inIormation does
not call upon the trier to compare the parties` Iault, one toward the
other, but rather to measure the extent oI the impact, iI any, the
insured`s alleged misperIormance (by withholding vital
inIormation) may have had on the main issue in the case the
good or bad Iaith oI the insurer`s decision not to deIend the action
against the insured.
267

Other courts agree.
268
Some courts have held that a policyholder`s alleged bad Iaith against the
insurance company could not oIIset the bad Iaith damage award against the insurance company.
Those courts have held that while the insurance company`s bad Iaith was in tort, the

267
First Bank oI Turley v. Fidelity & Deposit Ins. Co. oI Md., 928 P.2d 298, 309 (Okla.
1996)(emphasis added).
268
See, e.g., Waite Hill Services, Inc. v. World Class Metal Works, 935 S.W.2d 197 (Tex. App.
1996)(Iinding that Texas 'has not recognized a principle oI law known as comparative bad Iaith,` and we
decline to do so now.); United States Fire Ins. Co. v. Morrison Assurance Co., 600 So. 2d 1147, 1153
(Fla.Dist.Ct.App. 1992)(court Iound case not susceptible to comparative bad Iaith deIense, 'even iI
available); Alexander Underwriters Gen. Agency, Inc. v. Lovett, 182 Ga. App. 769, 777, 357 S.E.2d 258
(1987)(no error in trial court`s reIusal to instruct jury on comparative bad Iaith); Jessen v. National
Excess Co., 776 P.2d 1244, 1249 (N.M. 1989)(same).

NYDOCS1-449390.1
11/16/11 11:58 AM
-107-


policyholder`s conduct gave rise only to a breach oI contract, which could not oIIset tort
damages.
269

In Kransco v. American Empire Surplus Lines Insurance Co.,
270
a CaliIornia
appellate court decision aIIirmed a trial court`s decision that a policyholder`s comparative bad
Iaith and comparative negligence should not be considered and should not reduce the amount oI
compensatory and punitive damages awarded against an insurance company Ior the insurance
company`s bad Iaith.
Michael Hubert (Hubert) was seriously injured on a slide toy manuIactured by
Kransco. Kransco was deIended in the action by American Empire Surplus Lines Insurance
Company (AES) which had issued a liability insurance policy with a limit oI $900,000 in excess
oI Kransco`s selI-insured retention oI $100,000. Kransco also had excess liability insurance.
Hubert oIIered to settle his suit Ior $750,000 during the trial but AES rejected the oIIer. The jury
returned a verdict at over $12.3 million--$2.3 million in compensatory damages and $10 million
punitive damages.
Kransco brought a bad Iaith suit against AES Ior Iailure to settle the claim within
the policy limits. The jury in the insurance coverage case Iound that AES breached its duty oI
good Iaith and assessed compensatory damages at $14 million (the $12.5 million Hubert
judgment plus deIense and settlement costs incurred in an unrelated injury action which was paid
by Kransco and its excess insurer because otherwise available insurance coverage had been
exhausted by the Hubert claim mishandled by AES). However, the jury also Iound that Kransco

269
Stevens v. SaIeco Ins. Co. oI America, 852 P.2d 565, 258 Mont. 142 (1993); Kelly v. State Farm
Mut. Auto. Ins. Co., 764 F. Supp. 1337 (S.D. Iowa 1991).
270
54 Cal. App. 4th 1171, 63 Cal. Rptr. 2d 532 (1st Dist. 1997), review granted, 942 P.2d 414 (Cal.
1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-108-


had breached its duty oI good Iaith and Iair dealing and attributed Iault Ior the verdict at 90
percent to Kransco and 10 percent to AES.
Upon Kransco`s motion Ior judgment notwithstanding the verdict, the court Iound
comparative negligence was wholly inapplicable to the case and that the consideration oI
comparative bad Iaith should have been limited to whether Kransco contributed to AES`s Iailure
to settle by impairing AES`s assessment oI the likelihood oI an excess judgment.
The appellate court`s opinion contains a detailed examination oI 'comparative
bad Iaith under CaliIornia law. The Court noted that the state supreme court has not yet
determined whether comparative bad Iaith is a valid deIense in CaliIornia |a dissenting justice
argues at length that it has 'implicitly recognized such a deIense| and stated that 'no state
Supreme Court has embraced the doctrine, and the weight oI authority is against it.
271
The Court
explained that while an insurance company`s breach oI the covenant oI good Iaith is governed by
tort principles, the policyholder`s breach is not a tort, but is a breach oI contract.
272
The Court
stated:
The doctrine oI comparative bad Iaith is marked by inconsistencies
and complexities in application because it is Iounded on the Iaulty
premise that the obligations oI insurer and insured--and thus their
bad Iaith--are comparable. They are not. The parties are bound by
a reciprocal obligation oI good Iaith and Iair dealing, but the
particular duties diIIer given the diIIering perIormance due under
the contract oI insurance. A Iundamental disparity exists between
the insured, which perIorms its basic duty oI paying the policy
premium at the outset, and the insurer, which hopes never to
perIorm its basic duties oI deIense and indemniIication. Contrary
to the dissenting opinion`s suggestion, a 'sophisticated insured is
not on equal Iooting with its insurers. The relationship between
insured and insurer is inherently unequal, and the inequality rests
on contractual asymmetry, not degrees oI sophistication.

271
54 Cal. App. 4th at 1182, n.1.
272
54 Cal. App. 4th at 1183-1184.

NYDOCS1-449390.1
11/16/11 11:58 AM
-109-


54 Cal. App. 4th at 1184-85 (citation omitted). The Court also determined that the amount
recoverable Irom the insurance company may include punitive damages as consequential
damages.
The CaliIornia Supreme Court has decided to review the Kransco decision.
273

8. The Attorney-Client Privilege and the Crime-Fraud Exception
Insurance companies will oIten seek to avoid liability Ior bad Iaith misconduct by
searching Ior shelter under the attorney-client privilege or work product doctrines. This
insurance industry code oI silence is rarely broken. There are exceptions. For example, State
Farm`s destruction oI evidence (spoliation) was recently and dramatically exposed. Read the
Iollowing memo Irom a State Farm executive to her claims personnel:
With the increase oI bad Iaith suits being Iiled against State Farm,
it is important that you get rid oI all your old stuII I know you have
lurking around in your drawers and Iiling cabinets. |P| Please get
rid oI any old memo`s |sic|, claim school notes, old seminar or
claim conIerence notes, and any old procedure guides you may
have. They are trying to avoid having to come up with old records
when the request Ior production oI documents` comes in and they
request all training manuals, memo`s |sic|, procedural guides, etc.,
that are in possession oI your claim reps and management.`. . .
That way iI they subpoena our claim manual. . . Ior 1987, Ior
example, we will say we don`t have it. This should be easier than
trying to produce it or having to deIend it. So look through all oI
your old stuII and dump it. You won`t ever miss it.
274

This State Farm memorandum was only part oI the evidence produced by the claimants in the
case. The claimants alleged Iraudulent misrepresentation, destruction oI documents and Iorgery

273
942 P.2d 414 (Cal. 1997).
274
See State Farm Fire & Cas. Co. v. Superior Court oI Los Angeles, 54 Cal. App. 4th 625, 635 at
n.3, 62 Cal. Rptr. 2d 834 (1997). The executive who wrote this memorandum is not the Iormer employee
whose testimony is at issue in the case.

NYDOCS1-449390.1
11/16/11 11:58 AM
-110-


by State Farm
275
and produced evidence that: (1) State Farm possessed claims manuals and
documents which the court had ordered to be produced and which State Farm had denied
possessing, and; (2) that the State Farm employee allegedly responsible Ior denying the
claimant`s claim was repeatedly unable to recognize her own signature or her own voice on
audio tape.
276

The claimants sought to introduce the testimony oI a Iormer State Farm
employee, Amy Zirod Zuniga, to substantiate their allegations against State Farm. While she
was an employee oI State Farm, Ms. Zuniga had been responsible Ior evaluating bad Iaith claims
made against State Farm and had worked on the case.
277
Ms. Zuniga provided the claimants with
aIIidavits which stated that State Farm trained their personnel to be evasive witnesses and that
State Farm did in Iact possess claims manuals and other documents which it claimed not to
have.
278
In addition, Ms. Zuniga disclosed her conversations with in-house counsel and other
State Farm employees regarding the claimant`s case. Ms. Zuniga revealed in-house counsel`s
litigation and discovery strategies.
279
State Farm has recently taken steps to minimize Ms.
Zuniga`s statements.
280


275
The evidence oI State Farm`s bad Iaith is set Iorth in the Iact section oI the decision; the court at
this time was only considering whether the testimony oI State Farm`s Iormer employee should be barred
under the attorney-client privilege, work-product doctrine or trade secret laws. 54 Cal. App. 4th at 637.
276
Id. at 633.
277
Id. at 635-36.
278
Id.
279
Id.
280
State Farm`s lawyers deposed Ms. Zuniga and claimed that her deposition testimony 'although
not inconsistent with her declarations -- unequivocally shows there was absolutely no Iraud by State Farm
or its employees. Paul Elias, Fraud Claim Still Festering, THE RECORDER, Feb. 25, 1998, at 1, quoting
counsel Ior State Farm. On February 16, 1998, State Farm`s lawyers requested the CaliIornia Supreme
Court to depublish the appellate decision containing Ms. Zuniga`s statements. Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-111-


The CaliIornia appellate court held that State Farm could not prevent Ms. Zuniga
Irom testiIying about State Farm`s internal practices and procedures or the existence oI claims
manuals and other documents used by State Farm. The court Iound that although Ms. Zuniga
had worked closely with State Farm`s attorneys, the attorney-client privilege 'does not protect
disclosure oI underlying Iacts which may be reIerenced within a qualiIying communication.
281

The court then held that the crime Iraud exception barred State Farm Irom using
the attorney-client privilege or the work-product doctrine to prevent turning over to the claimants
documents and inIormation usually protected by those doctrines. The court held that application
oI the crime Iraud exception turns on two questions:
|W|hether the services oI the |law Iirm| were retained and utilized
to enable State Farm to commit a crime or a Iraud; and whether
there exists a reasonable relationship between the crime or Iraud
and the attorney-client communication`. . . In that connection, it is
the intent oI the client upon which attention must be Iocused and
not that oI the lawyers.
282

The claimants, in opposing State Farm`s motion Ior summary judgment on the
claimants motion to invoke the crime/Iraud exception to the attorney-client privilege, presented
the declarations oI Ms. Zuniga. The court quoted, in Iull, paragraphs 3-5 oI Ms. Zuniga`s
declaration:
I am aware that there were many other State Farm claims arising
out oI the Northridge earthquake like the Taylors` involving
unauthorized signatures by State Farm agents or agency employees
on applications omitting earthquake coverage. At the time oI the
Taylor claim, the company was well aware that this was a problem.
As a matter oI practice, the company would pay these claims, iI it
believed that the Iorgery issue would be brought to light and

281
Id. at 639.
282
State Farm Fire & Cas. Co. v. Superior Court, 54 Cal. App. 4th 625, 645, 62 Cal. Rptr. 2d 834
(1997)(emphasis added)(internal citations omitted)(citing BP Alaska Exploration, Inc. v. Superior Court,
199 Cal. App. 3d 1240, 1261-62 (1988); People v. Superior Court, 37 Cal. App. 4th 1757, 1769 (1995);
Glade v. Superior Court, 76 Cal. App. 3d 738, 746 (1978).

NYDOCS1-449390.1
11/16/11 11:58 AM
-112-


proven by the insured. Because oI the Iorgery issue in the Taylor
case, iI the case was not dismissed on summary judgment, it was
my impression that the claim was going to be reconsidered.
However, we were waiting to see iI we could save money on the
Taylor claim by having summary judgment granted, and as part oI
that plan I was instructed not to provide certain relevant
inIormation at my depositions. |P| 4. SpeciIically, my supervisor
in the SAC unit, Vanessa Gudelj, and her supervisor, John
Poptanich, put pressure on me to withhold the existence oI
documents memorializing certain State Farm claims handling
guidelines Irom plaintiIIs` counsel Bernie Bernheim at my
deposition, which they believed, iI revealed, would deIeat
summary judgment and ultimately lead to payment oI the Taylors`
claim. They pressured me into not revealing the existence oI
claims handling documents which established guidelines under
which claims like the Taylors were to be handled. These included
a three ring binder called CATHR Management InIormation and
Memos Manual` used and maintained by Claim Superintendent
Tinga Nicholson who was the Claim Superintendent that denied
the Taylors` claim. It was responsive to the Taylors` discovery
request and we simply chose not to produce it. Similarly, Ms.
Nicholson had prepared a breakdown oI earthquake claims in her
unit. . . by category oI claim, and one oI the categories was
unauthorized signatures.` This document showed the percentage
oI total earthquake claims which involved unauthorized signatures.
This document, too, was never produced. |P| 5. The Taylors` claim
was denied by personnel working in the so-called Special
Handling Unit.` In addition to the claims handling documents
mentioned above, we never produced to Mr. Bernheim a document
memorializing a SHU meeting at which the subject oI
unauthorized signatures on applications omitting earthquake
insurance was discussed.
283

The court held that the inIormation was not protected Irom discovery. Even though the contents
oI paragraphs 3-5 oI Ms. Zuniga`s declaration were protected by the attorney-client privilege,
284

the court went on to hold that 'the Ioregoing evidence is more than suIIicient Ior application oI

283
54 Cal. App. 4th at 647-48.
284
Id. at 640-41.

NYDOCS1-449390.1
11/16/11 11:58 AM
-113-


the crime/Iraud exception to the privileged materials contained in the Zuniga declarations.
285

Further, the court held that the work product doctrine did not protect the inIormation.
286

Insurance companies also invoke the crime Iraud exception. For example, in a
suit Iiled against its insurance company, Columbia Casualty argued:
|The insurance company`s| duty oI utmost good Iaith alone
abrogates any privilege applicable to the undisclosed |insurance
company| documents. In the Iiduciary context, it is well settled
that the existence oI the Iiduciary relationship creates an exception
to the attorney client privilege . . . |C|ourts have Iound that the
beneIiciary oI the duties oI utmost good Iaith can prevent the
Iiduciary Irom invoking the attorney client privilege to preclude
discovery iI there is 'good cause Ior the privilege`s non-
application.
287

Furthermore, according to Columbia Casualty:
The protection oIIered by the |attorney- client| privilege, however,
creates the potential Ior abuse by shrouding these communications
in secrecy. The abuse is the use oI a proIessional`s knowledge and
advice to help commit an intentional wrong. Thus,
communications between lawyer and client that are made in
Iurtherance oI criminal or tortious or Iraudulent behavior are

285
Id. at 649. BeIore deciding to apply the crime/Iraud exception, the court also considered portions
oI Ms. Zuniga`s declaration containing unprivileged material. This included a disclosure that one oI State
Farm`s 'senior executives had advised that 'State Farm witnesses should not admit that Iorgeries
happen, unless and until they are compelled to do by Court order. The same executive Iurther
expounded that 'should the Company be compelled to admit that it has knowledge oI the unauthorized
signatures` . . . we should try to make this practice look like a service.`' Another part oI Ms. Zuniga`s
declaration states that State Farm prepares witnesses 'on how to give up as little inIormation as possible
at deposition . . . |b|ut |that| Ior trial, the witnesses were trained to appear helpIul and polite, and to drop
the evasive tactics used to keep inIormation Irom being disclosed at deposition. Id. at 649.
286
The court held that '|i|n CaliIornia, the crime/Iraud exception only applies to attorney-client
privileged materials; it does not apply to the work product doctrine. Id. at 650. However, since Ms.
Zuniga`s declarations implicated only the 'qualiIied as opposed to the 'absolute portion oI CaliIornia`s
work product statute, the court held that 'the same analysis we utilized Ior the crime Iraud exception leads
to the inevitable conclusion that reIusal to allow disclosure oI the inIormation contained in the Zuniga
declarations would not only unIairly prejudice real parties, it would also result in an injustice. (citations
omitted) Id. at 648-50, discussing CaliIornia Code oI Civil Procedure 2018.
287
Columbia Casualty`s Memorandum oI Law in Opposition to North River`s Motion For A
Protective Order, at 20, dated Nov. 1, 1994, North River Ins. Co. v. Columbia Cas. Co., (S.D.N.Y.
1994)(90 Civ. 2518 (MJL)(JCF))(citations omitted).

NYDOCS1-449390.1
11/16/11 11:58 AM
-114-


excepted Irom the privilege`s protection . . . . The ongoing tort and
Iraud exception to the attorney client privilege mandates disclosure
oI |the insurance company`s| documents.
288

Similarly, HartIord argued:
A client who consults an attorney Ior advice that will serve him in
the commission oI a Iraud will have no help Irom the law. He
must let the truth be told. This Iorms the basis Ior what has
become known as the 'crime-Iraud exception to the attorney-
client privilege . . . The 'crime-Iraud exception also overcomes
the work product immunity. A client cannot assert the work
product doctrine any more than he can assert the attorney-client
privilege when there has been a showing oI ongoing client Iraud.
289

. . .
It is thus not surprising that a breach oI a Iiduciary duty has been
deemed suIIicient to satisIy the crime Iraud exception.
290

Both insurance companies and policyholders understand the legitimacy oI
invoking the crime Iraud exception to expose misconduct by insurance companies.
D. Concealing Insurance Coverage is Bad Faith
1. Insurance Companies Must Disclose Insurance Coverage
Insurance companies have an aIIirmative duty to disclose inIormation regarding
coverage to their policyholders. The duty to disclose is widely recognized as a component oI an
insurance company`s duty oI good Iaith and Iair dealing. This duty is oIten systematically
violated by insurance companies which seek to conceal, rather than disclose, coverage Ior
insurance claims.
The duty to disclose inIormation is premised on an insurance company`s
responsibility to look Ior insurance coverage rather than Ior ways to deny it:

288
Id. at 24, 26 (citations omitted).
289
Memorandum oI Law Re Motion to Compel, at 62, Iiled Nov. 29, 1994, HartIord Steam Boiler
Inspection & Ins. Co. v. Industrial Risk Insurers, (Conn. Super. Ct. 1994)(No. CV-94-705105)(internal
quotations and citations omitted).

NYDOCS1-449390.1
11/16/11 11:58 AM
-115-


A trier oI Iact may Iind that an insurer acted unreasonably iI the
insurer ignores evidence available to it which supports the claim.
The insurer may not just Iocus on those Iacts which justiIy denial
oI a claim.
291

A leading insurance proIessor has argued that the duty to disclose insurance
coverage is only one oI several elements comprising an insurance company`s obligations to its
policyholders:
Following notiIication oI an occurrence, I believe an insurer is
obligated to disclose all applicable beneIits, or to clearly inIorm
insureds about the existence oI rights and duties regarding all
coverages, or to explain why the insurance beneIits will not be paid
in order to (a) IulIill the insurer`s contractual commitment, (b)
comply with the obligation--implied as a matter oI law in all
contracts--to deal Iairly and in good Iaith, (c) protect the insured`s
reasonable expectations, and (d) avoid omissions that could
constitute Iraudulent misrepresentation.
292

This last theoretical Ioundation--the doctrine oI Iraudulent misrepresentation--
illustrates the way in which the courts have viewed the duty to disclose as an aIIirmative duty. II
an insurance company Iails to disclose inIormation which might have assisted the policyholder in
securing coverage, the insurance company`s omission may constitute an actionable
misrepresentation.
293

An insurance company may breach its duty to disclose where it learns oI a claim,
determines that the policyholder may be entitled to coverage, but nevertheless Iails to inIorm the
policyholder oI this potential Ior coverage. Such behavior may be characterized as a breach oI

290
Id. at 62.
291
Mariscal v. Old LiIe Republic Ins. Co., 42 Cal. App. 4th 1617, 1623 (1996).
292
Alan I. Widiss, Obligating Insurers to InIorm Insureds About the Existence oI Rights and Duties
Regarding Coverage Ior Losses, 1 CONN. INS. L.J. 67, 70 (1995).
293
Id. at 85, citing Weber v. State Farm Mut. Auto. Ins., 873 F. Supp. 201, 209 (S.D. Iowa
1994)(court grants policyholders summary judgment motion 'to the extent that in connection with the
Iraudulent nondisclosure claim the deIendant was under a duty to exercise reasonable care to disclose the
uninsured motorist coverage provisions oI the policy).

NYDOCS1-449390.1
11/16/11 11:58 AM
-116-


contract because '|i|nvestigation, Iair evaluation, and prompt rejection or settlement constitute
`perIormances` that are `the essence oI what the insured has bargained and paid Ior . . . .`'
294

In the landmark decision oI Dercoli v. Pennsylvania National Mutual Insurance
Company, the Supreme Court oI Pennsylvania held that 'the duty oI an insurance company to
deal with the insured Iairly and in good Iaith includes the duty oI Iull and complete disclosure as
to all oI the beneIits and every coverage that is provided by the applicable policy or policies
along with all requirements, including any time limitations Ior making a claim.
295

In one case cited by the Dercoli court, Gatlin v. %ennessee Farmers Mutual
Insurance Company,
296
Tennessee Farmers Mutual Insurance Company ('Farmers Mutual)
issued policies to each automobile involved in a two-car collision. M. Annette Gatlin, one oI the
drivers, was injured in the accident. She Iiled suit against the other driver, James K. Williams.
When she discovered that her settlement demand was in excess oI the limits oI the policy held by
Williams, she turned to Farmers Mutual Ior coverage her own uninsured motorist insurance.
Farmers Mutual reIused to pay Ior the reason, among others, that Gatlin`s notice oI claim was
untimely. Reversing an appellate state court decision, the Tennessee Supreme Court held that
the late-notice deIense was without merit. The court noted that Farmers Mutual 'was an active
participant in all phases oI this case, and that the insurance company 'had liability insurance

294
Widiss at 72, quoting Beck v. Farmers Ins. Exch., 701 P.2d 795, 801 (Utah 1985).
295
Dercoli v. Pennsylvania Nat`l Mut. Ins. Co., 520 Pa. 471, 477, 554 A.2d 906 (1989), citing Gatlin
v. Tennessee Farmers Mut. Ins. Co., 741 S.W.2d 324 (Tenn. 1987)('Gatlin); Sarchett v. Blue Shield oI
Ca., 43 Cal. 3d 1, 233 Cal. Rptr. 76, 729 P.2d 267 (1987). See also Darlow v. Farmers Ins. Exch., 822
P.2d 820, 827 (Wyo. 1991); Rawlings v. Apodaca, 726 P.2d 565, 571 (Ariz. 1986); MFA Mut. Ins. Co. v.
Flint, 574 S.W.2d 718, 721 (Tenn. 1980).
296
Gatlin v. Tennessee Farmers Mut. Ins. Co., 741 S.W.2d 324 (Tenn. 1987).

NYDOCS1-449390.1
11/16/11 11:58 AM
-117-


coverage on both automobiles.
297
The duty oI good Iaith and Iair dealing required Farmers
Mutual to disclose inIormation regarding what Gatlin had to do to secure coverage:
|A|n insurer has the duty to deal with its insured 'Iairly and in
good Iaith. This includes inIorming an insured as to coverage and
policy requirements when (1) it is apparent to the insurer that there
is a strong likelihood that its insured only can be compensated
Iully under her own policy and (2) that the insured has no basis to
believe that she must rely upon her policy Ior coverage.
298

In Bowler v. Fidelity & Casualty Co.,
299
the New Jersey Supreme Court held that
an insurance company was estopped Irom asserting a statute oI limitations deIense because the
company had breached its duty to inIorm the policyholder oI the steps it needed to take to secure
coverage. The court characterized an insurance company`s duty to disclose as a 'contractual
undertaking:
In situations where a layman might give the controlling language
oI the policy a more restrictive interpretation than the insurer
knows the courts have given it and as a result the uninIormed
insured might be inclined to be quiescent about the disregard or
nonpayment oI his claim and not to press it in a timely Iashion, the
company cannot ignore its obligation. It cannot hide behind the
insurer`s ignorance oI the law; it cannot conceal its liability. In
these circumstances it has the duty to speak and disclose, and to act
in accordance with its contractual undertaking. The slightest
evidence oI deception or overreaching will bar reliance upon time
limitations Ior prosecution oI the claim.
300

In Bowler, the policyholder endured serious Iractures to his leg, and eventually
developed osteomyelitis, a serious bone inIection. As a result oI this condition, the policyholder
was disabled. The insurance company was obligated to pay the policyholder weekly indemnity
payments Ior up to 199 weeks oI disability. Assuming that the policyholder was deemed

297
Id. at 326.
298
Id.
299
Bowler v. Fidelity & Cas. Co., 250 A.2d 580, 587 (N.J. 1969).
300
Id. at 588 (emphasis added).

NYDOCS1-449390.1
11/16/11 11:58 AM
-118-


permanently disabled by the 200th week, the insurance company was then obligated to make a
Iinal weekly payment and a lump sum payment equal to 600 weeks. Shortly beIore the 200th
week, the policyholder was examined by his own doctor and a doctor assigned by the insurance
company. The doctor reports both Iound that the policyholder was disabled within the meaning
oI the policy. The insurance company sent the policyholder a number oI Iorms to complete. The
policyholder returned the Iorms, but never heard again Irom the insurance company. More than
six years later, the policyholder Iiled suit against the insurance company. In litigation, the
insurance company took the position that coverage was barred on the basis oI the statute oI
limitations. The New Jersey Supreme Court Iound the insurance company`s behavior to be
'shocking and unconscionable.
301
The court noted:
Instead oI IulIilling its contractual obligations, the company lapsed
into silence.... Bowler, a layman obviously not versed in insurance
law took no legal action until in some manner, not explained in the
present record, he got into the hands oI an attorney, and this suit
was brought--more than six years aIter the end oI the 200 week
total disability period. When this was done, the insurer pleaded the
six-year statute oI limitations, N.J.S. 2A:14-1 as a bar. We regard
such treatment oI its policyholder as shocking and
unconscionable.
302

The court added that when there is doubt regarding coverage, the insurance
company is obligated to inIorm its policyholder oI the precise steps it must take to secure
coverage:
|I|I the insurer has Iactual inIormation in its possession
substantially supporting the policyholder`s rights to beneIits, but it
has a reasonable doubt as to whether the evidence is suIIicient to
require payment, the obligation to exercise good Iaith, upon which
it knows or should know the insured is relying, cannot be satisIied
by silence or inaction. It must notiIy the insured oI its decision not
to pay his claim. But mere naked rejection would not be suIIicient.

301
Id.
302
Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-119-


The giving oI such notice should be accompanied by a Iull and Iair
statement oI the reasons Ior its decision not to pay the beneIits, and
by a clear statement that iI the insured wished to enIorce his claim
it will be necessary Irom him to obtain the services oI an attorney
and institute a court action within the appropriate time. The
'appropriate time means the time remaining under the policy or
the applicable statute oI limitations within which the suit must be
brought. Failure on the insurer`s part to Iollow such a course will
bar reliance on the statute oI limitations or a time restriction on
court action expressed in the policy.
303

An insurance company must disclose insurance coverage even when the
policyholder believes there is none.
Q. It is also correct that an insurance company should Iully
disclose all important Iacts related to an insurance policy |to| the
policyholder?
A. They should.
Q. An insurance company should always tell the truth to the
policyholder?
A. They should.
So testiIied the insurance company district manager in Foremost Insurance Company v.
Parnham.
304
The Alabama Supreme Court in that case held:
|A| duty does arise on the part oI an insurer to disclose the
existence oI a speciIic coverage under the policy when, as shown
by the evidence in this case, the insurer has speciIic knowledge
that a signiIicant number oI customers may not want or have a
need Ior the coverage and that the coverage could be dropped with
a corresponding savings in premium to the customer.
305

The breadth oI the duty to disclose coverage is illustrated by Travelers` brieIs in
the case oI %ravelers Insurance Co. v. Buffalo Reinsurance Co. Travelers sued its reinsurers to
recover $9,000,000 oI losses paid in hundreds oI property damage claims against its

303
Id. (emphasis added).
304
Foremost Ins. Co. v. Parnham, 693 So. 2d 409 (Ala. 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-120-


policyholder, Koppers Company, Inc. The losses arose Irom premature Iailures oI Koppers`
'KMM rooIing system. In March 1984, representatives Ior Koppers met with a team oI
proIessionals Irom Travelers` claims and engineering department to discuss the claims. During
that meeting, Koppers assumed that the losses were not covered Ior a variety oI reasons
including an erroneous view oI exclusions and deductibles in the policy.
306
In the Iace oI the
reinsurers` argument that Travelers should not have provided coverage where the policyholder
itselI did not believe there was coverage, Travelers responded that 'it was bound by ethical
claims-handling practices to apprise its insured . . . that indemnity coverage might exist.
307

Travelers reiterated the point:
Reinsurers argue that they were prejudiced by Travelers` decision
to provide coverage at all, notwithstanding that Koppers had never
claimed that coverage existed. |citation omitted|. However, once
Travelers receives notice oI claims that are potentially covered
under its policies even where the insured may not recognize that
coverage is available Travelers had an ethical obligation to
advise its insured.
308

Insurance companies have an aIIirmative duty to come Iorward and disclose
whether insurance coverage exists. That is, insurance companies must tell their policyholders --
and the courts-- oI their own positions Iavoring coverage. Support Ior this proposition is Iound
in the RESTATEMENT (2ND) OF CONTRACTS. Comment (e) oI Section 205 oI the RESTATEMENT
(2ND) OF CONTRACTS (1981) states:

305
Id. at 424. Foremost involved the sale oI insurance coverage Ior adjacent structures although the
policyholders did not have adjacent structures.
306
See Memorandum oI The Travelers Insurance Company In Opposition to DeIendants` Motions
Ior Summary Judgment On Late Notice Grounds, at 13-14, Sept. 26, 1988, Travelers Ins. Co. v. BuIIalo
Reinsurance Co., 86 C.V. 3369 (JMC).
307
Id. at 14-15.
308
Id. at 44-45.

NYDOCS1-449390.1
11/16/11 11:58 AM
-121-


(e) Good Faith in EnIorcement. The obligation oI good Iaith and
Iair dealing extends to the assertion, settlement in litigation oI
contract claims and oIIenses. See, e.g., 73, 89. The obligation
is violated by dishonest conduct such as conjuring up a pretended
dispute, asserting an interpretation contrary to one`s own
understanding, or IalsiIication oI Iacts.
309

Aetna Casualty and Surety Company has argued that this provision precludes a
party Irom arguing a position contrary to its pre-litigation understanding.
The obligation oI good Iaith and Iair dealing is very basic; it is an
obligation to be Iair and honest. The RESTATEMENT is clear in
stating that it is unIair and dishonest Ior a party seeking
enIorcement oI a contract to assert an interpretation that is contrary
to that party`s pre-enIorcement understanding. Whether the
asserted interpretation is supported by evolving case law, learned
treatises, or other authorities is irrelevant to the Iundamental issues
oI Iairness and honesty. A party cannot Iairly or honestly use the
beneIit oI 20/20 hindsight to excuse the unconscionability oI
asserting an argument that is entirely inconsistent with the actual
Iact oI its own understanding oI a contract. The violation oI the
covenant oI good Iaith and Iair dealing comes not Irom claiming
'the beneIit oI legal rulings Irom the courts, but Irom the basic
unIairness and dishonesty inherent in a contracting party`s
assertion oI a legal position contrary to its Iactual understanding.
It is just not right.
310

Under these principles, insurance companies should advise policyholders oI their
positions Iavoring coverage. Because the duty to disclose coverage is based upon the covenant
oI good Iaith and Iair dealing, insurance companies that Iail to disclose their prior positions
Iavoring coverage subject themselves to bad Iaith liability.
Insurance companies generally argue that the duty to disclose is limited to cases
in which (a) the insurance company was on notice that the policyholder was unaware oI potential

309
Emphasis added.
310
Letter dated June 8, 1994 Irom Brian R. Ade, counsel Ior Aetna, to Honorable Robert E. Francis,
Aetna Cas. & Sur. v. Morton Int`l, Inc.

NYDOCS1-449390.1
11/16/11 11:58 AM
-122-


coverage, and (2) where the policyholder solely relied upon the advice oI the insurance company,
and was not represented by an attorney. Neither oI these deIenses is supported by the caselaw.
311

2. Fraudulent Misrepresentation
An insurance company`s Iailure to disclose insurance coverage may constitute a
Iraudulent misrepresentation. A Iraudulent misrepresentation may be a Ialsehood or a 'lie oI
omission.
312
'A representation need not be an aIIirmative misstatement; it can arise as easily
Irom a Iailure to disclose Iacts.
313

II an insurance company Iails to disclose inIormation which might have assisted
the policyholder in securing coverage, the insurance company`s omission may constitute an
actionable misrepresentation.
314
In Weber v. State Farm Mutual Automobile Insurance
Company, the insurance company made indemnity payments to the claimant based on the
claimant`s automobile insurance policy but Iailed to disclose that there was also coverage
available under the uninsured motorist coverage. The court granted the claimant`s summary
judgment motion 'to the extent that in connection with the Iraudulent nondisclosure claim the

311
See Widiss at 87-90. Widiss criticizes an article suggesting that several CaliIornia precedents
support the Iirst deIense. Id. at 87-88, criticizing William T. Barker & Donna J. Vobornik, %he Scope of
the Emerging Duty of First-Party Insurers to Inform %heir Insureds of Rights Under the Policy, 25 TORT
& INS. L.J. 749, 758 (1989)(discussing Sarchett v. Blue Shield oI Ca., 43 Cal. 3d 1, 233 Cal. Rptr. 76, 729
P.2d 267 (1987), and Davis v. Blue Cross, 600 P.2d 1060 (Cal. 1979).
312
See Restatement (Second) oI Torts 551 (1977):
One who Iails to disclose to another a Iact that he knows may
justiIiably induce the other to ... reIrain Irom acting in a business
transaction is subject to the same liability to the other as though he
had represented the nonexistence oI the matter that he has Iailed to
disclose, iI but only iI, he is under a duty to the other to exercise
reasonable care to disclose the matter in question.
313
See Widiss at 83-85, citing Sinnard v. Roach, 414 N.W.2d 100, 105 (Iowa 1977); Cornell v.
Wunschel, 408 N.W.2d 369, 374 (Iowa 1987); Weber v. State Farm Mut. Auto. Ins. Co., 873 F. Supp.
201, 209 (S.D. Iowa 1994).

NYDOCS1-449390.1
11/16/11 11:58 AM
-123-


deIendant was under a duty to exercise reasonable care to disclose the uninsured motorist
coverage provisions oI the policy.
315


314
Widiss at 85, citing Weber v. State Farm Mut. Auto. Ins. Co., 873 F. Supp. 201, 209 (S.D. Iowa
1994).
315
Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-124-


3. The Reasonable Expectations Doctrine
a. Origins and Theory
The reasonable expectations doctrine oIIers an attractive alternative theory upon
which to base the duty to disclose.
Quote into Firemans fund web site and _____ Ins. L Rew Article]
In a 1970 law review article, ProIessor (now Judge) Robert Keeton recognized a
broad principle underlying the 'congeries oI doctrines which make up the rules oI insurance
policy interpretation.
316
He identiIied the principle as Iollows:
'The objectively reasonable expectations oI applicants and
intended beneIiciaries regarding the terms oI insurance contracts
will be honored even though painstaking study oI the policy
provisions would have negated those expectations.
317

The reasonable expectations doctrine, an outgrowth oI modern contract theory, is
based in part on the understanding that most policyholders do not draIt, negotiate, or assent to the
speciIic provisions in standard-Iorm insurance policies.
318
As many commentators have noted,
most policyholders do not see their policies until aIter they have purchased coverage; and aIter
they receive the policies, most policyholders do not read them.
319
In most cases, iI the

316
Keeton, Insurance Law Rights at Jariance with Policy Provisions, 83 HARV. L. REV. 961, 967
(part 1) & 1281 (part 2) (1970).
317
See also KEETON, INSURANCE LAW: BASIC TEXT 351 (1971); Keeton, Reasonable Expectations
in the Second Decade, 12 FORUM 275 (1976).
318
See, e.g., Atwater Creamery Co. v. Western Nat`l Mut. Ins. Co., 366 N.W.2d 271, 277 (Minn.
1985)('|t|he doctrine oI protecting the reasonable expectations oI the insured is closely related to the
doctrine oI contracts oI adhesion).
319
See KEETON, INSURANCE LAW: BASIC TEXT 352 (1971). See also C & J Fertilizer, Inc. v. Allied
Mut. Ins. Co., 227 N.W.2d 169, 174 (Iowa 1975), citing 7 S. WILLISTON, A TREATISE ON THE LAW OF
CONTRACTS 906B (3d ed. 1959)('where the document . . . delivered to him is a contract oI insurance
the majority rule is that the insured is not bound to know its contents); Atwater Creamery Co. v. Western
Nat`l Mut. Ins. Co., 366 N.W.2d 271, 278 (Minn. 1985)('in certain instances . . . the insured should be
held only to reasonable knowledge oI the literal terms and conditions); 3 A. CORBIN, CORBIN ON
CONTRACTS 559 (1964)('|o|ne who applies Ior an insurance policy ... may not even read the policy, the

NYDOCS1-449390.1
11/16/11 11:58 AM
-125-


policyholder has assented to anything, it is only to the general scope or type oI insurance
coverage provided by the policy, the premium, or the amount oI the policy limits. For these
reasons, courts have concluded that the express language oI the policy need not provide in literal
terms what the policyholder has come to reasonably expect. One such expectation is that the
insurance company 'will respond by clearly speciIying what the insured must do to initiate a
claim and, when those actions are taken, will then either pay those beneIits or explain why
insurance beneIits will not be paid.
320

The doctrine oI reasonable expectations, as a speciIic principle oI law, is a
relatively new addition to the body oI insurance law.
321
It is not, however, a surprising departure
Irom established legal principles. The reasonable expectations doctrine is an outgrowth oI
modern contract theory and is rooted in several well established principles oI common law. As
one commentator has noted, ProIessor Keeton discovered` the doctrine 'in the more
traditional doctrines with which lawyers are more Iamiliar and comIortable.
322
In ProIessor

number oI its terms and the Iineness oI its print being such as to discourage him); Note, Unconscionable
Contracts. %he Uniform Commercial Code, 45 IOWA L. REV. 843, 844 (1960)('|i|t is probably a saIe
assertion that most involved standardized Iorm contracts are never read by the party who `adheres` to
them. In such situations, the proponent oI the Iorm is Iree to dictate terms most advantageous to
himselI).
320
Widiss at 82. While Widiss cites no cases directly on point, he quotes Rawlings v. Apodaca, 726
P.2d 565, 571 (Ariz. 1986), in which the Arizona Supreme Court held 'that one oI the beneIits that Ilow
Irom the insurance contract is the insured`s expectation that his insurance company will not wrongIully
deprive him oI the very security Ior which he bargained. In Apodaca, the insurance company issued a
policy covering Rawlings, the victim oI a negligent Iire. The policy insured only a small portion oI the
losses. The insurance company Iailed to disclose that it had also issued a policy to the perpetrator oI the
Iire. The court Iound that the insurance company`s willIul Iailure to disclose this inIormation not only
violated the policyholder`s reasonable expectations oI coverage, but also constituted a breach oI the duty
oI good Iaith and Iair dealing. Id.
321
ProIessors Widiss and Keeton write that courts in the early 1960s began to 'clearly and explicitly
employ|| the doctrine oI honoring reasonable expectations. See ROBERT E. KEETON & ALAN I. WIDISS,
INSURANCE LAW: A GUIDE TO FUNDAMENTAL PRINCIPLES, LEGAL DOCTRINE AND COMMERCIAL
PRACTICES 6.3(a)(3), at 632 (Practitioners ed. 1988).
322
ROBERT H. JERRY, II, UNDERSTANDING INSURANCE LAW 25D, at 144 (2d ed. 1996). ProIessor
Jerry explained the common law origins oI the reasonable expectations doctrine:

NYDOCS1-449390.1
11/16/11 11:58 AM
-126-


Keeton`s words, the reasonable expectations doctrine simply recognizes the broad principle
underlying the 'congeries oI doctrines comprising the rules oI insurance policy interpretation.
323

The reasonable expectations doctrine is an objective rule that is, it protects the
reasonable expectations oI insurance coverage that most policyholders would hold not
subjective belieIs and not idiosyncratic policyholders:
The key to understanding the role played by the expectations
principle . . . |is| that the obfectively reasonable expectations oI the
policyholder as to coverage will be honored, notwithstanding
contrary policy language. The requirement that the expectations be
objectively reasonable is signiIicant . . . because objectively
reasonable expectations are those that are likely to be held by the
majority oI policyholders.
324


When the insured`s expectation is created by some kind oI
ambiguity or vagueness in the policy language, syntax, or
organization, something like the doctrine oI contra proferentem ...
is operating. When the insured`s expectation comes Irom some
assertion by an agent oI the insurer or through the insurer`s
advertising, something like the doctrine oI misrepresentation or
deceit is operating. When the insured`s expectation is grounded in
an assumption that coverage Ior the loss in question would exist
given the amount oI premium charged, something like the doctrine
oI unconscionability is operating. When the insured`s expectation
is part and parcel oI the insured`s sudden surprise and dismay at
the absence oI coverage, something like the doctrine oI mistake is
operating. When the insured`s expectation comes Irom the
insurer`s invitation to the insured to place trust in the insurer that
the insured`s coverage needs will be satisIactorily met, something
like an estoppel or reliance theory is operating.
Id. at 144-45 (underscoring added, Iootnotes omitted).
323
See KEETON, INSURANCE LAW: BASIC TEXT 351 (1971); Keeton, Reasonable Expectations in the
Second Decade, 12 FORUM 275 (1976).
324
Kenneth S. Abraham, A %heory of Insurance Policy Interpretation, 95 MICH. L. REV. 531, 559
(1994)(Iootnote omitted). ProIessor Abraham analogized the objective Iocus oI the doctrine oI reasonable
expectations to two oI the doctrine`s common law ancestors:
Thus, the expectations principle does Ior policyholders as a group
what waiver and estoppel did Ior the individual policyholder-
plaintiII: it aIIords them coverage under policy provisions that are
reasonably clear under the circumstances, but not suIIiciently clear,

NYDOCS1-449390.1
11/16/11 11:58 AM
-127-


An objective standard has limits. As ProIessor Corbin points out:
As usually understood, the objective theory` is based upon a great
illusion the illusion that words, either singly or in combination,
have a meaning` that is independent oI the persons who use them.
It is crudely supposed that words have a true`, or legal,` meaning
(described as objective`), one that all persons oI whatever race,
origin, or education are bound to know . . . . As a good dictionary
shows, all words have been used by men to convey a variety oI
meanings, variable with time, place and circumstance. The
cheaper and more incomplete the dictionary, and the more
parochial and limited the linguistic education and experience oI a
man, the more Iirmly Iixed is the illusion oI an objective meaning`
and the more positive its assertion as the truth.
325

That the reasonable expectations doctrine is rooted in the 'objectively reasonable expectations
oI the policyholder reveals that the doctrine is not and was not intended to be a radical
departure Irom traditional contract law. The doctrine remains consistent with the rule that 'the
terms oI a contract are to be interpreted and their legal eIIects determined as a whole.
326
The
reasonable expectations doctrine could also be viewed as modernizing the objective standard oI
contract interpretation so that the particular problems oI standard Iorm insurance policies and the
business oI insurance are not ignored. Application oI the reasonable expectations doctrine
ensures that an insurance policy will not be interpreted in a Iactual vacuum.
327


or at least not suIIiciently obvious, to deIinitively communicate
their meaning to the ordinary policyholder.
Id.
325
1 Arthur Corbin, Corbin on Contracts 106, at 474 (1963).
326
3 CORBIN 549, at 183.
327
See, e.g., Glidden v. Farmers Auto. Ins. Ass`n, 312 N.E.2d 247, 250 (Ill. 1974), citing Jensen v.
New Amsterdam Ins. Co., 213 N.E.2d 141 (Ill. App. Ct. 1965):
An insurance policy is not to be interpreted in a Iactual vacuum; it
is issued under given Iactual circumstances. What at Iirst blush
might appear unambiguous in the insurance contract might not be
such in the particular Iactual setting in which the contract was
issued.

NYDOCS1-449390.1
11/16/11 11:58 AM
-128-


It can be argued that the origin oI the reasonable expectations doctrine can be
traced to Lord MansIield, the Iather oI insurance law. Many years ago, he wrote:
Every under-writer is presumed to be acquainted with the practice
oI the trade he insures, and that whether it is recently established,
or not. II he does not know it, he ought to inIorm himselI. It is no
matter iI the usage has only been Ior a year.
328

Lord MansIield`s holding is consistent with the view that an insurance company is expected to
know the policyholder`s objectively reasonable expectations oI insurance coverage. Courts have
held that insurance companies selling an insurance policy which speciIically excludes insurance
coverage Ior the policyholder`s essential activities or business are required to provide insurance
coverage.
329

Contrary to insurance company arguments, the Iundamental purpose oI the
reasonable expectations doctrine is to enIorce the terms oI the original bargain, not to create new
'Iairer deals as the court sees Iit. This goal coincides with the aims oI traditional contract law.
Insurance companies argue that iI the doctrine is applied, policyholders will seek to enIorce their
'post-loss subjective expectations.
The reasonable expectations doctrine is commonly thought oI as an extension oI
the doctrine oI contra proferentem.
330
Under the doctrine oI contra proferentem, ambiguities are

328
Noble v. Kennoway, 2 Doug. 511, 513 (K.B. 1780), United Kingdom.
329
See Howard Ende, Eugene R. Anderson & Susannah Crego, Liability Insurance. Primer for
College and University Counsel, 23 J.C. & U. L. 609, 663-68 (Spring 1997)(listing cases). See, e.g.,
Globe & Rutgers Fire Ins. Co. v. Indiana Reduction Co., 113 N.E. 425, 428 (Ill. App. Ct. 1916);
American States Ins. Co. v. Kiger, 662 N.E.2d 945 (Ind. 1996), reh`g denied, (May 31, 1996).
330
See Peter J. Kalis, et al., Policyholders Guide To The Law oI Insurance Coverage 20.04, at 20-6
(1st ed. 1997)(Mr. Kalis represents policyholders in insurance coverage disputes); 1 Eugene R. Anderson,
et al., Insurance Coverage Litigation 2.3, at 73-76 (1st ed. 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-129-


to be construed against the draIter.
331
In insurance law, it has long been established that
ambiguities are to be construed against the insurance company.
332

The purpose oI the reasonable expectations doctrine is to provide protection
which goes beyond the doctrine oI contra proferentem. While the doctrine oI contra
proferentem can only be applied iI the insurance policy contains an ambiguity, the Keeton
Iormulation oI the reasonable expectations doctrine
333
recognizes that a reasonable expectation
oI insurance coverage can exist without an ambiguity in the policy:

331
See BARRY R. OSTRAGER & THOMAS R. NEWMAN, HANDBOOK ON INSURANCE COVERAGE
DISPUTES 1.03|b||1|, at 13-14 (7th ed. 1994)(listing cases). Ostrager and Newman are attorneys who
regularly represent insurance companies in insurance coverage disputes. The term contra proferentem
comes Irom the Latin phrase verba chartarum fortius accipiuntur contra proferentem. 3 A. CORBIN,
CORBIN ON CONTRACTS 559 (2d ed. 1960). The term is deIined to mean 'against the party who
proIIers or puts Iorward a thing. BLACK`S LAW DICTIONARY 393 (4th ed. 1951). See also BLACK`S
LAW DICTIONARY (6th ed. 1990), providing the same deIinition but spelling the doctrine as contra
proferentum.
332
See BARRY R. OSTRAGER & THOMAS R. NEWMAN, HANDBOOK ON INSURANCE COVERAGE
DISPUTES 1.03|b||1|, at 13-14 (7th ed. 1994), quoting Liverpool & London & Globe Ins. Co. v.
Kearney, 180 U.S. 132, 135-6 (1901) ('|T|he general rule . . . is . . . that where a policy oI insurance is so
Iramed to leave room Ior two constructions, the words used should be interpreted most strongly against
the insurer(cases in accord omitted)).
333
A term is generally considered to be ambiguous iI it is 'Iairly susceptible to two diIIerent
reasonable interpretations. See PETER J. KALIS, ET AL., POLICYHOLDERS GUIDE TO THE LAW OF
INSURANCE COVERAGE 20.07, at 20-13 and 20-14 (1st ed. 1997)(listing cases and authorities); 1
EUGENE R. ANDERSON, ET AL., INSURANCE COVERAGE LITIGATION 2.2, at 49 (1st ed. 1997)(a term is
patently ambiguous iI it is susceptible on its Iace to more than one reasonable interpretation). An
ambiguous term is oIten a term which is clear until it is applied to a particular set oI Iacts. For example,
in Bird v. St. Paul Fire & Marine Insurance Co., 224 N.Y. 47, 120 N.E. 86 (1918) a Iire started in some
Ireight cars loaded with explosives. There was an explosion, causing another Iire which in turn caused a
much larger explosion. The last explosion caused a concussion in the air which damaged the
policyholder`s boat, lying in the harbor about one thousand Ieet away. The policyholder owned a Iire
insurance policy and sought insurance coverage under the terms oI the policy. Justice Cardozo, writing
Ior the high court oI New York, held that there was no insurance coverage. The decision, though
discussing the meaning oI proximate cause, sets Iorth the proper standard to determine whether a genuine
ambiguity exists:
We must put ourselves in the place oI the average owner whose
boat or building is damaged by the concussion oI a distant
explosion, let us say a mile away. Some glassware in his pantry is
thrown down and broken. It would probably never occur to him
that within the meaning oI his policy oI insurance, he had suIIered

NYDOCS1-449390.1
11/16/11 11:58 AM
-130-


While ambiguities may be highly relevant in determining the
reasonable expectations oI the insured, nevertheless the invocation
and application oI the doctrine does not depend Ior its existence
upon the presence oI ambiguities.
334

Requiring an ambiguity in the policy language before applying the reasonable expectations
doctrine would render the doctrine a mere redundancy oI contra proferentem:
II the doctrine oI reasonable expectations is limited to ambiguous
contracts, it is not a doctrine at all; it is nothing more than the
traditional rule that ambiguous contracts be interpreted against the
draIter. Only iI courts discard the Iiction that consumers read Iorm
language, unambiguous or otherwise, will contracting parties
realize their reasonable expectations.
335


loss by Iire. A philosopher or lawyer might persuade him that he
had, but he would not believe it until they told him.
120 N.E.2d at 87. Thus:
There is no use in arguing that distance ought not to count, iI liIe
and experience tells us that it does. The question is not what men
ought to think oI as a cause. The question is what they do think oI
as a cause.
Id. (emphasis added).
In determining whether a term is ambiguous, many courts consider whether dictionaries provide diIIering
deIinitions Ior the same term or whether other courts have reached contrary meanings Ior the same term.
DiIIering judicial interpretations may either establish an ambiguity or be evidence oI an ambiguity. See
Kalis, id. (listing cases). For examples listed therein, see e.g. CrawIord v. Prudential Ins. Co., 783 P.2d
900, 908 (Kan. 1989)('reported cases are in conIlict, the trial judge and the Court oI Appeals reached
diIIerent conclusions and the justices oI this court |disagree|. Under such circumstances, the clause is, by
deIinition, ambiguous and must be interpreted in Iavor oI the insured); New Castle County v. HartIord
Accident & Indem. Co., 933 F.2d 1162, 1198 (3d Cir. 1991), cert. denied, 113 S. Ct. 1846 (U.S.
1993)('That so many learned jurists throughout the nation diIIer on the construction oI this phrase, is, in
our view, additional prooI that the phrase admits oI two reasonable constructions.); New Castle, at 1198
('our dictionaries, like the district court`s, deIine sudden` both with and without a temporal element, thus
lending considerable weight to the County`s assertion that either interpretation is reasonable.).
334
COUCH ON INSURANCE 3d 22:11, at 22-25 (Lee R. Russ & Thomas Segalla, eds., 1995). Some
jurisdictions, however, do require an ambiguity in the policy language beIore applying the doctrine oI
reasonable expectations.
335
M. Meyerson, The ReuniIication oI Contract Law: The Objective Theory oI Consumer Form
Contracts, 47 U. MIAMI L. REV. 1263, 1281 (1993).

NYDOCS1-449390.1
11/16/11 11:58 AM
-131-


The RESTATEMENT (SECOND) OF CONTRACTS contains a model version oI the
reasonable expectations doctrine which does not require an ambiguity in the policy. It states that
with respect to standard-Iorm type
336
contracts:
(2) Such a writing is interpreted wherever reasonable as treating
alike all those similarly situated, without regard to their knowledge
or understanding oI the standard terms oI the writing. (3) Where
the other party has reason to believe that the party maniIesting
such assent would not do so iI he knew that the writing contained a
particular term, the term is not part oI the agreement.
337

Terms 'beyond the range oI reasonable expectations are not enIorceable against
the adhering party.
338
Terms are considered to be 'beyond the range oI reasonable expectations
when 'the other party has reason to believe that the adhering party would not have accepted . . .
had |the party| known that the agreement contained the particular term. This would include a
term which is 'bizarre or oppressive, 'eviscerates the nonstandard terms explicitly agreed to, or
'eliminates the dominant purpose oI the transaction. The Restatement version oI the reasonable
expectations doctrine was speciIically adopted by the Arizona Supreme Court.
339


336
Subsection (1) speciIically states:
(1) Except as stated in Subsection (3), where a party to an
agreement signs or otherwise maniIests assent to a writing and has
reason to believe that like writings are regularly used to embody
terms oI agreements oI the same type, he adopts the writing as an
integrated agreement with respect to the terms included in the
writing.
Restatement (Second) oI Contracts 211 (1979).
337
Restatement (Second) oI Contracts 211 (1979).
338
Restatement (Second) oI Contracts 211, cmt. I, (1979).
339
See Darner Motor Sales, Inc. v. Universal Underwriters Ins., 682 P.2d 388 (Ariz. 1984). For a
discussion oI the application oI the Restatement version oI the reasonable expectations doctrine, see Amy
D. Cubbage, Note, %he Interaction of the Doctrine of Reasonable Expectations and Ambiguity in
Drafting. %he Development of the Kentucky Formulation, 85 KY. L.J. 435 (Winter 1996/1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-132-


Certainly, insurance policy terms oIten are ambiguous. But relying on
'ambiguity as a catch-all solution is dangerous. Doing so 'invites the draIter to keep rewriting
until the provisions, although possibly unIair, are acceptably unambiguous.
340
Nevertheless,
some courts hold that the reasonable expectations oI the policyholder will be invoked only iI
there is an ambiguity in the policy eIIectively blending the doctrine oI reasonable
expectations with the doctrine oI contra proferentem.
341


340
K. Llewellyn, Book Review, 52 HARV. L. REV. 700, 701 (1939).
341
The Iollowing is a non-exhaustive list oI courts in thirty-Iour jurisdictions which have recognized
some variation oI the reasonable expectations doctrine:
Alabama: Travelers Ins. Co. v. Jones, 529 So. 2d 234, 239 (Ala. 1988); Lambert v. Liberty Mut. Ins. Co.,
331 So. 2d 260 (Ala. 1976);
Alaska: Stewart-Smith Haidinger v. Avi-Truck, Inc., 682 P.2d 1108 (Alaska 1986); U.S. Fire Ins. Co. v.
Clover, 600 P.2d 1 (Alaska 1979); Puritan LiIe Ins. Co. v. Guess, 598 P.2d 900 (Alaska 1979); Stordahl
v. Government Employees Ins. Co., 564 P.2d 63 (Alaska 1977); INA LiIe Ins. Co. v. Brundin, 533 P.2d
236 (Alaska 1975); National Indem. Co. v. Flesher, 469 P.2d 360 (Alaska 1970).
Arizona: Gordinier v. Aetna Cas. & Sur. Co., 154 Ariz. 266, 742 P.2d 277 (1987); Darner Motor Sales,
Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 682 P.2d 388 (1984); Zuckerman v. Transamerica
Ins. Co., 133 Ariz. 139, 650 P.2d 441 (1982), Mason v. State Farm Mut. Auto. Ins. Co., 148 Ariz. 271,
714 P.2d 441 (Ct. App. 1985); Cain v. Aetna LiIe Ins. Co., 135 Ariz. 189, 659 P.2d 133 (Ct. App. 1983);
California: Hanson v. Prudential Ins. Co., 772 F.2d 580 (9th Cir. 1985), modiIied and reh`g denied en
banc, 783 F.2d 762 (9th Cir. 1985); Continental Cas. Co. v. City oI Richmond, 763 F.2d 1076 (9th Cir.
1985); McLaughlin v. Connecticut Gen. LiIe Ins. Co., 565 F. Supp. 434 (N.D. Cal. 1983); Wilson v.
Insurance Co. oI N. Am., 453 F. Supp. 732 (N.D. Cal. 1978); AIU Ins. Co. v. Superior Court (FMC
Corp.), 51 Cal. 3d 807, 799 P.2d 1253, 274 Cal. Rptr. 820 (1990) (en banc); Smith v. Westland LiIe Ins.
Co., 15 Cal. 3d 111, 539 P.2d 433, 123 Cal. Rptr. 649 (1975); Gyler v. Mission Ins. Co., 10 Cal. 3d 216,
514 P.2d 1219, 110 Cal. Rptr. 139 (1973);
Colorado: Davis v. M.L.G. Corp., 712 P.2d 985 (Colo. 1986);
Delaware: Del Collo v. Houston, Civ. No. 83C-JA-121, 1986 Del. Super. LEXIS 1236 (Del. Super. Ct.
May 7, 1986); Steigler v. Insurance Co. oI N. Am., 384 A.2d 398 (Del. 1978);
District of Columbia: Owens-Illinois, Inc. v. Aetna Cas. & Sur. Co., 597 F. Supp. 1515 (D.D.C. 1984);
Georgia: Macon Light House Revival Center, Inc. v. Continental Ins. Co., 651 F. Supp. 417 (M.D. Ga.
1987); Southeastern Fire Ins. Co. v. Heard, 626 F. Supp. 476 (N.D. Ga. 1985);
Hawaii: CrawIord v. Ranger Ins. Co., 653 F.2d 1248 (9th Cir. 1981); Okada v. MGIC Indem. Corp., 608
F. Supp. 383 (D. Haw. 1985), aII`d in part and rev`d in part, 795 F.2d 1450 (9th Cir. 1986), amended, 823
F.2d 276 (9th Cir. 1987); Fortune v. Wong, 68 Haw. 1, 702 P.2d 299 (1985).
Indiana: Eli Lilly & Co. v. Home Ins. Co., 794 F.2d 710 (D.C. Cir. 1986), cert. denied, 479 U.S. 1060
(1987);

NYDOCS1-449390.1
11/16/11 11:58 AM
-133-



Iowa: Grinnell Mut. Reins. Co. v. Voeltz, 431 N.W.2d 783, 786 (Iowa 1988); Farm Bureau Mut. Ins. Co.
v. Sandbulte, 302 N.W.2d 104 (Iowa 1981); Gibson v. Milwaukee Mut. Ins. Co., 265 N.W.2d 742 (Iowa
1978); Steinbach v. Continental W. Ins. Co., 237 N.W.2d 780 (Iowa 1976); C&J Fertilizer, Inc. v. Allied
Mut. Ins. Co., 227 N.W.2d 169 (Iowa 1975); Rodman v. State Farm Mut. Auto. Ins. Co., 208 N.W.2d 903
(Iowa 1973); City oI Cedar Rapids v. Insurance Co. oI N. Am., 562 N.W.2d 156 (Iowa 1997); Global
Aviation Ins. Managers v. Lees, 368 N.W.2d 209 (Iowa Ct. App. 1985);
Kansas: Dronge v. Monarch Ins. Co., 511 F. Supp. 1 (D. Kan. 1979);
Kentucky: Woodson v. Manhattan LiIe Ins. Co., 743 S.W.2d 835, 839 (Ky. 1987); Ohio Cas. Ins. Co. v.
StanIield, 581 S.W.2d 555 (Ky. 1979);
Louisiana: Louisiana Ins. Guar. Ass`n v. Interstate Fire & Cas. Co., 630 So. 2d 759 (La. 1994); Breland
v. Schilling, 550 So. 2d 609 (La. 1989);
Maine: Peerless Ins. Co. v. Brennon, 564 A.2d 383 (Me. 1989); Baybutt Constr. Corp. v. Commercial
Union Ins. Co., 455 A.2d 914 (Me. 1983)
Massachusetts: Davenport Peters Co. v. Royal Globe Ins. Co., 490 F. Supp. 286 (D. Mass. 1980); Home
Indem. Ins. Co. v. Merchants Distributors, Inc., 396 Mass. 103, 483 N. E.2d 1099 (1985); Bond Bros. v.
Robinson, 393 Mass. 546, 471 N.E.2d 1332 (1984). But see JeIIerson Ins. Co. v. City oI Holyoke, 23
Mass. App. Ct. 472, 477, 503 N.E.2d 474, 478 (1987) (reasonable expectations doctrine 'does not appear
to have been explicitly adopted in Massachusetts);
Michigan: Crowell v. Federal LiIe & Cas. Co., 397 Mich. 614, 247 N.W.2d 503 (1976); Fresard v.
Michigan Millers Mut. Ins. Co., 97 Mich. App. 584, 296 N.W.2d 112 (1980), aII`d, 414 Mich. 686, 327
N.W.2d 286 (1982);
Minnesota: Auto-Owners Ins. Co. v. Jensen, 667 F.2d 714, 721 (8th Cir. 1981); Atwater Creamery Co.
v. Western Nat`l Mut. Ins. Co., 366 N.W.2d 271, 278-79 (Minn. 1985); Arndt v. American Family Mut.
Ins. Co., 380 N.W.2d 885 (Minn. Ct. App. 1985), aII`d in part and rev`d in part, 394 N.W.2d 791 (Minn.
1986);
Mississippi: Brown v. Blue Cross & Blue Shield, Inc., 427 So. 2d 139 (Miss. 1983);
Missouri: Wright v. Newman, 598 F. Supp. 1178 (W.D. Mo. 1984), aII`d, 767 F.2d 460 (8th Cir. 1985);
Katz Drug Co. v. Commercial Standard Ins. Co., 647 S.W.2d 831 (Mo. Ct. App. 1983);
Montana: Transamerica Ins. Co. v. Royle, 202 Mont. 173, 656 P.2d 820 (1983);
Nebraska: Kracl v. Aetna Cas. & Sur. Co., 220 Neb. 869, 374 N.W.2d 40, 44 (1985); Nile Valley
Cooperative Grain Milling Co. v. Farmers Elevator Mut. Ins. Co., 187 Neb. 720 193 N.W.2d 752 (1972);
Nevada: Farmers Ins. Exch. v. Young, 108 Nev. 328, 832 P.2d 376 (1992); National Union Fire Ins. Co.
v. Caesars Palace Hotel & Casino, 106 Nev. 330, 792 P.2d 1129 (1990) (per curiam); National Union Fire
Ins. Co. v. Reno`s Executive Air, Inc., 100 Nev. 360, 364-66, 682 P.2d 1380, 1383 (1984); Prudential Ins.
Co. v. Lamme, 83 Nev. 146, 425 P.2d 346 (1967); Sullivan v. Dairyland Ins. Co., 98 Nev. 364, 649 P.2d
1357 (1982) (per curiam); Catania v. State Farm LiIe Ins. Co., 95 Nev. 532, 598 P.2d 631 (1979).
New Hampshire: Great Lakes Container Corp. v. Nation Union Fire Ins. Co., 727 F.2d 30, 34 (1st Cir.
1984); Commercial Union Assur. Co. v. Aetna Cas. & Sur. Co., 455 F. Supp. 1190 (D.N.H. 1978); Town
oI Epping v. St. Paul Fire & Marine Ins. Co., 122 N.H. 248, 444 A.2d 496 (1982); Atwood v. HartIord
Accident & Indem. Co., 116 N.H. 636, 365 A.2d 744 (1976);
New 1ersey: Van Orman v. American Ins. Co., 680 F.2d 301 (3d Cir. 1982); McNeilab, Inc. v. North
River Ins. Co., 645 F. Supp. 525 (D.N.J. 1986), aII`d without opinion, 831 F.2d 287 (3d Cir. 1987); Meier
v. New Jersey LiIe Ins. Co., 101 N.J. 597, 503 A.2d 862 (1986); Sparks v. St. Paul Ins. Co., 100 N.J. 325,
495 A.2d 406 (1985); Gerhardt v. Continental Ins. Cos., 48 N.J. 291, 225 A.2d 328 (1966); Kievet v.

NYDOCS1-449390.1
11/16/11 11:58 AM
-134-


Courts have adopted three general variations oI the reasonable expectations
doctrine: (1) restricting the doctrine oI reasonable expectations to ambiguous terms only; (2)
applying the doctrine to determine whether 'Iine print unIairly limits the policyholder`s more
prominent reasonable expectations, and; (3) looking to the 'whole transaction to determine

Loyal Protective LiIe Ins. Co., 34 N.J. 475, 170 A.2d 22 (1961); LerhroII v. Aetna Cas. & Sur. Co., 271
N.J. Super 240, 638 A.2d 889 (App. Div. 1994);
New Mexico: Woodmen Accident & LiIe Ins. Co. v. Bryant, 784 F.2d 1052 (10th Cir. 1986); Konnick v.
Farmers Ins. Co., 103 N.M. 112, 703 P.2d 889 (1985); Pribble v. Aetna LiIe Ins. Co., 84 N.M. 211, 501
P.2d 255 (1972); Read v. Western Farm Bureau Mut. Ins. Co., 90 N.M. 369, 563 P.2d 1162 (Ct. App.
1977);
New York: Fried v. North River Ins. Co., 710 F.2d 1022 (4th Cir. 1983); Board oI Educ., Yonkers City
Sch. Dist. v. CNA Ins. Co., 647 F. Supp. 1495 (S.D.N.Y. 1986), aII`d, 839 F.2d 14 (2d Cir. 1988);
Champion Int`l Corp. v. Continental Cas. Co., 400 F. Supp. 978 (S.D.N.Y. 1975), aII`d, 546 F.2d 502 (2d
Cir. 1976), cert. denied, 434 U.S. 819 (1977); Atlantic Cement Co. v. Fidelity & Cas. Co., 91 A.D.2d 412,
459 N.Y.S.2d 425 (1st Dep`t 1983), aII`d, 63 N.Y.2d 798, 471 N.E.2d 142, 481 N.Y.S.2d 329 (1984); I Q
Originals, Inc. v. Boston Old Colony Ins. Co., 85 A.D.2d 21, 447 N.Y.S.2d 174 (1st Dep`t), aII`d, 58
N.Y.2d 651, 444 N.E.2d 1004, 458 N.Y.S.2d 540 (1982);
North Carolina: Great Am. Ins. Co. v. C.G. Tate Constr. Co., 303 N.C. 387, 279 S.E.2d 769 (1981);
North Dakota: Mills v. Agrichemical Aviation, Inc., 250 N.W.2d 663 (N.D. 1977); but cI. Walle Mut.
Ins. Co. v. Sweeney, 419 N.W.2d 176 (N.D. 1988);
Pennsylvania: Tonkovic v. State Farm Mut. Auto. Ins. Co., 513 Pa. 445, 521 A.2d 920 (1987); Collister
v. Nationwide LiIe Ins. Co., 479 Pa. 579, 388 A.2d 1346 (1978), cert. denied, 439 U.S. 1089 (1979); cI.
Standard Venetian Blind Co. v. American Empire Ins. Co., 503 Pa. 300, 469 A.2d 563 (1983); Beckham
v. Travelers Ins. Co., 424 Pa. 107, 225 A. 2d 532 (1967); Gdovic v. Catholic Knights oI St. George, 308
Pa. Super. 6, 453 A.2d 1040 (1982);
Rhode Island: Gleason v. Merchants Mut. Ins. Co., 589 F. Supp. 1474 (D.R.I. 1984); American
Universal Ins. Co. v. Russell, 490 A.2d 60 (R.I. 1985); Elliott Leases Cars, Inc. v. Quigley, 118 R.I. 321,
373 A.2d 810 (1977);
Texas: Fritz v. Old Am. Ins. Co., 354 F. Supp. 514 (S.D. Tex. 1973);
West Virginia: National Mut. Ins. Co. v. McMahon & Sons, Inc., 356 S.E.2d 488, 495-96 (W. Va.
1987);
Wisconsin: Lund v. American Motorists Ins. Co., 619 F. Supp. 1535 (W.D. Wis. 1985), aII`d in part and
rev`d in part, 797 F.2d 544 (7th Cir. 1986); Gross v. Lloyd`s oI London Ins. Co., 121 Wis.2d 78, 358
N.W.2d 266 (1984).
See 1 Eugene R. Anderson, et al., Insurance Coverage Litigation 2.7, at 68-69 (1st ed. 1997);
Barry R. Ostrager & Thomas R. Newman, Handbook on Insurance Coverage Disputes 1.03|b||2||B|, at
21-24 (7th ed. 1994). For an excellent discussion oI many oI these cases, as well as an analysis oI
speciIic jurisdictions and a comparison oI how courts have interpreted ProIessor Keeton`s doctrine, See
Roger C. Henderson, Symposium. Current Issues In Insurance Law. Article. %he Doctrine of Reasonable
Expectations In Insurance Law After %wo Decades, 51 Ohio St. L.J. 823 (Fall 1990).

NYDOCS1-449390.1
11/16/11 11:58 AM
-135-


whether the policyholder`s reasonable expectations have been negated.
342
The doctrine oI
reasonable expectations may also be properly invoked where the premium charged does not truly
reIlect 'the actual scope oI the risk that the policy provisions deIine.
343
In eIIect, '|c|onstruing
an insurance policy to protect the insured`s reasonable expectations` means diIIerent things to
diIIerent courts.
344

The 'whole transaction version oI the reasonable expectations doctrine reIlects
the most narrow version oI the doctrine as originally set Iorth by ProIessor Keeton. This version
evaluates both the reasonable expectations oI the policyholder according to the language and
structure oI the policy (the Iine print approach) and also evaluates the 'marketing patterns and
general practices oI the insurance company.
345
Courts Iollowing the 'whole transaction
approach recognize that merely reviewing the policy language is insuIIicient to determine the
scope oI insurance coverage a policyholder reasonably believed it had bought.
346


342
See Stephen J. Ware, A Critique of the Reasonable Expectations Doctrine, 56 U. CHI. L. REV.
1461, 1467-75 (Fall 1989).
343
Widiss 6.3(c)(1), at 642, quoting Vargas v. Ins. Co. oI N. Am., 651 F.2d 838, 841 (2d Cir. 1981).
In Vargas, the insurance company argued that insurance coverage was properly denied where the
policyholder`s plane crashed beyond the territorial limits 'unambiguously set Iorth in the policy. The
court Iound:
The Iact that coverage oI the entire Caribbean, including the ocean
areas, cost only an additional IiIty dollars undermines the argument
that substantial additional risks are involved. Moreover, INA
oIIers no evidence that over-water Ilights between covered
locations are more dangerous than Ilights over points . . .
expressly covered by the policy and that include vast mountain
ranges, lakes, deserts, and urban centers with heavy air traIIic.
Common sense and experience contradict INA`s assertion that
over-water Ilights add materially to these explicitly covered risks.
344
Id. at 1466.
345
Stephen J. Ware, A Critique of the Reasonable Expectations Doctrine, 56 U. CHI. L. REV. 1461,
1472-73 (Fall 1989), quoting Keeton, 83 HARV. L. REV. at 973.
346
Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-136-


While the approach to applying the reasonable expectations doctrine has varied
Irom court to court, the reasons supporting the application oI the doctrine, however, have
remained consistent regardless oI which approach a court has chosen to adopt.
b. Standardized Form Language and Contracts of Adhesion
During the early days oI Lloyd`s CoIIee House in the sixteenth and seventeenth
centuries, merchant shipowners seeking insurance coverage, and the underwriters willing to
provide it, entered into transactions with relatively equal bargaining power.
347
Not only were
most merchant policyholders at least as wealthy as the underwriters, but it was not uncommon
Ior the policyholder to prepare the insurance policy and submit it to the underwriters, who would
then agree to underwrite a speciIic dollar amount.
348
In this respect, the policyholder`s
expectations oI insurance coverage 'were at least as accurately described as those oI the
insurer(s).
349

Times have changed. Today, standard Iorm insurance policies are draIted:
with the aid oI skillIul and highly paid legal talent, Irom which no
deviation desired by an applicant will be permitted. The
established underwriter is magniIicently qualiIied to understand
and protect its own selIish interests. In contrast, the applicant is a
shorn lamb driven to accept whatever contract may be oIIered on a
'take-it-or-leave-it basis iI he wishes insurance protection.
350

The classic model oI Ireely negotiated agreements is 'Iar removed Irom the reality oI the
business oI insurance.
351
Even insurance companies have acknowledged the Iutility oI

347
See Robert E. Keeton & Alan I. Widiss, Insurance Law: A Guide To Fundamental Principles,
Legal Doctrine and Commercial Practices 6.3(a)(1), at 627-28 (Practitioners ed. 1988).
348
Id.
349
Id.
350
Samuel Williston, A Treatise on the Law oI Contracts 900, at 19-20 (3d ed. W. Jaeger 1973).
351
Robert H. Jerry, II, Understanding Insurance Law 25C, at 139 (2d ed. 1996).

NYDOCS1-449390.1
11/16/11 11:58 AM
-137-


determining a policyholder`s reasonable expectations oI coverage based on the language oI the
insurance policy alone:
Because oI the way the insurance industry operates, most oI the
relevant policy language is Iound in standardized insuring Iorms,
draIted by insurance associations or bureaus, and used industry-
wide. Thus, questions oI intent may be addressed on a
standardized basis. Predictably, there will be precious little
evidence oI the negotiation oI individual policies. The primary
evidence oI the intent oI the parties draIting the contracts, and their
expectations about the scope oI coverage, will be obtained through
document productions Irom key industry wide organizations, and
depositions oI their personnel.
352

It makes no sense to rely on contract remedies when even insurance companies believe that
extrinsic evidence not the policies themselves is the best way to determine a policyholder`s
expectations oI insurance coverage.
The modern standard Iorm insurance policy has long been recognized as the
'archetypal adhesion` contract:
353
One commentator has set Iorth the seven qualities that
'deIine the model contract oI adhesion.
354
Note that most standard Iorm insurance policies
possess all oI the these characteristics in some, and oIten, to a high degree:

352
Travelers` Reply Memorandum in Support oI Coordination; In Opposition to GAF`s Motion oI
Separate Hearing, and Exhibits in Support ThereoI, Iiled Jan. 2, 1981, Armstrong Cork Co. v. Aetna Cas.
& Sur. Co., No. C315367 (Cal. Super. Ct., Los Angeles County).
353
See Stephen J. Ware, A Critique of the Reasonable Expectations Doctrine, 56 U. CHI. L. REV.
1461, 1464 (Fall 1989). For an extensive discussion on insurance policies as contracts oI adhesion, see 1
EUGENE R. ANDERSON ET AL., INSURANCE COVERAGE LITIGATION 2.1, at 45-48 (1st ed. 1997). The
term was coined nearly a century ago by a French commentator. See R. SALEILLES, DE LA
DECLARATION DE VOLONTE 229-30 (1901)(translated in W. Patterson, %he Interpretation and
Construction of Contracts, 64 COLUM. L. REV. 833, 856 (1964). It is interesting to note that in the United
States, the term was Iirst used in an insurance coverage case. See Bekken v. Equitable LiIe Assurance
Soc`y, 293 N.W. 200, 212 (N.D. 1940).
354
T.D. RakoII, Contracts oI Adhesion: An Essay in Reconstruction, 96 HARV. L. REV. 1173 (1983).

NYDOCS1-449390.1
11/16/11 11:58 AM
-138-


(1) The document whose legal validity is at issue is a printed Iorm that
contains many terms and clearly purports to be a contract.
(2) The Iorm has been draIted by, or on behalI oI, one party to the transaction.
(3) The draIting party participates in numerous transactions oI the type
represented by the Iorm and enters into these transactions as a matter oI
routine.
(4) The Iorm is presented to the adhering party with the representation that,
except perhaps Ior a Iew identiIied items (such as the price term), the
draIting party will enter into the transaction only on the terms contained in
the document. The representation may be explicit or may be implicit in
the situation, but it is understood by the adherent.
(5) AIter the parties have dickered over whatever terms are open to
bargaining, the document is signed by the adherent.
(6) The adhering party enters into Iew transactions oI the type represented by
the Iorm Iew, at least, in comparison with the draIting party.
(7) The principal obligation oI the adhering party in the transaction considered
as a whole is the payment oI money.
355

With standard Iorm policies and contract oI adhesion, there is no Ireedom oI
contract. As one commentator noted:
Freedom oI contract enables enterprisers to legislate by contract
and, what is even more important, to legislate in a substantially
authoritarian manner without using the appearance oI authoritarian
Iorms. Standard contracts in particular could thus become
eIIective instruments in the hands oI powerIul industrial and
commercial overlords enabling them to impose a new Ieudal order
oI their own making upon a vast host oI vassals.
356

The insurance companies, not an activist judiciary or renegade policyholders, have destroyed the
Ireedom to contract. The reasonable expectations doctrine attempts to re-inject not remove
a limited amount oI Ireedom to contract. Under standard Iorm policy language, that Ireedom
was never there.

355
Id. at 1176.

NYDOCS1-449390.1
11/16/11 11:58 AM
-139-


Insurance policies are interpreted as a reasonable lay person or ordinary purchaser
oI insurance would understand them.
357
Insurance policies are not always interpreted according
to a lay person`s or an average policyholder`s understanding because interpretations oI insurance
policies are governed by two legal rules that severely restrict policyholders` claims. The Iirst is
that questions oI insurance policy interpretation are Ior judges not juries. The judiciary
zealously guards its selI-assumed role as the arbiter oI what insurance policies mean. This
means that insurance coverage is determined in large measure by the idiosyncrasies oI judges.
The result is that the rules are rules oI individuals and not rules oI law. The second legal rule is
that judges determine what an 'ordinary purchaser oI insurance would understand. Almost by
deIinition, judges are not 'ordinary. In most other areas oI the law, we have juries to determine
what is 'ordinary. AIter the Iire, every idiot knows that kerosene should not be stored near a
propane water heater. The real question is whether before the Iire, could it have been 'ordinary
to store kerosene by the water heater? Judges engage in 'post-claim underwriting as do
insurance companies.
358
Judges and juries (iI given the opportunity) would most likely oIten
diIIer in their reasoning and conclusions.

356
Kessler, Contracts oI Adhesion -- Some Thoughts About Freedom oI Contract, 43 COLUM L.
REV. 629, 640 (1943).
357
See 1 Eugene R. Anderson et al., Insurance Coverage Litigation 2.5, at 62-63 (1st ed.
1997)(listing cases).
358
A superb description oI post-claim underwriting is as Iollows:
THINGS PICK UP A BIT on Tuesday, partly because I`m getting
tired oI wasting time, partly because the witnesses either know
little or can`t remember much. I start with Everett LuIkin, Vice
President oI Claims, a man who`ll not utter a single syllable unless
it`s a response to a direct question. I make him look at some
documents, and halIway through the morning he Iinally admits it`s
company policy to do what is known as 'post-claim underwriting,
an odious but not illegal practice. When a claim is Iiled by an
insured, the initial handler orders all medical records Ior the
preceding Iive years. In our case, Great BeneIit obtained records

NYDOCS1-449390.1
11/16/11 11:58 AM
-140-


The reasonable expectations doctrine does not require that an insurance policy
state in literal terms the insurance coverage that a policyholder has come to reasonably expect.
359

Rather, the doctrine is based in part on the understanding that most policyholders do not draIt,
negotiate, or assent to the speciIic provisions in standard-Iorm insurance policies.
360
In nearly all
cases, iI the policyholder has assented to anything, it is only to the general scope or type oI
insurance coverage provided by the policy, the premium, or the amount oI the policy limits. As
many commentators have noted, most policyholders do not see their policies until aIter they have
purchased insurance coverage. That most policyholders do not read their policies aIter they
receive them is nearly universally accepted:
|T|he adhering party is in practice unlikely to have read the
standard terms beIore signing the document and is unlikely to have
understood them iI he has read them. Virtually every scholar who
has written about contracts oI adhesion has accepted the truth oI
this assertion, and the Iew empirical studies that have been done
have agreed.
361


Irom the Black Iamily physician who had treated Donny Ray Ior a
nasty Ilu Iive years earlier. Dot did not list the Ilu on the
application. The Ilu had nothing to do with the leukemia, but
Great BeneIit based one oI its early denials on the Iact that the Ilu
was a preexisting condition.
John Grisham, THE RAINMAKER at 295 (1st ed. 1995).
359
See e.g. Storms v. United States Fidelity & Guar. Co., 118 N.H. 427, 338 A.2d 578, 580 (1978).
II a policy is so constructed that a reasonable man in the position
oI the insured would not attempt to read it, the insured`s reasonable
expectations will not be delimited by the policy language,
regardless oI the clarity oI the particular phrase among the Augean
stable oI print.
360
See, e.g., Atwater Creamery Co. v. Western Nat`l Mut. Ins. Co., 366 N.W.2d 271, 277 (Minn.
1985)('|t|he doctrine oI protecting the reasonable expectations oI the insured is closely related to the
doctrine oI contracts oI adhesion).
361
T.D. RakoII, Contracts of Adhesion. An Essay in Reconstruction, 96 HARV. L. REV. 1173, 1179
(1983). See also KEETON, INSURANCE LAW: BASIC TEXT 352 (1971); C & J Fertilizer, Inc. v. Allied
Mut. Ins. Co., 227 N.W.2d 169, 174 (Iowa 1975), citing 7 S. WILLISTON, A TREATISE ON THE LAW OF
CONTRACTS 906B (3d ed. 1959)('where the document . . . delivered to him is a contract oI insurance

NYDOCS1-449390.1
11/16/11 11:58 AM
-141-


Virtually no one expects the policyholder to have read or understood the language oI a standard
Iorm insurance policy:
362

|a| party who makes regular use oI a standardized Iorm oI
agreement does not ordinarily expect his customers to understand
or even to read the standard terms . . . . Customers do not in Iact
ordinarily understand or even read the standard terms.
363

This includes the insurance industry:
Insurance agents and consumers usually discuss the consumer`s
broad insurance needs and whether the insurer can satisIy those
needs at an acceptable price. Discussion is usually limited to the
Iew terms that are inserted into blanks in the contract. The insurer
does not expect the insured to understand all the terms and usually
makes no attempt to explain them. Exclusions and limitations, as
well as most other 'boilerplate provisions, are not discussed.
364

But the insurance industry wants to have their cake and eat it too. Nearly all
insurance companies use identical standard Iorm language draIted by the Insurance Services
OIIice, Inc. ('ISO). This is why most insurance policies are identical, and why, except Ior
perhaps negotiating the premium to be paid, 'shopping around Ior diIIerent insurance coverage

the majority rule is that the insured is not bound to know its contents); Atwater Creamery Co. v. Western
Nat`l Mut. Ins. Co., 366 N.W.2d 271, 278 (Minn. 1985)('in certain instances . . . the insured should be
held only to reasonable knowledge oI the literal terms and conditions); 3 A. CORBIN, CORBIN ON
CONTRACTS 559 (1964)('|o|ne who applies Ior an insurance policy . . . may not even read the policy,
the number oI its terms and the Iineness oI its print being such as to discourage him); Note,
Unconscionable Contracts. %he Uniform Commercial Code, 45 IOWA L. REV. 843, 844 (1960)('|i|t is
probably a saIe assertion that most involved standardized Iorm contracts are never read by the party who
`adheres` to them. In such situations, the proponent oI the Iorm is Iree to dictate terms most advantageous
to himselI).
362
See e.g., W.D. Slawson, %he New Meaning of Contract. %he %ransformation of Contracts Law By
Standard Forms, 46 U. PITT L. REV. 21, 26 (1984) ('|U|nder the conditions oI modern contracting,
buyers are not reasonably expected even to read the Iorms beIore they are bound.).
363
Restatement (Second) oI Contracts 211 cmt. b (1979):
364
Note, A Common Law Alternative to the Doctrine oI Reasonable Expectations in the
Construction oI Insurance Contracts, 57 N.Y.U. L. REV. 1175, 1181 (1982)(Iootnotes omitted).

NYDOCS1-449390.1
11/16/11 11:58 AM
-142-


is Iutile.
365
Moreover, insurance companies know, or should know, that it is pointless Ior
policyholders to attempt to negotiate standard Iorm language, since insurance company
'|e|mployees regularly using a Iorm oIten have only a limited understanding oI its terms and

365
The insurance industry`s exemption Irom antitrust regulation allows diIIerent insurance
companies to use identical policy language. Congress exempted the insurance industry Irom antitrust
regulation in the McCarran-Ferguson Insurance Regulation Act, 15 United States Code Annotated
1011-1015 (1945). Exemption Irom antitrust regulation helps explain why '|i|nsurance is Iar Irom the
market ideals oI complete inIormation . . . . E.I. du Pont De Nemours & Co. v. Pressman, 679 A.2d 436,
447 (Del. 1996) (quoting Mark Pennington, Punitive Damages for Breach of Contract. A Core Sample
from the Decisions of the Last %en Years, 42 ARK. L. REV. 31, 54 (1989)). The eIIects oI antitrust
exemption supports the arguments that contract damages are inadequate Ior opportunistic breach oI
insurance policies. The insurance industry`s exemption Irom antitrust regulation gives insurance
companies a tremendous litigation and organizational advantage. Exemption Irom antitrust regulation
allows insurance companies to exchange vast amounts oI allegedly conIidential insurance industry
inIormation and documents. Policyholders are deprived oI this same inIormation and those same
documents.
The McCarran-Ferguson Act was the result oI the United States Supreme Court decision in
United States v. South-Eastern Underwriters Ass`n, where the Court rejected insurance company
arguments that insurance was not commerce and held that Congress could properly apply Iederal antitrust
statutes to the insurance industry. United States v. South-Eastern Underwriters Ass`n, 322 U.S. 533
(1944). Exemption Irom antitrust regulation indicates the inIluence oI the insurance industry over the
legislative process. As one noted commentator tells it:
This decision sent shivers down the spines oI insurance company
executives, who Ieared the prospect oI Iederal agencies,
particularly the Federal Trade Commission, interIering with the
insurers` cozy relationships with the state insurance
commissioners. The insurance industry devised an ingenious plan
to head oII Iederal regulation. It persuaded Congress to introduce
legislation, known as the McCarran-Ferguson Act, which provided
a three year moratorium on Iederal regulation oI the insurance
industry. At the expiration oI the moratorium the Iederal
regulators could then assert their authority only over those aspects
oI the insurance industry not regulated by the states. This
moratorium gave the insurance commissioners the opportunity,
through the National Association oI Insurance Commissioners
(NAIC), to draIt model legislation intended to preempt the entire
Iield oI insurance industry regulation and thus protect the
commissioners` turI Irom Federal Trade Commission
encroachment. (Iootnotes omitted)
See Stephen S. Ashley, Bad Faith Actions: Liability and Damages 9:02 at 4 (1996).

NYDOCS1-449390.1
11/16/11 11:58 AM
-143-


limited authority to vary them.
366
Though aware oI the inherent limitations oI standard Iorm
language, insurance companies tout the beneIits oI its use:
For the insurance system to Iunction, insurers need to be able to
predict their insureds potential losses based upon known categories
oI risks . . . . That is why policies are written on standard Iorms.
Standardization enables ISO |Insurance Services, Inc.| to track the
claims experience oI the deIined coverages nationwide which in
turn enables insurers to set realistic premiums and reserves. This is
possible only iI the words have the same meaning in New York
and Washington as they do in CaliIornia. Standardization also
promotes the consumer interest by providing well-deIined
coverages which permit insureds to know what they are buying and
to evaluate it comparatively.
367

The beneIit oI using standardized language is that it increases commercial eIIiciency by
reducing, or eliminating, the time and expense oI bargaining.
368
Requiring unnegotiable standard
Iorm language to be read especially the language contained in a standard Iorm insurance
policy would produce the opposite result and obliterate the beneIits oI standardization.
369
The

366
Restatement (Second) oI Contracts 211 cmt. b (1979).
367
Real Parties in Interest |Industrial Indemnity Company and Industrial Insurance Company oI
Hawaii, Ltd.| Opening BrieI on the Merits at 36-37, Bank oI the West v. Superior Court, 833 P.2d 545
(Cal. 1992). See also Eugene R. Anderson et al., Environmental Insurance Coverage In New ersey. A
%ale of %wo Stories, 24 RUTGERS L.J. 83 (Fall 1992) (reviewing the development oI the pollution
exclusion and the invocation oI regulatory estoppel to prohibit insurance companies Irom adopting
positions contrary to insurance company representations made when regulations were proposed).
368
See E. ALLAN FARNSWORTH, CONTRACTS 4.26 (2d. ed. 1990) and RESTATEMENT (SECOND) OF
CONTRACTS 211 cmt. c. (1979)(discussing the beneIits oI using standardized language).
369
This is especially true with insurance policies standard Iorm language. Consider the opening
language and exclusions in a typical ISO-approved comprehensive general liability policy:
Section I Coverages
Coverage A. Bodily Injury and Property Damage Liability
1. Insuring Agreement
a. We will pay those sums that the insured becomes legally obligated to pay as damages
because oI bodily injury` or property damage` to which this insurance applies. No other
obligation or liability to pay sums or perIorm acts or services is covered unless explicitly
provided Ior under SUPPLEMENTARY PAYMENTS -- COVERAGES A AND B. This
insurance does not apply to bodily injury` or property damage` which occurred beIore the
Retroactive Date, iI any, shown in the Declarations or which occurs aIter the policy period.
The bodily injury` or property damage` must be caused by an occurrence.` The

NYDOCS1-449390.1
11/16/11 11:58 AM
-144-


simple solution, as one insurance company has argued, is that 'Because an insurer prepares its
own contracts, it has a duty to make its meaning clear.
370

In short, reading or understanding the complicated standard Iorm policy language
in order to alter it is not possible. And iI it were possible, doing so would deIeat the beneIits to
the insurance industry oI using standardized Iorms. Yet the problems with securing policyholder
expectations under standard Iorm insurance policies is not a new phenomenon. Over IiIty years
ago one commentator noted:
|T|he insurance policy has become overloaded with warranties,
representations, conditions and exceptions, and other restrictive
provisions, which tend to take on highly technical and treacherous
characteristics. . . . It has been oIten said that iI all the provisions
oI the modern insurance policy were literally enIorced, no

occurrence` must take place in the coverage territory.` We will have the right and duty to
deIend any suit` seeking those damages.
. . . .
2. Exclusions
This insurance does not apply to:
a. Bodily injury` or property damage` expected or intended Irom the standpoint oI the
insured. The exclusion does not apply to bodily injury` resulting Irom the use oI reasonable
Iorce to protect persons or property.
b. Bodily injury` or property damage` Ior which the insured is obligated to pay damages
by reason oI the assumption oI liability in a contract or agreement. This exclusion does not
apply to liability Ior damages:
1. Assumed in a contract or agreement that is an insured contract;` or
2. That the insured would have in the absence oI the contract or agreement.
Commercial General Liability Coverage Form CG 00 01 01 96, p.1 (Copyright, Insurance Services
OIIice, Inc., 1994), set Iorth in YOUR GUIDE TO THE ISO COMMERCIAL LINES POLICIES, Appendix B, at
B-2 (6th ed. 1996).
The above-quoted policy contains 12 additional exclusions and 6 additional sections. Requiring a
policyholder to read this language, much less understand it prior to purchasing insurance coverage, would
deIeat the purpose oI using standardized language. It certainly does not make matters clearer.
370
BrieI oI Appellees, at 42, dated Apr. 22, 1996, Associated Wholesale Grocers, Inc. v. Americold
Corp., No. 95-75279-AS (Kan.). The statement was made by Arkwright Mutual Insurance Co.

NYDOCS1-449390.1
11/16/11 11:58 AM
-145-


policyholder could recover a penny. This is an overstatement, but
suggestive.
371

That standard Iorm insurance agreements and boilerplate are particularly subject
to hidden meanings and conIusion has been succinctly noted by the courts:
'Although insurers have had over a hundred years to hone their
policies into Iorms that would not Ierry the unwary reader on a trip
through Wonderland, they regrettably have not seen Iit to do
so.
372

Insurance companies have reIused to remedy the situation on their own. Despite the century to
clariIy their policies, the same is true today:
Ambiguity and incomprehensibility seem to be the Iavorite tools oI
the insurance trade in draIting policies. Most are a virtually
impenetrable thicket oI incomprehensible verbosity. It seems that
insurers generally are attempting to convince the customer when
selling the policy that everything is covered and convince the court
when a claim is made that nothing is covered. The miracle oI it all
is that the English language can be subjected to such abuse and still
remain an instrument oI communication. But, until such time as
courts generally weary oI the task we have just experienced and
strike down the entire practice, we Ieel that we must run with the
pack and attempt to construe that which may well be impossible oI
construction.
373

c. The Fallacy of The Sophisticated Policyholder
Insurance companies and their lawyers have strenuously argued that the doctrines
oI reasonable expectations and contra proferentem should not apply when a claim is made by a
so-called 'sophisticated policyholder.
374
So-called 'sophisticated policyholders have been

371
W. Vance, Cases on Insurance 211-12 (3d ed. 1940).
372
Storms v. United States Fidelity & Guar. Co., 118 N.H. 427, 338 A.2d 578, 579-80 (1978).
373
South Carolina Ins. Co. v. Fidelity & Guar. Ins. Underwriters, 327 S.C. 207, 486 S.E.2d 200, 204
(1997), quoting Universal Underwriters Ins. Co. v. Travelers Ins. Co., 451 S.W.2d 616, 622-23 (Ky. Ct.
App. 1970).
374
See e.g. Barry R. Ostrager & David W. Ichel, Should the Business Insurance Policy Be Construed
Against the Insurer? Another Look at the Reasonable Expectations Doctrine, 33 FED`N INS. COUNS. Q.
273 (1983).

NYDOCS1-449390.1
11/16/11 11:58 AM
-146-


deIined by one pro-insurance commentator as commercial policyholders whose 'business
insurance policies . . . are typically negotiated (and oIten draIted) on behalI oI the insured by
sophisticated brokers, risk managers and/or counsel . . . .
375
This argument, and the Iacts upon
which it rests, are pure Iabrication.
The Iirst obvious problem with the sophisticated policyholder argument is that
standard Iorm insurance policies contain no 'sophisticated policyholder exclusion, although
nothing prevents the insurance industry Irom draIting one.
376
That a 'sophisticated
policyholder exclusion does not exist is strong evidence that insurance companies never intended
to treat commercial and individual policyholders diIIerently. In Iact, insurance companies
apparently have no speciIic criteria to determine what constitutes a 'sophisticated policyholder.
One insurance company argued (unsuccessIully) that a policyholder who had graduated Irom
business school was a sophisticated policyholder.
377
The slippery slope character oI the
'sophisticated policyholder argument is selI-evident.
Holding commercial policyholders to a higher standard based on nebulous Iactors
such as size or wealth 'suggests that big companies ought to receive less insurance coverage than
small companies, notwithstanding that big companies pay big premiums Ior their coverage.
378

The size or wealth oI a commercial policyholder has nothing to do with its understanding oI the

375
The sophisticated policyholder 'exclusion recently gained general support. |Cite Brennan| See
Barry R. Ostrager & Barry R. Newman, Handbook on Insurance Coverage Disputes 1.03|c|, at 27 (7th
ed. 1994).
376
See Carl A. Salisbury, Pollution Liability Insurance Coverage, The Standard-Form Pollution
Exclusion, And The Insurance Industry: A Case Study In Collective Amnesia, 21 ENVTL. L. 357, 362
(Winter 1991).
377
See Brotherhood Ins. Co. v. Roseth, 177 Ill. App. 3d 443, 532 N.E.2d 354 (1988).
378
Carl A. Salisbury, Pollution Liability Insurance Coverage, The Standard-Form Pollution
Exclusion, And The Insurance Industry: A Case Study In Collective Amnesia, 21 ENVTL. L. 357, 362
(Winter 1991).

NYDOCS1-449390.1
11/16/11 11:58 AM
-147-


language in its insurance policy. One court recently contrasted the policyholder`s purported
'sophistication to the insurance industry`s typical business practices:
In transactions involving sophisticated and unsophisticated
insureds alike, the insured has a right to expect that |it| will receive
something oI comparable value in return Ior the premium paid, yet
the courts have recognized that the insured can be Iorced by the
insurer to rely upon the oral representations oI the insurance agent.
The control exercised by insurers is especially problematic when
the insured, whether sophisticated or not, does not receive the
actual insurance policy until aIter oIIering to buy insurance and
paying the Iirst premium . . . Moreover, when the insured does not
know or have reason to know oI the existence oI an unIavorable
provision, then the insured lacks the ability to negotiate a more
Iavorable insurance policy, and its sophistication or putative
bargaining power is meaningless.
379

The court, though cognizant that the reasonable expectations doctrine was 'adopted to combat
the eIIects oI the relatively unequal bargaining power exercised by insurer and insured, reversed
the district court`s Iinding that the policyholder`s expectation oI insurance coverage was
'irrelevant as a matter oI law because oI |the policyholder`s| status as a sophisticated purchaser
oI insurance.
380

The truth is that America`s largest corporations purchase standard Iorm policy
language just like everybody else.
381
In Iact, most large commercial policyholders do not

379
Reliance Ins. Co. v. Moessner, 121 F.3d 895, 905 (3d Cir. 1997)(internal citations and quotations
omitted, quoting Collister v. Nationwide LiIe Ins. Co., 388 A.2d 1346, 1353 (Pa. 1978) and citing Robert
Keeton, Insurance Law Rights at Jariance With Policy Provisions, 83 HARV. L. REV. 961, 968 (1970)
and Zuckerman v. Transamerica Ins. Co., 133 Ariz. 139, 650 P.2d 441 (1982)).
380
Reliance Ins. Co. v. Moessner, 121 F.3d 895, 904 (3d Cir. 1997).
381
See David B. Goodwin, Disputing Insurance Coverage Disputes, 43 STAN. L. REV. 779, 796-97
(Feb. 1991)(listing examples oI cases involving large policyholders with policies containing unvaried
standard Iorm language. Among others, the article cites Eli Lilly & Co. v. Home Insurance Co., 764 F.2d
876, 879 (D.C. Cir. 1985)(policyholder`s 242 policies issued over the course oI 29 years by diIIerent
insurance companies contained Iunctionally identical deIinitions oI 'injury and 'occurrence); In re
Asbestos Ins. Coverage Cases, judicial Coordination Proceeding No. 1072, Statement oI Decision
Concerning Phase III Issues, slip. op. at 1-3, 14 (Cal. Super. Ct. Jan. 24, 1990)(insurance agreement,

NYDOCS1-449390.1
11/16/11 11:58 AM
-148-


purchase 'manuscript policies, and policies which insurance companies purport to be
manuscript policies are oIten no more than a typewritten version oI the standard Iorm
language.
382
A policy based on standard-Iorm language, whether sold to a multinational
corporation or a residential homeowner, is oIIered on a take-it-or-leave-it basis.
383
Even large
commercial policyholders who work with brokers are only paying to have segments oI yet more
standard-Iorm language assembled terms are rarely rewritten. As the Illinois Supreme Court
commented:
The insurance industry is powerIul and closely knit. . . . Any
insured, whether large and sophisticated or not, must enter into a
contract with an insurer which is written according to the insurer`s
pleasure by the insurer.
384

Other courts have come to the same conclusion. The Washington Supreme Court in Boeing Co.
v. Aetna Casualty and Surety Co. held that:
|O|n the Iacts oI this case, it is questionable whether these standard
rules oI construction are no less applicable merely because the
insured is itselI a corporate giant. The critical Iact remains that the
policy in question is a standard Iorm policy prepared by the
company`s experts, with language selected by the insurer. The
speciIic language in question was not negotiated, thereIore, it is
irrelevant that some corporations have company counsel.
Additionally, this standard Iorm policy has been issued to big and
small businesses throughout the state. ThereIore it would be
incongruous Ior the court to apply diIIerent rules oI construction

injury and occurrence language is 'Iunctionally identical Ior policies issued by dozens oI insurance
companies to several large policyholders).
382
See David B. Goodwin, Disputing Insurance Coverage Disputes, 43 STAN. L. REV. 779, 796
n.100 (Feb. 1991), quoting Wondie Russel et al. Insurance Policy Construction and the Non Sequitur of
the 'Sophisticated Insured,` 3 ENVTL. CLAIMS J. 3, 16-17 (1990).
383
See Melody A. Hamel, The 1970 Pollution Exclusion in Comprehensive General Liability
Policies: Reasons For Interpretations in Favor oI Coverage in 1996 and Beyond, 34 DUQ. L. REV. 1083,
1111 (Summer 1996)(arguing that the non-competitive nature oI the market Ior pollution insurance
coverage justiIies application oI the doctrines oI contra proIerentem and reasonable expectations, even
where the policyholder is 'sophisticated.).
384
Outboard Marine Corp. v. Liberty Mut. Ins. Co., 607 N.E.2d 1204, 1218 (Ill. 1992).

NYDOCS1-449390.1
11/16/11 11:58 AM
-149-


based on the policyholder because once the court construes the
standard Iorm coverage clause as a matter oI law, the court`s
construction will bind policyholders throughout the state regardless
oI the size oI their business.
385

Similarly, the CaliIornia Supreme Court in AIU Insurance Co. v. Superior Court held that the
mere Iact a policyholder possessed 'both legal sophistication and substantial bargaining power
'has little bearing on the construction oI the speciIic |standard-Iorm| policy language in question
here.
386
Insurance companies simply have no reason to believe that policyholders sophisticated
in building automobiles, manuIacturing chemicals or Ilying airplanes, Ior instance, are equally
sophisticated about insurance:
The particular sophisticated commercial entities involved in this
case were in diIIerent businesses. |The policyholders| may have
been knowledgeable about their own businesses, aviation, and
security, respectively, but not necessarily insurance. Though they
may have possessed some degree oI generic business
sophistication, it would be nonetheless reasonable Ior a jury to
inIer that both relied extensively on the superior expertise oI |the
insurance company|.
387

In addition, large commercial policyholders do not negotiate policy terms Ior
economic reasons created by the insurance company. The economic reasons Ior not negotiating
standard Iorm language were succinctly set Iorth by one commentator:
The reality is that sophisticated insureds normally devote their
'bargaining power resources to obtaining higher limits oI liability
or coverage Ior a broader range oI risks than to negotiating speciIic
policy language. AIter all, when insurance carriers use non-
standard language, the carrier is unable to use pooled risk rating
inIormation and thereIore must charge a higher premium to

385
Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wash. 2d. 869, 883, 784 P.2d 507, 514
(1990)(emphasis added). See also 1 EUGENE R. ANDERSON ET AL., INSURANCE COVERAGE LITIGATION
2.15, at 101 (1st ed. 1997).
386
AIU Ins. Co. v. Superior Court (FMC Corp.), 51 Cal. 3d 807, 799 P.2d 1253, 1266, 274 Cal.
Rptr. 820 (1990).
387
United States v. Brennan, 938 F. Supp. 1111, 1121, (E.D.N.Y. 1996), appeal pending.

NYDOCS1-449390.1
11/16/11 11:58 AM
-150-


compensate Ior the increased risk. Sophisticated insureds thus
rarely will Iind that the cost oI purchasing non-standardized
policies make Iinancial sense.
388

Nor is there any reason why large commercial policyholders should be compelled
to negotiate their policy language; the very purpose oI the regulatory process is to approve
standard-Iorm language 'so that the state can negotiate with the insurance industry on behalI oI
policyholders who never get that chance.
389
To Iorce a policyholder with deep pockets to
undertake the same responsibilities is a purely opportunistic argument.
The 'sophisticated policyholder argument suIIers Irom an additional Ilaw: at
what point, exactly, does an 'ordinary policyholder become a 'sophisticated policyholder?
Policyholders may not have been 'sophisticated decades ago when the policies were purchased.
Or they may not have been 'sophisticated when insurance coverage under those policies was
triggered.
390
Moreover, insurance companies standing in the shoes oI a policyholder` have
IorceIully argued that the 'sophisticated policyholder argument is meritless. So said:

388
David B. Goodwin, Disputing Insurance Coverage Disputes, 43 STAN. L. REV. 779, 797 (Feb.
1991)(Iootnotes omitted).
389
Melody A. Hamel, The 1970 Pollution Exclusion in Comprehensive General Liability Policies:
Reasons For Interpretations in Favor oI Coverage in 1996 and Beyond, 34 DUQ. L. REV. 1083, 1112
(Summer 1996) quoting Morton Int`l, Inc. v. General Accident Ins. Co., 134 N.J. 1, 629 A.2d 831, 848
(1993), cert. denied, 512 U.S. 1245 (1994):
The insurance industry`s presentation and characterization oI the
standard pollution-exclusion clause to state regulators constituted
virtually the only opportunity Ior arms length bargaining by
interests adverse to the industry, insureds having virtually no
choice at all but to purchase the industry-wide standard CGL
policy.
390
See David B. Goodwin, Disputing Insurance Coverage Disputes, 43 STAN. L. REV. 779, 798 n.5
(Feb. 1991).

NYDOCS1-449390.1
11/16/11 11:58 AM
-151-


CNA Casualty oI CaliIornia:
|T|he level oI sophistication oI the insured is irrelevant when the
policies are standard Iorm policies slapped together without any
negotiation as to their terms.
391

Travelers Insurance Co.:
SigniIicantly, regardless oI the sophistication oI the insured, the
|plaintiII insurance company`s| policy is a printed FORM policy
prepared by the carrier without the possibility oI negotiation or
modiIication by the assured. (129a). It Iollows thereIore that an
ambiguity which permits an interpretation oI either coverage or
noncoverage must be resolved as coverage in Iavor oI the insured .
. . .
392

Travelers continued:
|T|he Iorm policy was selected and prepared by |the plaintiII
insurance company|. It must suIIer the consequence oI the
carelessness oI its own draItsmanship. II there exists a possibility
oI an interpretation by providing coverage Irom the viewpoint oI
the reasonable expectations oI the insured, the court must conclude
that coverage exists.
393

Continental Casualty Co.:
|T|he CaliIornia Supreme Court has recently and unanimously held
that even where the policyholder is sophisticated (even to the
extent oI operating a subsidiary that draIted CGL policies identical
to those at issue in the case), the usual rule oI interpreting
ambiguities in Iavor oI the policyholder applies where standard
Iorm policy language is involved.
394

Again Irom Continental Casualty Co.:

391
Reply BrieI oI Respondent CNA Casualty oI CaliIornia in Reply to Appellants Seaboard Surety
Company and Insurance Company oI North America and Opening BrieI oI Cross-Appellant CNA
Casualty oI CaliIornia, at 20, Iiled Aug. 16, 1984, CNA Cas. oI Ca. v. Seaboard Sur. Co., (No. 761572)
176 Cal. App. 3d 598 (1984).
392
BrieI Ior DeIendant-Appellee Travelers Insurance Company, at 22, First State Underwriters
Agency oI New England Reinsurance Corp. v. Travelers Ins. Co., (D.N.J.).
393
Id. at 23.
394
PlaintiII Metropolitan`s Memorandum oI Points and Authorities in Opposition to DeIendant
CalFarm`s Motion Ior Summary Judgment, at 11, dated May 22, 1991, Metropolitan LiIe Ins. Co. v.
CalIarm Ins. Co., (No. 419329-8)(Cal. Super. Ct.), citing AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807,
815, 823-824 (1990).

NYDOCS1-449390.1
11/16/11 11:58 AM
-152-


The |deIendant insurance company| recognizes . . . that any
ambiguities in an insurance policy should be construed strictly
against the insurer and in Iavor oI the insured . . . |but| argues that
the rule should not be applied in this case because |the
policyholder| is a sophisticated` corporate entity . . . . |I|n this
case there is ample evidence on the record that |the policyholder|
would have had very limited bargaining power in obtaining the
|deIendant insurance company`s| policy because Iew general
liability carriers were willing to write the sort oI coverage sought
by |the policyholder|.
395

The court accepted Continental`s argument. Another insurance company, Commercial Union,
then relied upon the Iavorable decision to make its own arguments against the 'sophisticated
policyholder:
Commercial Union:
|Commercial Union, citing Continental Cas. v. Canadian Universal
Ins.| Iollows the general rule that the sophisticated insured` (or
equal bargaining power) exception does not apply when the
insured, no matter how large or sophisticated` has no actual
participation in draIting the contract language.
396

HartIord LiIe Insurance Co.
The |deIendant insurance company| made the superIicial comment
that HartIord`s argument . . . is perhaps a bit shameIul to be made
by a major insurance company.` HartIord, however, is not, and
never has been, involved in the title insurance business. Its normal
practice oI requiring title insurance oI its real estate investments
and relying on the expertise oI the title insurance companies is no
diIIerent Irom a labor lawyer seeking the advice oI a tax lawyer
with regard to his personal income tax problems, or a medical
general practitioner reIerring his wiIe to a gynecologist.
397


395
BrieI Ior PlaintiII-Appellee Continental Casualty Co., at 12-13, undated, (internal quotations and
citations omitted), Continental Cas. Co. v. Canadian Universal Ins. Co.,(Nos. 90-1406, 90-1491) 924 F.2d
370 (1st Cir. 1991).
396
BrieI oI Appellant Commercial Union Insurance Company, at 39, dated Apr. 6, 1993,
Commercial Union Ins. Co. v. Walbrook, 7 F.3d 1046 (1st Cir. 1993), citing Continental Cas. Co. v.
Canadian Universal Ins. Co., 924 F.2d 370, 375 (1st Cir. 1991).
397
Reply BrieI oI Appellant, HartIord LiIe Insurance Co., Iiled Oct. 26, 1975, HartIord LiIe Ins. Co.
v. Title Guar. Co., 520 F.2d 1170 (D.C. Cir. 1975)(Nos. 74-1451, 74-1461).

NYDOCS1-449390.1
11/16/11 11:58 AM
-153-


It is also interesting to note that despite their arguments, insurance companies treat large
commercial and individual policyholders similarly in another respect: like the individual
policyholder, the 'sophisticated policyholder does not receive their policy until weeks or
months aIter the premium has been paid.
PART V
Civil RICO
A. Considerations
One option available to policyholders and other claimants prosecuting a bad Iaith
claim against an insurance company is to make a claim under the Racketeering InIluenced and
Corrupt Organizations Act ('RICO).
398
The United States Supreme Court recently held that the
insurance business was subject to RICO |Cite Hummana|
Section 1962(c) prohibits a 'person Irom conducting or participating in the
conduct oI the aIIairs oI an 'enterprise through a 'pattern oI racketeering activity, Ior example,
the commission oI at least two 'predicate acts such as mail or wire Iraud.
399
To collect treble

398
18 U.S.C. 1961 et seq.
18 United States Code Annotated 1962(a) states in pertinent part:
It shall be unlawIul Ior any person who has received any income
derived, directly or indirectly, Irom a pattern oI racketeering
activity . . . to use or invest . . . any part oI such income, or the
proceeds oI such income, in acquisition oI any interest in, or the
establishment or operation oI, any enterprise which is engaged in,
or the activities oI which aIIect interstate or Ioreign commerce.
Similarly, 18 United States Code Annotated 1962(c) states in pertinent part:
It shall be unlawIul Ior any person employed by or associated with
any enterprise engaged in . . . interstate or Ioreign commerce, to
conduct or participate . . . in the conduct oI such enterprise`s
aIIairs through a pattern oI racketeering activity or collection oI
unlawIul debt.
399
See 18 U.S.C. 1971(1).

NYDOCS1-449390.1
11/16/11 11:58 AM
-154-


damages, a plaintiII must show injury to business or property and that the alleged injury was
actually and proximately caused by the racketeering predicates.
400

The Iour greatest potential challenges to pleading a successIul RICO claim are:
(1) circumventing the requirement that the RICO 'enterprise be entirely distinct Irom the RICO
'person (the deIendant); (2) making out a colorable 'scheme to deIraud within the meaning oI
the mail/wire Iraud statutes; (3) showing the requisite injury to business or property oI the
plaintiII; (4) proving that such injury was proximately caused by the racketeering activity; and
(5) avoiding a conIlict with the McCarran-Ferguson Act.

400
Holmes v. Sec. Inv. Protection Corp., 503 U.S. 258, 268 (1992).

NYDOCS1-449390.1
11/16/11 11:58 AM
-155-


1. The RICO Enterprise: Circumventing the Distinctiveness Requirement
Section 1962(c) applies only to a 'person employed by or associated with any
enterprise and makes it unlawIul Ior such a person 'to conduct or participate in the conduct oI
such enterprise`s aIIairs through a pattern oI racketeering activity.
401
Courts considering the
question hold that, as a matter oI law, the same person may not be both a 1962(c) enterprise
and a deIendant and Iurther, that corporations are not distinct Irom their aIIiliates or subsidiaries
Ior purposes oI 1962(c).
402

The rationale oI these decisions is that a corporation acts through its aIIiliates and
subsidiaries, particularly where the alleged conduct oI the enterprise is based simply on the
regular business activity oI the parent corporation.
403
Thus, a plaintiII may not be able to
circumvent the distinctiveness requirement by naming a subsidiary (or aIIiliate) as the RICO
enterprise and the parent (or related) company as the RICO deIendant. Courts have similarly

401
A 'person as deIined in 1961(3) 'includes any individual or entity capable oI holding a legal
or beneIicial interest in property. An 'enterprise is an element oI a RICO claim, not a party to the
litigation. Section 1961(4) provides that an 'enterprise includes any individual, partnership, corporation,
association, or other legal entity, and any union or group oI individuals associated in Iact, although not a
legal entity.
402
The leading case in this area is a Seventh Circuit case, Haroco, Inc. v. American National Bank &
Trust Co., 747 F.2d 384 (7th Cir. 1984), aII`d on other grounds, 473 U.S. 606 (1985). In Haroco, the
plaintiIIs alleged in one oI their RICO counts that deIendant American National Bank & Trust ('ANB)
violated 1962(c) by conducting the bank`s aIIairs through a pattern oI racketeering activity (i.e., using
the mails to deIraud plaintiIIs by overstating the prime interest rate, which determined their own variable
interest payments). The court held that the 'enterprise and the 'person must be distinct Ior purpose oI
1962(c), and concluded that 'ANB may not be held liable under section 1962(c) Ior conducting its own
aIIairs through a pattern oI racketeering activity. 747 F.2d at 402. Accord Arzzuaga-Collazo v. Oriental
Federal Savings Bank, 913 F.2d 5 (1st Cir. 1990); Bennett v. United States Trust Co., 770 F.2d 308 (2d
Cir. 1985), cert. denied, 474 U.S. 1058 (1986); Elliott v. FouIas, 867 F.2d 877 (5th Cir. 1989); Rae v.
Union Bank, 725 F.2d 478 (9th Cir. 1984).
403
In practice, the determination oI whether 'an association in Iact is properly alleged oIten turns
on the court`s view oI whether the Copperweld doctrine -- which holds that a corporation cannot conspire
with its own subsidiary in the antitrust context because the two are viewed as a single entity -- applies in
the RICO context. See J. RAKOFF AND H. GOLDSTEIN, RICO: CIVIL AND CRIMINAL LAW AND
STRATEGY (1997) at 1.05|2|; Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 777
(1984).

NYDOCS1-449390.1
11/16/11 11:58 AM
-156-


rejected allegations oI an association-in-Iact RICO enterprise that consists merely oI a corporate
deIendant associated with its own aIIiliates or subdivisions carrying our the regular business
activities oI the deIendants. In short, claims will be dismissed when the enterprise and
deIendant, although Iacially distinct, are in reality no diIIerent Irom each other. Several courts,
however, suggest that a corporation can be both a deIendant and part oI the enterprise, as long as
the enterprise can meaningIully be deIined to include other corporations or individuals as well.
This result may obtain even where all oI the members oI an alleged association-in-Iact enterprise
are named as deIendants.
404

A problem might arise in case the deIendants are Iound to be aIIiliated. The
distinctiveness problem may be avoided iI the RICO enterprise is pled to include various
corporations and individuals other than those that are named as (or aIIiliated with) the RICO
deIendants. Adding directors and oIIicers to the mix can help, since several courts have held that
a plaintiII can name a corporation as the RICO 'enterprise and its oIIicers and directors as the
RICO 'persons.
405


404
See C.A. Westel De Venezuela v. AT&T, 90 Civ. 6665, 1994 U.S. Dist LEXIS 14481 (S.D.N.Y.
Oct. 11, 1994); River City Markets, Inc. v. Fleming Foods West, Inc., 960 F.2d 1458 (9th Cir. 1992).
405
See United States v. Robinson, 8 F.3d 398 (7th Cir. 1993); Sever v. Alaska Pulp Corp., 978 F.2d
1529 (9th Cir. 1992). Adding outside agents, however, may not circumvent the distinctiveness problem.
Courts in the Second, Seventh and Ninth Circuits have rejected eIIorts to allege an association-in-Iact
enterprise consisting oI a deIendant employer and its outside agents. See Nicholas J. Murlas Trust v.
Mobil Oil Corp., No. 93 C 6956, 1995 U.S. Dist. LEXIS 12037 (N.D. Ill. Aug. 17, 1995); Barker v. E.F.
Hutton Co., No. C-89-1840 EFL, 1990 U.S. Dist. LEXIS 19039 (N.D. Cal. July 6, 1990); Skylon Corp. v.
GuilIord Mills, Inc., No. 93 Civ. 5581, 1997 U.S. Dist. LEXIS 2104 (S.D.N.Y. Mar. 3, 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-157-


2. Racketeering Activity: Proving Mail and Wire Fraud
To prove mail or wire Iraud, a plaintiII need only establish three elements:
(1) a scheme or artiIice to deIraud or to obtain money or property by means oI
Ialse pretenses, representations or promises;
(2) a use oI U.S. mails or interstate wires Ior the purpose oI executing the
scheme; and,
(3) a speciIic intent to deIraud, either by devising, participating in or abetting
the scheme.
The courts construe these elements broadly. A scheme or artiIice to deIraud has
been construed by the courts to include any trickery, deceit, halI truth, concealment oI material
Iacts, or aIIirmative misrepresentation. The omission oI a material Iact can constitute mail Iraud
even in the absence oI a speciIic duty to disclose the inIormation.
406
The communication need
only be in Iurtherance oI a scheme which itselI intentionally or recklessly causes the harm. In
short, nearly any communication by any person in the racketeering association, whether to the
victim, or to any other member oI the association, and whatever its content can satisIy this
requirement, iI in Iurtherance oI the scheme.
407

The third element oI a mail/wire Iraud violation, a speciIic intent to deIraud by
means oI Ialse or Iraudulent pretenses, representations, promises or other deceptive conduct, can
be demonstrated by circumstances which give rise to a strong inIerence that the deIendant knew
oI the Ialsity. An 'intent to deIraud can be demonstrated either by a pattern oI conduct or
(according to the Seventh and Ninth Circuits) recklessness.

406
See Emery v. General Finance, Inc., No. 95-1037, 1996 U.S. App. LEXIS 1493 (7th Cir. Jan. 13,
1996).
407
Further, it is not necessary Ior the deIendant to personally use the mails or even intend that the
mails be used. United States v. Bortnovsky, 879 F.2d 30, 36 (2d Cir. 1989); Spira v. Nick, 876 F. Supp.
553, 559 (S.D.N.Y. 1995). However, iI the deIendant did not actually participate in the communication,
the use oI the mails or wires must have been 'reasonably Ioreseeable by him although it need not be
actually known. United States v. Maze, 414 U.S. 395, 399 (1974).

NYDOCS1-449390.1
11/16/11 11:58 AM
-158-


There is a split in the circuits, however, as to whether reliance is a necessary
element or proximate cause when a RICO violation is predicated on acts oI wire or mail Iraud.
Some courts have held that reliance is required, and that iI the plaintiII was never exposed to the
misrepresentation, did not believe it, and took no action with regard to it, then the
misrepresentation could not have been a cause in Iact oI his injury. Others have held that
reliance need not be shown, since reliance is not an element oI the underlying predicate crimes oI
mail/wire Iraud. Seventh Circuit precedent mandates reliance as a necessary element oI mail or
wire Iraud.
408
The cases in the Second Circuit appear to go both ways.
409

A 'scheme or article to deIraud also includes a scheme to deprive another oI the
'intangible right oI honest services.
410
Several courts have interpreted this proviso so as to
make breaches oI Iiduciary duty prosecutable as mail and wire Irauds.
411
The courts have held

408
See Moore v. Fidelity Financial Servs., Inc., 949 F. Supp. 673 (N.D. Ill. 1997).
409
Compare TCH Holdings Corp. v. Tishman, No. 93 Civ. 5393, 1996 U.S. Dist. LEXIS 7562
(S.D.N.Y. May 30, 1996) and B.V. Optische Industrie DeGude DelIt v. Hologic, Inc., 909 F. Supp. 162
(S.D.N.Y. 1995) (holding that plaintiII seeking to base RICO liability on mail or wire Iraud claims must
prove that its injuries are the result oI reliance on the Iraud) with In re American Express Co. Shareholder
Litigation, 840 F. Supp. 260 (S.D.N.Y. 1993) and Sterling Interiors Group v. Haworth, Inc., No. 94 Civ.
9216(CSH), 1996 U.S. Dist. LEXIS 13908 (S.D.N.Y. Sept. 19, 1996) (holding that the law oI the Second
Circuit does not require a RICO plaintiII to allege that he relied on the underlying misrepresentations in
order to have standing under the statute; rather, the plaintiII must simply allege that the predicate acts
committed in Iurtherance oI the Iraud proximately caused injury to him either by way oI his own reliance
or some third party`s reliance.).
410
18 U.S.C. 1346.
411
See e.g., United States v. Sawyer, 85 F.3d 713 (1st Cir. 1996)(lobbyist convicted oI providing
trips, giIts and entertainment to members oI the Massachusetts Legislature in return Ior Iavorable
legislation; 1346 broadened mail Iraud to encompass schemes to deIraud citizens oI the intangible right
to the honest services oI their public oIIicials); United States v. Gray, 96 F.3d 769 (5th Cir. 1996)(1346
was constitutionally applied to coaches, employees oI college who deIrauded their employer oI intangible
rights to honest services by withholding material inIormation as to their eIIorts to academically assist
prospective basketball players in violation oI NCAA rules); United States v. NeuIeld, 908 F. Supp. 491
(S.D. Ohio 1995)(doctor convicted oI mail Iraud relating to his reIerral oI patients Ior home health care
services); United States v. Sancho, 957 F. Supp. 39 (S.D.N.Y. 1997)(essential elements oI 1343, 1346
met where deIendant devised scheme to deprive the Tishman Construction Corp. oI the intangible right oI
honest services oI someone deIendant believed to be Tishman`s consultant (really an undercover agent)).

NYDOCS1-449390.1
11/16/11 11:58 AM
-159-


that an intangible rights scheme is only cognizable when at least one oI the schemers is in a
Iiduciary relationship with the deIrauded person or entity.
However, courts in the Second Circuit have held that existence oI a Iiduciary duty
is not a necessary element oI a mail/wire Iraud violation under 1346. In this connection, courts
in the Second Circuit also hold contrary to courts in the other jurisdictions that a Iiduciary
relationship exists between an insurance company and its policyholder.
412

3. Two Acts of Racketeering Activity
A RICO claimant must establish that the deIendants engaged in at least two acts
oI racketeering activity that are related, and that they occurred over a substantial period oI time
(most courts require a period oI over one year), or amount to or pose a threat oI continuing
criminal activity.
413

4. Showing the Requisite Injury
In order to establish a RICO cause oI action the plaintiII must show that it has
been injured in its 'business or property and that such injury was proximately caused by this
alleged scheme. With regard to the Iirst oI these requirements, courts have held that the injury to
business or property must constitute an actual, tangible, provable, out-oI-pocket Iinancial loss.
'Injuries that are speculative or unprovable in nature or amount are not recoverable recovery
must wait until the nature and extent oI damages becomes clear and deIinite.`'
414


412
United States v. Brennan, 938 F.Supp. 1111, 1120 (E.D.N.Y. 1996), appeal pending, '|t|he
Iiduciary relationship that an insurer owes to its insured is a Iixture oI New York law). But see North
River Ins. Co. v. Columbia Cas. Co., No. 90 Civ. 2518, 1995 U.S. Dist. LEXIS 13682, at *5 (S.D.N.Y.
Jan. 5, 1995)(reinsurance company owes no Iiduciary duty to its policyholder).
413
See H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229 (1989); Sedima S.P.R.L. v. Imrex Co.,
473 U.S. 479, 496 (1985).
414
Dornberger v. Metropolitan LiIe Ins. Co., 961 F. Supp. 506, 521 (S.D.N.Y. 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-160-


Policyholders may claim that they have been injured through unreasonable delay
and/or unjustiIiable reIusal to pay claims under their insurance policies. Some courts have
reIused to Iind a RICO 'injury where the alleged harm is the plaintiII`s hypothetical inability to
recover on a judgment against the deIendant. That is, where the actual injury is contingent upon
a judicial resolution oI liability, and the plaintiII`s inability to collect thereupon, the plaintiII`s
RICO claim has been deemed 'unripe Ior adjudication.
A policyholder may claim that it has suIIered a RICO injury through paying
premiums on insurance policies which the insurance company has eIIectively dishonored by
Iailing to provide adequate security Ior its obligations thereunder. A policyholder may argue that
the insurance company has derogated its obligation to 'pay or make good on losses covered by
its policies and has intentionally pushed back the timing oI its payments on claims in order to
take advantage oI the investment return on its reserves. A policyholder may argue that it has not
obtained the beneIit oI its bargain in that it has not received the security or service its insurance
premiums have purchased.
In Dornberer v. Metropolitan Life Ins. Co.,
415
the plaintiII brought a RICO action
against a liIe insurance company, arguing that she did not receive the beneIit oI her premium
payments because the policies were tainted by the insurer`s Iraud.
416
Essentially, the plaintiII
argued that the policies were riskier than she had bargained Ior, and that she had thus suIIered
injuries equal to the Iull amount oI her premium payments. The court rejected this argument,
Iinding that (1) the plaintiII had not alleged that the insurer had reIused to honor the policies; and
(2) the plaintiII had not alleged an actual injury by simply claiming that she had incurred an

415
961 F. Supp. 506 (S.D.N.Y. 1997).
416
See 961 F. Supp. at 522.

NYDOCS1-449390.1
11/16/11 11:58 AM
-161-


additional risk oI loss as a consequence oI the Iraud.
417
The court Iound the plaintiII`s
contentions were merely allegations oI mental or emotional distress and not compensable under
RICO.
418
However, the court nevertheless held that the plaintiII had suIIiciently alleged a
present RICO injury to the extent she claimed that the insurance company had Iailed to make
certain tax payments and to provide other services which it was obligated to provide in
consideration Ior plaintiII`s premium payments.
419
The court held that plaintiII had adequately
alleged that she had been Iraudulently induced to pay a portion oI her premiums toward these
items, but had not received what she had bargained Ior.
420
These damages were not speculative
or unprovable, because the insurance company had already Iailed to provide what it was
obligated to provide under the insurance contract.
421

5. Proving Proximate Cause
In pleading and proving a RICO violation, the plaintiII must demonstrate that the
RICO violation was the proximate cause oI the injury to its business or property. This
requirement arises Irom the Supreme Court`s ruling in Holmes v. Securities Investor Protection
Corp.
422
The holding in Holmes instructs courts to undertake an analysis oI any intervening
causes oI the plaintiII`s alleged injury. '|A| plaintiII who complain|s| oI harm Ilowing merely
Irom the misIortunes visited upon a third party by the deIendant`s act |is| generally said to stand
at too remote a distance to recover.
423
A predicate act proximately causes a RICO injury iI it is

417
Id.
418
Id.
419
Id.
420
Id.
421
Id.
422
503 U.S. 258, 268 (1992).
423
503 U.S. at 268-69.

NYDOCS1-449390.1
11/16/11 11:58 AM
-162-


a substantial Iactor in the sequence oI responsible causation, and iI the injury is reasonably
Ioreseeable or anticipated as a natural consequence.
Some courts, however, have applied a pass-through liability analysis in Iinding
proximate cause to exist notwithstanding the Iact that the alleged mail or wire Iraud deceived a
third party, rather than the plaintiII itselI.
424
As one court has stated, the RICO plaintiII 'need
not be the primary victim, only an intended victim oI the scheme.
425

Nonetheless, as the Second Circuit has stated, '|W|hen Iactors other than the
deIendant`s Iraud are an intervening direct cause oI plaintiII`s injury, that same injury cannot be
said to have occurred by reason oI the deIendant`s actions.
426
Thus, the 'Iactual directness oI
the causal connection between the insurance company`s actions and the policyholder`s Iailure to
obtain payment under its insurance policies may be compromised by intervening actions.
B. RICO and the McCarran-Ferguson Act
The National Association oI Insurance Commissioners recently told the United
States Supreme Court that RICO absolutely applies to insurance companies:
Petitioners . . . contend that . . . to bring suit under |RICO| would
impair` the enIorcement oI the CaliIornia Insurance Code. The
National Association oI Insurance Commissioners ('NAIC),
whose members are the principal state insurance regulators,
strenuously disagrees with the notion that RICO impairs any

424
See, e.g., Israel Travel Advisory Serv. v. Israel Identity Tours, Inc., 61 F.3d 1250, 1257 (7th Cir.
1995)(allegedly Iraudulent mailings to plaintiII`s customers could be proximate cause oI RICO injury to
plaintiII so long as plaintiII was an intended victim oI the Iraud), cert. denied, 116 S. Ct. 1847 (U.S.
1996); County oI SuIIolk v. Long Island Lighting Co., 907 F.2d 1295, 1311-12 (2d Cir. 1990)(RICO
claim based on utility`s Ialse submissions to New York Public Service Commission could cause RICO
injury to utility`s competitor); Trautz v. Weisman, 819 F. Supp. 282, 287 (S.D.N.Y. 1993) (nursing home
operators` mailing oI Ialse compliance certiIicates to licensing agencies in order to secure renewal oI
operating licenses could have proximately caused injury to nursing home residents).
425
Rodriguez v. McKinney, 878 F. Supp. 744, 747 (E.D. Pa. 1995).
426
First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir. 1994).

NYDOCS1-449390.1
11/16/11 11:58 AM
-163-


state`s insurance laws. The NAIC urges, to the contrary, that
RICO enhances the eIIective enIorcement oI those laws.
427

Insurance companies oIten, but not always, argue that the McCarran-Ferguson
Act
428
preempts the application oI any Iederal laws, such as RICO, to the business oI insurance.
The insurance companies then argue that the McCarran-Ferguson Act requires claimants
including policyholders, state insurance commissioners, and lawyers to rely solely on
remedies provided under state insurance law.
429
Why? Because many state insurance laws and
courts do not award the mandatory treble damages, attorneys Iees and costs that RICO allows.
430


427
BrieI oI Amicus Curiae National Association oI Insurance Commissioners Supporting
Respondent, at 1, Iiled Oct. 12, 1995, Prometheus Funding Corp. v. Merchants Home Delivery Servs.,
Inc., 50 F.3d 1486 (9th Cir.), cert. denied, 516 U.S. 964 (1995). The NAIC participated as amicus on
behalI oI the policyholder in opposition to certiorari.
428
The McCarran-Ferguson Insurance Regulation Act, 15 U.S.C. Annotated 1011-1015 (West
1986).
429
See e.g. Reply Memorandum oI Points and Authorities in Support oI Petition Ior Preemptory or
Alternative Writ oI Mandate, at 14-15, Iiled Mar. 14, 1990, American Int`l Group v. Superior Court oI the
State oI Ca., 234 Cal. App. 3d 749, 285 Cal. Rptr. 765 (Sept. 25, 1991), cert. denied, 504 U.S. 911 (1992).
AIG argued that 'the clear mandate oI CaliIornia law, consistent with the McCarran-Ferguson Act, is that
|the policyholder| have only a common law cause oI action Ior Iraud based on its transaction and not a
statutory RICO claim.). Similar is the BrieI oI Amici Curiae Alliance oI American Insurers, American
Insurance Association, National Association oI Independent Insurers, and National Association oI Mutual
Insurance Companies In Support oI Appeal By DeIendants-Appellants, at 26, dated Oct. 31, 1997, United
States v. Brennan, No. 97-1440 (2d Cir.). The insurance industry associations quoted an Ohio decision
precluding the use oI RICO against an insurance company to argue that the McCarran-Ferguson Act
similarly precluded application oI a Iederal mail Iraud statute against an insurance company and its
president:
By holding insurance companies liable under a Iederal law, such as
RICO, when Ohio law provides Ior no liability, RICO would
impair the regulatory Iramework within which Ohio expects its
insurance companies to do business.
Id., quoting Kenty v. Bank One, Columbus, N.A., 92 F.3d 384, 392 (6th Cir. 1996).
430
A plaintiII which can prove injury under RICO is entitled to triple the actual damages as well as
their costs and reasonable attorneys Iees. 18 United States Code Annotated 1964 states in pertinent part:
Any person injured in his business or property by reason oI a
violation oI section 1962 oI this chapter may sue thereIor . . . and
shall recover threeIold the damages he sustains and the cost oI the
suit, including a reasonable attorney`s Iee.

NYDOCS1-449390.1
11/16/11 11:58 AM
-164-


Insurance Iraud and discriminatory practices are not part oI the business oI
insurance which the McCarran-Ferguson Act was intended to protect. Nor does RICO impair the
application oI state insurance law as could some Iederal statutes. The truth is that RICO
complements rather than conIlicts with state insurance laws.
1. RICO and the McCarran-Ferguson Act: Dueling or Complimentary
Statutes?
The McCarran-Ferguson Act is both an opportunity and a unique hurdle Ior
claimants alleging a RICO claim against an insurance entity usually an insurance company,
agent or brokerage Iirm. The McCarran-Ferguson Act states:
No Act oI Congress shall be construed to invalidate, impair or
supersede any law enacted by any State Ior the purpose oI
regulating the business oI insurance . . . unless such Act
speciIically relates to the business oI insurance. Provided: That
aIter June 30, 1948, . . . the Sherman Act, and . . . the Clayton Act,
and . . . the Federal Trade Commission Act . . . shall be applicable
to the business oI insurance to the extent that such business is not
regulated by State law.
431

The McCarran-Ferguson Act precludes a RICO claim only iI: (1) applying RICO would
invalidate, impair or supersede ('conIlict) with applicable state law; (2) the state has enacted
laws regulating the conduct in question; (3) RICO does not speciIically relate to the business oI
insurance, and; (4) the acts complained oI constitute the 'business oI insurance.
432
Failure oI a

Moreover, invocation oI RICO does not necessarily preclude award oI state law punitive damages. See,
e.g., Neibel v. Trans World Assurance Co., 108 F.3d 1123 (9th Cir. 1997)(plaintiII`s suing Ior damages
arising out oI a Iraudulent tax scheme were entitled to RICO treble damages and state law punitive
damages. The court noted that the text oI RICO states that 'nothing in this title shall supersede any
provision oI . . . law imposing criminal penalties or aIIording civil remedies in addition to those provided
Ior under this title.).
431
15 U.S.C.A. 1012(b).
432
This is the nearly universally cited test. See Dornberger v. Metropolitan LiIe Ins. Co., 961 F.
Supp. 506, 516 (S.D.N.Y. 1997)(listing cases and one exception).

NYDOCS1-449390.1
11/16/11 11:58 AM
-165-


deIendant insurance related entity to establish any one oI these requirements allows the RICO
claim to proceed, regardless oI whether the other requirements oI the statute are met.
Several recent cases have held that RICO does not invalidate, impair or
supersede` state insurance law. In addition, widespread insurance company use oI RICO raises
serious questions regarding whether RICO might now be considered to 'speciIically relate to
the business oI insurance.
2. The Business of Fraud
In Merchants Home Delivery Services, Inc. v. Frank B. Hall & Co., Inc.,
433
the
policyholder sued its insurance broker Ior overcharging premiums on particular policies,
collecting premiums Ior non-existent policies, and billing the policyholder Ior claims which were
not insured. The policyholder alleged that the insurance broker had engaged in a pattern oI
Iraudulent misconduct in violation oI RICO.
434

The United States Court oI Appeals Ior the Ninth Circuit relied on the test
established by the United States Supreme Court in United Labor Life Insurance Co. v. Pireno in
order to determine whether overcharging Ior an insurance policy was within the business oI
insurance.`
435
The Pireno test looks to whether the alleged insurance business practice in
question: (1) has the eIIect oI transIerring or spreading the policyholder`s risks; (2) is integral to
the relationship between the policyholder and the insurance company, and; (3) is limited to
entities within the insurance industry.
436
The Pireno decision also emphasized that the transIer

433
Merchants Home Delivery Servs., Inc. v. Frank B. Hall & Co., Inc., 50 F.3d 1486 (9th Cir.), cert.
denied, 516 U.S. 964 (1995).
434
Merchants, 50 F.3d at 1488.
435
Id. at 1490.
436
United Labor LiIe Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982). See also United States Dep`t oI
the Treasury v. Fabe, 508 U.S. 491, 497-98 (1993).

NYDOCS1-449390.1
11/16/11 11:58 AM
-166-


and spreading oI risk is the primary or 'indispensable characteristic oI the business oI
insurance.
437

The Merchants court rejected the policyholder`s argument that since Iraud is not
part oI the business oI insurance, a RICO claim alleging Iraud is not preempted by the
McCarran-Ferguson Act. Such an approach, the court held, would 'read the McCarran-Ferguson
Act out oI existence, since '|a|ny practice which violated any Iederal statute would, by
deIinition, not be the business oI insurance . . . .
438
The proper inquiry, the court ruled, is 'not
whether the deIendant and the plaintiII transact the business oI insurance . . . . |but| whether,
taken as a whole, the speciIic practice being challenged under Iederal law is part oI the business
oI insurance.`'
439

The Merchants court concluded that under the Pireno test, overcharging Ior an
insurance policy was part oI the business oI insurance` protected by the McCarran-Ferguson Act
because all three Iactors oI the Pireno test were met.
440
However, the court held that collecting
premiums Ior policies which did not exist and on claims Ior which there was no insurance
coverage clearly was not the business oI insurance` because no risk was spread.
441
Moreover,
since a non-existent policy means the policyholder was sold no insurance at all, there was no
relationship between the policyholder and the insurance company, leading the court to conclude

437
See Pireno, 458 U.S. at 127; Group LiIe & Health Ins. Co. v. Royal Drug, 440 U.S. 205, 211-12
(1979). See also Merchants Home Delivery Servs., Inc. v. Frank B. Hall & Co., Inc. 50 F.3d 1486 (9th
Cir.), cert. denied, 516 U.S. 964 (1995).
438
Merchants, 50 F.3d at 1490.
439
Id. at 1489-90. See also Dornberger v. Metropolitan LiIe Ins. Co., 961 F. Supp. 506, 517
(S.D.N.Y. 1997)(listing additional cases which have held that insurance company Iraud or
misrepresentation does not automatically Iall outside the 'business oI insurance).
440
Id. at 1490.
441
Id. at 1490-91.

NYDOCS1-449390.1
11/16/11 11:58 AM
-167-


that the conduct 'comes close to being the business oI Iraud.`'
442
Similarly, collecting
premiums Irom the policyholder Ior Ialse claims and pocketing the money 'is not even
arguably the business oI insurance because there was no transIer oI risk, no relationship
between the policyholder and the insurance company, and the misconduct was not limited to the
insurance industry.
443

'The McCarran-Ferguson Act does not exempt the business oI insurance
companies . . . . The exemption is Ior the business oI insurance.
444
In short, the purpose oI the
McCarran-Ferguson Act is to govern insurance as insurance not to shield misconduct Irom
RICO simply because it involves an insurance company.
3. The Insurance Companies` Imagined ~Conflicts With State Law
In Merchants, the deIendant insurance brokerage company had argued that
allowing policyholders to make a RICO claim Ior treble damages, costs and attorneys Iees would
'upset the balance struck by CaliIornia`s insurance code, since the code could only be enIorced
by the state commissioner oI insurance and only allowed actual damages. The court rejected the
'upset the balance arguments, holding that 'state and Iederal laws proscribing identical
misconduct do not conIlict with or displace each other and may co-exist with the McCarran-
Ferguson Act.
445
Noting that the text oI the McCarran-Ferguson Act requires that no less than
Iour separate conditions must be met beIore excluding a Iederal statute, the court held that 'the

442
Id.
443
Id. at 1491.
444
Id. at 1489 (internal quotations and brackets omitted), quoting Royal Drug, 440 U.S. at 210-11.
445
Id. at 1492, citing NAACP v. American Family Mut. Ins. Co., 978 F.2d 287, 297 (7th Cir. 1992),
cert. denied, 508 U.S. 907 (1993).

NYDOCS1-449390.1
11/16/11 11:58 AM
-168-


language oI the McCarran-Ferguson Act is inconsistent with a congressional intent to allow
states to preempt the Iield oI insurance regulation.
446

Several other courts have similarly concluded that when state insurance law and
RICO prohibit the same acts, RICO does not invalidate, impair or supersede state law. In
Dornberger v. Metropolitan Life Insurance Co., in a case oI Iirst impression within the
jurisdiction oI the United States District Court Ior the Southern District oI New York, the court
speciIically rejected the upset the balance` arguments oI the insurance companies and held that
the McCarran-Ferguson Act does not conIlict with New York state insurance law.
447
The court
noted that New York`s insurance code already allowed a private right oI action to policyholders.
Citing Merchants, the court held that the McCarran-Ferguson Act was not meant to cede the
entire Iield oI insurance to the states. The court Iurther held that the McCarran-Ferguson Act
applies only when a Iederal statute invalidated, impaired or superseded state law,
448
and that such
is not the case when RICO and state insurance law both provide Ior a private right oI action and
both punish the same substantive conduct. Rather than conIlicting with state insurance laws,
'application oI the greater Iederal remedies tends to Iurther the policies which the Iederal and
state laws share.
449

In Pinski v. Adelman, the court held that although the sale oI liIe insurance
policies Iell squarely within the business oI insurance, RICO complemented rather than
conIlicted with state insurance law.
450
The court Iound that even iI Illinois` Insurance code did

446
Id.
447
Dornberger, 961 F. Supp. at 519-20.
448
Id.
449
Id. at 520.
450
Pinski v. Adelman, No. 94 C 5783, 1995 U.S. Dist. LEXIS 16550, at *20-*22 (N.D. Ill. Nov. 2,
1995).

NYDOCS1-449390.1
11/16/11 11:58 AM
-169-


not provide Ior a private right oI action, Illinois insurance law and RICO both prohibit
misrepresentation oI insurance policy terms and beneIits. Similarly, the court Iound that the
policyholder under Illinois law could bring a claim Ior common law Iraud and may be entitled to
punitive damages and attorneys Iees.
451
As in Merchants, the court concluded held that 'state
and Iederal rules that are substantially identical but diIIerent in penalty do not conIlict with or
displace each other.
452

In .. White, Inc. v. William Graham Co., the court Iound that alleged hidden
commissions and overpayment oI service Iees to the insurance company Iell within the scope oI
the business oI insurance.
453
The court held that although Pennsylvania law provided
comprehensive insurance regulations, a RICO claim would 'supplement|| rather than supplant
state law. The court so ruled because not only did RICO and Pennsylvania insurance law
prohibit the same acts, but the policyholder would also have common law actions Ior Iraud,
misrepresentation and deceit under state law.
454

Additional courts have concluded that Congress simply did not intend to cede the
entire Iield oI insurance to the states when it enacted the McCarran-Ferguson Act.
455


451
Id.
452
Id. at *21, quoting NAACP v. American Family Mut. Ins. Co., 978 F.2d 287, 297 (7th Cir. 1992),
cert. denied, 508 U.S. 907 (1993).
453
J.J. White, Inc. v. William Graham Co., No. 96-6131, 1997 U.S. Dist. LEXIS 3274, at *6 (E.D.
Pa. Mar. 14, 1997).
454
Id. at *8-*9.
455
. See also Forsyth v. Humana Health Ins., Inc., 114 F.3d 1467 (9th Cir.), cert denied, 118 S. Ct.
559 (U.S. 1997)(on Iacts similar to those in Merchants, the court held that over-charging premiums and
not reducing co-payments is the business oI insurance, but that RICO does not conIlict with Nevada state
insurance law); see also, Moreland v. Behl, No. C-92-1238, 1996 U.S. Dist. LEXIS 5653, at *80-*81
(N.D. Cal. Apr. 17, 1996)(per Merchants, rejecting insurance company argument that RICO conIlicts with
state law).

NYDOCS1-449390.1
11/16/11 11:58 AM
-170-


4. Why RICO May Substantially Relate to the Business of Insurance: The True
Purpose of the McCarran-Ferguson Act and Barnett Bank v. Aelson
Just as Congress did not intend to cede the entire Iield oI insurance to the states
when it enacted the McCarran-Ferguson Act, the McCarran-Ferguson Act was not meant to
preempt every Iederal statute which could ultimately eIIect an insurance company. So said the
United States Supreme Court in Barnett Bank v. Nelson.
456

Barnett Bank required the Court to determine whether the McCarran-Ferguson
Act preempted application oI a 1916 Iederal law which allowed certain small banks to sell
insurance when a Florida state law prohibited the same banks Irom doing so.
457
The U.S.
Supreme Court ruled that the McCarran-Ferguson Act did not preempt this Iederal law,
explaining that:
the |McCarran-Ferguson| Act does not seek to insulate state
insurance regulation Irom the reach oI all Iederal law. Rather, it
seeks to protect state regulation primarily against inadvertent
Iederal intrusion say, through enactment oI a Iederal statute that
describes an activity in broad, general terms, oI which the
insurance business happens to comprise one part.
458

II the goose gets cooked, why not the gander too? Considering the insurance companies` own
enthusiastic use and sophisticated understanding oI RICO, there is nothing unanticipated about
the provisions or eIIects oI RICO on either policyholders or insurance companies. So willing an
embrace oI RICO by the insurance companies can hardly constitute the 'inadvertent . . .
intrusion, which Congress had contemplated when it passed the McCarran-Ferguson Act.

456
Barnett Bank v. Nelson, 517 U.S. 25, 1996 U.S. LEXIS 2161 (1996).
457
1996 U.S. LEXIS 2161, at *1.
458
Id. at *25 (emphasis added).

NYDOCS1-449390.1
11/16/11 11:58 AM
-171-


In Blue Cross of California, et al. v. SmithKline Beecham
459
more than thirty-Iive
major health insurance companies charged SmithKline with RICO violations allegedly involving
improper billing and kickbacks to doctors. The plaintiII insurance companies contended that
they represented '40 oI America`s health insurance industry.
460

In Chubb & Son, Inc. v. Wigand,
461
not only did the court allow the insurance
companies to proceed on their RICO claims, but the court held that the insurance company
constituted an 'enterprise Ior the purposes oI RICO. In Wigand, several insurance companies
charged an insurance adjuster with violations oI RICO and conspiracy to violate RICO Ior
allegedly devising schemes to inIlate claims.
462
The deIendant had unsuccessIully argued that
RICO was inapplicable because the insurance company Ior which he had been employed was not
an enterprise Ior the purposes oI RICO.
The truth is that the cases involving insurance industry application oI RICO are
legion.
463


459
Blue Cross oI CaliIornia, et al. v. SmithKline Beecham, No. 397CV01795 AVC (D. Conn. Iiled
Aug. 19, 1997).
460
See Health Insurers Sue Lab SmithKlines Lab Division, INS. COVERAGE LITIG. RPTR., Sept. 5,
1997, at 254. See also, Insurers Sue Over Lab Billing, BUS. INS., Aug. 25, 1997, at 2.
461
Chubb & Son, Inc. v. Wigand, N.Y.L.J., Jan. 23, 1998, at 26 (N.Y. Sup. Ct. N.Y. County).
462
Id. See also Company Adjuster Who InIlated Claims For Kickbacks, Loses Bid To Avoid RICO
Liability Suit By Former Employer, Chubb, INS. L. REV., Jan. 31, 1998, at 22.
463
For a non-exhaustive sampling oI RICO claims brought by insurance companies in 1997 alone,
See e.g., Old Republic Ins. Co. v. Hansa World Cargo Serv., 170 F.R.D. 361 (S.D.N.Y. 1997)(insurance
company sought return oI payments made under surety bonds alleging that deIendants had engaged in
scheme to import steel products into United States in violation oI RICO); Nationwide Mut. Ins. Co. v.
Perez, No. 97-2172 (JP), 1997 U.S. Dist. LEXIS 13744 (D.P.R. Aug. 14, 1997)(insurance company
alleged that policyholder had engaged in insurance Iraud by purchasing wrecked cars and registering the
cars in the name oI 'co-conspirators in violation oI RICO); Soanes v. Empire Blue Cross/Blue Shield,
970 F. Supp. 230 (S.D.N.Y. 1997)(in response to suit Ior breach oI a health insurance policy brought by
administrators oI various labor unions` health insurance programs, insurance company Iiled counter-claim
alleging violations oI RICO).

NYDOCS1-449390.1
11/16/11 11:58 AM
-172-


Insurance companies have also been quick to take advantage oI pro-RICO
opinions such as the Merchants decision. For example, in Zenith Insurance Company v.
Eisenberg, the court speciIically adopted the Merchants decision in Iavor oI an insurance
company, holding that there was 'no principled basis Ior distinguishing, Ior McCarran-Ferguson
Act purposes between the insurance company`s allegations oI Iraud in that case and the
policyholder`s allegations oI Iraud in Merchants.
464
Pro-RICO decisions are used by both
insurance companies and RICO claimants.
Nearly thirty years ago, the United States Supreme Court recognized that
'Congress was mainly concerned with the relationship between insurance ratemaking and the
antitrust laws, and with the power oI the States to tax insurance companies.
465
The U.S.
Supreme Court in Barnett Bank similarly Iound that the creation oI the McCarran-Ferguson Act
was motivated by a single concern antitrust regulation oI the insurance industry. The Barnett
Bank Court explained that the Act was meant to 'cautiously avoid 'unanticipated interIerence
with state regulation oI insurance
466
a Iar, Iar cry Irom a carte blanche authorization to
preempt any and all Iederal laws touching on insurance. The Court Iurther explained that the
genesis oI the McCarran-Ferguson Act was United States v. South-Eastern Underwriters, a 1944
United States Supreme Court decision which held that the insurance industry was not exempt
Irom the antitrust provisions oI the Sherman Act.
467
As one noted commentator tells it:
This decision sent shivers down the spines oI the insurance
company executives, who Ieared the prospect oI Iederal agencies,

464
See Zenith Ins. Co. v. Eisenberg, Nos. 94-55983, 94-56188, 94-56138, 1996 U.S. App. LEXIS
26815 (9th Cir. Jan. 11, 1996), cert. denied, 117 S. Ct. 2452 (U.S. 1997).
465
SEC v. National Securities, Inc., 393 U.S. 453, 458-59 (1969).
466
Barnett Bank, 1996 U.S. LEXIS 2161, at *26.
467
Barnett Bank, 1996 U.S. LEXIS 2161, at *25-*27 (discussing the scope and implications oI
United States v. South-Eastern Underwriters Ass`n, 322 U.S. 533 (1944).

NYDOCS1-449390.1
11/16/11 11:58 AM
-173-


particularly the Federal Trade Commission, interIering with the
insurers` cozy relationships with the state insurance
commissioners.
468

The genuine purpose oI the McCarran-Ferguson Act was to protect the
'|insurance| commissioners` turI Irom Federal Trade Commission encroachment.
469
Most
telling is the text oI the McCarran-Ferguson Act itselI, which, by providing that only 'the
Sherman Act . . . the Clayton Act . . . and the Federal Trade Commission Act . . . shall be
applicable to the business oI insurance to the extent that such business is not regulated by State
law,
470
reveals a concern solely with antitrust legislation.
The United States Supreme Court in Barnett Bank also noted that '|t|he word
relates` is highly general, and this Court has interpreted it broadly in other pre-emption
contexts.
471
The Court went on to explain that a Iederal statute may speciIically relate to more
than one thing:
Just as an ordinance Iorbidding dogs in city parks speciIically
relates to dogs and to parks, so a statute permitting banks to sell
insurance can speciIically relate to banks and to insurance. Neither
the McCarran-Ferguson Act`s language, nor its purpose, requires
the Federal Statute to relate predominately to insurance.
472

This reasoning is crucial to determining whether a RICO claim involving an
insurance company has been properly brought. RICO is a statute about Iraud and conspiracy
which is committed by a statutorily deIined 'enterprise. Even more than a statute which
regulates dogs and public parks, a RICO 'enterprise may, and does, relate to much more than

468
Stephen S. Ashley, Bad Faith Actions: Liability and Damages 9:02 at 4 (1996)(Iootnotes
omitted).
469
Id.
470
The McCarran-Ferguson Insurance Regulation Act, 15 U.S.C. Annotated 1011-1015 (West
1986).
471
Barnett Bank, 1996 U.S. LEXIS 2161, at *22 (listing cases).

NYDOCS1-449390.1
11/16/11 11:58 AM
-174-


one thing. RICO has been successIully applied against anti-abortion protestors, members oI
traditional organized crime organizations, securities Iirms, and insurance companies even
though the text oI the statute does not reIer to any oI these groups. That RICO does not mention
'insurance is hardly surprising nor determinative oI whether RICO speciIically relates to
the business oI insurance. Given the widespread use oI RICO by both insurance companies and
state insurance commissioners, it is especially diIIicult to understand how RICO could not
'speciIically relate to the business oI insurance. So prevalent is the use oI RICO by the
insurance industry that one commentator candidly noted that insurance commissioners would be
apoplectic iI they suddenly discovered that they were unable to use RICO to prosecute
allegations oI insurance Iraud.
473

5. The McCarran-Ferguson Act Does Not Protect Discriminatory Insurance
Company Practices
In NAACP v. American Family Mutual Insurance Co., the United States Court oI
Appeals Ior the Seventh Circuit held that the Federal Fair Housing Act`s
474
prohibition against
redlining, the practice oI charging higher premiums or reIusing to provide insurance coverage to
persons within a particular, usually racially speciIic, geographical area, was not preempted by the
McCarran-Ferguson Act.
475
Although the court agreed with insurance company arguments that
the Federal Fair Housing Act did not relate to the business oI insurance, it held that it could not
Iind any law regulating the business oI insurance which the Act invalidated, impaired or

472
Barnett Bank, 1996 U.S. LEXIS 2161, at *28 (emphasis added).
473
Christopher Winans, Insurers` Weapon Against RICO Claims Could BackIire II It`s Too
SuccessIul, BEST`S INS. MGMT. REP., June 14, 1993, at 4.
474
Title VIII oI the Civil Rights Act oI 1968, as amended, 42 U.S.C. 3601-3631 (1988 & Supp.
IV 1992).
475
NAACP v. American Family Mut. Ins. Co., 978 F.2d 287 (7th Cir. 1992), cert. denied, 508 U.S.
907 (1993).

NYDOCS1-449390.1
11/16/11 11:58 AM
-175-


superseded.
476
Several other decisions have held that the McCarran-Ferguson Act does not
preempt application oI the Federal Fair Housing Act. These cases make clear that the McCarran-
Ferguson Act does not preempt Iederal laws which protect against racially discriminatory
practices in the sale oI insurance.
477

Insurance company discrimination, though most commonly alleged in cases
involving the Federal Fair Housing Act, is not limited to that area oI law. In Duane v.
Government Employees Insurance Co.,
478
a legal permanent resident oI the United States
attempted to purchase a homeowners policy Irom the deIendant insurance company. The
insurance company reIused to do so because he was not a U.S. citizen and the claimant Iiled suit
alleging violations oI the Civil Rights Act oI 1991.
479

The United States District Court Ior the District oI Maryland rejected insurance
company arguments that the discriminatory practice constituted a 'business oI insurance
protected by the McCarran-Ferguson Act. First, since the insurance company had reIused to sell
the claimant a policy or allow him to become a policyholder, the practice Iailed to transIer any

476
978 F.2d at 295.
477
See Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351 (6th Cir. 1995), cert denied, 516 U.S.
1440 (1996)(Iollowing American Family in holding that the Fair Housing Act is not preempted by the
McCarran-Ferguson Act); United Farm Bureau Mut. Ins. Co. v. Metropolitan Human Relations Comm`n,
24 F.3d 1008, 1010, 1016 (7th Cir. 1994)(claim brought by policyholder under the Fair Housing Act
alleging that insurance company Iailed to renew his policy because he lived in a 'racially mixed area
was not preempted by the McCarran-Ferguson Act; Fair Housing Act did not conIlict with state insurance
law, and that the Fair Housing Act duplicated certain substantive portions oI state law did not constitute a
conIlict between the two); McDiarmid v. Economy Fire & Cas. Co., 604 F. Supp. 105 (S.D. Ohio
1984)(policyholder`s allegations oI redlining brought under the Federal Fair Housing Act not preempted
by the McCarran-Ferguson Act; no conIlict with state insurance law)(listing older cases in accord);
Mackey v. Nationwide Ins. Cos., 724 F.2d 419, 420,423 (4th Cir. 1984)(holding the McCarran-Ferguson
Act did not preempt a claim brought under the Fair Housing Act, but that the Fair Housing Act did not
prohibit redlining).
478
784 F. Supp. 1209 (D. Md. 1992), aII`d, 37 F.3d 1036 (4th Cir. 1994), cert. granted, 513 U.S.
1189 (1995). GEICO later withdrew its appeal and settled the case. See GEICO Settles Lawsuit By Alien
Denied Coverage, FED. AND ST. INS. WEEK, June 5, 1995.

NYDOCS1-449390.1
11/16/11 11:58 AM
-176-


risk.
480
Second, the court concluded that despite insurance company arguments that the allegedly
discriminatory practices were 'an integral part and 'at the core oI the business oI insurance, it
had Iailed to demonstrate a 'positive relationship between the policy oI reIusing to underwrite
aliens and the general practice oI underwriting and ratemaking.
481
Finally, the court held that
the challenged insurance company practice discrimination was hardly limited to insurance
companies. In sum, the McCarran-Ferguson Act clearly did not preempt a claim oI
discrimination brought under the Civil Rights Act oI 1991.
482
The United States Supreme Court
agreed to hear the case, but the insurance company soon thereaIter withdrew its appeal and
settled the case.
483

Courts repeated reIusals to allow the insurance industry to use the McCarran-
Ferguson Act to shield discriminatory practices Irom the reach oI Iederal law drives home what
the term 'business oI insurance is intended to mean Ior the purposes oI the McCarran-Ferguson
Act. The purpose oI the McCarran-Ferguson Act was to allow states to regulate the business oI
insurance as they had traditionally done prior to Southeastern Underwriters, not to grant states
regulatory powers beyond what they possessed prior to that decision.
484
Traditional state
regulation oI the insurance industry Iocused on the policyholder/insurance company relationship
and the Iinancial condition oI the insurance companies.
485
The Pireno test, and the United States
Supreme Court`s explanations oI the origins and purpose oI the McCarran-Ferguson Act, remind

479
Title 42 U.S.C. 1981.
480
784 F. Supp. at 1221.
481
Id.
482
Id.
483
See GEICO Settles Lawsuit By Alien Denied Coverage, FED. AND ST. INS. WEEK, June 5, 1995.
484
748 F. Supp. at 1221, quoting SEC v. National Securities, Inc., 393 U.S. 453, 459 (1969).
485
Id. at 1221-22, citing SEC v. Variable Annuity LiIe Ins. Co., 359 U.S. 65, 90-91 (1969)(Brennan,
J, concurring).

NYDOCS1-449390.1
11/16/11 11:58 AM
-177-


RICO claimants, policyholders, insurance companies and the courts that '|i|nsurance companies
may do many things which are subject to paramount Iederal regulation; only when they are
engaged in the business oI insurance` does the statute apply.
486
Decisions like American Home
and Duane should come as no surprise when '|i|ndividual civil rights and discrimination in the
making and enIorcement oI contracts . . . have been the proper subject oI Iederal regulation Ior
over a century.
487

6. Is RICO Somehow Different From Other Federal Laws Which Interact With
The McCarran-Ferguson Act?
The McCarran-Ferguson Act 'was not intended to bar enIorcement oI Iederal
policies in such Iields as civil rights, labor, and other areas oI national concern. . . . Racketeering
activity, at which RICO is aimed, is an area oI national concern`. . . .
488
Several cases
concerning McCarran-Ferguson preemption oI Iederal laws other than RICO
489
have Iound that
the McCarran-Ferguson Act is inapplicable. These cases Iurther illustrate the deIects oI the
insurance industry arguments to preclude RICO.
In Stephens v. National Distillers and Chemical Corp., the United States Court oI
Appeals Ior the Second Circuit held that the McCarran-Ferguson Act did not preempt application
oI the Foreign Sovereign Immunities Act (FSIA), holding that the FSIA was 'so diIIerent Irom
the kind oI congressional statutory action that the McCarran-Ferguson Act was meant to deal
with |that it| virtually compel|s| the conclusion that the McCarran-Ferguson Act should not be

486
Id., quoting SEC v. National Securities, Inc., 393 U.S. at 459-60.
487
Id. at 1222.
488
Dornberger v. Metropolitan LiIe Ins. Co., 961 F. Supp. 506, 521 (S.D.N.Y. 1997)(quotations
omitted).
489
See 125 L. Ed. 2d 879 (1997) Ior a discussion oI U.S. Supreme Court decisions judging the
applicability oI the McCarran-Ferguson Act to various Iederal laws.

NYDOCS1-449390.1
11/16/11 11:58 AM
-178-


interpreted to exclude insurance companies Irom the FSIA`s requirements . . . .
490
The origins
and history oI RICO lends itselI to the same reasoning.
In Jillafane-Neri: v. Federal Deposit Insurance Co.,
491
the United States Court oI
Appeals Ior the First Circuit rejected the Insurance Commissioner oI Puerto Rico`s arguments
that application oI the Federal Deposit Insurance Act (FDIA) 'impaired his ability to regulate
the business oI insurance. Under the FDIA, the Commissioner was not entitled to deposit
insurance on a $50,000 certiIicate oI deposit assigned to the Commissioner by an insurance
company which became insolvent. The Commissioner`s Iinancial loss, the court held, was the
product oI events, not a conIlict between Iederal and Commonwealth statutes.
492
Nothing
'impaired the Commissioner`s ability to enIorce the relevant insurance law. The court reIused
to Iind that Puerto Rico`s insurance laws were 'impaired merely because the insurance
commissioner suIIered a Iinancial loss in the Iield oI insurance.
493

In Murff v. Professional Medical Insurance Co., the United States Court oI
Appeals Ior the Eighth Circuit held that the McCarran-Ferguson Act did not preclude a claim
brought under the Federal Age Discrimination in Employment Act (ADEA) against an insurance
company in liquidation.
494
The court rejected insurance company arguments that application oI
the ADEA would undermine Missouri insurance law, holding that '|t|he ADEA does not
prohibit something that the |Missouri| Insolvency Act commands, nor does it command

490
Stephens v. National Distillers & Chem. Corp., 69 F.3d 1226, 1231 (2d Cir. 1995).
491
VillaIane-Neriz v. FDIC, 75 F.3d 727 (1st Cir. 1996), amended, No. 95-1492, 1996 U.S. App.
LEXIS 7813 (1st Cir. Apr. 9, 1996).
492
Id. at 736.
493
Id.
494
MurII v. ProIessional Med. Ins. Co., 97 F.3d 289 (8th Cir. 1996), cert. denied, 117 S. Ct. 2452
(U.S. 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-179-


something that the Insolvency Act prohibits. The provisions oI the ADEA itselI, applied to
insurance companies, are entirely compatible with the state`s regulation oI insurance law.
495

In Securities and Exchange Commission v. Walt:er & Associates, the United
States Court oI Appeals Ior the Second Circuit held that production oI inIormation pursuant to an
SEC subpoena relating to sales oI insurance by an investment adviser did not violate the
McCarran-Ferguson Act because the Commission`s request did not invalidate, impair or
supersede any state insurance law.
496

7. Public Policy and the Insurance Industry Use of RICO: Conflicts and
Contradictions
Insurance companies aggressively employ RICO on a regular basis to prosecute
allegations oI insurance Iraud. Permitting insurance companies to use RICO at their pleasure,
only to allow the same insurance companies to argue that RICO is inapplicable when invoked
against them, is patently unIair. Equally hypocritical are insurance company arguments that their
allegations oI Iraud are not part oI the business oI insurance, and thus not governed by the
McCarran-Ferguson Act, but that a RICO claimant`s allegations oI insurance Iraud are part oI
the business oI insurance` and Ioreclosed by the McCarran-Ferguson Act. When insurance
companies repeatedly use RICO against their employees and policyholders, it makes little sense
to argue that when policyholders similarly invoke RICO against an insurance company, it is
suddenly contrary to the purposes oI the RICO or the McCarran-Ferguson statutes. These
arguments should not be entertained by the courts.
II insurance companies continue to Iight RICO claims by arguing that RICO does
not speciIically relate` to the business oI insurance, they may Iind that courts are willing to

495
Id. at 292.
496
SEC v. Waltzer & Assocs., No. 96-6261, 1997 U.S. App. LEXIS 23830 (2d Cir. Sept. 10, 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-180-


apply the argument against other insurance companies or themselves in other cases. Insurance
company arguments against RICO claimants may be adopted by courts to Ioreclose the insurance
companies Irom invoking RICO when it is to their beneIit. Given the number oI cases in which
insurance companies invoke RICO, this is certainly not to their beneIit. An insurance industry
which does not see itselI as a major perpetrator oI Iraud has nothing to lose by acknowledging
that RICO speciIically relates to the business oI insurance and complements rather than conIlicts
with state insurance laws.
497
In this way, RICO claimants and insurance industry entities can
both more Iairly and equally use RICO to prosecute Iraud.
RICO`s steep penalties represent a strong public policy against Iraud and
conspiracy. EnIorcement oI this broad public policy is especially well-directed at an industry
which is not only exempt Irom Iederal antitrust regulations, but which also draIted its own set oI
laws and regulations in lieu oI having states Iollow Iederal law.
498
Contrary to insurance
company arguments, courts across the country are indicating that conIlicts between RICO and
other Iederal laws and state insurance regulations are the exception, not the rule. Under the

497
See Christopher Winans, Insurers Weapon Against RICO Claims Could Backfire If Its %oo
Successful, BEST`S INS. MGMT. REPS., June 14, 1993, at 4.
498
See Stephen S. Ashley, Bad Faith Actions: Liability and Damages 9:02 at 4 (1996).
|Following the decision in Southeastern Underwriters|, |t|he
insurance industry devised an ingenious plan to head oII Iederal
regulation. It persuaded Congress to introduce legislation, known
as the McCarran-Ferguson Act, which provided a three year
moratorium on Iederal regulation oI the insurance industry. At the
expiration oI the moratorium the Iederal regulators could then
assert their authority only over those aspects oI the insurance
industry not regulated by the states. This moratorium gave the
insurance commissioners the opportunity, through the National
Association oI Insurance Commissioners (NAIC), to draIt model
legislation intended to preempt the entire Iield oI insurance
industry regulation and thus protect the commissioners` turI Irom
Federal Trade Commission encroachment. (Iootnotes omitted).

NYDOCS1-449390.1
11/16/11 11:58 AM
-181-


McCarran-Ferguson Act, '|I|ederal laws that do not conIlict with or supersede state rules always
apply.
499

Courts across the country are reigning in the McCarran-Ferguson Act, repeatedly
holding that RICO does not necessarily conIlict with state insurance law and that Iraudulent
insurance industry misconduct is not the business oI insurance. The recent cases, coupled with
NAIC`s Iirm conviction that RICO is applicable to the business oI insurance, suggest a
receptiveness by both courts and insurance regulators to allow policyholders and other RICO
claimants to bring RICO claims against insurance companies, brokers or agents. The United
States Supreme Court`s decision in Barnett Banks, as well as insurance companies` routine use
oI RICO, indicate that RICO may 'speciIically relate to the business oI insurance. The
McCarran-Ferguson Act is no longer the impenetrable shield that it once was Ior the insurance
industry.
All the same, the mandatory treble damages, attorney Iees and costs awarded to a
victorious RICO claimant virtually guarantee that insurance companies will Iight hard any RICO
claim. RICO claimants must also still prove the remaining elements oI a RICO claim, and care
must be taken to avoid Iederal courts in a circuit that is hostile in general to RICO.
500

Establishing that RICO does not conIlict with the McCarran-Ferguson Act is an
essential Iirst step to bringing a RICO claim. Claimants alleging Iraud against an insurance
company, broker or agent should very seriously consider RICO.

499
Stephens v. National Distillers & Chem. Corp., 69 F.3d 1226, 1234 (2d Cir. 1995)(McCarran-
Ferguson Act does not preempt the Foreign Sovereign Immunities Act); NAACP v. American Family
Mut. Ins. Co., 978 F.2d 287, 295 (7th Cir. 1992), cert. denied, 508 U.S. 907 (1993)(McCarran-Ferguson
Act does not preempt the Fair Housing Act).
500
For a discussion oI the split in the courts, a list oI cases on each side and a decision that RICO
does conIlict with state law, see Doe v. Norwest Bank oI Minnesota, N.A., 107 F.3d 1297 (8th Cir.) reh`g
denied, en banc, No. 96-1763MNST, 1997 U.S. App. LEXIS 11337 (8th Cir. May 12, 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-182-


PART VI
Other Claims to Consider: Common Law Fraud and Negligent Misrepresentation
To constitute actionable common law Iraud: (1) there must be a material
representation; (2) the representation must be Ialse; (3) the deIendant, when he made the
representation either knew that it was Ialse, or made it recklessly, without any knowledge oI its
truth; (4) the deIendant made the representation with the intention that it should be acted on by
plaintiII; (5) plaintiII acted in reliance on it; and (6) the plaintiII thereby suIIered injury.
The tort oI negligent misrepresentation involves a Iailure to use due care in
obtaining and communicating inIormation upon which a party may reasonably be expected to
rely in the conduct oI his economic aIIairs. The elements oI a claim oI negligent
misrepresentation are a misrepresentation concerning a material Iact justiIiably relied on by
plaintiII and loss or damages proximately caused by such misrepresentation.
An action Ior negligent misrepresentation is essentially an action Ior Iraud,
without the same level oI intent. Negligent misrepresentation generally requires that the
statement or omission be made without a reasonable basis Ior believing its truthIulness, rather
than actual knowledge oI its Ialsity. A plaintiII, however, generally cannot recover Ior economic
injuries cause by deIendant`s negligent misrepresentation absent actual privity oI contract
between the parties or a relationship so close as to approach that oI privity.
Actionable Iraud may be predicted on a misrepresentation oI solvency or Iinancial
condition. To sustain a recovery, plaintiII must show all essential elements oI Iraud. The rule
that representations, to be actionable, must have been made with intent to induce action by the
complainant has been applied to representations oI Iinancial standing.

NYDOCS1-449390.1
11/16/11 11:58 AM
-183-


PART VII
Death or Disability of a Policyholder: Seek Consequential Damages
1. Death of Company
Bad Iaith denials oI insurance coverage can ruin a policyholder`s credit, cause
tremendous emotional distress and create a mountain debt.
501
At worst, the policyholder may be
severely disabled or Iorced into bankruptcy, sometimes reIerred to as 'death oI company.
502

Death oI company cases display the most egregious results oI insurance company misconduct
and go well beyond the realm oI policy limits or purely economic loss. Moreover, there is
evidence that insurance companies know Iar in advance that Iailure to timely pay a particular
policyholder`s claims can be devastating.
503
As one insurance adjuster explained the typically
bleak picture Ior policyholders aIter experiencing a loss:
The claim is starting the Iourth month, the insured is behind in
rent, getting threatened by suppliers, has lost his customers and all
commissioned employees have leIt. And this is iI there are no
complications. The insured is lucky iI he is still in business.
504

In one death oI company case, the policyholder, a contractor, was sued Ior alleged
construction deIects. The position oI the policyholder`s insurance company was that iI the
policyholder reIused to accept the proposed settlement, the policyholder would be responsible
Ior any settlement or judgment which exceeded the proposed settlement amount and responsible

501
Glenn E. Smith, Understanding The New Tort OI First Party Bad Faith In Wyoming:
McCullough v. Golden Rule Insurance Company, 26 LAND & WATER L. REV. 226, 238 (1991); Joseph
Segal, Sluggish Claim Process Can Cause Insured Business` Demise, CLAIMS, Feb. 1995, at 86.
502
See, e.g., Motion For Partial Summary Judgment And Incorporated BrieI In Support ThereoI, at
3, dated Aug. 29, 1995, In re: Cooper MIg. Corp. v. Home Indem. Co., No. 94-C-901-BU (N.D. Okla.).
In this case, the liquidating trustee in bankruptcy Ior the policyholder brought an action against the
policyholder`s insurance companies Ior bad Iaith conduct and improper denials oI insurance coverage.
These denials constituted the sole basis Ior the policyholder`s need to seek bankruptcy protection. The
insurance companies reIerred to this allegation as 'death oI company.
503
See Joan Hartnett-Barry, A Delicate State of Mind, CLAIMS, May 1997, at 46.
504
Joseph Segal, Sluggish Claim Process Can Cause Insured Business Demise, CLAIMS, Feb. 1995,
at 86. Mr. Segal is a CPA and public insurance adjuster.

NYDOCS1-449390.1
11/16/11 11:58 AM
-184-


Ior any additional legal Iees incurred in his deIense.
505
This was despite expert testimony Irom
Iive witnesses who each had concluded that the policyholder was not at Iault Ior any deIects,
506

and despite the policyholder`s desire to clear his name.
507
The insurance company never
attempted to exonerate the policyholder or to join the parties more likely to be at Iault because it
wanted to minimize its expenses.
508

AIter the policyholder agreed to settle because 'he could not aIIord to take on the
insurance company, the insurance company sued him to recover the amount oI the settlement
and Ior the legal Iees it had incurred in the policyholder`s 'deIense.
509
The policyholder
counterclaimed, claiming breach oI contract and breach oI the duty oI good Iaith a Iair dealing.
In all, the policyholder incurred over $320,000 in legal Iees. He lost his business
and his assets. He had already paid more than $60,000 in premiums to the insurance company
Ior his liability insurance.
510
There was also evidence that the insurance company may have lied
about the destruction oI its documents.
A jury awarded the policyholder $12 million in punitive damages against the
insurance company. In aIIirming the award, a CaliIornia appellate court held that 'the award
was based on the reprehensibility oI |the insurance company`s| conduct toward |the

505
See West Am. Ins. Co. v. Freeman, 46 Cal. App. 4th 1476 (1st Dist. 1995), rev. granted, 907 P.2d
1323 (Cal. 1995), rev. dismissed, 927 P.2d 1172 (1996), rev. denied, 1997 Cal. LEXIS 649 (Cal. Feb. 5,
1997)(No. S049306), cert. denied, 117 S. Ct. 1695 (U.S. 1997).
506
46 Cal. App. 4th at 1481, 1490.
507
Id. at 1482.
508
Id. at 1481-82. Trial testimony also indicated that the insurance company`s greatest expense was
attorneys Iees, and as such, had made a 'policy decision to seek reimbursement Irom policyholders in
cases where the insurance company had been required to pay Ior Cumis counsel. Id. at 1483-84.
509
Id. at 1482-83.
510
Id. at 1484.

NYDOCS1-449390.1
11/16/11 11:58 AM
-185-


policyholder| and its Iailure to accord |the policyholder| the consideration to which he was
entitled.
511
The appellate court accorded great weight to the trial court`s Iindings:
|T|he conduct oI the insurance company in this case was egregious
. . . |the insurance company`s claims adjuster| somehow seemed to
determine that he wasn`t going to cover this claim, and that he
would do what he wanted despite the evidence to the contrary. He
exhibited an absolute total disregard Ior |the policyholder`s| rights
under the contract, and Ior his rights as a person to be treated
decently.
512

The CaliIornia Supreme Court agreed to review the case and accepted brieIs in light oI the U.S.
Supreme Court`s decision in BMW.
513
The review was dismissed by the CaliIornia Supreme
Court without opinion.
514
West America`s petition oI certiorari to the U.S. Supreme Court was
denied.
515

2. Consequential Damages, Bad Faith or Both - The Brass Ring and Meat and
Potatoes
Consequential damages are very Irequently overlooked by counsel in the quest Ior
punitive damages. Consider this: Virtually, no large punitive damage award withstands
appeals. Virtually, no consequential damages are upset on appeal.
Focus on consequential damages. This is an accounting matter Iirst and a
causation matter second. Under established law, the policyholder is entitled to recover all
damages incurred by the policyholder as a consequence oI a breach oI an insurance policy under

511
Id. at 1490.
512
Id.
513
See West Am. Ins. Co. v. Freeman, 46 Cal. App. 4th 1476, 907 P.2d 1323 (1995); See also
Insurer Claims Petition, Due Process Jiolations In Request %o Supreme Court, MEALEY`S LITIG. REP.:
BAD FAITH, Mar. 26, 1997.
514
See West Am. Ins. Co. v. Freeman, 927 P.2d 1172 (Cal. 1996), rev. denied, 1997 Cal. LEXIS 649
(Cal. Feb. 5, 1997)(No. S049306).
515
See West Am. Ins. Co. v. Freeman, cert. denied, 117 S. Ct. 1695 (U.S. 1997).

NYDOCS1-449390.1
11/16/11 11:58 AM
-186-


the rule announced in Hadley v. Baxendale.
516
At least one insurance company has argued that
recovery oI consequential damages is allowed under the state`s 'bad Iaith statute.
517

Hadley held that the damages recoverable Ior breach oI contract are those that
arise naturally Irom the breach, or those that were in the contemplation oI the parties at the time
the contract was made. Consequential damages Ior an insurance company`s breach can include
lost proIits and damages Ior the loss oI the business without regard to policy limits. The
policyholder can recover consequential damages as a measure oI contract damages entirely apart
Irom policy limits and any punitive damages Ior the insurance company`s bad Iaith.
518

There are established methods to calculate and prove consequential damages in
insurance coverage disputes. They are not unlike the ways lawyers prove damages Ior bodily
injury. They are virtually identical to the ways a business calculates a business interruption
claim on a Iirst party property insurance policy. Consider this: a Iarmer reports to Stonewall
Insurance Company that the John Deere tractor has been stolen. The Stonewall adjuster has
'heard that pot has been grown in the area. OI course, Stonewall Insurance does not want to aid
in such an immoral, illicit and politically incorrect activity.
519
Investigation oI the claim

516
Hadley v. Baxendale, 156 Eng. Rep. 145 (1854).
517
See BrieI Ior Appellee, Nationwide Mutual Fire Insurance Company, at 11-12, dated Sept. 30,
1996, Polselli v. Nationwide Mut. Fire Ins. Co., No. 96-1107 (3d Cir.):
Indeed, when one reads |42 Pa. C.S.A. 8371| in its entirety,
Nationwide respectIully suggests that it is designed to include both
compensatory and punitive elements Ior an insurer`s bad Iaith
handling oI an insurance claim.
518
See 2 Eugene R. Anderson et al., Insurance Coverage Litigation 11.19, at 45-46 (1997).
519
One might reasonably ask why Stonewall Insurance Company did not make an investigation
beIore collecting the premium. Lord MansIield, the Iather oI insurance law, wrote may years ago:
'Every underwriter is presumed to be acquainted with the practice oI the trade he insures, and that
whether it is recently established, or not. Noble v. Kennoway, 2 Doug. 511, 513 (K.B. 1780), United
Kingdom.

NYDOCS1-449390.1
11/16/11 11:58 AM
-187-


proceeds, with the adjuster busy doing the work oI the state police and the Federal Drug
EnIorcement Agency. The bank holding the mortgage on the Iarm hears about the inquiry and
decides not to renew the mortgage. Like the proverbial Job, the Iarmer`s liIe is downhill
thereaIter. Stonewall eventually pays $30,000 Ior the stolen tractor which it later retrieves and
oIIers to return to the now 'Iormer Iarmer. Stonewall then demands the $30,000 back and sues
the 'Iormer Iarmer. The 'Iormer Iarmer deIaults. One stolen tractor and the 'Iormer
Iarmer`s Iarm is lost and the Iormer Iarmer`s credit is irresponsibly damaged.
A perIect bad Iaith case? Maybe, but the bad Iaith case would not be worth much
even at 10 times the policy limits oI $30,000.
What about consequential damages? There is a huge body oI lore and law on
'business interruption insurance. That lore and that law can be applied to the Iarm business and
it can be applied to recover much more than the value oI the tractor.
Take next the case oI a small business, Jones Leather Goods Co., which Ior
generations has manuIactured leather goods and sent the scraps to the local municipal landIill.
The state and Iederal environmental authorities sue Jones to recover clean-up costs. Stonewall
Insurance Company denies liability insurance coverage because it does not like 'polluters.
Jones Leather deIends itselI, paying lawyers $275,000 and settling with the authorities Ior
$300,000.
A good bad Iaith case, maybe. What about consequential damages? Booker
Jones IV is asked what, iI any, impact the Iailure oI Stonewall to deIend had on the leather
business. Among the many items he catalogues is the Iact that the company lost 5 oI its sales
because he and other members oI management had to spend time on the governments` claims.

NYDOCS1-449390.1
11/16/11 11:58 AM
-188-


Five percent oI sales over the 6 or 7 years translates into $23,000,000 in lost proIits.
520
In theory
at least, $23,575,000 could support a very large bad Iaith award, even under BMW.
3. Consequential Damages --What the Cases Say
To depart Irom the cardinal rule to learn insurance lore not insurance law
there are many cases permitting consequential damages. As demonstrated by the Iollowing
IiIty-two representative cases, courts throughout the country have granted policyholders
consequential damages Ior their insurance company`s breach oI its insurance policy as breach oI
contract damages, distinct Irom any bad Iaith recovery, and without regard to policy limits. The
cases are:
1. Gray v. Grain Mut. Ins. Co., 871 F.2d 1128, 1130-32 (D.C. Cir. 1989) ( applying
North Carolina law) (aIIirming the trial court`s award oI consequential damages resulting
Irom the insurance company`s breach oI its duty to settle).
2. Carpenter v. Automobile Club Interinsurance Exch., 58 F.3d 1296, 1303 (8th Cir.
1995) (applying Arkansas law) (holding that an insurance company could be required to
pay, as consequential damages Ior Iailure to settle, sums that would not otherwise be
covered under the terms oI the insurance policy).
3. Bettius & Sanderson, P.C. v. National Union Fire Ins. Co., 839 F.2d 1009, 1014-15
(4th Cir. 1988) (applying Virginia law) (awarding consequential damages Ior loss oI
proIits oI law Iirm Iorced to dissolve by insurance company`s breach oI its insurance
policy).
4. A&E Supply Co. v. Nationwide Mut. Fire Ins. Co., 798 F.2d 669, 677-78 (4th Cir.
1986), cert. denied, 479 U.S. 1091 (1987) (applying Virginia law) (recognizing, as a
matter oI contract law, that violation oI the duty oI good Iaith by an insurance company

520
Id.; see generally ALLAN D. WINDT, INSURANCE CLAIMS AND DISPUTES 6.37, at 374-75 (1988)
('The general measure oI damages available Ior breach oI a contract to pay money is the amount due,
plus interest. There is language in a Iew cases, thereIore, indicating that an insurer, Iollowing its breach
oI contract, is liable only Ior the amount oI policy beneIits owed, plus interest. The dicta in those cases,
however, do not accurately represent the law. Absent a statute to the contrary, consequential damages
are, in Iact, always available in contract actions iI they arise naturally Irom the breach and are such that
they may reasonably be supposed to have been in the contemplation oI the parties at the time the contract
was made. The courts that have expressly considered the issue, thereIore, have consistently recognized
that, under certain circumstances, the Ioregoing test might be met in an action against the insurance
company)(emphasis added).

NYDOCS1-449390.1
11/16/11 11:58 AM
-189-


entitles policyholder to Iull consequential losses: 'Ioreseeable losses, not susceptible to
mitigation).
5. Murphy v. Cincinnati Ins. Co., 772 F.2d 273, 276-77 (6th Cir. 1985) (applying
Michigan law) (recognizing that damages recoverable Ior breach oI an insurance policy
include 'those that arise naturally Irom the breach or those that were in the contemplation
oI the parties at the time the contract was made, and, in this case, included attorneys`
Iees incurred in bringing the insurance coverage action).
6. Salamey v. Aetna Cas. & Sur. Co., 741 F.2d 874, 877 (6th Cir. 1984) (applying
Michigan law) (allowing, as consequential damages Ior the breach oI an insurance policy,
lost proIits Irom the policyholder`s inability to reopen his store without an insurance
recovery: 'The policy limits restrict the amount the insurer may have to pay in the
perIormance oI the contract, not the damages that are recoverable Ior its breach.`')
(quotation omitted).
7. Don Burton, Inc. v. Aetna LiIe & Cas. Co., 575 F.2d 702, 708 (9th Cir. 1978) (in
dicta, noting that, Ior breach oI an insurance policy, the policyholder could recover
consequential damages Ior the loss oI his business, iI suIIicient evidence oI a causal
relationship between the breach and the anticipated net proIits were demonstrated).
8. Alliance Ins. Co. v. Alper-Salvage Co., 19 F.2d 828 (6th Cir. 1927) (applying
Tennessee law) (holding policyholder was entitled to damages Ior loss oI use oI its
property caused by insurance company`s breach oI its insurance policy).
9. Heller Int`l Corp. v. Sharp, 839 F. Supp. 1297, 1302-03 (N.D. Ill. 1993) (applying
Illinois law) (noting that the 'general principles oI contract law apply equally well in the
insurance contract context, and that '|i|n many instances, the measure oI damages is
governed by the contractual policy amount. That rule is not an absolute. As noted above,
Illinois law does allow recovery oI consequential damages where they were reasonably
Ioreseeable, were within the contemplation oI the parties at the time the contract was
entered, or arose out oI special circumstances known to the parties.`').
10.Haardt v. Farmer`s Mut. Fire Ins. Co., 796 F. Supp. 804, 811 (D.N.J. 1992) (applying
New Jersey law) (holding policyholder could recover consequential damages Ior
insurance company`s breach oI its insurance policy in Iailure to pay Ior repair oI house,
including devaluation oI property and loss oI rents).
11.PaciIic Employers Ins. Co. v. P.B. Hoidale Co., 789 F. Supp. 1117, 1124 (D. Kan.
1992) ('Employers concedes that lost proIits are recoverable Ior breach oI an insurance
policy. Such damages are limited to those which may Iairly be considered to arise 'in
the usual course oI things, Irom the breach itselI, or as may reasonably be assumed to
have been within the contemplation oI both parties as the probable result oI the
breach`') (citations omitted).
12.Red Ceders, Inc. v. Westchester Fire Ins. Co., 686 F. Supp. 614, 616 (E.D. Mich.
1988) (applying Michigan law) ('An insured may recover consequential damages Ior the

NYDOCS1-449390.1
11/16/11 11:58 AM
-190-


insurer`s breach oI contract. . . . The policy`s limits on losses do not restrict
consequential damages claimed as a breach oI the policy.).
13.Diaz Irizarry v. Ennia, N.V., 678 F. Supp. 957, 962 (D.P.R. 1988) (applying Puerto
Rico law) (holding that consequential damages are recoverable Ior breach oI an insurance
policy iI 'Ioreseeable).
14.Earth Scientists (Petro Servs.) Ltd. v. United States Fidelity & Guar. Co., 619 F.
Supp. 1465, 1474-75 (D. Kan. 1985) (applying Kansas law) (permitting policyholder to
seek as consequential damages lost proIits, including those Ior closing down its
operations, as a result oI insurance company`s Iailure to pay Ior damage to policyholder`s
oil rig).
15.Ingersoll Milling Mach. Co. v. M/V Bodena, 619 F. Supp. 493, 507 (S.D.N.Y. 1985)
(holding policyholder was entitled to recover expenses oI bringing action against other
companies to cover the cost oI a loss aIter insurance company breached its insurance
policy by Iailing to cover the loss).
16.Strader v. Union Hall, Inc., 486 F. Supp. 159, 164 (N.D. Ill. 1980) (applying Illinois
law) (permitting policyholder to seek consequential damages Ior breach oI an insurance
policy).
17.Mann v. Glens Falls Ins. Co., 418 F. Supp. 237, 249 (D. Nev. 1974), rev`d on other
grounds, 541 F.2d 819 (9th Cir. 1976) (applying Nevada law) (adopting Reichert in toto
and holding policyholder could recover consequential damages Ior insurance company`s
breach oI its insurance policy).
18.McDowell v. Union Mut. LiIe Ins. Co., 404 F. Supp. 136, 140-41 (C.D. Cal. 1975)
(applying CaliIornia law) (holding that insurance company`s breach oI an insurance
policy exposed it to liability Ior consequential damages, including expenses associated
with the policyholder`s bankruptcy, including Iiling Iees, legal expenses, and loss oI
credit reputation).
19.Asher v. Reliance Ins. Co., 308 F. Supp. 847, 852 (N.D. Cal. 1970) (applying Alaska
and CaliIornia law) (holding policyholder could recover as consequential damages Irom
insurance company`s breach oI its insurance policy, loss oI rents because oI insurance
company`s Iailure to pay Ior burned property under Iire insurance policy iI 'such damage
were proximately caused` by or Ilowed naturally and expectedly` Irom the deIendant`s
breach).
20.Scrima v. Insurance Co. oI N. Am., 116 B.R. 951, 960-62 (Bankr. W.D. Mich. 1990)
(allowing consequential damages loss oI proIits Ior insurance company`s breach oI
insurance policy).
21.Independent Fire Ins. Co. v. LunsIord, 621 So. 2d 977, 979 (Ala. 1993) (aIIirming a
verdict Ior the policyholder 'oI compensatory damages Ior breach oI contract, including
damages Ior mental anguish).

NYDOCS1-449390.1
11/16/11 11:58 AM
-191-


22.State Farm Mut. Auto. Ins. Co. v. Allstate Ins. Co., 9 Cal App. 3d 508 (1970)
('damages Ior breach oI the duty to deIend are not inexorably imprisoned within the
policy limit but are measured by the consequences proximately caused by the breach).
23.Travelers Ins. Co. v. Wells, 633 So. 2d 457, 461-63 (Fla. Dist. Ct. App. 1993),
clariIied, Nos. 92-2958, 92-2959, 1994 Fla. App. LEXIS 2445 (Fla. Dist. Ct. App. 1994)
(allowing consequential damages projected net proIits Ior breach oI insurance
contracts Ior loss oI business caused by Iailure oI insurance company to renew insurance
policy causing policyholder`s business to cease: '|c|onsequential or resulting collateral
damage may also be recovered iI it can be suIIiciently proved).
24.LiIe Investors Ins. Co. v. Johnson, 422 So. 2d 32, 34 (Fla. Dist. Ct. App. 1982)
(applying Hadley, and Iinding that a breach oI an insurance policy 'may give rise to
damages which were in contemplation oI the parties at the inception oI the contract).
25.Leader Nat`l Ins. Co. v. Smith, 339 S.E.2d 321, 331 (Ga. App. 1985) (Iinding that, as
with other contracts, '|r|emote or consequential damages are not recoverable unless they
can be traced solely to the breach oI the contract or unless they are capable oI exact
computation, such as the proIits which are the immediate Iruit oI the contract, and are
independent oI any collateral enterprise entered into in contemplation oI the contract,`'
noting '|l|oss oI proIits has oIten been regarded as consequential damages and is
recoverable in contract actions, and noting '|d|amages growing out oI a breach oI
contract . . . must have arisen according to the usual course oI things, and be such as the
parties contemplated as a probable result oI the breach`') (citations omitted).
26.Clark v. Standard LiIe & Accident Ins. Co., 386 N.E.2d 890, 898 (Ill. App. Ct. 1979)
(holding that, Ior breach oI an insurance policy, 'consequential damages may be
recovered when they were reasonably Ioreseeable and were within the contemplation oI
the parties at the time the contract was executed` arising out oI special circumstances
communicated and known to both parties) (citation omitted).
27.Indiana Ins. Co. v. Plummer Power Mower & Tool Rental, Inc., 590 N.E.2d 1085,
1092 (Ind. Ct. App. 1992) (Iinding proper an award oI consequential damages caused by
insurance company`s breach oI its insurance policy: 'When a business owner contracts
Ior insurance on his primary source oI income, he has the expectation oI prompt payment
so that he can rebuild and continue his business aIter the occurrence oI a catastrophe such
as the Iire involved in this case. Delayed payment, whether as a result oI good or bad
Iaith, will undoubtedly result in the Iailure oI the owner`s business. The damages
incurred Irom such inability to pay bills Ilow directly, and are proximately caused by, the
insurer`s Iailure to pay. The likelihood oI such damages is only unIoreseeable to
unreasonably narrow-minded insurers.).
28.Salvator v. Admiral Merchants Motor Freight, 509 N.E.2d 1349, 1359-61 (Ill. App.
Ct.), appeal denied, 515 N.E.2d 126 (Ill. 1987) (aIIirming award oI consequential
damages loss oI earnings Ior insurance company`s breach oI its insurance policy).

NYDOCS1-449390.1
11/16/11 11:58 AM
-192-


29.Mohr v. Dix Mut. County Fire Ins. Co., 493 N.E.2d 638, 643-44 (Ill. App. Ct. 1986)
(noting '|c|onsequential damages . . . may be recovered where they were reasonably
Ioreseeable, were within the contemplation oI the parties at the time the contract was
entered, or arose out oI special circumstances known to the parties, and that '|l|ost
proIits may be recovered where the loss is shown with reasonable certainty, the
deIendant`s wrongIul action caused the loss, and the lost proIits were within the
contemplation oI the parties when they entered the contract).
30.Hochman v. American Family Ins. Co., 673 P.2d 1200, 1203 (Kan. App. Ct. 1984)
(aIIirming award oI interest paid by a policyholder on loan to repair tractor as
consequential damages Ior insurance company`s Iailure to pay Ior tractor repair, noting
'|d|amages recoverable Ior breach oI contract are limited to those which may Iairly be
considered as arising, in the usual course oI things, Irom the breach itselI, or as may
reasonably be assumed to have been within the contemplation oI both parties as the
probable result oI the breach).
31.Hinson v. Zurich Ins. Co., 196 So. 2d 827, 829-31 (La. App. Ct. 1967) (Iinding that a
policyholder can recover consequential damages Ior loss oI wages and humiliation
incurred by loss oI employment on account oI insurance company`s breach oI its
insurance policy, but Iinding that lost wages were not suIIiciently proved in this case).
32.Pennsylvania Threshermen & Farmers` Mut. Cas. Ins. Co. v. Messenger, 29 A.2d 653
(Md. 1943) (willIul Iailure to comply with obligations under liability insurance policy
requires insurance company to respond in damages Ior any loss suIIered as a
consequence: '|t|he damages allowed Ior breach oI a contract should compensate the
injured person Ior the loss he has sustained as a result oI the breach. The court should
endeavor to place the injured person as Iar as possible by monetary award, in the position
in which he would have been, iI the contract had been properly perIormed).
33.Lawrence v. Will Darrah & Assocs., Inc., 516 N.W.2d 43, 48 (Mich. 1994) (Iinding
policyholder could recover as consequential damages Ior insurance company`s breach oI
its insurance policy those damages 'the promisor knows or has reason to know about,
including lost proIits Irom trucking business by reason oI insurance company`s Iailure to
pay Ior repair oI truck).
34.Miholevich v. Mid-West Mut. Auto Ins. Co., 246 N.W. 202, 203 (Mich. 1933)
(damages sustained by policyholder in body execution Iollowing Iailure oI insurance
company to pay judgment were such as were contemplated by the parties and hence
recoverable).
35.Wendt v. Auto-Owners Ins. Co., 401 N.W.2d 375, 377-80 (Mich. Ct. App. 1986)
(Iinding policyholder could bring action Ior damages consequential to insurance
company`s breach oI its obligation to pay Ior the repair oI a truck, including loss oI use oI
the owed money, deIault on a note upon which the truck was security, loss oI use oI the
truck, decline in policyholder`s business, and storage costs oI damaged truck).

NYDOCS1-449390.1
11/16/11 11:58 AM
-193-


36.Parmet Homes, Inc. v. Republic Ins. Co., 314 N.W.2d 453, 457 (Mich. 1981)
(although disallowing consequential damages Ior unrelated venture which policyholder
could not participate in because oI Iailure oI insurance company`s to pay on policies, on
the ground that damages Irom such unrelated venture were not Ioreseeable, noting 'the
damages recoverable Ior breach oI contract are those that arise naturally Irom the breach
and were within the contemplation oI the parties at the time the contract was executed.
Loss oI proIits which result Irom the breach may be considered in assessing damages).
37.Olson v. Rugloski, 277 N.W.2d 385, 387-88 (Minn. 1979) (holding that policyholder,
whose insurance company breached its insurance policy by Iailing to reimburse him Ior
the loss oI his trucks, was responsible Ior consequential damages Irom that breach,
including lost proIits: 'When the insurer reIuses to pay or unreasonably delays payment
oI an undisputed amount, it breaches the contact and is liable Ior the loss that naturally
and proximately Ilows Irom the breach. . . . Lost proIits may recovered iI they are a
natural and proximate result oI the breach and are proved with reasonable, although not
absolute, certainty.) (citation omitted).
38.Aetna Cas. & Sur. Co. v. Day, 487 So. 2d 830, 835 (Miss. 1986) ('Although the
insurance policy expressly limits coverage to a speciIic amount, this is not to say that
damages Ior breach oI contract are limited to those oI mere repair. In a contract action,
generally a plaintiII may recover consequential damages reasonably Ioreseeable at the
time the contract was made and established at trial, where properly pled and supported by
substantial evidence.).
39. Landie v. Century Indem. Co., 390 S.W.2d 558, 562 (Mo. Ct. App. 1965)
('Thus, all the cases agree that where it is the insurer`s duty to deIend, and the insurer
wrongIully reIuses to do so on the ground that the claim upon which the action against
the insured is based is not within the coverage oI the policy, the insurer is guilty oI a
breach oI contract which renders it liable to the insured Ior all damages resulting to him
as a result oI such breach.`') (citation omitted).
40.A.B.C. Builders, Inc. v. American Mut. Ins. Co., 661 A.2d 1187, 1192 (N.H. 1995)
(awarding costs oI Iinancing settlement and other consequential damages proper in
breach oI insurance policy action 'because an insurance policy is a contract and 'its
breach may result in an award oI consequential damages iI they were Ioreseeable and can
be proved).
41.Drop Anchor Realty Trust v. HartIord Fire Ins. Co., 496 A.2d 339, 342-43 (N.H.
1985) (Iinding compensable consequential damages Irom insurance company`s breach oI
duties under an insurance policy to pay Ior repair oI policyholder`s hotel, including loss
oI good will and business reputation and lost proIits Ior vacation season).
42.Jarvis v. Prudential Ins. Co., 448 A.2d 407, 410 (N.H. 1982) (Iinding '|t|he insured
may recover speciIic consequential damages iI he can prove that such damages were
reasonably Ioreseeable by the insurance company and that he could not have reasonably
avoided or mitigated such damages).

NYDOCS1-449390.1
11/16/11 11:58 AM
-194-


43.Lawton v. Great Southwest Fire Ins. Co., 392 A.2d 576, 578 (N.H. 1978) (holding
consequential damages may be recovered Ior breach oI an insurance policy, thereby
holding that (i) consequential damages are not limited by doctrine that insurance policies
are mere contracts to pay money; (ii) the policy limits are merely limits Ior payments
owed on account oI an insurable event and not limits Ior damages Irom breach oI contract
and (iii) Iinancial injuries Irom an insurance company`s breach oI its duty).
44.Pickett v. Lloyd`s (a Syndicate oI Underwriting Members), 600 A.2d 148, 155 (N.J.
App. Div. 1991), aII`d, 621 A.2d 445 (N.J. 1993) (Iinding policyholder could recover
consequential damages including loss oI use Ior breach oI insurance policy to pay
Ior replacement oI tractor-trailer: 'we consider the damages awarded here to have been
reasonably Ioreseeable at the time the policy was issued, and thus recoverable in an
action Ior breach oI contract. Here, the insurer knew it was insuring a commercial tractor
used by |the policyholder|. Although the insurance application is not part oI the record,
the policy Iorm issued on January 5, 1987 described the vehicle and its use as
commercial. Thus, it was reasonably Ioreseeable to both parties at the time the contract
was entered into that iI the vehicle was totally destroyed the insured`s livelihood and
income would be aIIected.).
45.Exum v. Ferguson, 637 P.2d 553, 555 (N.M. 1981) (holding that policyholder was
entitled to consequential damages Irom insurance company`s breach Iailure to pay Ior
damage to his truck including loss oI proIits and loss oI equity in the truck that was
repossessed).
46.Mitchell v. Intermountain Cas. Co., 364 P.2d 856, 857 (N.M. 1961) (although noting
'contractual damages recoverable Ior breach oI the contract are those damages
contemplated by the parties at the time oI the making oI the contract, Iinding that the
damages were not Ioreseeable).
47.Bibleault v. Hanover Ins. Co., 417 A.2d 313, 318-19 (R.I. 1980) (noting that
'|t|raditionally, recovery in contract Ior breach oI a unilateral or independent obligation
to pay a certain sum oI money is conIined to the actual amount owed under the contract
plus legal interest, but holding '|t|he duty oI an insurer to deal Iairly and in good Iaith
with an insured is implied by law. Since violation oI this duty sounds in contract as well
as in tort, the insured may obtain consequential damages Ior economic loss and emotional
distress and, when appropriate, punitive damages).
48.Brown v. South Carolina Ins. Co., 324 S.E.2d 641, 645-47 (S.C. 1984), appeal
dismissed, 348 S.E.2d 530 (S.C. 1985) (Iinding bad Iaith to be an action based on
contract, but noting that 'the insurer is liable Ior whatever consequential damages Iollow
as a natural consequence and proximate result oI the breach, and holding that damages
consequential to insurance company`s breach in Iailing to pay Ior damage to car,
including lost income, were recoverable).
49.Holmes v. Nationwide LiIe Ins. Co., 258 S.E.2d 924, 926-27 (S.C. 1979) (holding
that '|i|n breach oI contract actions, only such damages as may reasonably be supposed
to have been in the contemplation oI both parties at the time the contract was made may

NYDOCS1-449390.1
11/16/11 11:58 AM
-195-


be collected,`' and allowing, as consequential damages Ior insurance company`s breach,
interest on loan policyholder was Iorced to procure to pay medical expenses) (citation
omitted).
50.Beck v. Farmers Ins. Exch., 701 P.2d 795, 801-02 (Utah 1985) (allowing
consequential damages 'those reasonably within the contemplation oI, or reasonably
Ioreseeable by, the parties at the time the contract was made Ior breach oI an
insurance policy, noting 'a broad range oI recoverable damages is conceivable,
particularly given the unique nature and purpose oI an insurance contract. An insured
Irequently Iaces catastrophic consequences iI Iunds are not available within a reasonable
period oI time to cover an insured loss; damages Ior losses well in excess oI policy limits,
such as Ior a home or business, may thereIore be Ioreseeable and provable).
51.Hayseed`s, Inc. v. State Farm Fire & Cas. Co., 352 S.E.2d 73, 79-80 (W. Va. 1986)
(noting that '|i|t is now the majority rule in American courts that when an insurer
wrongIully withholds or unreasonably delays payment oI an insured`s claim, the insurer
is liable Ior all Ioreseeable, consequential damages naturally Ilowing Irom the delay,
and, thus, 'the policyholder is entitled to damages Ior net economic loss caused by the
delay in settlement, as well as an award Ior aggravation and inconvenience).
52.Newhouse v. Citizens Sec. Mut. Ins. Co., 501 N.W.2d 1, 6 (Wis. 1993) (Iinding, upon
breach oI its insurance policy, '|t|he insurance company must pay damages necessary to
put the insured in the same position he would have been in had the insurance company
IulIilled the insurance contract. Policy limits do not restrict the damages recoverable by
an insured Ior a breach oI the contract by the insurer).
521


521
But see Polito v. Continental Cas. Co., 689 F.2d 457, 461 (3d Cir. 1982) (applying New Jersey
law) (an insured 'is generally denied consequential damages Ior |the insurance company`s| Iailure to pay
the loss, because in a suit Ior money due under a contract, recovery is limited to the debt plus interest.);
Walker v. American Motorists Ins. Co., 529 F.2d 1163, 1165 (11th Cir. 1976) (applying Alabama law)
('The damages claimed by |the policyholder| Ior breach oI contract include the loss oI his home and
business, injury to his reputation and credit, and costs oI deIending the state litigation. Under Alabama
law, these damages are not recoverable Ior breach oI an insurance contract.); Burleson v. Illinois
Farmers Ins. Co., 725 F. Supp. 1489 (S.D. Ind. 1989) (applying Indiana law) (Iinding consequential
damages precluded as a matter oI law where the insurance company disputes coverage in good Iaith;
although Iinding consequential damages would be allowed under a contract theory, it prohibits them as a
matter oI public policy to allow insurance companies to deny coverage without penalty iI they act in good
Iaith); Schwegmann Giant Super Markets v. Golden Eagle Ins. Co., 693 F. Supp. 478, 487 (E.D. La.
1988) (applying Mississippi law) (denying lost proIits as a consequence oI insurance company`s Iailure to
pay timely, noting that, in insurance policies, the policyholder is limited to the amount oI insurance under
the policy); Brown Township Mut. Ins. Ass`n v. Kress, 330 N.W.2d 291, 298 (Iowa 1983) (Iinding '|t|he
insurer`s obligation or liability under a policy oI Iire insurance is measured and deIined by the terms oI
the policy; the insured is entitled to recover to the extent oI his loss occasioned by the Iire, not exceeding
the maximum amount stated in the policy); General Accident Fire & LiIe Assurance Co. v. Judd, 400
S.W.2d 685, 687 (Ky. 1966) ('The traditional measure oI recovery Ior Iailure to pay money due under
contract is the amount agreed to be paid.); Burnside v. State Farm Fire & Cas. Co., 528 N.W.2d 749, 751
(Mich. Ct. App. 1995) (holding that attorneys` Iees and actual costs are not recoverable as a result oI the
insurance company`s bad-Iaith breach oI an insurance policy); Haas v. PaciIic Mut. LiIe Ins. Co., 41

NYDOCS1-449390.1
11/16/11 11:58 AM
-196-


One insurance company responded to a policyholder`s claim Ior consequential
damages by complaining that the cases cited by the policyholder involved Iirst party rather than
third party claims.
522
Yet the insurance company Iailed to note why this distinction made a
diIIerence and then noted that where consequential damages were awarded to a third party, it was
'almost inevitably because oI the insurers wrongIul, bad Iaith, reIusal or delay in settlement oI a
claim against the insured.
523
In Iact, the insurance company`s opening argument was that the
policyholder had misinterpreted the 'ancient case oI Hadley v. Baxendale.
524
The power oI the
argument Ior consequential damages is obvious when these are the best arguments a group oI
insurance companies can make in opposition.
Thus, under general principles oI law, a policyholder can recover as consequential
damages Ior a breach oI an insurance policy any losses that either (i) arose Irom the breach itselI,
or (ii) were in the contemplation oI the parties.
525
In support oI the Iirst wing oI this rule, a
policyholder might prove that, had the insurance company properly complied with its obligations
to investigate and deIend claims against the policyholder, the policyholder`s business would

N.E.2d 263 (Ohio Ct. App. 1941) (Iinding policyholder not entitled to consequential damages Irom
breach oI insurance policy).
522
GulI Underwriter Insurance Company`s Opposition To NEMA`s Motion To Recover
Consequential Damages and Motion For Rule 11 Sanctions at 2, dated May 28, 1997, National Elec. MIr.
Ass`n v. Century Indem. Co., No. 96-985-A (E.D. Va.).
523
Id. at 3-4.
524
Id. at 2.
525
See, e.g., Royal College Shop v. Northern Ins. Co, oI N.Y., 895 F.2d 670, 679 (10th Cir. 1990)
('|D|amages recoverable Ior breach oI contract are limited to those which may Iairly be considered as
arising, in the usual course oI things, Irom the breach itselI, or as may reasonably be assumed to have
been within the contemplation oI both parties as the probable result oI the breach.` Thus, the disjunctive
or` demonstrates that the language usual course oI things` may be used in the place oI within the
contemplation oI the parties.` Both permissible standards aIIord the jury a course oI Iinding that the
damage was not a remote, unIoreseeable event unrelated to the breach itselI. ThereIore, plaintiIIs were
required to prove either that the damages arose in the usual course oI things, Irom the breach itselI, or that
the damages were within the contemplation oI the parties.); Bettius & Sanderson, P.C. v. National Union

NYDOCS1-449390.1
11/16/11 11:58 AM
-197-


have been better and the Iinancial burdens would have been ameliorated. Moreover, the
policyholder would have had some guarantee oI the policyholder`s Iuture health.
Alternatively, in support oI the second wing oI the Hadley rule, the policyholder
could demonstrate that the policyholder purchased millions oI dollars in liability insurance
coverage and a separate deIense obligation. The purchase oI such massive protection rendered it
Ioreseeable that an insurance company`s delay in complying, or Iailure to comply, with
investigation, deIense and indemnity obligations in the Iace oI catastrophe would cause the
policyholder to suIIer consequential damages.
526
Under either wing oI Hadley, it is clear that
policyholders can and should seek consequential damages.
Do not miss consequential damages; the meat and potatoes.
PART VIII
1ury Charges - Do Not Reinvent Wheels
With one eye on the appellate courts, obtain and use charges that have been used
in reported cases. When requested, most lawyers who handled old cases will dig through old
Iiles to retrieve old charges and requests to charge. With the best oI luck, both the requests to
charge and the actual charge can be obtained. Tell the trial judge the case in which the charges
were used.

Fire Ins. Co., 839 F.2d 1009, 1015 (4th Cir. 1988) (consequential damages recoverable iI 'direct and
natural result oI breach).
526
See, e.g., Royal College Shop, 895 F.2d at 679; Heller, 839 F. Supp. at 1302-05 ('It does not
appear objectively unreasonable that in the context oI a Iidelity bond designed to replace money lost
through an employee`s misconduct that the need Ior an alternate source oI the Iunds would be within the
reasonable contemplation oI the parties. Indeed, a basic reason Ior obtaining Iidelity bond coverage is to
provide a ready source oI replacement Iunds when a covered loss occurs and to avoid the uncertainty oI
obtaining loans with the attendant interest costs aIter the loss is discovered.); Mann, 418 F. Supp. at 249;
Reichert, 428 P.2d at 864; Plummer, 590 N.E.2d at 1089-92; Mohr, 493 N.E.2d at 644; Hochman, 673
P.2d at 1204; Lawrence, 516 N.W.2d at 45-46; Kewin v. Massachusetts Mut. LiIe Ins. Co., 295 N.W.2d
50, 54 (Mich. 1980); Wendt, 401 N.W.2d at 380; Lawton, 392 A.2d at 579; Pickett, 600 A.2d at 155.

NYDOCS1-449390.1
11/16/11 11:58 AM
-198-


Usually it is not advisable to try to advance the state oI the law in jury charges.
Remember that the insurance company is going to appeal.
Superb places to look Ior pro-policyholder jury charges are in the legislative
recitations given by legislatures when enacting laws regulating insurance and claims practices.
Another excellent source is the recitals written by state insurance regulators when proposing and
adopting insurance claims handling regulations.
PART IX
Trial Evidence - Bulldogs or Pussycats?
Try a bad Iaith case on the assumption that the policyholder is going to win AND
THE INSURANCE COMPANY TO GOING TO APPEAL.
Keep an eye on the appellate courts. They are inventing new and diIIerent ways
to nulliIy insurance coverage and to eliminate bad Iaith damages against insurance companies.
With respect to evidence, iI the insurance company objects to the policyholders`
evidence, think hard about pressing it. When the insurance company oIIers an outrageous
document, demonstration, or piece oI testimony, the policyholder may be much better served by
letting the evidence in. Many items oI evidence can be 'Ilipped and used against the insurance
company.

NYDOCS1-449390.1
11/16/11 11:58 AM
-199-


PART X
Avoiding Bifurcation
Fight biIurcation with Iacts! Juries are not dumb. The argument Ior biIurcated
trials rests on the erroneous assumption that juries can not assimilate judicial instructions in the
context oI complex civil litigation. In Iact, research shows the opposite to be true. Recent
empirical studies oI juror competence indicate that juries are 'capable oI deciding even very
complex cases.
527
Accordingly, insurance company arguments concerning alleged prejudice are
without Ioundation. When biIurcation is suggested, insist on prooI that there will be prejudice.
Try not to let the issue be decided on the basis oI opinions oI trial lawyers and trial judges.
Contrary to the typical insurance company assertions, judicial economy and
eIIiciency is not be promoted by biIurcation. Despite a common Iactual basis, policyholder`s
bad Iaith claims are not dependent on the success oI their underlying policy claims. Rather, bad
Iaith claims oIten contain diIIerent elements and are viable regardless oI the outcome oI the
policy claim. BiIurcation can only result in enormous waste, duplication, delay and excess cost.
Moreover, 'trial-splitting devices |such as biIurcation| prevent the jury Irom
hearing relevant and essential inIormation. . . To preserve the jury`s role as the ultimate Iinder oI
Iact, the jury must hear the evidence in its Iull context.
528

A biIurcated trial would prejudice a policyholders claims, as the 'empirical
research suggests that an advantage is accorded to the deIendants when civil trials are

527
See Joe S. Cecil et al., Citizen Comprehension oI DiIIicult Issues: Lessons Irom Civil Jury Trials,
40 AM. U. L. REV. 727, 764 (1991). See also JenniIer Granholm & William Richards, BiIurcated Justice:
How Trial-Splitting Devices DeIeat the Jury`s Role, 26 U. TOL. L. REV. 505, 506 (1995) ('|R|esearch has
established that juries are competent, conscientious, IaithIul to the judge`s instructions and not oIten
swayed by personal prejudices.) (citing HARRY KALVEN JR. & HANS ZEISEL, THE AMERICAN JURY 55-
62 (1966); David T. Wasserman & J. Neil Robinson, Extra-Legal InIluences, Group Processes, and Jury
Decision-Making: A Psychological Perspective, 12 N.C. CENT. L.J. 96, 101 (1980)).

NYDOCS1-449390.1
11/16/11 11:58 AM
-200-


biIurcated.
529
The prejudice and increased expense to policyholders and the Court that would
result Irom biIurcation is Iar greater than any speculative prejudice that insurance companies
might Iace by allowing a policyholder to proceed with all oI its claims. Indeed, any concerns oI
prejudice raised by the insurance companies can be easily cured by limiting instructions to the
jury. In contrast, proceeding with a single lawsuit rather than multiple lawsuits best promotes
justice, avoids prejudice and promotes judicial economy.
PART XI
Consider Malicious Defense
The tort oI malicious deIense derives Irom the recognized tort oI malicious
prosecution. Simply put, malicious deIense provides that deIendants should be liable Ior the
malicious assertion oI Ialse and baseless deIenses.
530

Until recently, the tort oI malicious deIense had been nearly universally rejected
by the courts. New Hampshire has recently expressly adopted malicious deIense and New York
has implicitly recognized the tort as a valid cause oI action Ior plaintiIIs.
These decisions indicate that more courts may begin to take notice oI this tort.
In Aranson v. Schroeder, the Supreme Court oI New Hampshire held:
when a deIense is commenced maliciously or is based upon Ialse
evidence and perjury or is raised Ior an improper purpose, the
litigant is not made whole iI the only remedy is reimbursement oI
counsel Iees. It Iollows that upon proving malicious deIense, the

528
JenniIer Granholm & William Richards, Bifurcated ustice. How %rial-Splitting Devices Defeat
the urys Role, 26 U. TOL. L. REV. 505, 506 (1995).
529
Id. at 513 (citing MAURICE ROSENBERG, COURT CONGESTION: STATUS, CAUSES, AND PROPOSED
REMEDIES, IN THE COURTS, THE PUBLIC AND THE LAW EXPLOSION, 29, 48 (Harry W. Jones ed. 1965);
Hans Zeitel & Thomas Callahan, Split %rials and %ime Saving. A Statistical Analysis, 76 Harv. L. Rev.
1606 (1963).
530
See Jonathan K. Van Patten & Robert E. Willard, The Limits oI Advocacy: A Proposal Ior the
Tort oI Malicious DeIense in Civil Litigation, 35 HASTINGS L.J. 891, 893.

NYDOCS1-449390.1
11/16/11 11:58 AM
-201-


aggrieved party is entitled to the same damages as are recoverable
in a malicious prosecution claim.
531

The court noted that malicious deIense should be construed as a limited and closely scrutinized
cause oI action to avoid precluding deIendants Irom raising a potentially legitimate deIense Ior
Iear oI being sued.
532

Aranson set Iorth a standard oI liability Ior malicious deIense:
One who takes active part in initiation, continuation, or
procurement oI deIense oI civil proceeding is subject to liability
Ior all harm proximately caused, including reasonable attorney
Iees, iI he or she acts:
(1) without probable cause;
(2) with knowledge or notice oI lack oI merit in such actions;
(3) primarily Ior purpose other than securing the proper adjudication oI the claim and
deIense thereto, such as to harass, annoy or injure, to cause unnecessary delay or
needless increase in the cost oI litigation;
(4) previous proceedings were terminated in Iavor oI party bringing malicious
deIense action; and
(5) injury or damage is sustained.
533

In Aranson, the Supreme Court oI New Hampshire accepted the plaintiIIs`
argument that malicious deIense would provide a remedy Ior Ialse deIenses just as malicious
prosecution already provides a remedy Ior Ialse claims. The plaintiIIs argued that, under present
law, Ialse evidence is condemned Irom the plaintiII`s side but tolerated Irom the deIendant`s
side. The plaintiIIs maintained that both Iorms oI misconduct should be treated in the same
manner. The New Hampshire Supreme Court agreed:

531
Aranson v. Schroeder, 671 A.2d 1023 (N.H. 1995).
532
Id. at 1028.
533
Id. at 1024.

NYDOCS1-449390.1
11/16/11 11:58 AM
-202-


Is a plaintiII less aggrieved when the groundless claim put Iorth in
the courts is done deIensively rather than aIIirmatively in asserting
a worthless lawsuit Ior improper purposes? We think not.
534

Similarly, in Aufrichtig v. Lowell,
535
the New York Court oI Appeals recognized a
slight variation oI malicious deIense. In this case, the plaintiII`s physician provided an insurance
company with a perjured aIIidavit. The insurance company submitted this aIIidavit to the United
States District Court.
On the eve oI trial, the physician admitted that the aIIidavit had no basis in Iact.
When the Federal District Judge learned oI the Ialse aIIidavit, he urged the plaintiII to settle with
the insurance company due to the physician`s conIlicting statements.
The plaintiII then instituted a claim against the physician. The Aufrichtig court
Iound that the physician may have breached his duty to provide truthIul medical inIormation as
part oI the physician-patient relationship and denied the physician`s motion Ior summary
judgment. Thus, the holdings oI Aufrichtig and Aranson are in line with each other; both hold
that the presentation oI Ialse evidence is actionable.
Moreover, iI a non-party witness can be held liable Ior presenting Ialse evidence,
then a party deIendant should also be liable Ior similar activity. Insurance companies, like
doctors, are Iiduciaries. Both have special obligations and duties to their clients. It may be
possible to make an especially strong argument to apply the tort oI malicious deIense to all
Iiduciaries in order to best protect the sanctity and purpose oI the Iiduciary relationship. The
crime-Iraud exception to the attorney-client privilege, Ior instance, does just that.

534
Id. at 1027.
535
AuIrichtig v. Lowell, 85 N.Y.2d 540, 650 N.E.2d 401, 626 N.Y.S.2d 743 (1995).

NYDOCS1-449390.1
11/16/11 11:58 AM
-203-


PART XII
Pre-litigation Musts`
A. Locate All Insurance Policies
Locate all insurance policies, including old ones. Old insurance policies are
extremely valuable because they tend to provide insurance coverage Ior any damage or injury
that took place during the policy period, no matter when the damage or infury is discovered. II a
particular policy cannot be Iound, secondary sources may be used to demonstrate that the policy
was purchased. The search Ior insurance policies should include a review oI:
internal accounting records and outside accountants` Iiles Ior
evidence oI premium payments;
legal records and lawyers Iiles, paying special attention to claims
Iiles;
known insurance policies Ior reIerences to other policies;
insurance policies oI other parties also Iacing potential liability in
the same matter;
records oI aIIiliated or predecessor companies;
workers compensation records to determine iI an insurance
company deIended the workers compensation claim, since workers
compensation and liability insurance are oIten purchased Irom the
same insurance company;
iI possible, records oI companies which would have required
submission oI a certiIicate oI insurance Irom your company beIore
engaging in business with it, Ior instance, railroad company
records or state and Iederal government records;
a search oI the London insurance market Ior London brokers
records.
There are several companies, known as insurance archaeologists, which specialize
in locating old insurance policies. These companies may be able to locate missing insurance
policies on a cost-eIIective basis. And never Iorget, despite repeated insurance company

NYDOCS1-449390.1
11/16/11 11:58 AM
-204-


arguments to the contrary, that insurance companies should have copies oI the insurance policies
purchased Irom them.
B. Give Notice To the Insurance Company
Giving notice is absolutely critical. Give notice early and oIten.
536
A
policyholder should contact its insurance agent or broker and have them give written notice to all
possibly implicated insurance companies.
537
Do not rely on the broker`s or agent`s word that
there is no insurance coverage. To repeat, insist that the insurance broker or agent immediately
Iorward written notice oI the claim to all potentially involved insurance companies. When all is
said and done, veriIy that the agent or broker has promptly Iorwarded the notice.
The insurance industry has developed standardized Iorms Ior giving notice. 'Plain
vanilla type notice, without extensive detail, is best. When Iirst giving notice oI an event or
happening which may lead to a claim, all that needs to be provided to the insurance company is a
copy oI the document that the policyholder received alleging its liability. The Iirst notice oI
claim should also state that additional insurance policies may be involved and request that the
insurance company provide a list oI all policies which have been sold to the policyholder.
Additionally, the notice should request that the insurance company provide a deIense, or agree to

536
There are two separate and distinct notice requirements. The Iirst requirement is that the
policyholder must give notice to its insurance companies oI an event or happening (an 'occurrence) that
may lead to a claim. The second requirement is that the policyholder must also give notice oI an actual
claim or potential claim. In either case, the policyholder should give notice to every insurance company
which had sold it insurance coverage at any point in time during the alleged bodily injury or property
damage. For example, iI the policyholder receives Irom the United States Environmental Protection
Agency (USEPA) a letter alleging that it may be potentially responsible Ior the clean-up oI a municipal
waste Iacility which opened in 1950, the policyholder should give notice to all insurance companies that
sold the policyholder insurance Irom 1950 to the present. This is true even iI the policyholder did not
send materials to the site until 1960. II the claim Ior insurance coverage is related to a product, the
policyholder should give notice to every insurance company which sold the policyholder insurance
coverage Irom the date the product was Iirst marketed to the date oI the 'occurrence or oI the actual or
potential claim.

NYDOCS1-449390.1
11/16/11 11:58 AM
-205-


pay Ior deIense costs, provide indemniIication Ior any past or Iuture liabilities, and advise the
policyholder oI all possible legal and Iactual bases that would support a Iinding oI insurance
coverage. Again, make sure that notice is given to all potentially involved insurance companies.
Other items which may be included when giving notice, iI readily available, are a general
description oI the product or event giving rise to the liability, what happened, when, where, how
the policyholder is involved, and what insurance policies the policyholder believes were
purchased Irom the insurance company. Bear in mind, however, that initially providing
extensive detail may delay the policyholder Irom promptly getting notice out to the insurance
companies. II providing detail delays giving notice, it can only work to the insurance companies
advantage. Incomplete notice can be corrected. Late notice, oIten times, cannot.
Do not wait to give notice. Notice should be given as soon as a claim is made or
threatened against the policyholder, or as soon as the policyholder senses that an event or
happening may result in a claim against it.
538

C. Contending With The Reservation of Rights Letter
II the insurance company denies insurance coverage outright, send a letter to the
insurance company disagreeing with the denial. Most insurance companies, however, do not
deny insurance coverage without undertaking some type oI investigation. Thus, instead oI an

537
See Eugene R. Anderson et al., A Guide to Insurance Coverage Ior Environmental Liability
Claims, (1996). Copies oI this material is available Irom the authors.
538
Policyholders oIten do not give their insurance companies notice oI what seem to be smaller
claims. Many policyholders still believe that they should 'wait Ior the Big One beIore giving notice,
assuming that this will prevent their premiums Irom rising. Following this misguided practice is perhaps
the single best way Ior a policyholder to IorIeit all oI its insurance coverage. This is especially true when
the 'small problem turns into the 'Big One which the policyholder was worried about all along; Ior
instance, when the tank with the 'small leak turns out to have slowly contaminated an entire area water
supply. Insurance companies commonly use late notice as a reason to deny insurance coverage. In some
states, delaying notice by as little as 10 days may lead to the IorIeiture oI all insurance coverage. In those
states, it is not even necessary Ior the insurance company to demonstrate that it was harmed, in any way,
by the policyholder`s delay.

NYDOCS1-449390.1
11/16/11 11:58 AM
-206-


outright denial, most insurance companies will send the policyholder a reservation oI rights
letter. The letter is a long, tersely worded statement which sets Iorth a panoply oI reasons
explaining why insurance coverage may be denied.
When contending with a reservation oI rights letter and requests Ior inIormation
Irom the insurance company regarding the claim, the goal should be to cooperate with the
insurance company as much as possible without giving up any rights. The insurance company
should be considered an adversary. Any inIormation or documents subject to the attorney-client
privilege or prepared in anticipation oI litigation should not be given to the insurance company.
This includes conversations and correspondence between a policyholder and its lawyer, and, in
some instances, materials prepared Ior the policyholder by the policyholder`s lawyer.
Answering the insurance company`s questions should not unduly burden the
policyholder with Iinancial expense or consumption oI time. For example, iI an insurance
company wants to see a large set oI documents, the policyholder should not bear the expense oI
having the documents copied and shipped to the insurance company. Rather, the insurance
company should be invited to review the documents at the policyholder`s oIIice.
In addition, keep records oI when documents and inIormation are provided to the
insurance company, as well as the expenses incurred in providing them. Under many insurance
policies, the insurance company is required to reimburse the policyholder Ior cooperating with
the insurance company.

NYDOCS1-449390.1
11/16/11 11:58 AM
-207-


D. Keep In Contact With The Insurance Company
The policyholder should establish a system oI periodic reports to keep the
insurance company inIormed oI what is happening and oI the status oI each claim. In addition,
the policyholder should Iorward proposed settlement agreements to the insurance company,
beIore agreeing to them.
1. Complain To The State Insurance Commissioner
Complain to the oIIice oI the state insurance commissioner when it appears that
the insurance company is stalling or not acting in good Iaith.
PART XIII
Discovery
Obviously, every case will present a diIIerent Iact pattern which will generate
diIIerent acts oI bad Iaith. Certainly, a common theme is that the insurance company`s
investigation was geared to Iinding a way to deny the claim. In eIIect, the insurance company
became an adversary oI its policyholder. ThereIore, what the insurance company did during its
investigation is important, especially any instructions it gave to investigators.
Do searches regarding other successIul bad Iaith claims against an insurance
company (especially in your jurisdiction) and contact the policyholders` lawyers in those cases.
Check local bar associations to see iI they have recently sponsored programs on bad Iaith and
obtain copies oI the written materials.

NYDOCS1-449390.1
11/16/11 11:58 AM
-208-


A. Must Have` Documents:
The Iollowing lists that documents that must be obtained in any bad Iaith claim.
539

1. Insurance policy.
2. All correspondence to and Irom the insurance company.
3. All correspondence to and Irom broker.
4. Underwriting Iile.
5. Underwriting manuals.
6. Underwriting guidelines.
7. Underwriting training materials.
8. Claims Iile.
9. E-mail and any other means oI electronic communication or correspondence.
10. Insurance company web page.
11. Claims manuals.
540

12. Claims guidelines.

539
See Appendix E Ior a more detailed list items which should be sought in discovery.
540
II the insurance company contends that it does not use claims manuals, a bad Iaith expert may be
able to testiIy that this Iailure in and oI itselI constitutes bad Iaith. See Kraeger v. Nationwide Mut. Ins.
Co., No. 95-7550, 1997 U.S. Dist. LEXIS 2726 (E.D. Pa. Feb. 28, 1997)(holding that an expert witness
can testiIy that an insurer had 'no reasonable basis Ior its actions, but can`t assert that it violated the law
or acted in bad Iaith. II there are no written guidelines, Iind out iI there is any custom and practice
applicable to claims handling or no guidelines whatsoever. The absence oI any guideline may be bad
Iaith.
II the claims manuals contain positive statements you can show that the insurance company did
not live up to its own standards. II the manual contains negative statements you can argue that the claim
was doomed Irom the beginning. See, e.g., Neal v. Farmers Ins. Exch., 582 P.2d 980, 987 (Cal. 1978)
(Company Manual admitted to show insurer`s 'conscious course oI conduct, Iirmly grounded in
established company policy.); Maxwell v. Aetna LiIe Ins. Co., 693 P.2d 348 (Ariz. Ct. App. 1984)
(Manuals properly admitted to show insurance company`s knowledge that denial oI a claim may cause
emotional distress); Moore v. American United LiIe Ins. Co., 197 Cal. Rptr. 878, 883-84 (Cal. Ct. App.
1984).
For an interesting story showing, in a diIIerent context, oI why insurance companies are now
destroying (or claim not to have) claims manuals, see Robert B. Whitemore, Caution. For Reference
Only, NFPA, A Guide For Fire And Explosion Investigations, CLAIMS, May 1997, at 38.

NYDOCS1-449390.1
11/16/11 11:58 AM
-209-


13. Claims training manuals.
14. Insurance company sales materials, advertisements and brochures.
541

15. Insurance company Iinancials certiIied by the state insurance department.
542

16. Insurance company annual reports Iiled with the SEC on Iorm 10-K. II possible,
obtain a 'glossy insurance company annual report to stockholders.
543

17. Insurance company Codes oI Ethics,
544
Ethical Guidelines, and training materials.
18. Insurance company charter and by-laws.
19. Insurance company mission statement and minutes oI any committee organized to
create a company mission statement. Was the mission statement draIted by a public
relations Iirm?
20. The insurance company`s audit oI its claims Iiles.

541
See Tom Baker, Symposium on the Law oI Bad Faith in Contract and Insurance Agreements:
Theory: Constructing the Insurance Relationship; Sales Stories, Claim Stories, and Insurance Contract
Damages, 72 TEX. L. REV. 1395 (1994).
542
Obtain certiIied copies oI Iinancial statements oI the insurance company Irom the State
Department oI Insurance. You will need to establish the insurance company`s net worth in order to obtain
punitive damages. But see Pluid v. B.K., 948 P.2d 981 (Alaska 1997)(holding that sexual assualt victim
was not required to introduce evidence oI the deIendant`s wealth worth to recover punitive damages. The
Alaska Supreme Court noted that other state courts are divided on the issue, citing Hicks v. Lilly
Enterprises, Inc., 608 P.2d 186 (Or. Ct. App. 1980). The Pluid court noted that the deIendant is uniquely
situated to enter evidence oI its own net worth.
Insurance company Iinancial statements and annual reports (discussed below) may enable an
accounting, Iinancial or economics expert to provide extensive testimony about an insurance company`s
underwriting and general business practices. For example, with these documents an expert could
establish a deIendant insurance company`s:
(1) move towards relying on underwriting cash Ilow as opposed to underwriting income, determining the
Iinancial gain the insurance company realized as a result;
(2) pattern and practice oI denying insurance claims Ior Iinancial beneIit as demonstrated in the Iinancial
reports oI the deIendant insurance company;
(3) Iinancial beneIit gained as a result oI the pattern and practice oI denying claims;
(4) available Iunds oI the insurance company to respond to a damage award, as well as determine the
Iinancial impact oI a punitive damage award on the deIendant insurance company.
543
See Kirk A. Pasich, Measuring %rue Jalue of Insurance Companies For Punitive Damages
Purposes, MEALEY`S LIT. REP., Oct. 11, 1994, at 17, 20 ('In order to accurately determine how much oI a
punitive damage award is enough, but not too much, the Iinancial condition oI an insurance company
needs to be evaluated . . . . The most basic and reliable source oI Iinancial inIormation about an insurance
company -- at least iI its own representations are to be believed -- is its annual statement Iiled with
various state insurance departments or insurance commissions).
544
See Appendices A and F.

NYDOCS1-449390.1
11/16/11 11:58 AM
-210-


21. State insurance department Iiles oI policyholder complaints against insurance
company. These are usually maintained according to state insurance regulations.
22. Insurance company annual statements Iiled with the state insurance department.
23. Another good place to 'look Ior coverage is in the draIting and regulatory
history oI insurance regulations.
545

24. Review insurance company vs. insurance company cases.
25. Insurance company`s compliance program.
546


545
See e.g. Eugene R. Anderson et al., Environmental Insurance Coverage In New ersey. A %ale of
%wo Stories, 24 RUTGERS L.J. 83 (Fall 1992) (reviews the development oI the pollution exclusion and
regulatory estoppel to prohibit insurance companies Irom adopting positions contrary to what they
represented when proposing regulations).
546
Insurance companies oIten have compliance programs because these programs reduce the Iine a
sentencing judge is required to impose under the Federal Sentencing Guidelines Ior convictions under
Iederal criminal statutes. Most notable Ior insurance companies is the Federal Insurance Crimes Act. See
Larry P. SchiIIer & Vanessa L. Sutter, If You Cant Pay the Fine, Dont Do . . ., BEST`S REV. P/C ed.,
Dec. 1997, at 73.

NYDOCS1-449390.1
11/16/11 11:58 AM
-211-


B. Must Have` Depositions
Interview client and insurance brokers and agents careIully regarding all contacts
with the insurance company regarding the claim. OIten an insurance company will raise and
then abandon a number oI theories on which to deny coverage. These changes in position
undercut the credibility oI its deIenses, as well as demonstrate the insurance company`s bad Iaith
by showing its desperate attempt to raise any argument, even Irivolous ones, to deIeat insurance
coverage. To the extent that the deIenses go to policy interpretation issues, policyholder`s
counsel can establish that the insurance company never told the policyholder about its
interpretation at the time it sold the policy and took the premium. IdentiIy and review prior
depositions given by insurance company personnel regarding claims handling.
547

1. Underwriters.
Remember: Underwriters believe that they sell policies to provide insurance coverage.
Even an 'ignorant underwriter can be an excellent witness.
548

2. Underwriting supervisor.
3. Claims handlers.
549


547
See Joel P. Gumbinger, Deposing the Insurer. Practical and Strategic Considerations, THE
BRIEF, ABA TORT & INS. PRACTICE SECTION, Winter 1998, at 47 (providing an in depth analysis oI
deposition strategy), and Betty C. Love, Discovery In Insurance Bad-Faith Cases. Guidelines for the
Plaintiffs Lawyer, TRIAL, Dec. 1987, at 23 (discussing discovery strategies). Both articles are attached
at Appendix G. For an insurance industry perspective on deposition taking strategies, see Michael Sean
Quinn, %he Ethical Habitat of Adfusters. Part 1. Principles, Problems, and Practicalities, 10 ENVTL.
CLAIMS J. 91 (Winter 1998).
548
For an extensive discussion oI how courts have treated testimony by underwriters, the
inIormation contained in underwriting Iiles and the interpretive materials published by or attributed to
insurance industry underwriting groups, see Douglas G. Houser & Randy L. Arthur, %he Role of the
Insurance Underwriter in Claims Disputes, 31 TORT & INS. L.J. 573 (Spring 1996).
549
Insurance company deIense counsel will sometimes act as claims handlers Ior the insurance
company and subsequently attempt to avoid producing during litigation certain materials to the
policyholder by invoking the attorney-client privilege. In the insurance context, to the extent that an
attorney acts as a claims adjuster, claims process supervisor, or claims investigation monitor, and not as a
legal advisor, the attorney-client privilege does not apply. See Mission National Co. v. Lilly, 112 F.R.D.
160, 163 (D. Minn. 1986)(Iire loss claim)('To the extent that |outside counsel| acted as claims adjusters,
then, their work-product, communications to client, and impressions about the Iacts will be treated herein
as the ordinary business oI the plaintiII, outside the scope oI the asserted privileges); Allendale Mut. Ins.

NYDOCS1-449390.1
11/16/11 11:58 AM
-212-


4. Claims supervisor.
5. Agent or Broker to avoid trial surprises.
550

6. Insurance company executives
551

Video depositions cost more, but save time.
C. Must Ask` Deposition Questions
Remember President Eisenhower`s rule:

Co. v. Bull Data Systems, Inc., 152 F.R.D. 132, 137 (N.D. Ill. 1993)('The Iact that the material was
produced originally by a lawyer is irrelevant, as is the case here, the material reIlects ordinary insurance
inIormation.); Dawson v. New York LiIe Ins. Co., 901 F. Supp. 1362, 1367 (N.D. Ill. 1995)(attorney-
client privilege did not attach where attorneys were acting more as 'couriers oI Iactual inIormation
rather than 'legal advisors). Simply put, Iactual inIormation conveyed to an attorney by a party/client is
not shielded Irom discovery by the attorney-client privilege and such inIormation is discoverable. See
Penk v. Oregon State Bd. oI Higher Educ., 99 F.R.D. 511 (D. Or. 1983) ('An attorney cannot shield Irom
discovery purely IactIul inIormation obtained Irom a third party in some cases, and a client cannot resist
testiIying as to a Iact merely because he has told that Iact to his attorney at some point.).
II an outside law Iirm was hired to do the claims handling, this suggests that bad Iaith may be
present. Lawyers, by nature, are adversaries representing the insurance company`s interest against the
policyholder. It is unlikely that they will be neutral in the claims investigation or look Ior ways to Iind
coverage. Lawyers also are trained to raise every argument, even iI Irivolous. Outside lawyers also try to
impress the insurance company client (and compete against other law Iirms Ior the business) by being
tough. Finally, an outside law Iirm, who represents the insurance company in coverage disputes as well
as claims handling, cannot possible be neutral.
550
The deposition oI the broker or agent must be handled careIully, particularly because oI their split
loyalty. Tie them down on the duty oI good Iaith and Iair dealing so that they cannot change their
testimony at trial.
551
Do not Iorget that under Federal Rule oI Evidence 612, any document used by insurance
company deIense counsel to prepare a witness Ior deposition or used in any way to reIresh a witness`
recollection is discoverable by policyholder`s counsel. Federal Rule oI Evidence 612 states that where a
witness uses a writing to reIresh their recollection Ior the purposes oI providing deposition testimony:
beIore testiIying, iI the court in its discretion determines it is
necessary in the interests oI justice, an adverse party is entitled to
have the writing produced at the hearing, to inspect it, to cross-
examine the witness thereon, and to introduce in evidence those
portions which relate to the testimony oI the witness.
Senior executives and other insurance company witnesses unIamiliar with the claim typically review
documents in order to Iamiliarize themselves with the claim prior to providing deposition testimony.
Under FRE 612, any documents reviewed by those witnesses, even iI privileged, must be given to
policyholder`s counsel Ior use in cross-examination. One commentator has argued that parties should
waive Rule 612 in order to have a Iactually complete deposition and to prevent the witness Irom relying
on memory. See Clayton H. Farnham, 'How to Prepare Insurance Company Witnesses Ior Depositions
and Trial Testimony in A Bad Faith Claim, in Extra Contractual Claims -- Bad Faith -- Punitive Damages,
First and Third Party Claims Seminar, at J-16 (DeIense Research Institute, Inc. 1994).

NYDOCS1-449390.1
11/16/11 11:58 AM
-213-


You learn more with your ears open than with your mouth open.
1. Mark the claims Iile as an exhibit. Does the claims Iile contain a written record oI every
signiIicant event?
Same Ior underwriting Iile.
2. Does the claims Iile contain a copy oI every document and every notation and every
piece oI inIormation that was ever in it?
Same Ior underwriting Iile.
552

3. IdentiIy and Iind out what happened to any missing materials.
4. IdentiIy every person mentioned in the Iiles. Where are they now?
5. What is good Iaith?
6. Go through the claims Iile and ask Ior all documents showing that insurance company
searched Ior insurance coverage.
7. Know what your compensatory damage expert and your bad Iaith expert are going to say
and get as much Ioundation Ior their testimony Irom the insurance company witnesses as
possible.
8. Prepare Ior an opening statement by getting the insurance companies to admit to the
miracles that insurance is supposed to provide.
9. Personal and company membership in anti-policyholder trade associations.
10. Establish company management changes and ownership changes to lay the Ioundation Ior
changes in 'claims paying philosophy.
11. Work on negating the 'bad policyholder deIense. For example, Stonewall does not
cover polluters and drunken drivers. This is the 'reprehensible conduct deIense and
must be approached with care. One approach is to ask claims people about 'taking care
oI the victims oI 'tortIeasors.
12. II you could handle the claim all over again, would you do it the same way? Ask this oI
every witness. Almost any answer can be helpIul.

552
AIter obtaining the underwriting and claims Iiles, make sure that you know by bates number
which documents appear in each Iile. Get this tied down early in the case so that the insurance company
cannot add documents to these two Iiles as the case proceeds.

NYDOCS1-449390.1
11/16/11 11:58 AM
-214-


D. Pleadings Considerations
Forum Consideration Determine whether Iorum recognizes existence oI tort
or contract cause oI action (or both).
Advantages of tort cause of action
1. greater measure oI damages no 'Ioreseeability requirement
2. availability oI punitive damages
3. non-perIormance oI contract conditions is not an absolute deIense
4. no 'collateral source rule
Advantages of contract cause of action
1. may have longer statute oI limitations
2. contractual claim may be preIerable in states where an 'evil mind is required
see below
Forum Consideration Determine the requisite standard re insurance company
state oI mind Ior 'Bad Faith and/or Punitive Damages
There are at least three diIIerent tests Ior 'Iirst party (e.g., Iire or theIt policy) bad Iaith claims:
1. CaliIornia standard Need only show conduct was objectively unreasonable.
553

2. Wisconsin standard Must show awareness or reckless disregard that position
was unreasonable; but this may be inIerred Irom lack oI reasonable grounds Ior
delay or denial.
554

3. 'Evil Mind standard Must show dishonest or oppressive motivation.
555


553
Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 510 P.2d 1032 (1973).
554
Anderson v. Continental Ins. Co., 85 Wis. 2d 675, 271 N.W.2d 368 (1978).
555
Aetna Cas. & Sur. Co. v. Broadway Arms Corp., 281 Ark. 128, 664 S.W. 463 (1984)

NYDOCS1-449390.1
11/16/11 11:58 AM
-215-


IdentiIy sources oI duty oI good Iaith/duty not to act in bad Iaith
1. Bad Iaith statutes.
2. UnIair or Deceptive Trade Practices Acts
3. State Fair Claims Practices Acts.
4. Regulations promulgated by state insurance commissioners under Fair Claims
Practices Acts (caution: these regulations may not be applicable to large
policyholders).
5. National Association oI Insurance Commissioners model good Iaith claims
handling Act.
6. Common law doctrines.
E. Proof of Damages Considerations
1. Actual damages - breach oI contract. The payment the policyholder was entitled
to under the policy.
2. Interest - may be an issue Ior the judge to calculate aIter the jury returns a verdict
in your Iavor.
3. Consequential damages - mental anguish, loss oI use oI money, reputation
damage. Anything beyond the insurance owed under the policy. Make sure these
damages are sought in the complaint.
4. Attorneys Iees - check state statute.
a. Reasonableness oI Iees in underlying case. (This is an element oI contract
damages.) Will probably require the testimony oI an expert on
reasonableness.
b. Reasonableness oI Iees in coverage case may be (authorized by statute).
This issue may be decided by the judge aIter trial, but check state law.
c. On the issue oI reasonableness, look Ior Iee applications (bankruptcy or
surrogates court) submitted by counsel to the insurance company Ior
comparison.
5. Punitives.
Punitive damages must be large enough to get the attention oI upper management.
ThereIore, they should be proportional to the size and net worth oI the insurance company.

NYDOCS1-449390.1
11/16/11 11:58 AM
-216-


Under BMW v. Gore, a punitive damage award may have to be tied to the insurance company`s
conduct in the Iorum state. One issue is whether the jury looks at the net worth oI the individual
company or related companies.
556

F. Where Not to Look For Coverage
Policyholders are oIten 'demonized in the traditional legal press. This
unIortunate Iact should make policyholder counsel wary oI relying on the 'wisdom oI treatises.
One insurance law proIessor explains the internal, oIten subtle bias oI insurance law legal
treatises as Iollows:
It may be signiIicant that Mr. Appleman was the Iormer head oI
the Legal Department oI the State Farm Insurance Companies in
the 1930s when he Iound 'much oI the insurance Iield in chaotic
condition, and this may have inIluenced his treatise`s general
philosophy oI emphasizing the more predictable and more uniIorm
Formalistic contractual approach to the interpretation oI insurance
policies . . . . As a Iormer insurance deIense attorney while writing
his impressive insurance law treatise Irom 1939-47, Mr. Appleman
arguably may not have been a strong advocate oI Legal
Functionalism in the academic or legal community. Furthermore,
his law school training may, or may not, have predated the rise oI
Legal Realism as a jurisprudential model in American law school
classrooms oI the 1930s.
Likewise, Couch`s Cyclopedia oI Insurance Law, in its discussion
oI the interpretation oI insurance contracts, has no mention
whatever oI the Keeton Functionalist doctrine oI reasonable
expectations, other than a tangential discussion oI dealing with
ambiguous contract provisions. See, e.g., 1-2 GEORGE J.
COUCH, CYCLOPEDIA OF INSURANCE LAW 1:4, 15:16
(Mark S. Rhodes, rev. 2d ed. 1984).
Little is known oI George J. Couch except that he was born in
1881, that he was a member oI the New York Bar, and that he
wrote his insurance law treatise Irom 1929-31, a time which

556
There are several sources to turn to determine and insurance companies wealth. The NATIONAL
UNDERWRITER oIten publishes inIormation on how much money is being made by insurance companies
in a particular state. BEST`S INSURANCE REPORTS also provides Iinancial inIormation on insurance
companies. In addition, state insurance commissioners maintain Iinancial statements Ior casualty
insurance companies doing business in the state. Get a certiIied copy.

NYDOCS1-449390.1
11/16/11 11:58 AM
-217-


predated the Keeton Functionalist reasonable expectations
approach, and which arguably predated the predominant view oI
Legal Realism in American law schools. Subsequent authors and
revisers to the Couch treatise include Ronald A. Anderson, a
member oI the Pennsylvania Bar, and Mark S. Rhodes, a member
oI the Illinois Bar. Both revising authors have paid little, iI any,
attention to the Keeton Functionalist reasonable expectations
doctrine in the Cyclopedia oI Insurance Law, 2d edition.
557

The views expressed in legal treatises can change. A well-known example oI this
occurred when a commentator discussed the, then-new 'polluters`' exclusion in 1973. ProIessor
Long observed in his treatise, the LAW OF LIABILITY INSURANCE, that the polluter`s exclusion
clause was a restatement oI the occurrence deIinition contained in standard CGL insurance
policies.
558
A later commentator, proposing the opposite view oI the same exclusion, a pro-
insurance industry solution, suggested 'DESTROY LONG.
559
ProIessor Long`s comments
disappeared Irom later versions oI his treatise.
Use treatises and journals with care.
560


557
Peter Nash Swisher, Judicial Interpretations oI Insurance Contract Disputes: Toward a Realistic
Middle Ground Approach, 57 OHIO ST. L.J. 543, 558, n.48 (1996).
558
R. Long, 3 Law oI Liability Insurance, App-58 (1973).
559
E. Joshua Rosenkranz, %he Pollution Exclusion Clause %hrough %he Looking Glass, 74 GEO. L.J.
1237, 160 n.119 (1986) (citing Hickman, 'The Pollution Exclusion Clause: A Hazardous Wasteland, in
Insurance Law ConIerence: The Most Important Topics oI the 80s, b-18 (CGL Reporter`s Seminar, Apr.
2-26, 1985)).
560
There are many diIIerent treatises in addition to those discussed above. Here are some:
Eugene R. Anderson, et al., Insurance Coverage Litigation (1st ed. 1997)(probably not appropriate to
comment).
Robert H. Jerry, II, Understanding Insurance Law (2nd ed. 1996)(excellent).
Peter J. Kalis, et al., Policyholders Guide To The Law oI Insurance Coverage (1st ed. 1997)(brand new).
MITCHELL L. LATHROP, ENVIRONMENTAL INSURANCE COVERAGE: STATE LAW AND REGULATION
(1991)(updated to 1997; comprehensive treatment by counsel who normally represents insurance
companies).
BARRY R. OSTRAGER AND THOMAS R. NEWMAN, HANDBOOK ON INSURANCE COVERAGE DISPUTES (5th
ed. 1992)(comprehensive treatment by counsel who normally represents insurance companies).

NYDOCS1-449390.1
11/16/11 11:58 AM
-218-


G. BMW of Aorth America v. Core: Preserving Punitive Damages To Deter and Punish
Reprehensible Conduct
1. The Three Guideposts of BMW
In BMW of North America v. Gore,
561
('BMW) the issue oI punitive damages
arose in the Iollowing context:
In January, 1990 Dr. Ira Gore, Jr. purchased a black BMW sports sedan Ior
$40,000 Irom an authorized BMW dealer in Birmingham, Alabama. Upon learning that the
automobile had been repainted prior to the sale, Dr. Gore brought suit against BMW oI North
America. Dr. Gore alleged that the Iailure to disclose that the car had been repainted constituted
Iraud,
562
and he sought compensatory as well as punitive damages. At trial, BMW
acknowledged that its policy was to repair cars that were damaged during manuIacture or
transportation without advising the dealer oI such repairs when the repair cost did not exceed 3
oI the retail price oI the car.
The jury Iound that BMW was liable Ior compensatory damages oI $4,000 as well
as Ior $4 million in punitive damages. On appeal, the Alabama Supreme Court held that the
punitive damages award did not exceed the constitutionally permissible amount, yet reduced the

DeIense Research Institute, Inc.; publishes books and seminar papers, i.e 'Insurance Seminar: Extra-
Contractual Claims - Bad Faith - Punitive Damages - First Party and Third Party Claims, (published Ior
DeIense Practice Seminar, Feb. 22-23, 1996)(deIinite pro-insurance company slant).
Tort and Insurance Practice Section (TIPS)(publishes Tort & Insurance Law Journal; deIinite pro-
insurance company slant; i.e. Anthony W. Kraus, Extension of Ratification of %orts Doctrine %o
Workplace Harassment Claims, 32 TORT & INS. L.J. 807 (Spring 1997).
Federation oI Insurance & Corporate Counsel Quarterly (publishes quarterly journal; deIinite pro-
insurance company slant; i.e. Michael J. Brady, et al., Dismissing Insurance Coverage Actions In Federal
Court For Want of Supplemental Subfect Matter urisdiction, 46 FED`N OF INS. & CORP. COUNS 113 (Fall
1995).
American Trial Lawyers Association (ATLA)(publishes newsletter; deIinite pro-policyholder slant).
561
116 S. Ct. 1589 (U.S. 1996).
562
Id. at 1593.

NYDOCS1-449390.1
11/16/11 11:58 AM
-219-


award to $2 million on the ground that the jury had improperly punished BMW Ior transactions
outside Alabama. The United States Supreme Court granted certiorari, vacated the award and
remanded the case to the Alabama Supreme Court, Iinding the actual harm slight and the
misconduct to be minor: 'None oI the aggravating Iactors associated with particularly
reprehensible conduct is present. On remand, the Alabama Supreme Court recently reduced the
punitive damages award to $50,000.
563

BMW recognizes the long-standing notion
564
that reprehensible conduct is a Iactor
in determining how much, not why not, punitive damages should be awarded to an aggrieved
party.
565
The Court in BMW oIIered three 'guideposts to gauge whether a punitive damages
verdict violates substantive due process: First, the degree oI reprehensibility oI the misconduct;
second, the relationship between the punitive award and the actual harm; and third, the
relationship oI the award to other civil or criminal penalties imposed Ior comparable conduct.
566

The Supreme Court explained that '|p|erhaps the most important indicia oI the
reasonableness oI a punitive damages award is the degree oI reprehensibility oI the deIendant`s

563
BMW oI North America v. Gore, No. 1920324, 1997 Ala. Lexis 126 (Ala. May 9, 1997).
564
The concept oI punitive damages as recompense Ior reprehensible conduct has ancient origins,
dating as Iar back as early 2000 B.C.; the Code oI Hammurabi, the earliest known legal code, provided
Ior punitive awards. Multiple damages were also a part oI other ancient legal systems such as the Hittite
Laws, the Hebrew Covenant, the Hindu Code oI Manu, and Roman civil law. Likewise, since their
inception into American law, punitive damages have been awarded in response to reprehensible conduct.
See Nathan C. Prater, Punitive Damages in Alabama. A Proposal for Reform: 26 CUMB. L. REV. 1005
(1995).
565
116 S. Ct. at 1599.
566
Id. at 1598, 1603.

NYDOCS1-449390.1
11/16/11 11:58 AM
-220-


conduct.
567
The court emphasized that the primary goal in awarding punitive damages is to
punish and deter
568
egregious conduct:
|W|e have consistently rejected the notion that the constitutional
line is marked by a simple mathematical Iormula, even one that
compares actual and potential damages to the punitive award.
Indeed, low awards oI compensatory damages may properly
support a higher ratio than high compensatory awards iI, Ior
example, a particularly egregious act has resulted in only a small
amount oI economic damages.
569

Thus, although noting that the 500-1 ratio in actual damages to punitive damages awarded in
BMW was 'breathtaking,
570
the Court reIused to rule out the potential Ior granting high punitive
awards even where the damages are low. This point is particularly important: Insurance
company bad Iaith oIten involves relatively small amounts oI damages suIIered by vulnerable
parties as a consequence oI egregious insurance company misconduct.
The third guidepost in the Supreme Court`s analysis in BMW requires a reviewing
court to compare 'the punitive damages award and the civil or criminal penalties that could be
imposed Ior comparable misconduct.
571
A court determining whether an award oI punitive
damages was excessive must 'accord substantial deIerence` to legislative judgments concerning

567
Id. at 1599.
568
See BMW, 116 S. Ct. at 1603 ('The sanction imposed in this case cannot be justiIied on the
ground that it was necessary to deter Iuture misconduct. See also International Brotherhood oI Elec.
Workers v. Foust, 442 U.S. 42, 48 (1979) quoting Gertz v. Robert Welch, Inc., 418 U.S. 323, 350
(1974)('punitive damages are not compensation Ior injury. Instead, they are private Iines levied by civil
juries to punish reprehensible conduct and to deter its Iuture occurrence.`'
569
BMW, 116 S. Ct. at 1602, citing TXO Prod. Corp. v. Alliance Resources Corp., 509 U.S. 443,
458 (1993).
570
Id. at 1603.
571
Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-221-


appropriate sanctions Ior the conduct at issue.
572
The Supreme Court`s decision in BMW makes
clear that any review oI a punitive damages award must include a thorough consideration oI all
applicable criminal and civil penalties, including the maximum available penalty.
573
In the
insurance context, 48 states have speciIically passed statutes which have allowed penalties
oIten severe, such as revocation oI license to be meted out against insurance companies who
have acted unIairly toward their policyholders.
Further, the Court emphasized that the Iacts oI BMW made the Court`s decision
inapplicable to many punitive damages cases, especially cases which involved reprehensible
conduct and involved more than economic damages:
|N|one oI the aggravating Iactors associated with particularly
reprehensible conduct is present. The harm that BMW inIlicted on
Dr. Gore was purely economic in nature . . . |T|his case discloses
no deliberate Ialse statements, acts oI aIIirmative misconduct, or
concealment oI evidence oI improper motive, as were present in
Haslip and TXO.
574

The Iacts oI BMW are a Iar cry Irom the Iacts oI a typical bad Iaith action brought
by a policyholder against an insurance company. BMW clariIies that punitive damages should
apply to situations which involve conduct as egregious and reprehensible as insurance company
bad Iaith. In light oI the 'special relationship between insurance companies and their
policyholders, the threat oI punitive damages remains one oI the Iew eIIective means to curb

572
Id., quoting Browning-Ferris Inds. oI Vt. v. Kelco Disposal, Inc., 492 U.S. 257, 301 (1989)
(O`Conner, J., concurring in part and dissenting in part), modiIied by Cooter & Gell v. Hartmarx Corp.,
496 U.S. 384 (1990).
573
Id.
574
BMW, 116 S.Ct. at 1599, 1601. TXO Production Corp. v. Alliance Resources Corp., 509 U.S.
443 (1993) involved title to oil and gas rights where the jury awarded $19,000 in actual damages and $10
million in punitive damages. PaciIic Mut. LiIe Ins. Co. v. Haslip, 499 U.S. 1 (1991) involved
misappropriation oI insurance premiums and Iraud by the agent Ior the insurance company, causing
insurance coverage to lapse; the jury awarded compensatory damages oI $200,000 and punitive damages

NYDOCS1-449390.1
11/16/11 11:58 AM
-222-


insurance company bad Iaith and enIorce the duty oI good Iaith and Iair dealing. Insurance
companies do not dispute that BMW has been Iollowed nationwide.
575

2. Post BMW Decisions
BMW did not obliterate punitive damages. Although Federal courts appear more
willing than state courts to reduce punitive damage awards in light oI BMW,
576
it is not clear that
these awards would not have been reduced regardless oI the decision in BMW
577
; tempering
punitive damage awards is hardly a new undertaking Ior most courts. State court opinions, on
the other hand, usually note that BMW was speciIically concerned with purely economic harms
and that the Supreme Court had rejected a mathematical brightline test to determine the
excessiveness oI punitive damage awards. For instance, the Supreme Court oI South Dakota
reIused to reduce a $750,000 punitive damages award Ior Iraudulent sale in oil and gas

oI over $840,000 on an out-oI-pocket loss oI less than $4000. Haslip, 499 U.S. at 7, n.2. The Court
upheld the award oI punitive damages in both cases.
575
Appellant`s Petition For Rehearing, at 2, dated Jan 21, 1997, PaineWebber Real Estate Secs., Inc.
v. Fireman`s Fund Ins. Co., Inc., No. 888592 (Cal.)(stating that BMW 'has been Iollowed nationwide
and listing cases).
576
See Rush v. Scott Specialty Gases, 930 F. Supp. 194 (E.D. Pa.), clariIied, 940 F. Supp. 814
(1996)(reducing $3 million punitive damages award to $650,000 in sexual harassment case, citing
$300,000 statutory cap, that annual earnings oI the deIendant company indicated it could be deterred by
lesser punishment, and ratio oI compensatory to punitive damages); Lee v. Edwards, 101 F.3d 805 (2d
Cir. 1996)(Iinding $200,000 punitive damage award in malicious prosecution case could not be justiIied
when compared to penalties in similar cases); Patterson v. P.H.P. Healthcare Corp., 90 F.3d 927 (5th Cir.
1996), reh`g denied, No. 95-50319, 1996 U.S. App. LEXIS 26029 (5th Cir. Sept. 11, 1996), cert. denied,
117 S. Ct. 767 (U.S. 1997) (Iinding $150,000 punitive damages award in sexual harassment case
excessive); Kimsey v. Walmart, slip op. Nos 95-4219, 95-4220 (6th Cir. Feb. 20, 1997) (reducing $5
million punitive damages award in sexual harassment case to $350,000, rejecting argument that Title VII
cap limited amount oI punitive damages, but holding that mitigating Iactors may have made the conduct
less reprehensible; the dissent noted that a $4.5 million remittitur amounted to a slap on the wrist and
could hardly deter a company with $32 billion in net assets; Schimizzi v. Illinois Farmers Ins. Co., 928 F.
Supp. 760 (N.D. Ind. 1996)($600,000 punitive damage award Ior insurance company`s breach oI duty oI
good Iaith was excessive, noting that deIendant`s conduct was not terribly reprehensible, that punitive
damages were 13 times the policyholder`s compensatory damages and that maximum penalty in Indiana
Ior misconduct was only $10,000).
577
Claudia Maclachlan, BMW %riggers Cuts in Punies, NAT`L L.J., Jan. 20, 1997, at A1.

NYDOCS1-449390.1
11/16/11 11:58 AM
-223-


partnerships. Although the ratio oI damages was 30 to 1, the court Iocused on the lack oI any
mathematical standard in BMW.
578

The Supreme Court oI Idaho upheld a $3.2 million punitive damages award Ior
Iraudulent sales oI cancer insurance policies involving post-claim underwriting.
579
In language
apropos to all claims involving insurance company bad Iaith, the court held:
Repainting BMWs prior to sale does not rise high on the
reprehensibility scale. Misrepresenting insurance coverage and
reIusal to pay a claim that any reasonable person would say is due
does rise high on the reprehensibility scale.
580

Similarly, in addressing the BMW court`s concern over punitive damages which impermissibly
inIlict punishment beyond the borders oI the jurisdiction, the court succinctly noted:
The evidence in BMW v. Gore || indicates that approximately 60
percent oI the vehicles that were reIinished were sold in states
where Iailure to disclose the repair was not an unIair trade practice.
The issues in this case are more Iundamental in their application
throughout the states . . . . It is highly unlikely that the decision in
this case inIringes on the interests oI other states, because it is
highly unlikely that any state sanctions, approves, or trivializes
Iraud or bad Iaith settlement practices.
581

It was not lost on the court that BMW was unlike the traditional insurance company bad Iaith
case. The court noted that unlike the Iacts in BMW, the record in Walston 'demonstrates

578
SchaeIer v. Edward D. Jones & Co., 552 N.W.2d 801 (S.D. 1996).
In addition to the language in BMW rejecting any brightline mathematical test, the ratio oI
compensatory damages to punitive damages in the principle case relied on in BMW, TXO Production
Corp. v. Alliance Resources Corp., 509 U.S. 443, was 524 to 1. The BMW court later explained that
when the potential harm to the plaintiII in %O was Iactored in, the ratio was 10 to 1. See BMW v. Gore,
116 S. Ct. at 1602.
579
See Walston v. Monumental LiIe Ins. Co., 923 P.2d 456 (Idaho 1996).
580
Id. at 467 (emphasis added).
581
Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-224-


deliberate Ialse statements and acts oI aIIirmative misconduct.
582
Finally, the court stressed that
although the ratio oI punitive to compensatory damages was just under 26 to 1 and greater than
the ratio in %O, 'the U.S. Supreme Court in BMW made it clear that it was not prescribing a
mathematical Iormula to be Iollowed.
583

The high courts oI at least two other states have partially reinstated punitive
damage awards, citing BMW.
584
In addition, at least two Iederal cases have used BMW to uphold
awards oI punitive damages. In Scribner v. Waffle House Inc.,
585
a case involving 'severe and
pervasive sexual harassment,
586
the court reviewed an award oI $8 million in punitive damages
according to the BMW guideposts. The court concluded that a 'signiIicant award oI punitive
damages is required to punish WaIIle House Ior its egregious conduct and to deter it Irom
engaging in such reprehensible wrongdoing in the Iuture.
587
The court stressed the need to send
a 'wake-up call in order to deter Iuture misconduct and noted that BMW had rejected a 'simple
mathematical Iormula to determine the excessiveness oI punitive damages.
588
Similarly, the 7th
Circuit upheld an award oI punitive damages in a civil rights action against prison guards, citing

582
Id.
583
Id. The court was also concerned with deterring the insurance company and other insurance
companies Irom similar Iuture misconduct. The court held that punitive damages which amounted to 5
oI the deIendant insurance company`s annual proIits would be suIIicient to deter it and other similarly
situated insurance companies Irom Iuture bad Iaith settlement oI claims. See id. at 466.
584
See Management Computer Servs. v. Hawkins, 557 N.W.2d 67 (Wis. 1996)(partially reinstating
jury`s $1.75 million punitive damage award to $650,000 aIter it had been reduced by trial judge to
$50,000, Iinding conduct was egregious but limited to economic harm); Wilson v. IBP Inc., 558 N.W.2d
132 (Iowa 1996) (partially reinstating jury`s $15 million punitive damage award to $2 million aIter it had
been reduced by trial judge to $100,000, holding that health and saIety issues required a higher amount oI
punitive damages).
585
See Scribner v. WaIIle House Inc., 976 F. Supp. 439 (N.D. Tex. 1997). See also Jerbatim, BMW
Drives Punitives In $8 Million Sex Harassment Suit, TEX. LAW., Mar. 17, 1997.
586
Id. at *1
587
See Verbatim; BMW Drives Punitives In $8 Million Sex Harassment Suit, TEX. LAW., Mar. 17,
1997, at 2.

NYDOCS1-449390.1
11/16/11 11:58 AM
-225-


BMW Ior the proposition that 'a mechanical ratio . . . would not make good sense.
589
Since the
BMW decision, the United States Supreme Court has denied certiorari in case which Iound that
calculating punitive damages based on the deIendant insurance company`s net worth rather than
the reprehensibility oI its conduct did not violate the due process clause oI the U.S.
Constitution.
590

But perhaps the most telling indicator that BMW was concerned about curtailing
excessive punitive damages involving economic harms comes Irom the U.S. Supreme Court
itselI. While considering BMW, the Court had accumulated an additional 18 punitive damages
cases. AIter deciding BMW, rather than remanding all 18 cases back Ior reconsideration in light
oI BMW, as is customarily done, the court remanded only six cases Ior reconsideration - the
cases involving purely economic injury.
591
The court denied or dismissed the appeals in the
remaining cases, eIIectively upholding the award oI punitive damages in those cases. In doing
so, the court sent a clear message BMW is concerned with cases where punitive damages are
awarded Ior purely economic harms.
592


588
See id.
589
See Cooper v. Casey, 97 F.3d 914, 919 (7th Cir. 1996). See also Thomas R. Newman & Steven
J. Ahmuty, Post-BMW Punitive Damages Decisions -- Part I, N.Y.L.J., Jan. 29, 1997, at 3.
590
See Fireman`s Fund v. Ins. Co. Inc. v. PaineWebber Real Estate Secs. Inc., No. S059054. 1997
Cal. LEXIS 1711 (Mar. 26, 1997)(denying request Ior depublication), cert denied, 118 S. Ct. 156 (U.S.
1997); reported in Andrews Ins. Ind. Lit. Rptr., Nov. 5, 1997, at 22,569. The decision let stand a $21
million bad Iaith punitive damage award against Fireman`s Fund. See also Petition For Review oI
Decision oI the Court oI Appeal First Appellate District, Division Three, dated Feb. 13, 1997, Fireman`s
Fund v. Ins. Co. Inc. v. PaineWebber Real Estate Secs. Inc., Appeal No. A063060, (Cal. Super. Ct. San
Francisco, No. 888592).
591
See Daniel A. Devito, Punitive Damage Awards, METROPOLITAN CORP. COUNS., Feb. 1997, at 9.
See also Paul M. Barrett, %op Courts Punitive-Damages Ruling Wont Help Defendants In Many Cases,
WALL ST. J., May 29, 1996, at A3.
592
See id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-226-


Conclusion
The gravity oI insurance company misconduct seems to be lost on some insurance
companies.
593
A group oI pro-insurance industry associations recently proclaimed:
While the number oI times insurers have actually been held liable
Ior punitive damages is quite limited, thousands oI punitive
damage claims are brought against insurers, imposing an enormous
burden on the insurers and their policyholders and the court
system, until such claims are disposed oI in pre-trial or trial
proceedings or on appeal.
594

The statement ignores the outrageous insurance company bad Iaith which has
been proven, time and again, in courts across the country. Such conduct imposes enormous
burdens on policyholders.
595
One court scathingly summarized the recent bad Iaith misconduct
oI one insurance company, perhaps capturing the essence oI bad Iaith:
|T|he |insurance company| really didn`t look into this very deeply.
I get the distinct impression in reading these papers and the papers
are voluminous, |the insurance company| was looking Ior a way to
deny coverage in this particular case because oI the large claims in
these environmental cases because it appears as though they sent
this letter out with total reckless disregard oI their internal memos
and what they knew to be the Iacts.
596

The court held that the insurance company`s denial oI coverage was contrary to its insurance
policies, contrary to the understanding oI the insurance company employees, contrary to

593
See Judy Greenwald, State %o Review Awards, BUS. INS., Jan. 29, 1996, at 2, 12. CI. Lee Craig,
Avoid Bad Faith Liability By Handling Claims Properly, FOR THE DEFENSE, Nov. 1996, at 17 (the author
is a lawyer who regularly represents insurance companies in insurance coverage disputes).
594
BrieI oI American Insurance Association, Alliance oI American Insurers, and The Surety
Association oI America as Amicus Curiae, at 3, New York Univ. v. Continental Ins. Co., 668 N.E.2d
1370 (N.Y. 1995)(No. 11627/92).
595
See Lia B. Royle & Paul B. Breene, Insurance Company Bad Faith In Settlement: When Insurers
Put Policyholders` Interests Last, N.J. LAW., Feb. 19, 1996, at 28.
596
Colonial Foods, Inc. v. Aetna Cas. & Sur. Co., No. Mon-L-0392-93 (N.J. Super. Ct. Law Div.
Apr. 21, 1995), leave to appeal denied, (N.J. Super. Ct. App. Div. June 20, 1995).

NYDOCS1-449390.1
11/16/11 11:58 AM
-227-


memoranda that were submitted, and contrary to the investigation that was conducted by the
insurance company.
597
But it denied coverage anyway.
Bad Iaith claims and punitive damages are necessary to deter bad Iaith by
insurance companies but should not obscure the compensatory damages. Insurance company
grumblings and assaults over the legitimacy oI bad Iaith and punitive damage claims by
policyholders are undermined by the Irequency oI insurance company reIusals to honor claims
Ior insurance coverage Irom policyholders made in good Iaith.
The recent Supreme Court decision in BMW clariIies the situations in which
punitive damages are appropriate. In traditional contract situations, where the harm caused by
the breach is mainly an economic harm, punitive damages have been restricted. But BMW was
not meant to restrict all large punitive awards. Where the deIendant`s conduct is deemed
reprehensible, punitive damages remain an appropriate remedy. For bad Iaith insurance claims,
where insurance companies dispute valid claims in order to earn investment income, punitive
awards are particularly suitable.
Trickery and deceit remain more reprehensible than negligence.
598


597
See Edward M. Joyce, Arizona And New Jersey Courts Tell Insurance Companies: Watch It -
Bad Faith Claims Are Alive And Well, CORP. LEGAL TIMES, Feb. 1996, at 24.
598
BMW v. Gore, 116 S. Ct. at 1599.

NYDOCS1-449390.1
11/16/11 11:58 AM
-228-


PART XIV
GOOD FAITH
A. Definitions of Good Faith
Barron`s Law Dictionary deIines good Iaith as:
|A| total absence oI any intention to seek an unIair advantage or to
deIraud another party; an honest and sincere intention to
IulIill one`s obligations. In the case oI a merchant, good
Iaith reIers to honesty in Iact and the observance oI
reasonable commercial standards oI Iair dealing in the
trade. U.C.C. 2-103(1)(b). More generally, the term
means 'honesty in Iact in the conduct or transaction
concerned. U.C.C. 1-201(19). In property law, a 'good
Iaith purchaser oI land pays the value oI the land and has
no knowledge or notice oI any Iacts that would cause an
ordinary, prudent person to make inquiry concerning
validity oI the conveyance. See Security Trust Co. v.
Tuller, 243 Mich. 570, 220 N.W. 795, 797 (1928).
BARRON`S LAW DICTIONARY (2nd ed. 1984), at 204.
GOOD FAITH
General. A term used to reIer to conduct which is to be expected
in any other commercial transaction; that is, all parties to a
transaction are expected to have honest motives, to Iully
intend to perIorm their obligations under the terms set Iorth
in the relationship, and to abstain Irom deIrauding or taking
unIair advantage oI the other party. In may legal
relationships (e.g. the employment relationship, an
insurance contract, etc.), there is an 'implied covenant oI
good Iaith and Iair dealing which requires both parties to
treat the other party Iairly and to give at least as much
consideration to the other party`s welIare as it gives to its
own.
RUPP`S INSURANCE & RISK MANAGEMENT GLOSSARY (1991) p.156.
Good Faith. Good Iaith is an intangible and abstract quality with
no technical meaning or statutory deIinition, and it
encompasses, among other things, an honest belieI, the
absence oI malice and the absence oI design to deIraud or
to seek an unconscionable advantage, and an individual`s
personal good Iaith is concept oI his own mind and inner

NYDOCS1-449390.1
11/16/11 11:58 AM
-229-


spirit and, thereIore, may not conclusively be determined
by his protestations alone. Doyle v. Gordon, 158 N.Y.S.2d
248, 259, 260 (N.Y. Sup. Ct. 1954). Honesty oI intention,
and Ireedom Irom knowledge oI circumstances which
ought to put the holder upon inquiry. An honest intention
to abstain Irom taking any unconscientious advantage oI
another, even through technicalities oI law, together with
absence oI all inIormation, notice, or beneIit or belieI oI
Iacts which render transaction unconscientious. In
common usage this term is ordinarily used to describe that
state oI mind denoting honesty oI purpose, Ireedom Irom
intention to deIraud, and, generally speaking, means being
IaithIul to one`s duty or obligation. EIron v. Kalmanovitz,
249 Cal. App. 2d 187, 57 Cal. Rptr. 248, 251 (2d Dist.
1967). See Bona Iide. Compare Bad Iaith.
* * *
Insurance law. 'Good Iaith required oI a liability insurer in
determining whether to accept settlement within policy
limits implies honesty, Iair dealing and Iull revelation;
while 'bad Iaith implies dishonesty, Iraud and
concealment. Davy v. Public Nat. Ins. Co., 181 Cal. App.
2d 387, 5 Cal.Rptr. 488, 492 (4th Dist. 1960).
BLACK`S LAW DICTIONARY (6th ed. 1990) at 693.
|B|ad Iaith is the intentional Iailure by an insurer to perIorm the
duty oI good Iaith and Iair dealing implied by law.
Generally, an insurer may be acting in bad Iaith when it
reIuses to pay a claim and (1) has no reasonable basis Ior
reIusing to pay and has actual knowledge oI that Iact, or (2)
has intentionally Iailed to determine whether it had a
reasonable basis Ior so reIusing.
'Bad Faith And Insurer Actions, Fire Casualty & Surety (FC&S) Bull. (Personal Lines,
General B-1 (The National Underwriter Co., Jan. 1995).
Bad Iaith . . . generally implies or involves 'actual or constructive
Iraud, or a design to mislead or deceive another, or a
neglect or reIusal to IulIill some duty or some contractual
obligation, not prompted by an honest mistake as to one`s
rights or duties, but by some interested or sinister motive.
Term bad Iaith is not simply bad judgment or negligence,
but rather it implies the conscious doing oI a wrong
because oI dishonest purpose or moral obliquity; it is
diIIerent Irom the negative idea oI negligence in that it

NYDOCS1-449390.1
11/16/11 11:58 AM
-230-


contemplates a state oI mind aIIirmatively operating with
Iurtive design or ill will. Insurance case law has soItened
the 'ill will or 'conscious doing oI wrong into areas oI
more passive action . . .
Id. at General B-2 (quoting BLACK`S LAW DICTIONARY, 5th ed.)
|C|ourts have held that the cause oI action against the insurer
arises 'where there is no reasonable basis Ior a denial oI a
claim or when the insurer Iails to determine or delays in a
determination oI whether there is any reasonable basis Ior a
denial oI the claim . . . In order to sustain a claim Ior breach
oI good Iaith, the insured must establish (1) the absence oI
a reasonable basis Ior denying or delaying payment oI the
claim and (2) that the insurer knew, or should have known,
that there existed no reasonable basis Ior denying or
delaying payment oI the claim.
Id. at General B-5 quoting Dixon v. State Farm Fire & Cas. Co., 799 F. Supp. 691 (S.D. Tex.
1992).
When a claim is Iairly debatable, an insurer is entitled to debate it,
whether the debate concerns a matter oI Iact or law. A
knowing Iailure on the part oI the insurer to exercise an
honest and inIormed judgment constitutes a tort oI bad
Iaith. An such may be shown where a claim is not properly
investigated or reviewed.
APPLEMAN, INSURANCE LAW AND PRACTICE, 8878.25 (1981 ed.)
'To show a claim Ior bad Iaith a plaintiII must show the absence oI
a reasonable basis Ior denying beneIits oI the policy and the
deIendant`s knowledge or reckless disregard oI the lack oI
a reasonable basis Ior denying the claim. It is apparent then
that the tort oI bad Iaith is an intentional one. Implicit in
that test is our conclusion that the knowledge oI the lack oI
a reasonable basis may be inIerred and imputed to an
insurance company where there is reckless indiIIerence to
Iacts or to prooIs submitted by the insured.
UTMOST GOOD FAITH
What constitutes or what is utmost good Iaith has also been
addressed.

NYDOCS1-449390.1
11/16/11 11:58 AM
-231-


'|T|he |insurance| company acts in utmost Iair dealing with all oI
its insureds in any claim situation.
Deposition oI Robert E. Hyland, Aetna V.P. taken in Colonial Foods v. Aetna, supra, Mar. 28,
1995 at page 59 (emphasis added).
'The insurance transaction . . . is generally considered a personal
transaction requiring complete honesty and Iull disclosure
by both parties....both the insurance buyer and the
insurance company expect utmost good faith and fair
dealing Irom one another.
James J. Markham, et al., The Claims Environment (1st ed. 1993) at 5-6 (emphasis added).
'It is to the insured that the insurance company owes the contractual obligation oI
utmost good faith and fair dealing.
Id. at 18 (emphasis added).
'The insurance . . . business |is a| business|| oI Utmost Good Faith. By custom
and practice both the insurer and the insured are held to a higher level oI care when dealing with
each other.
Letter dated Nov. 29, 1994 at 7, Irom Aetna`s Insurance Expert, ProI. Peter R. Kensicki, re
Penco Prods. v. Aetna Cas. & Sur. Co., No. M-49IX (N.Y. App. Div. 1st Dep`t) (emphasis
added).
Utmost good Iaith has also been deemed:
A phrase in a legal document calling Ior the highest standards oI
integrity on the part oI the insured and the insurer
DICTIONARY OF INSURANCE, 7th Rev. ed. p. 473
utmost good faith
Insurer Operations/Reinsurance. The insurance contract is a
personal contract between an insurer and insured where
each party must be able to rely on the other Ior valid critical
inIormation.
syn: uberrimae fidei
RUPP`S INSURANCE & RISK MANAGEMENT GLOSSARY (1991) at 339.
uberrimae fidei
Insurer Operations/Reinsurance. A Latin legal term which
translates to 'utmost good Iaith. As respects insurance

NYDOCS1-449390.1
11/16/11 11:58 AM
-232-


contracts, it is assumed both parties to the contract (insurer
and insured, insurer and reinsurer) have entered into the
contract in good Iaith and have disclosed all relevant Iacts
with the intent to carry out their obligations. II a lack oI
such good Iaith is proven, an insurance contract may be
declared null and void.
syn: utmost good Iaith
RUPP`S INSURANCE & RISK MGMT. GLOSSARY (1991) at 333.
uberrimae fidei
'Utmost good Iaith. The basic principle oI insurance law is that
there must be utmost good Iaith between an insurer and an
insured, especially with regard to the nature oI the exposure
insured.
RISK MANAGEMENT SOCIETY GLOSSARY (1985) at 78.
uberrimae fidei
OI utmost good Iaith certain transactions require the utmost oI
good Iaith on both sides, and both parties must disclose
relevant Iacts. It is a Iundamental principle oI all insurance
contracts.
DICTIONARY OF INSURANCE, (7th Rev. ed.) at 465.
uberrimae fidei contract
agreement 'oI utmost good Iaith. Under law, it is assumed that
insurance contracts are entered into by all parties in good
Iaith, meaning that they have disclosed all relevant Iacts
and intend to carry out their obligations. Where lack oI
good Iaith can be proved, such as a Iraudulent application
to obtain insurance, the contract may be nulliIied.
BARRON`S DICTIONARY OF INSURANCE TERMS (2nd ed.) at 433.
uberrima fides
/ yuwbehreme Iaydiyz/. Lat. The most abundant good Iaith;
absolute and perIect candor or openness and honesty; the
absence oI any concealment or deception, however slight.
A phrase used to express the perIect good Iaith, concealing
nothing, with which a contract must be made; Ior example,
in the case oI insurance, the insured must observe the most
perIect good Iaith towards the insurer. GulIstream Cargo,
Ltd. v. Reliance Ins. Co., 409 F.2d 974, 981 (5th Cir 1969).

NYDOCS1-449390.1
11/16/11 11:58 AM
-233-


Contracts oI liIe insurance are said to be 'uberrima Iida
when any material misrepresentation or concealment is
Iatal to them.
BLACK`S LAW DICTIONARY (6th ed.) at 1520.

NYDOCS1-449390.1
11/16/11 11:58 AM
-234-


Review of Bad Faith Caselaw and Statutes of Selected States
Kentucky
The Kentucky Supreme Court has recognized that insurance companies owe their
policyholders a duty oI 'utmost good Iaith.
599
Kentucky is also among the states which grants
policyholders a private right oI action Ior insurance company bad Iaith. This was not always the
case, however. In 1986, the Kentucky Supreme Court in Federal Kemper Insurance Co. v.
Hornback held that insurance company misconduct was a breach oI contract, not tortious
conduct.
600
As a result, punitive damages could not apply.
601

The rule oI law created in Federal Kemper lasted all oI three years. The
Kentucky Supreme Court overruled Federal Kemper in Curry v. Firemans Fund Insurance Co.,
this time underscoring the inherent unIairness oI a rule that Iails to punish insurance company
bad Iaith:
Our decision in Federal Kemper abolished tort liability to a
policyholder, regardless oI the conduct oI the insurance carrier.
Such a rule permitted an insurance carrier to deny payment without
any justiIication, attempt unIair compromise by exploiting the
policyholder`s economic circumstance, and delay payment by
litigation with no greater possible detriment than payment oI the
amount justly owed plus interest.
602


599
. James Graham Brown Found., Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 280 (Ky.
1991), modiIied and reh`g denied, No. 88-CA-2405-MR, 1991 Ky. Lexis 149 (Ky. Sept. 26, 1991).
600
. See Federal Kemper Ins. Co. v. Hornback, 711 S.W.2d 844, 845 (Ky. 1986), overruled by Curry
v. Fireman`s Fund Ins. Co., 784 S.W.2d 176 (Ky. 1989).
601
. See Federal Kemper, 711 S.W.2d at 845.
602
. Curry v. Fireman`s Fund Ins. Co., 784 S.W.2d 176, 178 (Ky. 1989).

NYDOCS1-449390.1
11/16/11 11:58 AM
-235-


The court concluded that the 'peace oI mind policyholders expected when purchasing insurance
was only an illusion iI policyholders were unable to ensure prompt payment Irom their insurance
company Ior their losses.
603

The Curry opinion does not provide extensive analysis, relying nearly entirely on
Judge Leibson`s dissent in Federal Kemper.
604
In essence, the law oI Kentucky is the dissent in
Federal Kemper.
605
The Federal Kemper dissent set Iorth three requirements to show that an
insurance company has acted in bad Iaith. The policyholder must be able to show that the
insurance company (1) is obligated to pay the claim under the terms oI the policy; (2) lacked a
reasonable basis Ior denying coverage; and (3) knew there was no basis Ior denying the claim or
acted with reckless disregard Ior whether such a basis existed.
606

In Kentucky, a complaint alleging insurance company bad Iaith which cannot
meet this test Iails to state a cause oI action.
607
In Empire Fire & Marine Ins. Co. v. Simpsonville
Wrecker Service, the Kentucky Court oI Appeals held that under the guidelines oI Curry, iI the
status oI the law governing the insurance coverage question is genuinely in dispute, the
policyholder`s claim is Iairly debatable and a tort claim based on the insurance company`s bad
Iaith Iailure to be pay is untenable.
608


603
. Id.
604
. See id. at 177-78 ('Judge Leibson`s dissenting opinion in Federal Kemper contains an excellent
statement oI the applicable principles involved herein and we incorporate those views in this opinion).
605
. See MIKE BREEN, BAD FAITH IN KENTUCKY: A PRIMER 36-7 (coming to the same conclusion as
the authors).
606
. See Federal Kemper Ins. Co. v. Hornback, 711 S.W.2d 844, 846-47 (Ky. 1986)(Leibson, J.,
dissenting), overruled by Curry v. Fireman`s Fund Ins. Co, 784 S.W.2d 176 (Ky. 1989).
607
. Empire Fire & Marine Ins. Co. v. Simpsonville Wrecker Service, 880 S.W.2d 886, 890 (Ky. Ct.
App. 1994).
608
. Id. at 890.

NYDOCS1-449390.1
11/16/11 11:58 AM
-236-


At least one Iederal court has used the holding oI Empire Marine to reverse an
award oI consequential damages arising Irom insurance company bad Iaith. In First National
Bank of Louisville v. Lustig,
609
a FiIth Circuit case interpreting Kentucky law, the court held that
the insurance company`s Iailure to provide coverage was 'Iairly debatable.
610
In that case, the
policyholder was denied insurance coverage Ior loan losses caused by a Iormer loan oIIicer`s
Iraudulent acts.
611
Citing Empire Fire and Marine, the court held that insurance coverage was
properly denied because (1) the issue in question was oI Iirst impression in Kentucky and (2)
there were Iactual questions relating to whether or not insurance coverage existed.
612
The court
Iound that under Empire Fire and Marine, the existence oI either oI these Iactors causes a denial
oI coverage to be Iairly debatable and precludes a Iinding oI bad Iaith against the insurance
company. Because the denial oI coverage was Iairly debatable, the court held that the second
Iactor oI the Federal Kemper three Iactor test
613
that the policyholder had shown the
insurance company lacked a reasonable basis in law or Iact Ior denying the claim was not
met.

609
. First Nat`l Bank oI Louisville v. Lustig, 96 F.3d 1554 (5th Cir. 1996)
610
. Id. at 1567-68. Following a biIurcated trial on the issues oI coverage and bad Iaith, the jury had
Iound that insurance coverage existed and returned a verdict oI over $17,000,000 in damages Ior the
insurance coverage (the bank had lost over $20,000,000 Irom the bad loans). The same jury Iound that
the insurance company had acted in bad Iaith, awarding the policyholder over $11,000,000 in lost
earnings and $5,850,000 in attorneys Iees. The insurance company contested solely the bad Iaith
judgments and attorneys Iees, both oI which the court reversed. Id. at 1559, 1563.
611
. Id. at 1559-1560 (explaining the Iormer loan oIIicer`s misconduct).
612
. First, the issue oI Iirst impression in Kentucky Iacing the court was the deIinition 'maniIest
intent in a banker`s blanket bond. Second, the court held that a Iactual issue existed as to whether the
loan oIIicer had possessed the requisite intent to injure the bank at the time he committed his acts, or iI his
guilty plea acknowledging willIul and knowing conduct with 'the intent to injure had been draIted
speciIically to implicate insurance coverage. See id. at 1567.
613
. Judge Leibson`s three Iactor test was incorporated in the Kentucky Supreme Court`s decision in
Wittmer v. Jones, 864 S.W.2d 885 (Ky. 1993). Judge Leibson also wrote the Wittmer opinion. For a Iull
analysis oI the Iar-reaching consequences oI the Wittmer decision see BREEN at 45-51.

NYDOCS1-449390.1
11/16/11 11:58 AM
-237-


The First National decision is a good example oI the hostility oI Federal courts to
policyholders. Kentucky`s UnIair Claims Settlement Practices Act is KRS 304.12-230.
614

Kentucky is also one oI the Iew states granting a policyholder a private right oI action against an
insurance company under the statute.
615
However, the Kentucky Supreme Court has held that the
standards adopted in Curry must be met beIore a claim can be made under Kentucky`s UnIair
Claims Settlements Practices statute.
616
Kentucky also allows a bad Iaith claim against an
insurance company under its Consumer Protection Act, KRS 367.220.
617

Kentucky does not recognize arbitration clauses between a policyholder and its
insurance company. Kentucky Revised Statute 417.050 states:
A written agreement to submit any existing controversy to
arbitration . . . is valid, enIorceable and irrevocable, save upon
such grounds as exist at law Ior the revocation oI any contract.
This chapter does not apply to:
. . . .
(2) Insurance contracts. Nothing in this subsection shall be
deemed to invalidate or render unenIorceable contractual

614
. See BREEN at 37.
615
. The Kentucky Supreme Court held in State Farm Mutual Automobile Insurance Co. v. Reeder,
763 S.W.2d 116 (Ky. 1988), and Wittmer v. Jones, 864 S.W.2d 885 (Ky. 1993) that Iirst and third parties,
respectively, retain a private right oI action under KRS 304.12-230.
Kentucky is one oI only 10 states which allow Ior a private right oI action under their UnIair Claims
Settlement Practices statute. See ASHLEY at 9:03, at 10-11 (listing cases). Note that BREEN states only
two other jurisdictions allow a private right oI action under their respective statutes. See BREEN at 37.
616
. See Wittmer v. Jones, 864 S.W.2d 885 (Ky. 1993).
617
. See Stevens v. Motorists Mut. Ins. Co., 759 S.W.2d 819, 820 (Ky. 1988) (holding that the
purchase oI an insurance policy is the purchase oI a service intended to be covered by Kentucky`s
Consumer Protection Act).

NYDOCS1-449390.1
11/16/11 11:58 AM
-238-


arbitration provisions between two (2) or more insurers, including
reinsurers.
618
(emphasis added)
Thus, although the Kentucky Court oI Appeals has recognized that 'it requires no citation oI
authority to point out that arbitration is a Iavorite oI the law, both within and without this
jurisdiction, and iI the parties to a transaction agree to such a submission it is generally
enIorced|,|
619
this admonition does not apply to insurance policyholders in Kentucky.

618
. KRS 417.050 is Kentucky`s version oI the UniIorm Arbitration Act. See Thomas J.
Stipanowich, %he Kentucky Law Survey. Arbitration, 74 KY. L.J. 319, 320 (1985). ProIessor Stipanowich
provides a history oI the development oI arbitration in Kentucky.
619
. Valley Constr. Co., et al., v. Perry Host Mgmt. Co., 796 S.W.2d 365 (Ky. Ct. App. 1990). The
'et al. includes Transamerica Insurance Company. Although the court recognized that KRS 417.050
precludes the arbitration oI insurance coverage, the court Iound that 'there was no attempt to arbitrate the
contract oI insurance itselI. Id. at 368. Transamerica had Iurnished the perIormance bond Ior Valley
Construction and the case did not raise issues oI insurance coverage.

NYDOCS1-449390.1
11/16/11 11:58 AM
-239-


Pennsylvania
The Pennsylvania Superior Court in Romano v. Nationwide Mutual Fire
Insurance Company, noted that it was 'because oI the special relationship between an insurance
company and its policyholder, that '|t|he Pennsylvania Supreme Court has long held that an
insurer must act with the utmost good Iaith` toward its insured.
620
Similarly, the Pennsylvania
Supreme Court in Dercoli v. Pennsylvania National Mutual Insurance Company, aIter
acknowledging that 'utmost Iair dealing should characterize the transactions between an
insurance company and the insured, Iurther stated:
The |insurance companies| were bound to deal with the
policyholder on a Iair and Irank basis, and at all times, to act in
good Iaith. The duty oI an insurance company to deal with the
insured Iairly and in good Iaith includes the duty oI Iull and
complete disclosure as to all oI the beneIits and every coverage
that is provided by the applicable policy . . . including any time
limitations Ior making a claim. This is especially true where the
insurer undertakes to advise and counsel the insured in the
insured`s claim Ior beneIits.
621


620
. Romano v. Nationwide Mut. Fire Ins. Co., 435 Pa. Super. 545, 646 A.2d 1228, 1231
(1994)(citing Fedas v. Insurance Co. oI Pa., 300 Pa. 555, 558, 151 A. 285, 286 (1930); Dercoli v.
Pennsylvania Nat`l Mut. Ins. Co., 520 Pa. 471, 554 A.2d 906 (1989); Cowden v. Aetna Cas. & Sur. Co.,
389 Pa. 459, 134 A.2d 223 (1957).
621
. Dercoli v. Pennsylvania Nat`l Mut. Ins. Co., 520 Pa. 471, 477-78, 554 A.2d 906, 909 (1989) In
Dercoli, the insurance company assured the policyholder that her claim could be processed without an
attorney. The insurance company subsequently Iailed to inIorm the policyholder oI a change in the law
which entitled the policyholder to additional coverage. By the time the policyholder had discovered that
she was entitled to additional insurance coverage, the statute oI limitations to Iile a claim against the
insurance company had expired. The court held that the insurance companies` Iailure to act in good Iaith
tolled the statute oI limitations. 520 Pa. at 477, 554 A.2d at 908-09. But see Miller v. Keystone Ins. Co.,
535 Pa. 531, 536, 636 A.2d 1109, 1112 (1994)(Pennsylvania Supreme Court holding that the appellate
court 'was incorrect in holding that Dercoli imposes an aIIirmative duty upon an insurer to advise and
inIorm an insured oI all potential claims when the insurer assumes the responsibility Ior processing the
claim. Id. The court in Keystone noted that the insurance company`s 'knowing and purposeIul
misrepresentation was critical to this Court`s determination |in Dercoli| that the insurers were bound to
disclose all oI the beneIits to which the claimant was entitled. 535 Pa. at 537, 636 A.2d at 1112. Note
also that the appellate court had tried to retroactively apply Dercoli.

NYDOCS1-449390.1
11/16/11 11:58 AM
-240-


Pennsylvania does not recognize a common law right oI action Ior insurance
company bad Iaith.
622
Thus, insurance companies` duty oI good Iaith and Iair dealing is
enIorced primarily by statute in Pennsylvania. These statutes are the UnIair Insurance Practices
Act
623
, the UnIair Trade Practice and Consumer Protection Law,
624
and 42 Pa.C.S.A. 8371
('8371)
625
.
In 1981, the Pennsylvania Supreme Court speciIically declined to create a
common law remedy Ior insurance company bad Iaith in DAmbrosio v. Pennsylvania National
Mutual Casualty Insurance Company.
626
The Pennsylvania Supreme Court held that
Pennsylvania`s UnIair Insurance Practices Act ('UIPA)
627
adequately deterred insurance
company bad Iaith. The court also held that only state insurance commissioner was empowered
to bring claims under the UIPA.
628
Courts remain steadIast in holding that there is no private
right oI action under the UIPA. Several decisions, however, have held that the UIPA does not
preclude existing common law remedies.
629


622
. See D`Ambrosio v. Pennsylvania Nat`l Mut. Cas. Ins. Co., 494 Pa. 501, 508, 431 A.2d 966, 970
(1981); Johnson v. Beane, 541 Pa. 449, 455, 664 A.2d 96 (1995).
623
. 40 Pennsylvania Statutes 1171.5.
624
. 73 Pennsylvania Statutes 201-2(4).
625
. 42 Pennsylvania Consolidated Statutes Annotated 8371.
626
. D`Ambrosio v. Pennsylvania Nat`l Mut. Cas. Ins. Co., 494 Pa. 501, 508, 431 A.2d 966, 970
(1981).
627
. 40 P.S. 1171.4, 1171.5
628
. See D`Ambrosio 494 Pa. at 507, 431 A.2d at 969-970. See also Romano v. Nationwide Mut. Fire
Ins. Co., 435 Pa. Super. 545, 646 A.2d 1228, 1231-32 (1994) Ior a good synopsis oI the evolution oI
Pennsylvania statutory and common law with regard to insurance company bad Iaith.
629
. See Pekular v. State Farm Mut. Auto. Ins. Co., 355 Pa. Super 276, 282-83, 513 A.2d 427, 430,
(1986), appeal denied, 516 Pa. 635, 533 A.2d 93 (1987)(holding that the UPIA did not preclude a
policyholder Irom bringing a cause oI action in common law tort and deceit); Wright v. North Am. LiIe
Assurance Co., 372 Pa. Super. 272, 281, 539 A.2d 434, 439 (1988)(citing Pekular); Katz v. Aetna Cas. &
Sur. Co., 972 F.2d 53, 57-8 (3d Cir. 1992). The Pekular and Kat: opinions speciIically rely on the
concurrence by Judge Nix in DAmbrosio. Judge Nix`s concurrence speciIically states that the holding in
DAmbrosio did not preempt other common law causes oI action (speciIically, breach oI contract and

NYDOCS1-449390.1
11/16/11 11:58 AM
-241-


In 1990, the Pennsylvania legislature responded to DAmbrosio by enacting
8371, creating a statutory remedy Ior insurance company bad Iaith.
630
8371 sets Iorth the
Iollowing:
In an action arising under an insurance policy, iI the court Iinds
that the insurer has acted in bad Iaith towards the insured, the court
may take all oI the Iollowing actions:
(1) Award interest on the amount oI the claim....
(2) Award punitive damages against the insurer.
(3) Assess court costs and attorneys Iees against the insurer.
631

Romano v. Nationwide Mutual Fire Insurance Company was the Iirst decision to
construe the meaning oI 8371.
632
The court, Iinding that 8371 did not deIine the meaning oI
bad Iaith, but that 'in the insurance context, the term bad Iaith has acquired a universally
acknowledged meaning, provided the Iollowing deIinition:

deceit). D`Ambrosio v. Pennsylvania Nat`l Mut. Cas. Ins. Co., 494 Pa. 501, 511, 431 A.2d 966, 973
(1981)(Nix, J., concurring). Because D`Ambrosio was a plurality opinion, Judge Nix`s concurrence is
controlling Pennsylvania law. See Katz at 58, citing Planned Parenthood oI Southeastern Pa. v. Casey,
947 F.2d 682, 693 (3d Cir. 1991)(the controlling opinion in a splintered decision is that oI the U.S.
Supreme Court Justice or Justices who concur on the narrowest grounds), aII`d, 505 U.S. 833 (1992).
630
. See Tina M. OberdorI, Bad Faith Insurance Litigation in Pennsylvania. Recurring Issues Under
Section 8371, 33 DUQ. L. REV. 451, 452 (Spring 1995). The article provides a thorough review oI
insurance coverage litigation under 8371, noting that the primary problems with 8371 is the
legislature`s Iailure to provide a statutory deIinition oI bad Iaith and a Iailure to provide a set oI standards
to assist courts in determining damages. Id. at 451.
631
. 42 Pa. C.S.A. 8371.
632
. Romano v. Nationwide Mut. Fire Ins. Co., 435 Pa. Super. 545, 646 A.2d 1228, 1232 (1994).
Note, however that the only Pennsylvania Supreme Court decision to discuss 8371 to date appears to be
Johnson v. Beane, 541 Pa. 449, 664 A.2d 96 (Pa. 1995). The court in Johnson, noting that 8371 was
inapplicable to the present case, stated in dicta that 8371 does not provide Ior a third party action. Id. at
455. 'An obligation oI the insurer to act in good Iaith in dealing with its insured is not intended to beneIit
one injured by the insured. The |insurance company`s| duty to act in good Iaith . . . runs only to the
policyholder. Id. 'The only statute in this Commonwealth providing Ior a direct action by an injured
third party against the insurer oI an alleged tortIeasor, the Act oI May 24, 1933, P.L. 0987, 1, 40 P.S.
177, provides Ior such direct action solely upon the bankruptcy or insolvency oI the insured and only Ior
an amount not exceeding the policy limits. Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-242-


Insurance: 'Bad Faith on part oI insurer is any Irivolous or
unIounded reIusal to pay proceeds oI a policy; it is not necessary
that such reIusal be Iraudulent. For purposes oI an action against
an insurer Ior Iailure to pay a claim, such conduct imports a
dishonest purpose and means a breach oI a known duty (i.e., good
Iaith and Iair dealing), through some motive oI selI-interest or ill
will; mere negligence or bad judgment is not bad Iaith.
633

The deIinition oI bad Iaith supplied by the Romano court has been used by other Pennsylvania
state and Iederal courts.
634

The Romano court noted that although the UIPA can only be enIorced by the state
insurance commissioner, a policyholder 'may point to bad Iaith conduct as deIined in various
provisions oI the UIPA as a basis Ior recovery under 42 Pa.C.S.A. 8371.
635
Thus:
Although the trial court lacks the requisite jurisdiction to impose
sanctions under the various provisions oI the UIPA and insurance
regulations, we Iind that the rules oI statutory construction permit a
trial court to consider, either sua sponte or at the request oI a party,
the alleged conduct constituting violations oI the UIPA or the
regulations in determining whether an insurer. . . acted in 'bad
Iaith.
636

. . .

633
. Id. Perhaps a testament to the Court`s caution, the deIinition is quoted directly Irom BLACK`S
LAW DICTIONARY 139 (6th ed. 1990).
634
. See e.g. Rottmund v. Continental Assurance Co., 813 F. Supp. 1104, 1108-09 (E.D. Pa.
1992)(this case also stands Ior the proposition that an insurance company owes its policyholders a
continuing duty oI good Iaith and Iair dealing through litigation). See also Woody v. State Farm Fire &
Cas. Co., 965 F. Supp. 691 (E.D. Pa. 1997). For courts ruling against the policyholder but adopting the
deIinition, see Polselli v. Nationwide Mut. Fire Ins. Co., 23 F.3d 747 (3d Cir. 1994); Cabrelli v. State
Farm Fire & Cas. Co., No. 96-0209, 1997 U.S. Dist. LEXIS 197 (E.D. Pa. Jan. 14, 1997).
635
. Id.
636
. Id. at 1233, citing MacFarland v. United States Fidelity & Guar. Co., 818 F. Supp. 108 (E.D. Pa.
1993)(holding that alleged conduct constituting violations oI the UIPA and the regulations can be
considered in determining whether the insurer acted in bad Iaith under 8371); Rottmund v. Continental
Assurance Co., 813 F. Supp. 1104 (E.D. Pa. 1992)(holding that courts may look to other statutes on the
same or similar subjects to deIine bad Iaith under 8371); Coyne v. Allstate Ins. Co., 771 F. Supp. 673
(E.D. Pa. 1991)(holding that the provisions oI the UIPA can be used to describe conduct constituting bad
Iaith).

NYDOCS1-449390.1
11/16/11 11:58 AM
-243-


The Iact that |the policyholder| makes reIerence to a provision oI
the UIPA does not divest the trial court oI its jurisdiction.
637

Several decisions have held that a bad Iaith claim brought under 8371 is to be considered
independent oI any claim Ior breach oI the insurance company`s obligations under the insurance
policy:
|A| claim brought under section 8371 is a cause oI action which is
separate and distinct Irom the underlying contract claim . . . |A|s
the language oI section 8371 does not indicate that success on the
contract claim is a prerequisite to success on the bad Iaith claim,
we Iind that an insured`s claim Ior bad Iaith brought pursuant to
section 8371 is independent oI the resolution oI the underlying
contract claim.
638

The court held that a policyholder`s bad Iaith claim brought under 8371 is independent oI a
claim brought Ior breach oI the insurance policy, and that the statute oI limitations period in the
insurance policy had no aIIect on the bad Iaith claim.
639
However, the court reversed the trial
court`s summary judgment Ior the insurance company on the policyholder`s bad Iaith claim
without deciding the proper statute oI limitations period under 8371. One court has recently
held that the statute oI limitations period to bring a claim under 8371 is six years.
640


637
. Id.
638
. Internal citations omitted. March v. Paradise Mutual Ins. Co., 435 Pa. Super. 597, 601-02, 646
A.2d 1254, 1256 (1994), appeal denied, 540 Pa. 613, 656 A.2d 118 (1995), citing Boring v. Erie Ins.
Group, 434 Pa. Super. 40, 641 A.2d 1189 (1994); Okkerse v. Prudential Property & Cas. Ins. Co. , 425
Pa. Super. 396, 625 A.2d 663 (1993). The court also noted that Iederal courts have 'consistently held
that 8371 created a separate and independent cause oI action, citing Margolies v. State Farm Fire & Cas.
Co., 810 F. Supp. 637, 642 (E.D. Pa. 1992); KauIIman v. Aetna Cas. & Sur. Co., 794 F. Supp 137, 140
(E.D. Pa. 1992), recons. denied, No. 91-4450 (E.D. Pa. Sept. 18, 1992); Lombardo v. State Farm Mut.
Auto. Ins. Co., 800 F. Supp. 208, 214 (E.D. Pa. 1992).
639
. March v. Paradise Mut. Ins. Co., 435 Pa. Super. 597, 602, 646 A.2d 1254, 1257, appeal denied,
540 Pa. 613, 656 A.2d 118 (1995).
640
. See Woody v. State Farm Fire & Cas. Co., 965 F. Supp. 691 (E.D. Pa. 1997)(as a matter oI Iirst
impression Ior either a Pennsylvania state or Iederal court, holding that the statute oI limitations period to
Iile a claim under 8371 is 6 years, as provided by 42 Pa.C.S.A. 5527. The same limitations period
applies to a claim brought under the UnIair Trade Practices and Consumer Protection Law. Id. at *4).

NYDOCS1-449390.1
11/16/11 11:58 AM
-244-


A conIlict is currently brewing in Pennsylvania over the scope oI 8371 and bad
Iaith claims can only be brought Ior an improper denial oI insurance coverage or is more
expansive and can include claims Ior alleged Iraud or misrepresentation.
641
Recent cases holding
that alleged misconduct supported an action Ior bad Iaith under 8371 include:
1. Making an unreasonable, unduly restrictive and selI-serving interpretation
oI the terms oI an insurance policy. Chowdhury v. LMI Ins. Co., 107 F.3d
6 (3d. Cir. 1997)
2. Forcing an insured to pay excessive premiums on a retrospective premium
insurance policy. Argonaut Ins. Co. v. HGO Inc., No. 96-1115, 1996 U.S.
Dist. LEXIS 10892 (E.D. Pa. July 26, 1996)
3. Terminating an insured`s disability beneIits where there has been no
established change in the insured`s medical condition. DiMaggio v.
UNUM Corp., No. 96-8440, 1997 U.S. Dist. LEXIS 1912 (E.D. Pa. Feb.
24, 1997)
4. Threatening an insured that iI she did not accept a lump sum payment, her
insurance beneIits would be terminated. DiMaggio v. UNUM Corp., No.
96-8440, 1997 U.S. Dist. LEXIS 1912 (E.D. Pa. Feb. 24, 1997)
5. Intentionally making contact with an insured outside the presence oI the
insured`s attorney. DiMaggio v. UNUM Corp., No. 96-8440, 1997 U.S.
Dist. LEXIS 1912 (E.D. Pa. Feb. 24, 1997)
6. Misrepresenting terms and provisions oI an insurance policy. Certainteed
Corp. and Bay Mills, Ltd. v. Federal Ins. Co., 913 F. Supp. 351 (E.D. Pa.
1995) and
7. Failing to oIIer a reasonable settlement oI a UNIM claim. Draeger v.
Nationwide Mut. Ins. Co., No. 95-7550, 1996 U.S. Dist. LEXIS 18056
(E.D. Pa. Dec. 1996).
Although the Pennsylvania Supreme Court does not appear to have addressed the
issue, there is substantial authority Ior the proposition that policyholders may maintain a private

641
. Compare Conners v. Metropolitan LiIe Ins. Co., PICS Case No. 98-0328 (C.P. Fayette Dec. 26,
1997)( 8371 allows suits only Ior bad Iaith denial oI claims) with Ihnat v. Pover, PICS Case No. 98-
0006, (Ct. C.P. Allegheny Dec. 16, 1997)(suits under 8371 can be brought Ior any oI the acts prohibited
under Pennsylvania`s UnIair Insurance Practices Act). Both cases are discussed in Hank Grezlak,
Another Debate Over Bad Faith Suits Erupts, PENN. L. WKLY, Feb. 23, 1998, at 11.

NYDOCS1-449390.1
11/16/11 11:58 AM
-245-


cause oI action under Pennsylvania`s UnIair Trade Practice and Consumer Protection Law even
when the policyholder`s allegations Iall within the practices prohibited by the UPIA.
642


642
. See 73 P.S. 201-9.2 (providing Ior private right oI action) and 73 P.S. 201-2(4) (listing prohibited
practices). See also Pekular v. State Farm Mut. Auto. Ins. Co., 355 Pa. Super. 276, 285-90, 513 A.2d
427, 432-34 (1986), appeal denied, 516 Pa. 635, 533 A.2d 93 (1987); Wood v. Allstate Ins. Co., No. 96-
4574, 1996 U.S. Dist. LEXIS 16332 (E.D. Pa. Nov. 4, 1996); Wright v. North Am. LiIe Assurance Co.,
372 Pa. Super. 272, 279-80, 539 A.2d 434, 438 (Pa. Super. Ct. 1988); Falbo v. State Farm LiIe Ins. Co.,
No. 96-5540, 1997 U.S. Dist. LEXIS 2687 (E.D. Pa. March 13, 1997). In addition, Katz v. Aetna Cas. &
Sur. Co., 972 F.2d 53, 55 (3rd Cir. 1992) recognized that a private cause oI action existed under the
UnIair Trade Practice and Consumer Protection Law, but Iound that under the Iacts oI the case, the
claimants, since they were making a third party claim, did not have standing to Iile such a claim under the
statute.

NYDOCS1-449390.1
11/16/11 11:58 AM
-246-


Ohio
The Supreme Court oI Ohio in Zoppo v. Homestead Insurance Co. set Iorth the
standard Ior evaluating whether an insurance company has IulIilled its duty oI good Iaith and Iair
dealing:
An insurer Iails to exercise good Iaith in the processing oI a claim
oI its insured where its reIusal to pay the claim in not predicated
upon circumstances that Iurnish reasonable justiIication thereIor.
643

Under Ohio law:
'|A| breach oI this duty will give rise to a cause oI action in tort
against the insurer. The tort oI bad is not a tortious breach oI
contract, Ior no matter how willIul or malicious the breach, it is no
tort to breach a contract . . . |T|he legal duty oI good Iaith imposed
by law on the insurer applies with equal Iorce to the company`s
settlement oI third party claims against its insured as it does to
those claims brought by the insured himselI.
644

An insurance company`s breach oI its duty oI good Iaith and Iair dealing sounds in tort
'irrespective oI any liability that might arise Irom a breach oI the underlying insurance

643
. Zoppo v. Homestead Ins. Co., 71 Ohio St. 3d 552, 554, 644 N.E.2d 397, 400 (1994).
644
. Internal citations omitted. Motorists Mut. Ins. Co. v. Said, 63 Ohio St. 3d 690, 590 N.E.2d 1228
(1992), overruled in part by Zoppo v. Homestead Ins. Co., 71 Ohio St. 3d 552, 644 N.E.2d 397, quoting
Hoskins v. Aetna LiIe Ins. Co., 6 Ohio St. 3d 272, 452 N.E.2d 1315. The above quoted language reIlects
the Ohio Supreme Court`s recognition oI the rationale set Iorth in the landmark case oI Gruenberg v.
Aetna Ins. Co., 9 Cal. 3d 566, 510 P.2d 1032, 1038 (1973):
|I|n every insurance contract there is an implied covenant oI good
Iaith and Iair dealing. The duty to so act is imminent in the
contract whether the company is attending to the claims oI third
persons against the insured or the claims oI the insured itselI.
Accordingly, when the insurer unreasonably and in bad Iaith
withholds payment oI the claim oI its insured, it is subject to
liability in tort.

NYDOCS1-449390.1
11/16/11 11:58 AM
-247-


contract.
645
Thus, limitations clauses contained in the insurance policy are inapplicable to
claims alleging a breach oI the insurance company`s duty oI good Iaith and Iair dealing.
646

In Zoppo, the Ohio Supreme Court clariIied that 'intent is not and has never been
an element oI the reasonable justiIication standard.
647
The court Iound that the insurance
company breached its duty oI good Iaith and Iair dealing to its policyholder where the
policyholder`s bar was destroyed by Iire and the insurance company`s investigation: (1) Iocused
primarily on the policyholder; (2) Iailed to seriously explore evidence that other parties had
threatened to burn the building down; (3) Iailed to locate key suspects or veriIy alibis; (4) did
little more than ask cursory questions oI other suspects; (5) Iailed to Iollow up with witnesses,
despite evidence that one bar patron had bragged to others about setting the Iire; (6) did nothing
to veriIy the policyholder`s story that he was out oI state when the Iire started. There was also
evidence that one witness was paid to change his statement and implicate the policyholder in
starting the Iire.
648


645
. Buckeye Union Ins. Co. v. State Farm Mut. Auto. Ins. Co., No. C-960282, 1997 Ohio App.
LEXIS 1472 at *10 (Ohio Ct. App. Apr. 16, 1997) citing StaII Builders, Inc. v. Armstrong, 37 Ohio St. 3d
298, 525 N.E.2d 783 (1988), paragraph one oI syllabus. See also Pizzino v. Lightning Rod Mut. Ins. Co.,
93 Ohio App. 3d 246, 254-55, 638 N.E.2d 146 (1994)(holding that a policyholder who had settled her
claim with the insurance company could bring a subsequent bad Iaith claim).
646
. Bullet Trucking, Inc. v. Glen Falls Ins. Co., 84 Ohio App. 3d 327, 333, 616 N.E.2d 1123
(1992)(rejecting insurance company`s argument that to succeed on a tort claim Ior a breach oI Iiduciary
duty, the policyholder must succeed on the underlying contract claim).
647
. Id. The Zoppo court reaIIirmed the court`s 'consistent application oI the reasonable justiIication
standard to bad Iaith cases, citing Hart v. Republic Mut. Ins. Co. 152 Ohio St. 185, 87 N.E.2d 347 (1949),
reaIIirmed, Hoskins v. Aetna LiIe Ins. Co., 6 Ohio St. 3d 272, 452 N.E.2d 1315 (1983); StaII Builders,
Inc. v. Armstrong, 37 Ohio St. 3d 298, 525 N.E.2d 783 (1988). The court speciIically overruled the
portion oI its decision in Motorists Mut. Ins. Co. v. Said, 63 Ohio St. 3d 690, 590 N.E.2d 1228 (1992),
which only two years earlier had ruled that a breach oI good Iaith required 'an intentional Iailure to
determine whether there was any lawIul basis Ior such reIusal. Zoppo, 71 Ohio St. 3d 554, 644 N.E.2d at
399. The Said opinion remains viable in other respects.
648
. Zoppo, 71 Ohio St. 3d at 555-56, 644 N.E.2d at 400.

NYDOCS1-449390.1
11/16/11 11:58 AM
-248-


The Zoppo court reversed a lower court Iinding that under these Iacts, the
policyholder had Iailed to show bad Iaith by its insurance company. The court then reviewed
whether the insurance company`s bad Iaith warranted punitive damages:
Punitive damages may be recovered against an insurer that
breaches its duty oI good Iaith in reIusing to pay a claim oI its
insured upon prooI oI actual malice, Iraud or insult on the part oI
the insurer.
649

The court Iound that although there was no showing oI Iraud, and although the insurance
company did not act with actual malice, 'the trial court had the obligation to determine that there
was suIIicient evidence that the |insurance company| consciously disregarded the |the
policyholder`s| rights.
650
The court Iound that the insurance company`s one sided investigation
justiIied the award oI punitive damages.
651
Furthermore, 'an insurer who acts in bad Iaith is
liable Ior those compensatory damages Ilowing Irom the bad Iaith conduct oI the insurer and
caused by the insurer`s breach oI contract.
652

Ohio speciIically exempts insurance companies Irom its Consumer Sales
Practices Act.
653
In addition, Ohio courts have steadIastly held that there is no private right oI

649
. 71 Ohio St. 3d at 557-58, 644 N.E.2d at 402.
650
. Id.
651
. Id. For another Ohio case reIlecting an insurance company`s apparent desire to avoid providing
insurance coverage at all costs (and despite the Iacts), see LaForge v. Nationwide Mut. Fire Ins. Co., 82
Ohio App. 3d 692, 696-97, 612 N.E.2d 1318 (insurance company claimed that policyholders had burnt
down their own home, relying on, among other things, evidence that the policyholders had clothing at the
dry cleaners when the Iire occurred and that a video tape oI a birthday party taken in the policyholders
home and recording the home`s contents was given to a relative in an artiIicial attempt to document
damages. In addition, the insurance company ignored other Iactors which would seemingly cut against its
theory).
652
. Id.
653
. Ohio Consumer Sales Practices Act 1345.03 lists a series oI prohibited/unIair business
practices. 1345.01(A) speciIically excludes insurance companies Irom the Act.

NYDOCS1-449390.1
11/16/11 11:58 AM
-249-


action under the UnIair and Deceptive Trade Practices Act, Ohio`s statute proscribing unIair
trade practices in the insurance industry.
654


654
. See Ohio UnIair and Deceptive Trade Practices 3901.21 sets Iorth the list oI practices deIined
to be unIair and deceptive acts in the business oI insurance. Ohio Administrative Code 3901-1-07 is the
corresponding regulations. Both sections are attached at Appendix D. For representative cases holding
that there is no private right oI action under 3901.21 and OAC 3901-1-07 , see Strack v. WestIield
Cos., 33 Ohio App. 3d 336, 515 N.E.2d 1005 (1986); SpringIield Impregnators, Inc. v. Ohio State LiIe
Ins. Co., No. 3090, 1994 Ohio App. LEXIS 1168 (Ohio Ct. App. March 23, 1994); Goodyear Tire &
Rubber Co. v. Aetna Cas. & Sur. Co., C.A. No. 16993, 1995 Ohio App. LEXIS 2975 (Ohio Ct. App. July
12, 1995).

NYDOCS1-449390.1
11/16/11 11:58 AM
-250-


West Virginia
'West Virginia Iirst party insurance damage law was essentially born in 1986
with the decision in Hayseeds, Inc. v. State Farm Fire & Casualty Company
655
In Hayseeds,
the court held that
We consider it oI little importance whether an insurer contests an
insured`s claim in good Iaith or bad Iaith. In either case, the
insured is out his consequential damages and attorneys Iees.
656

The court held that whenever the policyholder substantially prevails in a property
damage suit against the insurance company, the policyholder is entitled to reasonable attorneys
Iees and damages Ior delay in the settlement, aggravation and inconvenience.
657

Whether a policyholder has substantially prevailed is determined by:
the status oI the negotiations between the insured and the insurer
prior to the institution oI the lawsuit. Where the insurance
company has oIIered an amount materially below the damage
estimates submitted by the insured, and the jury awards the insured
an amount approximating the insured`s damage estimates, the
insured has substantially prevailed.
658


655
. Vince J. King, Esq, Damages in Insurance Cases: The PlaintiII`s Perspective (program paper on
Iile with the authors). Mr. King is an attorney practicing in Charleston, West Virginia. Among Mr.
King`s specialties is insurance company bad Iaith.
656
. Hayseeds, Inc. v. State Farm Fire & Cas., 177 W. Va. 323, 352 S.E.2d 73, 79-80 (1986).
657
. Emphasis added. 352 S.E.2d at 80. The court explained its reasoning:
UnIortunately, awards oI consequential damages currently turn on
judicial interpretation oI such malleable and easily manipulated
concepts as 'reasonable, 'wrongIul, 'good Iaith and 'bad
Iaith. We believe that the interests oI both the parties and the
judicial system would be better served by the enunciation oI a
clear, brightline standard governing the availability oI
consequential damages in property damages insurance cases.
Id.
658
. Thomas v. State Farm Mut. Auto. Ins. Co., 181 W. Va. 604, 383 S.E.2d 786 (1989). Thomas was
the Iirst court to interpret Hayseeds 'substantially prevails requirement. It has been widely adopted. See
McCormick v. Allstate Ins. Co., 197 W. Va. 415, 475 S.E.2d 507, 517; Shamblin v. Nationwide Mut. Ins.
Cos. 183 W. Va. 585, 396 S.E.2d 766 (1990).

NYDOCS1-449390.1
11/16/11 11:58 AM
-251-


However, determining whether the insurance company acted in good Iaith
towards its policyholder remains important in establishing an insurance company`s bad Iaith
Iailure to settle. In Shamblin v. Nationwide Mutual Insurance Companies, the court held:
|W|henever there is a Iailure on the part oI the insurer to settle
within the policy limits where there exists the opportunity to so
settle and where such settlement within policy limits would release
the insured Irom any and all liability, that the insurer has prima
Iacie Iailed to act in its insured`s best interest and that such Iailure .
. . constitutes bad Iaith towards the insured.
659

The court held that it then becomes the insurance company`s burden to establish that it attempted
to reach a settlement and that any Iailure to do was based on reasonable grounds.
660
'The proper
test is whether the reasonably prudent insurance company would have reIused to settle within the
policy limits, 'keeping in mind always its duty oI good Iaith and Iair dealing with its insured.
661

Among the Iactors that the trial court should consider in determining a bad Iaith Iailure to settle
is whether:
(1) the insurance company conducted an objective investigation;
(2) the insurance company had a reasonable basis to conclude that there was a
genuine and substantial issue as to the liability oI the insured;
(3) there was a potential Ior a substantial verdict in excess oI the policy limits against
the insured.
662

Policyholders in West Virginia also are entitled to a private right oI action under
West Virginia`s UnIair Trade Practices Act ('UTPA).
663
The Iirst case to recognize a private

659
. Shamblin v. Nationwide Mut. Ins. Cos. 183 W. Va. 585, 595, 396 S.E.2d 766, 776 (1990).
660
. Id.
661
. Id. See also Marshall v. Erie Ins. Co., 192 W. Va. 94, 101, 450 S.E.2d 791, 798 (1994).
662
. Id.

NYDOCS1-449390.1
11/16/11 11:58 AM
-252-


right oI action under the UTPA was enkins v. .C. Penney Cas. Ins. Co., decided in 1981.
664

Since then, enkins and its progeny have clearly set Iorth the requirements to Iile a claim under
the UTPA. A claim brought under the UTPA relies on a violation oI the statute which indicates
a 'general business practice by the insurance company.
665
To establish a general business
practice, the policyholder must show that there was more than a single isolated violation oI the
UTPA. Doing so requires:
1. ProoI oI several breaches by an insurance company oI 33-11-4(9), or;
2. ProoI oI multiple violations oI 33-11-4(9) occurring in the same claim, or;
3. ProoI oI other violations by the same insurance company to establish the
Irequency issue. ProoI can be obtained Irom other claimants and attorneys who
have dealt with such company and its claims agents, or Irom any person who is
Iamiliar with the company`s general practice in regard to claim settlement
666

In addition, the policyholder asserting a private right oI action under the UTPA need not show
that it has 'substantially prevailed as required under the Hayseeds common law approach.
667
At
least one court has Iound a private right oI action under 33-11-4(1)(a) oI the UTPA prohibiting
misrepresentation and Ialse advertising oI insurance policies.
668


663
. W. Va. Code 33-11-4(9) attached as Appendix E.
664
. Jenkins v. J.C. Penney Cas. Ins. Co., 167 W. Va. 597, 280 S.E.2d 252, 258 (1981), overruled in
part by State Farm Fire & Cas. Co. v. Madden, 192 W. Va. 155, 451 S.E.2d 721 (1994).
665
. See McCormick v. Allstate Ins. Co., 197 W. Va. 415, 475 S.E.2d 507, 519 (1996); citing Jenkins
at 167 W. Va. at 610, 280 S.E.2d at 260. See also 33-11-4(9) ('No person shall commit or perIorm with
such Irequency as to indicate a general business practice).
666
. See McCormick at 519, Jenkins at id.
667
. McCormick v. Allstate Ins. Co., 197 W. Va. 415, 475 S.E.2d 507, 519 (1996); Maher v.
Continental Cas. Co., 76 F.3d 535, 543 (4th Cir. 1996).
668
. See Morton v. Amos-Lee Securities et al., 195 W. Va. 691, 466 S.E.2d 542 (1995)(holding that
sale oI annuities are covered by the UTPA). Equitable LiIe Assurance was among the deIendants.

NYDOCS1-449390.1
11/16/11 11:58 AM
-253-


Punitive damages are allowed under causes oI action brought under a Hayseeds
approach or the UTPA.
669


669
. See e.g. Hayseeds, Inc. v. State Farm Fire & Cas., 177 W. Va. 323, 352 S.E.2d 73
(1986)(insurance company can only be held liable Ior punitive damages upon a showing oI a malicious
intention to injure or deIraud)(syllabus note 1); Poling v. Motorists Mut. Ins. Co., 192 W. Va. 46, 450
S.E.2d 635 (1995)(punitive damage awards in insurance bad Iaith cases are not prohibited under 33-11-
4(9))(syllabus note 3); Shamblin v. Nationwide Mut. Ins. Cos. 183 W. Va. 585, 396 S.E.2d 766
(1990)(policyholder may recover punitive damages Irom insurance company in case alleging bad Iaith
upon establishing actual malice)(syllabus note 1); McCormick v. Allstate Ins. Co., 197 W. Va. 415, 475
S.E.2d 507 (1996)(insurance company not liable Ior punitive damages absent a showing oI a malicious
intention to injure or deIraud).

NYDOCS1-449390.1
11/16/11 11:58 AM
-254-


PART XV
DISCOVERY CHECK LIST - GENERAL
1. Complete paper and electronic claim files: home office, regional, and local.
(1) Reports and correspondence
(2) Memos oI any type, i.e. telephone slips, inter oIIice communications,
handwritten notes, etc.
(3) Tapes - Video and Audio
(4) Photographs - original negatives
(5) Instructions regarding investigation, coverage questions, etc.
(6) Statistical documents and draIt copies
(7) Copy Iile jacket (Note: examine original Iiles Ior evidence oI authenticity
or alterations)
2. Testimony and statements of client and any witnesses.
(1) Depositions - including past cases
(2) Original tapes
(3) Claims handler aIIidavits and testimony
3. Claims Manuals
(1) Property loss handling procedures
(2) Liability claim handling procedures
(3) Supervisor`s and manager`s manuals
(4) Data processing/systems manuals
(5) Fraud/arson or Special Investigation Unit (S.I.U.) manuals
4. Information on the handling adjusters and supervisors.
(1) Job descriptions
(2) Original application Ior employment
(3) Annual perIormance evaluations
(4) History oI salary and promotions/demotions
(5) Educational records (including company courses) and curriculum (taped or
written) used Ior these courses
(6) Letters oI commendation or complaint
(7) Memberships in proIessional organizations
5. Personnel or salary administration manuals.
(1) Job descriptions
(2) Salary grade classiIications
(3) Criteria Ior promotion/demotion
(4) Plans Ior adequate staII levels
(5) PerIormance evaluations and activity reviews
(6) Incentive programs and retirement Iunds
(7) ProIit sharing and stock ownership
6. Documents which show the Legal history of the claim.

NYDOCS1-449390.1
11/16/11 11:58 AM
-255-


(1) Legal opinions prior to the date oI denial
(2) Legal analysis oI issues at any time (as when the deIend was devising the
program or policy)
(3) Correspondence to/Irom counsel
7. Reports, correspondence, and materials provided by ~outside investigators.
(1) ConIidential reports
(2) Surveillance tapes (audio or video)
(3) Activities checks
(4) Investigations to determine level oI disability
(5) List oI investigators used Ior similar claims
8. Reports, correspondence, and materials provided by Experts.
(1) Testing results
(2) Tapes (video or audio)
(3) List oI experts used Ior similar claims
(4) Surveys/Research
9. Loss reserve history:
(1) Documents showing original reserves and all changes
(2) Documents showing methods and criteria Ior setting reserves
10. Reinsurance information, facultative or treaty:
(1) Reinsurance policies
(2) Reinsurance treaties
(3) 'Loss pooling agreements
(4) Documents concerning the acquisition, negotiation, an draIting oI the
agreements including bills, payments, claims, inspections, or other
(5) Job descriptions, personnel Iiles, and addresses oI person most
knowledgeable about reinsurance
(6) List oI reinsurers with whom the company had contracts
11. Documents pertaining to programs designed to control claim costs (including both
indemnity and allocated/unallocated claim costs).
(1) Medical cost containment
(2) Medical management
(3) Peer review
(4) Bill review
12. Videotaped, recorded, or written training materials on the subjects of:
(1) Property loss adjusting
(2) Fire or accident investigation
(3) Investigation, evaluation, and handling oI disputed claims Liability claims
handling
(4) Fraud & arson detection, S.I.U. units
(5) Hiring outside experts or investigators
(6) Interpretation oI coverage

NYDOCS1-449390.1
11/16/11 11:58 AM
-256-


(7) Medical training
(8) Resolving ambiguous policy language
(9) Other speciIic issues
13. Employee Handbook.
(1) Orientation manual or booklets
(2) InIormation regarding beneIits and disability plans
(3) InIormation regarding proIit-sharing, stock ownership, and incentive plans
(4) Company philosophies and policies
(5) Personnel administration manual
14. Newsletters
(1) Company-wide
(2) Regional
(3) Local
(4) Claims
(5) 'Sales
15. Quality control audits or surveys for the offices handling the claim.
(1) Home oIIice or regional audits
(2) Manuals or guidelines Ior audits
(3) Claim handling quality criteria
16. Records of public complaints.
17. Records of other property loss litigation or bad faith complaints.
18. Forms, publications and manuals available for use by the claims staff.
(1) Index or inventory oI available materials
(2) Copies oI bulletins, memoranda, or other not part oI the 'oIIicial manuals
used to convey instructions Irom management to claim handlers
(3) Job descriptions, personnel Iiles, and addresses oI the authors oI the
materials
19. Company guides for letter writing or correspondence.
(1) Index oI Iorm letters
20. Description of the data processing equipment in use in the insurer`s claim
department:
(1) Language oI the system
(2) Programs available Ior speciIic loss situations
(a) Bulletins and manuals explaining the capabilities and capacities oI
the programs
(b) Orientation bulletins or manuals used to train employees on the use
oI the equipment
(3) Location oI data 'centers

NYDOCS1-449390.1
11/16/11 11:58 AM
-257-


(4) Job descriptions, personnel Iiles, and addresses oI those most
knowledgeable about the data processing system
21. Documents of any type which provide information on the organization and officers
of the Insurance company.
(1) Diagram or chart oI the claim department 'chain oI command
(2) Management documents which show the company structure by line and
levels oI authority
(3) Manuals or bulletins on the issuance oI management reports and the
preparation oI operations displays
(4) Job descriptions, personnel Iiles, and addresses oI those most
knowledgeable on annual reports, management reports, and/or
organization charts
(5) Job descriptions, personnel Iiles, and addresses oI those most
knowledgeable oI writing the manuals and bulletins
22. Annual reports:
(1) 10K reports to the Securities and Exchange Commission
(2) Reports to the shareholders
(3) Reports to regulators/insurance departments
(Note: Agreement that Best`s Key Rating Guide is authentic source oI
deIendant`s wealth will sometimes suIIice)
23. Advertising or promotional materials used to sell the specific policy.
(1) 5 video ads displayed in area prior to loss
(2) 5 audio ads displayed in area prior to loss
(3) 5 print ads displayed in area prior to loss
24. Archives or records storage:
(1) Bulletins or manuals on the subject oI records retention and destruction
policies
(2) Index oI retained materials, including instructions Ior retrieval
(3) Documents which explain the establishment, location, and accessibility oI
archives or records storage centers
(4) Location oI historical material
(5) Job descriptions, personnel Iiles, and addresses oI the people most
knowledgeable about records storage and archives
25. Documents which detail the services, procedures, and activities of loss control,
engineering, or risk inspection services.
(1) 'Inspections oI risk subject
26. Agency manuals
(1) Service instructions Ior premiums, claims handling, communications,
access to medical inIormation, handling oI complaints and disputed
claims, and other related actively

NYDOCS1-449390.1
11/16/11 11:58 AM
-258-


(2) Advertising, representations, speciIications, and descriptions oI any nature
used to attract the policyholder
27. Seating plan of claims department showing physical proximity of the individuals
handling the claim.
28. Documents pertaining to the establishment, existence, consistency of, and activities
of a ~claim committee.
(1) Names oI the committee members
(2) Any reports or directives issued by the committee with regard to this case
(3) Documentation oI any 'committee deliberations
29. List of organizations by name and address of which the company is a member or
subscriber:
(1) Dates such associations began
(2) Codes oI ethics or by-laws
30. Underwriting files on the property and insured In question.
(1) Inspection reports
(2) Any manuals used in any phase oI the process oI issuing the policy
31. Corporate liability insurance policies for E & 0, professional liability, bad faith, or
suits:
(1) Copies oI the policies
(2) Reports and correspondence to such insurers
(3) Names oI the persons handling the investigation and adjustment
32. Any separate file on the loss which deals with ~fieldwork, salvage, accounting,
subrogation, cause and origin investigation, or any other subject.
33. ~Binders, course materials, audio/video tapes of local, regional, or home office
conferences for adjusters, managers, or others.
(1) Course materials, audio/video tapes kept by adjusters or supervisors Ior
personal reIerence.
34. Documents of any type which set forth the insurer`s philosophies on:
(1) Claims handling policies
(2) Providing service to policyholders
(3) Good/bad Iaith claim handling
(4) Extra-contractual damages and suits
(5) Compliance with unIair claim practices statutes
(6) WrongIul claims handling
35. Speech transcripts.
(1) Executive oIIicers
(2) Claims oIIicers
(3) 'House counsel
TABLE OF CONTENTS

Page

NYDOCS1-449390.1
11/16/11 11:58 AM
-i-


PART I INSURANCE LORE .......................................................................................... 1
PART II BAD LORE ........................................................................................................ 1
PART III WHAT MAKES INSURANCE DIFFERENT..................................................... 1
A. Insurance Products And Contract Law: Apples and Oranges? ............................. 2
B. Systemic Imbalances Must Be Called To the Court`s Attention ........................... 8
1. The InIormation Imbalance ..................................................................... 8
2. The Imbalance In Money and Litigation Resources ............................... 11
3. The Imbalance in Bargaining Power Between the Insurance
Company and the Policyholder .............................................................. 14
4. Insurance Companies ProIit From Litigation ......................................... 16
5. Other Contributors to the InIormation Imbalance................................... 20
C. Judges ............................................................................................................... 35
D. The Insurance Industry Code oI Conduct and Insurance Fraud: Is
Insurance A DeIective Product? ........................................................................ 37
E. Claims Handling ............................................................................................... 45
PART IV INSURANCE COMPANIES` FIDUCIARY DUTIES AND DUTY OF
GOOD FAITH AND FAIR DEALING ............................................................. 46
A. Insurance Companies Are Fiduciaries ............................................................... 46
1. Insurance Company Admissions ............................................................ 46
2. Insurance Companies Trumpet Their Fiduciary Duties For
Marketing and Litigation Purposes ........................................................ 51
3. FIDUCIARY DUTY OF INSURANCE COMPANIES ......................... 55
4. Communication in Court ....................................................................... 57
5. Communication Via Litigation Tactics .................................................. 61
6. Communication in the Marketplace ....................................................... 62
TABLE OF CONTENTS
(continued)
Page

NYDOCS1-449390.1
11/16/11 11:58 AM
-ii-


7. Case law:............................................................................................... 69
B. The Public Service Nature OI Insurance............................................................ 80
C. The Duty OI Good Faith And Fair Dealing ....................................................... 85
1. Insurance Company Admissions OI The Duty OI Good Faith And
Fair Dealing .......................................................................................... 85
2. Judicial Recognition .............................................................................. 90
3. Statutory Recognition ............................................................................ 92
4. The Duty oI Good Faith Continues Through Insurance Coverage
Litigation .............................................................................................. 94
5. Examples oI Bad Faith .......................................................................... 98
6. Reverse Bad Faith ............................................................................... 105
7. Comparative Bad Faith ........................................................................ 106
8. The Attorney-Client Privilege and the Crime-Fraud Exception ............ 110
D. Concealing Insurance Coverage is Bad Faith .................................................. 115
1. Insurance Companies Must Disclose Insurance Coverage .................... 115
2. Fraudulent Misrepresentation .............................................................. 123
3. The Reasonable Expectations Doctrine ................................................ 125
PART V CIVIL RICO ................................................................................................... 154
A. Considerations ................................................................................................ 154
1. The RICO Enterprise: Circumventing the Distinctiveness
Requirement ........................................................................................ 156
2. Racketeering Activity: Proving Mail and Wire Fraud .......................... 158
3. Two Acts oI Racketeering Activity ...................................................... 160
4. Showing the Requisite Injury .............................................................. 160
5. Proving Proximate Cause .................................................................... 162
TABLE OF CONTENTS
(continued)
Page

NYDOCS1-449390.1
11/16/11 11:58 AM
-iii-


B. RICO and the McCarran-Ferguson Act ........................................................... 163
1. RICO and the McCarran-Ferguson Act: Dueling or Complimentary
Statutes? .............................................................................................. 165
2. The Business oI Fraud ......................................................................... 166
3. The Insurance Companies` Imagined 'ConIlicts With State Law ....... 168
4. Why RICO May Substantially Relate to the Business oI Insurance:
The True Purpose oI the McCarran-Ferguson Act and Barnett
Bank v. Nelson .................................................................................... 171
5. The McCarran-Ferguson Act Does Not Protect Discriminatory
Insurance Company Practices .............................................................. 175
6. Is RICO Somehow DiIIerent From Other Federal Laws Which
Interact With The McCarran-Ferguson Act? ........................................ 178
7. Public Policy and the Insurance Industry Use oI RICO: ConIlicts
and Contradictions .............................................................................. 180
PART VI OTHER CLAIMS TO CONSIDER: COMMON LAW FRAUD AND
NEGLIGENT MISREPRESENTATION ........................................................ 183
PART VII DEATH OR DISABILITY OF A POLICYHOLDER: SEEK
CONSEQUENTIAL DAMAGES ................................................................... 184
1. Death oI Company .............................................................................. 184
2. Consequential Damages, Bad Faith or Both The Brass Ring and
Meat and Potatoes ............................................................................... 186
3. Consequential Damages --What the Cases Say .................................... 189
PART VIII JURY CHARGES DO NOT REINVENT WHEELS .................................. 198
PART IX TRIAL EVIDENCE BULLDOGS OR PUSSYCATS? ............................... 199
PART X AVOIDING BIFURCATION ......................................................................... 200
PART XI CONSIDER MALICIOUS DEFENSE ............................................................ 201
TABLE OF CONTENTS
(continued)
Page

NYDOCS1-449390.1
11/16/11 11:58 AM
-iv-


PART XII PRE-LITIGATION MUSTS` ........................................................................ 204
A. Locate All Insurance Policies .......................................................................... 204
B. Give Notice To the Insurance Company .......................................................... 205
C. Contending With The Reservation oI Rights Letter ......................................... 206
D. Keep In Contact With The Insurance Company............................................... 208
1. Complain To The State Insurance Commissioner ................................ 208
PART XIII DISCOVERY ................................................................................................. 208
A. Must Have` Documents: ................................................................................ 209
B. Must Have` Depositions ................................................................................ 212
C. Must Ask` Deposition Questions ................................................................... 213
D. Pleadings Considerations ................................................................................ 215
E. ProoI oI Damages Considerations ................................................................... 216
F. Where Not to Look For Coverage ................................................................... 217
G. BMW of North America v. Gore: Preserving Punitive Damages To Deter
and Punish Reprehensible Conduct ................................................................. 219
1. The Three Guideposts oI BMW............................................................ 219
2. Post BMW Decisions .......................................................................... 223
PART XIV GOOD FAITH ................................................................................................ 229
A. DeIinitions oI Good Faith ............................................................................... 229
PART XV DISCOVERY CHECK LIST - GENERAL ..................................................... 255

NYDOCS1-449390.1
11/16/11 11:58 AM
1