Tag Archives: insurance law

When Are Background Checks Not Allowed?

The Equal Employment Opportunity Commission (EEOC) has been quite active in challenging employers’ use of criminal background and credit history checks during hiring. There is still significant uncertainty as to the current standards and law about the checks of criminal and credit history. The lack solid guidance makes it difficult for employers to determine how to evaluate their current use of this information, as well as to understand the legal pitfalls and hurdles that the EEOC has placed in front of them.

EEOC Directives

The recent activity emanates from the EEOC’s recent directive and key priority (as per its December 2012 Strategic Enforcement Plan (SEP)) to eliminate hiring barriers. This priority includes challenges to policies and practices that exclude applicants based on criminal history or credit check. The EEOC has a keen interest in this area, as it believes that criminal/credit checks have a disparate impact on African American and Hispanic applicants. As the EEOC pursues the directive, expect the EEOC to scrutinize failure-to-hire claims where a criminal history or background check was conducted. Even if the background check was “facially neutral” and was uniformly given to all applicants, the EEOC may investigate to determine if the check had a “discriminatory effect” on certain applicant(s).

The EEOC asserts that criminal background checks must be “job-related” and “consistent with business necessity.” Employers are advised to consider: (1) the nature and gravity of the offense or conduct; (2) the time that has passed since the offense, conduct or completion of the sentence; and (3) the nature of the job held or sought. The EEOC stresses the need for an “individualized assessment” before excluding an applicant based on a criminal or credit record.

Local/State/Federal Laws

Employers face additional legal hurdles regarding hiring practices because of recent local and state legislative developments. These laws are commonly referred to as “ban the box” (i.e., restrictions on the use of criminal history in hiring and employment decisions). Making matters even more difficult, employers have also been subject to a surge in class action litigation under the Fair Credit Reporting Act (FCRA). The FCRA regulates the use of and gathering of criminal histories through third-party consumer reporting agencies with respect to conducting background checks on applicants or employees.

Legal Actions

In pursuit of its directive, the EEOC has filed several large-scale lawsuits against employers. We expect that the EEOC will continue to file similar lawsuits throughout 2015 and beyond. Most have been brought as failure-to-hire claims. For example, an African-American woman brought a claim alleging that she was discriminated against based on her credit history. This claim started out as a single plaintiff action, but, after the EEOC conducted its initial investigation, the EEOC dramatically expanded the scope of the initial charge, alleging that the employer was engaging in a “pattern and practice of unlawful discrimination” against: (1) African-American applicants by using poor credit history as a hiring criterion and (2) African-American, Hispanic and white male applicants by using criminal history as a hiring criterion.

Reasonable employers complain that the EEOC has placed employers in a Catch 22. Employers have to choose between ignoring criminal history and credit background, exposing themselves to potential liability for criminal and fraudulent acts committed by employees or to an EEOC lawsuit for having used this information in a discriminatory way.

Takeaway for Employers

Claims involving criminal background checks and credit checks are an EEOC priority. At this time, employers have little guidance from the courts or the EEOC as to exactly what “job-related” and “consistent with business necessity” mean and just how closely a past criminal conviction has to correspond with the duties of a particular job for an employer to legally deny employment to an applicant. Moreover, employers continue to witness expanding restrictions dealing with criminal history at the state and local level based on ban-the-box legislation, as well as with an increasing number of class action lawsuits involving background checks as required under the Fair Credit Reporting Act.

Employers are encouraged to work closely with legal counsel as to what they should and should not ask on applicants as well as how and when they can use background information they obtain. Based on this evolving area of the law, we additionally recommend that employers purchase a robust EPL policy that will defend them in the event that the EEOC or a well-skilled plaintiff’s counsel pursues a claim against them for discrimination, or for failure to hire based on criminal or credit background checks.

Montana Clarifies Notice-Prejudice

On May 29, 2015, the Montana Supreme Court affirmed the application of the notice-prejudice rule in cases of third-party claims for damages. Atlantic Casualty Ins. Co. v. Greytak, 2015 MT 149, OP 14-0412 (Mt. 2015). The rule requires the insurer to establish prejudice as a condition to denying coverage when an insured fails to provide timely notice of a claim.

Background
This case arose from a lawsuit initiated by GTL Inc. against John P. Greytak and Tanglewood Investors Limited Partnership (collectively, Greytak), based on Greytak’s failure to pay GTL for obligations arising from a construction project. In response, Greytak filed construction defect counterclaims against GTL. Greytak and GTL later entered into a settlement whereby GTL would notify its insurer, Atlantic Casualty Insurance Co. (Atlantic), of Greytak’s claims. According to the agreement, if Atlantic did not defend GTL or initiate a declaratory judgment action regarding coverage, then GTL would allow a $624,685.14 judgment to be entered against it and Greytak would pursue Atlantic only for recovery of the judgment. GTL notified Atlantic of Greytak’s counterclaims approximately one month after the agreement with Greytak and approximately one year after GTL first received notice of Greytak’s potential counterclaims.

Atlantic initiated an action in the U.S. District Court for the District of Montana seeking a declaration as to whether it was required to defend or indemnify GTL. The District Court granted Atlantic’s motion for summary judgment and found that (a) Atlantic did not receive timely notice of Greytak’s claims against GTL and that (b) Montana law did not mandate Atlantic to demonstrate prejudice from GTL’s untimely notice. Greytak subsequently appealed to the U.S. Court of Appeals for the Ninth Circuit, which certified the question regarding the application of the notice-prejudice rule in the third-party liability context to the Montana Supreme Court.

Montana Supreme Court Decision
The Supreme Court followed the majority of jurisdictions, and its own ruling issued a week earlier when it adopted the notice-prejudice rule in the first-party context, and held that prejudice must be demonstrated to deny coverage when an insured provides untimely notice of a claim. The court reasoned that the purpose of the notification requirement was to provide the insurer with the opportunity to “defend its interest and to prevent or mitigate adverse judgments.” Additionally, the court noted that Montana public policy required a narrow and strict interpretation of insurance coverage exclusions to accomplish the “fundamental protective purpose” of insurance.

Despite discussing the rationale of the rule, which includes mitigating adverse judgments, the court declined to address the merits of the insurer’s claims of prejudice, reasoning that such determination was outside the scope of the certified question. Significantly, however, two justices issued separate specially concurring opinions, which effectively concluded that when an insurer receives notice of a claim almost a year after the insured engaged in litigation, executed a settlement agreement without the insurer’s knowledge and deprived the insurer of any opportunity to defend its interest and to prevent or mitigate adverse judgments, prejudice is presumed as a matter of law. Moreover, in her special concurrence, Justice Laurie McKinnon proposed a limited exception to the notice-prejudice rule to provide that prejudice to the insurer would be presumed as a matter of law when an insured failed to notify the insurer of a pending lawsuit until after judgment has been entered. 

Implications of the Decision
As a result of the Montana Supreme Court’s holding, Montana courts affirmatively join the majority of jurisdictions that similarly hold that the notice provision of an insurance policy is essentially ineffective to deny coverage for late notice of a claim, unless the insurer can demonstrate that it was prejudiced by the untimely notice. Notwithstanding and based on the Supreme Court’s analysis, if the insurer can establish that it was deprived of the opportunity to defend its interest and to prevent or mitigate adverse judgments or that the delay was not merely technical, then there is sufficient basis to deny coverage.

The court did not specifically state whether its holding was limited to occurrence-based policies, but quoted the “as soon as practicable” notice language from the typical commercial general liability policy, and footnoted that this language did not impose a specific time within which the insured must provide notice. Thus, whether the court would impose the notice-prejudice rule to claims made and reported policies is an open question under Montana law, but given the court’s footnote, it appears it would likely join the majority of jurisdictions that do not require an insurer to demonstrate prejudice resulting from late notice under a claims made and reported policy.

The Revenue Threat to Defense Lawyers

Thousands of insurance defense law firms across the country have built a steady business over the years by defending the claims of insurance carriers and self-insured clients.

The traditional business model for defense lawyers is undergoing significant change, however, as the personal client relationships that served as the foundation for many law firms are giving way to highly sophisticated litigation management programs maintained by carriers.

This article will explore the risks faced by insurance defense law firms in today’s competitive market, as well as risk management actions that can be taken to protect the law firm’s revenue base.

By way of background, it is important to understand that insurance defense law firms must typically be approved in advance by the litigation manager of an insurance carrier before they are assigned any cases. Getting on a “panel” of approved outside counsel can be a difficult process for two primary reasons. First, the market for panel positions is intensely competitive. Secondly, it is not easy for a law firm to determine who is in charge of a panel to get the initial introduction.

Panels of interest to a law firm will vary with the firm’s areas of expertise. Many law firms concentrate their practice in certain types of cases, like the defense of auto injury, inland marine, premises liability, product liability or professional liability. Other firms take more of a full-service approach by handling cases across a wide range of practice areas.

On the carrier side, multiple panels might be managed by a single gatekeeper or could each have a separate panel manager. The litigation management chain of command within an insurance carrier or self-insured varies from firm to firm, adding complexity to the law firm’s business development process.

While rates paid in the insurance defense market can be significantly less than a law firm’s “retail” rates, the attraction is in the high case volume that can result once a law firm gets named to an insurance panel as approved defense counsel.

Insurance defense law firms that have been approved as panel counsel for multiple insurance companies can inadvertently find that their revenue base is threatened by a shrinking number of insurance accounts over time. In the section that follows, we will address the primary revenue risks facing insurance defense law firms.

The Imperative of Client Diversification

Insurance is about risk management, specifically the process of identifying, assessing and quantifying risk. Attorneys practicing in the area of insurance defense may find it beneficial to apply some risk assessment principles to the business development efforts within their own law firms.

There are three primary practice management mistakes that managing partners make, as outlined below. The solution is to establish a business development process that seeks to reduce the risk associated with unexpected account loss.

Risk #1: Too Many Eggs in One Basket

A leading risk facing insurance defense law firms is that a small number of clients can represent a large portion of the firm’s revenue base. In fact, many law firms (large and small) rely on three to five primary insurance clients to generate the majority of their revenue stream. While reliance on a handful of clients is a common situation early in any law firm’s lifecycle, the lack of client diversity puts the long-term viability of a firm in great danger.

There is no hard and fast rule regarding the number of clients needed for the long-term success of a law firm. Rather, the managing partner should start to worry when the loss of any single client would put the firm at a serious financial disadvantage. For many firms, this might be when one client starts to approach 15% to 20% of total revenue.

While the loss of any client is not desirable, an account that represents only 5% of total revenue presumably can be offset relatively easily by the inflow of other small accounts.

A long-term negotiated agreement with one primary client can look appealing initially but suddenly turns into a major risk factor when the viability of the account comes into question.

Risk #2: Failure to Recognize Changing Dynamics Within the Insurance Market

The times they are a-changin, as Bob Dylan warned in his well-known ballad. Listed below are several real-world examples where insurance defense managing partners either lost or risked losing a major insurance account.

The Industry Consolidation Scenario

“We were the lead insurance defense law firm in our state for a respected insurance company,” a managing partner for a Midwest law firm recalls. “Suddenly, without any advance notice, our insurance client was acquired by a larger insurance company. Not only did we lose the work, but many of the claims managers at our insurance client lost their jobs in the post-merger consolidation.”

The “Out for Bid” Scenario

“After its founding, our law firm grew extremely rapidly in response to the needs of our primary client,” a founding member of a Southeastern law firm reports. “We opened new offices and added attorneys simply to keep up with the client’s case load. The quality and pricing for our legal services was widely acclaimed, but a new vice president of claims brought in by the insurance carrier after a reorganization decided that he wanted to put our work out for bid. We eventually retained our work, fortunately, but it was a hard-fought RFP process.”

The Attrition Scenario

“Our insurance defense practice has a 20-year history of success,” explains the managing partner of a six-attorney firm who spends his work day as one of the lead litigators. “Over the years, however, I did not have the time to develop new business while also serving the needs of current clients. We found ourselves overly reliant on one client, and without the benefit of an established business development process.”

The “No One Told Me” Scenario

“I suddenly noticed that we were not receiving the same level of incoming cases,” reports a practice group chair with a long history of providing specialized legal services to one of the country’s leading banks. “In researching the problem, not even our internal contacts could tell us who was now responsible for panel appointment decisions. It took many days to identify the bank’s panel manager and realize that they had decided to favor regional law firms over single-location firms like ours. We ultimately got back on the panel, but it was a very nerve-wracking process.”

Insurance defense law firms also face more routine risks, including:

  • Departure of a partner who leaves with her book of business
  • Retirement of a founding member who served as the primary rainmaker
  • Insurance clients that decide to hire more in-house attorneys
  • Centralization of the insurer’s litigation management team

Risk #3: Lack of Time to Expand the Book of Business

Once approved as outside panel counsel, law firms frequently enjoy a steady stream of cases that arrive at their doorstep with little additional business development effort.

Of course, panel members must perform satisfactorily, maintain good relations, be available around-the-clock for the infrequent (one hopes) emergency and offer billing rates that are attractive to the insurance company.

The challenge is that existing clients, particularly large accounts, can easily consume all available capacity within a law firm, leaving little time for courting new clients.

It is indeed a juggling act to manage the day-to-day requirements of meeting court deadlines and responding to client requests, while also trying to devote time to business development.

Looking at the risks, however, it may be easier to make time for marketing after considering what would happen if you lost one of your largest clients. The loss of a major account could result in lay-offs, as well as possible difficulty making lease and other overhead payments. In an extreme case, a law firm may need to quickly affiliate with another firm, thereby losing its independent status.

Minimize Revenue Risk With a Law Firm Marketing Committee

Insurance defense law firms or practice groups that plan for long-term success may find it helpful to create a marketing committee responsible for establishing panel counsel relationships among a broader range of insurance companies and other entities.

Marketing committee members can address issues like:

  • Where to expand geographically. This can be a difficult question, because it may involve an acquisition or opening an office.
  • Development of new insurance defense skill sets. A firm that handles auto cases may want to expand into related forms of transportation, like trucking, railroads or aviation.
  • Exploration of adjacent market segments. Staying with auto for the moment, law firms could try to create business opportunities with fleet managers or delivery services.
  • Growth in the self-insured market. Many large retail, municipal or corporate accounts self-insure up to a certain level (known as “self-insured retentions”).

The time to start looking for more clients is now! Attracting a new account takes time, so it is advisable to work on business expansion while the firm has a satisfactory level of business already in place.

In Summary

The best defense is a good offense. Paying close attention to existing clients, while maintaining an active business development process, is an effective way to minimize revenue risk in the insurance defense sector.

Start early. Marketing for insurance defense success is a long-term process that benefits from a continuous focus on business development campaigns.

Owner Controlled Insurance Program Liability Claims Challenges, Part 8

This is the eighth article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7, Part 9, Part 10, and Part 11.

Particular Challenges Of Owner Controlled Insurance Program Claims

Uncovered Damages
Under a typical general liability policy, if a claim presented against an “insured” is partially covered by the policy, the insurance carrier issues a reservation of rights. The reservation of rights letter identifies those claims, causes of action, or damages that are not covered by the policy. The insurance carrier also notifies the insured whether it will defend and whether it will allow the insured to use its choice of counsel in doing so. Significantly, however, where the insurance company does not agree to indemnify the insured for all claims and damages, the insured retains the right to pursue other responsible parties to recover those sums. In the liability Owner Controlled Insurance Program, there are two consequences of reserving rights to deny uncovered claims.

First, in underwriting an Owner Controlled Insurance Program, the insurance company hopes to enjoy cost savings by using a limited number of attorneys to defend the enrolled contractors against claims by the sponsor or by a third party. If the carrier reserves its rights to, however, it is possible, and indeed likely, that the enrolled subcontractor will seek recovery from other enrolled subcontractors under indemnity contracts. The indemnity claims a conflict preventing the retention of a single defense counsel. Second, each enrolled contractor has a right to pursue indemnity claims against other enrolled contractors for covered and uncovered claims.

Therefore, in a complex liability claim presented against the general contractor and/or several subcontractors, the insurance company must recognize early the potential for conflict between the enrolled contractors and the likely value of the uncovered claims.

Post Construction Premises Claims
In numerous Owner Controlled Insurance Programs, the sponsors request products-completed operations coverage for a period of time after construction. Premises liability claims arising after construction of the project create a particular challenge to underwriters attempting to limit their risk to construction-related liability. A typical extension endorsement provides coverage for liability occurring after construction and arising out of the construction. Under California and most states’ laws, the term “arising out of” connotes a minimal causal connection between the liability and the construction activities. Acceptance Insurance Company vs. Syufy Enterprises (1999) 69 Cal.App.4th 321. An additional insured endorsement requiring that liability “arise out of” the subcontractor’s work needs only a minimal causal connection between the subcontractor’s work and the liability of the additional insured to trigger coverage.

In a premises liability claim, the claimant alleges that the ground is slippery, uneven, or otherwise defective. In fact, in order to establish liability against the landowner, the plaintiff must establish that the premise is defective in some fashion. Accordingly, it is very likely that a premises liability claim will at least implicate a products-completed operations tail under an Owner Controlled Insurance Program. In large projects where the owner is self-insured, such as large hotels or public entities, it is likely that the only insurance coverage will be the Owner Controlled Insurance Program. An insurer may not seek contribution from its insured nor may it seek contribution against a carrier with a self-insured retention. (Truck Insurance Exchange vs. Amoco Corporation (1995) 35 Cal.App.4th 814.) Accordingly, notwithstanding that there may be both a “condition” component of the loss as well as a “maintenance” component of the loss, there may be a more significant exposure to the Owner Controlled Insurance Program than the underwriters contemplated.

Owner Controlled Insurance Program Liability Claims Challenges, Part 7

This is the seventh article in an 11-part series on Owner Controlled Insurance Programs. Preceding and subsequent articles in this series can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 8, Part 9, Part 10, and Part 11.

Liability Defenses Unique To Owner Controlled Insurance Programs

Waiver of Subrogation/Insurance Clauses
In the construction contract, there will be contractual language relating to the procurement of insurance and the operation of the Owner Controlled Insurance Program. In the context of property damage claims for damage occurring to the project itself, those contracts may articulate defenses available to the enrolled contractors. Two of the most important would be the waiver of subrogation clause and the identification of builders risk insurance.

With regard to the waiver of subrogation, the clause would typically find that the owner, as part of procuring the Owner Controlled Insurance Program, would waive its right to subrogation on behalf of the builders risk carrier against the enrolled contractor. Under this scenario, the builders risk carrier could not satisfy a loss on behalf of the contractor for damage occurring during construction, then turn around and sue the subcontractor causing the damage. (See, e.g., Affiliated FM Insurance Co. vs. Patriot Fire Protection, Inc. (2004) 120 WN App. 1039 (Washington).) In that case, Patriot Fire Protection, Inc., installed a fire sprinkler system at the Owner Controlled Insurance Program insured premises. As part of the Owner Controlled Insurance Program, the builders risk policy issued through Affiliated FM Insurance contained a waiver of subrogation clause. In the subcontract agreement, there was a waiver of subrogation granted in favor of the subcontractors by the owner. The court found in this instance that the builders risk carrier had no rights against the enrolled contractors.

A second contractual defense would exist where the owner promises to obtain builders risk coverage in favor of the enrolled contractors with a set deductible. Under that scenario, the enrolled contractor may be able to assert that the owner’s claims against it are limited to amounts which are not covered by the builders risk policy. Such amounts would include the deductible (which is an uninsured loss) stated in the contract would be the amount, which is not covered by the builders risk policy.

While there are no cases that directly address the second point, the issue arises frequently. The enrolled contractors believe that there is builders risk coverage available and that there will be a set amount deductible. Lack of adequate builders risk coverage creates a number of interlocking questions which will have to be clarified through subsequent case law including:

  1. If the owner changes the builders risk program to a higher deductible and/or more narrow coverage, what are its rights against the enrolled contractors who understood that broader coverage was being provided?
  2. Does a waiver of subrogation condition apply to limit the owners’ claims against enrolled contractors for losses not covered by the builders risk policy or which are within the deductible of the builders risk policy?
  3. If the owner chooses not to present a builders risk claim, may it still pursue a liability claim against the enrolled subcontractor; and what is the effect of the waiver of subrogation clause in that event?

To answer these questions under any particular fact setting, we suggest the following will have to be reviewed by the liability underwriters:

  1. The builders risk policy, to see the terms of the waiver of subrogation clause and/or the deductible clause and named insureds under the policy;
  2. The construction contract and Owner Controlled Insurance Program manual to determine whether there was a mutual intent between the enrolled contractors and the owner concerning risk of loss occurring at the job site; and
  3. The marketing and enrollment documentation, to the extent that the relationship between the owner and enrolled contractors concerning insurance and risk of loss were not spelled out in the contract or insurance policy.

Owner’s Waiver By Using Owner Controlled Insurance Program Contractor For Repairs
One of the most problematic claim scenarios that occurs is that of emergency repairs. When there is a large loss that requires immediate repair, there may be insufficient time to document and present a formal insurance claim. The owner will be inclined to use the contractors already mobilized to repair the damage that they just caused.

In some instances, the owner issues a change order to the enrolled contractor for the increased work that they have performed. Assuming that is the case, what is the legal effect of the change order? Is it an acquiescence or agreement by the owner that the contractor was not at fault? Certainly, it would be a strange claim or lawsuit indeed that has the plaintiff (owner) paying the defendant (contractor) to perform work at the job site caused by the contractor’s negligence. In that event, the plaintiff’s damages would be the amount that they already paid the contractor for the work that was done.

A second problem can occur when the enrolled contractor performs the work as requested by the owner, but the owner then refuses payment. Let us assume that the condition is one that is otherwise covered by the policy and one for which the enrolled contractor is liable. Should the carrier assume that the costs incurred by the enrolled contractor are roughly equal to that which would be paid to an outside vendor and adjust the claim accordingly? Alternatively, should the liability carrier view the claim as one for partial payment by the owner? In this scenario, the subcontractor may enjoy a liability defense to the owner’s claim, since the owner acquiesced to any additional work being performed and agreed to pay for it. Simultaneously, there may be no coverage for the owner for this enrolled contractor’s claim because it is one for contractual damages due under the contract.

The topic of emergencies and emergency repairs must be discussed with the sponsor at the time of the policy issuance. If the parties intend that the contractor should mitigate the damages and repair the loss as quickly as possible while reserving all rights under the liability policy, and modifications to the “Voluntary Payments” conditions, the reporting conditions and the like can be designed into the program. Clearly, however, most carriers will not agree to pay uncovered claims and damages as part of the concession.3

3 For example, we think it unlikely that a carrier would agree that the discovery of defective work constitutes such an urgency, assuming such a condition would not otherwise be the liability of a subcontractor and/or be one for covered damages under the policy.