Tag Archives: reservation of rights

Nursing Home Insurance: Are Your Policy Limits Wasting Away?

Over the last 15 years, the nursing home industry has seen substantial changes in the liability insurance markets. At one time, insurers looked at the elderly population in nursing homes using traditional measures of damages like lost income and concluded that the industry was a risk worth insuring. The tidal wave of elder abuse litigation that drove sky-high verdicts changed the insurance landscape dramatically, resulting in a dearth of available coverage and forcing many nursing home entities to become self-insured. Insurance carriers are once again writing policies for the nursing home industry, but with significant changes in how limits of insurance work under some new Nursing Home Liability forms.

Nursing home policies typically combine a Professional Liability policy with a Commercial General Liability policy with limits set for an individual case or claim and an aggregate limit for the facility or company. The policies are written in a way to make sure a claim is covered under either the professional liability side or the commercial general liability side of the policy, but never both. For example, a policy might have a $3M aggregate and a $1M per claim limit. This means that no claimant can ever recover more than $1M on the policy, but the company's overall coverage does not exhaust until all $3M has been paid out. Traditionally, Commercial General Liability policies paid for an insured's defense outside of the per claim or aggregate limit. In other words, a $1M limit could only be exhausted by paying out that sum to a claimant. There was no limit on defense costs at all, which frequently put pressure on carriers to settle cases.

Many of the newer policies for nursing homes are now being written on a “wasting” form where defense costs erode the stated limits of the policy. This means that the insurance company has now capped its liability at $1M per claim, which includes both defense costs and any money paid to settle the case or satisfy a judgment. The effects of this change are profound. Nursing home entities and their defense counsel need to reconsider their limits and how they choose to defend claims. The prospect of an expensive defense no longer concerns insurers the way it used to. Now insureds have to worry about that instead.

If you are involved in risk management for a nursing home entity, you need to know whether or not your liability policy includes defense costs within the stated per claim limit. If it does, you have what insurance lawyers refer to as a “wasting” policy. The following examples demonstrate the way a wasting policy is different from traditional Commercial General Liability policies.

Example 1:
Suit Filed — General Negligence. Taking the case to trial results in Defense Costs of $500,000 and a Verdict for $1,000,000 Standard Commercial General Liability Policy with $1M per claim limit pays all defense costs incurred and the jury verdict. Insured would be responsible for paying any deductible or self-insured retention.

Example 2:
Suit Filed — Professional Negligence. Taking the case to trial results in Defense Costs of $500,000 and a $1M Verdict Commercial General Liability “Wasting” Policy with defense costs eroding limits. Insurance carrier pays $500,000 in defense costs and $500,000 towards the jury verdict. Nursing home is liable for remaining $500,000, as well as any deductible or self-insured retention.

As Example 2 demonstrates, if you have a wasting policy, a $1M per claim limit will be reduced by costs incurred to defend the case. Under a traditional Commercial General Liability policy, the insured could afford to take an aggressive stand in litigation and try to wear down plaintiff's counsel through use of extensive discovery, filing motions for summary judgment and even taking an appropriate case through trial. After all, the aggressive defense was being paid for by the insurance carrier, not the insured nursing home. Under a wasting policy, this litigation strategy can be disastrous. A nursing home could end up spending almost its entire limit defending a serious case, only to end up funding a large settlement or verdict out of its own pocket.

A wasting policy also has significant implications for defense counsel. Normally, insurer-appointed defense attorneys never want to get involved in questions regarding insurance coverage. They cannot afford to alienate the insurers that hire them as panel counsel, so they only want to focus on defending the underlying case. When defense costs are outside of limits, avoiding all things insurance is a safe course for appointed defense counsel. All of this changes, however, when you have a wasting policy because every dollar the lawyer spends on defense will not be available for settlement. It is imperative to know at the outset of a case if you have a wasting policy. If it is, liability needs to be assessed quickly and realistically in order to preserve as much of the limits as possible for settlement. Failure to do so may result in unfortunate consequences.

Nursing home insureds are also frequently defended under a reservation of rights from their insurer that may entitle them to hire independent counsel at the insurer's expense. Whether or not you are entitled to independent counsel based on a given reservation of rights is beyond the scope of this article, but risk managers for nursing homes need to know that insurers issuing wasting policies will take the position that the cost of independent counsel will also come out of the available limit. Therefore, requesting independent counsel who bills at a higher rate than counsel assigned by an insurer can have the unfortunate effect of depleting limits even faster.

Nursing home entities also need to consider the impact of wasting limits on the aggregate limit covering all claims in a given policy year. Where defense costs erode both individual claim and aggregate limits, a nursing home entity could successfully defend a number of cases and pay out no money whatsoever in liability, but still exhaust all available insurance coverage. For instance, a company with a $3M aggregate limit could successfully defend five cases to verdict at a cost of $600,000 per trial and have no remaining insurance whatsoever. While that example may seem unlikely, you have to look at your own company's claims experience to consider what type of limits are appropriate if you have liability coverage written on a wasting form.

Recommendations
Risk Managers should review all pending litigation and the policies that are covering those claims to determine whether or not defense costs are eroding limits. Talk with your broker about what types of liability coverage are currently available in the market. If you can purchase policies with defense costs outside of limits, that may be worth paying a higher premium. If your broker can only find insurers willing to write liability insurance on wasting forms, revisit your per claim and aggregate limits with your broker to determine if you are adequately covered.

If the thought of actually reading an insurance policy is too painful to contemplate, hire coverage counsel to do it for you. Of course, this assumes you have a copy of your policy. In many cases, brokers bind coverage and the policy is not issued for months. If you are about to purchase a new policy, make sure your broker confirms the type of policy form it will be issued on. Once the policy arrives, make sure it is what you were promised. Finally, if your liability insurance is written on a wasting form and you do get sued, have a frank discussion with your defense counsel at the outset of the case before significant defense costs are incurred. Get a budget and a liability assessment as soon as possible. If you don't, the financial consequences could be painful indeed.

Slumlord Must Repay Insurer for Settlement Contribution

Insurers Should Never Allow Slumlord to Profit From Bad Acts
In Axis Surplus Insurance Company v. Reinoso No. B228332 (2012) WL 2389324) an insurer, under a full reservation of rights, including the right to recover any costs of defense or settlements paid, defended Edgar and Linda Reinoso from claims by their tenants. Evidence, as the defense progressed clearly established that the Reinosos operated rental properties in a manner that allowed infestations of insects, vermin, and rats. Mr. Reinoso had pleaded no contest to at least two charges about properties he owned and was classified as a “slum lord.”

Ultimately, the tenants settled their claims against the Reinosos and their management company, Proud American, for over $3 million, with Axis contributing over $2 million under a reservation of rights.

Axis sued the Reinosos and Proud American for reimbursement of defense and settlement costs, based on the policy’s exclusion for injuries that were “expected or intended from the standpoint of the insured.” The trial court awarded Axis recovery of its $2 million+ settlement contribution, concluding that Axis had proven that the tenants’ claims were not actually covered.

The California Court of Appeal affirmed the judgment allowing Axis reimbursement of its settlement contribution and found wanting Mrs. Reinoso’s argument that she was an “innocent” insured and that the exclusion for “expected or intended” injuries thus did not apply to her.

Since an insurer only has a duty to indemnify the insured for covered claims, and no duty to pay for non-covered claims because the insured did not pay premiums for such coverage, and since both Reinosos owned and operated the apartment complex in a manner that damaged their tenants and profited from the operation of the apartments Mrs. Reinoso was not innocent of the charges made by the tenants. Since evidence showed that Linda had a sufficient benefit from the settlement such that not to allocate to her joint and several liability to the insurer of the full amount paid by the insurer to settle the Tenant Action the Court of Appeal concluded would amount to unjust enrichment.

Mrs. Reinoso was a co-owner of the property in question with Edgar, and the property was held as community property. She participated in the management of the property. Defendants in a joint venture are jointly and severally liable for non-economic damages whatever their respective interests in the joint venture. Moreover, Linda’s community property interest would be liable for obligations in connection with the property. Faced with exposure of many millions of dollars, perhaps up to $30 million, and punitive damages, Linda received the full benefit of the settlement.

The Court of Appeal agreed with the trial court that the insurer was entitled to reimbursement of the amounts it contributed to the settlement.

Conclusion
When defending a case under a reservation of rights it is imperative to, as did Axis, properly reserve rights to contribute to a settlement. If done properly it is imperative that the insurer then file suit to recover the amounts paid if the insured will not voluntarily pay.

To do so, the Court of Appeal noted, that the insurer must create and deliver to the insured:

  1. a timely and express reservation of rights;
  2. an express notification to the insureds of the insurer’s intent to accept a proposed settlement offer; and,
  3. an express offer to the insureds that they may assume their own defense when the insurer and insureds disagree whether to accept the proposed settlement.

Axis did so, and all insurers considering paying a settlement in a case where there is no coverage for indemnity should follow the recommendation.