Coverage Disputes: How Ugly Can They Get? September 16, 2015 11:00 a.m. – 12:15 p.m.

1. Coverage Disputes: How Ugly Can They Get? September 16, 2015 11:00 a.m. – 12:15 p.m. 2015 FALL CONFERENCE & TRAINING SEMINAR

2. Important Considerations • Ensure the coverage and exclusions represent what the members want • Acknowledge the conflict of interest • Balance sympathy with guidelines • Consider all interests (reinsurers, pools, individual members) 2015 FALL CONFERENCE & TRAINING SEMINAR

3. Legal Framework • Dearth of JPA-specific cases • Paradox of applying insurance law principles to JPAs • Lack of understanding that an MOC is NOT a contract of adhesion 2015 FALL CONFERENCE & TRAINING SEMINAR

4. Preventing Disputes • Pre-existing relationships with the members • Importance of partnership • Coverage letter advisability/content • Communication • Before a coverage letter is sent • Importance of conversation • Crystal ball 2015 FALL CONFERENCE & TRAINING SEMINAR

5. What to look for… Governing Documents Other documents Individual member underlying insurance policies • Resolution Process • Arbitration • Courts • Internal process • Types of damages that may be recovered • Jurisdiction 2015 FALL CONFERENCE & TRAINING SEMINAR

6. Who should represent the JPA? • JPA counsel vs. outside coverage counsel • Considerations • Has the person handled coverage disputes? • Is there a conflict of interest? • Was JPA counsel involved from the start? 2015 FALL CONFERENCE & TRAINING SEMINAR

7. Dispute expense issues • Governing documents must be clear regarding cost allocation of coverage disputes • Allocation of losses involving multiple members • How are expenses for claims which include covered v. non-covered issues handled/allocated? • Financial statements • Claim loss runs 2015 FALL CONFERENCE & TRAINING SEMINAR

8. Need for change Before dispute… After dispute… Review the dispute resolution process Propose revisions to governing documents if necessary Educate Boards, committees, members • Educate Boards, committees, members • Ensure the dispute resolution process is effective and efficient • Review the policy with the reinsurers, coverage committees, Board 2015 FALL CONFERENCE & TRAINING SEMINAR

9. Case Study #1A - Background • State building freeway • City wanted a section to be below grade to allow enhanced views. • County agreed to undertake the management of a drainage construction to reroute water flows. 2015 FALL CONFERENCE & TRAINING SEMINAR

10. Case Study #1A - Background • The result funneled the water to a drain which would empty onto contractor’s property, being developed for housing. • County believed that 60-year old easements enabled them to use the property for this purpose. 2015 FALL CONFERENCE & TRAINING SEMINAR

11. Case Study #1A - Issues • Is there an occurrence? If so, how many occurrences? Water was funneled where it was directed, and no subsequent PD occurred. • Does the inverse condemnation exclusion apply? If so, does the exception to the exclusion apply? • Several members of the BOS allegedly accepted bribes to vote for the settlement of the litigation. Does that invalidate the agreement? 2015 FALL CONFERENCE & TRAINING SEMINAR

12. Case Study #1A - Issues • A ROR was issued. The County proceeded with the litigation and settlement without express approval. • Does this invalidate coverage? • The pool did not participate in any settlement meetings despite being invited. Did this constitute waiver? 2015 FALL CONFERENCE & TRAINING SEMINAR

13. Case Study #1A – Lessons Learned • Arbitration with judges does not necessarily result in full education of the JPA process, difference with insurance • Rules of evidence differ – can be good and/or bad • What is the purpose of a confidentiality agreement? • Allegations can be different in different proceedings. Again, confidentiality agreement may interfere. 2015 FALL CONFERENCE & TRAINING SEMINAR

14. Case Study #1A – Lessons Learned • Clarify whether different levels of coverage have same or different policy terms, definitions. Clarify scope of hearing. • MOC: Occurrence and inverse condemnation definitions were reviewed and revised 2015 FALL CONFERENCE & TRAINING SEMINAR

15. Case Study #1B - Background • Private developer sued Flood Control District. • Developer’s case essentially was for inverse condemnation and did not specifically allege “property damage.” • District eventually settled and sued City for indemnity for amounts it had paid in settlement. • Settlement agreement defined the types of damages sought against the City. 2015 FALL CONFERENCE & TRAINING SEMINAR

16. Case Study #1B - Background • City tendered to JPA, and coverage was denied. • City appealed to Board of JPA, and denial was upheld. • City then sued in Superior Court for declaratory relief and “bad faith.” 2015 FALL CONFERENCE & TRAINING SEMINAR

17. Case Study #1B - Issues • Leave in court or enforce MOC arbitration clause? • Who represents JPA? – considerations. • Arbitrator selection process – considerations. • Fighting coverage issues – when to “hold ‘em and when to fold ‘em.” 2015 FALL CONFERENCE & TRAINING SEMINAR

18. Case Study #1B - Issues • Can the “extrinsic” evidence of the settlement agreement be considered? • The challenge of convincing arbitrator that this is not an insurance case. • Does the “any potential” insurance standard apply to considering the duty to defend under an MOC? • What recovery is available against a JPA? 2015 FALL CONFERENCE & TRAINING SEMINAR

19. Case Study #1B – Lessons Learned • Choose your battles – is this coverage dispute going to cause more harm than benefit to JPA? • Advantages to court process over arbitration process • Reconsider arbitration provision in MOC • Consider clearer duty to defend language in MOC • Consider MOC language limiting remedies and recovery in coverage dispute 2015 FALL CONFERENCE & TRAINING SEMINAR

20. Case Study #2 - Background • City installed a sewer pipeline in an area with new condo construction. • There was an omission in the construction which allowed gases to seep upwards through the system, causing noxious odors and eroding the upstream pipes. • After investigation, it was determined that a pollution policy seemed to cover this. • The pollution policy had a timely reporting requirement, and had New York law as applying to contractual disputes. 2015 FALL CONFERENCE & TRAINING SEMINAR

21. Case Study #2 - Issues • Was there late notice? • What constituted late? • If so, was there prejudice? • Did it matter (New York law, at the time, did not use prejudice as a determination of whether the late reporting condition would apply)? 2015 FALL CONFERENCE & TRAINING SEMINAR

22. Case Study #2 – Lessons Learned • Insurance documents for Members with only California exposure must have California jurisdiction for coverage disputes. • Need understanding of the coverage issues • Need court of jurisdiction to understand and apply California laws 2015 FALL CONFERENCE & TRAINING SEMINAR

23. Case Study #3 - Background • School uncovered a teacher had been molesting students over a two-year period, five students in all. 2015 FALL CONFERENCE & TRAINING SEMINAR

24. Case Study #3 - Issues • How many occurrences does this constitute? • Reinsurance coverage changed between the two periods. Which reinsurer applies? • Reinsurance policy had exclusion for molestations if officials of the district were aware of the issue. The principal was advised, but investigated and felt there was no substance. Does this exclusion apply? 2015 FALL CONFERENCE & TRAINING SEMINAR

25. Case Study #3 - Issues • District had a $1 million SIR, and purchased an underlying policy to cover $750,000 above $250,000. • That policy did not have similar occurrence language and, in fact, has language which indicates each molestation claimant is a separate application of coverage. 2015 FALL CONFERENCE & TRAINING SEMINAR

26. Case Study #3 - Issues • District had a $1 million SIR, and purchased an underlying policy to cover $750,000 above $250,000. • How many policy limits may apply for underlying insurer? How many SIRs for District? For any monies from underlying carrier, how does the amount above the $1 million SIR get allocated between pool and Reinsurer? 2015 FALL CONFERENCE & TRAINING SEMINAR

27. Case Study #3 – Lessons Learned • Consider the MOC “Other Coverage” clause. • Worked against the pool and in favor of reinsurer • Specify in reinsurance agreement who is responsible for coverage interpretation • Reinsurer kept raising coverage issues that pool had dismissed 2015 FALL CONFERENCE & TRAINING SEMINAR

28. Case Study #4 - Background • City experiences a sinkhole on July 3, after a MOC renewal July 1. The new MOC had a $5 million SIR. The prior MOC had a $2 million SIR. There are allegations of property damage, diminution of value for non-damaged homes, and emotional distress. 2015 FALL CONFERENCE & TRAINING SEMINAR

29. Case Study #4 - Background • There are also allegations there had been some minimal movement prior to the MOC inception, resulting in some cracking in some homes. The subsidence exclusion only applies to property damage. 2015 FALL CONFERENCE & TRAINING SEMINAR

30. Case Study #4 - Issues • In which period(s) does coverage apply (for the emotional distress claims)? Which SIR(s)? • The Damages indicated are significantly greater for property damage than for BI. • The matter was bifurcated as to liability before dealing with damages. City won the liability case. • Defense costs totaled $7 million. How much, if any, is reimbursable (how do you allocate defense costs between covered and uncovered damages)? 2015 FALL CONFERENCE & TRAINING SEMINAR

31. Case Study #4 – Lessons Learned • Need language as to how to pro rate defense costs between covered and non-covered damages claims. • Get involved early to oversee the defense cost incurrence • Opportunity to compromise case? 2015 FALL CONFERENCE & TRAINING SEMINAR

32. Case Study #5 - Background • City and RDA sued by private developer for breach of contract, promissory estoppel, intentional interference with contract. • Coverage denied – all arises out of contract and/or acts alleged were intended to cause damage. • City disputed denial, appealed to Board, denial upheld. 2015 FALL CONFERENCE & TRAINING SEMINAR

33. Case Study #5 - Background • City argued intentional interference with contract was a tort and did not itself arise out of a contract to which the City was a party, since the contract was with the RDA. • City insisted it did not intend any damage – but never explained why even through appeal process and into arbitration. 2015 FALL CONFERENCE & TRAINING SEMINAR

34. Case Study #5 – Background • As revealed only through depositions in the arbitration process, the City knew that the developer was withdrawing from the project before the City sent its termination letter, and that the plaintiffs were fraudulently representing themselves as authorized to act for the developer. • None of this was communicated to JPA. 2015 FALL CONFERENCE & TRAINING SEMINAR

35. Case Study #5 – Background • After a settlement was reached in mediation, City insisted that the settlement payment was not payment of a “claim,” and therefore should not count as part of the City’s loss history for purposes of assessments. 2015 FALL CONFERENCE & TRAINING SEMINAR

36. Case Study #5 - Issues • Duty of member to convey pertinent information to JPA. • What is the nature of a payment made in settlement of a coverage dispute? 2015 FALL CONFERENCE & TRAINING SEMINAR

37. Case Study #5 – Lessons Learned • Coverage disputes between a member and the JPA should be kept as non-adversarial as possible. • Consider MOC language on duty to share all relevant information at all stages. • Consider MOC language on character or nature of payments made to settle coverage disputes. 2015 FALL CONFERENCE & TRAINING SEMINAR

38. Questions? Thank you! 2015 FALL CONFERENCE & TRAINING SEMINAR

39. Speakers • Jack Blyskal, President • JB Consulting & Training • (916) 704-2467 • prinscoo@aol.com • Luther Lewis, Shareholder • Johnson Schachter & Lewis, A PLC • (916) 921-5800 • Luther@jsl-law.com 2015 FALL CONFERENCE & TRAINING SEMINAR