1. final October 28-29, 2013 LA Downtown Hotel, Los Angeles

2. The Mechanics of Buss and Blue Ridge Actions

3. Larry Beemer, CLMP QBE North America larry.beemer@us.qbe.com Mary Craig Calkins Kilpatrick Townsend & Stockton LLP mcalkins@kilpatricktownsend.com Mari Henry Leigh, CLMP Meckler Bulger Tilson Marick & Pearson LLP mari.henry.leigh@mbtlaw.com

4. Buss v. Superior Court, 6 Cal. 4th 35 (Cal. 1997) An insurer must defend its policyholder against claims that are merely potentially covered, in light of facts alleged or otherwise disclosed. Buss, at 46 (emphasis added). An insurer may only obtain reimbursement for those [d]efense costs that can be allocated solely to the claims that are not even potentially covered. Buss, at 57. An insurer must carry the burden of proof as to these costs by a preponderance of the evidence. And to do that . . . it must accomplish a task that, if ever feasible, may be extremely difficult. Hence, the insurer will probably pursue the matter only in apparently exceptional casesfor example, where the defense costs the insurer may obtain in reimbursement are clear and substantial and where the assets the insured has available for reimbursement are themselves of the same sort. Buss, at 57 (citations omitted).

5. Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489, 505 (Cal. 2001) An insurance company may seek reimbursement for a settlement paid on behalf of an insured even in the absence of the insureds express agreement. Blue Ridge, at 502.

6. Other case law supporting allocation: Johansen v. California State Auto. Assoc., 15 Cal. 3d 9 (Cal. 1975) Insurer can obtain reimbursement of amounts paid to settle on behalf of policyholder, because duty to indemnity is narrower than duty to defend and only exists where there is actual coverage). State Farm Gen. Ins. v. Mintarsih, 175 Cal. App. 4th 274 (Cal. Ct. App. 2009) The contractual duty to defend extends only to those claims for which there is at least potential coverage under the policy, as we have stated. An insurer has no contractual duty to defend the insured as to claims that are not even potentially covered. Mintarsih, at 286 (citing Buss). Scottsdale Ins. Co. v. MV Transportation, 26 Cal. 4th 643 (Cal. 2005) [A]n insurer, having properly reserved its rights, may advance sums to defend its insured against a third-party lawsuit, and may thereafter recoup such costs from the insured if it is determined, as a matter of law, that no duty to defend... Scottsdale, at 662 (discussing Buss).

7. Case law rejecting recoupment absent an express agreement: General Agents Ins. Co. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005). As a matter of public policy, we cannot condone an arrangement where an insurer can unilaterally modify its contract, through a reservation of rights, to allow for reimbursement of defense costs in the event a court later finds that the insurer owes no duty to defend. General Agents, at 1102. Shoshone First Bank v. Pacific Employers Ins. Co, 2 P.3d 510 (Wyo. 2000). Recognizing that in other jurisdictions allocation is allowed between the insurer and the insured, we eschew this theory, and hold that unless an agreement to the contrary is found in the policy, the insurer is liable for all of the costs of defending the action. Shoshone, at 514.

8. Buss =Defense---------BlueRidge = Indemnity The How To Issues: Preservation of rights Initial Reservation of Rights Letters should be completed as soon as possible (generally within 60 days of receiving the claim or suit). Certain cases due to their nature may take more time. The Reservation or Rights or Partial disclaimer of coverage should detail as many facts as possible. A thorough investigation to obtain the relevant facts is essential. FACTS ARE STUBBORN THINGS John Adams The Reservation letter must be specific to the causes of action in the lawsuit and relating the facts and coverage to them. Simply reserving to the entire policy will not work. Identification of covered vs. uncovered claims Initially the identification of covered vs. uncovered claims may be difficult. As more facts are developed, the Reservation or Partial Disclaimer should be updated.

9. Buss =Defense---------BlueRidge = Indemnity The How To (continued): Create a paper trail advising the insured constantly of the coverage issues and the right to reimbursement. Early in the case try to work out an allocation with the insured. The insured and carrier need to consider the overall economic outcome by working out an early allocation. In a Buss situation if the matter cannot be resolved early, the carrier should consider the retention of counsel who is an expert in legal bill review.

10. How a Legal Fee Expert Can Assist the Parties by Providing Helpful Data on Defense Costs Defense Costs Allocation Methodologies Excess of Costs Carrier is required to show but for the uncovered claims the defense costs would not have been as large; carrier allowed to recoup the excess over costs to defend covered claims. Buss, 16 Cal 4th 35 (1997). Fair Share or Equitable Allocation The lack of scientific certainty [in allocation] does not justify imposing all of the costs on the insurer by default. The legal system frequently resolves issues involving considerable uncertainty. We presume that the insurer and insured can negotiate a satisfactory settlement that fairly apportions the defense costs. When they are unable to agree, we likewise presume that our courts will be able to analyze the allegations in the complaint in light of the coverage of the policy to arrive at a fair division of costs. SL Industries, Inc. v. American Motorists Ins. Co. , 128 N.J. 188 (1992).

11. How a Legal Fee Expert Can Assist the Parties By Providing Helpful Data on Defense Costs Fees Research, $12,296 Settlement, $2,604 Strategy/Status, $29,514 Trial, $2,291 Appeal, $3,091 Pre-Litigation, $1,015 Discovery, $184,226 Pleadings, $18,958 General Counsel, $88,775 Motions, $331,693 Vague *, $8,180 Management, $28,226 Non-Defense/Ins., $27,380 Investigation, $21,136

12. How a Legal Fee Expert Can Assist the Parties by Providing Helpful Data on Defense Costs All Motions Activity Motion for Summary Judgment on Intentional Conduct 475 120 Motion to Bifurcate Fraud Claims 72 Motion to Dismiss Fraud Claims 0 100 200 300 400 500

13. How a Legal Fee Expert Can Assist the Parties by Providing Helpful Data on Defense Costs: Clearly Covered Clearly Uncovered Mixed Vague

14. How a Legal Fee Expert Can Assist the Parties with Cumis Rates Average Actual Rates Charged vs. Average Rates Typically Paid by Carriers $458 $351 Senior Partner $210 Average Rates Paid by Carrier $405 Junior Partner $315 $190 $345 Average IP Rates Published by Survey $272 Senior Associate $158 $235 Associate Average Rates Charged by Counsel $197 $143 $155 Paraprofessional $0 $129 $70 $100 $200 $300 $400 $500

15. In Blue Ridge the carrier should consider a consistent approach to handle the matter properly Evaluate the suit for settlement. When defending the insured, can the company achieve a reasonable settlement? Analyze the reasonable value of the case for settlement while not considering coverage. To be reasonable, the tenents of the proposed settlement should be more favorable to the insured than the likely judgment if the case goes to trial. Remember Johansen Make a reasonable settlement offer. If the carrier wants to seek reimbursement of uncovered damages the company can settle but must give the insured timely notice of its intent to resolve the claim and seek reimbursement.

16. Advise the insured in writing of your intent to accept the settlement offer. Again, in writing, reserve your right to seek reimbursement for non-covered claims pursuant to Blue Ridge. If the insured does not agree to the settlement notify the insured of the option for it to assume its own defense. Once the case is resolved, again, write the insured seeking reimbursement. Consider mediation, or some form of ADR or limited litigation proceeding.

17. Burden of proof: The burden is the preponderance of the evidence standard and the insurer bears the burden Insureds may argue the carrier must show that costs were not reasonably related and/no greater than otherwise would have been incurred in the defense via the Larger Settlement Rule: Safeway Stores v. National Union Fire Ins. Co., 64 F.3d 1282, 1289 (9th Cir. 1995) (Safeways defense costs are reasonably related to the defense of its officers and directors in the class-action suits and are therefore fully covered by the D&O policy.); Raychem Corp. v. Federal Ins. Co., 853 F. Supp. 1170, 1182 (N.D. Cal. 1994) (allocation refused where all defense costs were reasonably related to the defense of a covered claim).

18. Insureds will raise same arguments on burden of proof for recovery of settlements: Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d 955, 964 (7th Cir.1995) (insurer may attempt to allocate settlement, but only to "the extent which the settlement was larger because of claims against uninsured persons . . . . " ). See, also, Nordstrom, Inc. v. Chubb & Son, 54 F.3d 1424, 1432 (9th Cir. 1995). Insurers will argue that insureds should bear the burden of proof to allocate between covered and nonconvered claims where insured controlled the defense because the insured typically would have better access to information. Federal Ins. Co. v. Hawaiian Electric Indus. , No. 94-00125, 1996 U.S. Clackamas County v. Midwest Employers Cas. Co. , No. CV 07-782-PK, 2009 Dist., LEXIS 22804 (D. Haw. Oct. 27, 1996). U.S. Dist., LEXIS 118195 (D. Or. Oct. 8, 2009).

19. A Frequently Asked Question: Cumis counsel issues and controlling the defense [W]here there are divergent interests of the insured and the insurer brought about by the insurer's reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured. San Diego Navy Federal Credit Union v. Cumis Ins. Soc., 162 Cal. App. 3d 358, 375 (1984).

20. Other Frequently Asked Questions: Does a reservation of recoupment rights implicate bad faith issues? When can you bring a recoupment action? See Montrose Chemical Corp. v Superior Court, 6 Cal. 4th 287, 24 Cal. Rptr. 2d 467, 861 P.2d 1153 (1993). (A stay of the declaratory relief action pending resolution of the third party suit is appropriate when the coverage question turns on facts to be litigated in the underlying action.) Who and what cases are most susceptible to recoupment?

21. Is the juice worth the squeeze, i.e., does the amount in controversy exceed transactional costs of litigation and reallocation of non-economic resources? Is the insured solvent and capable of repayment? Is there an alternate means of resolving the recoupment issues?

22. Larry Beemer VP, Claims Management Litigation &Specialty Claims QBE North America/Irvine, CA (949) 222-7482 larry.beemer@us.qbe.com Mary Craig Calkins Partner, Kilpatrick Townsend & Stockton LLP/Los Angeles (310) 777-3720 mcalkins@kilpatricktownsend.com Mari Henry Leigh Partner, Meckler Bulger Tilson Marick & Pearson LLP/Chicago (312) 474-7133 mari.henry.leigh@mbtlaw.com