Thursday, March 23, 2006

Throwing Loaded Dice

One underappreciated overreach routinely engaged in by insurance companies is the practice of buying away adverse court decisions to manipulate the development of insurance coverage law.

Through the frequent use of vacatur (a.k.a. “buying and lying”), insurance companies have paid large dollars to wipe out case law that could hurt their bottom line.

In this way, insurance companies are able to erase the ‘bad’ decisions while retaining the ‘good’ ones, allowing them to relitigate the same issues with a loaded die.

One of the most popular mechanisms for this practice has historically been for the insurance companies to offer claim settlements with their policyholders that are explicitly conditioned upon the court vacating and withdrawing the adverse rulings. This scheme, where it succeeds, eradicates pro-policyholder case law and enables insurance companies to shape the insurance law war despite losing the courtroom battle. See Jill E. Fisch, Captive Courts: The Destruction of Judicial Decisions by Agreement of the Parties.

Thus, contrary to insurance company assertions, the true “majority of the courts” may not be on the law books for many important issues because reported court decisions do not accurately reflect the full range of outcomes. As the Colorado district court once observed:
[V]acatur becomes an important litigation tool, particularly for institutional litigators who must return to court many times with the same arguments. When a court rejects the arguments of institutional litigators such as [the defendant], an insurance company, the institutions are dealt a crippling blow not only in the case at bar but in future litigation. Vacatur allows disappointed litigators effectively to rewrite history. Vacatur allows them to control the direction and content of the jurisprudence — to weed out the negative precedent and preserve the positive — and create an artificially weighty and one-sided estimate of what comprises “the case law.”

While attorneys representing the insurance industry may claim that vacatur supports settlement, nothing could be further from the truth. As many courts and commentators have observed, an insurance company which wishes to avoid an adverse precedent need only settle before a decision is rendered. Moreover, parties which expend vast resources litigating an issue to decision, only to negotiate on appeal, are in effect seeking only an “advisory opinion” from the court, wasting precious judicial resources. Instead, as stated by Judge Kleinfeld, dissenting on the Ninth Circuit, “[t]he public’s interest is in settlement before all the work is done.”

Another insurance company tactic is to settle with a policyholder despite an insurance company’s win. This is done to prevent policyholders from appealing a decision favorable to the insurance company, thereby foreclosing any chance of reversal and allowing the entire insurance industry to cite the decision as positive precedent for years to come.

This is precisely what occurred in a case in the Western District of Washington involving the critically contested issue of whether CERCLA-mandated environmental cleanup costs are damages covered under a standard CGL policy. There, the district court ruled in favor of the insurance company and found that cleanup costs were *not* covered as damages under a comprehensive general liability policy. However, at the time that the parties entered the settlement agreement, the insurance company knew that two Washington state courts had ruled the other way. Moreover, it was reported that the judge had told the parties that he wished to reconsider his opinion in light of those decisions. Following these developments, Travelers decided to pay “a substantial amount to freeze the decision as precedent.” It was not until two years later that the Washington Supreme Court halted insurance company defendants from “primarily” relying on the vacated decision.

Despite the eventual setback to the insurance industry, it is clear that this strategy was a “success”: until the district court's decision was rejected by the Washington Supreme Court, the decision was cited at least a dozen times by other courts.

The Supreme Court finally addressed this issue in 1994, in a case titled U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, holding that “mootness by reason of settlement does not justify vacatur of a judgment under review,” although “exceptional circumstances may conceivably counsel in favor of such a course.” The Court recognized vacatur to be an “extraordinary remedy” which must take account of the public interest:
Judicial precedents are presumptively correct and valuable to the legal community as a whole. They are not merely the property of private litigants and should stand unless a court concludes that the public interest would be served by a vacatur.
Nor was it lost on the Court that:
[W]hile the availability of vacatur may facilitate settlement after 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 . . . if, but only if, an unfavorable outcome can be washed away by a settlement-related vacatur.

Despite the clarity of the Court’s language, there should be no mistake that the insurance companies’ campaign to limit unfavorable law has continued to the present day, wherever possible. For example, a Texas appellate court held that Bonner Mall “is not binding precedent because the issue decided was one of federal procedural law” and as such “does not apply to state courts’ application of state procedural law.” Texas decisions continue to support this rule. The Wisconsin Supreme Court signaled its agreement in Mason Shoe Mfg. v. Firstar Bank Eau Claire, NA. Similarly, California continues to follow its earlier precedents allowing vacatur following parties’ settlement, as noted in Morrow v. Hood Commun., Inc.

On the whole, however, vacatur does appear to have declined in popularity since the Supreme Court decision in Bonner Mall. At the same time, though, another threat to favorable law for policyholders—unpublished, non-citable decisions—are on the increase. See Eugene R. Anderson, et al., Out of the Frying Pan and Into the Fire: The Emergence of Depublication in the Wake of Vacatur, 4 J. App. Prac. & Process 475 (Fall 2002) (“It is estimated that eighty percent of the cases decided by federal appellate courts take the form of "unpublished" decisions.”). In many courts, these decisions are given no precedential effect, and may *not* be used by attorneys to support their arguments.

This practice — and the remaining gasps of improper vacatur — will continue to distort insurance law decisions for years to come.

(adapted and revised from Anderson Kill articles and court submissions)

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