Insurers Also Do Wrong
Law firms Wiley Rein and Coughlin Duffy, two law firms and the insurer they represented, Zurich American Insurance Companies, have been assessed $1.25 million in sanctions by Southern District of New York Judge Alvin Hellerstein. The basis for the sanctions started when the judge learned that:
On the day of the terrorist attacks, Zurich’s chief underwriter for the United States, Mary Merkel, asked her assistant to print a copy of the then-existing primary policy from the computer system Zurich uses to generate its policies. She retained the print-out, a 62-page document (the "9/11 Document"), in her files in Schaumberg, Illinois. The 9/11 Document, and the specific wording of the endorsements that were part of the 9/11 Document, contradict Zurich’s contention that the Net Lessees, excepting Westfield, were not Named Insureds under the Policies. In particular, the 9/11 Document contained a "Broad Form Named Insured" endorsement that listed as named insureds:
World Trade Center Properties, LLC c/o Silverstein Properties, Inc. and any subsidiary company as now formed or constituted, and any other company over which the named insured has active control so long as the named insured or any subsidiary company has an ownership interest of more than 50% of such company.
Just four days after Brunner's instruction to destroy nothing was issued, Zurich underwriter Lynn Maier sent an e-mail to two assistants and her supervisor saying, " As per our conversation, please confirm ASAP, that the old version of the policy has been deleted from the Document Library and replaced with the final corrected policy. This information needs to be relayed to the ... home office."
In March 2003, Zurich’s attorneys took possession of the 9/11 Document, or a copy, from Mary Merkel’s office. The document was not produced until February 18, 2005, after depositions had been completed and following pointed inquiries by opposing counsel, following up trace references in other of Zurich’s productions.
By signing, filing, or otherwise representing to the Court that something is or is not so, the attorney certifies that he has complied with each of the foregoing obligations to the best of his knowledge, information, and belief, formed after an inquiry reasonable under the circumstances. If, after notice and an opportunity to respond, the court determines that an attorney has not complied with his obligations set forth in Rule 11(b), it may impose an appropriate sanction on the attorney, law firm, or party that violated or is responsible for the violation.
The court reasoned:
A baseless factual contention poses a greater threat to justice than a baseless legal contention. The evidentiary foundation upon which an attorney rests his assertions of fact is, for the most part, exclusively within the control of the attorney and his client. In order to function, the court must repose trust in the attorneys who come before it to make factual representations supported by evidence. The legal process contemplates and requires that when the time comes for a judge or jury to find facts, both sides will have legally sufficient evidence to present in support of those facts. In a complex case, baseless factual contentions can delay the time for presentation of evidence to the fact-finder for years, at an expense running into the millions of dollars. An attorney who abuses the trust of the court in this manner, and who causes such delay and needless expense thereby, should be penalized. In contrast, a misstatement of law is much more easily remedied, by the adverse party’s research, or the court’s own research.
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Zurich denied that the Port Authority was entitled to Additional Insured status, arguing that because the only Named Insured on the policy binder was WTCP, and because the Port Authority did not lease the World Trade Center to WTCP, but rather to the Net Lessees, the endorsement providing additional insured coverage to the "lessor" did not extend coverage to the Port Authority.
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Simply put, Zurich’s position made no sense, because the parties would not have agreed to insure a holding company with no operations and no direct holdings, without an understanding and intent to insure the subsidiary entities that would actually be exposed to premises liability. See Hametz Decl., Ex. 7 (deposition testimony of Zurich employee Mark Elias). Nor has Zurich offered any evidence to the contrary, arguing not that it was right, but that in the absence of evidence, the Port Authority could not prove it was wrong. This approach shielded Zurich from judgment on Port Authority’s motion for judgment on the pleadings, but it will not suffice under Rule 11. The Port Authority’s motion for sanctions pursuant to Rule 11, Fed. R. Civ. P., is GRANTED.
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I impose Rule 37 sanctions in the amount of $500,000. Of this amount, $250,000 shall be payable to the Port Authority, and $250,000 to Westfield, to defray the costs they unreasonably incurred in the wasted discovery proceedings. The sanction is imposed jointly and severally against Zurich, Wiley Rein LLP, and Coughlin Duffy LLP, subject, as with the Rule 11 sanction, to review and re-allocation at the request of any of them. The sanction is additive of the sanction imposed pursuant to Rule 11, for a total sanction of $1,250,000.
It was "clearly important," and "not the type of document that becomes lost without a trace," Hellerstein wrote in In re September 11th Liability Insurance Coverage Cases, 03 Civ. 332. The discovery abuses also concealed that Westfield Corporation, a major retailer at the site, was one of the "additional insureds" that Zurich was obligated to cover under its policies with Silverstein.
"Zurich's 'culpable state of mind' is established by evidence that it intended to delete, and deleted, the electronic version of the 9/11 document, and by evidence that Zurich, or its attorneys, or both, had possession of the printed version of the 9/11 document, but failed to produce it," according to the order.
While the electronic version of the document was destroyed on Sept. 11, a paper version remained in a file cabinet in Illinois. "Wiley Rein attorneys obtained and copied the 9/11 document in March of 2003, but they left it buried in a box for nearly two years and failed timely to produce it. ...Counsel's failure to recognize the importance of this document, and to produce it timely, especially when alerted to its possible existence by opposing counsel, also constitutes a violation of discovery obligations."
Refusing to accept an explanation of inadvertence, the judge concluded: "The explanation is not apt," he said. "A finding of negligence or worse would appear to be a more appropriate characterization, and I so find."
"Clearly, Zurich's decision to assert and maintain its denials and defenses regarding the Port Authority's status as additional insured multiplied proceedings, caused substantial expense to the parties, caused substantial waste of court time, and insulted public and judicial expectations of the standard of conduct expected of attorneys and insurance carriers."
Barry Zalma
http://www.zalma.com
