Insurance Claims Investigations and "The Reasonable."

REALLY UNREASONABLE CLAIMS INVESTIGATIONS =

INSURER BAD FAITH

The Law Firm of Michael Sean Quinn*
*Author          
 1300 West Lynn St., Suite 208          
Austin, Texas 78703-3877
          (512) 296-2594              
(512) 344-9466 - Fax             
 E-mail:  mquinn@msquinnlaw.com            

          Insurance claims cannot be validly denied unless the denial is based upon a reasonable investigation. To do that is at least a paradigm of insurer error, and if the mistake is bad enough it will constitute insurer bad faith.  These kinds of errors can lead to winnable lawsuits based upon the common law or upon a variety of statutes in every state. There can be not only actual damages but also punitive, or, exemplary, damages.  Many are the reported cases from courts discussing these matter—“legion” is an exaggeration.

            So, how many ways can an investigation by an insurer, or by someone the insurer has hired, be unreasonable? Let me count the ways.

(1) Not done at all.

(2) Started late.

(3) Too long.

(4) Poor adjuster.

(5) Right questions not asked.

(6) Insufficient data collected. Important data not studied appropriately.

(7) Demanding an insured to provide the same information several times.

(8) Demanding an insured provide data when the insurer knows the insured cannot do it.

(9)  Demanding an insured provide data when the insurer knows that the insured is unlikely to be able to do it.

(10)                    Demanding an insured provide data when the insurer does not really need it.

(11)                    Demanding data of a size or complexity when there is an easier way to obtain needed information. (If one mode of assigned-to-the-insured mode of investigation, A, is easier than another, B and equally reliable, then A is the more reasonable. Or A is reasonable while B is not.)

(12)                    Demanding an insured provide unnecessary data.

(13)                    Demanding data from the insured when the insured could collect that data much more easily than the insured can.

(14)                    Demanding that the insured engage in burdensome collection of data, where a smaller amount or group or assortment would be sufficient.

(15)                    Threatening the insured with claim denial, whether explicitly or impliedly, in connection with unnecessary work.

Notice that there are whole variety of ways that an investigation can be unreasonable: None enough of this or too much of that.  Interestingly, an investigation can be defective for several opposite reasons all at once.  Suppose a claim had two independent aspects. An insurer could not do enough on one, A, but the right amount on another, B.  Or, a right about on A but too much on B. Starts late on A, but on time with B, but it’s A-lateness temporally retards the whole show. And so on.

            Does this sound like it involves a lot of balancing? Well, it does.  But balancing can require exactitude, or at least precision, under many circumstances. It must be remembered that built into all of this is the following proposition:

Except where there is a preconceived and intentional screw-job imposed on the insured, insurer negligence is a necessary condition for bad faith though not one that is sufficient. Also, it must be kept in mind that the word “negligence” does not entail a separate cause of action in tort. The word “negligence” does not really denote one single thing.

In more common usage, the word “negligence” means careless, sloppy, stumbling around, forgetful, and/or inattentive.  It is important to remember that all these can occur at once, or only a few of them together.  It must also be remembered that some instance of negligence can amount to breach of contract.

INSURER BAD FAITH & ITS DUTY TO INVESTIGATE CLAIMS

REALLY UNREASONABLE CLAIMS INVESTIGATIONS =

INSURER BAD FAITH

The Law Firm of Michael Sean Quinn*
*Author          
2630 Exposition Blvd., Suite 115          
Austin, Texas 78703 
          (512) 656-0503              
             
 E-mail:  mquinn@msquinnlaw.com            

          Insurance claims cannot be validly denied unless the denial is based upon a reasonable investigation. To do that is at least a paradigm of insurer error, and if the mistake is bad enough it will constitute insurer bad faith.  These kinds of errors can lead to winnable lawsuits based upon the common law or upon a variety of statutes in every state. There can be not only actual damages but also punitive, or, exemplary, damages.  Many are the reported cases from courts discussing these matter—“legion” is an exaggeration.

            So, how many ways can an investigation by an insurer, or by someone the insurer has hired, be unreasonable? Let me count the ways.

(1) Not done at all.

(2) Started late.

(3) Too long.

(4) Poor adjuster.

(5) Right questions not asked.

(6) Insufficient data collected

(7) Important data not studied appropriately.

(8) Demanding an insured to provide the same information several times.

(9) Demanding an insured provide data when the insurer knows the insured cannot do it.

(1) Demanding an insured provide data when the insurer knows that the insured is unlikely to be able to do it.

(11)  Demanding an insured provide data when the insurer does not really need it.

(12)   Demanding an insured provide unnecessary data.

(13)   Demanding data from the insured when the insured could collect that data much more easily than the insured can.

(14) Demanding that the insured engage in the burdensome collection of data, where a smaller amount or group or assortment would be sufficient.

(15) Threatening the insured with a claim denial, whether explicitly or impliedly, in connection with unnecessary work.

6) And on, and on, and on again. 

*********************

     Notice that there are a whole variety of ways that an investigation can be unreasonable: None enough of this or too much of that.  Interestingly, an investigation can be defective for several opposite reasons all at once.  Suppose a claim had two independent aspects. An insurer could not do enough on one, A, but the right amount on another, B.  Or, a right about on A but too much on B. Starts late on A, but on time with B, but it’s A-lateness temporally retards the whole show. And so on.

            Does this sound like it involves a lot of balancing? Well, it does.  But balancing can require exactitude, or at least precision, under many circumstances. It must be remembered that built into all of this is the following proposition:

Except where there is a preconceived and intentional screw-job imposed on the insured, insurer negligence is a necessary condition for bad faith but not sufficient. And it must be kept in mind that the word “negligence” does not mean a separate cause of action in tort.

The word “negligence” means careless, sloppy, stumbling around, forgetful, and/or inattentive.  It is important to remember that all these can occur at once, or only a few of them together.  It must also be remembered that some instances of negligence can amount to a breach of contract.

Insurance Agent/Broker Malpractice in Alaska--a Squib

INSURANCE AGENT/BROKER MALPRACTICE & STATUTE OF LIMITATIONS

            

                                                                       

The Law Firm of Michael Sean Quinn**Author          1300 West Lynn #208        Austin, Texas 78703           (512) 296-2594              (512) 344-9466 - Fax              E-mail:  mquinn@msquinnlaw.com            

This was a malpractice suit against an agent/broker of the plaintiff in the trial court and appellant in the Supreme Court. Christianson v. Conrad-Houston Insurance, 318 P.3d 390 (Alaska 2014).  The key issue in this tangled case 

was  when did the insured the customer-client of the insurance agent first have

 notice of  the possible misconduct of his agent.

Short Summary

The case hinged on an Alaska statute of limitations. Todd Christianson (“Christianson”) and at least one of his several companies, Great Alaska Lawn and Landscaping, Inc., sued his insurance agent-broker after losing two underlying insurance coverage cases and parts of  the bodily injury tort case brought against  Christianson-owned businesses that underlay the coverage cases companies. In the bodily injury case, Christianson prevailed in the trial court but the Alaska supreme court reversed and sent it back. The next two were insurance coverage suits initiated by insurers pursuing declaratory judgment suits. Christianson lost them both.  This case, the fourth one against the insurance intermediary, Christian also lost.  

Longer Summary 

Christianson was in the landscaping business.  During the relevant interval he had three separate companies: (1) Great Alaska Lawn and Landscaping (“GALL”) formed in 1992 and involuntarily dissolved in 2002.  In that same year, (2) Christianson formed a new company and named it Titan Enterprises, a (3) Titan Topsoil having been formed earlier by him in 1995.  The three companies did roughly the same type of work.  The court refers to both the Titan companies as “Titan,” and Christianson owned each of them.

Keith Jones (Jones) suffered an above the knee amputation of his leg. AIG paid Jones’s worker compensation claim. He then sued and Christianson, the owner of the businesses and  the manufacturer of the equipment that injured him. His suit against Christianson was based on the allegation that he negligently altered the equipment making it dangerous, lent  it to the injured worker’s actual employer, one of them owned by Christianson. Consequently, the argument went, Christianson was a proximate cause of his injuries.

 Jones lost that case in the trial court, but the judgment was reversed in the Supreme Court of Alaska. (Jones v. Christianson, 282 P.3d 316 (Alaska 2012).

 Since each of the relevant insurers had denied coverage, even as to providing a defense, Christianson was left to pay his own legal fees and exposed to paying the liability judgment.  As the court remarks in this case, Christianson’s accumulated legal fees were substantial.

Insurance Intermediary Case. In 2003,  Christianson contacted Mike Dennis (“Dennis”), an agent with Conrad-Houston Insurance (CHI), seeking, Christianson said in a deposition, complete coverage for both Titans. CHI obtained three policies: workers comp from AIG, CGL from Great Divide Insurance Company (Divide) and auto from Cascade National Insurance Company)(Cascade).

After losing the two coverage cases, Christianson filed the fourth suit in the sequence against his agent, Conrad-Hilton (CHI), for purchasing erroneous and insufficient  policies.   Christianson lost his case in the district court, on statute of  limitation grounds, and the Supreme Court affirmed. At the same time, however, the Supreme Court indicated that it concluded that the person servicing the insurance needs of the Christianson companies had failed to exercise due care by failing to purchase know policy requests. This case was decided 4-1, with one justice abating.

            In June 2003, an employee of Titan, Keith Jones (“Jones”) sustained serious bodily injury—an amputation above the knee on his right leg--from a hydromulcher aka hydroseeder (“seeder”).  AIG paid the “comp” claim.  On September 2004 Jones sued the manufacturer of the seeder, Bowie Industries, Inc. (“Bowie”) and Christianson.  In the suit, Jones pursued the regular causes of action against companies that allegedly have manufactured a defective product, and Christianson was alleged for “negligence in transferring the seeder to Titan, loaning a defective seeder to Titan, making modifications to the seeder that contributed to its defects, and failing to warn [him] of the inherent dangers involved in operating th[at] machinery.” 

(The loan of the seeder involved Christianson lending a truck last registered to GALL.  Titan routinely operated its business out of the GALL entity, such as it was.  The reason for the loan, as opposed to a sale, was the apparent existence at the time of a federal tax lien.)

At some point, Christianson had filed a claim with Divide, and it issued a letter to Christianson.  The letter stated that the insurer was investigating the claim and that in the interim Christianson would have to pay his own defense costs, but that he would be reimbursed for reasonable fees and costs if there was coverage, but not otherwise.  The letter also quoted an exclusions applying to bodily injuries to employees.  In addition, the letter stated that Divide was reserving all its rights.  

In March 2006, 18 months later, or so, Divide formally actually denied coverage and filed an action for declaratory judgment in federal court seeking a no-coverage judgment.  The fact that GALL seems to have owned the truck to which the seeder was attached was apparently significant. During that litigation, Divide took the deposition of CHI’s representative.  He basically said that he did not make any effort to determine who owned relevant truck or make sure GALL was an insured.  (Of course, that is a negligent omission and surely played a background role in the evaluation of CHI’s conduct.) In July 2007, the federal court declared that Titan and Christianson had no coverage.

During the same month, Christianson tendered his claim in Jones’s case to CHI, but it “declined the tender,” i.e.,  denied liability for Christianson’s  claim. 

Shortly thereafter, in October Cascade, the auto carrier, filed its own “dec” action, and in November, an even shorter period of time, it obtained a judgment of no coverage.

Jones’s personal injury case was tried in February-March 2008.  Both Christianson and GALL prevailed.  The superior court directed a verdict for Christianson, and the jury returned a verdict for GALL.  However, this court reversed both judgments because of several errors by the judge below and sent the case back for another trial.  (With respect to Christianson, the reasoning of the judge below pertained to the corporate nature of GALL.)

Christianson sued CHI on August 6, 2008. “His complaint alleged that CHI and Dennis breached their professional duty of care in exposing him to the costs of litigation and the risk of an uninsured judgment and therefore caused him ‘to spend money in his own defense.” The allegation was that Christianson had to spend over $100,000 in defending the personal injury case and the insurers’ declaratory judgment cases.

CHI denied liability and asserted that the period of limitation had begun

more than three (3) years before this suit was filed.  It contended that at the end of October 2004, in other words, approximately 5 weeks after Divide’s letter of September 23th.

In opposition to CHI’s motion for summary judgment, Christianson argued that there was a fact issue “as to when he discovered the elements of his claim against CHI.” (No issue as to equitable tolling is to be found in the majority opinion, in contrast that of the dissenter.)

 The superior court focused on the date of the Divide letter,  September 24, 2004, and observed that it contained several important pieces of information.  First, that it was necessary for Christianson to defend himself for awhile, since he likely needed to consult a lawyer. Divide in effect “disclaimed its duty to defend,” even though its policy contained the usual relevant language.  Second, the carrier quoted a significant exclusion regarding injury to employees, and Christianson “was fully aware that [Jones] was Titan’s employee.  Thus, he was aware of the reasons upon which Divide would base its denial of coverage. At that point, said CHI HI“it was evident that there were potential coverage gaps for “Christianson....” “A reasonable person in [Christianson’s] circumstances would have had enough information to alert him that he should begin an inquiry to protect his rights[,]” as the superior court put it.  In addition, there were Dennis’s statements in his deposition.  This would have indicated to a reasonable period that Cascade might well also deny coverage, though it had not happened yet.  

The relevant statute of limitations (A.S. 09.10.053) is three years for malpractices cases. It begins to run when the last element in the cause of action was or should have been discovered by a reasonable person under the circumstances.  This time period can be measured from the point in time when a reasonable person would have commenced a reasonable inquiry, given the circumstances. 

In Alaska, his is called “inquiry notice.”  In effect, Alaska’s laws governing the limitation period are through-and-through a “discovery rule,” as the supreme court” recognized in its opinion. See Gudenau v. Sweeney Ins. Inc., 736 P.2d 763 (Alaska 1987)

            The supreme court takes it that in 2004 Christianson was aware that he was beginning  to sustain losses for which he very much might not ever receive reimbursement.  Of course, he knew for certain he might lose more, but did not prevent his cause of action against CHI from accruing.  The fact that he probably could not then the amount of his future losses is irrelevant.

            After the supreme court discusses matters leading up to the superior court’s decision, it affirmed the judgment of that court in short order.  It had not erred in any of the following ways, given the facts in this case, the doctrine of “inquiry notice” and Alaska law regarding the statute of limitations:

1.      finding that Christianson was put on inquiry notice,

2.      finding that the September 23th letter alerted Christianson that Divide would not pay for is defense,

3.      finding facts regarding Christianson’s good-faith belief that he was covered in the Jones lawsuit,

4.     failing to resolve the issue as to whether or not Christianson conducted a reasonable inquiry,

5.     not considering the bearing of public policy on the case, and

6.     finding that equitable tolling would not excuse the untimeliness  of Christianson’s lawsuit against CHI.

The dissenting opinion does not appear to dispute the facts set forth in the majority.  According to the dissenting Justice he dissent is about the application of the discovery rule.  In the opinion of the dissenting Justice, “the stature of limitations did not begin to run until Great Divide formally disclaimed its duty to defend Christianson in March 2096 [at the earliest]. 

More particularly, the dissenting opinion sets forth the following errors in the superior court, citing a variety of different kinds of Alaska cases and some from other jurisdictions:

 The statute of limitations did not begin to run on September 24, 2004 because: (1) Christianson had not yet suffered a definite injury attributable to CHI. Hence, that claim was not yet ripe. Jarvill v. Porky’s Equip., 180 P.3. 335, 340-41 (Alaska 2008). (2) Divide’s letter of 9/24 was not a definitive denial of coverage.(3) Divide’s letter of 9/24, given its language, did not effectively decline coverage.(4) Divide’s discussion of the employee exclusion in the policy did not constitute  a denial of coverage.  (5) Many people do not have a well-informed knowledge of what exclusions mean and—in this context—a “murky and fact-sensitive” inquiry into what a reasonable period might realize and do is inconsistent with the clarity required for triggering the statute of limitations.

           

 The doctrine of equitable tolling applies, said the dissenting justice.  That principle provides that when a defendant has “more than one legal remedy available to him”  the statute is to be tolled. Its elements are these: “(1) pursuit of the initial remedy given defendant notice of plaintiff’s claim, (2) defendant’s ability to gather evidence is not prejudiced by the delay,  and (3) plaintiff acts reasonably and in good-faith.” These conditions are met, says the dissenting opinion.  See Brannon v. Continental Cas. Co., 137 P.3d 280, 286 (Alaska).  Of course, the majority opinion rejects all of this.

Christianson’s disputes with the insurance companies satisfy the first element. The presentation of the claim to the insurers gave CHI notice of Christianson’s claim, and its opportunity to gather evidence would not harmed by the delay permitted by equitable tolling. Finally, determinations regarding whether Christianson acted reasonably and in good-faith are questions of fact and should not be granted without due empirical inquiry.

Some Observations

When considered as a constellation or as a concatenation, these cases are an insurance litigation nightmare.

The supreme court’s  opinion is a lengthy one.  It involves a considerable amount of the three forms of underlying litigation—a personal injury tort case,  two coverage declaratory judgment cases, and the cases against the insurance intermediary, two of which involved appeals.  A printed copy of the WestLawNext opinion and the dissent, double column pages, is 44, including 6 pages of 133 footnotes—some quite lengthy and most listing and/or discussing precedent--and 21  headnotes.

The opinion of  the supreme court in the underlying tort case was nearly as long and just as complicated as this case.  This is true even though it had 102 footnotes; the two opinions evened out since the underlying case had 36 headnotes and many more issues. Here is a list of the issues:  admission of evidence errors, problematic expert testimony, problems arising out of compliance with regulations of the Occupational Safety and Health Administration, the post-sale duties of a manufacturer regarding informing customers of life-threatening dangers that exist in defective products, and the Alaska statute of repose.  Jones v. Bowie Industries & Christianson, 282 P.3d 316 (Alaska 2012).

The approach of the majority in this, the insurance intermediary case, is erroneous.  For one thing, it makes a number of decisions about Christianson’s knowledge and conduct that are factual matters, even though there had been little discovery about those relevant matters.  What did Christianson believe about the letter of September 24th, when did he believe it and why? 

This is not a coverage case where the rule requiring an insured to understand a policy as it may apply to the ostensible facts of a case.  It is only about the meaning of language in what is in effect a reservation of rights letter. The rule regarding insureds understanding their policies may not apply to reservation rights letters, even if they as quote from the contract of insurance.  The context of a quote is significant.

Finally, Divide deferred any obligation to provide a defense until coverage as to its duty to indemnity. Doing this is insurer error, and the kind of error that imposes huge to impossible costs of most insureds.  If so, one wonders why that fundament principle appeared, at least, to have played no role in the deciding at least one of the dec actions.  In any case, Divide was making coverage decisions in the wrong order, failing to recognize that the duty defend is not established in the same way the duty to indemnify is, or both. Why should anything an insurer conveys to an insured be given the slightest attention, if the communiqué occurs within a time frame during which the insurer is making a hopeless error?

By the way, there is no indication in this case, or on the internet, as to the disposition of the underlying case.  Nor is there any, I have found, that Todd Christianson is or has been in bankruptcy.

It may or may not be worth noticing that here was a fifth suit against a lender bank arising during the time of the Jones suits. It was after add not a suit underlying this case. In fact, they had nothing to do with each other See Christianson v. First National Bank of Alaska, 2012 WL 6062124 (Alaska 2012). Then again,  it is entertaining to wonder how the members of the supreme court feel about Christianson after his herd of cases were all gone, if indeed they really are.

Fine Arts Auctions, Guarantors, and Insurance

FINE ART AUCTIONS & FIRST PARTY INSURANCE

Michael Sean Quinn

                                            

         The Law Firm of Michael Sean Quinn
1300 West Lynn #208

                                   Austin, Texas 78703

                                        (512) 296-2594

                                   (512) 344-9466 - Fax

                      E-mail:  mquinn@msquinnlaw.com

Fine art should be insured in a variety of ways.  One mode of insurance is normal property insurance, e.g., insuring the object against fire.  Another is insurance against specialized thefts. Some of it is against losses sneaking up on buyers, sellers, and or middle-entities resulting from the object was looted, e.g., during World War II. (Maybe this is not actually a verb.)

 Among the factors that can make such insurance unusual are the different parties that may need coverage. One of these is  everyone in the case, of course, that is likely to want to be—or need to be--an insured.  If this sort of insurance following the established  principles of property insurance, only a person or entity with a property interest in the object insured can have insurance on that object, whether personal property or real estate. (Most art is personal property, though buildings are real estate and maybe some large, fixed sculpture might also be.)

Sometimes that rule is not enforces strictly, but approximations are usually demanded, even in odd cases. This could happen where there is a complicated loan or court judgment, especially where the entity that does not in the end actually have an ownership interest in the property but comes close, or, in any case, bought the policy and might therefore be the policy holder. 

Under some circumstances, the insured may have investigated a state of affairs and approved someone to be a named insured, even though that person did not have a property interest. An underwriter might do this, or counsel might. This situation can arise deliberately, or it could happen by error.

Now in the situation of a fine art auction, the parties that may need, think they need, or be perceived as needing, might be (1) the actual seller, (2) the entity or person for whom the ostensible seller is acting, if any, the ostensible seller being the owner’s agent, (3) the bidder, who is the trader on the floor working for the seller, the owner, some fraction of these , or the buyer. (4) Maybe the buyer, whether he is to be the owner or is simply the future owner’s agent, and (5) the ultimate owner. In addition, (6) the auction house will probably want to be an insured, as will the most interesting character in the ensemble and the least known, to wit:  the guarantors. if any.

Here is how the set up may look; for the sake of simplicity, I shall ignore the middle-entity agents and discuss only the seller, A, the house B, the buyer C, and the guarantors D. In any case,  A has agreed that a picture be sold, on a given night. The auction house, B, has agreed, for the purposes of this hypo, to sell it, come what may. However, B has guaranteed A a specified amount. But what if the sale price comes in lower than B’s guarantee? Enter D.  They may stand in for B; they may  pay on behalf of B, or they may reimburse B for what it has had to pay A. They might even be the actual buyer in the bushes, A's former spouse who hates him.

The guarantors may have no problem if the auction house burns down. To be sure, A did not receive his return on the sale, but what B would have owed A has been wiped out in the A-B contract. It would contain and exclusionary clause. Consequently, the guarantors would owe nothing. This problem would be taken care of by fire insurance. upon which A would be an insured, along with others. A would probably have an obligation to provide this insurance.

The interesting situation would arise when the price of the purchase comes in below the guarantee of B to A.  Depending on the size of the amount B may owe, it may seek a bail out from its group of guarantors.  The guarantors are actually  playing the role of a kind of insurer.  Along with its other role, it is B has guaranteed A a specified amount of money, and the guarantor group has guaranteed B that it will not itself have to make good on at least part of its guarantee. (A may have a similar guarantor that has guaranteed that A will gen at least a given price. Again, this is a form of insurance.)

I have no problem conceiving B and D as two or more insurers, at least one primary and at least one “re.” Others might be nervous about this; that is certainly not its conceptualization, at least concretely.

Consider the hypo X agrees to do something for Y that will earn a $100 for Y; X guarantees that amount; Y fails to perform, so X owe Y $100. This is a lot of money for X so it has gone to Z, bought a promise from Z that it will step in and pay if this happens. The fine arts actions transactions are instances of this. Insurance is risk transfer, and what has happened in this hypo is that some of X’s risk has been transferred to Z.

This template may have been concretely exemplified in the recent sale of the 1950 Giacometti longated bronze sculpture of a woman painted gold, in part, entitled “Chariot” .  Sotheby’s priced the piece at $104.3M, but the lone bidder bid and paid only a shade less than $101M. Assuming there was a guarantee running to the seller, this means that Sothebys (or somebody) owed $3.3M  to the seller and “change.” If there is a guarantee on this piece, and $0 deductible or risk-retention, $3.3M± is what the guarantors would have to pay.

There can be interesting differences.  B may estimate what its total sales are going to be on a given evening.  This might involve a whole list of different objects. Thus, it may have made a guarantee to A1, A2, A3, and so on, or a guarantee to one seller for several works of art.  It may be that the guarantors start owing money only when B’s estimate for the entire evening is above total sales. From the point of view of B, this may not make any difference is the various obligations have been calculated carefully. It will probably be fine with the guarantor since its owing money will probably decline very substantially  if the appraisals are accurate. Still, amounts may differ.

 Thus things would be quite different if there was a whole set of Sotheby’s for all the sellers. In that case, the auction house might owe “Chariot’s” seller on the guarantee, but its loss there might be made to equal $0 by other sale prices.  Or maybe not, depending on the terms of Sotheby’s guarantee for its guarantor. 

(There is considerable media coverage of this sale. A 2014 issue of the NEW YORKER, for example, contains a long-ish history. For a shorter story, see Carol Vogel, “Thanks to Giacometti, Sotheby’s Hits Its Highest Total Even at Fall Opening,” NEW YORK TIMES, November 4, 2014. A photo of “Chariot” is easily findable at numerous locations on the Internet.)

 In either system, whether object by object or by whole lot, the guarantors—to the extent they are insurers—will require B to suffer part of the loss.  It will demand this for its own protection since that will induce B to be more careful than it otherwise mighty be in its guarantee, regarding appraisals it accepts, and in the construction of its catalogues.  This is a species of the moral hazard, and it will be dealt with simply by the use of deductibles or the use of self-insured retentions.

B itself might have several guarantors, that is, insurers, if the sum to be, in effect, insured is very large. It also seems likely that the guarantors will get their own insurance if they have quite large exposures.  In this situation, B might be considered a primary carrier insuring A, the guarantors a reinsurer, and the insurer of the guarantors, if any, a retrocessionaire. 

This third one could, in addition, may be a different kind of carrier—a primary carrier, even—for one of other entities in the ensemble, perhaps even by means of the same package policy. Of course, so might B and D.

In theory, it could even be a liability carrier for at least one of them in the same policy.  But that is a different topic.

The #Looting of Fine Art: Its "Afterlife": Insurance and Lawyers

#Looting: Insuring and Lawyering

Michael Sean Quinn, Ph.D, J.D.,C.P.C.U.,  Etc., Author

2630 Exposition Blvd #115

Austin, Texas 78703

(o) 512-296-2594

(c) 512-656-9759

mquinn@msqlaw.com

(Resumes at www.michaelseanquinn.com)

All wars involve one side and/or the other looting the ground it covers of good and sometimes great art.  The Nazi’s were especially guilty of this during WWII: there was lots of it to steal (after all it was Europe); Hitler wanted a high class museum in his home village; some senior officers of the German government and military had what they regarded as good taste, as least with respect art. And some men in the field may have realized that after their retreats were complete, they or they families, just in case, were going to need all the money they could lay their hands on.  And besides lots of them said to themselves and sometimes to others, much of it belonged to Jews; Hitler had killed—or would kill--off most of them, or they had fled were gone for good.  Running often involves grabbing.

For many years some of the art has been returned when either discovered or re-categorized. Sometimes the courts make returns happen, sometimes not.  Many of the exchanges were done on a one to one basis, but over time they are also sold through auction houses like Christie’s and Sotheby’s.  That has been happening recently at both of these, and they are having different attitudes toward the loot versus ownership problem.  Patricia Cohen & Graham Bowley, Dispute Over Nazi Victim’s Art, NEW YORK TIMES C1 (October 25, 2014).

I wonder now about two things. What role might insurance play in these situations. And what dangers might be there for lawyers.

Insurance

Of course, whenever and where ever there are “heavy hitting” works of art and the person who “has” has any money, the works will be covered by property insurance. To a considerable extent the special first party policies coverage designed for fine art are pretty much what one would expect.  Liability policies may be a little different.

For one thing, most liability policies leave it open who may be a victim of the insured who might be entitled to compensation under the policy.  This would not necessarily be the case under a fine art insurance policy providing coverage for a sale which is illegal under the obscure and not-well-understood property law related to looting and “returning,” or—better--handing over.”

Under one policy, the seller of a piece would be the insured and probably the purchaser would be the only person who could qualify compensable. Maybe the auction house could be an additional insured. I guess the principal insured action would be a failure to return when it was required. One of the buyer’s damages would be his legal fees to obtain recovery. Another the amount he had to pay to obtain the work of art, assuming he really wanted. Or it might be the amount of the return to the seller which the buyer could have obtained if he could have been the seller.

The auction house might need liability coverage.  This might happen, for example, if Christie, say, didn’t do the kind of work it should have done to investigate true ownership of the work. Of course, the seller and the auction house could be insured under the same policy. In fact, I would expect this to be true and that the house would require it and get a certificate of insurance before it would be willing to so much as take possession of it.

(Of course, the house will also require that be liability coverage for its liability to the seller if it were to cause damage to the work. Naturally, it cannot be the same policy as the one just mentioned, where both the seller and the house are insureds, but the house could specify or simply obtain a particular type of policy while insisting that the seller pay for it.)

The buyer might want liability coverage aiming at its possible liabilities involving injuries done to the seller and/or to the auction house.  This could be something so simple as a physical loss it caused before it actually bought the policy.  Or it might occur if the buyer breached its contract to buy without the kind of justifications found in the policy.

            Another type of liability policy the seller might want is coverage for his selling the policy to someone when it was not what he said it was. For example, it might not be a painting by X but a forgery done by Y. (For those of you are interested in this sort of thing, there is a substantial literature on the subject.) Obviously, the seller’s coverage should extend only to his buyer and to no one else, unless that buyer’s lenders or co-investers were included in the policy type being here discussed.

            One interesting set of questions about these situations pertains to underwriting and the pricing of such policies. Works of art are now selling for huge sums—many millions of dollar.  But mistakes of the type here sketched are rare. Obviously, there would have to be detailed appraisals done in advance my top flight professionals, and they would have to be insured. So how could the peril  be priced? Normal actuarial methods could not be applied. Not even all the gods know how to do it.

Legal Malpractice         

            There is a handful of lawyers that are involved in these type of transactions all the time. Many of them are litigation oriented. Some represent the old time owners or their beneficiaries, e.g., their grandchildren.  Some represent the person or organization in possession of the picture, say, at the point found. Often they represent the museum to whom it has been given or who bought it. And a few represent the gallery that is marketing and then auctioning it.

            These lawyers can be guilty of malpractice in a variety of ways.  If the lawyer possesses a picture and then sells it himself for himself or simply makes off with it, he will be guilty of a breach of fiduciary duty. This can count as a type of malpractice.

            Usually lawyer malpractice involves negligence performance or omission.  This can happen in a variety of ways.  T he most problem is one of proof.  Usually professional negligence is determined by comparing and contrasting the conduct of the accused lawyers with other reasonable, reasonably prudent and knowledgeable practitioners who are adjudged reliable experts.  That is no simply problem in the situation under discussion here because there aren’t very many of them, so if two of them disagree, it is not clear that reliability can be established, since there are so few experienced lawyers in the population that’s relevant.

            For me, the most interesting problem regarding this kind of malpractice is what faces the lawyer who provides formal opinions as to who owns what and how much they own, if there are any fractions.  This is an easy place in which to make a mistake. Of course, this is a standard problem in transfers of property.  It is true even for old property that has changed hands a number of times. And it is true where property may be controlled by the laws of different jurisdictions.  It is not, however, so easily true when one or several persons have had possession of the object for perhaps more than a generation, even if no one has sold it to anyone.  Nor are any of these problems simplified or made more reliable by the fact that looting is the original possession.

            (A friend of mine is thinking about writing a novel in which the Germans loot it from a French museum, a Portuguese woman steals it from the German officer, the grandson of the Jew whose painting it was runs off  with it, gives it to his sister and dies, while the sister is arranging for its sale.   How many separate players might there be in this suit? How would limitations period, whether statutory, equitable, or procedural work? How many times would they have to be applied. And what if at least four different countries are legitimately involved? He thinks he wants the Portuguese woman murder the selling sister, but I have told my friend that the murder is antifeminist, a proposition both she and her brother—who is also her cousin--reject.)

            Things can get even more complicated when the attorney is rendering an opinion on a piece of the relevant type property for an insurer or a prospective insurer.  Of course, insurers seldom very seldom sue their own lawyers. Nevertheless, such a lawyer should obtain a very substantial applicable malpractice policy of the right sort, might wish to make sure that there is excess coverage, and might even consider obtaining at least some of his coverage from the insurance company that is his client.