A Sign of the Times: Policyholder Forced to Sue Insurers to Resume Payment of Defense Costs
In what is an unfortunate sign of the times, Springpoint Senior Living, Inc. recently sued its insurers in New Jersey federal court claiming they abruptly stopped covering Springpoint’s defense costs after doing so for nearly a decade. A copy of the complaint can be found here. Springpoint’s allegations are emblematic of a growing trend among insurers taking drastic measures to avoid coverage, which is no doubt in response to the tightening economic conditions and looming recession around the globe.
Springpoint is a senior living facility located in Wall Township, New Jersey. In 2013, Springpoint was sued in a class action alleging that the facility defrauded its residents through misleading statements regarding the refund of the initial fee paid by residents. Springpoint initially retained Clark Michie as its defense counsel.
Springpoint turned to its directors’ and officers’ insurer, National Union, and its professional liability insurer, CNA, for coverage. According to the complaint, National Union unconditionally agreed to cover 75% of Springpoint’s defense costs while reserving rights on other issues. National Union insisted that Springpoint use National Union’s panel counsel, Morgan Lewis & Bockius, alongside Clark Michie in the defense of the class action, and Springpoint agreed. CNA also accepted coverage and paid the defense costs incurred by Clark Michie. According to Springpoint, National Union was repeatedly advised about the CNA coverage, and National Union never raised any objection. For the next seven years, National Union covered 75% of Springpoint’s defense costs incurred by Morgan Lewis and CNA covered the defense costs incurred by Clark Michie.
Springpoint alleges that, out of the blue in May 2020, National Union took the position that its coverage was excess over the CNA policy. Years after the class action was commenced, National Union claimed “confusion” over the coverage available under the CNA policy. Despite being told repeatedly about that coverage, National Union insisted that it just came to fully understand that concurrent coverage was available through CNA. The complaint alleges that, in 2021, National Union and CNA then entered into an agreement under which CNA assumed responsibility for paying 75% of Morgan Lewis’s fees incurred defending the class action. The problem, according to Springpoint, is that now neither insurer is paying those defense costs.
Springpoint was left with no other option and sued National Union, CNA, and an excess insurer (Ironshore) to enforce its rights to coverage. Springpoint seeks declaratory relief regarding each insurer’s coverage obligations, damages for breach of contract and promissory/equitable estoppel against National Union, and bad faith damages against National Union.
Springpoint’s experience is not unique. Times are tough. The stock market is down, the Federal Reserve is hiking rates, inflation is running rampant, and most commentators believe we have a ways to go before things get better, which could involve a full-scale global recession. Insurance companies, which historically earn the bulk of their profits by investing the premiums received, are especially sensitive to these economic conditions. Insurers are accordingly clamping down where they can, which includes heightened scrutiny of claims that come in and looking for new ways to avoid coverage for existing claims. Springpoint is a prime example of how policyholders can become collateral damage in the process.
In these times, policyholders must take a proactive approach to submitting claims to insurers and carefully communicating regarding coverage. Policyholders should expect their insurers to look for ways to avoid or limit coverage and they should be prepared to fight back. One of the best ways to preempt this is to fully understand the coverage being purchased before a loss occurs. Experienced coverage counsel can help maximize the available coverage before a policy is issued, and can also act as a safety net when insurers fail to honor their contractual obligations after a loss arises.