Committee

News Winter 2010

BUSINESS LITIGATION COMMITTEE

DISTINCTION WITH A DIFFERENCE – PARTY AND

NONPARTY DISCOVERY IN INSURANCE
RECOVERY ACTIONS
By: Catherine J. Serafin and Todd L. Brecher
In insurance recovery actions involving liability
policies, such as directors’ and officers’ (“D&O”) poli-
cies, errors and omissions (“E&O”) policies, and com-
prehensive or commercial general liability (“CGL”)
policies, both policyholders and insurance companies
frequently utilize third party discovery to help prove
their respective cases. In some instances, third party
discovery can provide case dispositive documents and
testimony; in others, it fills in the blanks left by party
discovery. In this article, we examine some of the more
commonly sought types of third party discovery in
insurance recovery actions, why that discovery might
be useful, and some of the ways in which the rules
regarding third party discovery are different from the
rules regarding party discovery.
TYPES OF THIRD PARTY DISCOVERY COMMONLY
SOUGHT
Among the most commonly sought third party dis-
covery in insurance recovery actions involving D&O,
E&O, and CGL policies is discovery from reinsurance
companies, the policyholder’s attorney in the liability
claim giving rise to the insurance recovery action (the
“underlying action”), and insurance brokers. Some of
the reasons for seeking that discovery are discussed
below.
Discovery from Reinsurance Companies
Reinsurance is insurance for insurance companies.
Reinsurance contracts come in many different forms
but, in essence, they are contracts between an insurance
Continued on page 25
IN THIS ISSUE
Distinction With A Difference — Party And
Nonparty Discovery In Insurance Recovery
Actions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Welcome From The Chair. . . . . . . . . . . . . . . . . . . 3
The Wild, Wild West Mid-East: New Legal
Frontiers For Islamic Business Transactions . . . 4
Hits And Myths About The Use Of Graphics
At Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Separated By A Common Language: Differences
Between U.S. And British Insurance Law . . . . . 13
The Duty To Defend: What Insurers, Indureds
And Their Counsel Need To Know When Faced
With A Liability Coverage Dispute . . . . . . . . . . 17
Forensic Accounting And Insurance Claims . . . 21
Case Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2010 - 2011 TIPS Calendar. . . . . . . . . . . . . . . . . 28

Uniting Plaintiff, Defense, Insurance, and Corporate Counsel to

Advance the Civil Justice System
 Business Litigation Committee Newsletter Winter 2010
Chair Neal Berinhout
Wyndall Ivey AT&T
Maynard Cooper & Gale PC 1025 Lenox Park Blvd NE, 5th Fl
1901 6th Ave N, Ste 2400 Atlanta, GA, 30319-5309
Birmingham, AL, 35203-4604 (404) 986-1427
(205) 254-1182 Fax: (404) 986-1809
Fax: (205) 254-1999 neal.berinhout@att.com
wivey@maynardcooper.com Jeffrey Brauer
Hahn Loeser & Parks LLP
Chair-Elect 200 Public Sq, Ste 2800
James Myrick Cleveland, OH, 44114-2303
Buist Moore Smythe McGee PA (216) 274-2371
5 Exchange St Fax: (216) 241-2824
Charleston, SC, 29401-2593 jabrauer@hahnlaw.com
(843) 722-3400 Anderson Cao
Fax: (843) 723-7398 McGlinchey Stafford PLLC
jmyrick@buistmoore.com 1001 McKinney St., Ste 1500
Houston, TX, 77002-6420
Last Retiring Chair (713) 520-1900
Robert Caldwell Fax: (713) 520-1025
Kolesar & Leatham Chtd acao@mcglinchey.com
3320 W Sahara Ave., Ste 380
Lindsay Carlson
Las Vegas, NV, 89102-3202
Alston & Bird LLP
(702) 362-7800
333 S Hope St., Fl 16
Fax: (702) 362-1281
Los Angeles, CA, 90071-1406
rcaldwell@klnevada.com
(213) 576-1038
Law Student Fax: (213) 576-1100
Elizabeth Friedenstein Dennis Carrillo
7517 NW 115th St Lambert Coffin Haenin
Oklahoma City, OK, 73162-1334 477 Congress Street
efriedenstein.stu@okcu.edu Portland, ME, 04112
207-874-4000
Membership Vice-Chair Fax: 207-874-4040
Kathleen Foster dcarrillo@lambertcoffin.com
1929 Allen Pkwy Van Cates
Dallas, TX, 75266-0407 Veolia Water North America
(214) 596-5146 14055 Riveredge Dr., Ste 240
Fax: (214) 596-4599 Tampa, FL, 33637-2099
kathleen.foster@nissan-usa.com (813) 983-2804
Fax: (813) 983-2821
Newsletter Co-Vice-Chairs van.cates@veoliawaterna.com
Douglas Albritton
David Cohen
Reed Smith LLP
Angels Baseball LP
10 South Wacker Dr., 40th Floor
2000 Gene Autry Way
Chicago, IL, 60606-7507
Anaheim, CA, 92806-6143
(312) 207-1000
(714) 940-2065
Fax: (312) 207-6400
Fax: (714) 940-2251
Christine Davis david.cohen@angelsbb.com
Howrey LLP
Christopher L Davis
1299 Pennsylvania Ave NW
SCI Management
Washington, DC, 20004-2400
1929 Allen Pkwy, Fl 10
(202) 383-6768
Houston, TX, 77019-2506
Fax: (202) 383-6610
(713) 525-9171
daviscs@howrey.com
Fax: (281) 582-6236
Sharon Ferguson christopher.farmer@sci-us.com
Meckler Bulger & Tilson
Marcy Greer
123 N Wacker Dr., Ste 1800
Fulbright & Jaworski LLP
Chicago, IL, 60606-1770
600 Congress Ave., Ste 2400
(312) 474-4463
Austin, TX, 78701-3271
Vice-Chairs (512) 536-4581
John Allen Fax: (512) 536-4598
Varnum Riddering Schmidt mgreer@fulbright.com
251 N Rose St., Fl 4 Laura Hedge
Kalamazoo, MI, 49007-3842 Harrison Bettis
(269) 382-2300 1415 Louisiana Street, 37th Floor
Fax: (269) 382-2382 Houston, TX, 77002
jwallen@varnumlaw.com 713.843.7897
Fax: 713.843.7901
laura.hedge@harrisonbettis.com
2
Joma Jones David Reif
Robert Half International Inc McCarter & English LLP
2884 Sand Hill Rd 185 Asylum St., City Place I Fl 36
Menlo Park, CA, 94025-7072 Hartford, CT, 06103-3408
(650) 234-6939 (860) 275-6703
Fax: (650) 234-6319 Fax: (860) 560-5945
joma.jones@rhi.com dreif@mccarter.com
Kermitt Kendrick Dick Semerdjian
Burr & Forman LLP Schwartz Semerdjian et al
420 North 20th Street, Suite 3400 101 W Broadway, Ste 810
Birmingham, AL, 35203 San Diego, CA, 92101-8229
(205) 458-5393 (619) 917-5414
Fax: (205) 244-5665 Fax: (619) 236-8827
Kkendric@burr.com das@sshbclaw.com
Alyssa McCorkle Christopher Shelton
4375 Jutland Dr., 200 300 N State St., Apt 4501
San Diego, CA, 92117-3600 Chicago, IL, 60654-5462
(858) 750-7601 chshelton@gmail.com
Fax: amccorkle@piteduncan.com Earl Sundmaker, III
Joel Mohrman Chaffe McCall
McGlinchey Stafford PLLC 1100 Poydras St., Ste 2300
1001 McKinney Street; Suite 1500 New Orleans, AL, 70163
Houston, TX, 77002 504-585-7233
(713) 335-2107 Fax: 504-544-6094
Fax: (713) 520-1025 Sundmaker@chaffe.com
jmohrman@mcglinchey.com James Terrell
Steven R Parker McCallum Methvin & Terrell PC
Balch & Bingham LLP 2201 Arlington Ave S
1901 6th Ave N, Suite 2600 Birmingham, AL, 35205-4003
Birmingham, AL, 35203-4644 (205) 939-0199
(205) 251-8100 Fax: (205) 939-0399
Fax: (205) 488-5487 jterrell@mmlaw.net
sparker@balch.com Thomas Werth Thagard III
George Parker Maynard Cooper & Gale PC
Bradley Arant Boult Cummings 2400 Regions Harbert Plaza
401 Adams Avenue, Suite 780 1901 6th Ave N
Montgomery, AL, 36104 Birmingham, AL, 5203-2618
(334) 956-7607 (205) 254-1091
Fax: (334) 956-7701 Fax: (205) 254-1091
gparker@babc.com tthagard@maynardcooper.com
Robert Parker Howard Thagard III
Reed Smith Burr & Forman LLP
2 Embarcadero Ctr., Ste 2000 420 20th St N, Ste 3400
San Francisco, CA, 94111-3922 Birmingham, AL, 35203-3284
(415) 659-5965 (205) 458-5462
Fax: (415) 391-2869 Fax: hpwaltha@burr.com
rphillips@reedsmith.com Dale Weppner
Loren Podwill Greensfelder Hemker & Gale
Bullivant Houser Bailey PC 10 S Broadway, Ste 2000
888 SW 5th Ave., Ste 300 Saint Louis, MO, 63102-1747
Portland, OR, 97204-2089 (314) 241-9090
(503) 499-4620 Fax: (314) 241-8624
Fax: (503) 295-0915 dmw@greensfelder.com
loren.podwill@bullivant.com Thomas Wert
Michele Powers Roetzel & Andress
Alston & Bird LLP PO Box 6507
333 S Hope St., Fl 16 Orlando, FL, 32802-6507
Los Angeles, CA, 90071-1406 (407) 835-8548
(213) 576-1030 Fax: (407) 835-3596
Fax: (213) 576-1100 twert@ralaw.com
michele.powers@alston.com Scott Wolf
Nosizi Ralephata Blanchard Walker & Roberts
Turner Padget Graham & Laney 400 Texas St., Fl 14
PO Box 22129 Shreveport, LA, 71101-3525
Charleston, SC, 29413-2129 (318) 934-0228
(843) 576-2807 Fax: (318) 227-2967
Fax: (843) 577-1655 swolf@bwor.com
nralephata@turnerpadget.com
 Business Litigation Committee Newsletter Winter 2010

WELCOME FROM THE CHAIR

Thank you for being a part of the ABA/TIPS Business Litigation Committee (“BLC”). It is
my honor to serve as the BLC’s Chair for 2009-2010. Since the annual meeting in Chicago, the
Committee has been very productive in providing programs and services to its membership.
During the TIPS Fall Meeting in San Diego, members attended a Dutch treat breakfast at
Sheerwater Restaurant. The breakfast gave members an opportunity to fellowship and enjoy
views of the nearby beach and ocean. Also during the Fall Meeting, the Committee conducted its
regular business meeting and made a presentation to the CLE Board seeking approval to sponsor a CLE program
during the 2010 Annual Meeting. I am happy to report that the CLE Board approved our Annual Meeting CLE
topic, which is “New Communication Technology Litigation.” The 2010 Annual Meeting CLE program is being
chaired by Doug Albritton.
In November, the Committee continued its momentum by putting on two first-rate CLE programs. On
November 12, Kevin Flaherty and Dayne Gray with our sponsor Matson, Driscoll and Damico put on an outstand-
ing CLE program on forensic accounting. The program took place in Birmingham, AL. A special thank you to
Howard Walthall and Kermit Kendrick for organizing this CLE program. One week later on November 19, the
Committee put on its Fall Tele-CLE. The topic was “Guidelines for Working with Immigration and Customs
Enforcement (ICE) During an I-9 Investigation.” I want to thank Tom Wert and Nosi Ralephata for their hard work
in pulling together this program. In addition to the BLC’s Spring Tele-CLE, which is being headed up by Laura
Hedge, the BLC has agreed to co-sponsor a Tele-CLE with the Self-insurers and Risk Managers Committee. The
topic for that Tele-CLE is “Directors and Officers Strategies for Turbulent Times.” Lindsay Carlson will be work-
ing with the Self-insurers and Risk Managers Committee to put this Tele-CLE together.
It was a busy fall and the leadership of the Committee looks forward to providing more services and programs
for our membership. If you are interested in becoming more involved in planning BLC activities, please contact
me. Also, invite your friends and colleagues to join the BLC by visiting our web site at www.tipsbusinesslitiga-
tion.com. For existing ABA members, joining TIPS is only $50/year (and free for law students), and for TIPS
members joining the BLC is free. Some of the benefits include receiving the Business Litigation Newsletter, on-
line access to current and archived editions of the newsletter, discounts on publications and CLE programs, and
other ABA and TIPS-wide benefits.
I can’t tell you how appreciative, humbled and honored I am to chair this Committee. Remember, “Let’s Be
Relevant and Let’s Have Fun.”
With kind regards, I remain

Maynard, Cooper & Gale, P.C.

Wyndall A. Ivey

1901 Sixth Avenue North

2400 Regions/Harbert Plaza
Birmingham, Alabama 35203-2618
205-254-1000
wivey@maynardcooper.com

©2010 American Bar Association, Tort Trial & Insurance Practice Section, 351 N Clark St., Chicago, Illinois 60654; (312) 988-5607. All rights reserved.
The opinions herein are the authors’and do not necessarily represent the views or policies of the ABA, TIPS or the Business Litigation Committee. Articles
should not be reproduced without written permission from the Tort Trial & Insurance Practice Section.
Editorial Policy: This Newsletter publishes information of interest to members of the Business Litigation Committee of the Tort Trial & Insurance Practice
Section of the American Bar Association — including reports, personal opinions, practice news, developing law and practice tips by the membership, as
well as contributions of interest by nonmembers. Neither the ABA, the Section, the Committee, nor the Editors endorse the content or accuracy of any spe-
cific legal, personal, or other opinion, proposal or authority.
Copies may be requested by contacting the ABA at the address and telephone number listed above.

3
 Business Litigation Committee Newsletter Winter 2010
THE WILD, WILD WEST MID-EAST: NEW LEGAL
FRONTIERS FOR ISLAMIC BUSINESS TRANSACTIONS
By: Rabeh M. A. Soofi
The Islamic financial sector
has not just weathered the global
economic crisis that has crippled
domestic financial markets
domestically and in Western countries, but by most
accounts, appears to be thriving. Expanding fifteen to
twenty percent in recent years, Islamic business trans-
actions have become a staggering $1 trillion boom
industry.
As most practitioners know, where business transac-
tions lead, the legal industry tends to follow – so it may
only be a matter of time before the legal world catches
up to the buzz produced by Islamic business transac-
tions. For now, what is both unusual and dazzling
about the Islamic business and financial industry is that
the legal backdrop for Islamic business transactions
appears to be entirely uncharted territory for the
American judicial system. For business litigators, there
is probably nothing more extraordinary than the oppor-
tunity to see the development and creation of a poten-
tially new body of law unfold.
First, A Primer.
Islamic business transactions are categorized inde-
pendently from “other” business transactions because
there exist fundamental differences in the core terms,
conditions, and other elements governing contracts and
contracting parties between Islamic business transac-
tions and American jurisprudence. Most lawyers prob-
ably know that Islamic business transactions prohibit
charging interest on debt. Although this simplification
is technically accurate, the concept of usury is but one
element of a larger body of principles that when put
into practice, may pose significant challenges for the
litigation and dispute resolution of conflicts involving
Islamic business transactions, especially when good
deals go bad.
The core concepts embodied by Islamic business
transactions are founded on Islamic legal jurispru-
dence. Often termed “Shari‘ah compliant”1 business
practices, Islamic business transactions follow the prin-
ciples of Islamic law – a fluid and dynamic body of law
that can vary in nature, source, and ideology depending
on locale, school of jurisprudence (madhab), interpre-
1 There is no standardized or uniform spelling of this transliterated concept, which has been anglicized as Shari’a or Shari’ah.
4
tative guidance via analogy (qiya), as well as the con-
sensus of recognized jurists (ijma).
In the same way that decisionmaking can be influ-
enced by the personal beliefs and political leanings of
Supreme Court Justices or other judges, Islamic law is
subject to the interpretation of Islamic scholars. As
with any other view the scholars’ views may be conser-
There is no “one” Shari’ah law, much in the same way
vative, modern, liberalist or strict constructionist.
that there is no one “American” law; rather there is a
series of statutes and laws that are enacted by legistla-
tive bodies at various federal, state, and local jurisdic-
tional levels. Just as different states have different
statutory schemes, there are some general principles in
our American legal system that are overarching and
transcend all versions and interpretations of the law.
The same is true for the Islamic legal system.
With respect to business transactions, Islamic legal
jurisprudence prohibits several core concepts, such as
(riba). These concepts may sound philosophical or
contingency/speculation (gharar) and unearned profit
esoteric, but in practice, these overarching concepts
affect everything including the exchange of money, per-
formance on agreements, agency relationships, owner-
ship, risk of loss, damages for breach of contract, sale
of goods, leases, manufacturing agreements, invest-
ments, and otherwise. They affect more sophisticated
financial transactions involving private equity transac-
tions, joint ventures, project financing, mezzanine or
other types of financing, selling and trading of debts,
derivatives, futures, forward, options, and swap con-
tracts, savings, deposits, and others. They also affect
consumers at the retail and commercial level with
respect to leases, loans, mortgages, insurance coverage,
and other transactions. Islamic business transactions
are effectuated through a number of different vehicles,
(shirkah, musharakah), joint-venture agreements
such as sales agreements (murabaha), partnerships
(mudarabah), leases (ijarah), manufacturing agree-
tracts (bai salam).
ments (istisna), bonds (sukuk) and Agri-business con-
What makes Islamic business transactions so inter-
esting for business lawyers is that a number of “default”
rules and concepts that are foundational to American
 Business Litigation Committee Newsletter Winter 2010
commercial law are completely antithetical to Islamic
legal principles. Although there are numerous differ-
ences that span industries and various commercial
instruments, several illustrative examples follow:
Risk of Loss
One of the earliest tenets taught in first-year con-
tracts courses in American law schools is the concept of
risk of loss, where one party assumes or bears the risk
for accidental (i.e., property or casualty) losses in con-
tractual agreements. Consider this concept in the use of
a typical business lease. Ordinarily, most lease agree-
ments leave the risk of loss of the asset being leased to
the lessee, on the basis that the lessee has taken custody
and control of that asset and is thus in the best position
to insure against its loss. Islamic leases, on the other
hand, disallow such practices. Following the maxim
kharaj bi-al-daman),2 Islamic leases generally leave
that the one who gains is responsible for its loss (al-
the risk of loss to the asset or the owner of the asset,
namely, the lessor, for the duration of the lease, unless
some malfeasance exists on the part of the lessee. The
legal issues that may arise are interpretative in nature,
such as those arising from vagueness or ambiguity in
the contract, or some other situation leaving a risk of
loss provision otherwise unenforceable for one reason
or another. Although courts are authorized to construe
the terms of a contract to give meaning to the intent of
the parties, or to provide implicit “default” terms based
on the majority law of their jurisdictions, it is unclear
whether the provision of an implied term antithetical to
Islamic principles would affect the remainder of the
contract. Islamic business transactions that do not com-
ply with Islamic principles, for example, are void and
arguably subject to rescission.
Partnership Liability
Another interesting area involving Islamic legal
principles involves partnership (or for that matter, any
director, officer, or manager liability). Typically in
general partnerships, the default rule is that one partner
is responsible for the liability of all of the other
partners. This is another concept contrary to Islamic
principles. Islamic business transactions involving
partnerships and partnership agreements (shirkah)
only allow losses among partners to be shared in
accordance to each partners’ capital contribution.
2 Samuel Hayes, Islamic Law and Finance: Religion, Risk, and Return (1st ed. 998).
3 Islamic business and commercial law, including partnership law, is complex and subject to the circumstances of unique factual scenarios, and is being summarized only for gen-
4 See, e.g., Murray v. Geithner, 624 F.Supp.2d 667 (E.D. Mich. 2009). In that case, a taxpayer brought claims against the Secretary of the Treasury and Board of Governors of the
eral purposes here.
Shari’a compliant financial products in violation of the Establishment Clause of the First Amendment to the U.S. Constitution.
Federal Reserve, alleging that Stimulus funds (12 U.S.C. § 5201) appropriated to insurance conglomerate American International Group, Inc. (“AIG”) were used to finance AIG’s
Generally, all partners share in the profit according to
percentages previously agreed upon, but losses can
only be born proportionately, absent some sort of
malfeasance.3 As with all other Islamic transactions,
ciples result in an invalid contract, void ab initio. In the
the inclusion of terms that controvert core Islamic prin-
event such a partnership were to break down or suc-
cumb to liabilities that would leave it insolvent, it is not
quite clear how Courts would reconcile “majority” or
default legal positions that directly conflict with the
provisions of the partnership agreement – especially if
doing so may run afoul of state constitutional establish-
ment clauses4 or would render the agreement null
according to its terms.
Insurance Coverage
Islamic business transactions also include possibili-
that follow Islamic principles. Termed takaful and akin
ties for insurance contracts, agreements, and coverage
to mutual or cooperative pooling systems, Islamic
insurance models involve policyholders paying sub-
scriptions (like premiums) to create a reserve for the
among the pool. Takaful is implemented using the
group, with the losses divided and liabilities spread
joint-venture model (mudarabah) or an agency model
ally the takaful surplus is to be returned to the sub-
(wakalah) or a combination of both. While tradition-
scribers, a number of takaful operators now contribute
ties. Although American takaful policies generally use
surplus amounts collected from policyholders to chari-
standard forms and conditions just like any other insur-
ance policy, there are some coverage issues that could
arise in the interplay between Islamic principles and
a real question as to whether takaful administrators and
general insurance coverage law. For example, there is
insurers can disclaim coverage given the potential for
no-coverage positions taken on claims asserted by pol-
be akin to riba, or unearned profit, which is prohibited.
icyholders (be they third party liability or first party) to
Judicial Treatment
The examples above are but a few of the disconnects
that exist between Islamic and Western business princi-
ples. As mentioned above, Courts have only begun to
tackle the task of interpreting or reconciling the legal
issues that may arise during the enforcement or breach
of Islamic business contracts and agreements and
5
 Business Litigation Committee Newsletter Winter 2010
addressing torts based on Islamic legal principles, espe-
cially those that may involve choice of law issues. Rule
44.1 of the Federal Rules of Civil Procedure, for exam-
ple, governs the judicial determination of foreign law.
Rule 44.1 states that when deciding issues of foreign
law, a court “may consider any relevant material or
source, including testimony, whether or not submitted
by a party or admissible under the Federal Rules of
Evidence. The court’s determination shall be treated as
a ruling on a question of law.” This rule provides courts
with broad authority to conduct their own independent
research to interpret foreign law. The court may rely
upon its own research and any submissions from the
parties when considering foreign law. In order to arrive
at legal conclusions, courts may seek the aid of expert
witnesses, extracts from foreign legal material, and
may even consider material that would be inadmissible
at trial.
One of few decisions on these points involves a
and use of ijtihad (use of a reasoning methodology to
Delaware state court’s application of Saudi Arabian law
address previously un-addressed Islamic legal issues)
to assess the Saudi tort claim of usurpation (ghasb)
brought by Saudi Basic Industries against Mobil
contracts.5 Another example is that of National
Yanbu Petrochemical Corp arising out of petrochemical
Group for Communications and Computers, Ltd. v.
Lucent Technologies, in which the parties had a
5 See Saudi Basic Inds. Corp. v. Mobil Yanbu Petrochemical Co., Inc., 866 A.2d 1 (Del. 2005).
6 331 F.Supp.2d 290, 293 -94 (D.N.J. 2004).
7 Id.; see also Bridas Corp. v. Unocal Corp., 16 S.W.3d 893 (Tex. App. 2000) (assessing Shari’a principles under the Hanafi school of Islamic jurisprudence and Afghani law).
HITS AND MYTHS ABOUT THE USE OF GRAPHICS
AT TRIAL
By: Gayle Mumm Rossi
Overview
Over the past twenty years,
the use of demonstrative evidence
in the courtroom has evolved dramatically. Physical
aspects of the courtrooms have been renovated and
updated. The technology has changed. Computer soft-
ware has changed. And, most importantly, because they
too, use technology and visuals, jurors’ expectations
about technology and graphics have changed.
The only things that appear to have remained con-
stant, however, are the misperceptions and myths that
many trial attorneys have about using graphics and
6
telecommunications construction sub-contract which
and regulations.6 In Lucent, the United States District
was to be interpreted according to Saudi Arabian law
Court for the District of New Jersey analyzed and val-
uated the damages sought by the Plaintiff according to
Islamic legal principles, which of course prohibit spec-
ulation (gharar) and limits damages for contractual
breaches to actual and direct damages.7
* * *
It is too early to tell how the American judicial legal
system will ultimately deal with the challenges posed
by Islamic legal principles, which have given rise to bil-
lions of dollars of Islamic business transactions that are
growing at an unprecedented pace. With time will
likely come standardized and normative Islamic busi-
ness practices that will hopefully help close the chasm
that exists between Islamic and traditional American
commercial legal issues. Until then, however, the legal
issues pertinent to Islamic business transactions remain
challenging and exciting, not only because the industry
is such big business, but also because it will provide
lawyers with a rare instance of a new legal frontier.
Rabeh Soofi is an attorney at Ice Miller LLP in Indianapolis,
Indiana, and practices in the areas of competitive business practices,
business litigation, insurance coverage, Islamic/Shari’ah compliant
business transactions and litigation. She can be reached at
rabeh.soofi@icemiller.com.
technology in the courtroom. For some reason, attor-
neys remain reluctant to believe that our society and the
potential jury pool have evolved beyond chalkboards
and notepads.
The following are the most commonly held myths
by trial lawyers around the country:
Myth #1: “Using graphics will make us look
like Goliath.”
Myth #2: “I’ve never used graphics before, no
need to start now.”
Myth #3: “Graphics are distracting.”
 Business Litigation Committee Newsletter Winter 2010
Myth #4: “Jurors are stupid.”
Myth #5: “Judges and arbitrators don’t need
to be educated.”
Myth #6: “My in-house person (my parale-
gal, my assistant . . .) can make my
PowerPoint slides.”
The common perception is that graphics are an
accessory for cases with big budgets. If that was ever
true, the playing field has long ago been leveled.
Plaintiff attorneys now use graphics and technology as
often and as effectively as defendant attorneys do, and
their effective use goes far beyond keeping jurors
awake. Demonstratives have become an important trial
tool that can no longer be considered an afterthought or
only an option for a big budget.
Although attorneys frequently refer to graphics and
technology as “bells and whistles” or “laser light
shows,” these references reveal a misunderstanding of
both their audience and what makes an effective pres-
entation. Jurors today are part of a population of inter-
net users who are accustomed to getting (and commu-
nicating) information online, often, for those addicted
to a Blackberry or iPhone, from a screen smaller than
the palm of their hand. A 2008 study found that 37% of
Americans regularly get their news online.1 In January
2009, 100.9 million online visitors viewed 6.3 billion
videos on YouTube.2 Jurors are a sophisticated group
when it comes to their exposure to technology.
Between accessing the World Wide Web with a swipe
of their finger on their iPhone to watching their kids
play virtual games on the Wii, trial lawyers need not
worry about looking too “slick” or “fancy.”
Resistance to using demonstratives or any type of
multimedia is often rooted in the lawyers’ fear that they
will lose control over their presentation. Many sea-
soned lawyers are not tech-savvy; and using graphics
means relying on someone else to develop and display
the presentation. Remember that there is still “control”
in using a technology specialist to display complex
graphics and that the traditional “board” is always
available even in these technologically sophisticated
times.
The reality is that well-developed graphics provide
a visual roadmap of your case, which can be an invalu-
able tool in getting a jury to understand the themes that
are essential to your argument. This article addresses
each myth, and offers observations rooted in surrogate
1 PEW Research Center Biennial News Consumption Study, Aug. 17, 2008.
2 www.YouTube.com.
juror deliberations and in working with hundreds of
actual trial teams. It will also discuss how strategic and
deliberate use of demonstrative evidence can help sup-
port the themes of your case and can become an inte-
gral part of your trial strategy.
Myth #1: “Using graphics will make us look like
Goliath.”
There is a tendency for corporations going to trial to
downplay the fact that they are, in fact, large compa-
nies. This is a mistake. Jurors already know that cor-
porations are large and often wealthy. As a part of this
misperception, many corporations resist using any form
of graphics or multimedia. What we have discovered in
our research is that walking into a courtroom without
graphics will not fool anybody. The absence of strate-
gic graphics cannot disguise the fact that this is a
Fortune 500 company—in fact, what this poor display
suggests is that the company thinks it can fool jurors
into believing that it does not have the resources to edu-
cate the jurors or further, that it doesn’t care about the
case at hand.
Embrace the fact the company is a Goliath and
accept that it is incumbent upon trial counsel to put
forth the most effective and persuasive presentation
possible. Jurors assume that a corporation has billions
to spend, so why not invest some money in making
their experience as positive as possible.
Look at it from the jurors’ perspective. Jurors
appreciate efforts to make their job as decision maker
easier. Jurors are put in unfamiliar territory and asked to
listen to complex subject matter for weeks or months
without asking questions and then asked to make a
decision. Most trial teams have had the benefit of
months or years to work with witnesses and experts to
wrap their head around the case issues. Jurors are given
the same information crammed into a much tighter
timeframe. Incorporating graphics into a presentation
can help jurors navigate through the morass of details.
For example, use a simple board during your open-
ing that outlines the four or five key themes of your
case. (Fig. 1.) These themes form the structure of your
story. Your graphics, like your evidence, should support
each of those themes.
Additionally, graphics can punctuate key points in
your presentation or introduce a new set of facts. If
jurors are zoning out as they often do, using a visual
will prompt them to pay attention. Display a series of
7
 Business Litigation Committee Newsletter Winter 2010
Fig. 1
supporting documents to help establish your case, but
insert more illustrative graphics where possible to
break up the tedium. If your expert witnesses are deal-
ing with complex issues, weave tutorials and summary
slides throughout their testimony to increase the likeli-
hood that the jurors will retain more of the information.
Myth #2: “I’ve never used graphics before, no
need to start now.”
Many seasoned litigators hold fast to the belief, “If
it ain’t broke . . . .” As the sophistication of fact-finders
increases, it is unlikely that what was used successfully
in the past will have the same impact in the future.
Unless you’re E.F. Hutton, there is no guarantee that
your audience is listening.
Jurors will resort to their own means of organizing
the evidence they heard absent any graphics provided
2002 Texas Lawyer article, “Twelve Frustrated Jurors,”
by counsel. This very scenario is described in a July 3,
where the jurors discussed their experience in the
Arthur Andersen trial. They described how they spent
One juror. . . created visual aids to help himself and
days poring over “voluminous documents in the case.
others evaluate the case. . . .”3 This underscores the rea-
son why it is so critical to use graphics in your presen-
tation. Failing to do so leaves open the risk that they
will make their own graphic in a way that may not be
most favorable to your client. Rather than leave the
visuals to chance, create your key graphics in a way
3 Miriam Rozep and Brenda Sapino, Texas Lawyer, “Twelve Frustrated Jurors,” July 3, 2002.
8
you want to tell.
that best reinforces your client’s story. Tell the story
Consider using different multimedia throughout
your presentation to interact with the fact-finders. If
you want to develop a rapport with the jury, pull out a
board and place it on an easel close to the jury box. This
worked well in an antitrust case involving Major
League Soccer. The defense expert got up off the wit-
ness stand and proceeded to make checkmarks indicat-
ing all the leagues in which the MLS players had the
option of playing. Jurors later told the Associated Press
that “they were impressed by the testimony of former
deputy commissioner Sunil Gulati, who compiled a
chart noting that MLS players had come from and gone
to professional leagues in dozens of other countries.”
See Fig. 2
Fig. 2
Myth #3: “Graphics are distracting.”
Many lawyers worry that graphics will only get in
the way of the message or that fact-finders will be dis-
tracted by multimedia presentations—“If they’re look-
ing at the screen, they’re not looking at me.” Jurors are
visual learners and accustomed to spending hours in
front of the television where they are both seeing and
hearing the program. The primary purpose for creating
and using graphics at trial is to educate and persuade
your audience. Once you get the jurors to understand
the issues, you can advocate for your client. Well-
planned, strategic graphics don’t detract from your
presentation—they reinforce it.
It is important to remember not to compete with the
graphic on screen. Careful rehearsing can pay off in
timing how a graphic appears on screen. PowerPoint
slides can build and reveal as your voice punctuates
each point. This keeps jurors focused and on pace with
 Business Litigation Committee Newsletter Winter 2010

you and interested in where the presentation is going.
There is a fear among some trial lawyers that any
multimedia whether it is the demonstrative exhibits or
the actual hardware itself (e.g. screens, monitors), will
detract from them as the presenter. To the contrary,
multimedia used at trial has been shown to improve
proceedings. A survey of 1,000 judges conducted in
1997 showed 80% have used or plan to use technology,
87% believe video evidence presentation technologies
help them to understand the witness better, while 72%
believe video evidence presentation technologies help
them to understand the testimony better.4 Given the
growing trend of technology in courtrooms across the
country, these percentages are likely much higher now.
Myth #4: “Jurors are stupid.”
We spend many hours behind one-way glass observ-
ing surrogate juror deliberations. Often, the lawyers lis-
ten for a while and then come to the erroneous conclu-
sion that jurors are stupid. In actuality, the message was
not properly delivered. In a recent jury exercise, the
lawyer could not understand why the jury missed so
many pertinent facts in his 70 minute presentation. He
was sure he had mentioned these points. What he failed
to realize was he never reinforced his points with
demonstratives. Watching deliberations, it was evident
that the jurors were struggling to recall pieces of evi-
dence and only randomly remembered others. Use of
graphics can increase the length of time jurors will
remember the information.
Over the past several years, there have been a num-
Myth #5: “Judges and arbitrators don’t need to
be educated.”
Assuming that judges and arbitrators have more
education and knowledge about the subject matter at
issue is a mistake. For example, in a recent profes-
sional malpractice case, an accounting firm was
accused of conducting a poor audit. The claimant
argued that sloppy audit techniques prevented the audi-
tors from seeing red flags that would have pointed to a
fraud perpetrated by the company’s senior manage-
ment. Lawyers for the auditor stated that the audit was
conducted according to GAAS and immediately segued
into management’s own failures. When a mock arbitra-
tion panel consisting of three retired judges were
debriefed, they said that they were unable to determine
if, in fact, the auditors had done their job because no
one had explained the tenets of a proper audit. They
asked to have the generally accepted auditing standards
spelled out to assist them in making an informed deci-
sion. One judge later explained, “I’m very big on
[lawyers] treating an arbitrator or judge as a jury. Very
important. Do not assume the arbitrator gets it. Say it.
Show it.” Charts like Figures 2 & 4 are the types of
tutorials that teach the basic steps an auditor follows.

reforms. An April 2005 article in the ABA Journal

ber of jurisdictions focusing their attention on jury

reported on the “overhaul . . . to improve the jury sys-

tem from several angles.”5 Among other things, jury
reforms call for permitting jurors to take notes during
the presentations, to ask questions, and to show greater
care and concern for the jurors. One of the biggest pro-

Fig. 3
ponents of jury reform is former Chief Judge Judith
Kaye from the New York Court of Appeals. She
remarked, “We started with the nuts and bolts of how
you get a jury to the courthouse, and then we moved to
Myth #6: “My in-house person (my paralegal,
how they’re treated. Now we’ve moved on to utilization
and comprehension – how jurors can best go about their my assistant . . .) can create my PowerPoint
work.” This approach dovetails nicely with the argu- slides.”
ment that graphics are necessary in every case to enable As PowerPoint has become accessible to anyone
jurors to complete their civic duty to the best of their with MicroSoft Office on a PC, more attorneys feel
ability. capable of creating their slideshows in-house. The

4 Federal Court Management Report, Aug. 1997.

5 Terry Carter, ABA Law Journal, “The Verdict on Juries,” Apr. 2005.

9
 Business Litigation Committee Newsletter Winter 2010

needed to show what portion was covered by Medicare

and what portion was the Insured’s responsibility. The
expert in the case referred to it as the “donut hole,”
referring to the small gap between coverage and patient
responsibility for payment. We incorporated an actual
image of a donut to convey this concept. Fig. 6 The
donut served as a “visual anchor,” an image that jurors
would remember and help them articulate the takeaway
message, that basic medical care and very sick patients
would be covered.

Fig. 4
request then becomes make those slides look “pretty.”
There are several problems with this approach.
First, most in-house tech support and paralegal per-
sonnel do not have experience observing hundreds of
surrogate juries. As graphic professionals in a compre-
Fig. 5
hensive services company, we are fortunate to have this
kind of exposure on a regular basis, which informs how
we approach the graphics and helps us to determine
what information should (and should not) be on a slide.
Second, slides created by in-house personnel tend to
have a number of common problems: overuse of bul-
lets; placing too much information on a slide; and poor
usage of color to aid the viewer in identifying what is,
and is not, important. Producing a nice looking chart or
graph does not equate to knowing how to communicate
the fact, theme, or idea that needs to be delivered.
Basic fundamentals that should be applied to most
demonstrative exhibits are readability, ease of under-
standing and a simple takeaway. However, there are
some instances in which this is not the case. If the mes-
sage being conveyed is that there was a lot of activity
within a certain time period, then a “busy” chronology

would better convey that message. For example, in a
recent criminal case, the timeline needed to show that
the CEO had a heavy workload and was often busy with
meetings and paperwork. The purpose of the chart was
to explain why he may have overlooked the alleged red
flags in the financial statements. A timeline covered in
entries to emphasize his hectic schedule was the best
way to convey this theme. Any attempt to streamline
the slide, would, in fact, weaken the takeaway.
Figure 5, below is a rudimentary chart provided by
the client in a contract case involving Medicare. We
10
Fig. 6
Another example of when “busy” worked better was
in an antitrust case where the purpose was to show the
volume of calls between two competitors. Rather than
display dull black and white phone records to the jury,
(Fig. 7), we instead color-coded the calls according to
who made the call (Fig. 8). The visual takeaway of the
chart was ‘there were lots of calls between these two
people.”
 Business Litigation Committee Newsletter Winter 2010
Fig. 7
Fig. 8
The point is that having experience in working on
dozens of cases of a particular type means we can
better gauge jurors’ reactions and needs. For example,
having worked on many product liability cases allows
us to anticipate jurors pre-conceived notions and to
address them head on. In cases involving large pharma-
ceutical companies, we can anticipate the pre-existing
juror belief that pharmaceutical companies put profits
over patients. To address this from the outset, we can
create demonstratives emphasizing the resources the
company has spent on research and development, on
conducting numerous clinical trials to ensure a drug is
safe and in fully disclosing all findings to the FDA.
(Fig. 9.)
In insurance cases, companies are often accused of
bad faith. Based on research and experience, we know
that jurors often have preconceived notions that insur-
ance companies collect premiums but avoid paying
claims. Armed with case-specific knowledge, we can
create a chart like the one found in Fig. 10 that shows
the number of times underwriters made settlement
Fig. 9
Fig. 10
offers to the plaintiff. This type of chart underscores
the theme that the insurance company acted in good
faith and allowed jurors to consider that the plaintiff
was motivated by greed.
In Summary
Given the visual nature of our society and our tech-
nological evolution, graphics can no longer be viewed
as an accessory at trial or hearing. When viewed as an
integral part of the trial strategy, the absence of graph-
ics becomes glaring.
Graphics accomplish the following:
Increase the jurors’ retention and understanding.
Add impact to key points.
Reduce confusion and add clarity to the evidence.
Remove boredom and add interest.
Help jurors visualize concepts often difficult to
articulate in words.
11
 Business Litigation Committee Newsletter Winter 2010

Highlight trends and causal relationships.

The strategic use of graphics will reinforce your
case themes and strategies and increase your chances of
winning at trial.
Think of your visual aids as tools in a toolbox.
Which tool should you use? Use the one that best com-
municates your message. But use the tools. Remember
that visual tools are critical when building and support-
ing the framework for an effective and persuasive
visual strategy.
Next time you go to trial, be a hit, not a myth.
Gayle Mumm Rossi is a Vice President at DecisionQuest, one
of the nation’s leading trial consulting firms. She is adept at trans-
lating complex information into simple and compelling visuals for
use at trial. With over 15 years of experience, she has been involved
in over 400 cases, including product liability, accounting malprac-
tice, contract, securities, antitrust, white collar crime cases and
other complex civil disputes. Ms. Rossi is resident in the firm’s
New York office and may be reached at 212.577.9450 or via e-mail
at grossi@decisionquest.com.
© DecisionQuest, 2009. All rights reserved.

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12
 Business Litigation Committee Newsletter Winter 2010
SEPARATED BY A COMMON LANGUAGE: DIFFERENCES
BETWEEN U.S. AND BRITISH INSURANCE LAW
By: Gregory Gentry
When you first come across an
insurance policy governed by British
insurance law, you may be surprised
at some of the critical differences between how United
States courts and British courts deal with some of the
common insurance issues. How can two countries
whose legal systems evolved from the same common
law heritage end up so different? This article discusses
three of those critical differences – (1) the effect of set-
tling an underlying case and whether the insured must
prove its own liability; (2) non-disclosure and the void-
ability of insurance policies; and (3) the introduction of
extrinsic evidence to clarify policy terms. The first two
of these differences are seen as tilting the playing field
far in the direction of insurers while the third gives
some comfort to insureds.
I. Settling Cases and Proving Liability
The first difference between U.S. and British insur-
ance law is the effect of settling an underlying case on
liability insurance. In the United States, it is common
practice to settle cases while still denying liability.
When Dow Corning was defending its silicone breast
implants, for example, it denied that the implants
caused any injury, but still entered into a major settle-
ment. Its insurers denied coverage for that settlement,
arguing that, since the policy covered “injury” and Dow
Corning had denied there was any “injury,” there could
be no coverage. The court rejected this argument, stat-
ing that what was at issue was not “what really hap-
pened,” but “what did Dow Corning fear a judge or jury
might believe happened?”1 This conclusion represents
the clear majority rule in the United States – an insured
need not prove that it is actually liable, only that “given
the circumstances affecting liability, defense and cover-
age, the settlement was reasonable.”2
United States courts have long recognized that forc-
ing an insured to prove its own liability would put it
into a strange bind. As the Tenth Circuit stated:
1 Dow Corning Corp. v. Continental Cas. Co., Nos. 200143-53, 1999 WL 33435067 at *5 (Mich. App. Oct. 12, 1999).
2 United Servs. Auto. Ass’n. v. Morris, 741 P.2d 246, 253 (Ariz. 1987).
3 Vitkus v. Beatrice Co., 127 F.3d 936, 945 (10th Cir. 1997).
4 Post Office v. Norwich Union Fire Ins. Sy. Ltd., [1967] 2 QB 363, 373.
5 [2005] 1 Lloyd’s Rep. 494,
6 [2006] 1 Lloyd’s Rep. 500.
[There are] two important policy considerations
in adopting a legal standard that requires courts
to examine only the potential exposure of the set-
tling party, rather than the actual liability of that
party. First, if actual liability were the applicable
standard, settling defendants would be in the
‘hopelessly untenable position of having to
refute liability until the moment of settlement,
then turn about face to prove liability in the
insurance action’ [citation omitted]. Second,
requiring an insured to prove the case brought
against it in order to receive insurance coverage
would dissuade the insured from settling the
underlying litigation. Faced with the choice of
vigorously defending the underlying tort action
or settling it without the hope of insurance cov-
erage, the insured would choose the former.3
But British courts require exactly this about face.
Since 1967, British courts have understood that a set-
tlement must be one that, to a degree, at least, “estab-
lishes” liability.4 To what degree liability must be estab-
cases, Lumbermen’s Mutual Casualty Co. v. Bovis Lend
lished, however, was in question until recently. Two
Lease, Ltd,5 and Enterprise Oil v. Strand Ins.,6 clarified
Lumbermen’s concerned a building contract. From
that an insured must prove its actual liability.
1996 to 1997, Bovis was the main contractor on a proj-
ect to build the Braehead Retail & Leisure Centre in
Glasgow. Disputes arose about the construction and
Bovis sued its employer for £37 million. The employer
counter-claimed for either £75 million or £103 million,
alleging the project had been mismanaged and claiming
that the work done was defective and non-compliant.
The litigation was settled in 2002 with the employer
paying Bovis £15 million. There was no indication in
the settlement agreement how this number was arrived
at, nor whether it included a set-off against the
employer’s counter-claims. Bovis submitted a claim for
indemnification to its insurers for £19 million, relying
on its solicitors’ assessment of that being the amount of
13
 Business Litigation Committee Newsletter Winter 2010
the employer’s valid claims. The insurer filed for a
declaratory judgment that it was not liable to indemnify
Bovis. The court agreed. It found that an insured must
provide evidence that it was liable and that the settle-
ment amount was reasonable. In this case, however,
when the global settlement was not clear that any cov-
ered loss was included, the court could not reopen the
settlement to determine liability. That part of the deci-
sion, which suggested that for insurance purposes all
settlements should detail which part of the loss is attrib-
uted to each claim, was roundly criticized. The part of
the decision that suggested an insured must prove its
Enterprise Oil dealt a blow to Lumbermen’s, but
liability to the third party in court was not.
only to the controversial section of that decision deal-
ing with undifferentiated settlement agreements. It
reinforced the requirement that insureds prove their lia-
bility. This case dealt with three oil companies,
Enterprise Oil, Amoco and Amerada Hess, which
entered into an agreement in 1990 to explore and
develop North Sea oil fields. In 1997, Amoco agreed to
lease a drilling unit, known as a “Rowan Gorilla V”
(“RGV”) from British American Offshore (“BAO”) and
its US-parent, Rowan Companies, for at least one year
at a rate of $175,000 per day. When the RGV was deliv-
ered in 1999, Amoco attempted to terminate the lease,
claiming the machine was delivered late and was defec-
tive. This led to parallel proceedings in the United
States and England. In England, Amoco sought a dec-
laration that its termination was valid, and BAO sought
the value of its lease, $65 million. BAO won, and was
awarded damages and interest of over $73 million plus
costs in excess of £9.7 million. Enterprise Oil was
obliged to contribute $17.9 million to the damages and
£2.57 million to the costs.
The U.S. parent Rowan Companies (“Rowan”) sued
all three oil companies in Texas, alleging tortious inter-
ference with the lease and claimed actual losses and
also consequential losses arising out of the termination.
Chief among these consequential damages was the lost
value of the company’s share-price when it was
required to cancel a planned buy-back of Rowan stock.
Other losses included the cost of relocating the RGV
and five other rigs from the North Sea to the Gulf of
Mexico and the subsequent loss of earnings. The Texas
the settlement agreement in Lumbermen’s, this settle-
suit was settled on the eve of trial for $175 million. Like
ment did not apportion the damages among the various
7 Id., 516 ¶ 72.
8 See Distillers Co. Ltd. v. Ajax Ins. Co. Ltd., (1974) 48 A.L.J.R. 136 (Australia) (“The insured may make a reasonable settlement where the insurer breaches the contract by deny-
ing liability and refusing to settle.”).
9 General Reinsurance v. Southern Surety, 27 F.2d 265, 273 (8th Cir. 1928).
14
claims. Thus, the insurer sought a declaratory judgment
from Lumbermen’s, that a settlement agreement that
that it was not liable. While the court rejected the idea
did not specifically allocate damages to covered claims
of liability was insufficient for recovery, it stated that
absent express wording, coverage under an indemnity
policy only extends to actual liability, not alleged lia-
bility.7 Therefore, Enterprise could only recover if it
could demonstrate that it was, or would have been,
actually liable to Rowan in the Texas proceedings in
respect of the alleged tortious interference. In addition,
the question the English court should answer was not
decided based on the facts, but what they should have
whether a judge and jury could legitimately have
decided based on its determination of what Texas law
requires. The judge’s task, then, was to decide what the
outcome of the case would have been, applying Texas
law and procedure to the facts as he finds them and act-
ing as both judge and jury. In this case, the judge was
satisfied that Enterprise had failed to prove it had inter-
fered with the lease, which defeated the insurance
claim.
One small ray of hope for insureds, however, is that
both of these cases involved insurers who were not
involved in the settlement process. In both cases the
a fait accompli. It is, therefore, an open question how
insurer was informed of the settlement only after it was
the English courts will deal with an insurer who refuses
to defend or consent to settle. Other Commonwealth
Countries have found an insurer who wrongfully denies
their duty to defend gives up the right to contest more
than the reasonableness of the settlement amount.8
II. Non-Disclosure and Uberrima Fides
A second way in which English insurance law tends
to favor the insurer is in the concept of non-disclosure.
In the United States, outside of maritime contracts, the
only time an insurance contract can be voided for the
insured failing to provide material information is if it
can be proved that the insured acted fraudulently. Fraud
is defined as either: “(1) Where insured, having actual
knowledge of material facts, has intentionally failed to
disclose them truthfully. (2) Where insured, though not
having actual knowledge of material facts, yet has
intentionally, and in bad faith, refused to become
acquainted with the facts.”9 An innocent nondisclosure
– accidental or negligent – by contrast, cannot lead to
the voiding of an insurance contract.
 Business Litigation Committee Newsletter Winter 2010

In England, however, the rule is one of uberrima

fides, utmost truthfulness. The duty of utmost truthful-
ness is premised on the assumption that the insured has
the advantage of information. “Insurance is a contract of
speculation. The special facts upon which the contin-
gent chance is to be computed lie most commonly in the
knowledge of the insured only; the underwriter trusts to
his representation, and proceeds upon confidence that
he does not keep back any circumstance. . . .”10
Thus, an insurance contract is voidable if the
insured fails to disclose a known material fact, which
would influence the judgment of the reasonable insurer
and which, if disclosed, would have induced the actual
insurer either not to make the contract or make it on dif-
ferent terms. The burden is on the insurer to prove the
elements of non-disclosure.11
The withheld information must be of the type that
would be material to a reasonable insurer.12 What is
material depends on several factors, including the
branch of insurance, the general practice, context, and
public policy. For withheld information to be consid-
ered misrepresentation, the risk known to the insured
and unknown to the insurer must be of a type that
would impact the issuance of the type of insurance
involved. Not disclosing a flaw in a reinsurance
arrangement might not endanger a liability insurance
contract, for example. In other words, non-disclosure is
only found to be material for those matters where an
information imbalance would be expected. The courts
next look to the general practice of what is done by
insurers who work in the same line of insurance in a
similar situation,13 and to the questions those insurers
generally put to the insured, but the courts will not give
much weight to the questions the specific insurer put to
the insured outside the context of the general industry.
This is the opposite of what the majority rule is in the
United States, where an unasked question is presumed
to be immaterial.
In addition to the branch of insurance and the gen-
eral practice of the industry, the British courts look to
context and public policy. First, the time when the
information is given is important. For example, the fact
10 Carter v. Boehm, (1766) 3 Burr 1905, 1909.
11 Butcher v. Dowlen, [1981] 1 Lloyd’s Rep. 310.
12 Mutual Life Ins. Co. v. Ontario Metal Products, [1925] AC 344, 351, per Lord Salveson, adopted by Lord Greene MR, in Zurich General Accident & Liability Ins. Co. Ltd v.
that a ship is chartered to a German company may be
quite material during World War I, but completely
immaterial at the time the contract was written if it was
written in the years before the war.14 Finally, public pol-
icy may put things out of bounds of materiality that
might otherwise be material. In England, under the
Rehabilitation of Offenders Act of 1974,15 criminal con-
victions are “spent” and need not be disclosed after a
period of time, which varies according to the sentence.
So while an insurer may find it vitally material to know
that a proposed insured has a conviction for drunk driv-
ing on his record, if that conviction is spent, that is
deemed by law to be not material.
Of course, a company can only fail to disclose infor-
mation it knows. However, the knowledge of a com-
pany in England is broader than a company in the
United States. In England, the knowledge of “agents to
know” and employees who can exercise some discre-
tion or executive authority is generally imputed to a
company. “Agents to know” are employees involved in
making the insurance contract and those “specially
employed for the purpose of communicating to him the
very facts which the law requires him to divulge to his
insurer.”16
In addition to actual knowledge and imputed knowl-
edge of agents and employees, a company is presumed
to know “ever[y] circumstance which, in the ordinary
course of business, ought to be known to him.”17 Also,
a company is assumed to have a degree of general
knowledge, sometimes referred to as “street smarts” or
“common sense.” The test for what a company should
know in the ordinary course of business is analogous to
that in tort law: the knowledge held by a reasonable
individual of the same characteristics.18
British courts, however, have long recognized that
one need not disclose that which is truly unknown; as a
consequence, a company is not required to undertake
extensive inquiries prior to concluding a contract for
insurance.
To impose such an obligation upon the proposer is
tantamount to holding that insurers only insure persons

13 Glasgow Assurance Corp Ltd. v. Symondson, (1911) 16 Com Cas 109, 120, per Scrutton J.
Morrison, [1942] 2 KB 53, 58.

14 Associated Oil Carriers v. Union of Canton, [1917] 2 KB 184.

15 Mitchell [1998] LMCLQ 411, 415.
16 Blackburn v. Vigors, (1887) 12 App Cas 531, 541 per Lord Watson.
17 Marine Insurance Act of 1906, § 18(1).
18 Economides v. Commercial Assurance Co. Plc., [1998] QB 587.

15
 Business Litigation Committee Newsletter Winter 2010
who conduct their business prudently, whereas it is
commonplace that one of the purposes of insurance is
to cover yourself against your own negligence or the
negligence of your servant.19
The rule can be stated that negligence after the for-
mation of the contract is insured against, but negligence
in the application for coverage is not.
III. The Matrix of Facts
One area where British insurance law appears to
lean slightly in favor of the insured is in the area of
parol evidence. In the United States, the common rule,
learned by every 1L in their contracts class, is that parol
evidence is not admissible to contradict the plain mean-
ing of the contract unless there is some ambiguity. In
Britain, the rule appears to be broader. The general rule
of contract interpretation is that all facts reasonably
knowable to both parties are admissible to aid in the
interpretation of a contract. The only exception to this
rule is that the previous negotiations of the parties and
are generally inadmissible. As the Enterprise Oil court
any statements of subjective intent made by the parties
stated, “the interpretive exercise must not be done in a
vacuum, but in the milieu of the admissible background
material. That comprises anything that a reasonable
man would have regarded as relevant in order to com-
prehend how the document should be understood, pro-
vided that the material was reasonably available to both
parties at the time (i.e., up to the time of the creation of
the document) . . . .”20 This set of available data points
is referred to as the “Matrix of Facts.”
Far from having to first prove an ambiguity to admit
sible. Lewison on the Interpretation of Contracts, one
the Matrix of Facts, they are considered always admis-
of Britain’s premiere treatises on contract interpretation
states:
It has, however, always been the case that the
court must construe a written agreement . . . in
19 Australia and New Zeland Bank LTD. v. Colonial and Eagle Wharves Ltd., [1960] 2 Lloyd’s rep 241.
20 [2006] 1 Lloyd’s Rep. 500, 514, ¶ 60.
21 ¶ 3.14.
22 North British Fishing Insurance Co. Ltd. V. Starr, (1922) Lloyd’s LI.L.Rep. 206.
16
the light of the circumstances (or background)
surrounding its making. Although recent deci-
sions have emphasized the importance of the
background to a contract, the principle has long
been part of English law … It will be noted that
the principle thus formulated applies even where
the words of the contract are plain and intelligi-
ble . . . Accordingly, evidence of the surrounding
circumstances is admissible in all cases to place
the contract in its correct setting, even where
there is no ambiguity apparent on the face of the
document . . . .21
The only requirement is that the facts must be
known, or reasonably knowable to the parties at the
time the contract was entered into. They need not be
subjectively known to the parties if a reasonable party
should have known them. Insurers, in particular, are
assumed to have a great breadth of knowledge of the
industry they are insuring. For example, a British court
said of a marine insurer that its underwriters could be
deemed to know the course of losses affecting particu-
lar classes of ships, but not the particular circumstances
affecting individual ships or ship lines.22
The difference between the insurance law of the
United States and Britain can often be subtle, but as
seen above, it can also be fundamental and striking. A
policy that would shock the conscience of a U.S. court,
requiring the insured to prove its own liability, is seen
as an implied term of any liability policy in Britain.
This article gives a brief glimpse of some of the pitfalls
that can present themselves to U.S. lawyers coming to
terms with an insurance policy governed by British
insurance law.
Gregory Gentry is an attorney specializing in insurance cover-
age and products liability. He also counsels clients on allegations of
business crime and advises them on related governmental investiga-
Foley Hoag and Morrison Mahoney. He can be reached at
tions. He has litigation experience from the Boston firms of
greg.gentry@gmail.com.
 Business Litigation Committee Newsletter Winter 2010
THE DUTY TO DEFEND: WHAT INSURERS, INSUREDS
AND THEIR COUNSEL NEED TO KNOW WHEN FACED
WITH A LIABILITY COVERAGE DISPUTE
By: Eliot M. Harris
Practically every business and
protect against losses, i.e., direct damage to property or
homeowner obtains insurance to
business caused by an unforeseen event. However,
many policyholders do not realize that perhaps the most
important aspect of their insurance policy can be the
liability section, which protects them from certain dam-
ages sought in third-party claims asserted against them.
For business owners, this coverage is typically obtained
under a commercial general liability (“CGL”) policy,
which provides protection against certain risks that may
arise during the course of conducting business. For
homeowners, their liability protection against a lawsuit
or other claim is contained in the liability section of
their homeowner’s policy.
The Insurer’s Duties to Indemnify and to Defend
Most policies, regardless of whether it’s a CGL or
homeowners policy, include at least two liability-
related promises by the insurer. The first promise,
which is commonly referred to as the duty to indem-
nify, is the insurer’s agreement to pay for the insured’s
legal liability up to the stated policy limits. The second
promise, which is broader than the first promise, is
referred to as the promise to defend, and it means that
the insurer agrees to hire legal counsel to defend the
insured against a covered suit. The duty to defend also
includes a promise to cover all legal fees and costs.
Therefore, if a policyholder is faced with a covered
third-party claim, the insurer has a duty to defend
against the claim, in addition to a duty to pay any mon-
etary award entered against the insured for covered
claims.
Of course, the practical application of these rules is
not so straightforward. The rights and obligations of
the insurer and insured in this context are controlled by
numerous rules and exceptions, only some of which are
explicitly stated in the applicable insurance policy.
Disputes over whether a civil lawsuit, or other legal
proceeding, triggers an insurer’s duty to defend are
common. These disputes are unique in that two parties,
jointly defending against a third-party lawsuit, are
1 R.T. Vanderbilt Co. v. Continental Cas. Co., 870 A.2d 1048 (Conn. 2005) (finding that policies providing coverage for “suits” will always be construed to cover Environmental
Protection Agency administrative actions initiated by a PRP letter).
directly adverse to each other in a separate lawsuit
regarding which one of them is responsible for cover-
ing the costs of the third-party lawsuit, as well as any
resulting judgment. Below is an overview of common
issues that can arise during such disputes.
Analysis Of Whether The Claim Falls Under The
Policy
When determining whether a liability insurer has a
duty to defend, the first inquiry is whether a “suit”
exists. The term “suit,” which became a defined term
under most CGL policies in 1986, means a civil pro-
ceeding, such as the filing of a complaint. Though most
commonly thought of as a civil lawsuit, most liability
policies contain a broad definition of “suit” that could
be interpreted to include other claims against an
insured, such as arbitration demands or other alterna-
tive dispute resolution proceedings, as well as adminis-
trative challenges and petitions. In certain circum-
stances, the term “suit” may even include a govern-
mental agency proceeding. For example, governmental
agencies sometimes issue a potentially responsible
party (“PRP”) letter to an entity that it suspects is caus-
ing, or at least contributing to, an environmental con-
tamination. While the Courts are mixed so far as to
whether this constitutes a “suit,” some courts have
found that such a demand falls under the usual meaning
of “suit” in the context of a CGL policy.1 Conversely,
an example of a proceeding that is generally not con-
sidered a “suit” is a criminal complaint for trespassing
or negligent homicide, which would not trigger a duty
to defend as the relief sought is a criminal penalty, not
necessarily monetary damages.
Assuming the definition of “suit” is satisfied, the
next hurdle is determining whether the “suit” seeks
damages caused by an “occurrence,” which is typically
defined as an “accident,” and includes the continuous or
repeated exposure to the same harmful condition. The
term “accident” generally is defined as a fortuitous cir-
cumstance, event, or happening that is neither expected
nor intended by the insured. To clarify the definition of
“occurrence,” insurance policies typically contain a
17
 Business Litigation Committee Newsletter Winter 2010
specific exclusion for damages caused by intentional
acts. However, many courts have broadly construed the
terms “occurrence” and “accident.” For example, the
Texas Supreme Court recently ruled that unintended
construction defects may constitute an “occurrence” or
“accident” under a CGL policy even if the act causing
the defects was deliberate, so long as the act was also
negligent and, “the effect is not the intended or
expected result; that is, the result would have been dif-
ferent had the deliberate act been performed correctly.”2
Conversely, a suit may not involve an “accident” or
“occurrence” when the insured intended the injury, or
when the resulting damage was the natural and
expected result of the insured’s actions, regardless of
whether the insured was negligent.3 Under this analy-
sis, the inquiry is focused on whether the insured
intended to cause the damage, and not whether the
damage resulted from the intentional act.
Another major issue is whether the damages sought
in the “suit” are the types of damages covered under the
policy. For example, it is common for “property dam-
age” and “personal injury” to be covered under most
policies, but issues arise as to the appropriate interpre-
tation of these claims. Also, because most insurance
policies provide broad coverage subject to a myriad of
limitations and exclusions that restrict coverage to cer-
tain circumstances, questions regarding coverage for
certain claims, but not others, often cannot be resolved
by simply reviewing the policy and the complaint. This
issue is discussed more fully below. Moreover, it is
important to have a solid understanding of the specific
exclusionary language contained in the policy, as well
as sufficient knowledge of how the applicable policy
language has been previously interpreted by courts in
the relevant jurisdiction, in order to properly determine
whether the insurer’s duty to defend is triggered by the
complaint.
You also must determine if the “suit” occurred dur-
ing the effective period of the policy. If the claims
arose outside of the policy period, the insurer has no
duty to defend. Common issues in this context arise
when the policy has been cancelled and/or reinstated
repeatedly, either for nonpayment or late payment of
policy premiums. Another context where these issues
arise is when the claimed damage is progressive and
ongoing over a series of years. It is important to review
2 Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007).
3 Id.
4 Claims-made policies, however, may also cover claims arising from events that occurred prior to the effective date of the policy when they contain what is commonly called “prior
acts coverage.”
5 This is also referred to as the “Eight Corners” or the “Complaint Allegation” rule.
18
the policy language to determine if the policy covers
suits based on when they occur or when the claim is
made. For “occurrence-based” policies, there may be
coverage for suits brought years after the underlying
events occurred, provided that the covered “damage”
and events occurred during the policy period. For
“claims-made” policies, coverage is only available if
the claim is brought or reported during the policy
period.4 Therefore, it is important for all policyholders
and insurers to understand the policy period and how it
applies to the asserted claims to determine if the “suit”
falls outside the policy period.
Review Of Materials Beyond The Complaint
The insurer’s duty to defend is controlled by the
allegations contained in the complaint. Thus, the first
step is a careful reading of the complaint to determine
the nature of the underlying allegations. Most juris-
dictions require that even if only one claim in a suit is
potentially covered by the policy, the insurer has a
duty to defend the entire suit. Therefore, all allega-
tions in the complaint must be analyzed for potential
coverage, even if clearly non-covered claims are
included.
Because most jurisdictions allow notice pleadings,
which require only a short and plain statement of the
facts supporting the relief requested, the allegations in
the complaint sometimes do not, by themselves, pro-
vide sufficient information to determine the full extent
of the claims being made. Therefore, the next step is
looking outside the complaint when evaluating whether
there is a duty to defend. There are two common
approaches to this issue, and certain jurisdictions may
follow one, or even both, of these approaches depend-
ing on the circumstances involved.
Under the “Four Corners” test,5 courts will look
only at the allegations contained in the complaint initi-
ating the suit to determine if the allegations are covered
under the policy. Under this test, a jury will be asked
to examine only the allegations in the underlying com-
plaint, as well as the insurance policy, to determine
whether the allegations are covered under the policy.
An important rule to remember in this context is that
the jury will not usually see the pleadings or discovery
from the underlying suit. In addition, the jury will
likely be instructed to assume that all of the allegations
 Business Litigation Committee Newsletter Winter 2010
in the complaint are true when deciding if the claims
are covered under the policy.
The second test allows “extrinsic evidence” to be
considered during a coverage evaluation. Evidence
outside the complaint may include evidence obtained
during the pre-suit investigation by the insured and/or
the coverage investigation by the insurer. Oftentimes,
an insurer will attempt to resolve coverage issues prior
to the filing of a suit, but the admissibility of evidence
obtained during pre-suit investigation will depend on
the jurisdiction and the circumstances involved. Some
courts have recently allowed “extrinsic evidence” to
evaluate coverage when the case contains readily ascer-
tainable facts, relevant to coverage, that do not overlap
with the merits of, or engage the truth or falsity of, any
facts alleged in the underlying case.6 Admitting such
evidence at trial allows a jury to more closely approxi-
mate the insurer’s knowledge at the time it decided to
accept or deny defense of the underlying suit.
Admission of this additional evidence is important not
only as it relates to the actual dispute, but also as to any
claims of bad faith based on an insurer’s denial of cov-
erage. The “extrinsic evidence” test also avoids pro-
viding coverage for claims that are clearly not covered
under the insurance policy despite the allegations that
appear on the face of the complaint. For example, a
complaint that merely contains the word “negligence”
will not change a generally non-covered breach of con-
tract action into a generally covered tort action.
Reimbursement of Defense Costs
An insurer will generally not be able to recover from
an insured the cost of defending any claim. Therefore,
even after defending the insured, and later proving that
the allegations against the insured were not covered by
the policy, the insurer still is unlikely to recover from
the insured any money already paid for the insured’s
defense.
This is significant when the cost to defend a claim
may equal, or even exceed, the policy limits under the
policy. In other words, the insurer may pay over $1
million dollars to defend against a lawsuit where the
policy limits are only $500,000. Thus, for the insured,
the value of appointed defense counsel could far out-
weigh the value of indemnity from any monetary award
6 See Ooida Risk Retention Group, Inc v. Williams, No. 08-10381, 2009 WL 2461850 (5th Cir. Aug. 12, 2009).
7See Buss v. Superior Court, 16 Cal.4th 35 (1997), see also Aerojet-General Corp. v. Transport Indem. Co., 17 Cal.4th 38 (1997).
8 See, e.g., Sherwood Brands, Inc. v. Hartford Acc. & Indem. Co., 698 A.2d 1078, 1083 (Md. 1997).
9 See Viking Ins. Co. v. Hill, 787 P.2d 1385 (Wash. Ct. App. 1990). Other jurisdictions are in accord. See, e.g., Samply v. Integrity Ins. Co., 476 So.2d 79 (Ala. 1985); Conway v.
10 In some jurisdictions, an insurer may even have a further duty to appeal if there are reasonable grounds for an appeal. See, e.g., Truck Ins. Exch. v. Century Indem. Co., 887
Country Cas. Ins. Co., 442 N.E.2d 245 (Ill. 1982); Delaney v. Vardine Paratransit, Inc., 504 N.Y.S.2d 70 (1986).
P.2d 455 (Wash. Ct. App. 1995).
entered against it. Not only does this illustrate the
potential value of a liability insurance policy to the
insured, it also demonstrates the insurer’s potential
risks of not diligently conducting a pre-suit coverage
investigation to resolve coverage issues before it
assumes defense of a suit.
There are exceptions to this general rule, one of
which is where a complaint contains arguably covered
allegations and undisputedly non-covered allegations.
In this context, insurers have successfully sought
reimbursement from an insured for defense costs
paid to defend against non-covered allegations.7
Reimbursement is unlikely as a practical matter
because the burden is on the insurer to demonstrate the
specific defense costs allocated to the covered versus
non-covered claims. Conversely, there are an increas-
bursement for “pre-tender” defense costs, i.e., costs the
ing number of insureds successfully obtaining reim-
insured incurs before the insurer becomes involved in
the defense.8
Termination Of The Duty To Defend
It is a common misconception that the duty to
defend lasts only until the limits of the insurance policy
have been exhausted. In other words, many people tend
to agree that an insurance company can simply tender
the policy limits up front to avoid paying the defense
costs. One common example of this issue arising is
when the policy limits are clearly insufficient to cover
the potential liability. For example, if an insured has
only $1 million in liability coverage, but is faced with
liability for a catastrophic injury or massive environ-
mental cleanup, the settlement or judgment will almost
certainly exceed the policy limits; however, the insurer
may still have a duty to defend the insured even after it
tenders the policy limits to satisfy the claim.
Simply tendering the policy limits without retaining
defense counsel runs counter to the concept of separate
duties to defend and indemnify. In fact, numerous
courts have repeatedly found this practice in violation
of the insurer’s duty to defend, and consequently the
insurer’s duty of good faith.9 Therefore, insurers must
be cautious when denying or withdrawing defense of an
insured before the underlying action is resolved or there
is a showing of no coverage for the claim.10
19
 Business Litigation Committee Newsletter Winter 2010

Of course, an insurer is free to deny or withdraw than the amount that his traumatized ex-employee was
defense of a previously accepted claim. As a practical compensated for this cruel ‘joke.’”13
matter, only a fraction of claims actually result in the
When faced with defending against a non-covered
payment of damages. Thus, if the damages being
claim, the insurer appears to be faced with two choices:
sought are clearly not covered by the policy, the insurer
(1) accept defense of a dubious claim and pay the
has no duty to defend. However, the potential conse-
defense costs; or (2) deny the claim and risk losing the
quences for refusing to defend an insured for even an
coverage determination, which would inevitably lead to
arguably covered claim can be severe. Any doubt
a bad faith claim. As discussed below, there are alter-
regarding the duty to defend will likely be resolved in
native options available to the insurer, however.
favor of the insured. Insurers should be aware that a
denial of coverage could cause a breach of the insur- Reservation of Rights and Declaratory Judgment
ance contract, which, as discussed below, can also lead
Actions
to a bad faith claim against the insurer.
An insurer’s first option is to disclaim its duty to
Bad Faith Claims defend and reserve all of its rights. This must be done

sonably breaches the insurance policy, i.e., fails to

Generally, bad faith occurs when the insurer unrea-
defend its insured without a reasonable belief that the
underlying suit is not covered. However, if a claim is
even arguably covered under the policy, the insurer may
act in bad faith even if it has a reasonable basis for
denying the claim. In a recent case, an insurer was
found to have acted in bad faith when it refused to
defend a dentist for claims arising from a practical joke
during surgery.11 While performing a dental procedure,
the dentist inserted flippers shaped like boar tusks into
the patient’s mouth and took pictures. After the suc-
cessful surgery, the patient learned of the photographs
and filed suit against the dentist for various claims
including outrage, medical negligence, and negligent
infliction of emotional distress. The dentist tendered
the claim to his professional insurance carrier, who
denied coverage finding that the claims were not cov-
ered under the policy. The Washington Supreme Court
found that the claims were potentially covered as “den-
tal services” and stated the following: “[t]he acts that
comprised the practical joke were integrated into and
at the outset to avoid potential waiver and estoppel
effect of its coverage defenses. An effective reservation
of rights letter (often referred to as a “ROR” letter)
should include all of the insurer’s potential coverage
defenses, including whether the claim meets the defini-
tions of “suit,” “occurrence,” and “accident” under the
policy, as well as whether the suit seeks appropriate
damages, typically “personal injury” or “property dam-
age.” The ROR letter should also include a notation
regarding the policy limits, and any other applicable
limitations or exclusions to coverage. An insurer that
fails to assert all potential defenses in the ROR letter
may be viewed as having waived these defenses during
a subsequent coverage dispute.
To avoid confusion, the ROR letter should clearly
state that the insurer is disputing coverage for the
claim, but is still providing a defense for the insured
subject to any and all policy defenses, regardless of
whether they are specifically included in the ROR let-
ter or not. This may prevent waiver and estoppel of
any other coverage defenses. It is also important to
advise the insured that it has the right to retain its own

The Woo case also illustrates the severity of the risks

inseparable from the overall [dental] procedure.”12 coverage counsel, and in some states, retain separate
defense counsel as well.14
for breaching the duty to defend. Because of its bad Either in lieu of, or in addition to, submitting the
faith conduct, the insurer had to pay $250,000 to the ROR letter, the insurer can file a declaratory judgment
dentist as reimbursement for the underlying settlement action. This is a separate lawsuit requesting a determi-
with the patient. In addition, the insurer had to pay the nation as to coverage for the underlying suit.
dentist $750,000 as bad faith damages. Therefore, the Essentially, a declaratory judgment is a court order
result of the case is that the insurer was ordered to pay declaring the rights and liabilities of the parties under
the dentist and his attorneys “a million dollars more the insurance policy. A policyholder may also file a
11 Woo v. Fireman’s Fund Ins. Co., 164 P.3d 454 (Wash. 2007).
12 Id. at 57. The Court also refused to adopt a “reasonable expectations” test, under which an insurer has a duty to defend if the insured would reasonably expect coverage under
the policy. Id. at 53 n.5.
13 Id. at 73.
14 See San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 385 (1984). Some states view the issuance of a ROR letter as creating a possible conflict of
interest between the insurer and the insured. Thus, under these circumstances, the insured may have the right to appoint separate independent counsel to represent the insured.
20
 Business Litigation Committee Newsletter Winter 2010
declaratory judgment action.
Filing a declaratory judgment action is not without
risks for the insurer, however. There is the potential
that if the insurer loses the declaratory judgment action
on its merits, the insurer could be held liable not only
for defense costs of the underlying lawsuit (assuming
the insurer continues to provide defense after com-
mencing the declaratory judgment action), but also for
the cost incurred by the insured in the declaratory judg-
ment action. Courts have awarded costs to the insured
in the declaratory judgment actions regardless of
whether the declaratory judgment action was filed in
good faith or was the subject of a legitimate dispute.15
In sum, given the potential pitfalls for both insurers
and insureds in duty-to-defend disputes, it is critical
that both sides research the applicable law in the rele-
15 See, e.g., Rubenstein v. Royal Ins. Co. of America, 708 N.E.2d 639 (Mass. 1999).
FORENSIC ACCOUNTING AND INSURANCE CLAIMS
By: David R. Elmore Jr., CPA
No matter the type of insurance
claim, if a party suffers an economic
establish financial damages. There
or financial impact, there is a need to
are many claim types which may
require some level of financial analysis; however, first-
party property insurance and casualty and general lia-
bility (“CGL”) insurance are two that will be the focus
of this article. I will touch on the variables involved in
determining financial damages in each of these claim
types, as well as possible impacts an economic reces-
sion may have on each.
First Party, Third Party . . . Who Are They?
Generally, first-party claims involve an insured that
sustained the impact of the loss whereas CGL claims
typically involve the party that may have been liable for
the loss that was sustained. The financial impact to the
carriers who insure either the business that was directly
affected or who insures the liable entity is real. The
tools and techniques employed by the Forensic
Accountant to measure the impact on liability claims
are similar, and in many cases the same, as those con-
sidered in the measurement of first-party property dam-
age claims. Consider the concept that the CGL loss is
the “flip or reverse-side” to the first-party property
claim where fault can be established.
vant jurisidiction before taking a position that could
affect their rights and responsibilities to each other if a
coverage dispute arises. Given the broad coverage
afforded under many liability policies, issues involving
the duty to defend could potentially arise in almost any
area of litigation. Thus, it is important that potential lit-
igants and liability insurers protect their rights from the
outset of the underlying litigation, and if necessary,
take steps to protect their rights and defenses under the
relevant insurance policies.
Eliot M. Harris is an attorney in the Seattle office of Williams
Kastner & Gibbs, PLLC. Mr. Harris has represented residential and
commercial insurers, as well as businesses and individual insureds,
involved in insurance coverage disputes throughout the Pacific
Northwest. He practices in the areas of insurance coverage, mass
torts, product liability, and catastrophic personal injury. He can be
reached at eharris@williamskastner.com.
The Forensic Accountant’s role is not limited to the
verification of property claims in subrogation matters.
In many circumstances, the liability carrier will be put
on notice and immediately be interested in potential
exposures resulting from the events of its insured. It is
preferable that the Forensic Accountant be retained
early in the process, so that analyses can be prepared
and potential exposures established simultaneously
with the first-party claim settlement process. As such,
once the subrogation process begins, the liability car-
rier is aware of the accuracy or potential differences in
the damage assessments.
Whether the Forensic Accountant is retained by the
first-party carrier or the liability carrier, the modeling
and measurements to determine the financial impact of
the loss are not necessarily dissimilar even though the
policy wording for each defers greatly. The wording of
a first-party business owners policy (CP 00 30 06 07)
regarding Business Income reads as follows:
Business Income means the: a. Net Income (Net
Profit or Loss before income taxes) that would have
been earned or incurred; and b. Continuing normal
operating expenses incurred, including payroll.
The wording of a typical Casualty and General
Liability policy (CG 00 01 12 04) is typically the fol-
lowing:
21
 Business Litigation Committee Newsletter Winter 2010
We will pay those sums that the insured becomes
legally obligated to pay as damages because of
“bodily injury” or “property damage” to which
this insurance applies.1
Although the typical first-party policy specifically
defines “Business Income” and the liability policy only
speaks to “damages,” from an accounting perspective,
the measurement is similar. The goal in any damage
assessment is to establish what the insured or claimant
would have done that it now could not do for itself as a
result of the loss during the period in which it was
affected.
The financial professional engaged to establish
these damages should consider through various meth-
ods the projected level of sales the insured or claimant
would have earned had the loss not occurred, and
deduct from that any costs or expenses that would have
been saved as a result of the inoperable nature of the
entity. Although there are many other considerations,
this general assessment should be performed regardless
of whether the policy involved specifically refers to the
“road map” of determining the measurement.
Calculating Damages in an Economic Recession
As the goal in any damage assessment is to
endeavor to determine what would have been earned or
incurred by the insured or claimant had a loss not
occurred, it is important to delineate between any
reductions in sales or profits resulting from the loss
event versus any reductions in sales or profits that may
have been a result of a reduction in business due to an
economic recession. A few potential areas of impact
from an economic recession may be, but are not limited
to, the following:
Projections:
The financial professional will need to determine
the level of sales and expense that would have
been incurred had the loss event not happened.
From a sales perspective, industry statistical
information could be considered to overlay the
insured’s or claimant’s historical data to under-
stand how the entity typically compares in the
general industry in which it operates. This may
give the financial professional an idea of what
the insured or claimant may have experienced
during a time in which the industry was
adversely affected.
1 Please note that I do not hold myself out as an expert in interpretation of insurance policy language and I am not an insurance adjuster. I reference the policy wording merely to
draw attention to the differences in the definitions within each policy.
22
Capacity:
It is possible that in advance of a loss event, an
insured or claimant has limited available capac-
ity in its operations where “make-up” for a loss
may not have been possible. However, due to the
economic downturn, it is possible that the same
insured or claimant may have excess capacity
that may be utilized for make-up after the
restoration or a loss is complete. These consid-
erations may affect the actual economic impact
to an insured or claimant resulting from a loss.
Whereas with no excess capacity, the financial
impact may be a loss of business income, with
excess capacity, the financial impact may be lim-
ited to any extra expenses that would be incurred
to “make-up” the loss that otherwise may have
been incurred.
Increased Cost of Doing Business:
Any increased expenses incurred during in a
recessionary period also need to be considered.
Typically, in an effort to determine what the nor-
mal expenses would have been for an insured or
claimant during a time in which the operations
were affected, the financial professional will
review historical financial statements. However,
to the extent the historical financial statements
are before any economic downturn, the profits
reflected on the historical data may not be repre-
sentative of what the insured or claimant would
have earned but for the loss event. As such, to
the extent the profitability would have been
impacted regardless of the loss, it is imperative
that the financial professional make an effort to
assess what the profitability would have been
had the loss not occurred but that which may be
somewhat varied from the results reflected on
the historical financials. Generally, profitability
of a business may be potentially impacted in an
economic recession by such factors as:
reduced Sales;
increased material costs;
increased fuel/freight costs (both receiving
and shipping); and
reduced labor due to layoffs.
The timing of a loss is also important. As much as
a business could be negatively impacted during an eco-
 Business Litigation Committee Newsletter Winter 2010
nomic recession compared to before the downturn
began, the opposite is true when a business is impacted
after the recovery has started and the economy begins
to improve. The financial documentation relied upon to
establish damages may be impacted by the economic
downturn and may not necessarily be representative of
what the business may have been able to accomplish
after the economic recovery began. As such and dis-
cussed previously, the financial professional has a
responsibility to measure damages based on what the
business would have done for itself had a loss not
occurred. If that amount would have been compara-
tively “better” than the pre-loss financials may reflect
(if those financials represent a period during an eco-
nomic recession), then the financial professional is
responsible to consider the potential increase the busi-
ness may have experienced had the loss not occurred
due to the recovering economy. The affects of the eco-
nomic downturn not only impact damage measure-
ments during the period of recession but will also need
to be considered during the recovery.
There are many other areas that could be impacted
when measuring financial damages in an economic
recession, which the financial professional should con-
sider. The key point to note is that if a loss were to
occur during (or immediately preceding) an economic
downturn or subsequent to the economic recovery the
CASE NOTES
By: Elizabeth Friedenstein
AN INSURER CANNOT DEFEND A CLAIM ABOUT
WHICH IT HAS NO KNOWLEDGE
Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904
N.E.2d 1267 (Ind. 2009)
The Indiana Supreme Court recently held that notice
its insured in Dreaded, Inc. v. St. Paul Guardian Ins.
is a condition precedent to an insurer’s duty to defend
Co. The relevant facts of Dreaded are as follows: In
November 2000, the Indiana Department of
Environmental Management (IDEM) demanded, by
letter, that Dreaded investigate a possible soil contami-
nation issue. Dreaded hired an attorney and an envi-
ronmental contractor. The contractor produced two
financials may not necessarily be representative of what
the insured (or claimant) would have incurred and/or
sustained.
First Party, Third Party . . . Which Is Affected?
As indicated previously, the tools and techniques
applied to measuring damages in first-party claims and
third-party claims are essentially the same. As such,
the impact an economic recession may have on an
insured (or claimant) would have to be considered
regardless of where in the process the financial profes-
sional is involved.
Whether the financial professional is hired by the
insurance carrier (either the first-party carrier or the lia-
bility carrier) or is involved by counsel representing
either the plaintiff or defense, it is imperative that he or
she endeavors to consider potential factors that could
impact the damage measurement and the ultimate
recovery.
David R. Elmore Jr., CPA, is a partner at MATSON DRISCOLL
& DAMICO, an international public accounting firm specializing in
investigative or “forensic” accounting and measurement of dam-
ages. He has been involved in hundreds of engagements involving
the evaluation and quantification of damages, including lost profits,
damaged property and inventory, and employee dishonesty. These
cases have ranged in magnitude from under $5,000 to in excess of
$300 million.
reports, one in mid-2001 and the other in late 2002. In
August 2003, IDEM sent another letter demanding an
additional investigation and the full delineation of the
contamination. Finally, in March 2004 (three and a half
years later), Dreaded notified St. Paul of the IDEM
claim and requested its defense and the reimbursement
of all of Dreaded’s expenditures. St. Paul accepted the
claim going forward, but refused to reimburse Dreaded
for past defense costs.
Dreaded sued St. Paul for pre-tender defense costs.
St. Paul responded that it was currently defending
Dreaded, and that Dreaded was obliged to comply with
the terms of the contract which required notice to St.
Paul. The trial court granted summary judgment in
favor of St. Paul based on Dreaded’s unreasonable three
and a half year delay and presumed prejudice to St.
Paul. The court of appeals, however, held that although
23
 Business Litigation Committee Newsletter Winter 2010
Dreaded’s actions were unreasonable, there was a
rebuttable presumption of prejudice, and Dreaded had
presented enough evidence to raise a genuine issue of
material fact as to whether St. Paul was prejudiced as a
result of the delayed notice.
The Supreme Court of Indiana affirmed the trial
court’s decision and sided with St. Paul. While the
court noted that there was a conflict as to whether
delayed notice results in a rebuttable presumption of
prejudice, or presumed prejudice for costs going for-
ward, the court nonetheless decided that in this case
such a decision was not necessary. The sole issue was
whether St. Paul had a duty to defend Dreaded during
the pre-notice period. The court held that no insurer
has a duty to defend a claim about which it has no
knowledge. No proof of prejudice was required in
these circumstances.
IS CARBON MONOXIDE A POLLUTANT?
Nautilus Ins. Company v. Country Oaks Apartments
Ltd., 566 F.3d 452 (5th Cir. 2009)
Workers of the insured, Country Oaks Apartments
(“Country Oaks”), accidentally blocked the vent to the
furnace, which resulted in carbon monoxide entering
several apartments. One of those apartments belonged
to a pregnant woman whose child was born with severe
disabilities. The mother sued Country Oaks on behalf
of the child, and Country Oaks submitted its claim to its
insured, Nautilus Insurance Company (“Nautilis”), for
its defense. Nautilus, however, refused to defend, cit-
ing the policy’s absolute pollution exclusion.
Initially Country Oak’s policy excluded “bodily
injury if sustained within a building and caused by
smoke, fumes, vapor or soot from equipment used to
heat that building.” However, Nautilus subsequently
amended the policy to state “bodily injury or property
damage which would not have occurred in whole or in
part but for the actual, alleged, or threatened discharge,
dispersal, seepage, migration, release, or escape of pol-
lutants at any time.” With this amendment it appeared
that Country Oak’s policy did not cover the claim.
Nautilus filed a declaratory judgment action to deter-
mine its duties, and moved for summary judgment on
the duty to defend and indemnify. Country Oak’s coun-
terclaimed seeking a defense and fees and costs. The
district court granted Nautilus’ motion for summary
judgment and denied Country Oak’s cross-motion.
24
The main issue was whether carbon monoxide was
a “pollutant” as described in the policy. Country Oaks
contended that St. Paul should defend it because it did
not reasonably expect this type of claim would be
excluded under the pollution exclusion. Specifically,
Country Oaks argued that there should have to be a
“more robust event,” rather than the normal emission of
carbon monoxide, to qualify for the exclusion under the
policy. The court, however, was not convinced due to
the plain language of the policy; there was no qualifi-
cation required under the policy. Country Oaks then
attempted to argue that the pollution exclusion did not
apply to situations where there was containment of the
substance, instead of the substance in the surrounding
environment. Again, the court was not convinced due
to the plain language of the policy; the only require-
ment was that the pollutant be “dispersed,” “dis-
charged,” or “released.” Further, Country Oaks argued
that the injuries relating to the exclusion should be lim-
ited to injuries occurring in the workplace, not in a
home or apartment. The court held that the distinction
being offered, while reasonable, is not what was explic-
itly stated in the contracted policy. Country Oak’s final
argument was that the event that caused the injury was
not the release or discharge of carbon monoxide, but
the confinement in the mother’s apartment. Again the
court disagreed. The court held that the two causes
(confinement and release) cannot be separated and
were both the “but for” causes that triggered the exclu-
sion. The court discussed that even though at low lev-
els carbon monoxide may not be dangerous, it is con-
sidered to be a pollutant at higher levels and that cities
attempt in many ways to reduce carbon monoxide for
air quality.
The second issue was whether the carbon monoxide
was “dispersed,” “discharged,” “seep,” or “released” at
any time. The court determined that the fact that the
carbon monoxide emission from the furnace fell within
the plain meaning of the policy exclusion language
“discharge, disperse, seepage, migration, release or
escape of pollutants.” Notably, the court indicated that
the fact that a reasonable insured might not expect this
result was irrelevant to its determination.
Elizabeth Friedenstein will receive her juris doctor from
Oklahoma City University School of Law in May 2010. Ms.
Friedenstein is preparing to take the New Mexico Bar Exam in July.
She can be reached at efriedenstein.stu@my.okcu.edu.
 Business Litigation Committee Newsletter Winter 2010

DISTINCTION... Insurers often argue that reinsurance information is

Continued from page 1
company and a reinsurance company that allow the
insurance company to be reimbursed, in whole or in
part, by the reinsurance company when the insurance
company must pay on a claim to its policyholder.
Reinsurance is “[i]nsurance of all or part of one
insurer’s risk by a second insurer, who accepts the risk
in exchange for a . . . premium.”1 Discovery relating to
an insurer’s claim for reinsurance coverage can be
important in an insurance recovery action between the
policyholder and the insurance company because com-
munications with reinsurers may contain admissions
against the insurance company’s interest, such as state-
ments that the policyholder’s claim is covered under the
policy at issue, and the rationale for reserves for the
underlying action set by the insurance company.
Numerous courts have held that Rule 26(a)(1)(iv) on its
face allows for discovery of reinsurance policies.2
For many reasons, courts often compel insurance
and reinsurance companies to provide reinsurance
information to policyholders beyond just the reinsur-
ance policies. Such other information may include
communications between the insurer and reinsurer
regarding the policyholder’s claim, documents relating
to the reinsurer’s observations as to the insurer’s cover-
age obligations, and other types of information that
might be relevant to the policyholder’s case.3 Some
courts, for example, allow discovery of reinsurance
information to assist with factual development of intent
at the time of contracting.4 Further, because insurance
companies and their reinsurers, as a matter of routine
business practice, communicate information about the
strengths and weaknesses of policyholders’ claims to
reinsurers, reinsurance discovery may provide evidence
of the insurance company’s position on, or interpreta-
tion of, key policy terms.5
privileged or confidential. However, numerous courts
have held reinsurance documents are not privileged.6
For example, commonly sought documents such as
reinsurance policies and claim notices to reinsurers
generally are not privileged.
To the extent materials are privileged, the general
rule is that a party waives privilege by voluntarily dis-
closing the information to a third party. Insurers often
argue that privileged materials disclosed to reinsurers
are protected by the “common interest doctrine,” which
preserves privilege when a party discloses information
to another party with which it shares a “common inter-
est.” However, many courts have held that insurers and
reinsurers do not share a common interest.7
Discovery of communications and documents
exchanged between an insurer and its reinsurer can be
invaluable to a policyholder. For example, if the insur-
ance company was telling its policyholder that the
underlying action was not covered under the policy at
issue in the insurance recovery action, but was arguing
to its reinsurer at the same time that the claim was or
might be covered under that policy (and, therefore, cov-
ered by the reinsurance contract), information obtained
via reinsurance discovery could be used to impeach
insurance company witnesses, such as claims handlers
who denied coverage, in the insurance recovery action,
as well as support a policyholder’s claim for fraud or
bad faith on the part of the insurance company.
Discovery from The Policyholder’s Lawyer or
Plaintiff’s Lawyer in the Underlying Action
Insurance companies often seek documents from the
policyholder’s counsel in the underlying action, and the
result usually is a battle regarding whether the insur-
ance company is entitled to a policyholder’s privileged
communications with its counsel. Most states have
rejected the notion that an insurance company that

1 Black’s Law Dictionary 1312 (8th ed. 2004).

2 See, e.g., Nat’l Union Fire Ins. Co. v. Continental Ill. Corp., 116 F.R.D. 78, 83-84 (N.D. Ill. 1987); Stonewall Ins. Co. v. Nat’l Gypsum Co., No. 86 Civ. 9671, 1988 WL 96159 at
*5 (S.D.N.Y. Sept. 6, 1988); but see Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 139 F.R.D. 609, 611-13 (E.D. Pa. 1991).
3 See, e.g., Allendale Mut. Ins. Co. v. Bull Data Systems, Inc., 152 F.R.D. 132, 139-142 (N.D. Ill. 1993) (“Bull Data”) (requiring reinsurers to produce communications with insurer

surance-related material that bears in any way upon policyholder); Hoechst Celanese Corp. v. Nat’l Union Fire Ins. Co., 623 A.2d 1099, 1107-1108 (Del. Super. Ct. 1991); cf.
regarding policyholder’s claim); Owens-Corning Fiberglass Corp. v. Allstate Ins. Co., 660 N.E.2d 765, 768 (Ohio 1993) (compelling insurer to provide policyholder with all rein-

Potomac Elec. Power Co. v. California Union Ins. Co., 136 F.R.D. 1, 2-3 (D.D.C. 1990) (reinsurance policies discoverable but communications between insurer and reinsurer from
time of reinsurance policy placement not discoverable); Leksi, Inc. v. Federal Ins. Co., 129 F.R.D. 99, 106, 115 (D.N.J. 1989) (reinsurance information discoverable only to prove
lost policy terms).
4 Cigna Ins. Co. v. Cooper Tire & Rubber, Inc., 180 F. Supp. 2d 933, 936 (N.D. Ohio 2001).
5 Bull Data, 152 F.R.D. at 139.
6 See, e.g., Bull Data, 152 F.R.D. at 136-37; Front Royal Ins. Co. v. Gold Players Inc., 187 F.R.D. 252, 258 (W.D. Va. 1999) (“Front Royal”); Aetna Cas. & Sur. Co. v. Certain
Underwriters at Lloyd’s London, 676 N.Y.S. 2d 727 (1998), aff’d, 692 N.Y.S. 2d 384 (1999).
7 See, e.g., Bull Data, 152 F.R.D. 140; North River Ins. Co. v. Columbia Cas. Co., No. 90 Civ. 2518, 1995 WL 5792 at *8 (S.D.N.Y. Jan. 5, 1995); AIU Ins. Co. v. TIG Ins. Co.,
No. 07 Civ. 7052, 2008 WL 5062030, at *7 (S.D.N.Y. Nov. 25, 2008); Front Royal, 187 F.R.D. at 258; American Reinsurance Co. v. U.S. Fid. & Guar. Co., 837 N.Y.S. 2d 616, 621
(2007); North River Ins. Co. v. Philadelphia Reinsurance Corp., 797 F. Supp. 363, 366-67 (D.N.J. 1992).

25
 Business Litigation Committee Newsletter Winter 2010

disputes coverage with its policyholder is entitled to
review a policyholder’s privileged material in underly-
ing defense counsel’s files.8 The insurance company
may be seeking information to prove, for example, that
the settlement of the underlying action was not reason-
able, or that all of the defense costs were not reasonable
and necessary. Insurance companies may also be look-
ing for statements made by the policyholder or its coun-
sel that could compromise the policyholder’s positions
on coverage. For example, there could be communica-
tions between the policyholder and its counsel relating
to the applicability of policy exclusions or other limita-
tions on coverage.
Discovery from Insurance Brokers
The facts surrounding the underwriting of the policy
at issue may be critical in many insurance recovery
cases. For example, where an insurance company seeks
rescission of the policy due to an alleged misrepresen-
tation in the application for insurance, or where there
are non-standard terms in the policy at issue, the files or
testimony of the insurance broker involved in the
issuance of the policy are relevant because they may
provide crucial evidence as to the intent of the parties.
A broker’s file also may contain information on miss-
ing policy terms, premium payment, or loss runs gener-
ated by the insurance company regarding the policy at
issue, which are potentially relevant to show, for exam-
ple, lack of policy cancellation, payment of similar
claims, exhaustion of limits, and amounts of reserves.9
Insurers also may seek to discover communications
between a policyholder (or its counsel) and the broker
subsequent to the policy placement. A policyholder
often communicates with its broker regarding claims
under a policy. An insurer may seek to discover such
information because a policyholder may have commu-
nicated facts about an event or occurrence relating to a
claim, or made admissions to the broker that could be
used against the policyholder. Some courts are reluc-
tant to apply the attorney-client privilege to such com-
munications, even if the communication was between
8 See, e.g., Stumpf v. Continental Cas. Co., 794 P.2d 1228, 1234 (Ore. 1990); Rockwell Int’l Corp. v. Superior Court, 26 Cal. App. 4th 1255 (1994); Remington Arms Co. v. Liberty
Mut. Ins. Co., 142 F.R.D. 408, 416-17 (D. Del. 1992); Eastern Air Lines, Inc. v. U.S. Aviation Underwriters, Inc., 716 So.2d 340, 343 (Fla. Ct. App. 1998). Cf. Waste Management,
the policyholder’s counsel and the broker.10
THIRD PARTY DISCOVERY RULES
“Third party discovery is a time-honored device to
get at the truth of a claim or defense. A party in litiga-
tion is not obligated to take the word of an opponent
regarding what relevant documents do or do not exist.
Indeed, it is common experience to find that third par-
ties are in possession of documents that parties to an
action have asserted do not exist.”11
This sometime crucial discovery targeting third par-
ties is subject to different rules from those applicable to
parties. The procedures for subpoenaing and respond-
ing to third party discovery are set forth in Federal Rule
of Civil Procedure (“Fed. R. Civ. P.”) 45.
Objections to Party and Third Party Discovery
A key difference between party and third party dis-
covery involves the procedure for objecting to the dis-
covery. A party served with document requests under
Fed. R. Civ. P. 34 generally has 30 days to respond to
the requests.12 Third parties, on the other hand, have 14
days to object to a Rule 45 document subpoena.13
Objections timely asserted defer any obligation of the
third party to produce documents, and the requesting
party must move to compel the information.
With respect to depositions, there is no similar pro-
vision in the rules allowing parties or third parties to
serve written objections to deposition subpoenas or
notices. A third party objecting to a deposition sub-
poena generally must challenge the subpoena “by mov-
ing to quash or modify the subpoena pursuant to Fed.
R. Civ. P. 45(c)(3)(A), or by moving for a protective
order pursuant to Rule 26(c).”14 In order for a motion to
quash to be “timely” under Fed. R. Civ. P. 45, the
motion generally must be made prior to the subpoena
compliance date (i.e., the date of the deposition or the
date the documents are to be produced).15 A third party
that fails to seek affirmative relief may lose its ability to
object to the deposition subpoena and must appear for

9 See, e.g., Essex Ins. Co. v. David’s Floor Service, Inc., No. MICV200500040C, 2007 WL 4357853, at *4 (Mass. Super. Oct. 22, 2007); Dart Indus., Inc. v. Commercial Union Ins.
Inc. v. Int’l Surplus Lines Ins. Co., 579 N.E.2d 322 (Ill. 1991).

10 See, e.g., SR Intern. Bus. Ins. Co. Ltd. v. World Trade Center Properties LLC, 01 Civ. 9291, 2002 WL 1334821 (S.D.N.Y. June 19, 2002).
Co., 28 Cal.4th 1059, 1075 (2002).

11 L.G. Phillips LCD Co., Ltd. v. Tatung Co., No. 07 Civ. 80073, 2007 U.S. Dist. LEXIS 24181, at *5-*6 (N.D. Cal. Mar. 20, 2007) (“L.G. Phillips”).
12 See Fed. R. Civ. P. 34(b)(2)(A).
13 See Fed. R. Civ. P. 45(c)(2)(B).
14 In re Coan, No. 06 Civ. 80350, 2007 WL 128010, at *2 (N.D. Cal. Jan. 12, 2007); see also Aetna Cas. and Sur. Co. v. Rodco Autobody, 130 F.R.D. 2, at 3-4 (D. Mass. 1990)

15 See Innomed Labs, LLC v. Alza Corp., 211 F.R.D. 237, 240 (S.D.N.Y. 2002); City of St. Petersburg v. Total Containment, Inc., No. 07 Civ. 191, 2008 WL 1995298, at *2 (*E.D.
(“Rodco”).

Pa. May 5, 2008); Dexter v. Cosan Chemical Corp., No. 91 Civ. 5436, 2000 U.S. Dist. LEXIS 22134, at *9-10 (D.N.J. Oct. 24, 2000).
26
 Business Litigation Committee Newsletter Winter 2010

deposition.16 A party similarly may challenge its oppo-
nent’s right to deposition discovery by moving for a
protective order under Fed. R. Civ. P. 26(c).
Alternatively, the party seeking deposition discovery
may move to compel the discovery under Fed. R. Civ.
P. 37.
Reducing the Burden to Third Parties
Rule 45(c)(1) provides that “[a] party or attorney
responsible for issuing and serving a subpoena must
take reasonable steps to avoid imposing undue burden
or expense on a person subject to the subpoena.” This
has led some third parties to object to deposition and
document subpoenas on the ground that third parties
should not be burdened with discovery until all party
discovery is completed.
The Rules provide that a party may seek discovery
in the sequence and by the methods it chooses.17 Thus,
there is no requirement in the rules that party discovery
must proceed first. Given the unambiguous language
of Fed. R. Civ. P. 26, courts deciding issues relating to
third party subpoenas are hesitant to dictate the
sequence of discovery, particularly when the main
action is pending in a different court, and that court has
reason for this is that parties will often want to sub-
poena documents from third parties even if main parties
may have some of the same documents. Courts recog-
nize the value to parties in seeking some of the “same”
discovery from the opposing party as well as third
parties.19
Some courts have noted that third parties bear a
“heavy burden” of proving that compliance with a sub-
poena would be “unreasonable and oppressive.”20 In
evaluating whether a subpoena is unduly burdensome,
courts “weigh the burden to the subpoenaed party
against the value of the information to the serving
party.”21 Thus, it is important that third party subpoenas
are narrowly tailored. However, a third party subpoena
is not unduly burdensome simply because it is issued to
a nonparty. In fact, some courts find that “the obliga-
tions of a nonparty under Rule 45 . . . are equivalent to
the duties of parties responding to discovery under
other rules.”22
Third party discovery can be a very fruitful avenue
for policyholders and insurance companies alike to pur-
sue. However, counsel should be cognizant of the dif-
ferences in the rules for party and third party discovery.

ciate in the Washington, D.C. office of Howrey LLP. They repre-

not issued a scheduling order addressing the sequenc- Catherine J. Serafin is a partner and Todd L. Brecher is an asso-
ing of third party discovery.18
sent policyholders in disputes against insurance companies. The
It is, in fact, not uncommon for party and third-party views in this article are those of the authors, not the firm or any of
discovery to proceed simultaneously in litigation. One its clients.
16 L.G. Phillips, 2007 U.S. Dist. LEXIS 24181, at *7; Rodco, 130 F.R.D. at 3-4.
17 Fed. R. Civ. P. 26(d)(2); see also Wright, Miller & Marcus, Federal Practice and Procedure: Civil 2d §2046 (2d ed. 2009).
18 See, e.g., Coffeyville Res. Ref. & Mktg., LLC v. Liberty Surplus Ins. Co., No. 08MC00017, 2008 WL 4853620, at *2 (E.D. Ark. Nov. 6, 2008).
19 See, e.g., Meeks v. Parsons, No. 03 Civ. 6700, 2009 WL 3003718, at *11 (E.D. Cal. Sept. 18, 2009) ( “[A] responding party generally may not refuse to provide discovery because
the proponent of the request already has knowledge of the existence or contents of the requested documents”) (citations omitted); see also L.G. Phillips, 2007 U.S. Dist. LEXIS

20 See, e.g., Composition Roofers Union Local 30 Welfare Trust Fund v. Graveley Roofing Enterprises, Inc., 160 F.R.D. 70, 72 (E.D. Pa. 1995) (citation omitted).
24181, at *5-*6.

21 Bridgeport Music Inc. v. UMG Recordings, Inc., No. 05 Civ. 6430, 2007 WL 4410405, at *2 (S.D.N.Y. Dec. 17, 2007).
22 Id. at *3 (quotation omitted).

ABA/Tort
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27
 Business Litigation Committee Newsletter Winter 2010

2010-2011 TIPS CALENDAR

April
8-9 2010 Emerging Issues in Motor Arizona Biltmore
Vehicle Product Liability Litigation Resort & Spa
Contact: Donald Quarles – 312/988-5708 Phoenix, AZ

9-10 19th Annual Toxic Torts Spring CLE Meeting Arizona Biltmore
Contact: Debra D. Dotson – 312/988-5597 Resort & Spa
Phoenix, AZ

17-21 TIPS/ABOTA National Trial Academy Grand Sierra Resort & Spa
Contact: Donald Quarles – 312/988-5708 Reno, NV

May
6-7 FSLC Spring Meeting Loews New Orleans Hotel
Contact: Donald Quarles – 312/988-5708 New Orleans, LA

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Contact: Felisha A. Stewart – 312/988-5672 San Juan, PR

August
5-10 ABA Annual Meeting TBD
Contact: Felisha A. Stewart – 312/988-5672 San Francisco, CA
Speaker Contact: Donald Quarles - 312/988-5708

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February
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Contact: Felisha A. Stewart – 312/988-5672 Atlanta, GA

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28