Municipalities Are Policyholders Too: A Review of Unique Insurance Coverage Issues Faced by Cities and Towns
American Bar Association
2015 Insurance Coverage Litigation Committee CLE Seminar
Niquelle Allen Winfrey, City of Gary
Brent W. Huber, Ice Miller LLP
Nicholas B. Reuhs, Ice Miller LLP
Michelle R. Valencic, Clausen Miller PC
In most cases, cities, counties, and other political subdivisions are like any other commercial insureds. They have many of the same procurement, claim, and coverage problems encountered by typical businesses. However, over the past few years, a handful of insurance coverage issues unique
to political subdivisions have received judicial or statutory attention. This paper explores a few of those issues.
A. Buying Insurance May be Buying Liability:
The Interplay of Insurance and Local Governmental Tort Immunity
Navigating the liability of a city or county can be difficult. Under historic common-law principles, sovereign immunity extended to governmental entities, including municipalities, at least to when performing governmental functions. See, e.g., Porter v. Delmarva Power & Light Co.
, 488 A.2d 899 (Del. Sup. Ct. 1984); Oien v. City of Sioux Falls
, 393 N.W.2d 286 (S.D. 1986). However, over time this immunity has eroded. See, e.g., Civil Actions Against State and Local Government
, 1 Civ. Actions Against State & Loc. Gov’t § 1:8 (discussing abrogation of common law immunity). As a result, most states have addressed the issue legislatively, passing Tort Claims Acts and other statutes providing municipalities with statutory immunity from suits involving tort claims, unless the facts come within a specific exception. Moreover, even where such liability falls within such an exception, these statutes often contain procedural requirements, limitations, and damage caps.
Still, sovereign immunity is far from absolute and can be expressly or impliedly waived under a host of circumstances. One issue which receives regular judicial attention is whether immunity may be waived through the purchase of liability insurance. In many states, the purchase of liability insurance has no effect on municipal immunity. In support of this view, courts explain that “the mere fact that a governmental unit is authorized to procure insurance does not warrant the conclusion that its immunity has been removed.” Liability or Indemnity Insurance Carried by Governmental Unit as Affecting Immunity From Tort Liability
, 68 A.L.R.2d 1437 § 1(b). Rather, “liability insurance which is procured by a governmental unit entitled to immunity from tort liability is insurance only against torts which do not come within the scope of the immunity.” Id.
In an increasing number of states, however, courts have held that where a municipality or other political subdivision purchases liability insurance, “its immunity from tort liability is removed to the extent of the coverage of the insurance.” Id.
(collecting cases and enumerating jurisdictions); see also, e.g., Herring ex rel. Marshall v. Winston-Salem/Forsyth County Bd. of Educ
., 529 S.E.2d 458 (N.C. Ct. App. 2000) (a board of education’s immunity deemed waived by the act of obtaining insurance to the extent the board is indemnified by insurance for negligence or tort). The support for this rationale is that “the primary reason for the immunity doctrine – that is, the protection of public funds – no longer exists when a governmental unit has insurance protection and, in this situation, there is no need for application of the doctrine.” 68 A.L.R.2d 1437, supra
. This potential waiver raises a host of complex questions for practitioners.
For instance, because the governmental unit must be insured before it can be sued, extensive discovery regarding insurance may be necessary and an allegation of insurance coverage may be required in the pleading stage of a claim. See, e.g., Validity and Construction of Statute Authorizing or Requiring Governmental Unit to Procure Liability Insurance Covering Public Officers or Employees for Liability Arising Out of Performance of Public Duties
, 71 A.L.R.3d 6 (collecting cases holding that “the complaint must allege that the governmental unit had waived its governmental immunity by purchasing the insurance.”). Even if these steps are followed, this paradigm still begs the question as to whether it is the purchase of insurance that constitutes waiver or the actual provision of coverage for a particular claim. In other words, how does the waiver operate if the insurance lapses or a condition precedent to coverage is not satisfied? Similarly, how should the waiver be treated when coverage is debatable? Moreover, if a policy indicates that it is not intended to act as a waiver, is such a provision enforceable?
Insureds and insurers need to understand this dynamic in order to understand the risk profile being insured. Indeed, as one leading treatise has suggested, it may be appropriate for insurers to base their premiums on the insured being immune or being subject to suit. Couch on Insurance
, 7A Couch on Ins. § 103:3 (3d. Ed.). However, even that notion raises additional questions, such as, “if the relevant jurisdiction allows direct actions and the insured is held not to have waived its immunity by purchasing insurance, can the victim avoid the insured’s immunity from suit by the device of proceeding directly against the insurer?” Id.
B. An Unexpected Liability:
Securities Claims Against Municipalities
Congress has specifically exempted offerings of municipal securities from the registration requirements and civil liability provisions of the Securities Act and from the reporting requirement provided by the Exchange Act. See
Exchange Act Rel. No. 33741 (Interpretive Guidance). However, to provide accountability notwithstanding the exemptions, the SEC issued Rule 15c2-12, providing that underwriters may not sell municipal securities without procuring a commitment from the issuer that it will provide continuing disclosures regarding itself and the securities, including information about its financial condition and operating data (the “Continuing Disclosure Obligations”). The SEC may file enforcement actions under either Section 17(a) of the Securities Act of 1933 and/or Section 10(b) of the Exchange Act against issuers for inaccurately stating in final official statements that they have substantially complied with their Continuing Disclosure Obligations.
Despite this rule, SEC actions against municipalities have been historically sparse. As a result, compliance with the Continuing Disclosure Obligations has been erratic, especially for smaller communities with small legal budgets. However, the financial crisis of 2008 created solvency issues for political subdivisions around the county and the notion of increased enforcement became a possibility. This notion became realty when, in a settled administrative proceedings announced in July 2013, the SEC for the first time charged a municipal bond issuer for misstatements about compliance with continuing disclosure undertakings. See In the Matter of West Clark Community Schools
, Securities Act Release No. 9436, Exchange Act Release No. 70057 (Jul. 29, 2013).
This action is notable to insurance counsel in that liability policies typically issued to municipalities are often ill-equipped to address an SEC action. Indeed, because SEC actions against municipalities were historically nonexistent, consideration of such actions by policy language in local government policies is rare. Some policies clearly (though perhaps inadvertently) provide coverage for such claims, while others include clear exclusions. However, a large number of the policy forms do not expressly address the issue one way or the other, and the case law construing D&O policies is not always sufficiently analogous to provide clear guidance. As a result, municipalities need to review their specific policy language and work with their brokers to ensure such claims are within the scope of their coverage. On the other hand, insurers not intending to provide such coverage should consider express exclusions to address the issue.
As would be expected, the West Clark
action created concern for countless municipal bond issuers who had not been faithful in meeting their Continuing Disclosure Obligations. As a result of that concern, in March of last year, the SEC announced a self-reporting initiative for municipal bond issuers. The initiative is called the Municipalities Continuing Disclosure Cooperation Initiative (“MCDC”). The MCDC invites issuers to voluntarily report to the SEC possible violations involving materially inaccurate statements in official statements relating to an issuer’s prior compliance with their Continuing Disclosure Obligations. Participation in the MCDC is initiated by completing a questionnaire made available by the SEC. By completing the questionnaire, the issuer “consent[s] to the applicable settlement terms under the MCDC Initiative.” Those settlement terms require the issuer to, among other things, “consent to the institution of a cease and desist proceeding under Section 8A of the Securities Act for violation(s) of Section 17(a)(2) of the Securities Act.” In consideration of an issuer’s acceptance of such terms, the SEC’s Enforcement Division will recommend that the SEC accept a settlement in which there is no payment of any civil penalty by the issuer.
Anecdotally, MCDC participation was robust. However, the MCDC initiative covers only eligible issuers (and underwriters). The SEC still may initiate enforcement actions against municipal officials and employees and may seek remedies against those individuals. Moreover, those individuals as well as the issuers may still be subject to bondholder suits, or to enforcement actions by state regulators or agencies other than the SEC. Of course, this raises the possibility that, by participating in the MCDC initiative without involving its insurer, an insured may violate its policy’s notice or cooperation clauses and jeopardize coverage for individuals in subsequent claims. Thus, counsel representing municipalities may be wise to inquire about the extent of their client’s MCDC participation and consider notifying its insurers.
C. Disagreements About Insurance Triggers:
The Potential Need to “Over-Notice” on Wrongful Imprisonment Claims
Wrongful incarceration cases generally include allegations of malicious prosecution by public entities or law enforcement personnel, leading to the wrongful incarceration. The tort of malicious prosecution has been described as “sui generis
” or unique, because unlike most torts which accrue when damages are sustained by a claimant, the tort of malicious prosecution accrues when criminal proceedings are favorably terminated, not
when the injury or damage to the claimants occurs. See St. Paul Fire & Marine Ins. Co. v. City of Zion
, 2014 IL App. 2d 131312 (Sept. 10, 2014), citing Mueller Fuel Oil Co. v. Ins. Co. of N. America
, 232 A.2d 168 (N.J. Sup. Ct. App. Div. 1967) (the first case to have addressed the issue). This circumstance leads to disagreements as to the appropriate trigger of coverage for a claim involving malicious prosecution.
Policies providing coverage for such claims are generally occurrence based and most courts have held that claims for malicious prosecution implicate insurance policies in effect at the time of the commencement of the prosecution, not those in effect when the claimant is ultimately exonerated. Id., citing City of Erie v. Guaranty Nat’l Ins. Co.
, 935 F. Supp. 610, aff’d
109 F.3d 156, 160 (3rd
Cir. 1997); Royal Indem. Co. v. Werner
, 979 F.2d 1299 (8th
Cir. 1992); Gulf Underwriters Ins. Co. v. City of Council Bluffs
, 755 F. Supp. 2d 988 (S.D. Iowa 2010); Billings v. Commerce Ins. Co.
, 936 N.E.2d 408 (Mass. 2010); Harbor Ins. Co. v. Central National Ins. Co.
, 165 Cal. App. 3d 1029, 1034 (Cal. Ct. App. 1985); Town of Newfane v. General Star Nat’l Ins. Co.
, 784 N.Y.S.2d 787 (N.Y. App. Div. 2004).
While the rationale of the cases differ somewhat, the majority view is generally based upon the concept that public entity liability insurance is intended to cover the acts or omissions of an insured leading to an injury, and that in the case of a malicious prosecution, the conduct giving rise to the cause of action occurred at or near the time of the prosecution, not later, when the individual is exonerated.
In contrast, the United States Court of Appeals for the Seventh Circuit rejected the majority rationale and joined a distinct minority of courts in holding that the termination of a malicious prosecution is the occurrence or circumstance which triggers insurance coverage. See, e.g., Northfield Ins. Co. v. City of Waukegan
, 701 F.3d 1125 (7th
Cir. 2012); American Safety Cas. Ins. Co. v. City of Waukegan
, 678 F.3d 475 (7th
Cir. 2012); National Cas. Co. v. McFatridge
, 604 F.3d 335 (7th
Cir. 2010). The Seventh Circuit decisions were all based upon Illinois law, specifically Security Mutual Cas. Co. v. Harbor Ins. Co.
, 65 Ill. App. 3d 198 (1978), rev’d
77 Ill. 2d 446 (1979), the only Illinois case which had addressed the issue, and which arguably supported the “minority view.”
As a general matter, the minority approach reasons that exoneration is a necessary element of the tort of malicious prosecution, and that insurance coverage is therefore triggered when the cause of action accrues. An exoneration-as-trigger approach has been advocated by some as more flexible, in that insurers can potentially adjust their exposure by changing the language in their policies, if need be, to define the triggering event as the misconduct at issue, if that is the underwriting intent.
In September of 2014, the Appellate Court for the Second District of Illinois rejected the Seventh Circuit’s approach, expressly noting that the Security Mutual
decision was “not helpful” to its analysis, and after weighing the rationale for both the majority and minority views, the court ultimately found coverage triggered in that case at the time of the initial prosecution. St. Paul v. City of Zion, supra.
Based upon the specific policy language at issue in that case, the court found that the “injury” caused by malicious prosecution results at the commencement of a malicious prosecution, not at the time of a favorable termination. The court reasoned that the favorable termination of a criminal case cannot be the “injury” or occurrence which triggers coverage, because the termination actually marks the “beginning of the judicial system’s remediation” of the wrong committed, not the commencement of an injury or damage. Id., citing Town of Newfane, supra.
More recently, on December 29, 2014, the court again applied the same reasoning in Indian Harbor Ins. Co. v. City of Waukegan
, 2014 WL 7390865, 2014 IL App. 2d 140293-U (Ill. App. 2d Dist. December 29, 2014) (unreported). In Indian Harbor
, the policy language at issue responded to “wrongful acts” during the policy period which result in injury, including malicious prosecution. The court reasoned that based upon such language, the initiation of the allegedly malicious action was the triggering event for purposes of determining insurance coverage. Until the Illinois Supreme Court weighs in on the issue, the City of Zion
decision is the leading published state court opinion to address the trigger of coverage for malicious prosecution claims. And under such precedent, the Seventh Circuit “minority view” cases referenced above may no longer be viewed as particularly persuasive, at least in cases applying Illinois law.
It is important to note that none of the courts which have addressed the trigger of coverage for wrongful incarceration cases have adopted a “continuous trigger” or “multiple trigger” of coverage approach, along the lines of that adopted in certain jurisdictions in the context of certain mass torts or other latent injuries which progress over time. The rationale for this outcome is at least two-fold. First, because insurance coverage for wrongful incarceration cases is often written to respond to the wrongful acts or conduct of an insured, the conduct at issue in a wrongful incarceration case generally ends once the individual is incarcerated. Second, while a wrongfully incarcerated person may endure emotional distress over the length of time of their incarceration, the emotional distress is not an ongoing injury in and of itself but is, instead, a continuing ill effect of the initial violation of the individual’s rights. Of course, policyholders continue to argue in favor of a “continuous trigger,” urging that claimants suffer both new and continuing injuries each day that they are incarcerated.
It is important to recognize that public entities often maintain a variety of primary liability policies, as well as excess or umbrella coverages, most often issued by a variety of different insurers, using different insurance language. The terms and provisions which may be at issue in a wrongful incarceration case vary wildly, sometimes even within a single policyholder’s insurance program or within the same policy year.
Moreover, many states have yet to address the trigger of coverage for wrongful incarceration cases and the law in this area is still developing. As the number of exonerations grow, public entities and their insurers are sure to debate these and other issues, given the need for public entities to maximize any potential insurance coverage available to respond to their liabilities.
As a result, if a public entity or its employees are ever pursued in a wrongful incarceration context, or any other context, it is extremely important for the public entity to identify and obtain complete copies of all of its policies during the potentially applicable years in question, at all layers of coverage, and to thoroughly analyze the specific terms of those policies in light of the facts and allegations in a particular case, and the law in the jurisdiction at issue. Ultimately, given the state of the law and variation in policy language, it may be advisable for the insured to notify all carriers that issued policies during the period of arrest, the period of exoneration, and each period in between. Moreover, when renewing their insurance, insureds should be wary of changing policy forms at the risk of creating gaps in potentially available coverage.
D. Open Records Law:
Making Confidential Settlements an Oxymoron
Nearly every state has some form of a public records law. Under such laws, municipalities are generally required to disclose settlement agreements resolving suits and or claims, regardless whether such settlements have been designated as “confidential.” For instance, in holding that a confidential settlement agreement must be disclosed, the court in Miller v. Acad. Sch. Dist. No. 20
, No. 04CV1681, 2006 WL 3522507, at *5 (Colo. Dist. Ct. Sept. 28, 2006) explained that “[a]n agreement by a governmental entity that information in public records will remain confidential is insufficient to transform a public record into a private one.” See also, e.g., Anchorage Sch. Dist. v. Anchorage Daily News
, 779 P.2d 1191, 1193 (Alaska 1989) (a public agency may not circumvent the statutory disclosure requirements by agreeing to keep the terms of a settlement agreement confidential).
Moreover, as the court in Burnett v. Cnty. of Gloucester
, 415 N.J. Sup. 506, 512-13, 2 A.3d 1110, 1114 (App. Div. 2010) explained: “agreements may on occasion be executed by agents of the County, consisting of outside attorneys or insurance adjusters, they nonetheless bind the county as principal, and the agreements are made on its behalf.” Thus, such agreements are not outside the scope of an open records law. Id.
As a result, coverage and defense counsel must be reminded that, even where the insurer has full control of a municipality’s claim defense and settlement, it is still acting as its insured’s agent. Thus, it must exercise appropriate discretion in agreeing to particular settlement terms, stipulating to protective orders, agreeing that access to documents or information will be limited, or making concessions as part of its claim resolution.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
The trial court decision in St. Paul v. City of Zion
includes a detailed recitation of the competing cases and rationale on both sides. See St. Paul v. City of Zion
, 2013 WL 3476145 at n. 9 (Ill. Cir. Ct. May 10, 2013).
The City of Zion
case discussed above clarified the law in Illinois, however, its holding was heavily impacted by the precise policy language at issue in that case. See also Indian Harbor, supra
(deciding the case based upon the policy language at issue). The court did not create a broad sweeping rule as to the appropriate trigger of coverage for malicious prosecution claims in general, and it expressed no opinion as to the appropriate trigger for policies with differing language.