Defense Counsel Journal - International Association of Defense ...

Page 380advanced in the world, yet if he is unable to persuade a judge or jury to see the merits of hisclient’s position he will fail. As an organization composed of the best civil defenselawyers in the world, the IADC is uniquely positioned to explore all the ways we canembrace technological innovation while remaining true to what we do best as trial counsel.With that opportunity in mind, I have designated IADC 2013: Where Advocacy MeetsInnovation as the overarching theme for this year. Like Steve Jobs and his colleagues at Apple,I have challenged my CLE Program Chairs and Substantive Law Committee Chairs to thinkdifferently and envision programming that will teach us all how we can bestutilize technology to enhance what we do as legal advocates. I encourage each and every one ofyou to join us on what promises to be an exciting journey.

Page 381IADC Tenetsof ProfessionalismThe International Association of Defense Counsel is aware that applicable rules or codes ofprofessional responsibility generally provide only minimum standards of acceptable conduct.Since we aspire to the highest ideals of professionalism, we hereby adopt these tenets and agreeto abide by them in the performance of our professional services for clients.1. We will conduct ourselves before the court in a manner which demonstrates respect for thelaw and preserves the decorum and integrity of the judicial process.2. We recognize that professional courtesy is consistent with zealous advocacy. We will be civiland courteous to all with whom we come in contact and will endeavor to maintain a collegialrelationship with our adversaries.3. We will cooperate with opposing counsel when scheduling conflicts arise and calendarchanges become necessary. We will also agree to opposing counsel’s request for reasonableextensions of time when the legitimate interests of our clients will not be adversely affected.4. We will keep our clients well-informed and involved in making the decisions that affect theirinterests, while, at the same time, avoiding emotional attachment to our clients and theiractivities which might impair our ability to render objective and independent advice.5. We will counsel our clients, in appropriate cases, that initiating or engaging in settlementdiscussions is consistent with zealous and effective representation.6. We will attempt to resolve matters as expeditiously and economically as possible.7. We will honor all promises or commitments, whether oral or in writing, and strive to build areputation for dignity, honesty and integrity.8. We will not make groundless accusations of impropriety or attribute bad motives to otherattorneys without good cause.9. We will not engage in discovery practices or any other course of conduct designed to harassthe opposing party or cause needless delay.10. We will seek sanctions against another attorney only when fully justified by thecircumstances and necessary to protect a client’s lawful interests, and never for mere tacticaladvantage.11. We will not permit business concerns to undermine or corrupt our professional obligations.12. We will strive to expand our knowledge of the law and to achieve and maintain proficiencyin our areas of practice.13. We are aware of the need to preserve the image of the legal profession in the eyes of thepublic and will support programs and activities that educate the public about the law and thelegal system.

Page 3822013 midyear MeetingFebruary 9 - 14Boca Raton Club and Resort, Boca Raton, FL USA2013 annual MeetingJuly 7 - 12Grand Wailea Resort, Maui, HI USA

Page 383Officersand Board of DirectorsPresidentQuentin F. Urquhart, Jr., New Orleans, Louisiana USAPresident-ElectMolly H. Craig, Charleston, South Carolina USAVice President of CorporateConnie Lewis Lensing, Memphis, Tennessee USAVice President of InternationalPamela McGovern, Montreal, Quebec CanadaImmediate Past PresidentWilliam J. Perry, London, EnglandVice President of InsuranceDaniel M. Zureich, Cary, North Carolina USASecretary-TreasurerJoseph E. O’Neil, Philadelphia, Pennsylvania USADaniel K. CrayChicago, Illinois USAAnton G. MaurerStuttgart, GermanyNancy M. ErflePortland, Oregon USADirectorsTerms ending July 2013Fred M. (Tripp) Haston, IIIBirmingham, Alabama USATerms ending July 2014Kathleen J. MausTallahassee, Florida USATerms ending July 2015John T. LayColumbia, South Carolina USASusan C. RoneyBuffalo, New York USAW. Thomas Siler, Jr.Jackson, Mississippi USAKenneth R. MeyerMorristown, New Jersey USA1920-23 Myron W. Van Auken1923-26 Martin P. Cornelius1926-32 Edwin A. Jones1932-34 George W. Yancey1934-35 Walter R. Mayne1935-36 J. Roy Dickie1936-37 Marion N. Chrestman1937-38 P. E. Reeder1938-39 Milo H. Crawford1939-40 Gerald P. Hayes1940-41 Oscar J. Brown1941-43 Willis Smith1943-44 Pat H. Eager, Jr.1944-46 F. B. Baylor1946-47 Paul J. McGough1947-48 Lowell White1948-49 Kenneth P. Grubb1949-50 L. Duncan Lloyd1950-51 Wayne E. Strichter1951-52 Joseph A. Spray1952-53 Alvin R. Christovich1953-54 J. A. Gooch1954-55 Stanley C. Morris1955-56 Lester P. Dodd1956-57 John A. Kluwin1957-58 Forrest A. Betts1958-59 G. Arthur BlanchetPast Presidents1959-60 Charles E. Pledger, Jr.1960-61 Denman Moody1961-62 Payne Karr1962-63 William E. Knepper1963-64 Richard W. Galiher1964-65 Kraft W. Eidman1965-66 Wallace E. Sedgwick1966-67 Harley J. McNeal1967-68 Egbert L. Haywood1968-69 Gordon R. Close1969-70 W. Ford Reese1970-71 Samuel J. Powers, Jr.1971-72 Edward J. Kelly1972-73 Alston Jennings1973-74 Walter A. Steele1974-75 Theodore P. Shield1975-76 Jerry V. Walker1976-77 Henry Burnett1977-78 Darrell L. Havener1978-79 Robert E. Leake, Jr.1979-80 John R. Hoehl1980-81 Neil K. Quinn1981-82 William K. Christovich1982-83 Robert D. Norman1983-84 Grant P. DuBois1984-85 Thomas H. Sharp, Jr.1985-86 William H. Wallace1986-87 Henry B. Alsobrook, Jr.1987-88 W. Richard Davis1988-89 George B. McGugin1989-90 Morris R. Zucker1990-91 Jay H. Tressler1991-92 David J. Beck1992-93 Henry A. Hentemann1993-94 Michael A. Pope1994-95 Kevin J. Dunne1995-96 Edward J. Rice, Jr.1996-97 George Gore1997-98 Charles F. Preuss1998-99 Rex K. Linder1999-00 George H. Mitchell2000-01 Gregory C. Read2001-02 William C. Cleveland2002-03 Joan Fullam Irick2003-04 J. Walter Sinclair2004-05 George S. Hodges2005-06 Gregory M. Lederer2006-07 Bruce R. Parker2007-08 L. Gino Marchetti, Jr.2008-09 Robert D. Hunter2009-10 James M. Campbell2010-11 Joseph W. Ryan, Jr.2011-12 William J. Perry

Page 384Defense Counsel JournalBoard and Committee Vice ChairsEditor and Chair of the Board of EditorsRichard L. Neumeier, Esq., Morrison Mahoney LLP, 250 Summer Street, Boston, MA 02210Managing EditorRobert F. Greenlee, Esq., IADC, 303 West Madison, Suite 925, Chicago, IL 60606Michael F. AylwardShaun McParland BaldwinWilliam T. BarkerKeith N. BondFred E. Bourn, IIIDavid G. BrockChristopher D. BrownMichael E. BrownCharles W. BrowningJohn G. BrowningD. Jeffrey CampbellP. Ted ColquettGray T. CulbreathLynn S. DaviesPeter M. DurneyJeffrey J. EllisMark FahlesonBoard of EditorsMichael J. FarrellFred J. FresardDaniel W. GerberLeta E. GormanMichael J. HollandAnnette Christine Warfield HughesKevin T. JacobsAndrew Kopon, Jr.Mitchell Lee LathropJohn P. Lavelle, Jr.James K. LeaderCarl A. MaioChristopher J. MajorS. Gordon McKeeNicholas C. NizamoffMark S. OlsonJohn C. S. PierceRichard T. PledgerTodd PresnellWalter J. Price, IIIDouglas R. RichmondG. Edward Rudloff, Jr.Elizabeth Haecker RyanScott W. SaylerThomas F. SegallaFernando Eduardo SerecLawrence D. SmithMary Christine SungailaMark R.C. SutherlandEmilia SweeneyRobert T. VeonJ. Calhoun WatsonRebecca J. WilsonRachel E. YarchCommittee Vice Chairs of Journal Articles and PublicationsAlternative Dispute ResolutionJoseph P. EspositoAppellate PracticeJohn B. DrummyBusiness LitigationDeborah G. ColeClass Actions and Multi-PartyLitigationKara T. StubbsConstruction Law and LitigationTamara L. BoeckCorporate CounselAlfred R. PalianiDrug, Device andBiotechnologyLauren ColtonEmployment LawMark FahlesonEnvironmental and Energy LawWalter H. BooneFidelity and SuretyC. Allen Gibson, Jr.Insurance and ReinsuranceGary L. JohnsonInternationalPaul LefebvreLegislative, Judicial and GovernmentAffairsPat Long WeaverMedical Defense and Health LawChristopher S. BerdyProduct LiabilityMary G. PryorProfessional LiabilityJohn B. DrummyTechnologyA. Edwin Stuardi, IIIToxic And HazardousSubstances LitigationLinda Kay Barnes BaxterTransportation LawDonna L. BurdenTrial Techniques and TacticsMatthew D. KeenanWhite Collar Defense andInvestigationsDouglas S. BrooksBack issues of Defense Counsel Journal are available from William S. Hein & Co., 1285 Main St., Buffalo, N.Y. 14209 ●Defense Counsel Journal is indexed in Index to Legal Periodicals, published by H.W. Wilson Co., 950 University Ave.,Bronx, N.Y. 10452 and in Current Law Index, sponsored by American Association of Law Libraries and published by InformationAccess Co., 362 Lakeside Drive, Foster City, Calif. 94404 ● Defense Counsel Journal is available in microformfrom University Microfilms Inc., 300 Zeeb Road, Ann Arbor, Mich., and in CD-ROM form from ABI/Inform, also a serviceof University of Microfilms Inc. ● Defense Counsel Journal is included in the online and CD-ROM services of Westlaw,West Group, 610 Opperman Drive, Eagan, Minn. 55123, and in the database of Lexis, a service of Mead Data Central, 9393Springboro Pike, Dayton, Ohio 45401 ● Defense Counsel Journal is listed in Ulrich’s International Periodicals Directory,published by R.R. Bowker, 121 Chanlon Road, New Providence, N.J. 07974; in Insurance Almanac, published byInsurance Printing & Underwriting Co., 50 E. Palisade Ave., Englewood, N.J. 07631; in Serials Directory: An InternationalReference Book, published by EBSCO Industries Inc., Box 1943, Birmingham, Ala. 35201; in INSURLAW/InsurancePeriodicals Index Thesaurus & User’s Guide, published by NILS Publishing Co., P.O. Box 2507, Chatsworth, Calif. 91311;and in INFOSERV, an online service of Faxon Co., 15 Southwest Park, Westwood, Mass. 02090

Page 385International Association of Defense CounselCorporate Counsel CollegeApril 25 - 26, 2013The Ritz-CarltonChicago, IllinoisFor more information, please visit www.iadclaw.org.

Page 386Calendarof MeetingsMidyear MeetingFebruary 9 - 14, 2013Boca Raton Club and ResortBoca Raton, Florida USACorporate Counsel CollegeApril 25 - 26, 2013The Ritz-CarltonChicago, IL USAIADC/FDCC Joint Law Firm Management ConferenceMay 8 - 10, 2013Embassy Suites O’HareChicago, Illinois USAProfessional Liability RoundtableMay 16, 2013New York University Law SchoolNew York, New York USAAnnual MeetingJuly 7 - 12, 2013Grand Wailea ResortMaui, Hawaii USA41st Annual Trial AcademyJuly 25 - August 2, 2013Stanford Law SchoolPalo Alto, California USAThe full schedule for IADC Regional Meetingsand Webinars is at www.iadclaw.org.

Advisability and Practical Considerations of Court-Imposed Time Limits on TrialBy Andrew L. Goldman andJ. Walter SinclairWith the ever-increasing number ofdocket filings, it is becoming morecommon for courts to impose timelimits during trial. This should not besurprising. For decades circuit courtshave imposed page limits on writtenbriefs. The United States Supreme Courtand virtually all federal and stateappellate courts restrict the length of oralarguments. And now more than ever,trial courts are imposing time limits tospeed up the pace of civil trials.Though it can be challenging at timesto narrow the scope of a complex case,trial lawyers who have participated intime-limited trials generally appreciatethe value of being disciplined tostreamline their presentation of evidence.Carefully planning who will testify, forhow long, and on what subjects promotesefficiency for the courts, forces thelawyers to focus on the evidence thatreally matters, and helps to keep theattention of jurors on the most significantimportant witness testimony anddocumentary evidence.I. Time Limitations in PracticeThe growing trend of imposing timelimitations at trial is perhaps most evidentin recent bellwether trials that haveoccurred in mass tort litigation. Forexample, the Honorable Eldon E. Fallon,a highly regarded judge in the UnitedStates District Court for the EasternDistrict of Louisiana utilized suchtechniques as the MDL judge in severalAndrew L. Goldman ispartner in the law firm ofGoldman Ismail TomaselliBrennan & Baum LLP inits Chicago, Illinois office.He concentrates oncomplex commerciallitigation matters, with a particularemphasis on defending pharmaceutical andmedical device companies in productsliability and mass tort litigation. He is amember of the International Association ofDefense Counsel. Mr. Goldman hasextensive bench and jury trial experience incourts throughout the United Statesincluding federal and state courts inIllinois, Louisiana, New York, Florida,California and Connecticut.J. Walter Sinclair is apartner in the law firmof Stoel Rives LLP inits Boise, Idaho andSeattle, Washingtonoffices.Heconcentrates oncorporate and complexlitigation matters associated with contractdisputes, product liability (includingagricultural product liability), antitrust,class action and securities litigation. He isa past president of the InternationalAssociation of Defense Counsel and afellow in the American College of TrialLawyers and the International Academy ofTrial Lawyers. Mr. Sinclair has extensivebench and jury trial experience in courtsthroughout the United States includingfederal and state courts in Idaho,Washington, Oregon, Nevada, Utah,Arizona, Kansas, Michigan and New York.

Page 388 DEFENSE COUNSEL JOURNAL–October 2012pharmaceutical product liability masstorts including In re Propulsid ProductsLiability Litigation (MDL 1355) and In reVioxx Products Liability Litigation (MDL1657). 1 By the time trials started in theVioxx MDL, the parties had takenhundreds of hours of depositiontestimony, Merck had produced millionsof pages of documents, and many legaland factual issues remained in dispute.Nevertheless, in each of the six MDLbellwether Vioxx trials, Judge Fallon gaveeach side a maximum of seven days topresent their case. The six Vioxxbellwether trials were each tried in lessthan three weeks, resulting in one hungjury, four defense verdicts and oneremittitur. The one Propulsid bellwethertrial was tried in a total of eight days andresulted in a defense verdict. 2At the outset of these bellwethertrials, Judge Fallon emphasized to thejury and the lawyers that he appreciatesand values the jury’s time. He would notand did not tolerate short trial days. Inthe Vioxx trials, if the jurors were willingto work on Saturdays, he expected thelawyers and witnesses to do so as well.Judge Fallon required that crossexaminationbegin even if the directended late in the day. He insisted that thenext witness had to be called after re-redirectregardless of how much timeremained before the next-scheduled breakor the trial day’s end. Judge Fallon didnot tolerate cumulative fact and experttestimony, and he properly enforced1 In re Propulsid Prods. Liab. Litig., MDL No.1355, 2000 WL 35621417 (J.P.M.L. Aug 7,2000); In re Vioxx Prods. Liab. Litig., 360 F.Supp.2d 1352 (J.P.M.L. 2005).2 Diez v. Janssen Pharmaceutica, Inc., No. 00-2577 (E.D. La. filed Aug. 30, 2000).evidentiary rules such as necessaryfoundation before fact witnesses could becross-examined on evidence such asinternal company documents.Other MDL judges have utilizedsimilar techniques in bellwether trials,often resulting in defense verdicts. 3Judge Lynn B. Winmill of the UnitedStates District Court for Idaho allocatedfour months to the trial of a bellwethertrial involving 4 of the 110 plaintiffgroups in a mass tort products liabilitycase filed against multiple defendantsincluding the United States Bureau ofLand Management and DuPont. This wasafter several years of discovery and theproduction of millions of pages ofdocuments and hundreds of depositions.Following trial, the judge put theremainder of deposition discovery on atime allocation, which set forth the totaltime the parties could spend for alldepositions to be taken, withoutaddressing individual time limits, andallocated six months for the damagestrials of all other plaintiffs. Both thediscovery and trial time was allocated inminutes assigned by the court. Thebellwether trial ended as determined by3 For example, in an MDL involving Merck’sprescription drug Fosamax® (S.D.N.Y., MDL1789), Judge John F. Keenan has presidedover several trials limiting each side toapproximately six trial days. Maley v. Merck& Co. Inc., No. 06-cv-4110 (S.D.N.Y.)(defense verdict); Graves v. Merck & Co.,Inc., No. 1:06-CV-05513-JFK (S.D.N.Y.)(defense verdict); Secrest v. Merck & Co.,Inc., No. 06 MD 1789-JFK (S.D.N.Y.)(verdict for Merck); Boles v. Merck & Co.,Inc., No. 1:06-cv-09455-JFK (S.D.N.Y.)(initially resulted in a mistrial; retrial resultedin plaintiff verdict, followed by a remitter anddamages retrial set for September 2012).

Court-Imposed Time Limits on Trial Page 389the court, as did the discovery, while thefinal trial settled just prior to trial.Judges outside the mass tort productsliability context have also imposed timelimits for trials. Last year, Judge Alvin K.Hellerstein of the United States DistrictCourt for the Southern District of NewYork announced his plan to impose a onemonthtime limit for trial in a wrongfuldeath case filed by the family of MarkBavis, a passenger on the second plane tohit the World Trade Center on September11, 2001. 4 United Airlines and severalother parties were defendants. Had thecase not settled, each side would have hadno more than 50 to 60 hours to present itsevidence. The trial was to be timed inminutes, not days, much like a chessmatch with the clock ticking whenever alawyer questions a witness or argues tothe jury. As is often the case, lawyers forboth sides argued that such a time limitwas unrealistic for a case of thatmagnitude. Nevertheless, JudgeHellerstein fully intended to impose astrict time limit to avoid a protracted trialand to keep the jury focused. The courtreportedly reasoned that “once the jurygets bored with your presentation, you’velost the significant power of persuasion.”II. Standards Supporting TimeLimitationWhen imposing time limits at trial,federal district courts rely on varioussources, including FED. R. EVID. Rule611(a), which provides that:4 Bavis v. United Air Lines, Inc., No. 02-CV-7154-AKH (S.D.N.Y.).The court should exercise reasonablecontrol over the mode and order ofexamining witnesses and presentingevidence so as to:(1) Make those procedures effectivefor determining the truth;(2) Avoid wasting time; and(3) Protect witnesses from harassmentor undue embarrassment. 5State trial courts are afforded similardiscretion under state or local procedureand/or evidence rules, or common lawprinciples. 65 FED. R. EVID. 611(a); see also Gregory P.Joseph, American Bar Assoc. Princ. for Juries& Jury Trials, SL 044 ALI-ABA 653 (Oct.2005) (citing FED. R. CIV. P. 16(c)(4), (c)(15)(“the court may take appropriate action, withrespect to…an order establishing a reasonablelimit on the time allowed for presentation ofevidence”)); FED. R. EVID. 403, 611(a), 201,and MANUAL FOR COMPLEX LITIGATION(THIRD) §§ 21.653, 22.35 (1995) (providesgrounds for time limits); MCICommunications v. American Tel. & Tel. Co.,708 F.2d 1081, 1171 (7th Cir. 1983) (no abuseof discretion to limit antitrust trial to 26 dayseven where parties estimated an eight- to ninemonthtrial). See also Duquesne Light Co. v.Westinghouse Elec. Corp., 66 F.3d 604, 608-611 (3rd Cir. 1995); Crabtree v. Nat'l SteelCorp., 261 F.3d 715, 720-721 (7th Cir. 2001);Johnson v. Ashby, 808 F.2d 676, 678-679 (8thCir. 1987); Gen. Signal Corp. v. MCITelecomm. Corp., 66 F.3d 1500, 1508-1509(9th Cir. 1995).6 Further evidence of the judiciary’s interest inpromoting efficiency in litigation is thegrowing tendency of courts to implement timerestrictions in pretrial proceedings. Forexample, trial courts are issuing more tailoredand aggressive scheduling orders to expeditediscovery and, in some cases, promote prompt

Page 390 DEFENSE COUNSEL JOURNAL–October 2012While there are numerous cases inwhich the appellate court has been criticalof the time limits imposed by the trialcourt, no cases have been identified inwhich the trial court was actuallyreversed because of the time limitsimposed. 7 The language used to supportclaims against time limits is dicta:Trepel’s argument is impassionedbut unpersuasive. Although Trepelcites dicta from three casesdisfavoring time limits, seeMonotype Corp. v. Int’l TypefaceCorp., 43 F.3d 443, 451 (9th Cir.1994); McKnight v. Gen. MotorsCorp., 908 F.2d 104, 114-115 (7thCir. 1990); and Flaminio v. HondaMotor Co., 733 F.2d 463, 473 (7thCir. 1984), in none of these casesdid the imposition of the time limitlead to a reversal. Similarly, we findno cause to reverse here. 8Even those cases which have beencritical of the trial court’s actions havenot reversed them. In Pierce v. County ofOrange, for example, the court found thatresolution of meritless claims. Depositionsmay also be restricted (sometimes even furtherthan contemplated by the Federal Rules ofCivil Procedure) by limiting the number ofhours for all depositions in a case, or setting adeadline by which all depositions must becompleted.7 In Secretary of Labor v. DeSisto, 929 F.2d789, 794–796 (1st Cir. 1991), the First Circuitordered a new trial (despite the fact thatneither side had objected) when the trial courthad limited each side to one witness without aRule 403 inquiry, but the decision was basedon a witness limit, not a time limit.8 Trepel v. Roadway Express, Inc., 40 Fed.Appx. 104, 108 (6th Cir. 2002).imposing rigid time limits did notconstitute reversible error:Accordingly, we join the SeventhCircuit in disapproving rigid hourlimits such as those initiallysuggested here. [citing Flaminio].. . . .[W]e conclude that [Plaintiffs] havenot shown that “there was harmincurred as a result” of the timelimit. [citing Monotype]. Plaintiffsobjected to the time limitation butdid not specify what evidence theywould have presented if more timehad been allotted, nor did theyrequest additional time. 9Similarly, in McKnight v. GMC, thecourt found that the error associated withfirm limits did not merit reversal:But there was one error that in a caseas close as this potentially was grave.That is the hourglass methodemployed by the district judge tolimit the length of the trial. . . . By thetime the plaintiff rested, GM had only49 minutes in which to put on its fourremaining witnesses . . . . It was atthis point that the judge gave GeneralMotors the extra half hour, but 79minutes is still a very short time forfour witnesses and we were told atargument without contradiction thatthese witnesses ran to and from thestand in a desperate effort to completetheir testimony before time wascalled.9 Pierce v. County of Orange, 526 F.3d 1190,1200 (9th Cir. 2008) (upholding trial court’slimit of three days per side).

Court-Imposed Time Limits on Trial Page 391Flaminio v. Honda Motor Co., 733F.2d 463, 473 (7th Cir. 1984),disapproved the practice of placingrigid hour limits on a trial, whilerecognizing that in this age ofswollen federal caseloads districtjudges must manage their trials withan iron hand -- must scrutinize thewitness list and the exhibit list witha beady eye and ruthlessly pruneredundant or marginal evidence. Wedo not reverse district judges who dothis. Northern Indiana PublicService Co. v. Carbon County CoalCo., 799 F.2d 265, 269 (7th Cir.1986). We commend them. But toimpose arbitrary limitations, enforcethem inflexibly, and by these meansturn a federal trial into a relay race isto sacrifice too much of one good --accuracy of factual determination --to obtain another -- minimization ofthe time and expense of litigation.If General Motors had preserved theissue of undue curtailment of trialtime, we would reverse and order anew trial. But it has not preserved it,and this time its waiver is fatal. Itasked for an extra hour and wasgiven thirty minutes, so it must showwhat it would have done with theother thirty minutes if it had beengiven them. Id. at 270. Neither in thedistrict court nor in this court hasGeneral Motors attempted such ashowing. The spectacle of witnessesrunning to and from the witnessstand is unseemly, but GeneralMotors does not argue that thespectacle was prejudicial to it. Wedo not reverse for harmless errors.Fed. R. Civ. P. 61. McKnight isentitled to the award of back paythat the jury gave him. 10Both McKnight and Pierce cite theSeventh Circuit case of Flaminio v.Honda Motor Company, in which thecourt criticized the imposition of stricthour limits while ultimately affirming thejudgment of the district court:Finally, Flaminio argues that the trialjudge unduly curtailed hisopportunity to present his case byannouncing at the outset of the trialthat the trial would be allowed to takeonly 33 hours -- 18 for the plaintiffsand 15 for the defendants. HN15Although in this era of crowdeddistrict court dockets federal districtjudges not only may but mustexercise strict control over the lengthof trials, and are therefore entirelywithin their rights in settingreasonable deadlines in advance andholding the parties to them, see, e.g.,MCI Communications Corp. v.American Tel. & Tel. Co., 708 F.2d1081, 1170-72 (7th Cir. 1983), wedisapprove of the practice of placingrigid hour limits on a trial. The effectis to engender an unhealthypreoccupation with the clock,evidenced in this case by theextended discussion between counseland the district judge at the outset ofthe trial over the precise method oftime-keeping -- a method that madethe computation of time almost ascomplicated as in a professional10 McKnight v. GMC, 908 F.2d 104, 115 (7thCir. Wis. 1990) (superseded by statute ondifferent grounds) (not reversing because issuewas not preserved for appeal).

Page 392 DEFENSE COUNSEL JOURNAL–October 2012football game. But our disagreementwith the district judge’s method ofeconomizing on trial time does notwarrant reversal of his judgment.The 18 hours that the plaintiffs weregiven to put in their case were not anunreasonable period in relation to thecomplexity of the issues, and in anyevent the plaintiffs have failed toindicate what evidence they wouldhave put in, or cross-examinationthey would have conducted, if theyhad had more time. . . . . We trust,however, that in the future the abledistrict judge will not try to slice theloaf so thinly. 11III. The Benefits and Costs of Time-Limited TrialsAs with most any trial managementprocedure, there are advantages anddisadvantages to time-limited trials. Thefollowing are among the benefits from thedefense perspective:Time limits force the defense tofocus on w hat’s important.Time limits necessarily causedefense lawyers to plan ratherthan simply react during trial.For example, time limits imposethe necessary discipline of afocused cross-examination.Deciding what not to cover oncross can be at least as importantas deciding what to cover, andtime limits facilitate thatstrategic analysis well in11 Flaminio v. Honda Motor Co., 733 F.2d463, 473 (7th Cir. Wis. 1984) (emphasisadded).advance of trial. With respect toplanning its case-in-chief,defense counsel will have tofocus on developing the mostcompelling witness testimony,judiciously allocating subjectmatter among expert witnesses,using summary exhibits ordemonstratives, and introducinginto evidence only a subset ofthe most relevant documentsfrom an inevitably overbroadexhibit list. By contrast, withouttime constraints, defense lawyersmay be tempted to elicitredundant testimony from alldefense experts. It is rarely thecase, however, that experts areequally versed in the scientificand medical literature onsubjects such as generalcausation. Exposing unqualifiedexperts to cross-examination onsuch subjects runs the risk ofjeopardizing the witness’scredibility in their true areas ofexpertise. In a time-limited trial,that risk is significantly limitedbecause defense counsel mustcarefully consider and delineatethe scope of testimony wellbefore the witness takes thestand. In short, it is ourexperience that advancedplanning based on the availabletime inevitably leads to acleaner, sharper, and better-trieddefense case.Time limits ensure the defensehas a fair opportunity to put onits defense without beingaccused of wasting time. Time-

Court-Imposed Time Limits on Trial Page 393limited trials are perhaps theonly way to ensure that the courtreserves a fair amount of timefor the defense to present itscase. Most juries are told at theoutset of a trial that a trial willlast a certain period of time, sayfour weeks. A plaintiff that usesup three weeks in its case-inchiefobviously prejudices thedefendant if it were given onlyone week to present its defense.Similarly, jurors may hold itagainst the defense if the trialends up taking longer than thepromised period of time. Evenwhere judges attempt to explaindelays (e.g., sidebars orarguments during extendedbreaks), jurors are likely totolerate such delays early in thetrial but their patience will waneduring the defense case as thetrial goes on. If a defendant isguaranteed a certain amount oftime to present its case, thendefense counsel will be able todo so by saving necessary timethroughout the trial. Thus, bothon the merits and in terms ofengendering goodwill fromjurors, defendants seem to scoremore points by efficientlypresenting their evidence andthen sitting down.Shorter trials help to ma intainthe jury’s a ttention. Timelimitedtrials help keep the juryfocused and engaged. More thanever, jurors today are used togetting answers and gatheringinformation within seconds onthe Internet. They expect toresolve issues sooner rather thanlater. If jurors are forced to sitthrough a prolonged trial, theirattention and ability to processkey information inevitably willfade. In fact, shorter trials limitthe chance that jurors lose focusas a result of sheer boredom. Time limits red uce thelikelihood of jurors beingexcused for hardship duringvoir dire or during trial. Whilejudges have become lesssympathetic to jurors’ pleas to beexcused from jury duty on thebasis of work commitments, if acase is initially estimated to takea month or more, it is morelikely that pro-defense jurorsmay be released from the panelbecause they have a longstandingfamily obligation,purchased tickets for a businesstrip, or are better able toarticulate a legitimate hardshipcreated by a trial with no enddate in sight. With a predictablyshorter trial, it will be muchharder for pro-defense jurors toget excused for an allegedhardship. For those jurors andalternatives who are impaneled,a longer trial creates more of arisk that that they will become illor encounter an unforeseenconflict that may prevent themfrom completing their juryservice. Too many dismissedjurors or alternatives may lead toa mistrial, wasted expense forthe client, and a retrial where

Page 394 DEFENSE COUNSEL JOURNAL–October 2012plaintiff’s counsel would bearmed with a roadmap of thedefense’s strategy.Time limits may hamper theplaintiff’s ability to meet itsburden of proof and/or crossexaminedefense witnesses.Time limits can create a numberof problems for a plaintiff whomismanages its clock. In theextreme case, a plaintiff mayneglect to introduce necessaryevidence or otherwise fail toaddress all the elements of itsclaims. More commonly,plaintiff’s counsel who is notused to working within timelimits will be inclined to spendfar too much time putting oncertain witnesses, layingfoundation for an expert’sexpertise, or simply trying tointroduce the jury to complexsubjects for the very first time.As long as the court does notchange the rules of the trialmidstream, a defendant willbenefit from plaintiff’s timemismanagement in a number ofways, including the fact thatopposing counsel will have lesstime to cross-examine defensewitnesses.Time limits re strict the numb erof video depositions played attrial. In the mass tort context inparticular, the playing of videodepositions of unavailablecompany witnesses during trialis becoming increasinglycommon. If left unconstrained,many plaintiff lawyers wouldlike nothing more than to playdozens of hours of depositiontestimony where one witnessafter another is asked about thesame emails with the sameinflammatory languagehighlighted for the jury. In ashorter trial, a plaintiff is notonly forced to narrow the scopeof proffered depositiontestimony but also the judge, inthe interest of time, will sustain adefense objection on the basis ofcumulative evidence. Forexample, a defendant can arguethat each time a video depositionis played showing the sameallegedly “bad company”documents, the defense mustspend time counter-designatingtestimony to put the evidence inits proper context.Time limits red uce cumulativetestimony by experts. Just astimed trials limit redundanttestimony from fact witnesses,they likewise discourage judgesfrom allowing cumulativetestimony by expert witnesses.If, for example, the jury hasalready heard one expert testifyat length about whether amedicine causes a certain sideeffect or that the defendantcompany has violated FDAregulations, a defendant shouldnot be required to use up its timecross-examining another witnessabout the same topics. In otherwords, a court may be morewilling to restrict cumulative

Court-Imposed Time Limits on Trial Page 395expert testimony in the setting ofa time-limited trial.Time limits mo tivate judges tocontrol evasive adve rsewitnesses. In our experience,judges presiding over timerestrictedtrials are particularlyreceptive to control an evasiveand nonresponsive witness.Even where a judge is notproactive in controlling thewitness, the cross-examinershould remind long-winded orfilibustering witnesses about theneed to be responsive given thetime limits in the case. If theevasiveness continues, counselshould ask the court to instructthe witness accordingly. Again,judges appear to be particularlyreceptive to this request in atime-limited trial. This approachmay well create the impressionthat, unlike the plaintiff’switness, the defense is mindfulof and respects the jury’s andjudge’s time.Time limits provide clients withsome logistical and budgetcertainty. Clients and clientrepresentatives appreciatepredictability in an otherwiseunpredictable trial environment.A time-limited trial gives inhousecounsel a betteropportunity to plan andcoordinate with the company’strial witnesses. It also helpsoutside counsel to coordinate theschedules of expert witnesses, asopposed to having to keep themon “standby” for several weeksat a time. Even though it isobviously impossible to predict averdict with certainty, a shorter,time-limited trial can at leastprovide the client with the abilityto budget for the cost of tryingthe case itself.Notwithstanding the benefitsdescribed above, time limits during trialcan be detrimental to defendants incertain circumstances, particularly wherethe limits are unfair or not properlyenforced by the court.Inadequate total time li mitsand/or allocation can prejudicedefendants. Time constraintsduring trial have the potential toprejudice defendants if theoverall time is too short or if thetime is unfairly allocated amongthe parties. With respect to theallocation, the unfairness mayarise in a single defendant case(e.g., 75% to plaintiff and 25%to defendant) or in a multidefendantcase (e.g., 50% toplaintiff and 50% to be splitamong defendants). To preventthis, the parties should makeevery effort to present a realisticexpectation of the time needed topresent their case, and the courtshould take into account thefactual complexity of the caseand such factors as the numberof parties, legal claims, andwitnesses per party. Fairlyallocating time is even moredifficult in cases involvingmultiple defendants, particularly

Page 396 DEFENSE COUNSEL JOURNAL–October 2012if some defendants are adverse(or could be adverse) to eachother. For example, onedefendant may be the plaintiff’sprimary target whereas anotheris in the case solely to defeatdiversity. In that scenario, itwould be unfair for the court tosplit the allocated time evenlyamong the defendants. Similarly,in cases with multipledefendants, the first defendant topresent has the ability to drivethe direction of the defense forall other defendants. This canleave the remaining defendantsat the mercy of the firstdefendant’s decisions (ormistakes) as to how best topresent any duplicate orredundant witness/evidence.And the court may, under itsinherent power to control thepresentation of evidence, preventduplicate presentations if theinterests of the parties aredeemed to be essentiallyidentical. This can play realhavoc on defense theories of thecase, especially where there aremultiple defendants who do notshare a common defense theme.There is no real fix for thissituation, and although it existswhether or not the parties are onthe clock, the clock seems toemphasize it due to timerestrictions. Unenforced time limits arehighly prejudicial and defeatthe very purpose of timerestrictedtrials. Anotherpotential problem for defendantscan arise if the pre-establishedtime limits are not strictlyenforced by the court. Courtsare required to be reasonable inimposing time limitations and tobe flexible if good cause existsfor an extension. 12 Thisdichotomy presents the risk thata plaintiff can engage ingamesmanship by asking thecourt for more time during adefendant’s case-in-chief. If, forexample, a plaintiff uses up allof its allotted time before thedefense calls its final witness,and then requests (and isgranted) additional time to crossexaminethe defendant’s lastwitnesses, this would be unfairlyprejudicial to the defendant who,unlike the plaintiff, has gaugedits time properly throughout thetrial. Had defense counselknown the court would grantplaintiff additional time, theymight have used additional timeto cross-examine plaintiff’switnesses or otherwiseapproached plaintiff’s case-inchiefin a different manner.Once time limits are set, theysimply must be enforced, or theiruse is unfair to the party whoabided by its limits and theentire process is virtuallymeaningless.12 See, e.g., Gregory P. Joseph, American CarAssoc. Princ. For Juries & Jury Trials, SL044ALI-ABA 653 (Oct. 2005); MANUAL FORCOMPLEX LITIGATION (FOURTH) §§ 11.644,12.35 (2004).

Court-Imposed Time Limits on Trial Page 397Table 1: Pros & Cons of Time-LimitedTrials for DefendantsProsFocuses case on the most “important”evidenceFair opportunity to present defense caseKeeps jury’s attention and fosters efficientresolutionProtects against pro-defense jurorhardshipsMay restrict a plaintiff’s ability to crosswitnessesLess cumulative “bad company” conducttestimonyLess cumulative expert testimonyHelps to control evasive witnesses oncrossProvides some logistical and budgetcertaintyConsTotal time can be unreasonably shortTime allocations may be inequitable,especially in cases involving multipledefendantsUnenforced time limits are highlyprejudicialIV. Practical Suggestions in TimeLimited TrialsThere are, of course, a number ofpractical steps defendants should takebefore and during trial to limit thepotential downside of time-restrictedtrials.Define the Rules. As indicated in moredetail in Table 2 below, defendantsshould ensure that all details pertaining tothe time procedures are spelled out inwriting prior to trial, and that all partiesagree to the time keeping procedures. Itmust be determined from the outsetwhether opening statements, closingarguments, voir dire, etc. will be includedin a party’s time. 13Set Realistic Targets. During thepretrial conference, defense counselshould be realistic and specific when thecourt asks for input about the identity ofwitnesses, the nature of their testimony,and the expected duration of theirexaminations.Abide by the Rules. Parties must alsoagree that all time limits and procedureswill be strictly enforced, and be preparedto frequently remind the judge andpreserve the record for appeal if the rulesare not followed.Table 2: Key Considerations to LimitDefendants’ Risks of Time-Limited Trials1. Reach a pre-trial stipulation or agreementwith opposing counsel regarding:13a. Total number of hoursb. Fair allocation of hours among eachpartyc. Time-tracking proceduresi. Everything a party does, fromopenings through summation,should be on the clock. Theclock ticks whenever its lawyerrises to question a witness orargue to the jury.ii. Designated deposition testimonycounts against that side’sallocated time.1. Thus, plaintiff’saffirmative designationsshould count againstplaintiff, and defendant’sIt is our experience that voir dire isgenerally excluded from the parties’ timelimits, but is often subject to its own limit.

Page 398 DEFENSE COUNSEL JOURNAL–October 2012counter designationsshould count againstdefendant.iii. Objections and sidebars areexcluded. Judges expectobjections in federal court to beshort, and it is simply tooburdensome for the court totrack time during objections.iv. The clock should be managedby court personnel who willinform the parties at the end ofeach day how much remainingtime is available per party.d. Strict enforcement of time limitsi. Include a clear statement thattime limits will be strictlyenforced absent consent byboth parties during trial.2. During the pretrial conference, partiesshould agree on the record that the proceduresare fair, and that all time limits and procedureswill be strictly enforced.3. Remain cognizant of time limitationsthroughout the trial.4. Remind the judge frequently if the otherside is deviating from the rules and preservethe record for appeal if the rules are notfollowed.court are careful to set and enforcereasonable limits, time-restricted trials arelikely to be advantageous to defendantswhose lawyers are well-organized andknow how to present their evidenceclearly and concisely.V. ConclusionWith the docketing and timedemands placed on courts, the practice oftrying cases on the clock is increasingespecially in complex cases that wouldotherwise result in very lengthy trials.While it may be a necessary practice, itrequires serious thought and attention bythe court and the parties so that itaccomplishes its goal and is fair to allinvolved.We believe the discipline imposed bytimed trials is a good thing. It is good forthe judges, for juries, for the lawyers, andfor clients. As long as the parties and the

Splitting the File in Liability InsuranceBy Douglas R. RichmondLIABILITY INSURERS owe theirinsureds contractual duties of defenseand indemnity. { XE "para:N104CF"}Both duties are linked to coverage, butthey are different in key respects. { XE"para:N104E8" }The duty to indemnifyexists as soon as the contract is formed,but the duty is conditional; the insurer'sduty to pay proceeds is not due and owinguntil the insured’s liability is established. 1The duty to defend is not similarlyconditioned; it exists as soon as a claimpotentially within coverage is made,regardless of whether the law wouldimpose liability in the circumstances. 2The fact that an insurer’s duty to defendarises at the outset of litigation while itsduty to indemnify is determined at theconclusion of the litigation means { XE"para:N104FD" }that an insurer may haveto defend an action in which there will beno duty to indemnify the insured. 3 { XE1 Penn-Star Ins. Co. v. Griffey, 306 S.W.3d591, 601 (Mo. Ct. App. 2010) (stating that theduty to indemnify is determined by the facts asthey are established at trial or as they arefinally determined by some other means, suchas summary judgment) (quoting Penn-Am.Ins. Co. v. The Bar, Inc., 201 S.W.3d 91, 98(Mo. Ct. App. 2006)).2 See Trailer Bridge, Inc. v. Ill. Nat’l Ins. Co.,657 F.3d 1135, 1142 (11th Cir. 2011)(explaining that the merits of the underlyingsuit have “no bearing” on the duty to defend);Abouzaid v. Mansard Gardens Assocs., LLC,23 A.3d 338, 347 (N.J. 2011) (stating thatwhen analyzing the duty to defend, “thepotential merit of the claim is immaterial”).3 Colony Ins. Co. v. Peachtree Constr., Ltd.,647 F.3d 248, 254 (5th Cir. 2011) (applying"para:N104FD" } Insuch cases, insurersIADC member DouglasR. Richmond isManaging Director inthe ProfessionalServices Group of AonRisk Services inChicago, Illinois. Before joining Aon,Doug was a partner with ArmstrongTeasdale LLP in Kansas City, Missouri(1989-2004), where he had a nationaltrial and appellate practice. He is a coauthorof a leading insurance lawtreatise, UNDERSTANDING INSURANCE LAW(5th ed. 2012).typically defend insureds under areservation of rights.An insurer’s defense underreservation of rights sometimes concernsinsureds and courts because of potentialconflicts of interest that can arise. 4 Thereare essentially three issues: (1) whetherthe insurer may defend the case in such away as to defeat coverage; (2) whetherthe insurer may mount less than a fulldefense if it believes it will be able tolater deny coverage or that any ultimateloss will not be covered; or (3) whetherthe insurer will gain access to theinsured’s confidential or privilegedTexas law); ZRZ Realty Co. v. Beneficial Fire& Cas. Ins. Co., 266 P.3d 61, 66 (Or. 2011).4 But see Douglas R. Richmond, IndependentCounsel in Insurance, 48 SAN DIEGO L. REV.857, 859-860 (2011) (explaining that areservation of rights creates a conflict ofinterest entitling the insured to independentcounsel at the insurer’s expense only if themanner in which the case is defended canaffect coverage).

Page 400 DEFENSE COUNSEL JOURNAL–October 2012information which it can then use to itsadvantage in coverage litigation. 5 Toguard against these possibilities and todispel later allegations of bad faith,liability insurers sometimes “split thefile” in a case defended under reservationof rights. In such cases, the insurerestablishes one file for the investigationand defense of the loss and a second filefor the investigation and resolution ofcoverage issues, and assigns a differentclaims professional to each. 6But insurers do not always split files,and their failure to do so occasionallygives rise to bad faith and estoppelallegations, among other claimed wrongs.Policyholders’ lawyers insist that insurersthat do not split claim files in appropriatecases breach their duties to their insureds,violate industry custom and practice, andviolate state unfair claims settlementpractices acts. 7 They base thesearguments on years of case law holdingthat insurers cannot employ the samedefense counsel representing the insuredto develop coverage defenses, or useinformation wrongfully obtained by adefense lawyer to deny coverage. 8 There5 Armstrong Cleaners, Inc. v. Erie Ins. Exch.,364 F. Supp.2d 797, 814-815 (S.D. Ind. 2005).6 Steven Plitt and Steven J. Gross, SplittingClaim Files: Managing the Concern forConflicts of Interest Through Use of InsuranceCompany Conflict Screens, 32 INS. LITIG. REP.151, 151 (2010) (calling this “a commonclaims practice”).7 Brent W. Huber and Angela P. Krahulik,Bad Faith Coverage Litigation: The InCovenant of Good Faith and Fair Dealing, 42TORT TRIAL & INS. PRAC. L.J. 29, 47 (2006).8 Parsons v. Cont’l Nat’l Am. Group, 550 P.2d94, 97-100 (Ariz. 1976); Employers Cas. Co.v. Tilley, 496 S.W.2d 552, 558-561 (Tex.1973).is, however, a material differencebetween an insurer inducing a defenselawyer to violate her duties to her clientor exploiting confidential informationsupplied by a careless or unprincipleddefense lawyer to deny coverage and aninsurer making a single adjusterresponsible for evaluating both liabilityand coverage. The former types ofconduct may well expose the insurer tobad faith liability or strip it of coveragedefenses; the latter arrangement, standingalone, should not. The fact that a singleclaims professional is responsible for bothliability and coverage issues in a givencase does not compel the conclusion thatthe insurer will be tempted to shortchangethe insured’s defense. Courts’ focuswhen evaluating insurer-insured conflictsin this context therefore must be on theinsurer’s allegedly improper collection oruse of information to the insured’sdetriment, not on the insurer’s internalorganization. 9 Although insurancecompanies may opt to split files inappropriate cases, they have no duty to doso. 10 An insurer’s failure to split a file,9 See Vt. Mut. Ins. Co. v. Parsons Hill P’ship,1 A.3d 1016, 1025 (Vt. 2010) (“The issue isnot whether [the] insurance carrier properlyorganized its staff and maintained a wallbetween coverage counsel and defensecounsel. . . . Instead, the issue is whether itsorganization could have had any effect on thecoverage determination.”).10 Employers Ins. of Wausau v. Albert D.Seeno Constr. Co., 945 F.2d 284, 286-288 (9thCir. 1991) (applying California law); StateFarm Fire & Cas. Co. v. Super. Ct., 265 Cal.Rptr. 372, 374-375 (Cal. Ct. App. 1989);also Specialty Surplus Ins. Co. v. SecondChance, Inc., 412 F. Supp.2d 1152, 1169(W.D. Wash. 2006) (rejecting the argumentthat an insurer had to assign separate adjusters

Splitting the File in Liability Insurance Page 401without more, will not support bad faithallegations or similar claims. 11This article explains why insurers donot have a duty to split files in cases inwhich coverage is disputed. Part I beginsthat analysis with a survey of the limitedcase law on the subject. Part II goesbeyond the cases in explaining whyinsurers have no duty to split files. Part IIalso recognizes that although insurersclearly have no duty to split files, that factalone does not necessarily end theinquiry. Rather, the next question iswhether insurers arguably should splitfiles in appropriate cases to preemptpotential bad faith or estoppel argumentsor further the insured’s defense. Part IIidentifies several possible reasons forsplitting files that insurers may wish toconsider and briefly identifies somelogistical considerations when splittingfiles. Of course, the fact that an insurancecompany opts not to split a file in aparticular case evidences nothing otherthan a legitimate exercise of businessjudgment.to two insureds’ files in the same matter);United Servs. Auto. Ass’n v. Bult, 183 S.W.3d181, 187-188 (Ky. Ct. App. 2003) (concludingthat insurer had no duty to assign twoadjusters where multiple insureds wereinvolved in a single loss).11 See, e.g., State Farm Fire & Cas. Co. v.King Sports, Inc., 827 F. Supp.2d 1364, 1378(N.D. Ga. 2011) (applying Georgia bad faithlaw); Travelers Indem. Co. v. Page & Assocs.Constr. Co., No. 07-07-0022-CV, 2002 WL1371065, at *10 (Tex. App. June 25, 2002)(involving alleged violations of the TexasInsurance Code and Deceptive Trade PracticesAct and rejecting insurer’s failure to split fileas a basis for liability).I. Reviewing the Case LawNo reported case has recognized aduty on an insurer’s part to split a file andseveral courts have expressly rejectedcalls for such a duty. A few courts havediscussed insurers’ use of informationdeveloped in an insured’s defense toadvance their coverage positions, orinsurers’ decisions to split files or theirmethods for doing so, but have alwaysstopped far short of endorsing a duty tosplit a file.A. Cases Rejecting a Duty to Splita FileState Farm Fire & Casualty Co. v.Superior Court 12 is one of the firstreported cases to address file-splitting.State Farm was a bad faith case. In theunderlying action, State Farm defendedits insureds, the Durants, under areservation of rights. State Farm alsofiled a declaratory judgment actionalleging that it had no duty to defend orindemnify the Durants under theirhomeowners policy. State Farm providedthe Durants with independent counsel—Cumis counsel, in California parlance—and retained a separate law firm toprosecute the declaratory judgmentaction. 13 A single State Farm adjuster,12 265 Cal. Rptr. 372 (Cal. Ct. App. 1989).13 Although independent counsel are oftendescribed as Cumis counsel, the concept ofindependent counsel long preceded thedecision in San Diego Navy Federal CreditUnion v. Cumis Insurance Soc’y, 208 Cal.Rptr. 494 (Cal. Ct. App. 1984). See, e.g.,Prashker v. United States Guar. Co., 136N.E.2d 871, 876 (N.Y. 1956) (offeringindependent counsel paid for by insurer as

Page 404 DEFENSE COUNSEL JOURNAL–October 2012insured’s interests above its own and toavoid even the appearance ofimpropriety. 29 Thus, Seeno contended,when an insurer reserves its rights, “itmust use different people on the liabilityside and the coverage side, withoutexchange of information betweenthem.” 30 The Ninth Circuit rejected thisargument as contrary to California lawand affirmed the district court’s ruling.There were three principal bases forthe Seeno court’s decision. First, theCalifornia independent counsel statute,Civil Code § 2860, did not require thesegregation of liability and coverage files.In fact, section 2860 affirmativelyrequired insureds to disclose to theirinsurers all unprivileged informationrelevant to a coverage dispute. Second,the decision in State Farm had comedown since the district court deniedSeeno’s motion for a preliminaryinjunction. Notably, Seeno had filed anamicus brief in State Farm and theCalifornia Court of Appeal had rejectedSeeno’s arguments. 31 Third, Californiacourts had never classified the insurerinsuredrelationship as a fiduciaryrelationship as Seeno urged, but hadinstead characterized it as a specialrelationship. 32 Although some Californiacourts had recognized that the insurerinsuredrelationship had some fiduciaryaspects or features, it was not an actualfiduciary relationship. In sum, Californialaw was clear that the insurer-insured29 Id. at 286.30 Id.31 Id.32 Id. at 287 (quoting Love v. Fire Ins. Exch.,271 Cal. Rptr. 246, 252 (Cal. Ct. App. 1990)).relationship did not compel insurers tosegregate liability and coverage files. 33Seeno’s argument that Wausaushould be compelled to segregate itsliability and coverage activities becauseother insurers routinely did so fared nobetter. Other carriers’ choices or practicesdid not create a duty on Wausau’s part. 34As the court aptly observed, otherinsurers’ decisions to segregate theirliability and coverage roles did notnecessarily arise out of any duty to do so,but perhaps reflected precautions againstlater allegations of misconduct leveled bytheir insureds. 35Since Seeno was decided, courts havecontinued to reject bare allegations thatinsurers have a duty to split files. 36 AGeorgia federal case, State Farm Fire &Casualty v. King Sports, 37 is illustrative.King Sports sold golf clubs over theInternet. In 2007, Calloway Golf andNike sued King Sports for trademarkinfringement. In 2009, Cleveland Golfalso sued King Sports for trademarkinfringement and other alleged offenses.State Farm defended all three actionsunder reservations of rights andeventually settled the Calloway Golf andNike actions. The defense of theCleveland Golf case, however, wasmarred by King Sports’ breach of its dutyto cooperate. In January 2010, StateFarm filed a declaratory judgment action33 Id. at 288.34 Id.35 Id.36 See, e.g., Travelers Indem. Co. v. Page &Assocs. Constr. Co., No. 07-07-0022-CV,2002 WL 1371065, at *10 (Tex. App. June 25,2002); Vt. Mut. Ins. Co. v. Parsons HillP’ship, 1 A.3d 1016, 1025 (Vt. 2010).37 827 F. Supp.2d 1364 (N.D. Ga. 2011).

Splitting the File in Liability Insurance Page 405in which it disclaimed any duty toindemnify King Sports because (a) therewas no “occurrence”; (b) severalexclusions barred coverage; and (c) KingSports had failed to cooperate. KingSports and Cleveland Golf entered into ahuge consent judgment and King Sportsassigned any bad faith claim it might haveagainst State Farm to Cleveland Golf.Cleveland Golf then filed a bad faithcounterclaim in the declaratory judgmentaction and also alleged a bad faith claimas a purported third-party beneficiaryunder King Sports’ policy with StateFarm. State Farm eventually moved forsummary judgment on its declaratoryjudgment claim and on Cleveland Golf’sbad faith counterclaim.Cleveland Golf contended that StateFarm’s failure to timely split the file inthe defense of the underlying actionevidenced the insurer’s bad faith. 38 StateFarm had promptly split the file in theNike and Calloway Golf suits but waitedapproximately three months to do so inthe Cleveland Golf case, and two StateFarm claims professionals testified thatfiles should be split where coverage isdisputed so that information obtained inthe defense of the case is not used toinvalidate coverage. 39 Cleveland Golfalleged that by not immediately splittingthe file, State Farm enabled informationobtained in the defense of the third-partyaction to be used against King Sports inthe declaratory judgment case. The courtwas not persuaded.Although State Farm deviated fromits usual practices in not immediatelysplitting the file in the Cleveland Golf38 Id. at 1378.39 Id.case, Cleveland Golf could not articulatewhy or how that breakdown evidencedbad faith. 40 Cleveland Golf identified nosensitive information that the State Farmadjuster handling its underlying lawsuitwas able to obtain and use against KingSports as a result of her responsibility forboth liability and coverage issues. Forthat matter, “Cleveland Golf cite[d] noauthority to support its argument thatState Farm had a duty to split the file.” 41The court in King Sports ultimatelygranted State Farm summary judgment onits declaratory judgment claim and onCleveland Golf’s counterclaim for badfaith.B. Cases Discussing the Actual orPotential Improper Mixing ofDefense and CoverageInformationThe King Sports court’s dismissiveobservation that Cleveland Golf couldmuster no authority for its argument thatState Farm’s had a duty to split its fileraises an interesting question: was this afailure on the part of Cleveland Golf’slawyers, or did they offer no supportingauthority because there were none? Infact, there were (and presently are) noreported cases favoring Cleveland Golf’sposition. The courts that have eitherapprovingly discussed file-splitting orfactored the issue into their bad faith orcoverage analyses have not suggested thatsuch a duty existed.In Twin City Fire Insurance Co. v.City of Madison, 42 for example, the Fifth40 Id.41 Id.42 309 F.3d 901 (5th Cir. 2002).

Page 406 DEFENSE COUNSEL JOURNAL–October 2012Circuit reversed a grant of summaryjudgment for several Hartford Insuranceentities in a coverage and bad faith case.The defense lawyer’s alleged conflicts ofinterest were a central issue in the case, aswere the City’s entitlement toindependent counsel and whetherHartford had sufficiently notified the Cityof the possible conflict of interest. Indetermining that there were genuineissues of material fact preventingsummary judgment on the City’s badfaith claims, the court counted amongthem (1) whether a Hartford claimsconsultant, Kimberly Chabert, wasinvolved in both claims analysis andcoverage analysis, thereby prejudicing theCity through a conflict of interest; (2)whether Hartford adequately separated itsliability and coverage activities; (3)whether Chabert kept silent about theconflicts of interest while developingHartford’s coverage defenses; (4) whetherChabert induced defense counsel toprovide her with confidential informationdetrimental to coverage by concealing herrole and that of a second Hartford claimsconsultant, Michael Dandini, inevaluating coverage; (5) whether Dandinirelied on confidential information fromdefense counsel’s reports to formulatecoverage defenses; and (5) whetherHartford used defense counsel’s activitiesto construct coverage defenses. 43If any of those allegations were true,they would demonstrate the City’sentitlement to a defense by independentcounsel. They would also furtherevidence Hartford’s bad faith on the basisthat it attempted to take advantage ofdefense counsel’s fiduciary relationship43 Id. at 909.with the City to perfect coveragedefenses. That sort of underhandedconduct by an insurer is clearly out ofbounds. 44 Yet all of the alleged bad faithconduct in Twin City could have occurredwith split files. For example, Chabert’sand Dandini’s alleged exploitation ofconfidential information likely wouldhave occurred even with split filesinasmuch as they were alleged to haveworked in concert. The Twin City courtwas properly focused on Hartford’sconduct in defending the City and not onits internal policies or procedures. Thecase does not support liability insurers’alleged duty to split claim files whencoverage is disputed. 45More recently, in ArmstrongCleaner v. Erie Insurance Exchange, 46an Indiana federal court devotedrespectable attention to Erie’s decision tosplit its file and the adequacy of itsprocedures for preventing possible flowsof information between the adjusterresponsible for the insured’s defense andthe adjuster responsible for evaluatingcoverage. 47 The court did so, however,because Erie argued that its erection of a44 Parsons v. Cont’l Nat’l Am. Group, 550P.2d 94, 97-99 (Ariz. 1976).45 See also, e.g., Specialty Surplus Ins. Co. v.Second Chance, Inc., No. C03-0927C, 2006WL 2459092, at **16-17 (W.D. Wash. Aug.23, 2006) (questioning whether insurerimproperly used information gathered fromtwo insureds’ claims files in determiningwhether to try a case rather than settling it inthe belief that it would ultimately not have toindemnify one of the insureds because of itscoverage defenses, but refusing to find as amatter of law that the timing of the insurer’sdecision to split the file was unreasonable).46 364 F. Supp.2d 797 (S.D. Ind. 2005).47 Id. at 805, 817.

Splitting the File in Liability Insurance Page 407wall between the adjusters cured anyconflict of interest that would havenecessitated the appointment ofindependent counsel to defend the insuredin the underlying action. 48 The ArmstrongCleaners court rejected Erie’s argumentbased in part on the insufficiency of itsscreening procedures. 49 The court didnot, however, recognize a duty to split thefile.II.ANALYSISThere are good reasons, whetherconsidered individually or together, forrejecting arguments for a duty to splitfiles in conflict of interest situations.First, consider the case in which aliability insurer receives notice of a lossbefore suit is filed. Although no suit hasbeen filed, it is safe to say that the insurerwould prefer to have the loss fall outsidecoverage rather than within. Now, it iscertainly true that an insurer’s interest innegating coverage is not alone a conflictof interest. 50 At the same time, anadjuster conducting a pre-suitinvestigation may develop informationthat will allow the insurer to denycoverage just as easily as the adjuster willmarshal facts relevant to the insured’sdefense should a third-party sue theinsured. The insurer is entitled to obtaininformation from the insured that isrelevant to coverage—at least until theinsurer has good reason to believe that48 Id. at 817.49 Id.50 Nat’l Cas. Co. v. Forge Indus. Staffing Inc.,567 F.3d 871, 874 (7th Cir. 2009) (applyingIllinois law).coverage may be disputed. 51 Even thenthe insurer may be able to obtaininformation from the insured that bearson coverage pursuant to the cooperationclause in its policy. 52 Yet, the insurer isnot required at the outset to assign twoadjusters to the loss: one to prepare theinsured’s defense in the event of a claimor suit, and one to evaluate coverage. It isperfectly reasonable for a single adjusterto be responsible for both liability andcoverage when there is no litigationpending. 53If a liability insurer were to have aduty to split a file in a case in whichcoverage was disputed, then the insurerwould also have a duty to split the filefrom the time it received pre-suit noticeof a loss until it confirmed coverage forthe loss. The argument here isstraightforward: an insurer thatundertakes a pre-suit investigation andwaits to split the file only if and when theadjuster learns of information suggestinga possible coverage defense has actedinappropriately because the adjuster willby then be privy to information theinsurer can use against the insured.Assigning the original adjuster the51 See Lloyd’s & Inst. of London UnderwritingCos. v. Fulton, 2 P.3d 1199, 1204 (Alaska2000) (stating that an insurer conducting a presuitinvestigation must notify its insured of aconflict of interest when the insurer “has goodreason to believe that a coverage dispute mayexist”).52 1 ALLAN D. WINDT, INSURANCE CLAIMS ANDDISPUTES § 2:6 (5th ed. 2007).53 Edward Currie, Jr., John G. Farnan andLaura Faust, Splitting Files: Implications onHandling Liability and Coverage Claims 5(July 2011) (paper presented at the annualmeeting of the Federation of Defense &Corporate Counsel).

Page 408 DEFENSE COUNSEL JOURNAL–October 2012coverage side of the case going forwardand assigning a second adjuster to handlethe liability portion lessens the potentialrisk of harm to the insured but does notnecessarily eliminate it. Thus, the insurershould have split the file from thebeginning. Of course, this argument mustfail. The law does not require insurers tosplit all liability files at the outset. Evenadamant proponents of file-splittingwould not dare suggest that insurers’duties should reach so far. Carryingpotential conflicts of interest to thatextreme would pose an undue financialburden on insurers, and woulddramatically slow and complicate claimsprocessing. That is, however, the logicalextension of imposing a duty to split thefile.A reasonable response might be thatthe duty to split the file does not ariseuntil the insurer’s duty to defend istriggered by a claim or suit, because onlythen do the insurer’s and insured’sinterests potentially come into conflict. 54But that is no answer unless those whomight offer it will agree that a duty tosplit the file could never exist unless themanner in which the suit was defendedcould affect coverage. In other words, aninsurer’s duty to split a file, if any, couldarise only in a case in which the allegedconflict of interest entitled the insured toindependent counsel at the insurer’sexpense. That limitation would havesuperficial appeal, since it is in such casesthat the insurer’s access to the insured’sconfidential information is potentiallydetrimental to the insured. Even then,however, there are other reasons todisfavor the recognition of a duty.54 See id. at 20 (taking this position).To start, if the insured is entitled torepresentation by independent counsel,the insurer has no right to control thedefense. 55 The insurer has lost the rightto control the defense by virtue of theconflict of interest necessitatingindependent counsel. Vesting the insuredwith control of its own defense fullyeliminates two of the three risks that filesplittingis intended to guard against. 56The third—the insurer’s potential abilityto obtain confidential or privilegedinformation that it can use to itsadvantage in a coverage dispute—isreduced nearly to the point of elimination.Only if the lawyer serving as theinsured’s independent counsel were tosomehow betray the insured’s confidencewould there be any chance of the thirdrisk being realized. That possibility seemsremote at best.If an insured is sued and the insurerdefends under a reservation of rights, it isreasonable to assume that at some pointsomeone at the insurance company willhave to decide whether to settle thecase. 57 After all, the overwhelmingmajority of cases settle and insurersroutinely settle cases defended under areservation of rights. This decisionmakermust have access to both liability55Long v. Century Indem. Co., 78 Cal.Rptr.3d 483, 490 (Cal. Ct. App. 2008).56 These are the risks that (1) the insurer maydefend the case in such a way as to defeatcoverage; and (2) the insurer may mount lessthan a full defense if it believes it will be ableto later deny coverage or that any ultimate losswill not be covered.57 Philip W. Savrin and Jonathan J. Kandel,Splitting Claim Files Between Coverage andDefense, FOR THE DEF., May 2012, at 52, 55;Plitt and Gross, supra note 6, at 156.

Splitting the File in Liability Insurance Page 409information and coverage information tomake a reasoned decision. 58 Even beforecircumstances force it to evaluatepotential settlement, the insurer may wishto consider whether it should waive itscoverage defenses and settle the claim orsuit against the insured. 59 This againrequires knowledge of both the coverageand liability aspects of the case. In anyevent, the insurer is entitled to make thischoice and the insured benefits if theinsurer settles on its behalf. Given allthis, the argument that a liability insurershould have a duty to split a file is notpersuasive.Once defense counsel is retained in aparticular matter, it becomes even clearerthat a requirement to split the fileunnecessarily burdens the insurer.Defense lawyers’ ethical obligationsadequately protect the insured against therisks that file-splitting is designed toavoid.If the defense lawyer is the insured’sindependent counsel, the insured is hersole client and she owes her loyaltyexclusively to the insured. 60 Although alawyer functioning as independentcounsel must keep the insurer apprised ofdevelopments and facts relevant to thedefense of the third-party action, thelawyer must filter out information that the58 Plitt and Gross, supra note 6, at 156.59See, e.g., Flynn’s Lick Cmty. Ctr. &Volunteer Fire Dep’t v. Burlington Ins. Co.,No. M2002-00256-COA-R3-CV, 2003 WL21766244, at *5 (Tenn. Ct. App. July 31,2003) (“crossing over” from coverage side ofa wall to the liability side to settle claims wassaid to be appropriate because insurer waswaiving its coverage defenses by settlingclaims).60 Richmond, supra note 4, at 889.insurer might use to defeat or limitcoverage. 61 Thus, the presence ofindependent counsel alone should providesufficient protection for the insured andeliminate any alleged need for the insurerto split the file. 62 If the defense lawyerwas hired by the insurer and the insured isher sole client either by agreement or byoperation of law, the situation is thesame. 63 If the defense lawyer was hiredby the insurer and the insured and theinsurer are dual clients, the defenselawyer cannot share with the insurerinformation bearing solely on coverageabsent the insured’s consent. Suffice it tosay that such consent is unlikely to begranted and, for that matter, the lawyergenerally should not seek it. If there isdefense-related information that alsoaffects coverage, such that the insurer hasa right to receive it, the defense lawyerprobably has a material limitation conflictof interest that will require herwithdrawal from the case unless theinsured agrees to allow her to furnish theinformation to the insurer. 64 Regardless,the defense lawyer’s ethical duties to the61 Id. at 890-892.62 4 RONALD E. MALLEN AND JEFFREY M.SMITH, LEGAL MALPRACTICE § 30:21, at 369(2012 ed.) (citing Employers Ins. of Wausauv. Albert D. Seeno Constr. Co., 945 F.2d 284(9th Cir. 1991)).63 See State Farm Fire & Cas. Co. v. Mabry,497 S.E.2d 844, 847 (Va. 1998) (“Theattorney employed by the insurer to defend theinsured ‘is bound by the same high standardswhich govern all attorneys and owes theinsured the same duty as if he were privatelyretained by the insured.’”) (quoting Norman v.Ins. Co. of N. Am., 239 S.E.2d 902, 907 (Va.1978)).64MODEL RULES OF PROF’L CONDUCT R.1.7(a)(2) (2011).

Page 410 DEFENSE COUNSEL JOURNAL–October 2012insured are a sturdy barrier against thesort of information leakage that filesplittingis intended to prevent.Although there is no duty to split afile, there are valid reasons for an insurerto split a file anyway. First, anyadministrative costs or inconvenience thatmay accompany the decision to split a filemust be weighed against the possibility ofrelated allegations of bad faith or estoppelif the file is not split. An insurer mighttherefore conclude that splitting a file is areasonable precaution even in a case inwhich the perceived need to do so isdoubtful. Any administrative costsaccompany splitting a file are certain tobe lower than the cost of litigating theissue somewhere down the line. Second,splitting a file avoids the allegedappearance of impropriety. Granted, anappearance of impropriety is too thin areed on which to base allegations of badfaith or other misconduct against aninsurer, but appearances may nonethelessmatter to an insurer for a variety ofreasons. Third, an insurer may wish tosplit a file to give the insured extraassurance of fair treatment, or to increasethe defense lawyer’s willingness to shareinformation with the adjuster handling theliability aspect of the matter and, in doingso, enhance the insurer’s ability tosuccessfully defend the case. Finally, ifan insurer anticipates litigation with itsinsured, splitting the file may in somejurisdictions enhance the insurer’s abilityto assert the attorney-client privilege orwork product immunity with respect tocoverage-related communications withthe insurer’s in-house lawyers or outsidecoverage counsel. 6565 Savrin and Kandel, supra note 57, at 54-55.If an insurer opts to split a file, itmust consider at least two logisticalissues. First, who should be screened inthe process? Clearly, the adjustersresponsible for coverage and liabilitymust be screened from one another, buthow high must the screen go? Should itextend to the adjusters’ immediatesuperiors or higher? The safe answer isthat the screen should extend up to theperson ultimately responsible for decidinghow the claim should be resolved,whether by way of settlement, trial,declaratory judgment action, or denial.How the screen should be implementedwill depend on the insurer’s informationtechnology capabilities and itsinformation and records managementsystems. Second, under whatcircumstances, if any, should the screenbe treated as permeable? In other words,it is ever appropriate for the coverage andliability adjusters to communicate aboutthe matter with one another? If so, forwhat purpose? As a practical matter, thecoverage and liability adjusters may needto communicate about matters that willbenefit the insured or which at least willnot affect the insured’s defense.Enforcing an absolute ban oncommunications in such situations wouldseem to make little sense.An insurer that opts to split a filemust also consider at least two broaderpractical issues. First, and perhaps mostfundamentally, an insurer that opts to splita file must be prepared to demonstratewhy it employed the screening proceduresit did and further that those procedureswere effective. Insurers that split filesshould therefore think carefully abouthow they document and enforce theirscreening procedures or protocols.

Splitting the File in Liability Insurance Page 411Second, an insurer that establishes aprotocol for splitting files or which hasregular procedures for doing so must beprepared to follow them uniformly out ofthe reasonable concern that the failure tofollow them in any particular case maybecome evidence of allegedly improperconduct. 66III. ConclusionDefenses under reservation of rightsoccasionally raise concerns aboutconflicts of interest between the insurerand insured, including whether (1)whether the insurer may defend the casein such a way as to defeat coverage; (2)whether the insurer may mount less than afull defense if it believes it will be able tolater deny coverage or that any ultimateloss will not be covered; or (3) whetherthe insurer will gain access to theinsured’s confidential or privilegedinformation which it can then use to itsadvantage in coverage litigation. Toguard against these possibilities and todispel later allegations of bad faith orother claims of misconduct, liabilityinsurers sometimes “split the file” in acase defended under reservation of rights.Although insurers may choose to splitfiles for several legitimate businessreasons, they have no duty to do so. Aninsurer’s failure to split a file should notsupport bad faith or estoppel allegations,nor should it give rise to any other claimsof misconduct by the insurer.66 Id. at 55 (citing Aetna Cas. & Sur. Co. v.Mitchell Bros., Inc., 814 So. 2d 191, 199 (Ala.2001) (Lyons, J., concurring in part anddissenting in part)).

The Global Supply Chain: Understanding,Measuring, Mitigating and Managing Exposure in aSupply Chain Dependent Globalized MarketBy Daniel W. Gerber andBrian R. Biggie“You have to be very rich or very poor tolive without a trade.” 1WITH THE evolution of technologyand society, we have seen a drasticchange in the movement of goods andresources between countries. We haveadvanced from the days of trading silkand spices via ancient land routes to aglobal system that sends raw materialsand finished goods across the world byland, sea and air.Components are shipped from thepoint of manufacture to the point ofassembly and then to the point of sale. Aperfect example of this evolution is theauto manufacturing industry. The Ford F-150, often considered a symbol of theAmerican truck, while assembled inIllinois, is largely composed ofcomponent parts manufactured in Mexicoand China.The importance of maintaining thesafety and predictability of supply routesis not limited to component parts, butincludes commodities such as wheat orfruit. The United Kingdom imports 90%of its fruit and 60% of its vegetables. As aresult, supermarkets were in danger ofrunning out of these commodities duringthe height of the volcanic ash cloud thatinterfered with flights during the summerof 2010.1 Albert Camus.Daniel W. Gerber cochairsGoldbergSegalla’s GlobalInsurance ServicesPractice Group. Hemaintains aninternational practice incomplex insurance coverage andreinsurance matters, including thoseinvolving supply chain issues. He is theChair of the IADC’s Insurance andReinsurance Committee and a frequentauthor and national lecturer on insuranceand reinsurance issues.Brian R. Biggie, anassociate at GoldbergSegalla, concentrateshis practice on complexinsurance coveragedisputes and analysisand professionalliability. His experience includespreparing coverage opinions andlitigating insurance coverage mattersinvolving supply chain issues,employment-related incidents, third-partycoverage, and other issues. He haswritten and lectured on insurancecoverage for audiences nationally andabroad.Arguably the greatest strength of thisglobal economy, the relative ease inmoving parts and commodities, is thebasis for its greatest weakness—thefragility of the system and the concurrentsusceptibility to interruption. Thisdichotomy was noted by the recentlycreated National Strategy For Global

The Global Supply Chain Page 413Supply Chain Security, an articulation ofthe United States’ policy to strengthen theglobal supply chain. This January 2012report noted that the global system reliesupon an interconnected web oftransportation and infrastructure:“[W]hile these inter-dependenciespromote economic activity they also serveto propagate risk across a widegeographic area or industry that arisesfrom a local or regional disruption.” 2This article presents the advantages andweaknesses of the modern global supplychain and explores ways for participantsin the global economy to minimize ortransfer risks resulting from interruptionsin the supply chain.Part I considers the modern globalsupply system and analyzes potentialpoints of vulnerability. Understanding theevolution of this modern system and itspoints of vulnerability are key tomitigating risks along the supply chain.Part II analyzes the need for a participantin the supply chain to assess itssusceptibility to losses caused by tradedisruption and considers whatcontingencies should be addressed. PartIII addresses how a company can shift therisks of losses due to supply chaindisruptions to third parties. Developingstrategies for transferring risks orliabilities is critical in limiting acompany’s exposure and losses that canoccur when its supply chain is interruptedor broken.2 Office of the President of the United Statesof America, National Strategy For GlobalSupply Chain Security, at 2 (January 2012).I. The Modern Global Supply SystemA. It’s a Small World After AllOver the past 50 years we havewitnessed the growth of the globalizedeconomy. Global trade has become aprecondition to sustained profits asopposed to an economic advantageavailable to only a certain segment ofcompanies. Conceivably, the globaleconomy has reached a tipping point thatrenders it unlikely that we will ever see aretraction in the growth and/or reliance onthe global supply chain system. Today,more and more companies must managetheir global supply chain in order to staycompetitive in this new market place.Global supply chain is looselydefined as an international network ofcompanies that cooperate to convert ideasinto goods or services for customers. 3Partners in this chain must efficientlyexchange information as raw materialsare transformed to finished goods whiletraveling through the network’s physicalinfrastructure. Physical facilities includemanufacturers’ warehouses, wholesalers’distribution centers, retail chains’warehouses, and retail outlets. 43Barry Cross and Jason Bonin How ToManage Risk In a Global Supply Chain, IVEYBUSINESS JOURNAL, November/December2010.4 Russ Banham, Reducing Disruption in theGlobal Supply Chain, THE WALL STREETJOURNAL, available at http://online.wsj.com/ad/article/managingrisk-disruption.

Page 414 DEFENSE COUNSEL JOURNAL–October 2012Proper management of a company’sglobal supply chain is key to maximizingprofits and limiting losses caused by adisruption. While outsourcing may lead tocost savings, there is a litany of dangersand challenges that must be managed inorder to maintain production.save money. 6 This internal structure mustbe able to handle all required supplychain issues flexibly and responsively. Ifunable to manage the supply chain in theabsence of a specific peril, a companywill not reap the benefits of cheaper laboror components residing in other markets.Determining an internal structure formanaging supply chain is a first step insafeguarding against losses caused by itsinterruption.In managing supply chain,companies may choose a traditionalapproach and view supply chainmanagement as a subset of a largerdepartment or divide managementamongst various departments, such as“Purchasing” or “Operations.” 7 Such ahierarchy may look akin to:A company must organize its supplychain management structure to support itsoverall business strategy and design asystem to motivate behaviors thatoptimize performance for the company asa whole. Failing to understand the costsof importing goods from foreign locationscan lead a company to make a decisionthat serves to increase costs rather than5Image available at Cerqa, http://www.cerqa.com/services/supply-chain-management.aspx.586 Barchi Gillai and Anne-Caroline Vorburger,Business Value of Global Trade ManagementSolutions, Stanford Graduate School ofBusiness at 4 (March 2007) available atwww.gsb.stanford.edu/sites/default/files/documents/Bus_Value_Global_Trade_Mgmt.pdf.7 Shoshanna Cohen, The New Supply ChainOrganization PRTM (2006) available atwww.gsb.stanford.edu/sites/default/files/documents/PRTM_The_New_Supply_Chain_Org.pdf.8 Id.

The Global Supply Chain Page 415Alternatively, companies mayconsolidate supply chain management,wrapping various other departmentsunder this umbrella. In a sense, links in asupply chain could be viewed as“departments” and individuals that areresponsible for executing eachdepartment core process. 9 Again, such ahierarchy may look like:10With the resulting complexity of theglobal economy, companies will shift tothe more unified approach with onesupply chain manager overseeing thesupply chain, incorporating departmentssuch as purchasing, order fulfillment andmanufacturing. Such an arrangementwould increase a company’s flexibilityand responsiveness in managing itssupply chain.B. Only as Strong as the WeakestLinkThere is no shortage of threats to acompany’s supply chain, and these threats9 Id.10 Id.will be compounded by the increasedscope of the chain. As the concept andreal-world application of the globalsupply chain remains fluid, so does theconcept and real-world effects of variousthreats. To mitigate potential threats to itssupply chain, companies should develop aframework defining and characterizingthe different perils that may exist tointerrupt or break the supply chain.To better define potential threats thatexist, commentators have created anarchetype to categorize threats that mayarise as either “internal” or “external”pressures. The common link among theperils is that each has the potential todisrupt the supply chain. 11 “Internal”pressures include:Processes: Proper execution ofadministrative and/or managerialprocesses undertaken by thecompany. These processesinclude internal assets andinfrastructure, such ascommunication systems,responsiveness of departmentsand leadership structure. If theinternal infrastructure of thecompany fails to operateefficiently, supply chaindisruptions may occur. 12 Controls: The assumptions,rules, systems, and proceduresthat dictate how a company11 Alan Braithwaite, The Supply Chain Risksof Global Sourcing (LPC Consulting, July2009), available at http://www.lcpconsulting.com/files/Supplychain_risks_of_global%20Sourcing%20_v26%20May2010.pdf.12 Id.

Page 416 DEFENSE COUNSEL JOURNAL–October 2012exerts control over the processes.For supply chain management,this could include orderquantities, batch sizes, stockpolicies, and return policies.Control risk arises from theapplication or misapplication ofinternal controls. 13Mitigation: It is essential for acompany to plan forcontingencies that may occur.The failure to prepare a plan tomitigate losses from aninterruption in supply chain is arisk in and of itself. 14 Supply Chain Confidence:Different departments such assales, customer service oroperations view the viability of asupply chain differently. As aresult, sales persons may ordermore than is required, or holdstock to avoid a shortage due toa lack of confidence in the chain.Operations may be unable toderive patterns on sales ortrends, layering the existinginefficiencies. 15Inability to Measure Demand:Forecasting demand is importantto quantifying units produced13 Id.14 Id.15 Martin Christopher and Hau L. Lee, SupplyChain Confidence: The Key to EffectiveSupply Chains Through Improved Visibilityand Reliability, Cranfield Univ. & StanfordUniv. (November 6, 2001), available atwww.gsb.stanford.edu/sites/default/files/documents/SC_Confidence_whtppr.pdf.and shipped. The inability toproperly assess demand orrespond to a change createsinefficiencies that can disrupt thesupply chain and result ofeconomic losses. This has beencharacterized as the bullwhipeffect, when demandinformation becomes distorted asit is transmitted up the demandchain. This can lead to excessiveinventories, higher operationalcosts and lower customerservice. 16A company’s internal infrastructuremust be geared toward efficientlymanaging its supply chain. Interruptionspotentially caused by internal risks arewithin the control of the company and,although complex, can be assessed,amended and improved upon. These risksare not likely to cause significanteconomic losses, result in litigation or bethe types of risks that a company wouldtransfer to a third party.External risks, those risks outside thecontrol of the company, can have asignificant impact on the supply chainand cause significant economic losses. Itis not difficult to consider the myriad ofexternal risks that could interrupt a supplychain. Political instability, naturaldisasters, dock strikes, cyber attacks, andterrorism all could have a devastatingeffect on supply chains across the world,16 Id.; see also Calvin B. Lee, Demand ChainOptimization: Pitfalls and Key Principles,Evant White Paper Series, (2003), available atwww.gsb.stanford.edu/sites/default/files/documents/Demand_Chain_Optimization_whtppr.pdf.

The Global Supply Chain Page 417with dire impacts to companies. Externalrisks are categorized as: Demand Risk: Potential oractual disturbances to the flow ofproduct, information, and cashemanating from within thenetwork between the focal firmand the market. 17Supply Risk: Actual or potentialdisturbance of the flow ofproduct or informationemanating within the network,upstream to the focal firm. 18 Geo-political Risk: Naturaland/or political risks that canoccur. This category includesevents such as natural disastersand political upheaval. This riskcan impact the firm directly orthrough suppliers and customers.The final category is the most unnerving.While all external risks are, by definition,outside the control of the company, geopoliticalrisks pose the greatest threat ofsignificant disruption or cessation of thesupply chain. A geo-political event couldhave devastating effects on the supplychain system of an unprepared company.Raw materials, supply routes,manufacturing and the end marketplacemay be eliminated for an extended period.II. He Who Fails to Plan, Plans to FailTo minimize its risks, a companymust fully understand the entirety of its17 See Braithwaite, supra note 11.18 Id.supply chain and, more importantly, itspoints of vulnerability. Conducting anobjective assessment allows a company toprepare for interruptions, create flexibilityin its supply chain and be able to respondin kind to potential disruptions.Mapping. First, a company should drawa map of its supply chain and considerwhat perils may arise that would interruptits supply chain. This may appear simpleand obvious but it is easy to overlook andeasy to make certain assumptions about asupply chain absent a clear and objectiveview of the chain as a whole.Consider a company that minescopper in Russia, refines the copper intotubing in the Middle East and distributesthe finished product throughout theUnited States. By mapping the supplychain and considering the potential perilsthat may occur, the company can choosewhat risks it will transfer and what risks itwill bear. Because mining and fabricatingare inland, they are unlikely to be affectedby coastal flooding or wind damage. Thelocation of these activities may beaffected by an earthquake, industrialaccident (Russia) or political unrest(Middle East).In the scenario described above, thecompany could take additional steps tomitigate potential disruptions. Thecompany could position inventory tobuffer against uncertainties of demand oruncontrollable environmental risks. Bylimiting shipment to the refining areaaccording to demand, the company couldlimit the risk of lost materials due topolitical unrest. The company could alsoshift refining elsewhere without having tore-direct significant amounts of materialsalready in transit.

Page 418 DEFENSE COUNSEL JOURNAL–October 2012Supplier Management. Companiesshould retain multiple suppliers alongeach point of the chain at the outset,where possible. By limiting refining ormining to a single provider in a singlelocation, the company described aboverisks the loss of materials in the event of adisruption. This does not mean that eachsupplier must be on equal footing or beexpected to produce equally, but that eachshould complement each other and exist,in part, to avoid the cessation of supply inthe event of a loss. 19Information Management. In order toreduce lead times and achieve greatercoordination across the demand chain,information must flow seamlessly. Thisinformation must include end-consumerdemand, knowledge of inventory on hand,product still in transit and overallcapacity. 20 Companies should invest inunderstanding cultural differences alongthe supply chain. The importance ofcommunication among the players in thesupply chain cannot be overstated, andthe company must obtain a fullunderstanding of the practical mechanicsof maintaining a successful businessrelationship in various countries. 21 This iskey to moving product, responding tochanges in demand, and even handlingreturns or defective materials. A companyshould strive to align the interests ofmultiple parts of the supply chain with theinterest of the end seller.Early warning is also important tohandling and resolving disruptions in thechain. Considering how far materials19 See Cross and Bonin, supra note 3.20 See Lee, supra note 16, at 19.21 Id. at 17.must travel, there is an inherent lag timebetween when an item is shipped andwhen it is received. 22 For example, thereis a 17-23 day window between whenmaterials leave Asia by boat and reach theUnited States. If a company learns of aproblem only when the product arrives inthe United States, this creates a serioussupply-chain problem that could affectsales and overall customer satisfaction.Companies should endeavor to maintainquality control standards along the chainto avoid such a situation.A. If it Wasn’t for Lawyers, WeWouldn’t Need ThemEven the most diligent companyfrom time to time will experienceuncontrollable losses. A company mustalso prepare for the possibility oflitigation and the need to sufficientlyprove damages in the event of a loss dueto such a disruption. No discussion ofrisks and loss is complete withoutconsidering legal options available tolimit those risks and protect a company inthe event litigation results.1. Choice-of-law ProvisionsGiven that a company may havecontractual arrangements withmanufacturers or suppliers domesticallyand abroad, the company should consideradding choice-of-law and choice-ofvenueprovisions to its contracts. Whilethis assumes the ability to gainjurisdiction over another the manufactureror supplier, such clauses are beneficialand allow the company to choose the law22 Id. at 13.

The Global Supply Chain Page 419and jurisdiction governing any resultinglitigation.Generally, courts uphold choice-oflawor choice-of-venue provisions. TheBremen v. Zapapa Offshore Company isan early and prominent case addressingthe validity of choice of forumprovisions. 23 In The Bremen, thedefendant had contracted with theplaintiff to tow the plaintiff’s oceangoing,self-elevating drilling rig fromLouisiana to a point off Italy in theAdriatic Sea. The contract contained aprovision stating, “[a]ny dispute arisingmust be treated before the London Courtof Justice.”A dispute arose after the rig wasdamaged, and the plaintiff filed suit in theUnited States. The defendant moved todismiss citing the choice of forum clauseand asserting the United States court didnot have jurisdiction over the matter. Thecentral issue before the court was whetherthe choice of forum clause was valid. Inupholding the validity of the provisions,the court stated in part:The choice of that forum wasmade in an arms-lengthnegotiation by experienced andsophisticated businessmen, andabsent some compellingreason, it should be honored bythe parties and enforced by thecourts. 24A similar result was reached inMilanovich v. Costa Crociere. 25 There,the plaintiff resided in the District of23 407 U.S. 1 (1972).24 Id. at 12.25 954 F.2d 763 (D.C. Cir. 1992).Columbia and booked passage for aCaribbean cruise on an Italian vessel.The plaintiff alleged that while ininternational waters, a deck chaircollapsed, causing Mr. Milanovich tosustain serious injury. Plaintiff filed suitin the United States District Court for theDistrict of Columbia.The defendant argued that the ticketissued to the plaintiff stated that anypersonal injury actions had to beinstituted within one year of the date theaccident occurred and that Italian law wasthe “ruling law of this contract.” 26 Thecourt concluded that the determination ofwhether the contractual statute oflimitations was valid depended upon theresolution of governing law. The courtnoted that, while some courts view choiceof law provisions as only one factor indetermining the applicable law, thisinterpretation mainly reflects the court’sreluctance to automatically enforce theterms of such adhesion contracts againstpassengers. The court went on to state:While these concerns warrantheightened judicial scrutiny ofchoice of law provisions inpassage tickets, they do notsanction their utter disregard,especially when there are nocountervailing policies of theforum implicated and what it isthe non-drafting party thatseeks enforcement of thechoice of law provision. 27In referencing The Bremen, the courtstated:26 Id. at 764.27 Id. at 767.

Page 420 DEFENSE COUNSEL JOURNAL–October 2012Under The Bremen andCarnival Cruise, then, courtsshould honor extra-contractualchoice of law provision in apassenger ticket unless theparty challenging theenforcement of the provisioncan establish that enforcementwould be unreasonable andunjust, the cause was invalidwith such reasons as fraud oroverreaching or enforcementwould contravene a strongpublic policy of the forum inwhich suit is brought. 28In the context of global commerceand sophisticated business entities, thereis no reason to doubt such provisionswould be upheld. Choice-of-law andchoice-of-venue provisions represent aninitial strategic decision that could have astrong impact on a resulting litigation.2. Transferring LiabilityIn addition to provisions governingchoice of law and jurisdiction, thecompany should also consider contractualmeans to transfer liability for a potentialloss, including the use of indemnityprovisions. This will act to shift resultingliability to the indemnitor. Understandinglocal law, as well as the law governingthe dispute, is key to properly transferringthe risk of a loss by contract. Whiletransferring risk to a carrier or even awarehouse may limit the exposure ofdamages caused by an accident, thecompany will still have to mitigate anyinterruptions in the supply chain.28 Id. at 768.Air Freight. Losses in the context of airfreightare generally governed by theMontreal Convention. 29 The MontrealConvention applies to “all internationalcarriage of persons, baggage or cargoperformed by aircraft for reward.” 30Courts have construed the treaty ashaving a complete preemptive effect overall claims within its scope. With regardto indemnity, courts have held, “[W]hilethe Montreal Convention does not createa cause of action for indemnification orcontribution among carriers, it does notpreclude such actions as may be availableunder local law.” 31 The Ninth Circuitcontinued, “the Montreal Conventionrefers to these local law causes of actionfor indemnification, contribution,apportionment, or set-off, not as a ‘rightto damages,’ but as ‘a right ofrecourse.’” 32 The indemnity provisionfound in the Eli Lilly v. Air ExpressInternational read:Except for claims for personalinjury or property damagewhich are caused by the failureof Lilly to observe any of theterms and conditions of thisagreement and those claims forpersonal injury or propertydamage which arise from thegross negligence or willfulmisconduct of Lilly, Supplier29 Eli Lilly & Co. v. Air Express Int'l USA,Inc., 615 F.3d 1305, 1307 (11th Cir. 2010).30 Olaya v. Am. Airlines, Inc., No. 08-CV-4853, 2009 U.S. Dist. LEXIS94010 (E.D.N.Y. Oct. 6, 2009).31 Chubb Ins. Co. of Eur. S.A. v. MenloWorldwide Forwarding, Inc., 634 F.3d 1023,1026 (9th Cir. 2011).32 Id. at 1027.

The Global Supply Chain Page 421hereby agrees to indemnifyand hold Lilly harmless againstand from any and all claimsarising from any breach ordefault in the performance ofany obligation on Supplier'spart to be performed under theterms of the agreement, orarising from any act, neglect,fault, or omission of Supplieror of its agents, employees,visitors, invitees, or licenseeand from and against all costs,attorney's fees, expenses, andliabilities incurred in or aboutany such claims or any actionagainst customer by reason ofsuch claim. Supplier, uponnotice of Lilly, shall defendsame at Supplier's expense. 33Sea Freight. Claims based upon freighttraveling by sea are treated differently.For losses litigated within the UnitedStates, The Carriage of Goods By Sea Actgoverns. The statute provides an avenueto shift the burden of a loss to the carrier.The Fifth Circuit described the complexshifting of burdens of proof:Initially, the plaintiff mustestablish a prima facie case bydemonstrating that the cargowas loaded in an undamagedcondition and discharged in adamaged condition. “For thepurpose of determining thecondition of the goods at thetime of receipt by the carrier,the bill of lading serves asprima facie evidence that the33 Eli Lilly, 615 F.3d at 1314-1315.goods were loaded in thecondition therein described.” Ifthe plaintiff presents a primafacie case, the burden shifts tothe defendants to prove thatthey exercised due diligence toprevent the damage or that thedamage was caused by one ofthe exceptions set forth insection 1304(2) of COGSA,including “perils, dangers, andaccidents of the sea or othernavigable waters” and “latentdefects not discoverable bydue diligence.” If thedefendants show that the losswas caused by one of theseexceptions, the burden returnsto the shipper to establish thatthe defendants’ negligencecontributed to the damage.Finally, “if the shipper is ableto establish that the[defendants'] negligence was acontributory cause of thedamage, the burden switchesback to the [defendants] tosegregate the portion of thedamage due to the exceptedcause from that portionresulting from the carrier's ownnegligence.” 34To the extent the purchaser cansatisfy its burden of proof and avoid theapplication of any exception, thepurchaser will pass the burden of the lossto the shipper.A second treaty that may come intoplay in the course supply chain disputes is34 Steel Coils, Inc. v. M/V Lake Marion, 331F.3d 422 (5th Cir. 2003).

Page 422 DEFENSE COUNSEL JOURNAL–October 2012the United Nations Convention onContracts for the International Sale ofGoods (“CISG”). As the Second Circuitnoted, under the CISG, “the seller mustdeliver goods which are of the quantity,quality and description required by thecontract,” and “the goods do not conformwith the contract unless they . . . possessthe qualities of goods which the seller hasheld out to the buyer as a sample ormodel.” 35 The CISG further states that“the seller is liable in accordance with thecontract and this Convention for any lackof conformity.” 36 As to the damagesavailable in the event of a breach ofcontract, the Treaty states:Damages for breach ofcontract by one party consist ofa sum equal to the loss,including loss of profit,suffered by the other party as aconsequence of the breach.Such damages may not exceedthe loss which the party inbreach foresaw or ought tohave foreseen at the time of theconclusion of the contract, inthe light of the facts andmatters of which he then knewor ought to have known, as apossible consequence of thebreach of contract. 3735 Delchi Carrier Spa v. Rotorex Corp., 71F.3d 1024, 1028 (2nd Cir. 1995).36 Id.37 Article 74, United Nations Convention onContracts for the International Sale of Goods,Vienna, 11 April 1980, S.Treaty DocumentNumber 98-9 (1984), UN Document NumberA/CONF 97/19, 1489 UNTS 3.Finally, as with the choice-of-lawprovision, companies can always agree bycontract to shift the burden of a loss.Parties can include indemnificationprovisions that specify the extent andnature of damages the indemnitor isentitled to in the event of a covered loss.3. DamagesIdeally, a contract will be wordedwith sufficient strength to avoid litigation.Too frequently, however, litigation willstill ensue. Once a complaint is file,companies must think strategically and beprepared to prove every element ofdamages.Plaintiffs must present evidenceestablishing the full extent of damagesand explain the rationale used to reachtheir conclusions. Forensic accountantsmay be required to sift through recordsand calculate actual losses. Simplestatements about expected losses or priorsales will likely be insufficient. Damagecannot be speculative, and the claimantwill bear the burden of proof. The failureto sustain this burden will limit orpreclude recovery regardless of whetherthe claim is against a tortfeasor or aninsurer.In Texpor Traders v. Trust CompanyBank, the plaintiff filed a breach ofcontract action against Oxford Industriesbased upon the sale of cotton sweatshirtsand the refusal to honor a line of credit. 38Oxford, which had ordered thesweatshirts, contended the sweatshirtswere defective and counterclaimed for$61,036.40 paid to Texpor under a letter38 Texpor Traders, Inc. v. Trust Co. Bank, 720F. Supp. 1100 (S.D.N.Y. 1989).

The Global Supply Chain Page 423of credit for shipment and $163,265.95for lost profits on confirmed customerorders and potential customer orders thatOxford was unable to deliver because ofdefects in the merchandise.The court concluded that the goodsTexpor delivered to Oxford underpurchase orders were materially defectiveand not of “first quality” as the contractspecified. 39 Turning to the issue ofdamages, the court held that Oxford wasentitled to damages for lost profits in theamount of $111,112.78. The court notedthat Oxford had met is burden of proof inestablishing the damages by providingcomputerized printouts of orderconfirmations and cancellations, asummary of confirmed customer orders,and a tabular analysis of price per itemsold on confirmed customer orders andacquisition cost of such items. However,the court declined to award Oxford anydamages for potential orders because,“Oxford presented no evidence, however,of such prospective sales, and the courtwill not speculate in attempting to assessthem.” 40The obligation to provide evidencesupporting damages applies equally in thecontext of a claim for insurance coverage.An insurer has the right to seekinformation relevant to a claim. InAmerex Group v. Lexington InsuranceCompany, 41 Amerex was in the businessdistributing outerwear in the UnitedStates and acted as an intermediarybetween its wholesale customers andoverseas clothing manufacturers. Thecompany stored clothing in its warehouse39 Id. at 1106.40 Id. at 1108.41 678 F.3d 193 (2nd Cir. 2012).in Avenel, New Jersey. The warehouseutilized a large rack system thatfacilitated inventory storage andorganization. This rack subsequentlycollapsed, activating the warehouse'ssprinkler system, which flooded thepremises. The water not only damagedAmerex's merchandise, but also renderedits computer system inoperable for “oneto three weeks,” and prevented Amerexfrom making promised deliveries. Thedamages associated with the collapseincluded lost merchandise, cancellation oforders, late charges for orders fulfilled,and lost business income.At the time of the loss, Amerex wasinsured under three separate policies, afirst primary was issued by Fireman'sFund Insurance Company in the amountof $2.5 million and second and thirdpolicies were issued by appellees, andprovided insurance in excess of theFireman's Fund policy. Each excesspolicy had a liability limit of $5 million,for a total of $10 million beyond thecoverage provided by Fireman's Fund.The excess insurance policies containedsubstantially identical clauses thatallowed either party to insist in writing onthe appointment of an appraisal panel todetermine the extent of losses associatedwith any claim. The appraisal clause didnot specify any time limit for makingsuch a demand, and instead focused onthe procedure used to appoint the Panel.Two years after the rack collapse,Amerex submitted its proof of loss toFireman's Fund and the excess insurers,claiming total damages of $8.8 million.Fireman's Fund paid the full amount of itspolicy; Amerex then sought coveragefrom the excess insurers for the remaining$6.3 million. The excess insurers

Page 424 DEFENSE COUNSEL JOURNAL–October 2012subsequently rejected Amerex's claim onthree bases: (1) Amerex's failure tosubstantiate a number of aspects of itsclaims, due to the lack of documentaryevidence; (2) alternative explanations forthe loss of business income that Amerexreported, including the September 11,2001 terrorist attacks, economicrecession, and the bankruptcies of majorcustomers; and (3) Amerex's improperdetermination of the proper “restorationperiod,” the date after which businesslosses could no longer be attributed to therack collapse or computer failure.After Amerex filed its complaint, theexcess insurers demanded appraisal andanswered the complaint the next day,listing the appraisal demand among theiraffirmative defenses. The excess insurersthen moved to compel an appraisal.Amerex rejected the demand andcontested the motion, claiming that thedemand was untimely and was assertedonly to preclude Amerex fromprosecuting its claim and obtainingdiscovery. The trial court granted themotion to compel an appraisal resulting ina three person panel.In conducting the appraisal, the panelreviewed documentary and testimonialevidence and conducted investigations ofwitnesses. After almost two and a halfyears of review, the panel issued itsvaluation decision and found thatAmerex's damages amounted toapproximately $1.3 million, just morethan half of the value of Amerex'sinsurance policy with Fireman's Fund.In the resulting coverage litigation,Amerex argued that the appraisal demandwas untimely and the excess insurerswaived the right to make such a demand.The court noted that “New Yorkrecognizes that the right to require anappraisal ‘is not indefinite as to time, butmust be exercised within a reasonableperiod.’” 42 Accordingly, the resultinginquiry was whether the delay was“reasonable.” The court applied a threefactortest:(1) whether the appraisalsought is 'impractical orimpossible' (that is, whethergranting an insurer's appraisaldemand would result inprejudice to the insured party);(2) whether the partiesengaged in good-faithnegotiations over valuation ofthe loss prior to the appraisaldemand; and(3) whether an appraisal isdesirable or necessary underthe circumstances. 43In applying these factors to the caseat hand, the court concluded that theinsurers did not waive the right to demandan appraisal: “Amerex's challenges of thePanel's ultimate valuation and the timetaken to reach that valuation are merelypost-hoc criticisms of the appraisalprocess and results and do not provide areason why the district court should haveanticipated at the time the appraisal wasdemanded that the appraisal wouldprejudice Amerex.” 44Amerex also argued that the panelimproperly decided issues of law, notpurely the issue of damages. The court42 Id. at 199, citing Chainless Cycle Mfg. v.Sec. Ins. Co., 169 N.Y. 304 (N.Y. Ct. App.1901).43 Id. at 201.44 Id. at 202.

The Global Supply Chain Page 425noted that the distinction betweencoverage and damages is more difficultwhen the insured seeks coverage for lostbusiness income, however the courtconcluded nonetheless that the panel didnot decide issues of law in reaching itsdecision:While the present disputecertainly included legalarguments concerning thepolicy's coverage, thosedisputes were not implicated inthe appraisal's resolution. ThePanel instead focused solely ondetermining the extent of thedamages, including calculatingthe relevant restoration period,and did not address whetherthe Excess Insurers' policiescovered those damages. Thus,the Panel did not addressconflicting views of theapplicable policies, but ratherresolved factual questionsregarding claims about theconflicting causes of the lostbusiness income. 45The party seeking damages mustprovide sufficient evidence to sustain itsburden of proof. Expected profits basedupon a continuing relationship orpromises of additional order may beevident to a company, but absent actualevidence, it is unlikely a judge or jurywill award damages. Companies thatsustain losses as a result of defectivegoods or a breakdown in its supply chainmust be able to present evidence of lostprofits or other damages in order recover45 Id. at 205.such damages in a resulting litigation, oreven receive reimbursement from aninsurer.4. ExpertsA company seeking damages in theform of lost profits, increased costs orreplacement value, must pay carefulattention to proper bookkeeping prior tothe event. It is equally important to retainthe necessary expert to meet the burden ofproof in establishing damages. Courtswill not accept a witness as an expertunless the proponent meets its burden ofestablishing that the witness possessessufficient knowledge, experience, trainingor education to qualify him as an expert.Testimony cannot be vague orunsubstantiated and often, the scope of anexpert’s testimony must be limited to hisarea of expertise. 46Under the Rule 702 of the FederalRules of Evidence, an expert may bepermitted to offer testimony:If scientific, technical, or otherspecialized knowledge willassist the trier of fact tounderstand the evidence or todetermine a fact in issue, awitness qualified as an expert .. . may testify thereto . . . if (1)the testimony is based uponsufficient facts or data, (2) thetestimony is the product ofreliable principles andmethods, and (3) the witnesshas applied the principles andmethods reliably to the facts ofthe case.46 See Hernandez v. Lutheran Medical Center,46 A.D.3d 517 (N.Y. Sup. Ct. 2007).

Page 426 DEFENSE COUNSEL JOURNAL–October 2012Application of this rule relies upon athree-prong analysis: (1) whether theexpert is properly qualified; (2) whetherthe testimony's reasoning or methodologyis scientifically reliable; and (3) whetherthe testimony assists the trier of fact inunderstanding the evidence ordetermining a fact. 47 “[T]o be admissibleunder Rule 702, the expert's opinion mustoffer more than a ‘bottom line.’ Theexpert must explain the methodology andprinciples supporting the opinion.” 48The failure to retain the appropriateexpert or establish requisite knowledgecan result in a party’s disclosed expertbeing precluded. In Tamraz v. LincolnElectric, plaintiff filed suit alleging thatthe fumes from several welding supplyproducts produced by the defendantscaused him to develop manganisminducedParkinsons. 49 The plaintiffintended to rely on the expert testimonyof Dr. Carlini in support of his claims.The doctor, “hypothesized that Tamrazmight have a genetic predisposition toParkinson's Disease, and that manganesein lower levels than necessary to causemanganism might nevertheless ‘trigger’the symptoms of Parkinson's Disease, like‘the straw that broke the camel's back.’” 50The doctor concluded the plaintiff “didnot believe Tamraz has Parkinson'sDisease in the strict sense--thatmanganese in his view caused the diseasemeant by definition it could not be‘idiopathic’ Parkinson's Disease--but47See Quad/Graphics, Inc. v. One2OneCommuns., LLC, No. 09-CV-99, 2011 U.S.Dist. Lexis 108969 (E.D. Wis. Sept. 23, 2011).48 Minix v. Canarecci, 597 F.3d 824 (7th Cir.2010) (citations omitted).49 620 F.3d 665 (6th Cir. 2010).50 Id. at 669.believed it to be otherwise identical toParkinson's Disease.” 51Defendants argued that the purportedexpert’s testimony should have beenprecluded. On this point, the court notedthat “[N]o matter how good ‘experts'credentials’ may be, they are notpermitted to speculate.” 52 The courtcharacterized the expert’s testimony as a“leap”, stating:The problem here is that, whenDr. Carlini testified thatmanganese exposure causedTamraz's condition, he wentbeyond the boundaries ofallowable testimony under Rule702. In the video-tapeddeposition played at trial, Dr.Carlini opined that Tamraz has“manganese-inducedparkinsonism” “with areasonable degree of medicalcertainty.” But the etiologicalcomponent of this conclusion--the “manganese-induced” part--was at most a workinghypothesis, not admissiblescientific “knowledge.” Becausethe “knowledge” requirement ofRule requires “more thansubjective belief or unsupportedspeculation,” the testimonyshould have been excluded. 53In Turrentine v. Bell Canada, theplaintiff filed suit alleging negligence andproduct liability claims for a repetitive51 Id.52 Id. citing Goebel v. Denver & Rio GrandeW.R.R. Co., 215 F.3d 1083 (10th Cir. 2000).53 Id. at 669-670.

The Global Supply Chain Page 427stress injury. 54 The plaintiff relied uponexpert opinions of testimony in support ofher claims. The trial court concluded thatwhile plaintiff’s expert was qualified toprovide an expert opinion, his depositiontestimony failed to establish that he couldrender a reliable expert opinion as to thecause of the plaintiff's injury.On appeal, the Second Circuit notedthat expert testimony was only admissiblewhere it was both relevant and reliable. Inupholding the decision of the trial court,the court stated, “given the paucity ofdetail explaining what methodology[expert] employed in reaching hisconclusion that Turrentine's keyboardusage was a substantial factor in causingher symptoms, it was not an abuse ofdiscretion for the district court to excludehis testimony as to causation.” 55III. Shifting the Risks of TradeDisruptionA. Mechanisms to Transfer RiskTraditionally, companies haveattempted to lower their risk or exposureof supply chain interruptions by procuringBusiness Interruption (BI) coverage orContingent Business Interruptioncoverage (CBI). BI coverage is generallycontingent upon actual physical damageto the commodity or cargo. CBI providessimilar coverage to the extent the loss iscaused by a covered peril.BI coverage is not responsive to thevariety of perils that can affect the globalsupply chain system. The following brief54No. 98-7942, 1999 U.S. App. LEXIS7765 (2nd Cir. Apr. 13, 1999).55 Id.scenario illustrates gaps that may exist inBI coverage:Pear Inc. is an American companythat manufactures cell phones. Thephones are assembled in Mexico and usevarious components manufactured inChina, Thailand and Vietnam. A typhooncauses serious flooding in Vietnam,washing out critical roadways. As aresult, the components made in Vietnamsit in the plant, undamaged, but unable tobe shipped until the roadways arerepaired. In order to maintain productionand sales, Pear, Inc. finds a replacementmanufacturer to obtain the requiredcomponent, increasing costs by 30%.In this hypothetical, the actualcomponent did not sustain any physicaldamage. The plant could continue tooperate and manufacture the requiredpart, but the flood damage prevented, orsignificantly delayed, the ability to shipthe part for use in assembling the phonefor eventual sale. Under the typical BIprovision, the lack of “physical damage”would preclude coverage for Pear’seconomic losses.For Pear, the fact that there was nophysical damage certainly does mean ithas not sustained a significant loss. Still,the absence of such actual physicaldamage would preclude coverage under atypical contingent BI from beingtriggered. In this situation, Pear wasunable to transfer this risk and must bearthe subsequent losses. Of course, to theextent the flooding actually causeddamage to Pear’s components, thisanalysis would change. Dependent uponthe language of the policy, the resultinglosses would be covered and the risk ofthis loss properly transferred to theinsurer. The resulting question is what

Page 428 DEFENSE COUNSEL JOURNAL–October 2012opportunity exists for a company totransfer the risk of financial losses that donot arise from a physical loss.B. Bridging the GapIn light of the emerging globalsupply chain system, there is clearly amarket for transferring the risk offinancial losses that result from aninterruption of the supply chain that donot result from physical loss. As a result,carriers have begun underwriting TradeDisruption Insurance (TDI) coverage.TDI provides coverage for economicdamages that result from a disruption ofthe global supply chain. The intent is totransfer the risk of financial lossessustained by the policyholder in the eventof delay, or outright break, in the supplychain. While BI or even CBI coverage aregenerally triggered by an actual physicalloss, coverage under TDI is triggered bythe occurrence of a named peril.Pear Inc., who as a result of a floodin Vietnam was required to find anothermanufacturer to maintain production andsales, incurred increased production costsfor the twelve months it took to repair theroads to and from the Vietnam plant.Under TDI, Pear could seekreimbursement of these increased costsand any resulting lost profits to the extentthis peril was covered under the policy.C. The Interplay Between BI andTDIUnderstanding the interplay betweenBI and TDI is key to properly assessingvulnerability to an interruption in theglobal supply system and properlytransferring risk. Consider some recentexamples:Country Peril BI TDIJapan ChibaRefinery Fire– loss of oilYes NoIvory CoastUkraineEgypt/LibyaIcelandSemi-ConductorPlantDamaged –loss ofmanufacturedproductsSony –inability toship productssubsequent toearthquakePort closure– SendaiSanctions oncocoa cropsGrainembargoPoliticalupheaval –inability towork andemergencyevacuationsClosure of airspace –volcaniccloudYesNoNoNoNoNoNoNoYesYesYesYesYesYesA further example of the interplaybetween BI and TDI arises fromHurricane Mitch, which struck CentralAmerica in 1998 causing significantdamage. At that time, a multi-billiondollar fresh fruit and vegetable marketer’s

The Global Supply Chain Page 429sources for fresh goods were interrupteddue to damage caused by the hurricane.As the most powerful storm that year,Hurricane Mitch damaged theinfrastructure of Honduras, Guatemala,and Nicaragua.As a result, the marketer lost salesand incurred increased costs in findingalternative sources. The marketerdiscovered that its competitors hadcontingency plans that were moreadvanced and the competitors were ableto secure alternative supplies. Themarketer could not recover the economicdamages under a property policy as thephysical damage was to non-ownedassets. That said, the TDI policy coveredthe lost revenues and increased costs dueto the break in the supply chain.D. Interpretation of CoverageOptionsTo develop an insurance portfolioand those coverages required to properlytransfer risk to an insurer, one must alsoconsider how these policies have beeninterpreted.1. Business InterruptionInsuranceCourts have held the “[t]he purposeof business interruption insurance is toindemnify the insured against lossesarising from inability to continue normalbusiness operation and functions due tothe damage sustained as a result of thehazard insured against. . . . In otherwords, the goal is to preserve thecontinuity of the insured’s earnings.” 56Courts have made a distinctionbetween a partial shutdown and a mereslowdown or loss of productivity; theformer is generally covered, while thelatter is not. In Howard Stores v.Foremost, the insurer denied coverage fora business interruption claim that aroseout of water damage because there was nosuspension of business. 57 Thepolicyholder manufactured men’sclothing and sold the clothing at variousretail stores it owned. One of the storessustained water damage. The propertydamage claim was not disputed and waspaid by the insurer.The policyholder also submitted aclaim for business interruption. Theinsurer denied the claim on the basis thatthere was no business interruptionbecause the policyholder continued to dobusiness. The policyholder thenreformulated its claim and asserted thatsince it had to divert inventories fromsome of its other retail stores, thepolicyholder failed to meet projectedsales in all three stores. The court heldthat recovery was properly deniedbecause there was no suspension ofbusiness and an alleged adverse effect oncontinuing sales did not constitutebusiness interruption. 58Similarly, in Quality Oilfields, thecourt held “[I]n sum, after considering thepolicy as a whole and persuasive56 Howard Stores Corp. v. Foremost Ins. Co.,82 A.D.2d 398, 400-401 (N.Y. Sup. Ct. 1981);see also Quality Oilfield Prods. v. MichiganMut. Ins. Co., 971 S.W.2d 635 (Mich. App Ct.1998).57 See Howard Stores, 82 A.D.2d at 676.58 Id.

Page 430 DEFENSE COUNSEL JOURNAL–October 2012authority from other jurisdictions, we findthat ‘interruption of business’ is anunambiguous term meaning ‘cessation orsuspension of business.’ Therefore,Quality was not entitled to businessinterruption coverage for the workslowdown it experienced, and we find thetrial court did not err in grantingMichigan's motion for summaryjudgment.” 59The burden rests with thepolicyholder to prove that it is entitled tocoverage and the amount of thatentitlement. 60 In Fold-Pak Corp. v.Liberty Mut. Fire Ins. Co., the plaintiffmanufactured and sold various types offolding food containers. 61 Nearly one-halfof the plaintiff’s business was the sale ofso-called “food pails” typically used inChinese restaurants to package takeoutfood. On April 9, 1989, a fire at theplaintiff’s plant destroyed “flexologyequipment” which was used tomanufacture the food pails. 62 As a result,plaintiff had to use a more expensiveprocess to make food pails. The defendantinsurer paid the plaintiff for the loss ofthe Flexo machine, and advanced$250,000 towards its claimed losses.Subsequently, the plaintiff submitted aclaim for $4,081,471, claiming itsdamages were recoverable under theBusiness Interruption coverage providedby the policy. Of this amount, the plaintiffdesignated $1,479,940 as “Loss ofProduction” and $2,601,531 as “ExtraExpenses.” The “Extra Expense” claimconsisted of $2,077,984 in “Increased59 Quality Oilfields, 971 S.W.2d at 639.60 Cora Pub. Inc. v. Continental Cas. Co., 619F.2d 482 (5th Cir. 1980).61 784 F. Supp. 49 (W.D.N.Y. 1992).62 Id. at 51.Cost of Production,” $200,250 in“Management Expediting Expenses” andvarious other extra expenses. Thedefendant did not pay these full amounts,resulting in the coverage action. Theplaintiff sought $4,000,000 in damages.With regard to the loss of productionclaim, the plaintiff determined that, butfor the fire, it would have produced274,444,000 food pails at its plant. Thiswas 35 percent more food pails than itproduced during that same period in theprevious year. Moreover, the plaintiffestimated that the fire prevented it fromproducing 84,568,000 more pails than itactually produced during the relevantperiod. Questioning the plaintiff’s figures,the court stated, “Despite plaintiff'scalculation of lost profits, I find thatplaintiff has failed to show that thisalleged 84,568,000 pail shortfall, even ifit was caused by the fire, caused any lossof income.” 63 The court continued, “Thus,even if plaintiff had produced the pails,nobody was standing in line to buy them.There is no evidence that plaintiff wasunable to produce food pails in sufficientquantity to meet its customers'demands.” 64 The court held that given thecomplete absence of supporting evidencein favor of the plaintiff the court wasrequired to grant summary judgment tothe insurer.Business Interruption coverage canbe an important risk shifting option for acompany, however coverage remainsdependent upon a physical loss to theinsured. Coverage may not be applicableto a break in the supply chain where theinsured does not suffer a physical loss,63 Id. at 53.64 Id. at 54.

The Global Supply Chain Page 431but rather an integral supplied does,causing the insured to lose income.2. Contingent BusinessInterruption CoverageContingent business interruptioninsurance protects a company withincome that is contingent on the flow ofthe goods or services between the insuredand another business. The loss must becaused by damage to a separate businessentity’s property as a result of a coveredperil. Contingent business insurancecoverage insures against the insured’sloss resulting from damage to propertythat it does not own, operate or control.An important question to consider ineither Business Interruption or ContingentBusiness Interruption claims is the extentof time an insured can claim damages.This issue was analyzed in PennbarrCorp. v. Ins. Co. of N. America. 65 There,the insured sold electromechanicaltypewriters. The parent companycollected royalties on the sale andproduction of the typewriters. Theinsured’s subsidiaries included twowholly-owned subsidiaries in Hollandand Italy. The Italian companymanufactured all typewriters sold in theinsured’s North American market. TheHolland company produced typewritersfor sale in the insured’s other markets.Both foreign subsidiaries were listed inthe policy as “contributing properties.” 66The policy, in pertinent part, provided,II. COVERAGE 1. Subject to allof its provisions and stipulations,65 976 F.2d 145 (3d Cir. 1992).66 Id. at 147.this policy covers only againstloss resulting directly fromnecessary interruption ofbusiness conducted by/or throughthe insureds' U.S. salesoperations caused by damage toor destruction of any of the realor personal property (includingfinished stock) hereinafterdescribed and referred to ascontributing properties (and/ orarising out of inability of onecontributing property to producedue to destruction/damage/loss toor at another contributingproperty) by the perils insuredagainst by the terms of thispolicy which wholly or partiallyprevents the delivery of materials(including finished stock) to theinsured or to others for theaccount of the insured and resultsdirectly in the necessaryinterruption of the insureds'business.The insured asserted a businessinterruption loss related to twoearthquakes in Italy in November 1980and January 1981. The earthquakesdamaged the Italian subsidiary andproduction ceased for a period of timeafter each earthquake. The insured’s U.S.companies and the foreign subsidiaries allfiled for bankruptcy between March andNovember of 1981. After the bankruptcyof the foreign subsidiaries, the insuredwas not able to locate alternate typewriterproduction facilities. As a result, theinsured “went into a passive marketingmode in an effort to stretch its inventoryuntil it could switch to an alternative

Page 432 DEFENSE COUNSEL JOURNAL–October 2012product.” 67 The insured sold thetypewriters from its inventory andpurchased typewriters from anothersource from September to November1981 to meet its sales demands in thetime during and after the interruptions atthe Italian plant. The insured reorganizedin December 1981 and changed toproducing electronic typewriters.During the interruption, the insuredmet its sales obligations. After resumingoperations, the insured lost sales due to itsdepleted inventory. After itsreorganization, the insured filed a claimunder its business interruption insurancepolicy for the recovery of lost profits androyalties suffered as a result of the twoItalian earthquakes. Specifically, theinsured claimed that it incurred a lossafter restoration when it could have soldmore typewriters had the operations inItaly not been suspended as a result of theearthquakes.The central question in Pennbarr waswhether a contingent businessinterruption loss for lost sales sustainedafter the period of restoration wascovered under the policy. The insurerdenied coverage for the loss because thelosses occurred after the period ofrestoration. The Third Circuit agreed withthe insurer and held that the insured couldonly recover for loss of sales thatoccurred simultaneously with theinterruption of production caused by theearthquakes and that the policy did notcompensate the insured for lossesincurred after the damaged property isrestored. 68 The court found that this resultwas “consistent with the purpose of67 Id. at 148.68 Id. at 154.business interruption insurance: to returnto the insured that amount of profit thatwould have been earned during the periodof interruption had a casualty notoccurred . . . . This policy is not designedto compensate for losses sustainedbeyond the period of restoration.” 69 Thecourt was also concerned that “[w]ithoutsome cut-off date for the bringing ofclaims under the policy, ‘claims would beopen to a degree of speculation whichwould be absurd.’” 70It is interesting to note that the claimfor business interruption was made almostone year after the initial earthquake andshortly after the insured reorganized.These factors may have influenced theThird Circuit’s decision, particularlygiven the court’s concern about openendedand speculative claims.Because contingent businessinterruption coverage is dependent upondamage to a third-party for a coverageperil, one must pay attention to how thirdpartiesare defined and how thesecategories are interpreted. In Archer-Daniels-Midland v. Phoenix Assurance, 71the insured suffered losses from“unprecedented flooding” of theMississippi River in 1993 that affectednine states. The insured and itssubsidiaries are farm-product processorsand sustained substantial extra expensesand losses of income because of increasesin both transportation costs and the costof raw materials. The insurer paid aportion of the losses sustained by theinsured, and the insured brought a breachof contract action against the insurer for69 Id. at 154-155.70 Id. at 153.71 936 F. Supp. 534 (S.D. Ill. 1996).

The Global Supply Chain Page 433the remainder of the claim. At issue wasthe meaning of the “Extra ExpenseCoverage” (“EEC”) and the “ContingentBusiness Interruption and Extra ExpenseCoverage” (“CBI”) in the Difference-in-Conditions (“DIC”) policies.Regarding Extra Expense Coverage,the court held that the physical damagerequirement in the policy did not requiredamage to the insured’s property orscheduled locations and that damage tothe property of suppliers of goods andservices was covered. 72With respect to CBI coverage, thedispute concerned whether or notMidwest farmers and the United StatesGovernment, through (1) the Army Corpsof Engineers (“Corps”) (which operatesand maintains the Mississippi Riversystem), and (2) the United States CoastGuard (which “maintains systems ofmarine aids to navigation consisting ofvisual, audible, and electronic signalswhich are designed to assist the prudentmariner in the process of navigation”), aresuppliers of goods and services under thepolicies.The court noted that a substantial partof the insured’s raw materials “travel bybarge in the Mississippi River and itstributaries. When barge traffic was haltedbecause of the flooding, [the insured] hadto arrange alternate– and moreexpensive– transportation by rail....[Theinsured] argues that the plain language ofSection 13 (Q) supports its assertion thatits costs for alternate transportation arerecoverable under the policies.” Section13 (Q) is set forth below.This policy covers against loss ofearnings and necessary extra72 Id. at 538.expense resulting from necessaryinterruption of business of theinsured caused by damage to ordestruction of real or personalproperty, by the perils insuredagainst under this policy, of anysupplier of goods or serviceswhich results in the inability ofsuch supplier to supply aninsured locations [sic].The court agreed with the insured’sargument and found that the Corps andthe Coast Guard are “suppliers of goodsand services” under the policies. 73 In thisregard, the court noted that “Governmententities have been recognized as playing adual role in commerce, that of ‘regulator’and that of ‘market participant.’” 74 Thecourt also held that coverage under thepolicies is not limited to principalsuppliers or suppliers with the insuredunder a written contract. The policyapplies to “any supplier.”3. Trade Disruption InsuranceTrade Disruption Insurance isrelatively new to the marketplace. Thereis no developed line of reported casesinterpreting coverage under such policies.As with all areas of insurance coverage,disputes and resulting litigations, are onlya matter of time. One recent case, TamkoBuilding Products v. Factory MutualInsurance, is instructive. 75 In that case,the plaintiff manufactured roofingmaterials, including various types of73 Id. at 542.74 Id. at 543.75 No. 4:10CV89, 2012 U.S. Dist. LEXIS117622 (E.D. Mo. Aug. 21, 2012).

Page 434 DEFENSE COUNSEL JOURNAL–October 2012asphalt shingles. Tamko purchasedcoating grade asphalt from its supplier,Bitumar USA, Inc. Coating grade asphaltis produced with a product call asphaltflux, which was purchased from IrvingOil, which operates an oil refinery in NewBrunswick, Canada.Irving Oil’s operations consist of athree-room monobuoy located in the Bayof Fundy, to which ships dock whileunloading oil and a pipeline systemconnecting the monobuoy to onshorestorage tanks. Collectively, the monobuoyand subsea pipeline is referred to as a“single point mooring” (SPM) system.In August 2008 Irving Oil was forcedto shut down its pipeline because ofdamage to its pipeline. Due to theshutdown, Bitumar was unable to obtainasphalt flux from Irving Oil and Tamkowas unable to receive coating gradeasphalt from Bitumar. Tamko’soperations slowed and eventually stoppedcompletely in September and did notresume until October 2008.Factory Mutual had issued aCommercial Property Insurance Policy.Tamko submitted a claim for its loss inthe amount of $12 million. The FactoryMutual insurance provided “dependenttime element” coverage, which wasdescribed as, “cover[ing] the Actual LossSustained and EXTRA EXPENSEincurred by the Insured during thePERIOD OF LIABILITY directlyresulting from physical loss or damage ofthe type insured to property of the typeinsured at Dependent Time ElementLocations located within theTERRITORY of this Policy.”The policy defined a “dependent timeelement location as:(i) Any Location:(a) of a direct customer,supplier, contractmanufacturer or contractservice provider to theInsured.(b) of any companyunder a royalty, licensingfee or commissionagreement with theInsured.(ii) Any Location of acompany that is a director indirect customer,supplier, contractmanufacturer or contractservice provider to aLocation described ina)(i) above.The policy's Declarations broadlydefines an “Insured Location” under thepolicy as:A. The coverages under thisPolicy apply to anInsured Location unlessotherwise provided.Insured Location is alocation:1) listed on aSchedule ofLocations, AppendixA attached to thisPolicy.2) covered as aMiscellaneous

The Global Supply Chain Page 435UnnamedLocation.3) covered under theterms and conditionsof the AutomaticCoverage or Errorsand Omissionsprovisions.B. References andApplication. Thefollowing term(s)wherever used in thisPolicy means:1) MiscellaneousUnnamed Location:A Location owned,leased or rented bythe Insured but notspecified in theSchedule ofLocations.2) Location:a) as specified inthe Schedule ofLocations, orb) if not specifiedin the Schedule ofLocations, aLocation is abuilding, yard,dock, wharf, pieror bulkhead (orany group of theforegoing)bounded on allsides by publicstreets, clear landspace or openwaterways, eachnot less than fiftyfeet wide. Anybridge or tunnelcrossing suchstreet, space orwaterway willrender suchseparationinoperative for thepurpose of thisReference andApplication. 76The court characterized the coveragedispute as whether the damage to IrvingOil’s pipeline occurred at a covered“dependent time element” and a covered“dependent time element” (DTE)location. It was undisputed that under theterms of the policy, Irving Oil was asupplier to Tamko, and any of its“locations” suffering physical loss ordamage would be covered under thepolicy. The policy defined “location” as a“building, yard, dock, wharf, pier orbulkhead (or any group of theforegoing).” These terms were notseparately defined in the policy.Tamko argued that the SPM systemfit within the ordinary meaning of theterms dock, wharf, and building. Thecourt cited Merriam-Webster's CollegiateDictionary, which defined “dock” as “aplace (as a wharf or platform) for theloading or unloading of materials.” 77Similarly, the term “wharf” was definedas “a structure built along or at an anglefrom the shore of navigable waters so that76 Id. at *8-*9.77Id. at *11 (citing Merriam-Webster'sCollegiate Dictionary 341 (10th ed. 2002)).

Page 436 DEFENSE COUNSEL JOURNAL–October 2012ships may lie alongside to receive anddischarge cargo and passengers.” 78 Theresulting inquiry was whether the damageto the monobuoy, the three-room buildingwhere ships would dock and unload oil,would be covered under the terms of thepolicy.The court concluded that “themonobuoy and pipeline system does fitwithin the policy's list of coveredlocations.” The court held that themonobuoy constituted a building giventhat it was composed of walls and a roof,and workers occupied the space forseveral hours at a time. In addition themonobuoy also met the definition of awharf, as it was built to allow ships todock alongside the buoy to unload oil,and it constitutes a dock because it is aplace to discharge cargo.The court flatly rejected FactoryMutual's argument that the “monobuoy”was not covered solely because thatprecise term was not contained in the listof locations, concluding such anargument was “not a reasonableconstruction of the policy.” The courtheld:Rather, the policy, when readas a whole, is broad andinclusive, providing coveragefor all “locations” of theinsured's suppliers and thesuppliers' suppliers, evenwithout listing those suppliersin the policy itself. Such abroad and inclusive policy isnot subject to such a narrowconstruction of a particularphrase, analyzed in isolation. Iconclude that the monobuoyitself is a covered locationunder the policy, such thatTamko's loss from the damageto the pipeline is covered. 79Clearly, Tamko is fact specific, and itis difficult to extrapolate any overarchingguidelines regarding trade disruptioninsurance and potential coverage disputesbeyond the concept that while TDIcoverage is new to the marketplace itremains insurance, no more, no less. Thesame rules of underwriting, policyconstruction, and scope of coverageapply. Claims for coverage, as with anyinsurance dispute, will be governed by theterms and conditions of the policy.Insureds, insurers and counsel must becognizant that, while this market is newand expanding, the same rules still apply.E. Getting Coverage - WhatInsurers Will Want To KnowInsurers underwriting coverage forTDI will need to fully understand thepotential policyholder’s supply chain. Aninsurer will also want to gain insight intothe policyholder’s supply chainmanagement system and will askquestions like: Have contingencies beenconsidered for each point on the supplychain? Has there been an estimate of costfor each contingency? Can thepolicyholder bear the costs of aninterruption?A full picture of the supply chain,points of weakness and the ability of thepolicyholder to prepare for, and react to,78 Id.79 Id. at *12.

The Global Supply Chain Page 437contingencies is integral in assessing therisk and determining the resultingpremium.V. ConclusionAs the global economy continues toevolve and becomes more intertwined,more and more companies will be forcedto consider the ramifications ofinterruptions in the global supply chain.As with most risks, a company thatforesees potential threats and acts tomitigate those risks will be in the bestposition to weather any resulting storms.There is little likelihood that the globaleconomy will revert to a locally drivensystem of supply and demand.Accordingly, a wise company willidentify potential perils and act tomitigate against the potential threat.Properly managing a global supplychain requires consideration of internalinefficiencies and threats, as well as thosethreats that are external and beyond thecontrol of the company. In today’smarketplace, there are opportunities totransfer certain risks to third parties.Achieving the proper balance of risks thatare transferred with those borne by thecompany is key to navigating the highseas of global commerce.

Fending off the Use of a Rule 12(f) Motion to StrikeAffirmative DefensesBy Peter M. Durney andJonathan P. MichaudTHIS ARTICLE addresses potentiallyeffective arguments a defendant mayraise when confronted with a motion tostrike affirmative defenses based upon theSupreme Court’s decisions in BellAtlantic Co. v. Twombly 1 and Ashcroft v.Iqbal. 2 As most litigators by now know,in Twombly, the Supreme Court held thatin order to withstand a motion to dismiss,a plaintiff must plead sufficient facts in acomplaint to allege “a plausibleentitlement to relief.” 3 Plaintiffs havesince argued, with some success, that thisheightened pleading standard applies withequal force to a defendant’s affirmativedefenses. Facing such a motion early onin litigation can present myriad problemsfor a defendant. Upon being properlyserved with a Summons and Complaint,without the benefit of discovery and withonly twenty-one days to file an answer infederal court, defendants to a large extentmust anticipate the proof and raiseappropriate defenses in somewhat of avacuum. Yet, should an aggressiveopponent immediately challenge some ofthose defenses, the very real prospectlooms of possibly losing otherwise validaffirmative defenses, should an offensemotion be successful. This articlediscusses the various rationales used byfederal district courts in deciding suchmotions and considers how a defendant1 550 U.S. 544 (2007).2 556 U.S. 662 (2009).3 550 U.S. at 559.Peter M. Durney hasbeen a partner at Cornell& Gollub in Boston since1987. He has representedhundreds of domestic andforeign corporations inthe state and federalcourts in each of the NewEngland states and elsewhere in the U.S.His broad litigation experienceencompasses personal injury, productsliability, medical device, automotive,marine and commercial litigation,professional malpractice and appellatework.Jonathan P Michaud is anassociate in the productsliability and toxic tortpractice group at Cetrulo& Capone LLP in Boston,Massachusetts. In thatcapacity, he is part of ateam of attorneys thatdefend and advise clients on a local,regional and national level and act asdefense liaison counsel for asbestosactions in Massachusetts and RhodeIsland.may best fend off such an attack to ensurethat its affirmative defenses are preservedat least until adjudicated on the merits.I. The Heightened PleadingStandard under Twombly/IqbalIn Twombly, the Supreme Courtconsidered the pleading standardsufficient to satisfy the requirement that aplaintiff make “a short and plain

Fending off the Use of a Rule 12(f) Page 439statement of the claim that the pleader isentitled to relief.” 4 The Supreme Courtheld that in order to survive a motion todismiss pursuant to Federal Rule of CivilProcedure 12(b)(6), a plaintiff must pleadsufficient facts “to raise a right to reliefabove the speculative level.” 5 Thisstandard “requires more than labels andconclusions,” such that “a formulaicrecitation of the elements of a cause ofaction will not do.” 6 Thus, the Twomblycourt expressly retired the longestablished standard established set forthin Conley v. Gibson, 7 which held that apleading should not be dismissed “unlessit appears beyond doubt that the plaintiffcan prove no set of facts in support of hisclaim which would entitle him to relief.” 8The new heightened pleadingstandard subsequently was clarified inIqbal, as the Supreme Court reiteratedthat a plaintiff’s “complaint must containsufficient factual matter, accepted as true,‘to state a claim to relief that is plausibleon its face.’” 9 The Iqbal court furtheroutlined the two underlying principles ofTwombly. First, in evaluating thesufficiency of a complaint, bare legalconclusions that do nothing more thanrecite the elements of a cause of actionare not entitled to an assumption oftruth. 10 Second, a complaint must containsufficient factual allegations to allow acourt to infer that it states a “plausible4 Id. at 557; FED.R.CIV.P. 8(a)(2).5 Twombly, 550 U.S. at 555.6 Id. at 556.7 355 U.S. 41, 45-46 (1957).8 Twombly, 550 U.S. at 563 (citing Conley).9 Iqbal, 556 U.S. at 1949 (quoting Twombly,550 U.S. at 563).10 Id. at 1940 (citing Twombly, 550 U.S. at555).claim for relief.” 11 Courts considering amotion to dismiss were thereby directedto engage in a two-pronged analysis: (1)to identify legal conclusions that are notentitled to an assumption of truth; and (2)to identify factual allegations anddetermine if, taken as true, “theyplausibly give rise to an entitlement torelief.” 12 The Circuit Courts of Appealhave not ruled on whether the heightenedpleading standard of Twombly/Iqbalapplies to the pleading of affirmativedefenses, and there is fairly evendisagreement between, and even within,the United States district courts. 13II.Affirmative DefensesFederal Rule of Civil Procedure8(b)(1)(A) requires a party responding toa pleading to “state in short and plainterms its defenses to each claim assertedagainst it.” 14 Rule 8(c)(1) states that adefendant “must affirmatively state anyavoidance or affirmative defense,” andprovides a list of nineteen affirmativedefenses. 15 However, this list of11 Id. at 1950.12 Id.13See, e.g., Cottle v. Falcon HoldingsManagement, LLC, No. 2:11-CV-95-PRC,2012 WL 266968, *1 (N.D. Ind. January 30,2012) (noting split among district courts onissue).14 Rule 9(b) provides that certain defenses,fraud, mistake, and condition of the mind,must be plead with particularity.15 Those affirmative defenses are “accord andsatisfaction; arbitration and award; assumptionof risk; contributory negligence; discharge inbankruptcy; duress; estoppel; failure ofconsideration; fraud; illegality; injury byfellow servant; laches; license; payment;release; res judicata; statute of frauds; statute

Page 440 DEFENSE COUNSEL JOURNAL–October 2012affirmative defenses “is not intended tobe exhaustive.” 16“Affirmative defenses plead mattersextraneous to the plaintiff's prima faciecase, which deny plaintiff's right torecover, even if the allegations of thecomplaint are true.” 17 The burden ofproving an affirmative defense rests withthe party asserting it. 18 Such a defensemust be proven by a preponderance ofcredible evidence. 19 If proven by apreponderance of the evidence, “[a]naffirmative defense will defeat theplaintiff’s claim.” 20 Federal courts haveconsistently held that the failure by adefendant to plead an affirmative defensein their answer generally results in waiverand exclusion from the action. 21Rule 12(f) of the Federal Rules ofCivil Procedure permits a party, or thecourt acting sua sponte, to “strike from apleading an insufficient defense or anyredundant, immaterial, impertinent, orscandalous matter.” This provides amechanism to “‘clean up the pleadings,of limitations; and waiver.” FED.R.CIV.P.8(c)(1).16 5 CHARLES ALLEN WRIGHT AND ARTHUR R.MILLER, FEDERAL PRACTICE AND PROCEDURE,§ 1271 (3d ed. 2011).17 Fed. Deposit Ins. Corp. v. Main Hurdman,655 F. Supp. 259, 262 (E.D. Cal. 1987).18 Jones v. Taber, 648 F.2d 1201, 1203 (9thCir. 1981).19 Martin v. Weaver, 666 F.2d 1013, 1019 (6thCir. 1981).20 5 WRIGHT AND MILLER, supra note 17, at §1270.21 See, e.g., FDIC v. Ramirez Rivera, 869 F.2d624, 626 (1st Cir. 1989); Ingraham v. U.S.,808 F.2d 1075, 1078 (5th Cir. 1987);Stephenson v. Davenport Community SchoolDist., 110 F.3d 1303, 1305 n. 3 (8th Cir.1997).streamline litigation, and avoidunnecessary forays into immaterialmatters.’” 22III. Traditional Standard of ReviewTraditionally, courts appliedConley’s “no set of facts” standard topleadings that were challenged by a Rule12(b)(6) or Rule 12(f) motion. Under thatstandard, an affirmative defense was heldvalid as long as it provided “fair notice”to the plaintiff of the defense. 23 Thus, anaffirmative defense was generallyimmune from a motion to strike “unless itappear[ed] with certainty that plaintiffswould succeed despite any state of factswhich could be proved in support of thedefenses.” 24Even when there were no disputedquestions of fact or law, courts often werereluctant to strike an affirmative defensefrom an action when no discovery yet hadtaken place. As the First Circuit Court ofAppeals noted in Salcer, “even when thedefense presents a purely legal question,the courts are very reluctant to determinedisputed or substantial issues of law on amotion to strike; these questions quite22Sun Microsytems, Inc. v. VersataEnterprises, Inc., 630 F. Supp.2d 395, 402 (D.Del. 2009) (quoting McInerney v. MoyerLumber & Hardware, Inc., 244 F. Supp.2d393, 402 (E.D. Pa. 2002)).23 See Lawrence v. Chabot, 182 Fed. Appx.442, 456 (6th Cir. 2006); see also Clem v.Corbeau, 98 Fed. Appx. 197, 203 (4th Cir.2004).24 See William Z. Salcer, Panfeld, Edelman v.Envicon Equities Corp., 744 F.2d 935, 939 (2dCir. 1984), vacated on other grounds, 478 U.S.1015, 106 S.Ct. 3324, 92 L.Ed.2d 731; seealso Tyco Fire Products LP v. Victaulic Co.,777 F. Supp.2d 893, 897 (E.D. Pa. 2011).

Fending off the Use of a Rule 12(f) Page 441properly are viewed as determinable onlyafter discovery and a hearing on themerits.” 25In that same vein, when consideringa motion to strike an affirmative defense,courts would consider whether thedefense was “legally sufficient under anyset of facts which may be inferred fromthe allegations of the pleading.” 26Generally, courts would only grant amotion to strike an affirmative defenseunder Rule 12(f) upon a finding that (1)there was no question of fact or law thatmight allow the challenged defense tosucceed; (2) under no set ofcircumstances could the defense succeed,regardless of what evidence could bemarshaled to support it; and (3) prejudicewould result from the defense remainingin the case. 27Given the low bar set by the “no setof facts” standard of Conley v. Gibson,rarely were plaintiffs inclined to filemotions to strike affirmative defenses. Atthe same time, wary of waiver, defensecounsel would routinely draft long lists of25 Salcer, 744 F.2d at 939; see also EEOC v.Kelley Drye & Warren, LLP, No.10-CV-655-LTS, 2011 WL 3163443, *1-2 (S.D.N.Y. July25, 2011).26 Glenside West Corp. v. Exxon Co. USA,761 F. Supp. 1100, 1115 (D. N.J. 1991).27 See SEC v. Sands, 902 F. Supp. 1149, 1165-1166 (C.D. Cal. 1995), aff'd sub nom. SEC v.First Pac. Bancorp, 142 F.3d 1186 (9th Cir.1998). See also Augustus v. Bd. of PublicInstruction, 306 F.2d 862, 868 (5th Cir. 1962);Johnson v. Chrysler Corp., 187 F.R.D. 440,441 (D. Me. 1999); Microsoft Corp. v. PTI(USA), No. 1-CV-2018, 2003 WL 21406291,*1 (E.D.N.Y. Mar. 14, 2003) (setting forthsame three-part test); Texas 1845 LLC v. WuAir Corp., No. 11-CV-1825, 2012 WL382828, *6 (E.D.N.Y. Feb. 6, 2012).affirmative defenses in their responsivepleadings, often in “boiler plate” fashion.Historically, courts would generallyaccept this practice. 28 In short, there wasa general acceptance of the status quo.Not so after Twombly and Iqbal, whensuddenly plaintiffs began to ask courts toapply the heightened pleading standard toaffirmative defenses, creating “a frenzy ofdistrict court opinions reexamining thisposition.” 29 Alas, some federal districtcourts have been receptive to plaintiffs’position, which should be a “wake-up”call for the astute practitioner.IV. Rationales of District Courts ThatHave Applied the HeightenedPleading Standard to AffirmativeDefensesFederal district courts applying theheightened pleading standard ofTwombly/Iqbal to affirmative defenseshave justified doing so on a number ofgrounds, including (1) fairness to theparties; (2) a textual reading of theFederal Rules of Civil Procedure; and (3)efficiency and judicial economy. 30 Wetake those grounds one at a time.28 See Shinew v. Wszola, No. 08-14256, 2009WL 1076279, *2 (E.D. Mich. Apr. 21, 2009)(noting that a “grocery list” of affirmativedefenses with no facts to support them “hasbeen widely employed (and tolerated) as aform of notice pleading.”).29 Paducah River Painting, Inc. v. McNationalInc., No. 5-CV-00135-R, 2011 WL 5525938,*2 (W.D. Ky. Nov. 14, 2011).30 Recent district court decisions applying theheightened pleading standard ofTwombly/Iqbal to affirmative defensesinclude: Smithville 169 v. Citizens Bank &Trust Co., No. 4:11-CV-0872-DGK, 2012 WL13677 (W.D. Mo. Jan. 4, 2012); Barnes &

Page 442 DEFENSE COUNSEL JOURNAL–October 2012(1) Fairness to the PartiesIn essence, this simplistic rationale isbased upon common sense. Some courtshave stated that it would be inequitable tohold plaintiffs to a higher pleadingstandard than defendants. Such a rationalearguably is grounded in Twombly’sNoble, Inc. v. LSI Corp., No. C-11-2709EMC, 2012 WL 359713 (N.D. Cal. Feb. 2,2012); Schlief v. Nu-Source, Inc., No. 10-4477, 2011 WL 1560672 (D. Minn. Apr. 25,2011); Dion v. Fulton Friedman & GullaceLLP, No. 11-2727 SC, 2012 WL 160221(N.D. Cal. Jan. 17, 2012); Smith v. Mustang,Independent School District No. I-69, No.CIV-11-1146-M, 2012 WL 10848 (W.D.Okla. Jan. 3, 2012); Haley Paint Co. v. E.I.DuPont De Nemours and Co., 279 F.R.D. 331,336 (D. Md. 2012); Puryear v. Indiana PalletCo., No. 2:11-CV-12-PRC, 2011 WL 5553697(N.D. Ind. Nov. 15, 2011); Aguilar v. CityLights of China Restaurant, Inc., No., DKC11-2416, 2011 WL 5118325 (D. Md. Oct. 24,2011); Microsoft Corp. v. Lutian, No. 1:10CV 1373, 2011 WL 4496531 (N.D. Ohio Sept.27, 2011); Cassetica Software, Inc. v.Computer Sciences Corp., No. 11 C 2187,2011 WL 4431031 (N.D. Ill. Sept. 22, 2011);J&J Sports Productions, Inc. v. Martinez, No.CV-F-11-00676-LJO-SMS, 2011 WL4373960 (E.D. Cal. Sept. 19, 2011); Barry v.EMC Mortg., No. DKC 10-3120, 2011 WL4352104 (D. Md. Sept. 15, 2011); Gessele v.Jack in the Box, Inc., No. 3:10-cv-960-ST,2011 WL 3881039 (D. Ore. Sept. 2, 2011);Bottoni v. Sallie Mae, Inc., No. C10-03602LB, 2011 WL 3678878 (N.D. Cal. Aug. 22,2011); Lucas v. Jerusalem Café, LLC, No.4:10-CV-00582-DGK, 2011 WL 3511059(W.D. Mo. Aug. 10, 2011); Barnett v.Uniformed Services University of the HealthSciences, No. DKC 10-2681, 2011 WL3511049 (D. Md. Aug. 9, 2011); Francisco v.Verizon South, Inc., No. 3:09cv737, 2010 WL2990159 (E.D. Va. July 29, 2010).acknowledgment of “the need for fairnotice” in a plaintiff’s Complaint, andthat such a concern should be equallyapplied to defendants. 31 The reasoning issimple. Just as a defendant faced with afactually deficient Complaint, a plaintiffshould not have to respond to defensesthat lack factual support. 32In U.S. v. Quadrini, the district courtreasoned that the same pleading standardsmust apply to defendants and plaintiffs“otherwise a court could not make a Rule12(f) determination on whether anaffirmative defense is adequately pleadedunder Rules 8 and/or 9 and could notdetermine whether the affirmativedefense would withstand a Rule 12(b)(6)challenge.” 33 Accordingly, “[l]ike theplaintiff, a defendant also must pleadsufficient facts to demonstrate a plausibleaffirmative defense, or one that has a‘reasonably founded hope’ of success.” 34(2) Textual ConsistencyApplication of the same pleadingstandard to defendants and plaintiffs,alike, is also found by a textualcomparison of the relevant pleading rules.Courts using the textual approach reasonthat because both Rule 8(a)(2) and Rule8(b) of the Federal Rules of CivilProcedure require a “short and plain”statement in the pleading of claims and31 See LSI, 2012 WL 359713 (“[g]iving fairnotice to the opposing party would seem toapply as well to affirmative defenses given thepurpose of Rule 8(b)’s requirements fordefenses.”).32 See Francisco, 2010 WL 2990159 at *6.33 No. 2:07-CV-13227, 2007 WL 4303213(E.D. Mich. Dec. 6, 2007).34 Id.

Fending off the Use of a Rule 12(f) Page 443affirmative defenses, it follows that bothplaintiffs and defendants must pleadsufficient facts to put the other side onnotice of the basis of their defenses andclaims. 35 Such an approach requires adefendant to plead sufficient facts insupport of its defenses as “both its nonconclusoryfactual content and thereasonable inferences from that content,must plausibly suggest a cognizabledefense available to the defendant.” 36For example, in Aguilar v. CityLights of China Restaurant, the courtnoted that while Rules 8(a) and 8(b) were“not identical,” they contained “importanttextual overlap, with both subsectionsrequiring a ‘short and plain’ statement ofthe claim or defense.” 37 In addition, thecourt noted that Form 30, which isappended to the Federal Rules pursuant toRule 84, “strongly suggests that barebonesassertions of at least someaffirmative defenses will not suffice, asthe Form’s illustration of a statute oflimitations’ defense sets forth not only thename of the affirmative defense, but alsofacts in support of it.” 38 Similarly, inHayne v. Green Ford Sales, the districtcourt similarly applied Twombly toaffirmative defenses, in part because Rule8(b)(1)(A), which governs pleadingdefenses generally, contains the same35 See Barnes v. AT&T Pension Ben. Plan-Nonbargained Program, 718 F. Supp.2d 1167,1171 (N.D. Cal. 2010) (applying Twombly toaffirmative defenses and equating Rule 8(a)(1)and Rule 8(b)(1)).36 Haley Paint Co., 279 F.R.D. at 336.37 No. DKC 11-2416, 2011 WL 5118325, *3(D. Md. Oct. 24, 2011).38 Id.“short and plain” statement that isrequired of plaintiffs. 39(3) Preservation of ResourcesOther courts have adopted theheightened pleading standard to helpstreamline more complex factual disputesto the issues capable of being reasonablysupported at the earliest stage. In the viewof such courts, applying the heightenedpleading standard to affirmative defensesserves the policy goals of Twombly/Iqbalin promoting litigation efficiency, inerasing boilerplate affirmative defenses,and in eliminating or at least limitingunnecessary discovery. 40 In applying aheightened pleading standard toaffirmative defenses, the district court inHCRI TRS Acquirer v. Iwer noted thatTwombly and Iqbal were “designed toeliminate the potential high costs ofdiscovery associated with meritlessclaims,” and that “[b]oilerplateaffirmative defenses that provide little orno factual support can have the samedetrimental effect on the cost of litigationas poorly worded complaints.” 41 Byreducing the number of affirmativedefenses to only those with factualsupport, courts may believe that they arenarrowing the issues for the parties andfulfilling the policy goals of Twombly andIqbal. Of course, eliminating a practicethat has survived for so long is never thatsimple. In many defendants’ view, the39 263 F.R.D. 647, 650 (D. Kan. 2009).40 See HCRI TRS Acquirer, LLC v. Iwer, 708F. Supp.2d 687, 691 (N.D. Ohio. 2010).41 Id.; see also Barnes, 718 F. Supp.2d at 1172(applying heightened pleading standardweeded out boilerplate listing of affirmativedefenses).

Page 444 DEFENSE COUNSEL JOURNAL–October 2012premature elimination of defenses is akinto throwing the baby out with the bathwater. More to the point, the harsh resultof having one’s defenses stricken cannotpossibly be justified in the absence ofmeaningful discovery. So say thedefendants, in any case.(4) Harsh ResultsClearly, applying the heightenedpleading standard to affirmative defensescan lead to harsh results for a defendant.In Aguilar v. City Lights of ChinaRestaurant, the court struck fiveaffirmative defenses: accord andsatisfaction, estoppel, laches,payment/offset, and fraud. 42 As to thefirst four defenses, the court held thatthey were “conclusory legal statementswholly devoid of any supporting factualcontent.” 43 Similarly, in Puryear v.Indiana Pallet Co., 44 the district courtstruck the affirmative defenses of failureto state a claim upon which relief can begranted and the applicable statute oflimitations, finding the former defense a“bare bones assertion,” insufficient tosurvive the heightened pleadingstandard. 45 The court also found that thestatute of limitations defense wasinsufficient as it “fail[ed] to cite to theapplicable statute of limitations, the timelimits in the statute, or the manner inwhich the statute bars Plaintiff’s case.” 46This sets up the proverbial situationof being “stuck between a rock and a hard42 Aguilar, 2011 WL 5118325 at *4.43 Id.44 No. 2:11-CV-12-PRC, 2011 WL 5553697(N.D. Ind. Nov. 15, 2011).45 Id. at *1.46 Id.place.” If the heightened pleadingstandard applies to affirmative defenses,then a defendant may be caught betweenrisking waiver by failing to plead anaffirmative defense, and the courtpotentially finding that an affirmativedefense with no apparent factual supportshould be stricken. Thankfully, a numberof persuasive arguments can be made insupport of the position that Twombly andIqbal do not apply to the pleading ofaffirmative defenses.V. The Defendants’ OppositionAn increasing number of districtcourts have declined to apply theheightened pleading standard ofIqbal/Twombly to a defendant’saffirmative defenses. 47 Accordingly, a47 Recent district court decisions declining toapply the heightened pleading standard ofTwombly/Iqbal to affirmative defenses includethe following: Meas v. CVS Pharmacy, Inc.,No.11cv0823 JM(JMA), 2011 WL 2837432(S.D. Cal. July 14, 2011); Holdbrook, 2010WL 865380; Michaud v. Greenberg & Sada,P.C., No. 11-cv-01015-RPM-MEH, 2011 WL2885952 (D. Colo. July 18, 2011); Ioselev v.Schilling, No. 3:10-cv-1091-J-34MCR, 2011WL 5855342 (M.D. Fla. Nov. 22, 2011);Cottle, 2012 WL 266968; Bayer CropscienceAG v. Dow Agrosciences, LLC, No. 10-1045RMB/JS, 2011 WL 6934557 (D. Del. Dec. 30,2011); United States v. Center for DiagnosticImaging, Inc., No. C05-00558RSL, 2011 WL6300174 (W.D. Wash. Dec. 16, 2011);Whitserve, LLC v. GoDaddy.com, Inc., No.3:11-CV-948 (JCH), 2011 WL 5825712 (D.Conn. Nov. 17, 2011); Brossart v.DIRECTTV, No. 11-786 (DWF/JJK), 2011WL 5374446 (D. Minn. Nov. 4, 2011); Arosv. United Rentals, Inc., No. 3:10-CV-73(JCH), 2011 WL 5238829 (D. Conn. Oct. 31,2011); Sony/ATV Music Pub. LLC v. D.J.

Fending off the Use of a Rule 12(f) Page 445defendant faced with a motion to strikebrought under Rule 12(f) should focus onsome core rationales that those courtshave used to deny such motions.(1) Motions to Strike areDisfavoredAs a preliminary matter, defendantsshould emphasize that motions to strikepursuant to Rule 12(f) are disfavored. TheFourth Circuit Court of Appeals has notedthat such motions are disfavored,“because striking of a pleading is a drasticremedy and because it is often sought byMiller Distributors, Inc., No. 3:09-cv-01098,2011 WL 4729807 (M.D. Tenn. Oct. 7, 2011);Bank of Beaver City v. Southwest Feeders,L.L.C., No. 4:10CV3209, 2011 WL 4632887(D. Neb. Oct. 4, 2011); Leon v. JacobsonTransp. Co., Inc., No. 10 C 4939, 2010 WL4810600 (N.D. Ill. Nov. 19, 2010); Vurimindiv. Fuqua School of Business, No. 10-234,2011 WL 3803668 (E.D. Pa. Aug. 29, 2011);Ash Grove Cement Co. v. MMR Constructors,Inc., No. 4:10-CV-04069, 2011 WL 3811445(W.D. Ark. Aug. 29, 2011); Baroness SmallEstates, Inc. v. BJ’s Restaurants, Inc., No.SACV 11-00468-JST (Ex), 2011 WL 3438873(C.D. Cal. Aug. 5, 2011); Security Life ofDenver Ins. Co. v. Shah, No. CV411-008,2011 WL 3300320 (S.D. Ga. Aug. 1, 2011);InvestmentSignals, LLC v. Irrisoft, Inc., No.10-cv-600-SM, 2011 WL 3320525 (D. N.H.Aug. 1, 2011); Tyco Fire Products LP v.Victaulic Co., 777 F. Supp.2d 893 (E.D. Pa.2011); GE Capital Commercial, Inc. v.Worthington Nat’l. Bank, No. 3:09-CV-572-L,2011 WL 5025153 (N.D. Tex. Oct. 20, 2011);Chiancone v. City of Akron, No. 5:11CV337,2011 WL 4436587 (N.D. Ohio Sept. 23,2011); Chevron Intellectual Property LLC v.Alborz Petroleum Inc., No. 11cv0889 IEG(CAB), 2011 WL 3515929 (S.D. Cal. Aug. 11,2011).the movant simply as a dilatory tactic.” 48Not surprisingly, then, Rule 12(f) motionsto strike are “often not granted unlessthere is a showing of prejudice to themoving party.” 49 In light of the disfavoredstatus of Rule 12(f) motions as vehiclesfor determining questions of fact or lawbefore discovery has taken place, adefendant should stress that it would beinappropriate for a court to strikepleadings prior to any discovery. 50 Thus,the argument goes that applying theheightened pleading standard to a48 See Waste Mgmt. Holdings, Inc. v. Gilmore,252 F.3d 316, 347 (4th Cir. 2001); see alsoTreece v. Winston-Wood, No. 3:10-2354-DCN-JRM, 2011 WL 6780132, *2 (D. S.C.Dec. 27, 2011); Maupin v. Howard CountyPublic School System, No. L-10-2659, 2012WL 401071, *7 (D. Md. Feb. 7, 2012) (notingmotions to strike as a “drastic remedy”); SECv. Gendarme Capital Corp., No. CIV S-11-0053 KJM-KJN, 2012 WL 346457, *1 (E.D.Cal. Jan. 31, 2012) (“motions to strike aredisfavored and infrequently granted.”); FDICv. Gladstone, 44 F. Supp.2d 81, 84-85 (D.Mass. 1999) (motions to strike affirmativedefenses are generally “disfavored”); KaiserFound. Hospitals v. California Nurses Ass’n,No. 11-5588 SC, 2012 WL 440634, *4 (N.D.Cal. February 10, 2012) (“Motions to Strike‘are generally disfavored because they areoften used as a delaying tactics and because ofthe limited importance of pleadings in federalpractice.’”) (quoting Rosales v. Citibank, 133F. Supp.2d 1177, 1180 (N.D. Cal. Feb. 14,2001)).49 WRIGHT AND MILLER, FEDERAL PRACTICEAND PROCEDURE, § 1381 (3d ed. 2011).50 See EEOC v. Kelley Drye & Warren, 2011WL 3163443 at *5; see also Holdbrook, 2010WL 865380 at *2 (declining to apply Twomblyto pleading of affirmative defenses,“particularly in light of the disfavored statusof motions to strike.”).

Page 446 DEFENSE COUNSEL JOURNAL–October 2012defendant’s affirmative defenses wouldonly encourage motions to strike, whichis entirely counter to the well-establishedstandard that such motions are stronglydisfavored.(2) Textual SupportWhether textual support or tealeaves, the cases of Twombly and Iqbalmay be read differently by differentpeople. The simple truth is that neitherTwombly nor Iqbal addressed thepleading of affirmative defenses. Theholdings of Twombly and Iqbal applied tothe pleading requirements of a plaintiff’sComplaint under the “short and plainstatement” requirement of Federal Rule8(a)(1), when attacked by a Rule 12(b)(6)motion to dismiss. Both cases were silentas to whether the ruling extended toaffirmative defenses. 51 One mightlogically argue, then, that since Twomblyand Iqbal did not address the pleadingstandards of affirmative defensespursuant to Rule 8(c), “Iqbal andTwombly have no application to thepleading requirements of Rule 8(c).” 52In comparing the relevant federalrules, courts have found a distinctionbetween Rule 8(a)(2), which requires thepleader to show entitlement to relief, andRule 8(b)(1), which only requires astatement of affirmative defenses “inshort and plain terms.” In Enough forEveryone. v. Provo Craft & Novelty, thedistrict court held that, in the absence ofguidance from any Court of Appeals, and51 See Davis v. Indiana State Police, 541 F.3d760, 763-764 (7th Cir. 2008) (noting thatTwombly did not address affirmativedefenses).52 See Chiancone, 2011 WL 4436587 at *4.given the split in the district courts, thequestion as to whether to apply Twombly“is best resolved by reference to the textof the Federal Rules.” 53 In reading thefederal pleading rules, the court held that:… the sub-parts of the ruleappear to demand more from aparty stating a claim for relief,i.e., the party stating a claimmust show he or she is entitledto relief. In contrast, a partystating a defense need notshow he or she is entitled torelief, but need only state anydefense, and state each defensein short and plain terms. 54Given this distinction, the courtconcluded that the Twombly/Iqbalheightened pleading standard did notapply to affirmative defenses. 55 Thisretreat to the fair notice standard of years53 SA CV 11-1161 DOC, 2012 WL 177576,*2 (C.D. Cal. Jan. 20, 2012).54 Id. (emphasis in original).55 Id. See also Schlief, 2011 WL 1560672 at*9 (declining to apply Twombly to affirmativedefenses and noting that “language inFED.R.CIV.P. 8(a) that provided the basis forthe Supreme Court’s decisions does not appearin Rule 8(b) or 8(c), which govern defenses”);Unicredit Bank AG v. Bucheli, No. 10-2436-JWL, 2011 WL 4036466, *5 (D. Kan. Sept.12, 2011) (comparing Rule 8(a)(2), Rule 8(b)and Rule 8(c) and finding differences “providea textual basis for a less rigorous pleadingstandard.”); Meas, 2011 WL 2837432 (findingthat neither Rule 8(a) or Rule 8(b) contained“language that precisely corresponds to Rule8(a)’s language requiring the pleader ‘show’that he is entitled to relief”).

Fending off the Use of a Rule 12(f) Page 447gone by sounded a comforting note todefendants. 56(3) Fair Notice, Not PlausibilityPrior to Twombly and Iqbal, courtshave held that the pleading of affirmativedefenses requires only “fair notice” of thedefense. 57 That only “fair notice,” ratherthan “plausibility,” be provided by thedefendant is grounded in a textual readingof the Federal Rules of Civil Procedure8(a) and 8(c), and should continue toapply even after Twombly and Iqbal. Thedistrict court explained this rationale inTyco Fire Products v. VictaulicCompany:In light of the differencesbetween Rules 8(a) and 8(c) intext and purpose, the Courtconcludes that Twombly andIqbal do not apply to affirmativedefenses. An affirmative defenseneed not be plausible to survive;it must merely provide fair noticeof the issue involved. . . . [T]herequisite notice is providedwhere the affirmative defense inquestion alerts the adversary to56 Baroness Small Estates, 2011 WL 3438873at *5–6 (defendant notified plaintiff of itsaffirmative defenses, which, while boilerplate,sufficed at the outset of the case).57 See Wyshak v. City Nat’l Bank, 607 F.2d824, 827 (9th Cir. 1979) (“[t]he key topleading an affirmative defense is to give theplaintiff fair notice of the defense.”); see alsoDavis v. Sun Oil Co., 148 F.3d 606, 612 (6thCir. 1998) (holding that sufficient notice ofdefense was provided by simple statement that“plaintiffs’ claims are barred by the doctrineof res judicata”).the existence of the issue fortrial. Providing knowledge thatthe issue exists, not preciselyhow the issue is implicated underthe facts of a given case, is thepurpose of requiring avermentsof affirmative defenses. Thus, theCourt will only strike defenseschallenged on sufficiencygrounds if they do not meet thislow standard. 58Consistent with this position, anumber of courts have held that fairnotice in pleading affirmative defensesand the heightened pleading standardsarticulated in Twombly and Iqbal do notapply to affirmative defenses. 59 Thesecourts have held that affirmativedefenses, when read in conjunction withthe Complaint, provide the plaintiff withsufficient notice required by the rule.“The affirmative defense must provideenough information such that the plaintiffis given ‘fair notice of what … the claimis and the grounds upon which it rests.’” 6058 777 F. Supp.2d at 900-901.59 See, e.g., Center for Diagnostic Imaging,2011 WL 6300174 at *2 (citing cases).60 See Puryear, 2011 WL 5553697 (quotingTwombly, 550 U.S. at 555); see alsoKaufmann v. Prudential Ins. Co. of America,No. 09-10239-RGS, 2009 WL 2449872, *1(D. Mass. Aug. 6, 2009) (“[w]ith theexception of fraud, the designation of a listeddefense is sufficient notice to a plaintiff of itsbasic thrust.”); Barnhart v. American HomeMortg. Servicing, Inc., No. 2:11-cv-569-FtM-99SPC, 2012 WL 366930, *2 (M.D. Fla. Feb.3, 2012) (stating that Rule 8 obligates adefendant to provide “fair notice” rather than“detailed factual allegations” in his affirmativedefenses); Ioselev, 2011 WL 5855342 at *2(holding that the statement that a claim “is

Page 448 DEFENSE COUNSEL JOURNAL–October 2012These principles were applied in U.S.ex rel. Smith v. Boeing. 61 In that case, theplaintiff moved to strike the defendant’saffirmative defenses pursuant to FederalRule 12(f) and Twombly, alleging that theaffirmative defenses “are asserted in‘shot-gun’ style with no supportingfacts.” 62 The court noted that “[a] defenseis considered insufficient if it cannotsucceed, as a matter of law, under anycircumstances.” 63 In denying plaintiff’smotion to strike, the court held that thedefendant’s affirmative defenses as pleadhad not deprived the plaintiff of fairnotice, and that “a motion to strike anaffirmative defense as insufficient isdisfavored as a drastic remedy, and thecourt ‘should decline to strike materialfrom a pleading unless that material hasno possible relation to the controversyand may prejudice the opposing party.’” 64Requiring “factual plausibility” fromaffirmative defenses, rather than “fairnotice,” also would seem to run counterto certain appellate decisions that havediscussed issues of waiver and notice.Circuit courts of appeal have made itclear that the key to affirmative defensesis fair notice, even going so far as to holdthat a party may raise a defense at trialthat was not even pleaded as anaffirmative defense, as long as theplaintiff had notice of that defense atbarred by the statute of limitations” sufficientto put the party on notice as to the defense).61 No. 05-1073-WEB, 2009 U.S. Dist. LEXIS71625 (D. Kan. Aug. 13, 2009).62 Id. at *6.63 Id. at *7 (citing Wilhelm v. TLC Law Care,Inc., No. 07-2465-KHV, 2008 WL 474265, *2(D. Kan 2008)).64Id. at *9 (quoting Wilhelm, 2008 WL474265, * 2) (internal citations omitted).some point during the litigation. 65 InWilliams v. Ashland Engineering, theFirst Circuit Court of Appeals examinedwhether the defense of preemption hadbeen waived by a party’s failure toinclude it as an affirmative defense in itsanswer. 66 The First Circuit held thatwhere defense counsel had written toplaintiff’s counsel before the close ofdiscovery raising the preemption defenseand both parties had briefed the issue, “noambush occurred.” 67 The court alsoeschewed a hyper-technical analysis ofthe pleading rules, and made “a practical,commonsense assessment about whetherRule 8(c)’s core purposeto act as asafeguard against surprise and unfairprejudice—has been vindicated.” 68Courts have continued to rely on thisexception to the harsh application of awaiver rule even after Twombly andIqbal. 69 If a defense given fair notice ofcan be pursued at trial without it everhaving been formally plead, then it wouldmake little sense to strike affirmative65 See, e.g., Hassan v. U.S. Postal Service, 842F.2d 260, 263 (11th Cir. 1988); Hewitt v.Mobile Restaurant Technology, Inc., 285 Fed.Appx. 694, 696 (11th Cir. 2008); Brinkley v.Harbour Recreation Club, 180 F.3d 598, 612(4th Cir. 1999) (“[a]bsent unfair surprise orprejudice to the plaintiff, a defendant’saffirmative defense is not waived when it israised in a pre-trial dispositive motion.”);Williams v. Ashland Engineering Co., Inc., 45F.3d 588, 592 (1st Cir. 1995).66 45 F.3d at 592-593.67 Id. at 593.68 Id.69 See Massachusetts Asset Financing Corp. v.MB Valuation Services, Inc., 248 F.R.D. 359(D. Mass. 2008); see also Roush v. Stone, No.2:08-cv-141, 2010 WL 3037003, *3 (S.D.Ohio. Aug. 2, 2010).

Fending off the Use of a Rule 12(f) Page 449defenses pleaded at the outset, prior tomeaningful discovery.(4) Concerns of Twombly NotImplicatedIt also is important to educate thecourt on the potential waste of judicialresources that may result from theapplication of Twombly’s heightenedpleading standard to affirmative defenses.Some courts have expressed a concernthat the failure to apply the heightenedpleading standard to affirmative defenseswill result in delay and waste of thecourt’s and the parties’ resources.However, in raising the pleading standardin Twombly and Iqbal, the Supreme Courtintended to prevent unfounded cases fromproceeding to costly discovery. TheSupreme Court specifically noted the timeand expense of allowing an action toproceed to discovery, and stated thatwhen a plaintiff fails to plead sufficientfacts in a Complaint to show a plausibleentitlement to relief, “this basicdeficiency should … be exposed at thepoint of minimum expenditure of timeand money by the parties and the court.” 70The District Court, in Leon v.Jacobson Transportation Company,explained the rationale for not applyheightened pleading standard toaffirmative defenses as follows:70the driving force behindTwombly and Iqbal was to makeit more difficult to use a barebonescomplaint to open theTwombly, 550 U.S. at 558 (quoting 5WRIGHT AND MILLER, § 1216) (internalquotation marks omitted).gates to expensive discovery andforce an extortionate settlement.The point was to reduce nuisancesuits filed solely to obtain anuisance settlement. The Court,though, has never once lost sleepworrying about defendants filingnuisance affirmative defensesand considers the risk thatdefendants would file nuisancedefenses sufficiently small so asnot to warrant extendingTwombly and Iqbal. 71The concerns of Twombly simply arenot implicated by affirmative defenses. 72Other courts have stated thatapplying the heightened pleadingstandard to affirmative defenses almostcertainly guarantees the waste thatTwombly and Iqbal sought to eradicate.One District Court noted the following:To permit Plaintiffs to prevail onthis motion would create twounacceptable results: 1) Plaintiffswould be encouraged to continueto file Motions to Strike invirtually every case where adefendant had pleaded anaffirmative defense even whenthe plaintiff could easily discernthe bases for the defense; 2)Defendants would necessarilydelay filing answers until71 No. 10 C 4939, 2010 WL 4810600, *1(N.D. Ill. Nov. 19, 2010).72 See id.; see also Lane v. Page, 272 F.R.D.581, 596 (D. N.M. 2011) (“[D]ecidingwhether a complaint survives a motion todismiss may determine whether discovery willoccur at all, whereas an affirmative defense atmost affects the scope of discovery.”).

Page 450 DEFENSE COUNSEL JOURNAL–October 2012discovery had permitted thefactual pleading sought byplaintiffs. In the alternative, thosedefendants would continuallyseek leave to amend and theCourt’s and parties’ resourceswould be wasted. This coursewould also necessitate additionaldiscovery and likely lengthen thetime until a matter could bebrought to trial. That result issimply untenable. 73One recent District Court decisionconsidering a Rule 12(f) motion to strikeopenly wondered “how much energy andexpense was invested in the filing of, andopposition to, the instant Motion, whichenergy and expense could better be put tomatters that would advance thedetermination of the merits of the case.” 74Thus, for any court interested inminimizing potential disputes andconserving resources, it would be unwiseto apply the heightened pleading standardto affirmative defenses.Forcing a defendant to addaffirmative defenses in a piecemealfashion as discovery progresses wouldrequire numerous motions to amend,which plaintiffs likely would oppose. Theargument flows, then, that applying the73 Schlottman v. Unit Drilling Co., LLC, No.Civ-08-1275-C, 2009 WL 1764855, *2 (W.D.Okla. June 18, 2009); see also Brossart, 2011WL 5374446 at *2 (citing Wells Fargo & Co.v. United States, 750 F. Supp.2d 1049, 1052(D. Minn. 2010)) (applying the heightenedpleading standard to affirmative defenses“would significantly change federal practiceand would likely increase the burden on thefederal courts”).74 See Aros, 2011 WL 5238829 at *3 n.3.heightened pleading standard toaffirmative defenses almost certainlyguarantees discovery disputes and motionpractice, increasing the potential fordiscovery and trial dates to be delayed,with attendant increases in time, money,and effort:Applying Iqbal and Twombly toaffirmative defenses would forcedefendants to plead feweraffirmative defenses and then,after taking discovery, to movethe Court for permission toamend their answers to addaffirmative defenses. Plaintiffswould often resist those motionson the grounds that the proposedaffirmative defenses would befutile. Thus, another round ofmotion practice would be addedto many cases, increasing theburdens on the federal courts,and adding expense and delay forthe parties. 75As a practical matter, even when adefendant lists a large number ofaffirmative defenses, those that areclearly not viable later on simply will notbe pursued. 76 Parties are generally awareof the viability of listed defenses asdiscovery progresses, and there is little tobe gained by striking defenses even ifthey are technically inappropriate. 77 Not75 Wells Fargo, 750 F. Supp.2d at 1052.76 See id. at 1051-1052 (“In a typical case, itquickly becomes apparent that most of theaffirmative defenses are not viable, and theparties simply ignore them. No judicialintervention is necessary.”).77 See Cassetica Software, Inc. v. ComputerSciences Corp., No. 11 C 2187, 2011 WL

Fending off the Use of a Rule 12(f) Page 451to be overlooked is that additionaldefenses may arise over the course oflitigation, and to “preclude defendantsfrom challenging those claims, or [to]require an amended answer beforepermitting a challenge would result in anundue waste of the Court and the parties’resources.” 78In any event, even where affirmativedefenses may be stricken, a defendantwill normally be granted to leave toamend. 79 The usual remedy simplycreates “increased motions practice withlittle practical impact on the case’sforward progression.” 80In the final analysis, applying aheightened pleading standard toaffirmative defenses simply encouragesthe filing of motions to strike, moremotion practice, and delays. Whendiscovery is delayed, cases often cannotbe timely resolved. The discovery processinevitably acts to whittle down viable4431031, *5 (N.D. Ill. Sept. 22, 2011) (notingthat striking affirmative defenses “is not worththe time and expense it takes for the partiesand the Court to brief and rule on such amotion”).78 See Schlottman, 2009 WL 1764855 at *1(noting that “failure to exhaust administrativeremedies” invariably arises as a defense inemployment discrimination cases).79 See Banks v. Realty Mgmt. Serv., No.1:10cv14 (JCC/TCB), 2010 WL 420037, *1(E.D. Va. Jan. 29, 2010); see also Smithville169, 2012 WL 13677 at *2 (finding that partyhad failed to meet Twombly pleading standardfor twelve affirmative defenses, but orderingfiling of amended answer rather than strikingdefenses).80 See Falley v. Friends University, 787 F.Supp.2d 1255, 1259 (D. Kan. 2011) (citingHayne v. Green Ford Sales, Inc., 263 F.R.D.647, 652 (D. Kan. 2009)).claims and defenses. Motions forsummary judgment further act tostreamline issues before trial. TheFederal Rules of Civil Procedure alreadyplace limits on discovery, and the courtsare not without the means to controldiscovery as it progresses. To encouragewhat many courts view as an exercise infutility would accomplish little other thanto cause delay and further expense,directly counter to the Court’s concerns inTwombly and Iqbal.(5) It Cannot Be Said thatPlaintiffs and Defendants AreSimilarly SituatedMany courts have held that it isinequitable to apply the heightenedpleading standard to defendants as theyare not similarly situated to plaintiffs atthe commencement of litigation. Simplyput, because a plaintiff has time toinvestigate his or her case, limited onlyby the statute of limitations, he or sheshould be held to a higher pleadingstandard. On the other hand, a defendanthas a limited number of days in which tofile an answer, and is in far less of aposition to conduct a reasonableinvestigation in that time period. 81 Indeed,81 See Brossart, 2011 WL 5374446 at *2(declining to apply Twombly to affirmativedefenses in part because defendant only had21 days to file an answer and “is therefore in amuch different position from that ofplaintiff”); Wells Fargo, 750 F. Supp.2d at1051 (refusing to extend Twombly toaffirmative defenses as parties are in “muchdifferent positions . . . a plaintiff has months --- often years --- to investigate a claim beforepleading that claim in federal court.”);Schlottman, 2009 WL 1764855 at *1 (“[I]t is

Page 452 DEFENSE COUNSEL JOURNAL–October 2012as a practical matter, it is common for adefendant’s first notice of an incident tobe actual service of a complaint.That affirmative defenses should betreated differently from allegations in aComplaint also is logical given thatfailure to raise an affirmative defense inan answer can result in waiver. It is onlyafter discovery has taken place that adefendant can properly flesh out thefactual basis of an affirmative defense.Rather than forcing a defendant to pleadfacts that may or may not be apparent atthe beginning of a case, the better andmore economical route would be to allowthe parties to develop support for theirdefenses through discovery. 82(6) No Prejudice to PlaintiffsWhether or not they would willinglyconcede the point, because plaintiffs havehad time to investigate the facts andcircumstances of an action before filing,they also may become aware of andanticipate the factual bases for manyaffirmative defenses. Indeed, the factsestablishing an affirmative defense cansometimes be established on the face ofthe plaintiff’s complaint. Therefore, thesufficiency of affirmative defenses “mustbe compared and considered inconnection with the complaint itself.” 83 Itlikely that an answer, with or withoutaffirmative defenses, will contain fewerfactual assertions than a complaint and still besufficient.).82 See Hanzlik v. Birach, No. 1:09cv221, 2009WL 2147845, at *4 (E.D. Va. July 14, 2009)(noting its preference for the parties to developfactual support for affirmative defensesthrough discovery).83 Schlottman, 2009 WL 1764855 at *1.is difficult for the plaintiff to showprejudice, when the allegations containedin plaintiff’s complaint provide thenecessary notice for the basis of anaffirmative defense.Likewise, while a defendant may nothave any facts within its knowledge tosupport a particular defense betweenservice of the Complaint and filing of itsanswer, plaintiffs are generally on noticethat certain defenses will be raisedwithout fail in certain actions. Forexample, a plaintiff in a product liabilityaction usually can anticipate that issues ofcomparative negligence, plaintiff’spossible misuse of the product and timelynotice of the claim will be raised. Itwould be hard for a plaintiff to showprejudice even from the bare assertion ofan affirmative defense when plaintiff islikely aware of its factual applicability.One court noted the futile exercise ofrequiring a party to plead facts in supportof its affirmative defenses by stating“[t]he factual allegations contained in thecomplaint and answer are necessarilyincorporated into a defendant’s recitationof affirmative defenses,” rendering it“absurd to require a defendant to re-pleadevery fact relevant to an affirmativedefense.” 84Accordingly, some courts haveargued that plaintiffs simply are notprejudiced by the boilerplate assertion ofaffirmative defenses. A defendant isrequired to plead affirmative defenses inorder “to avoid surprise and undue84 See Baum v. Faith Techs., Inc., No.10-CV-0144-CVE-TLW, 2010 WL 2365451, *3(N.D. Okla. June 9, 2010); LSI, 2012 WL359713 at 11 (“Re-pleading facts the opposingparty has already plead is not necessary to put[a party] on notice of [] defenses.”).

Fending off the Use of a Rule 12(f) Page 453prejudice by providing the plaintiff withnotice and the opportunity to demonstratewhy the affirmative defense should notsucceed.” 85 Where a defendant haspleaded an affirmative defense, he has putthe plaintiff on notice, and avoidedprejudice. 86In denying plaintiff’s motion to strikeaffirmative defenses in Ailey v. MidlandFunding, LLC, the district court statedthat plaintiff had failed to show howprejudice would result from leaving thedefenses in the pleadings, especially inlight of the fact that the defendant had theburden of proof, and that “there can be noharm in letting them remain in thepleadings if, as the plaintiff contends,they are inapplicable.” 87 Therefore, areviewing court must exercise commonsense and practicality in any Rule 12(f)motion and consider if there is anyprejudice to the moving party. 88Where the basis for an affirmativedefense is readily apparent, there is noprejudice shown, and only furtherdiscovery can determine whether anaffirmative defense is valid. All thatshould be required is that the affirmativedefense “provid[e] knowledge that theissue exists, not precisely how the issue isimplicated under the facts of a givencase.” 89 The fact that a plaintiff mayclaim that they are unaware of whichaffirmative defenses apply to whichclaims is a matter to be settled indiscovery, rather than a reason toprematurely strike the entire defense. 90The favored course should not be to strikeaffirmative defenses prematurely, butrather to allow a clearly plead affirmativedefense to stand, pending discovery.VI. CONCLUSIONFair notice has long been the test ofaffirmative defenses, and neitherTwombly nor Iqbal has expressly alteredthat standard. Both textual and practicalrealities of pleading lend support to theposition expressed herein, that theheightened plausibility standard shouldnot be applied to affirmative defenses.85 Robinson v. Johnson, 313 F.3d 128, 134-135 (3rd Cir. 2002).86 See Haley Paint Co., 279 F.R.D. at 337(noting that plaintiffs “have articulated noprejudice that would result from a denial oftheir motion [to strike affirmative defenses]”).87 No. 3:11-CV-77, 2011 WL 3049283, *4(E.D. Tenn. July 25, 2011) (quotingConocophillips Co. v. Shafer, No. 3:05 CV7131, 2005 WL 2280393, *2 (N.D. Ohio.Sept. 19, 2005)).88See WRIGHT AND MILLER, FEDERALPRACTICE & PROCEDURE, § 1381 (3d. ed.2009) (“even when technically appropriate andwell-founded, Rule 12(f) motions often are notgranted in the absence of a showing ofprejudice to the moving party”).89 See Victaulic, 777 F. Supp.2d at 901.90 Id.

Predictability in Punitive Damages: ConsideringThe Use of Punitive Damage MultipliersBy Sarah G. Cronan andJ. Brittany CrossDEBATE ABOUT the various issuesarising from the award of punitivedamages, particularly in the context ofmass tort and complex litigation, hasraged for decades in courtrooms,classrooms, and the media. Faced with aclass action lawsuit, or a multitude oflawsuits from hundreds to thousands ofplaintiffs seeking compensatory andpunitive damages, courts and counselstruggle to handle the issues surroundingpunitive awards in the most economic andefficient manner that meets constitutionalmuster. For defendants in these lawsuits,the potential of being subjected tomultiple punitive damage awards indifferent amounts—and the economicuncertainty that necessarily follows—presents an especially vexing situation.Defendants in mass tort, multidistrict,and class action litigation oftenface lawsuits from numerous plaintiffs,each of whom is entitled to assert a claimfor and potentially obtain an individualaward of punitive damages for a single,allegedly egregious act. 1 While thesemultiple punitive awards may range fromde minimus to an award that exceedsconstitutional boundaries, in theaggregate, the cost to a defendant can be1For a full discussion on the ability ofmultiple plaintiffs to recover multiple punitivedamage awards from a single company for oneallegedly wrongful act, see JOHN J. KIRCHERAND CHRISTINE M. WISEMAN, PUNITIVEDAMAGES: LAW AND PRACTICE § 5.26 (2nd ed.2000).Sarah Grider Cronanis a Member at Stites& Harbison, PLLC.Drawing on hertwenty-plus years’experience, Sarahoffers creative andstrategic approaches to complexproblems confronting her clients.Sarah’s practice focuses on the defense ofproduct liability, toxic tort, insurancecoverage, bad faith, environmental, andcommercial disputes in state and federalcourts nationwide. She is knowledgeableabout multi-district litigation and themanagement of mass and class actions.Brittany Cross is anAssociate in Stites &Harbison's Louisvilleoffice where she is amember of the Tortsand Insurancepractice servicegroup. The authors also wish toacknowledge the contributions of HollyN. Lankster in relation to this article.catastrophic, ultimately bankrupting adefendant and leaving future plaintiffswithout recourse for their actual damages.One solution to this problem may bethe punitive damage multiplier. Ratherthan awarding a single punitive damageaward in each case, under the multiplierapproach, a jury sets a mathematicalrelationship between punitive andcompensatory damages by establishing adollar-for-dollar ratio after hearingevidence of the reprehensibility of thedefendant’s conduct, including

Predictability In Punitive Damages Page 455consideration of the harm to nonparties. 2Over the past decade, the U.S. SupremeCourt has made numerous attempts toprovide more clarity to the calculation ofpunitive damage awards. Significantly,the Supreme Court suggested in ExxonShipping Co. v. Baker that a multiplierapproach may be the best way to decreasethe unpredictability of punitive damageawards. 3Although the idea of a punitivedamage multiplier has not yet beenwidely recognized, various courts andcommentators have considered the use ofa multiplier to increase the efficiency ofcomplex litigation. This article examinesthe possibility of having juries use apunitive damage multiplier to determinepunitive damages in class action or masstort litigation, paying particular attentionto the advantages and disadvantages of itsuse. In addition, this article will alsoanalyze the context in which courts haveutilized a multiplier approach and thecommon arguments presented by partiesin favor of and opposed to punitivedamage multipliers.I. Recent U.S. Supreme CourtPunitive Damage JurisprudenceThe most often cited rationaleunderlying punitive damage awards is thepublic function they serve: to punish anddeter behavior society deemsobjectionable, similar to the function ofcriminal punishments. 4 In order to2 Phillip Morris USA v. Williams, 549 U.S.346, 357 (2007).3 Exxon Shipping Co. v. Baker, 554 U.S. 471(2008).4 See Jill Wieber Lens, Punishing for theInjury: Tort Law’s Influence in Defining theachieve this goal, however, courts mustprovide for some predictability inpunitive awards. 5 Research on punitivedamage awards has revealed that a majorsource of unpredictability in how juriesdecide punitive damage awards “comesfrom the fact that people do not knowhow to ‘translate’ their moral judgmentsinto dollar amounts.” 6 In response, theU.S. Supreme Court has attempted toprovide guidance in calculating a punitiveaward that both meets the requirements ofDue Process and provides the necessarypredictability for the award to fairly andadequately fulfill its function.In 2007, the Supreme Courtconsidered the Constitution’s DueProcess limitations with respect toawarding punitive damages in PhillipMorris U.S.A. v. Williams. 7 In PhillipMorris, the Court concluded that the DueProcess Clause forbids a state fromawarding punitive damages to punish adefendant for injuries to nonpartiesbecause such awards threaten punishmentfor conduct against which the defendantConstitutional Limitations on PunitiveDamage Awards, 39 HOFSTRA L. REV. 595,613-622 (2011) (discussing the United StatesSupreme Court’s emphasis on the state’sinterest in punitive damages and thesimilarities between punitive damages andcriminal punishments); see also ExxonShipping Co., 554 U.S. at 492 (“[T]heconsensus today is that punitives are aimednot at compensation but principally atretribution and deterring harmful conduct.”).5 Exxon Shipping Co., 554 U.S. at 499-500(declaring that “the real problem, it seems, isthe stark unpredictability of punitive awards”).6CASS R. SUNSTEIN, ET AL., PUNITIVEDAMAGES, HOW JURIES DECIDE, 29 (2002).7 Philip Morris, 549 U.S. 346 (2007).

Page 456 DEFENSE COUNSEL JOURNAL–October 2012has no opportunity to defend. 8 Whilepunitive damages cannot be awarded aspunishment for injuries suffered bynonparties, juries are allowed to considerthe harm to nonparties in determining adefendant’s reprehensibility. 9 Thus, theDue Process Clause requires states toprovide juries with adequate legalguidance, and to use procedural tools thatensure juries are accounting for the harmcaused to nonparties to determinereprehensibility only, and not to punishthe defendant for such harm tononparties. 10 The Court offered littleguidance on how states should providethese safeguards, providing only that“[a]lthough the states have someflexibility to determine what kind ofprocedures they will implement, federalconstitutional law obligates them toprovide some form of protection inappropriate cases.” 11 With this decision,the Supreme Court challenged courts todevelop procedures that ensure juriesengage in appropriate inquiries and reachpunitive damage awards that account forthe reprehensibility of defendants’conduct without punishing them based onharm to nonparties.The Supreme Court spoke again onthe issue of punitive damages in June2008 in Exxon Shipping Co. v. Baker. 12That case considered the validity of a $5million punitive damage award againstExxon arising out of 1989 Exxon Valdezoil spill. The Court reduced the punitivedamages verdict by half, and limited theratio of compensatory to punitive8 Id at 353.9 Id. at 357.10 Id. at 355.11 Id. at 357 (emphasis in original).12 Exxon Shipping Co., 554 U.S. 471 (2008).damages to 1:1 in maritime cases. 13Although the holding is limited tomaritime law, the opinion offersinteresting commentary on the problemsof punitive damage awards and somesolutions that have been formulated toaddress those problems.The Exxon Court noted that, despitestates’ efforts to limit damages awards bysetting statutory limits and maximumratios on punitive to compensatorydamages, punitive damage awards are“higher and more frequent in the UnitedStates than they are anywhere else.” 14The Court noted that the “real problem[of punitive damages] is the starkunpredictability of punitive awards.” 15“Courts of law are concerned withfairness [and] consistency,” but theevidence illustrates that factually similarcases often result in inconsistent punitiveawards. 16 For example, in two cases with“strikingly similar facts,” the juriesawarded comparable compensatorydamages, but one jury awarded $4 millionin punitive damages and the other did notaward any punitive damages. 17 In theExxon Court’s discussion of how toeliminate this unpredictability, the Courtsuggested “pegging punitive tocompensatory damages using a ratio ormaximum multiple” as an alternative tohard dollar caps, which do not accountwell for inflation. 18 This suggestionfocuses on the injury of the plaintiffs bytying the amount of punishment to the13 Id. at 515.14 Id. at 496.15 Id. at 499.16 Id.17 BMW of N. Am. v. Gore, 517 U.S. 559, 565n. 8 (1996).18 Exxon Shipping, 554 U.S. at 506.

Predictability In Punitive Damages Page 457level of injury. At least one commentatorhas argued that the Court’s suggestiongreatly diminishes the importance of thepreviously dominant factor indetermining the proper amount of apunitive award – the reprehensibility ofthe defendant’s actions. 19When faced with the possibility ofmultiple lawsuits in a legal system thatwill also allow a multitude of varyingpunitive damage awards determined bydifferent juries, the potential forunpredictability is particularly alarming.The Supreme Court’s suggestion of amultiplier as a potential solution providesan interesting method of reigning inunpredictable jury awards.II.The Pros and Cons of PunitiveDamage MultipliersMuch has been written on thedangers of punitive damage awards,including Due Process violations,discouraging individuals and companiesfrom engaging in socially beneficialactivities, and depriving later plaintiffs ofthe funds to cover their actual damages.Punitive damage multipliers canpositively affect each of these concernsby providing increased predictability andequality in the distribution of punitiveawards among plaintiffs. The use of apunitive damage multiplier also increasesadministrative convenience and promotesjudicial efficiency by providing “amethod by which defendants will not besubject to repeated individual trials wherepunitive [damages] are litigated. In oneunitary proceeding as to the entire classtried their punitive damages liability can19 See Lens, supra note 4, at 633-634.be resolved for all.” 20 A multiplier maybe used at the outset to determine aconsistent punitive damage award for anentire group of plaintiffs versus runningthe risk of multiple, and potentiallyinconsistent awards, for the sameconduct.The use of a multiplier, like punitivedamages generally, creates the potentialto jeopardize the claims of futureplaintiffs. 21 A high multiplier, whenapplied to high compensatory awards fornumerous plaintiffs, may lead to payoutsthat leave a defendant bankrupt. 22 Thus,the multiplier may not be prudent if thepossibility of excessive punitive damageawards threaten the defendant’ssolvency. 23 Using a multiplier at theoutset may also raise the risk ofsubsequent plaintiffs inflating theircompensatory damages in hopes ofincreasing their eventual payout shouldpunitive damages apply in their cases. Ifcompensatory damages are predicted tobe low and remain low, a multiplier maybe used to keep the ultimate payouts toplaintiffs within that lower range. Thiscould eliminate the risk of earlierplaintiffs getting a greater piece of thepunitive pie despite having de minimuscompensatory damages.Another concern about the use of apunitive damage multiplier is that themultiplier will decrease the likelihood20 ALBA CONTE AND HERBERT B. NEWBERG, 5NEWBERG ON CLASS ACTIONS, MASS TORTS§17:33 (4th ed.) (West 2008); see also DavidG. Owen, A Punitive Damages Overview:Functions, Problems and Reform, 39 VILL. L.REV. 363, 395 (1994).21 Owen, supra note 20, at 395.22 Id.23 Id.

Page 458 DEFENSE COUNSEL JOURNAL–October 2012that compensatory and punitive damagesbear a reasonable relationship to oneanother as required by the U.S. SupremeCourt in State Farm v. Campbell. 24 Onecommentator has suggested that “[h]avinga jury set a single, abstract punitivedamage multiplier deprives the jury of theopportunity to consider the facts andcircumstances of each individualplaintiff’s case and to determine whatamount of punitive damages, if any isappropriate for each plaintiff.” 25A small multiplier is less likely to beattacked on the grounds of excessivenessor that it lacks a reasonable relationship toactual damages awarded, 26 and thisconcern may also be addressed through acreative trial plan. If all claims areconsolidated for trial, and the punitivedamage multiplier is based on arepresentative group of plaintiffs’evidence of compensatory damages, amultiplier may be assessed for itsreasonableness based on therepresentative group’s damages following24 State Farm v. Campbell, 538 U.S. 408, 426(2003).25 Sheila N. Birnbaum, Punitive Damages andDue Process: How Much is Too Much,Benjamin N. Cardozo Lecture, THE RECORD,61 No. 2 165, 180 (2006). See also Laura J.Hines, Engle v. R.J. Reynolds Tobacco Co.:Lessons in State Class Actions, PunitiveDamages, and Jury Decision-MakingObstacles to Determining Punitive Damagesin Class Actions, 36 WAKE FOREST L. REV.889, 940 (in the context of a mass tort case,where varying facts and state laws may beinvolved, the use of a punitive damagemultiplier may not satisfy the reasonablerelationship test, as a multiplier may not beable to measure the true scope of harm toabsent class members).26 Hines, supra note 25, at 939-940.that initial trial. Because the multiplier istied to evidence supporting compensatorydamages of a representative group ofplaintiffs, this may address concernsabout the reasonable relationship betweenthe punitive and compensatory awards.Though there is very littlescholarship on the relative merits of amultiplier approach in comparison to alump sum award, one scholar has arguedthat the multiplier approach provides amethod of assessing punitive damagesthat reflects both the reprehensibility of adefendant’s conduct and the varyingdegrees of harm that individual plaintiffssuffer. 27 By applying a multiplier toevery dollar of compensatory damages,“individuals awarded high amounts ofcompensatory damages will receiveproportionately higher awards of punitivedamages.” 28 The author qualifies thisbenefit by stating that proportionality canalso be achieved utilizing a lump summethod that distributes punitive damagesin proportion to the plaintiffs’ harm,rather than on a per capita basis. 29 Also,at least one court has rejected the use of amultiplier despite its benefit ofproportionality, stating that suchtreatment does not “satisfy the state’sinterest in making sure that punitivedamage awards ‘are appropriate inspecific relation to differing amounts of –and reasons for – actual damages.’” 3027 Id. at 925.28 Id.; see also Arthur R. Miller and PriceAinsworth, Resolving the Asbestos Personal-Injury Litigation Crisis, 10 REV. LITIG. 419,443-444 (1991) (advocating for a multiplierapproach).29 Id.30 Id. at 931 (citing Phillip Morris, Inc. v.Angeletti, 752 A.2d 200, 249 (Md. 2000)).

Predictability In Punitive Damages Page 459Commentators have also debated theconcept of general fairness with respect tothe use of a multiplier. Looking at anaward from the standpoint of the ratio, themultiplier may be seen as promoting afair and balanced approach to damagesdistribution by assuring that plaintiffsreceive equal treatment in relation to oneanother, and in cases with multipledefendants, to each defendant. 31 Yet fromthe perspective of the actual punitiveawards assessed, the method may still beunfair because it provides differentawards to different plaintiffs, even thoughthe defendant’s conduct was the samewith respect to them all. 32 Under thislatter view, the multiplier is thought tooperate as an award or windfall to certainplaintiffs, rather than as punishment todefendants. 33The use of a multiplier in the contextof “reverse bifurcation” trials, wherepunitive damages are determined prior toany finding of liability, has also beensubject to substantial criticism. 34Defendants may be prejudiced by thisapproach, as they suffer loss of argumentsor defenses with respect to underlyingelements and become subject to damageawards by juries who are predisposed tothe idea of liability. 35 In addition, byconsidering punitive damages prior tohearing issues of causation and damages,the jury does not know how many victims31 Owen, supra note 20, at 395.32 Hines, supra note 25, at 924.33 Id.34 Victor E. Schwartz, Putting the Cart BeforeThe Horse: The Prejudicial Practice of A“Reverse Bifurcation” Approach to PunitiveDamages, 2 CHARLESTON L. REV 375, 383-387 (2008).35 Id. at 385.potentially exist, the severity of theirinjuries, or how their injuries occurred. 36III.Punitive Damage Multipliers InPracticeCourts in the Fifth Circuit, WestVirginia, and Maryland have consideredthe utility of using a multiplier approachin the class action or mass tort context.These cases provide insight into how amultiplier works in practice, the variety ofways that courts have evaluated themultiplier approach, and the argumentscounsel will likely face in advocating for,or challenging, its use.A. The Fifth CircuitJenkins v. Raymark Industries was aclass-action suit involving asbestosrelated claims. 37 Despite the credit itreceives for pioneering the idea of amultiplier in the Fifth Circuit, the court inJenkins did not apply or consider themultiplier approach in any detail. Rather,the court indirectly endorsed the use of amultiplier, stating only that, as analternative to awarding aggregatedamages, “the jury could be allowed toaward an amount of money that eachclass member should receive for eachdollar of actual damages awarded.” 38Purportedly taking its lead from Jenkins,the trial court in Cimino v. RaymarkIndustries fashioned a three-phase trialplan, which included the use of amultiplier. 39 In phase I, “the jury36 Id. at 400-401.37 702 F.2d 468, 469 (5th Cir. 1986).38 Id. at 475.39 Cimino v. Raymark, 751 F. Supp. 649, 657-658 (E.D. Tex. 1990).

Page 460 DEFENSE COUNSEL JOURNAL–October 2012assessed a punitive damage multiplier ‘foreach $1.00 of actual damages,’” invarying amounts for the differentdefendants involved. 40 Ultimately, thejudgments in the trial court werevacated. 41 The latter proceedings,however, did not attack the use of amultiplier. Rather, the appeals court tookissue with the lower court’s use ofstatistical methods to extrapolate awardsfor class members based on awardsdetermined for sample plaintiffs. 42The Fifth Circuit considered the useof a punitive damage multiplier again inWatson v. Shell Oil Co. 43 AlthoughWatson was later reversed en banc, 44 thecase provides further insight into the useof a punitive damage multiplier in a masstort action. Watson arose out of anexplosion at a manufacturing facility thatcaused extensive damage throughout theplant and surrounding communities. 45The court posited that where thedefendant’s culpability is determined inconnection with one single event in amass-disaster context, there is likely to beless variance between punitive damageawards with respect to different plaintiffsand, therefore, a multiplier approach todetermine punitive damages for the entireclass may be appropriate. 46 The courtwent on to note that to the extent thatplaintiffs’ claims for punitive damages40 Id.41 See generally Cimino v. Raymark, 151 F.3d297, 335 (5th Cir. 1998).42 Id.43 Watson v. Shell Oil. Co., 979 F. 2d 1014,1016-17 (5th Cir. 1992), reversed en banc, 53F.3d 663 (5th Cir. 1994).44 Id.45 Id. at 1016-1017.46 Id. at 1019.differ, a phased trial plan that utilizes amultiplier can be refined by settingdifferent ratios or multipliers for differenttypes of claims, rather than casting asidethe method altogether. 47 A refinedapproach using different multipliers fordifferent types of claims presumablywould allow the defendants anopportunity to present defenses tailored tothe specific categories of claims withoutrequiring individual determination ofpunitive damages with respect to everyplaintiff. The refined approach would bemore fair to the defendants, less likely todeny defendants an opportunity to presenta defense, and would still increasejudicial efficiency.B. West VirginiaThe Supreme Court of Appeals ofWest Virginia discussed the use of apunitive damage multiplier in the contextof a mass tobacco litigation involvingconsolidation of 1,100 individual claimsby smokers against tobacco companies. 48The court considered whether a bifurcatedtrial, where liability and a punitivedamage multiplier are determined inphase I, prior to a finding ofcompensatory damages for each plaintiffin phase II, violates the Due ProcessClause as interpreted by the U.S.Supreme Court in State Farm v.Campbell. 49The defendant tobacco companiesobjected to the bifurcated trial plan, andthe determination of a punitive damage47 Id. 1019 n.19.48 In re Tobacco Litigation, 624 S.E.2d 738(W.Va. 2005).49 538 U.S. 408 (2003).

Predictability In Punitive Damages Page 461multiplier prior to individualcompensatory damages, on two grounds:(1) the plan failed to ensure that punitivedamages would be proportionate to theinjury caused to individual plaintiffs; and(2) the plan failed to ensure a proper ratiobetween punitive and compensatorydamages. 50 The trial court rejected thesearguments stating that individualcompensatory damages would bedetermined in phase II, based onindividual evidence, and then themultiplier from phase I would be appliedto determine the punitive damageaward. 51 Furthermore, the court wouldhave the ability to review individualpunitive and compensatory damages oncethey were determined to ensure that theawards do not violate State Farm andother relevant case law. 52 The appellatecourt in In re Tobacco Litigation,however, did not rule on the use of amultiplier, and made no judgment as towhether the proposed trial plan was thebest way to proceed. 53 Rather, theappellate court narrowly held that theSupreme Court’s decision in State Farm“does not preclude the bifurcation of atrial into two phases wherein certainelements of liability and punitive damagemultiplier are determined in the firstphase and compensatory damages and50 In re Tobacco Litigation, 624 S.E.2d at 742-743.51 Id. at 742; see also State of West VirginiaEx. Rel. Chemtall Inc, et al. v. Madden, 655S.E.2d 161, 166-167 (W.V. Sup. Ct. of App.2007) (affirming a two-phase trial in whichpunitive damages multipliers were consideredprior to the determination of individualcausation and compensatory damages).52 Id. at 743.53 Id.punitive damages, based on a punitivedamage multiplier, are determined foreach individual plaintiff in the secondphase.” 54The concurring opinion in In reTobacco Litigation highlights anadditional argument asserted by thedefendants and provides insight into thebenefits of a punitive damage multiplierapproach. Defendants argued that theyhad a due process right to try the issue ofpunitive damages one case at a time inorder to allow the jury to assess thedefendant’s culpability with respect toeach individual plaintiff. 55 Theconcurring judge pointed out that if themajority had accepted such an argument,it would effectively mean that thedefendant would have a right tothousands of trials, which would result inadministrative gridlock in the courtsystem, and would deny individualplaintiffs their day in court. 56 Bycontrast, having the jury determine apunitive damage multiplier that“establishes a numerical relationshipbetween the potential harm of thedefendant’s conduct and the plaintiff’scompensatory damages” allows plaintiffstheir day in court, and permits thedefendants to contest a claim for punitivedamages in one proceeding. 57 If such aprocess were utilized, plaintiffs anddefendants would have a “just, speedy,and inexpensive determination of everyaction.” 58A federal court in West Virginia alsohas addressed the issue of punitive54 Id.55 Id. at 748 (Starcher, J., concurring).56 Id. at 749.57 Id.58 Id.

Page 462 DEFENSE COUNSEL JOURNAL–October 2012damage multipliers, although onlytangentially. In Loudermilk Services, Inc.v. Marathon Petroleum Company LLC, 59the Southern District of West Virginiareviewed the proposed trial plans of acomprehensive claim with 654 plaintiffs.In discussing the use of a punitivedamage multiplier, the court stated thefollowing:Using the multiplier, a jury couldmake a determination ofreprehensibility on a class-widebasis and decide on a numberwhich reflects this degree ofreprehensibility. That numberwould then be applied later toindividual plaintiffs, once anindividual class member’s claimis adjudicated and he is found tohave suffered harm from theconduct upon which themultiplier is based. 60The court held that because themultiplier was a direct ratio betweenpunitive and compensatory damages, it“ensure[d] a consistent and logic[al]relationship between punitive damagesand actual harm.” 61 While the courtaccepted and embraced the punitivedamage multiplier, it did prohibit its useto punish a defendant directly on harmsthat it allegedly inflicted on nonparties. 6259 No: 3-04-0966, 2008 U.S. Dist. LEXIS67866 (S.D.W.Va. Sept. 5, 2008).60 Id. at *13.61 Id. at *14.62 Id. at *14 (citing Philip Morris, 549 U.S.346 (2007)).C. MarylandMaryland’s high court considered theviability of using a punitive damagemultiplier in class action litigation thatinvolved claims against several tobaccomanufacturers in Phillip Morris, Inc. v.Angeletti. 63 Defendants successfullypetitioned the Maryland Court of Appealsto vacate the circuit court’s certificationof two classes, asserting that the circuitcourt grossly abused its discretion incertifying classes that did not meet therequirements for a class action suit. 64 Thedefendants also argued that the circuitcourt violated their state and federalconstitutional rights by splittinginterrelated issues of liability andcausation, and impermissibly separatingpunitive damages from liabilitydeterminations. 65 Class actionrepresentatives rebutted with threearguments: (1) bifurcation of commonliability from damages or causation wasnot constitutionally infirm; (2) the circuitcourt properly concluded that a punitivedamage multiplier could be determined asa common issue separate from findings ofliability and actual damages; and (3) thecircuit court was correct in determiningthat a claim for medical monitoring wasappropriate for class certification. 66The court of appeals provided asummary of its previous opinionshighlighting Maryland’s “essentialfeatures underlying an award of punitivedamages.” 67 The court of appeals began63 Philip Morris Inc., v. Angeletti, 752 A.2d200 (Md. 2000).64 Id. at 208.65 Id.66 Id. at 209.67 Id. at 246.

Predictability In Punitive Damages Page 463with the principle that “a jury must findcompensatory damages as a foundationbefore it may award punitive damages.” 68Next, the court noted that even wherepunitive damages may be appropriate, thedecision to award such damages is withinthe discretion of the trier of fact. 69Finally, the court concluded its overviewby stating that it is well settled underMaryland law that punitive damagescannot be decided in a vacuum, andcompensatory or actual damages must befound first in order to support an awardfor punitive damages. 70Recognizing that punitivedamages are meant to be a measure of thedefendant’s culpability, the courtnevertheless rejected the classrepresentatives’ argument that punitivedamages could be determined withoutregard to liability to any particular classmember. 71 The court then reiterated thatthere is “clearly established” law inMaryland prohibiting a punitive damageaward without regard to an actualcompensatory award. 72 Ultimately,although the court acknowledged the useof punitive damage multipliers in otherjurisdictions, it concluded that the use ofa multiplier in this context would notenable the jury to assess appropriatepunitive damages relative to actualdamages and would be contrary toMaryland law. 7368 Id.69 Id. at 246-247.70 Id. at 247.71 Id.72 Id.73 Id. at 246-249.IV. ConclusionUsing a multiplier in determiningpunitive damage awards provides amethod for courts to avoid overdeterrencethrough multiple punitiveawards, increase the predictability andeconomic efficiency of punitive awards,and improve the overall efficiency inmass tort and complex litigation cases.Despite these benefits, opponents arguethat the multiplier approach deprivesdefendants of an opportunity to presentall of their defenses, as it does not allowfor individual determinations of punitivedamages for individual plaintiffs. Manyof the arguments against the use of apunitive damage multiplier arise in casesin which plaintiffs are seeking adetermination as to punitive damages foran entire class before trying issues ofcausation and compensatory damages.This negative view of multipliers is oftenlinked to bifurcated trial plans that areobjectionable on other grounds.Courts and scholars that haveaddressed the advantages anddisadvantages of the punitive damagemultiplier have done so primarily withinthe class action context. The question yetto be addressed is whether a punitivedamage multiplier has a place in theworld of complex litigation beyond classactions. Where mass tort actions are notcertified as a class, they are oftenconsolidated for purposes of discoveryand trial. A punitive damage multipliermay be useful in this context, particularlywhere multiple parties’ actions areconsolidated for trial and representativeplaintiffs’ claims are presented to a juryto allow for a punitive damagedetermination. Regardless, the punitive

Page 464 DEFENSE COUNSEL JOURNAL–October 2012damage multiplier is a solution that hasyet to be fully explored and may holdfuture potential in helping courts andcounsel develop an economical andefficient resolution of unpredictablepunitive damage awards that withstandsconstitutional scrutiny.

Raising The Roof: What’s Hot In ConstructionDefect LitigationBy Kathleen J. Maus,Julius F. “Rick” Parker IIIand Michael HamiltonTHE PERIOD spanning from the mid-1990's to the crash of the real estatemarket in 2007 saw an unprecedentedexplosion of new construction throughoutthe United States, particularly in the SunBelt. As with any boom, the frenzy ofever-increasing real estate prices temptedmany of the players involved to cutcorners and increase profits. Thus, theterm “value engineering” took on a newmeaning in the construction field. Thebasic tenet of “value engineering” is toincrease the ratio of function to cost. Thiscan be done either by increasingfunctionality or decreasing cost. The fastbuck artists chose the latter with obviousconsequences.Unfortunately for the purchasers of“value engineered” projects, the reductionof cost generally resulted in a decrease infunction. However, the decreasedfunction generally did not make itselfevident until years after the developer hadpacked up and left town. Just likeSylvester McMonkey McBean in Dr.Seuss’s The Sneetches, “... when everylast cent of their money was spent, [t]hefix-it-up Chappie packed up. And hewent.” 1 Years after construction wascompleted, owners of properties, riddledwith defects, sued the developer, builderand /or subcontractor(s) to recover the1THEODOR S. GEISEL, THE SNEETCHES,(Random House, 1961).Kathleen Maus is apartner with ButlerPappas Weihmuller KatzCraig LLP, having joinedthe firm in 1991. JuliusF. “Rick” Parker III is asenior associate with thefirm, having joined the firm in 2004. Ms.Maus and Mr. Parkerboth practice in thefirm’s Tallahasseeoffice and focus theirpractices on first andthirdpartyextracontractuallitigation defense,casualty litigation and first and thirdpartycoverage matters. Ms. Maus serveson IADC’s Board of Directors. She alsoserves on DRI’s Insurance LawCommittee Steering Committee and is apast member of DRI’s Board of Directors.Michael Hamiltonchairs Nelson, Levine,de Luca & Hamilton'sNational InsuranceCoverage Group. Heconcentrates hispractice in the areas ofinsurance coveragedisputes, bad faith defense andcommercial litigation. Mr. Hamilton is amember of DRI, the IADC, thePennsylvania Bar Association, the NewJersey Bar Association, Insurance LawSection, the American Bar Association,Tort and Insurance Practice Sections, thePennsylvania Defense Institute, and thePhiladelphia Association of DefenseCounsel.

Page 466 DEFENSE COUNSEL JOURNAL–October 2012cost of repairing the defectiveconstruction.Ever eager to share the misery, thesued entities then turned to their generalliability insurers, claiming the defectiveconstruction was an “accident” andtherefore covered under their generalliability policies. Not since asbestoslitigation has any one coverage issuespawned so much litigation. As of thedate of this article, only seven states haveescaped addressing whether defectiveconstruction meets the definition of an“accident” and therefore constitutes acovered “occurrence” within the meaningof the I.S.O. general liability policy in usesince 1986. 2 This article explores thevarious approaches courts have taken onthe issue. It then presents other issuesthat are beginning to be addressed bycourts who have found defectiveconstruction to be an “occurrence.” Inaddition, state legislatures in at least fourstates have addressed the issue, spurredby decisions purportedly unfavorable toinsureds in those jurisdictions.I. Is Defective Construction an“Occurrence?”The broad form general liabilitypolicy widely in use since the 1960'sgrants the following coverage:We will pay those sums that theinsured becomes legally obligated topay as damages because of “bodilyinjury” or “property damage” towhich this insurance applies. ...2 See Appendix I.b. This insurance applies to “bodilyinjury” and “property damage”only if:(1) The “bodily injury” or“property damage” is causedby an “occurrence” thattakes place in the “coverageterritory”; and(2) The “bodily injury” or“property damage” occursduring the policy period. 3From this language, it is clear that inorder to trigger the coverage agreement inthe first instance, there must be “propertydamage ... caused by an ‘occurrence.’”What then is an “occurrence?” The I.S.O.policy defines an “occurrence” as “anaccident, including continuous orrepeated exposure to substantially thesame general harmful conditions.” 4 Enterthe fortuity principle—that which isaccidental is necessarily fortuitous. Thepolicy is obviously intended only to coverfortuitous events—those which areforeseeable, but not within the insured’scontrol. Arguably, if the resultant defectwas “accidental” then the loss was an“occurrence.”Other courts have reached the sameresult looking instead to policy exclusionsto justify their decisions. ComprehensiveGeneral Liability (“CGL”) policiescontain a number of exclusions, whichmight apply to bar coverage even wherethe court finds the defective construction3 Insurance Services Office, Form CG 00 0112 04, available at http://www.ramsgate.com/forms/CG0001.pdf.4 See United States Fire Ins. Co. v J.S.U.B.,Inc., 979 So.2d 871 (Fla. 2007).

Raising the Roof Page 467to be an occurrence. The I.S.O. broadform general liability policy currently inuse contains three exclusions, generallyreferred to collectively as the “businessrisk exclusions,” as follows:This insurance does not apply to:j. Damage to Property“Property damage” to:(5) That particular part of realproperty on which you or anycontractors or subcontractorsworking directly or indirectly onyour behalf are performingoperations, if the “propertydamage” arises out of thoseoperations; or(6) That particular part of anyproperty that must be restored,repaired or replaced because“your work” was incorrectlyperformed on it.Paragraph (6) of this exclusion doesnot apply to “property damage”included in the “products-completedoperations hazard”.k. Damage to Your Product“Property damage” to “your product”arising out of it or any part of it.l. Damage to Your Work“Property damage” to “your work”arising out of it or any part of it andincluded in the “products-completedoperations hazard”.This exclusion does not apply if thedamaged work or the work out ofwhich the damage arises wasperformed on your behalf by asubcontractor.The policy then defines the“products-completed operations hazard”as:all “bodily injury” and “propertydamage” occurring away frompremises you own or rent and arisingout of “your product” or “your work”except:(1) Products that are still in yourphysical possession; or(2) Work that has not yet beencompleted or abandoned. However,“your work” will be deemedcompleted at the earliest of thefollowing times:(a) When all of the work called forin your contract has been completed.(b) When all of the work to be doneat the job site has been completed ifyour contract calls for work at morethan one job site.(c) When that part of the work doneat a job site has been put to itsintended use by any person ororganization other than anothercontractor or subcontractor workingon the same project.Work that may need service,maintenance, correction, repair or

Page 468 DEFENSE COUNSEL JOURNAL–October 2012replacement, but which is otherwisecomplete, will be treated as completed. 5A state-by-state review of thedecisions on this subject reveals a broadspectrum of interpretations spanning thegap from those which find that defectiveconstruction is never an “occurrence”(therefore, regardless of the extent ofdamage beyond the insured’s own workproduct, the claim is not covered), tothose which find not only that defectiveconstruction is an “occurrence” but thatthe business risk exclusions areambiguous and do not bar coverage forrepair and replacement of the insured’sown work product. Those positions definethe extremes, while the overwhelmingmajority of decisions within the twoextremes may be harmonized into adistinct set of broad principles.The true majority rule as toconstruction defects is that claims ofdefective construction, standing alone, donot meet the element of fortuity necessaryto constitute an accident and are thereforenot covered. However, where the work inquestion was performed by the insured’ssubcontractor, the damage is eitherconsidered “accidental from thestandpoint of the insured” or fits withinthe subcontractor exception to the “yourwork” exclusions. Similarly, to the extentthe insured’s defective work results indamage to other property not the subjectof the insured’s work, that damage is alsogenerally covered. Leading decisions ofeach state are summarized in Appendix Ifollowing this article.A. Defective Construction isNever an “Occurrence”The Supreme Court of New Jerseyfirst recognized the requirement of afortuity analysis as a bedrock principle ofinsurance law in 1979 in what was andremains a landmark case, Weedo v. Stone-E-Brick. 6 Weedo involved a contractorwho installed stucco on the side of itscustomer’s house. The stucco latercracked and peeled. The homeownerssued the contractor, Stone-E-Brick, forthe cost of removing and replacing thedefective stucco. The New JerseySupreme Court was thus faced with thequestion of whether defectiveconstruction, standing alone, constitutesan “occurrence.” The court held that itdid not.The Weedo court distinguishedbetween the kinds of risks faced by atypical contractor, namely: 1) the risk thathis work will not meet the customer’sexpectation, thereby exposing him toliability in contract; and 2) the risk thatsome mistake on his part may result inbodily injury or property damage to athird party. In this regard, the courtnoted:While it may be true that thesame neglectful craftsmanshipcan be the cause of both abusiness expense of repair and aloss represented by damage topersons and property, the twoconsequences are vastly differentin relation to sharing the cost of5 Insurance Services Office, Form CG 00 0112 04.6 405 A.2d 788 (N.J. 1979).

Raising the Roof Page 469such risks as a matter ofinsurance underwriting. 7Quoting Dean Roger Henderson,who espoused the principle in theNebraska Law Review, the court noted:The risk intended to be insured isthe possibility that the goods,products or work of the insured,once relinquished or completed,will cause bodily injury ordamage to property other than tothe product or completed workitself, and for which the insuredmay be found liable. The insured,as a source of goods or services,may be liable as a matter ofcontract law to make good onproducts or work which isdefective or otherwise unsuitablebecause it is lacking in somecapacity. This may even extendto an obligation to completelyreplace or rebuild the deficientproduct or work. This liability,however, is not what thecoverages in question aredesigned to protect against. Thecoverage is for tort liability forphysical damages to others andnot for contractual liability of theinsured for economic lossbecause the product or completedwork is not that for which thedamaged person bargained.An illustration of thisfundamental point may serve tomark the boundaries between“business risks” and occurrences7 Weedo, 405 A.2d at 791.giving rise to insurable liability.When a craftsman applies stuccoto an exterior wall of a home in afaulty manner and discoloration,peeling and chipping result, thepoorly-performed work willperforce have to be replaced orrepaired by the tradesman or by asurety. On the other hand, shouldthe stucco peel and fall from thewall, and thereby cause injury tothe homeowner or his neighborstanding below or to a passingautomobile, an occurrence ofharm arises which is the propersubject of risk-sharing asprovided by the type of policybefore us in this case. 8Another prime example of theextreme on the “occurrence” spectrum isthe recent decision of the KentuckySupreme Court in Cincinnati Insurance v.Motorists Mutual Insurance. 9 InMotorists Mutual, the Court considered aclaim against the insured generalcontractor brought by a couple whichpurchased a home built by the insured(the decision is silent regarding whetherthe contractor used subcontractors toperform any of the work). Relying on thefortuity principle, the Court held simply:Inherent in the plain meaning of“accident” is the doctrine offortuity. Indeed, “[t]he fortuityprinciple is central to the notionof what constitutes insurance....”8 Roger Henderson, Insurance Protection forProducts Liability and Completed Operations,What Every Lawyer Should Know, 50 NEB. L.REV. 415, 441 (1971).9 306 S.W.3d 69 (Ky. 2010).

Page 470 DEFENSE COUNSEL JOURNAL–October 2012Although we have used the termfortuity in the past, we have notfully explored its breadth andscope. In short, fortuity consistsof two central aspects: intent,which we have discussed inearlier opinions, and control,which we have not previouslydiscussed. 10Obviously, intent is relevant indetermining fortuity. That which isintended is, by definition, not accidental.The applicability of the second concept,control, is less obvious but equallycompelling. A general liability policy isnot intended to provide coverage forthose risks which are within the insured’scontrol, such as the selection ofcompetent subcontractors and thefurnishing of quality building materialsproperly installed to provide protectionfrom the elements. Since the quality ofconstruction is always within the controlof the contractor, whether the work isperformed by a subcontractor or thecontractor’s own employees, any losswhich results from poor workmanshipcannot possibly be considered fortuitous.No fortuity, no accident, no occurrence,no coverage.In Hawkeye-Security Insurance v.Davis, the Missouri Court of Appealsfollowed this rationale in concluding thata claim against a builder for building adefective home was not covered eventhough much of the work was performedby subcontractors. 11 The court simplyheld that the construction was entirely10Motorists Mutual, 306 S.W.3d at 74(internal footnote omitted).11 See Hawkeye-Security Ins. Co. v. Davis, 6S.W.3d 419 (Mo. Ct. App. 1999).within the insured’s control and thereforeany damage resulting therefrom could notbe fortuitous. The Court also chose torest its decision on the distinctionbetween tort and contract theories:These uncontroverted factsestablish that Appellants’losses stem solely fromDavis’s breach of hiscontractual obligations,breach of his expresswarranties, or breach ofimplied warranties inconnection with thisconstruction. However,“breach of a definedcontractual duty cannot fallwithin the term ‘accident.’”[American Stats Ins. Co. v.]Mathis, 974 S.W.2d 647, 650[(Mo. Ct. App. 1998)]. Asthe Mathis court explained:“Performance of [the]contract according to theterms specified therein waswithin [the insuredcontractor’s] control andmanagement and its failure toperform cannot be describedas an undesigned orunexpected event.” 12B. Defective Construction,Standing Alone, is not an“Occurrence”The next position on the spectrum iswell illustrated by the decision of theNebraska Supreme Court in Auto-OwnersInsurance Company v. Home Pride12 Id.

Raising the Roof Page 471Companies. 13 In Home Pride, the courtconsidered a claim against a contractorwho replaced a number of roofs in anapartment complex. The insuredcontractor used a subcontractor toperform the work. Following completionof the work, the shingles began to fall offthe roofs and they leaked, resulting indamage to portions of the buildings otherthan the roofs themselves. The courtdrew a distinction between damage to theroofs (the insured’s work) and damage tothe buildings resulting from waterintrusion (other property):Important here, although faultyworkmanship standing alone, isnot an occurrence under a CGLpolicy, an accident caused byfaulty workmanship is a coveredoccurrence. ... Stated otherwise,although a standard CGL policydoes not provide coverage forfaulty workmanship thatdamages only the resulting workproduct, if faulty workmanshipcauses bodily injury or propertydamage to something other thanthe insured’s work product, anunintended and unexpected eventhas occurred, and coverageexists. 14This approach seems entirelyreasonable and consistent with DeanHenderson’s statements quoted in Weedo.Since the insured has full control over thequality of its work, whether it usessubcontractors or not any damage to the13 684 N.W.2d 571 (Neb. 2004).14Home Pride, 684 N.W.2d at 577-578(internal citations omitted) (emphasis inoriginal).work product of the insured itself isinherently non-fortuitous. DeanHenderson drew this precise distinction inthe context of the defective stucco wall:[S]hould the stucco peel and fallfrom the wall, and thereby causeinjury to the homeowner or hisneighbor standing below or to apassing automobile, anoccurrence of harm arises whichis the proper subject of risksharingas provided by the typeof policy before us in this case. 15In Home Pride, the damage toproperty resulting from water intrusion isa perfect analogue to the damage to thepassing automobile referenced above.The only difference (and it is truly adifference without a distinction) is thatthe passing automobile is not connectedto the work of the insured. It is logicallymuch easier to understand why thatdamage to the other property is covered,whereas the damage to the roof itself isnot. The fact that the property damagedby the insured’s faulty work happens tobe connected to the work product of theinsured should not be treated differentlythan the passing automobile; it is damageto property other than the insured’s workwhich was damaged as a result of theinsured’s work. Like the passingautomobile, the water intrusion damage iscovered.15 See Henderson, supra note 8, at 441.

Page 472 DEFENSE COUNSEL JOURNAL–October 2012C. Defective Construction is an“Occurrence” but the BusinessRisk Exclusions ApplyThe next line along the spectrumconsists of those courts who have foundthat defective construction is an“occurrence” (or the courts who skippedthat analysis completely), but that thebusiness risk exclusions apply to barcoverage entirely. This viewpoint isillustrated by the decision of theMassachusetts Supreme Judicial Court inCommerce Insurance v. Betty CapletteBuilders. 16 In Betty Caplette, the insuredwas a general contractor who was suedbased upon defective septic systemsinstalled by subcontractors. The courtskipped the “occurrence” analysis andinstead interpreted the business riskexclusions. After referring to Weedo andquoting Dean Henderson, the court took anovel approach and held that the houseswere the insured’s “product” and theclaims were therefore excluded byexclusion (k) of the broad form generalliability policy. (The exclusion at issue inBetty Caplette was actually numbered (n),but it was the identical “your product”exclusion to exclusion (k) in the currentbroad form policy.)Since the court applied the “yourproduct” exclusion, the fact that the septicsystems were installed by subcontractorswas irrelevant. The court considered theinsured’s contention that the home wasmore properly characterized as “yourwork,” such that the subcontractorexception to the exclusion would apply.It rejected that argument, relying onprecedent which held that the entire house16 647 N.E.2d 1211 (Mass. 1995).is a builder’s “product.” 17 Many of thecases relied upon by the court have sincebeen superseded by opinions consideringthe post-1986 I.S.O. coverage form(although in only one was the result at alldifferent 18 ). The end result in these casesseems to be dictated more by policy thaninterpretation.Ironically, a builder who usessubcontractors in Massachusetts willenjoy the same coverage as the samebuilder in Nebraska despite the fact thatin Massachusetts defective construction isconsidered an “occurrence.” Obviously,different approaches to the same questioncan yield the same result. This approach,which was originally described by theMassachusetts Supreme Judicial Court asthe majority approach, is now theapproach of only a single court—Massachusetts.D. Defective Construction is an“Occurrence” and theBusiness Risk Exclusions DoNot ApplyFinally, at the most liberal end of thespectrum, we find decisions that havemade builders very happy, such as the17 See Gary L. Shaw Builders, Inc. v. StateAutomobile Mutual Ins. Co., 355 S.E.2d 130(Ga. 1987); Indiana Ins. Co. v. DeZutti, 408N.E.2d 1275 (Ind. 1980); Owings v. Gifford,697 P.2d 864 (Kan. 1985); Allen v. Lawton &Moore Builders, Inc., 535 So. 2d 779 (La. Ct.App. 1988); Gene & Harvey Builders, Inc. v.Pennsylvania Mf’r Ass’n Ins. Co., 517 A.2d910 (Pa. 1986).18 See Lee Builders, Inc. v. Farm BureauMutual Ins. Co., 137 P.3d 486 (Kan. 2006)(holding that defective construction was an“occurrence” but not considering the businessrisk exclusions).

Raising the Roof Page 473Florida Supreme Court’s decision inJ.S.U.B., which followed the samerationale as that of the Texas SupremeCourt in Lamar Homes v. MidContinentCasualty Company. 19In J.S.U.B., the builder built severalhomes under contract. After delivery ofthe homes, the homeowners begandiscovering cracks in the ceilings, drywalland concrete slabs of the homes.Investigation revealed that the crackingwas a result of differential settlementcaused by poor soil compaction andfailure to remove loose organic materialby the site preparation contractors. Whensued by the homeowners, the buildersought coverage under its policy withU.S. Fire. This insurer, relying on a priordecision of the Florida Supreme Court,LaMarche v. Shelby Mutual Ins. Co., 20denied coverage for anything other thanpersonal property of the homeownersdamaged by the settlement.J.S.U.B. repaired the homes and filedsuit against U.S. Fire to determinecoverage. On appeal, the intermediatecourt held that LaMarche did not applyand found coverage for all of the damagessought by the homeowners. The FloridaSupreme Court agreed with theintermediate court and issued a lengthydecision in an attempt to justify thewholesale abandonment of decades ofprecedent.First, the Court considered the“occurrence” issue. Putting the cart wellbefore the horse, the Court engaged in alengthy exposé of the history of the “yourwork” exclusion in the broad form19 See J.S.U.B. 979 So. 2d 871 (Fla. 2007);Lamar Homes, Inc. v. Mid-Continent CasualtyCo., 242 S.W.3d 1 (Tex. 2007).20 390 So. 2d 325 (Fla. 1980).general liability policy. Putting aside itsown rule that exclusionary clauses cannotbe relied upon to create coverage, it choseinstead to read the policy “as a whole” todetermine whether work performed by asubcontractor came within the definitionof an “occurrence.” The Court found thatthe subcontractor exception to the “yourwork” exclusion indicated that workperformed by a subcontractor was meantto be covered in the first instance.In doing so, the Court explained thatits prior decision in LaMarche was basednot on whether defective construction wasan “occurrence,” but whether the businessrisk exclusions were ambiguous. Fromthat unremarkable proposition, the Courtconcluded that consideration of the “yourwork” exclusion was a proper method ofdetermining whether the defective workconstituted an “occurrence” in the firstinstance. Its justification was as follows:We conclude that the holding inLaMarche, which relied onWeedo and involved the issue ofwhether there was coverage forthe contractor’s own defectivework, was dependent on thepolicy language of pre-1986CGL policies, including therelevant insuring provisions andapplicable exclusions. . . .Because LaMarche involved aclaim of faulty workmanship bythe contractor, rather than a claimof faulty work by thesubcontractor, and because thepolicy being interpreted involveddistinct exclusions andexceptions, we do not regard

Page 474 DEFENSE COUNSEL JOURNAL–October 2012LaMarche as binding precedentin this case. 21The problem with this transparentjustification is that it fails to explain howconsidering the language of an exclusioncan aid in the determination of theinsuring agreement. In LaMarche, thecoverage grant was identical to that atissue in J.S.U.B., requiring an“occurrence” resulting in “propertydamage.” The exclusion at issue inLaMarche was the former exclusion (o),which equates to the current exclusion (l),or the damage to “your work” exclusion.The former provision stated that theinsurance did not apply:to property damage to workperformed by or on behalf of thenamed insured arising out of thework or any portion thereof, orout of materials, parts orequipment furnished inconnection therewith. 22By contrast, the current exclusion (l),excludes coverage for:“Property damage” to “yourwork” arising out of it or any partof it and included in the“products-completed operationshazard”.This exclusion does not apply if thedamaged work or the work out of whichthe damage arises was performed on yourbehalf by a subcontractor.21 J.S.U.B., 979 So. 2d at 882.22 LaMarche, 390 So. 2d at 326.So, the newer provision removeswork performed on the insured’s behalffrom the exclusion, whereas the olderversion expressly included workperformed on the insured’s behalf.Having recited the foregoingdifferences, the Court then resumed itsanalysis of whether defective constructionconstituted an “occurrence.” After citingto several other state decisions whichfound that such defects were“occurrences,” it then completely omittedany analysis of the issue and simply putforth the bold proposition that:If U.S. Fire intended to precludecoverage based on the cause ofaction asserted, it was incumbenton U.S. Fire to include clearlanguage to accomplish thisresult. ... In fact, there is abreach of contract endorsementexclusion, not present in the CGLpolicies at issue in this case, thatexcludes coverage for breach ofcontract claims. ... 23Of course, the court did not explainwhy U.S. Fire needed to include anendorsement to exclude coverage whichthe Florida Supreme Court had alreadyannounced did not exist. Analyzingwhether the insuring agreement of thepolicy is triggered in the first instance iscertainly different from analyzingwhether the exclusions bar coveragewhich otherwise exists. In other words,the Court put the proverbial cart beforethe horse by concluding that U.S. Firefailed to use clear language to precludecoverage.23 J.S.U.B., 979 So. 2d at 884.

Raising the Roof Page 475The question of whether defectiveconstruction is an “occurrence” askswhether the loss itself is the typecontemplated by the policy. Only if theanswer to that question is “Yes” is thereany need to consider whether any otherprovision of the policy precludes thatcoverage. Therefore, the Court’s relianceon U.S. Fire’s failure to use clearpreclusionary language in support of itsconclusion that defective constructionconstitutes an “occurrence” isnonsensical. Its analysis demonstratesthat the Court never really analyzedwhether defective construction isaccidental or fortuitous. Rather, it simplycited to changes in the relevant exclusionsto justify its departure from decades ofsettled precedent.E. Harmonization of theDecisionsDespite what appear to be a fairlysignificant divergence of views on thescope of coverage under the broad formgeneral liability policy, the reality is thatonly in a few states will builders have theequivalent of performance bond coverage(but without the insurer’s concomitantright to recoup any payments thereunderfrom the insured). Obviously, contractorsin Florida and Texas and the other stateswhich apply their rationale (see AppendixI) will enjoy broad coverage. Even inthose states, it is fair to assume that workdone by the contractor itself will not becovered. In J.S.U.B., the contractor subcontractedall of the work on the home.Therefore, all of the property damage wascovered. But even the J.S.U.B. decisionmakes it fairly clear that defective workthat is performed by the contractor itselfwill not be covered.As a result, we discern a broad themerunning through the great majority ofdecisions, such that several broadprinciples of law can be said to be theoverwhelming majority rule. First, claimsof defective construction, standing alone,do not meet the element of fortuitynecessary to constitute an accident andare therefore not covered. Second, wherethe work in question was performed by asubcontractor, the damage is eitherconsidered accidental from the standpointof the insured or fits within thesubcontractor exception to the “yourwork” exclusion. Third, to the extent theinsured’s defective work results indamage to other property not the subjectof the insured’s work, that damage islikely covered. In essence, after fortytwoyears of litigation, we end up at thesame place Dean Henderson described in1971. 24II. Other IssuesIn the aftermath of the constructiondefect litigation explosion, insurers,claims professionals and attorneyscontinue to struggle with other issues.While it is simple to say that damage tothe insured’s work is not covered,application of that principle is moredifficult, particularly in the context of theall-too-common water intrusion claimthat seems to define much of the currentlitigation. In the event the stucco isdefective, resulting in rotting of structuralframing members and damage to drywall,how do we parse the cost of removing24 See supra note 8.

Page 476 DEFENSE COUNSEL JOURNAL–October 2012and replacing the stucco (which may ormay not be covered, depending onwhether it was performed by asubcontractor) from the cost of repairingthe damaged structural elements (alleged“other property”)?This issue becomes more complex onclose examination. For example, a wiseinsured will argue that it is not possible toaccess the framing members withoutremoving the stucco. Therefore, forargument’s sake, even if the waterintrusion resulted from a different cause,even non-defective stucco would have tobe removed and replaced as part of thecost of repairing the damaged structuralelements. The players involved are justbeginning, relatively speaking, to addressthat kind of issue, sometimes referred toas “rip and tear” damages.In addition, as a result of thesubcontractor exception, which is almostuniversally recognized, contractorssimply use subcontractors for all work ona project. Clearly, had the builder inJ.S.U.B. done its own site preparation, itwould have deprived itself of coveragewhich it otherwise enjoyed. Of course,subcontractors purchasing the same formCGL policy usually do not have thatoption.There are also the ever-present issuesof indemnity, subrogation andcontribution. The builder who utilizedsubcontractors and/or its insurer will havean excellent argument that the entireliability should be passed down the line tothe subcontractors. Certainly, U.S. Fireshould have a right of subrogation topursue the site preparation contractor forindemnity since the builder cannot havecontributed to the loss. In that case, is thesubcontractor’s insurer in any betterposition to deny coverage than thebuilder’s insurer would have been sincethe subcontractor exception should notapply? That question is debatable giventhe “rationale” used by the FloridaSupreme Court to conclude that defectiveconstruction is an “occurrence.” Onecould certainly cite that decision for theproposition that defective construction isonly an “occurrence” when the work isperformed by a subcontractor. For thesubcontractor then, is there no“occurrence” because the subcontractordid not use a sub-subcontractor? That is aquestion which will also likely belitigated in the coming years.III. Legislating CoverageIn states where the courts’ decisionshave been unfavorable to policyholders,policyholders have turned to lobbyists,the plaintiffs’ bar and state legislatures toenact change. For example, recentlegislation reversed a decision by theSouth Carolina Supreme Court inCrossmann Communities of NorthCarolina v. Harleysville MutualInsurance. 25 The court (which laterwithdrew the opinion and reversed itself),held that damages resulting from faultyworkmanship were the “natural andprobable cause” of the faulty work and, assuch, did not qualify as an “occurrence.”In response, the South CarolinaLegislature passed a statute providing:Commercial general liabilityinsurance policies shall containor be deemed to contain a25 No. 26909, 2011 W.L. 93716 (S.C. Jan 7,2011).

Raising the Roof Page 477definition of “occurrence” thatincludes:(1) an accident, includingcontinuous re repeatedexposuretosubstantially the samegeneral harmfulconditions; and(2) property damage orbodily injury resultingfromfaultyworkmanship, exclusiveof the faultyworkmanship itself. 26The statute, which applies to anypending or future disputes, makes clearthat any damage flowing from faultyworkmanship constitutes a covered“occurrence” under CGL policies.In Hawaii, the legislature enactedHawaii Revised Statutes 431:1-217,attempting to preserve the meaning of“occurrence” that existed prior to a Courtof Appeals decision in Group Builders v.Admiral Ins. Co., 27 which was notfavorable to insureds. The Hawaii statuteprovides that “For purpose of a liabilityinsurance policy that covers occurrencesof damage or injury during the policyperiod and insures a constructionprofessional for liability arising fromconstruction related work, the meaning ofthe term ‘occurrence’ shall be construedin accordance with the law as it existed atthe time that the insurance policy wasissued.” 2826 S.C. CODE ANN. Sec. 38-61-70 (2011).27 123 Haw. 142, 231 P.3d 67 (Haw. Ct. App.2010).28 H.R.S. 431:1-217.In addition, Colorado 29 andArkansas 30 have recently adoptedlegislation regarding coverage under CGLpolicies for construction defects. TheColorado statute requires courts topresume that work resulting in propertydamage is an accident under a CGLpolicy unless the damage was intendedand expected by the insured. The statuteonly applies to policies expiring afterMay 21, 2010. 31 The Arkansas statute,while expressly not intended to limitexclusionary language, provides that allCGL policies must include a definition ofoccurrence that includes “propertydamage or bodily injury resulting fromfaulty workmanship.”IV. New EndorsementsAs a result of the flood ofconstruction defect litigation concerningthe I.S.O. broad form general liabilitypolicy, the industry has developed severalnew endorsements, which may be addedto the general liability policy (presumablyfor a reduced premium). The first is theBreach of Contract Endorsement,referenced in the J.S.U.B. decision, whichstates:This insurance does not apply toclaims for breach of contract,whether express or oral, norclaims for breach of an impliedin law or implied in fact contract,whether “bodily injury,”“property damage,” “advertisinginjury,” “personal injury” or an29 COLO. REV. STAT.13-20-808 (2011).30 ARK. CODE, 23-79-155 (2011).31 See TCD, Inc. v. American Family Mut. Ins.Co., 2012 COA 65 (Col. Ct. App. 2012).

Page 478 DEFENSE COUNSEL JOURNAL–October 2012“occurrence” or damages of anytype is alleged; this exclusionalso applies to any additionalinsureds under this policy.Furthermore, no obligation to defendwill arise or be provided by us for suchexcluded claims. 32In addition, I.S.O. has made availabletwo endorsements which have the effectof deleting the subcontractor exception tothe “your work” exclusion. Thatendorsement simply provides:Exclusion I. of Section I – Coverage A –Bodily Injury And Property DamageLiability is replaced by the following:2. ExclusionsThis insurance does not apply to:l. Damage To Your Work“Property Damage” to “yourwork” arising out of it or anypart of it and included in the“products-completed operationshazard”. 33Finally, I.S.O. has created a sitespecificendorsement for deleting thesubcontractor exception to the “yourwork” exclusion. That endorsementstates:32With respect to those sites oroperations designated in theInsurance Services Office, FormIC0238099. See also Insurance ServicesOffice, Form IC02381006.33 Insurance Services Office, Form CG 22 9410 01.Schedule of this endorsement,Exclusion I. of Section I –Coverage A – Bodily Injury AndProperty Damage Liability isreplaced by the following:2. ExclusionsThis insurance does not apply to:l. Damage To Your Work“Property Damage” to “yourwork” arising out of it or anypart of it and included in the“products-completed operationshazard”. 34Contractors will likely be offeredpolicies with one or more of the foregoingendorsements included automatically.Presumably, the endorsements could beremoved for an additional premium.While these endorsements appear toprovide a simple solution to a complexproblem, even these endorsements arelikely to engender further litigation ascourts grapple with their interpretation.V. ConclusionHave forty-two years of litigationreally changed anything? On thejudicially conservative end of thespectrum, things are as Dean Hendersondescribed them in 1971. Builders whobuild shoddy buildings will have to bearthe cost of replacement of their ownshoddy work. This is, of course, the way34 Insurance Services Office, Form CG 22 9510 01.

Raising the Roof Page 479it should be. Perhaps the real point ofdemarcation should be the distinctionbetween tort liability and contractliability. Without saying so, DeanHenderson’s example certainly drew theline there. For the person injured by thefalling stucco wall or the passing cardamaged by that same falling stucco, theonly remedy against the personresponsible is in tort. While it is true that,but for the contract between the builderand the stucco contractor, there would beno liability for the injured person or thepassing car. But that does not mean thatthe liability arises out of contract.The problem arises when the damagebecomes internal. When the insured’swork damages only itself, there is nocoverage even in Florida and Texas. Butwhen the insured’s faulty work damages“other property,” it is likely covered bythe builder’s general liability policy. Is ita coincidence that these principles seemto mirror those of the economic loss rulebefore it became whittled away byexceptions? Under that rule, a defectiveproduct which damages only itself givesrise to a cause of action in contract only.Only when the product damages “otherproperty” does the breach of contract (thedefect) become actionable in tort.Perhaps the erosion of the economicloss rule runs parallel to the erosion of theconcept that insurance is meant to coveraccidents, not business risks. Certainly inDean Henderson’s time, a complaintagainst a builder based on negligencewould have been summarily dismissedunder the economic loss rule. Today, itmight well stand based upon the manyexceptions courts have created to whatwas otherwise a bright-line rule. Just asthe line between tort and contract isblurring, so too is the line betweenaccidents and business risks.

Page 480 DEFENSE COUNSEL JOURNAL–October 2012APPENDIX ISTATE BY STATE INDEXAlabama: Town and Country Prop., LLCv. Amerisure Ins. Co., No. 1100009, 2011WL 5009777 (Ala. Oct. 21, 2011).Occurrence? Yes. Defectiveconstruction can be an “occurrence”if it subjects personal property orother parts of the structure to“continuous or repeated exposure” toharmful conditions resulting indamage.Insured’s work covered? No. Thebusiness risk exclusions precludecoverage for the repair of theinsured’s defective product. Onlydamage to “other property” iscovered.Alaska: Fejes v. Alaska Ins. Co., Inc.,984 P.2d 519 (Alaska 1999).Occurrence? Yes. Defectiveconstruction can be an “occurrence”where the insured did not expect orintend the result of the defectiveconstruction.Insured’s work covered? Yes, ifperformed by a subcontractor. No, ifperformed by the insured.Arizona: United States Fidelity &Guaranty Corp. v. Advance Roofing &Supply Co., Inc., 788 P.2d 1227 (Ariz. Ct.App. 1989).Occurrence? No.Insured’s work covered? No.Arkansas: Lexicon v. ACE American Ins.Co., 634 F.3d 423 (8th Cir . 2010).Occurrence? Damage to work itselfis not occurrence while collateraldamage caused by faulty work is anoccurrence.Insured’s work covered? No.Defective workmanship standingalone is not an occurrence. 35California: Standard Fire Ins. Co. v.Spectrum Community Ass’n, 46Cal.Rptr.3d 804 (Cal. Ct. App. 2006).Occurrence? Yes, implicitly.California courts seem to haveglossed over this question. There area number of opinions like StandardFire that address the question ofwhether a defect which occurs overtime triggers multiple policies.However, none of the decisionsactually addresses the threshold issueof whether such defects constitute an“occurrence” in the first instance.Insured’s work covered? Yes,implicitly, based upon the samerationale.Colorado: General Security IndemnityCo. of Arizona v. Mountain States Mut.Casualty Co., 205 P.2d 529 (Colo. Ct.App. 2009).35 Essex Ins. Co. v. Holder, 261 S.W.2d 456(Ark. 2008).

Raising the Roof Page 481Occurrence? No. Defectiveconstruction lacks the fortuityimplicit in the concept of an accident.Insured’s work covered? No.Connecticut: Travelers Prop. CasualtyCo. of Am. v. Laticrete, Int’l, Inc.,CV044002006S, 2006 WL 2349079(Conn. Super. Ct. July 27, 2006).Occurrence? Yes, implicitly. Likethe California court in Standard Fire,the court glossed over the initial“occurrence” analysis and analyzedwhen property damage occurred fortrigger purposes.Insured’s work covered? Yes,implicitly.Delaware: Charles E. Brohawn & Bros,Inc. v. Employers Commercial Union Ins.Co., 409 A.2d 1055 (Del. 1979).Occurrence? Yes, implicitly. Thecourt assumed that defectiveconstruction constituted propertydamage caused by an occurrence anddecided the case based upon the“sistership” exclusion.Insured’s work covered? Possibly,depending upon the applicability of a“sistership” or other exclusion.Florida: United States Fire Ins. Co. v.J.S.U.B., Inc., 979 So.2d 871 (Fla. 2007).Occurrence? Yes. Defective workperformed by a subcontractor wasnot expected or intended by thegeneral contractor and is therefore an“accident.”Insured’s work covered? Yes, if thework was performed by asubcontractor. No, if it wasperformed by the insured. However,damage to work other than theinsured’s work is covered regardless.Georgia: American Empire Surplus LineIns. Co. v. Hathaway Development Co.,Inc., 707 S.E.2d 369 (Ga. 2011).Occurrence? Yes. Faultyworkmanship causing damage toneighboring property constitutes anaccident.Insured’s work covered? No. 36Hawaii: Group Builders, Inc. v. AdmiralIns. Co., 231 P.3d 67 (Haw. Ct. App.2010).Occurrence? No. Whether couchedas contractual or tort-based claims,claims of defective construction donot constitute an “occurrence.”Insured’s work covered? No.Idaho: Undecided.Illinois: Country Mutual Ins. Co. v. Carr,867 N.E.2d 1157 (Ill. Ct. App. 2007).Occurrence? Yes. If the insured didnot intend or expect damage to result36 See Custom Planning & Development v.American National Fire Ins. Co., 606 S.E.2d39 (Ga. 2004).

Page 482 DEFENSE COUNSEL JOURNAL–October 2012from his work, then the resultingdamage is accidental and therefore an“occurrence.”Insured’s work covered? Unknown.Since the business risk exclusionswere not addressed in the trial court,the appeals court remanded for thetrial court to consider the exclusions inthe first instance.Indiana: Sheehan Const. Co., Inc. v.Continental Casualty Co., 935 N.E.2d160 (Ind. 2010).Occurrence? Yes. As long as theresulting damage is an event thatoccurs without expectation orforesight, defective construction canconstitute an accident and thereforean “occurrence.”Insured’s work covered? No. Onlydamage to property other than theinsured’s work is covered. Thebusiness risk exclusions clearlyexclude coverage for damage to theinsured’s work.Iowa: Pursell Const., Inc. v. HawkeyeSecurity Ins. Co., 596 N.W.2d 67 (Iowa1999).Occurrence? No. Defective workstanding alone is not an accident andtherefore not an “occurrence.”Insured’s work covered? No, butdamage to property other than theinsured’s work would presumably becovered.Kansas: Lee Builders, Inc. v. FarmBureau Mutual Ins. Co., 137 P.3d 486(Kan. 2006).Occurrence? Yes. As long as thedamage resulting from defectiveconstruction was unforeseen andunintended by the insured, it isaccidental and therefore an“occurrence.”Insured’s work covered? Yes,implicitly. The Lee Builders courtcould have considered the businessrisk exclusions, but did not, choosinginstead to hold simply that thedefective construction was an“occurrence” and therefore covered.Kentucky: Cincinnati Ins. Co. v.Motorists Mutual Ins. Co., 306 S.W.3d 69(Ky. 2010).Occurrence? No. Although aninsured would almost never haveintended to perform substandardwork, the concept of fortuity has asecond aspect: control. For thedefective construction to be anaccident, it must be a chance event,beyond the insured’s control.Insured’s work covered? No. 37Louisiana: Joe Banks Drywall &Acoustics, Inc. v. Transcontinental Ins.Co., 753 So.2d 980 (La. Ct. App. 2000).Occurrence? Yes. As long as thecomplaint does not allege that the37 See McBride v. Acuity, No. 5:10-CV-173,2011 WL 6130922 (W.D. Ky. Dec. 11, 2011).

Raising the Roof Page 483insured intended the damage, thedefective construction was accidentaland therefore an “occurrence.”Insured’s work covered? No. Thebusiness risk exclusions clearly applyto bar coverage for damage to theinsured’s work. Damage to otherproperty would presumably becovered.Maine: Massachusetts Bay Ins. Co. v.Ferraiolo Construction Co., 584 A.2d608 (Me. 1990); Peerless Insurance Co.v. Brennon, 564 A.2d 383 (Me. 1989).Occurrence? Yes. Comprehensivegeneral liability insurance is intendedto cover occurrence of harm risks,but not business risks. Occurrence ofharm risks are those involving harmto others due to faulty work orproducts, while business risks arethose involving business expensesincurred by the insured for repair orreplacement of unsatisfactory work.Insured’s work covered? No.Maryland: French v. Assurance Co. ofAm., 448 F.3d 693 (4th Cir. 2006)(applying Maryland law).Occurrence? No. The defectiveperformance of work can never be anaccident and therefore is not an“occurrence.”Insured’s work covered? No, unlessthe damage was to non-defectivework of the insured which resultedfrom defective work performed by asubcontractor (under thesubcontractor exception to the “yourwork” exclusion).Massachusetts: Commerce Ins. Co. v.Betty Caplette Builders, Inc., 647 N.E.2d1211 (Mass. 1995).Occurrence? Yes. The courtappeared to gloss over this questionsince the insurer did not dispute thatthe claims would be covered in theabsence of the “your work”exclusions.Insured’s work covered? No. Thecourt rejected the applicability of the“your work” exclusion and itssubcontractor exception, choosinginstead to hold that the entire housewas the insured’s “product.” Thus,the “your product” exclusion appliesto bar coverage entirely.Michigan: Auto Owners Ins. Co. v.Long’s Tri-County Mobile Home, Inc.,No. 252580, 2005 WL 1522169 (Mich.Ct. App. June 28, 2005).Occurrence? No, unless the defectiveconstruction causes damage toproperty other than the insured’swork. 38Insured’s work covered? No. Onlydamage to property other than theinsured’s work is covered.38 See also Kent Companies v. Wausau Ins.Co., No. 295237, 2011 WL 1687676 (Mich.App. May 3, 2011).

Page 484 DEFENSE COUNSEL JOURNAL–October 2012Minnesota: Bor-Son Bldg. Corp. v.Employers Commercial Union Ins. Co.,323 N.W.2d 58 (Minn. 1982).Occurrence? No, in concept. Ageneral liability policy is intended tocover tort risks, not contractual riskswhich are within the insured’scontrol. However, damage toproperty other than the insured’swork is caused by an “occurrence”and therefore covered. 39Insured’s work covered? No.Mississippi: Architex Ass’n., Inc. v.Scottsdale Ins. Co., 27 So.3d 1148 (Miss.2010).Occurrence? Yes, in certaininstances. The court distinguishedbetween intentional and negligentacts by the insured and itssubcontractors, holding that thequestion of whether the damage wasaccidental from the standpoint of theinsured will govern the question ofwhether there was an “occurrence.”Insured’s work covered? Possibly. Ifthe insured negligently performed itswork, then presumably the damage tothe insured’s work would be covered.Work performed by a subcontractorwould presumably be covered sincethe damage would not be intended orexpected from the standpoint of theinsured.39 See Integrity Mutual Ins. Co. v. Klampe,A08-0443, 2008 WL 5335690 (Minn. Ct. App.Dec. 23, 2008).Missouri: Hawkeye-Security Ins. Co. v.Davis, 6 S.W.3d 419 (Mo. Ct. App.1999).Occurrence? No. A builder’s breachof contract and warranty is inherentlynot an accident and therefore not an“occurrence.”Insured’s work covered? No.Montana: Story v. Hawkeye-SecurityIns. Co., No. DV-99-38, 2001 WL35735573 (Mont. Ct. App. May 24,2001).Occurrence? Yes, implicitly. Thecourt simply applied the business riskexclusions as being unambiguous tonegate coverage for constructiondefects, even where the work wasperformed by a subcontractor.Insured’s work covered? No. Thebusiness risk exclusions clearly barcoverage for any damage to theinsured’s work or arising out thatwork.Nebraska: Auto-Owners Ins. Co. v.Home Pride Co’s, Inc., 684 N.W.2d 571(Neb. 2004).Occurrence? No. Faultyworkmanship, standing alone, is notan “occurrence” because the elementof fortuity is lacking. However,faulty workmanship which causes anaccident is an “occurrence.”Insured’s work covered? No.However, damage to property otherthan the insured’s work is covered.

Raising the Roof Page 485Nevada: United States Fidelity &Guaranty Co. v. Nevada Cement Co., 561P.2d 1335 (Nev. 1977).Occurrence? Yes. While the courtdid not directly address the issue, itsconclusion is implicit in its holdingthat the “your product” exclusions donot otherwise bar coverage.Insured’s work covered? Yes.Where the insured’s defectiveproduct is incorporated into anotherstructure and weakens that structure,property damage has occurred, whichis covered by a general liabilitypolicy.New Hampshire: High CountryAssociates v. New Hampshire Ins. Co.,648 A.2d 474 (N.H. 1994).Occurrence? Yes. The court foundthe term “occurrence” to beambiguous and therefore interpretedit to encompass events which werenot expected or intended by theinsured.Insured’s work covered? Possibly.The court distinguished between an“occurrence of negligentconstruction” and “negligentconstruction which causes anoccurrence.” This ethereal languagepresumably distinguishes betweencoverage for the insured’s work(occurrence of negligentconstruction) and damage to otherproperty (negligent constructionwhich causes an occurrence). Thecourt did not consider the businessrisk exclusions because they were notconsidered by the trial court.New Jersey: Firemen’s Insurance Co. ofNewark v. Nat’l Union Fire Ins. Co., 904A.2d 754 (N.J. 2006). 40Occurrence? No. The court followedthe Weedo v. Stone-E-Brick logic thatmere defective work, standing alone,is not an “occurrence.” However,damage to other property can becovered as an “occurrence.” 41 Thecourt applied the familiar distinctionbetween sub-standard work whichmust be removed and replaced (notan “occurrence”) and sub-standardwork which results in accidentaldamage to other property (an“occurrence”), which came from theWeedo opinion.Insured’s work covered? No.New Mexico: Undecided.New York: Pavarini Construction Co. v.Continental Insurance Co., 759 N.Y.S.2d56 (N.Y. App. Div. 2003); George A.Fuller Co. v. U.S. Fid. & Guaranty Co.,613 N.Y.S.2d 152 (N.Y. App. Div. 1994).Occurrence? No. Defectiveconstruction which results only indamage to the insured’s workproduct lacks the element of fortuitynecessary to constitute an“occurrence.” However, defectivework which results in consequential40 See also Pennsylvania Nat’l Mutual Ins. Co.v. Parkshore Development, Inc., 403 Fed.Appx. 770 (3d Cir. 2010).41 405 A.2d 788 (N.J. 1979).

Page 486 DEFENSE COUNSEL JOURNAL–October 2012damage to other property which isnot the subject of the insured’s workis covered as an “occurrence.”Insured’s work covered? No.North Carolina: Production Systems,Inc. v. Amerisure Ins. Co., 605 S.E.2d663 (N.C. Ct. App. 2004).Occurrence? Yes, implicitly. Thecourt decided the case based upon thelack of property damage and appearsto have assumed the existence of an“occurrence.”Insured’s work covered? No.Damages resulting from the insured’sdefective construction are not“property damage” but instead thecost to repair the defects in theinsured’s own work product.North Dakota: Acuity v. Burd & SmithConst., Inc., 721 N.W.2d 33 (N.D. 2006).Occurrence? Yes. Faultyworkmanship which causes damageto property other than the insured’swork is an accidental “occurrence.”Insured’s work covered? No.Damage to the insured’s work isexcluded by the business riskexclusions. Only damage to otherproperty is covered.Insured’s work covered? No. Onlydamage to property which is not thesubject of the insured’s work iscovered.Oklahoma: Undecided.Oregon: Oak Crest Const. Co. v. AustinMutual Ins. Co., 998 P.2d 1254 (Ore.2000).Occurrence? No. Damage which isredressable under pure contractprinciples cannot be an accident andtherefore is not an “occurrence.”Insured’s work covered? No.However, damage to other propertyas a result of the insured’s breach ofcontract may be covered.Pennsylvania: Kvaerner Metals Div. ofKvaerner U.S., Inc. v. Commercial UnionIns. Co., 908 A.2d 888 (Pa. 2006).Occurrence? No. Defective workstanding alone lacks the element offortuity necessary to constitute anaccident.Insured’s work covered? No. 42Rhode Island: Undecided.Ohio: Heile v. Herrmann, 736 N.E.2d566 (Ohio Ct. App. 1999).Occurrence? No. Faultyworkmanship standing alone lacksfortuity and therefore is not anaccident, and not an “occurrence.”42 See Nationwide Mutual Ins. Co. v. CPBInternational, Inc., 562 F.3d 591 (3d Cir.2009); Millers Capital Ins. Co. v. GamboneBrothers Development Co., 941 A.2d 706 (Pa.Super. 2007).

Raising the Roof Page 487South Carolina: CrossmannCommunities of North Carolina, Inc. v.Harleysville Mutual Ins. Co., No. 26909,2011 WL 3667598 (S.C. Jan. 7, 2011).Occurrence? No. Defectiveconstruction, which only results indamage to the insured’s work, is nota claim for “property damage” andtherefore not an “occurrence.”However, if the insured’s defectivework results in damage to otherproperty, that damage is a covered“occurrence.” 43Insured’s work covered? No.South Dakota: Corner Const. Co. v.United States Fidelity & Guaranty Co.,638 N.W.2d 887 (S.D. 2002).Occurrence? Yes. To the extent asubcontractor’s work results indamage to the insured’s work, it isthe result of an “occurrence,”because it was not expected orintended by the insured.Insured’s work covered? Yes, butonly if it is the result of asubcontractor’s faulty work. If thedamage to the insured’s work is aresult of the insured’s faulty work,there is no “occurrence.”Tennessee: Travelers Indemnity Co. ofAm. v. Moore & Assoc., Inc., 216 S.W.3d302 (Tenn. 2007).Occurrence? Yes. Where damage tothe insured’s work was caused by asubcontractor’s defective work, thedamage was accidental from theinsured’s standpoint and therefore an“occurrence.”Insured’s work covered? Yes, butonly if it is the result of asubcontractor’s faulty work. If thedamage to the insured’s work is aresult of the insured’s faulty work,there is no “property damage.”Texas: Lamar Homes, Inc. v. Mid-Continent Casualty Co., 242 S.W.3d 1(Tex. 2007).Occurrence? Yes. As long as thedamage in question results from anaccident, i.e., negligence by theinsured, and is not intentional, thedamage resulted from a covered“occurrence.” There is no logicalbasis to determine whether thedamage was accidental based simplyon whether the property damagedwas the work product of the insuredor some other property.Insured’s work covered? Yes, as longas the work was done by asubcontractor. The court held thatthe subcontractor exception to the“your work” exclusion resurrectedcoverage which would otherwise bebarred.43 See L-J, Inc. v. Bituminous Fire & MarineIns. Co., 621 S.E.2d 33 (S.C. 2004).

Page 488 DEFENSE COUNSEL JOURNAL–October 2012Utah: Great Am. Ins. Co. v. WoodsideHomes Corp., 448 F. Supp.2d 1275 (D.Utah 2006) (applying Utah law).Occurrence? Yes. Defectiveconstruction performed by asubcontractor is accidental from thestandpoint of the insured andtherefore a covered “occurrence.”Insured’s work covered? No.Defective work performed by theinsured itself is not accidental andtherefore not an “occurrence.”Vermont: Undecided.Virginia: Nationwide Mutual Ins. Co. v.Wenger, 278 S.E.2d 874 (Va. 1981).Occurrence? Yes, implicitly. Thecourt simply considered the businessrisk exclusions and concluded thatthey unambiguously barred coveragefor the insured’s own defectivework. 44Insured’s work covered? No. Thebusiness risk exclusions bar coveragefor the insured’s own faulty work.Washington: Yakima Cement ProductsCo. v. Great Am. Ins. Co., 608 P.2d 254(Wash. 1980) (en banc).44 See also Stanley Martin Cos., Inc. v. OhioCas. Group, 313 Fed. Appx. 609 (4th Cir.2009) (applying Virginia law) (damage thatsubcontractor’s defective work caused togeneral contractor’s non-defective workconstituted an “occurrence” under CGLpolicy).Occurrence? Yes. The insuredwould almost never be seen to havewrongly constructed a building orportion thereof on purpose.Therefore, even from the insured’sperspective, defects in the insured’sown work product are accidental andtherefore an “occurrence.”Insured’s work covered? No. Evenwhen the insured’s defective work isincorporated into other non-defectivework, there is no “property damage”within the meaning of the policy.West Virginia: Corder v. William W.Smith Excavating Co., 556 S.E.2d 77 (W.Va. 2001).Occurrence? No. Damage to theinsured’s work product based ondefective construction is notaccidental and therefore not an“occurrence.” However, if thedefective work results in damage toother property, that damage isaccidental and therefore an“occurrence.”Insured’s work covered? No.Wisconsin: Am. Family Mutual Ins. Co.v. Am. Girl, Inc., 673 N.W.2d 65 (Wis.2004).Occurrence? Yes. Regardless ofwhether the damage is actionable intort or contract, defectiveconstruction will rarely be intendedor expected by the insured,particularly where the defective workis performed by a subcontractor.

Raising the Roof Page 489Insured’s work covered? Yes, ifperformed by a subcontractor.Implicit in the court’s decision is therecognition that if the work isperformed by the insured, thedefective construction would beexcluded by the business riskexclusions.Wyoming: Great Divide Ins. Co. v.Bitterroot Timberframes of Wyoming,LLC, No. 06-CV-020, 2006 WL 3933078(D. Wyo. Oct. 20, 2006).Occurrence? No. Defendant'sinadequate preparation andinstallation of the siding on the resortwas not an “accident” sincedefendant intended to perform incompliance with the contract, butallegedly failed to do so. Defendantcould foresee the naturalconsequences of any negligence orpoor workmanship, thus, anyresulting damage is not considered an“accident” triggering an“occurrence” under the Policy.Insured’s work covered? No.

CONNINGConning theIADC NewslettersInternational Association of Defense CounselCommittee members prepare newsletters on amonthly basis that contain a wide range ofpractical and helpful material. This section of theDefense Counsel Journal is dedicated tohighlighting interesting topics covered in recentnewsletters so that other readers can benefit fromcommittee specific articles.POTENTIAL LIABILITY FORATTORNEYS ENGAGING CO-COUNSEL AND REFERRALSBy: John T. Lay andChilds Cantey ThrasherThis article originally appeared in theJuly 2012 Professional LiabilityCommittee Newsletter.Professional liability claims againstattorneys using outside counsel are beingfiled more frequently than ever before.However, there are ways to avoid suchactions. The purpose of this article is toprovide an overview of the issuessurrounding professional liability in legalmalpractice claims arising when onelawyer or law firm associates with orrefers a case to another lawyer or lawfirm.John T. Lay is ashareholder inGallivan, White &Boyd, P.A.'s Columbia,South Carolina office.With over 20 years ofexperience managingcomplex, high-stakeslitigation for clients, his practice focuseson business litigation, professionalmalpractice, insurance bad faith andcoverage, financial services litigation,and product liability. Mr. Lay wasrecently elected to serve on the IADC’sBoard of Directors and served as Chairof the IADC's Business LitigationCommittee for the past year. ChildsCantey Thrasher is an associate inGallivan, White &Boyd, P.A.'s Columbia,South Carolina office.Her practice focuses onbusiness and commerciallaw, environmentallaw, andlitigation includingproducts liability, professional liabilityand internet law. Prior to joining GWB,she served as an Assistant AttorneyGeneral in both the civil and criminaldivisions of the South Carolina AttorneyGeneral's Office, where she prosecutedcriminal matters and represented theState in civil disputes such as the SC vs.NC Catawba River Water suit in theUnited States Supreme Court.

Newsletters Page 491Joint Ventures and Sub-agencyIn general, "a firm is not liable forthe acts or omissions of a lawyer outsidethe firm who is working with firmlawyers as co-counsel or in a similararrangement." 1 The outside lawyer isusually an independent agent of the clientover whom the firm has no control. He isnot an agent or a contractor of the firm.However, there are primarily twoinstances when this is not the case: jointventurers and sub-agents. Whether or nota joint venture is created by a referral is afact-specific question. Two cases canshed some light on when such arelationship may be found to exist.In In Re Fox, the South CarolinaSupreme Court found that "where anattorney retained on a contingent fee toprosecute a claim engages another lawyerto assist in the litigation, upon anagreement to share the fee in case ofsuccess . . . [the attorneys] become jointventurers." 2 The Court went on to say that"relations among joint venturers aregoverned by partnership law." 3 As such,one partner may be held liable for themisconduct of another depending on thespecific fact scenario.In W.B. Duggins, Jr. v. Guardianshipof Washington, the Supreme Court ofMississippi rejected attorney Duggins'argument that the associated attorney,Barfield, was an independent contractorbecause Duggins and Barfield divided the1RESTATEMENT (THIRD) OF THE LAWGOVERNING LAWYERS, § 58, Comment e.2 In Re Fox, 490 S.E.2d 265, 271 (S.C. 1997)(citing 46 Am.Jur. 2d Joint Ventures § 54(1994)).3 Id. (citing Tiger, Inc. v. Fisher Agro, Inc.,391 S.E2d 538, 543 (S.C. 1989)).responsibilities for preparing the case andsplit the fees equally. 4 Accordingly, "eachattorney [had] an equal stake in theoutcome of the case and . . . joint controlof the case." 5 Thus, the Court found thatDuggins and Barfield were jointventurers. 6 If Barfield were anindependent contractor, he would havebeen compensated under a fixed feearrangement rather than a contingency feearrangement. The Court further reasonedthat fraud committed by a partner actingwithin the scope of his actual or apparentauthority could be imputed to thepartnership. 7The ABA Model Code ofProfessional Conduct requires that thedivision of fees between lawyers is properonly if the division of fees isproportionate to the services performedand the responsibility assumed by eachlawyer and the total fee is reasonable. 8Additionally, a firm can subject itselfto vicarious liability if the representationis structured so that the referred-to firm oroutside counsel has no direct relationshipwith the client. This creates a sub-agencyrelationship, making the referred-to firm asub-agent of the law firm that hired it. Inthat situation, the outside counsel isacting as the firm's sub-agent and,therefore, vicarious liability is transferredto the initial firm or lawyer. In AliceWhalen v. DeGraff, Foy, Conway, Holt-Harris & Mealey, the New York4W.B. Duggins, Jr. v. Guardianship ofWashington, 632 So.2nd 420, 427 (Miss.1993).5 Id.6 Id. at 429, n. 12.7 Id. at 430.8 ABA MOD. CODE OF PROF. COND., EthicalConsideration 2-22.

Page 492 DEFENSE COUNSEL JOURNAL–October 2012Appellate Division found that because theclient had no contact with outsidecounsel, Bailey, and completely relied onher own counsel, DeGraff, to satisfy herjudgment, DeGraff "assumed theresponsibility to [the client] . . . andBailey became [DeGraff's] sub-agent.Therefore [DeGraff] had a duty tosupervise Bailey's actions." 9Negligent ReferralsNegligent referrals can create anotherprofessional liability cause of action.When lawyers arrange for co-counsel torepresent a client, they are serving as theirclient's agent and, accordingly, owe theclient a duty of care in the process. 10 Anagent, here the initial law firm or lawyer,who is authorized to employ other agents,here co-counsel, to handle his client'saffairs, is under a duty to selectcompetent and otherwise proper agents. 11In Rainey v. Davenport, the BankruptcyCourt of the Southern District of Texasfound that "bringing an incompetentattorney on board" would violate alawyer's fiduciary duty to his client. 12 Thelawyer's duty relates to the referral itself,regardless of whether the originalattorney cedes responsibility for thematter after making the referral or retains9 Alice Whalen v. DeGraff, Foy, Conway,Holt-Harris & Mealey, 53 A.D.3d 912, 915(N.Y. App. Div. 2008).10 RONALD E. MALLEN AND JEFFERY M. SMITH,LEGAL MALPRACTICE, § 5:9, at 679-681 (2009ed.).11RESTATEMENT (SECOND) OF AGENCY §405(2).12 Rainey v. Davenport, 353 B.R. 150 (Bankr.S.D. Tex. 2006).some level of responsibility incooperation with referred-to co-counsel.Additionally, collecting a referral feemay cause a problem under local Rules ofProfessional Conduct.Practice TipsHow can you protect you or your lawfirm from being found liable for theactions (or inactions) of another firm withwhom you are working on a case? Thereare ways to protect yourself and yourfirm. First and foremost, avoid the subagencyproblem by having your clientdirectly engage the other law firm. Thatis, the agreement should not be betweenyour law firm and local counsel, butbetween the client and local counsel.Moreover, the engagement letter shouldbe signed by local counsel and the client,and you should verify that such anengagement agreement has beenexecuted. The agreement should includea clear division of labor.Alternatively, if you are local counselserving in a litigation support role withnational counsel assuming fullresponsibility for trial strategy,examination of witnesses, etc., it isimperative that your engagement letterreflect with specificity your role andresponsibilities as local counsel.Do not accept a referral fee.Make sure that referrals are made tocompetent attorneys. Do not rely onsocial acquaintances. Use reputablesources to verify competence. There aremany sources for such confirmation. TheIADC membership list, made up of peerreviewed, vetted members, is a goodplace to start. Additionally, Martindale-Hubble, Lexis-Nexis, Westlaw, or other

Newsletters Page 493peer-reviewed sources can help. Do aninternet search. Seek recommendationsfrom other members of the jurisdiction inquestion's bar, as well as other leaders inthat particular area of law.Include a disclaimer in yourengagement contract.Make sure the referral has legalmalpractice insurance. Ask. You will besurprised how many attorneys are notkeeping up with premiums.While these cases may be showingup more frequently than in the past, thereare ways to protect yourself and yourfirm. Ultimately, choosing the rightattorneys to work with can be the bestway to prevent professional liabilityclaims. As the old saying goes, a goodoffense is the best defense.* * *

Newsletters Page 494TEXAS STATE COURT JUDGERECOGNIZES POTENTIALAPPLICATION OF “PUBLICTRUST” DOCTRINE TO REDRESSCLIMATE CHANGEBy: Richard O. Faulk andJohn GrayThis article originally appeared in theAugust 2012 Environmental and EnergyLaw Committee Newsletter.In statements that, to some, mayrepresent a “shot heard ‘round the world”in climate change litigation, a Texas statetrial judge recently recognized that the“public trust” doctrine potentiallyrequired the Texas Commission onEnvironmental Quality (“TCEQ”) to takeaction to regulate greenhouse gasemissions. Despite the novelty of thecourt’s remarks, serious questions remainunanswered before the environmentalmovement has legitimate reasons tocelebrate.In the underlying lawsuit, the TexasEnvironmental Law Center sued theTCEQ on behalf of a group of childrenand young adults. The Center assertedthat the State of Texas had a fiduciaryduty to reduce the emissions as thecommon law trustee of a “public trust”responsible for the air and atmosphere. 1Similarly to Massachusetts v. EPA– 2 aproceeding which successfully challenged1Bonser-Lain v Texas Commission onEnvironmental Quality, Case No. D-1-GN-11-002194 (201st Dist. Ct. Travis County,Texas).2 549 U.S. 497 (2007).Richard O. Faulkchairs the firm-wideLitigation Departmentof Gardere WynneSewell LLP in Dallas,Houston, Austin andMexico City. He alsoleads the firm’senvironmentalpractice. John Grayis a partner in theenvironmentalpractice group ofGardere WynneSewell LLP inHouston, Texas.the EPA’s refusal to regulate greenhousegases – the Texas lawsuit was broughtafter the TCEQ denied Plaintiffs’ petitionfor rulemaking related to greenhouse gasregulations. Plaintiffs then soughtjudicial review to force the TCEQ toregulate the emissions. They argued thatthe atmosphere is a “public trust” underthe common law; a “fundamental naturalresource necessarily entrusted to the careof our federal government … for itspreservation and protection as a commonproperty interest.”Bonser-Lain is not a solitary lawsuit.According to a press release by one of thegroups backing the plaintiffs, the Oregonbasednonprofit Our Children’s Trust,“The lawsuit is part of a campaign oflegal actions – in both state and federalcourts – being filed Alaska, Arizona,California, Colorado, Iowa, Minnesota,Montana, New Jersey, New Mexico,Oregon, Texas and Washington.”According to Our Children’s Trust, thesesuits are being brought “on behalf ofyouth to compel reductions of CO2

Newsletters Page 495emissions that will counter the negativeimpacts of climate change.”The “public trust” doctrine is a legalprinciple derived from English CommonLaw. Traditionally applied to waterresources, it recognizes that the waters ofthe state are a public resource owned byand available to all citizens equally forthe purposes of navigation, conductingcommerce, fishing, recreation and similaruses. Such a “public trust” is notinvalidated by private ownership of theunderlying land – instead, it serves tolimit the owner’s land use to those thatwill not interfere with the public’s useand interest in resources covered by thetrust. Generally, the public trustee –usually the state – must act to maintainand enhance the trust’s resources for thebenefit of future generations.Historically, American courts haveapplied the doctrine primarily tosubmerged lands on the shores of theocean, lakes, substantial rivers andstream, to the waters above them,groundwater, and to parklands. Althoughsome decisions have extended protectionto wildlife found in public areas,migratory fowl and to dry sand beachesjust above the high tide water mark,others have refused to expand thedoctrine beyond its traditional scope.Despite the narrowness of thedoctrine, environmental groups hope touse the elasticity of the “common law” toexpand its application beyond its historiclimitations. They argue that, like water,the atmosphere, which comprises the airwe breathe, is a legitimate “public trust” –one which imposes fiduciary obligationsupon the state as the trustee of theatmosphere for the public good. In manyrespects, these cases mark the “secondwave” of climate change litigation. The“first wave” sought – so farunsuccessfully – to regulate emissions orobtain damages caused by greenhouse gasemissions using the ancient common lawtort of public nuisance. 3Many legal experts have been unsurewhether an “atmospheric trust” can becreated and used successfully to combat“atmospheric” problems, such as climatechange caused by greenhouse gasemissions. Overall, courts have beenunwilling to expand the public trustdoctrine to impose public trust dutiesexcept in conjunction with a federalstatute or as required by a statute itself.Not surprisingly then, courts in severalstates, including Colorado, Oregon,Arizona, Washington, Arkansas, andMinnesota have dismissed these types ofcases early on, finding no basis for an“atmospheric trust” under state commonlaw.The United States Supreme Court hasraised even greater obstacles to thedoctrine’s expansion. Even if a court iswilling to consider expanding the “publictrust” doctrine to address climate change,it must address the “displacement” orpreemption of common law remediesrecognized in American Electric PowerCompany v. Connecticut. 4 In thatdecision, the Supreme Court held that theClean Air Act and EPA’s implementationof the Act displaced any federal commonlawright to seek abatement of carbondioxide emissions from fossil-fuel fired3 See generally, Richard O. Faulk, UncommonLaw: Ruminations on Public Nuisance, 18MO. ENVTL. L. & POL’Y REV. 1, 13-22 (2011)(analyzing the propriety of public nuisance toredress climate change claims).4 564 U.S. ___ (2011).

Page 496 DEFENSE COUNSEL JOURNAL–October 2012power plants. The High Court thenremanded the suit to the Second Circuit toconsider whether the complaining parties’remedies under state law were preemptedby the same federal statutes andregulations. 5Notwithstanding the SupremeCourt’s decision, the Texas District Judgepresiding over the Bonser-Lain case madea number of troubling statements in aletter ruling on July 9, 2012. Althoughthe court ultimately followed the SupremeCourt’s precedent – by deferring to theTCEQ’s denial of the Plaintiffs’ petitionfor rulemaking while State is pursuinglitigation over the Federal greenhouse gasregulations – the court flatly disagreedwith TCEQ’s position that the public trustdoctrine is limited to water. In its letterruling, the court found that TCEQ’s“conclusion that the public trust doctrineis exclusively limited to the conservationof water, was legally invalid.” Moreover,the court stated that “[t]he doctrineincludes all natural resources of theState.” In reaching this decision, the courtexpressly stated that the public trustdoctrine “is not simply a common lawdoctrine” but is incorporated into theTexas Constitution, which (1) protects“the conservation and development of allthe resources of the State,” (2) declaresconservation of those resources “publicrights and duties,” and (3) directs theLegislature to pass appropriate laws toprotect these resources. The court alsorelied upon the Texas Clean Air Act as anadditional ground of the TCEQ’s5 See Richard O. Faulk and John S. Gray,Defendants Win “Round One” of ClimateChange Litigation in United States SupremeCourt, 32 WESTLAW ENVTL. J. 1 (August 17,2011).authority to act “to protect againstadverse effects, including globalwarming.”Not surprisingly, environmentalactivists are hailing the court’s expansivedicta regarding the “public trust”doctrine’s inclusion of air and all othernatural resources. They believe that, ifaccepted elsewhere, this decision caneffect environmental policy decision in all50 states. Although the court’s dicta haveno true value as precedent, the court’sendorsement of the Plaintiffs’ reasoningwill probably encourage further litigation.Until this reasoning is disapproved by anauthoritative appellate court, the Bonser-Lain court’s dicta will probably be citedin climate change litigation cases aroundthe country.Although a New Mexico courtrecently allowed a similar case to goforward, the Bonser-Lain court is the firsttribunal to support the possibility that the“public trust” doctrine may justify thecreation of an atmospheric trust.According to Adam Abrams, one of theattorneys arguing the case against TCEQ,“I think it’s huge that we got a judge toacknowledge that the atmosphere is apublic trust asset and the air is a publictrust asset. It’s the first time we’ve hadverbage like this come out of one of thesecases.”This decision highlights the creativityof environmentalists to create newgrounds for natural resource protection –and the potential diversity of the “publictrust” doctrine. Although the Bonser-Lain court probably will not order theTCEQ to set limits on greenhouse gasemissions, the ruling illustrates thecontinuing resolve of the environmentalmovement to invoke and advocate

Newsletters Page 497“common law” solutions to problems thatface strong political opposition – such asthe continuing controversy overgreenhouse gas regulations.Even if most state courts are unlikelyto expressly recognize atmospheric trustsunder common law, it appears that somejudges might be willing to push theboundaries of ancient doctrines to addressnewly perceived harms. For the timebeing – at least until the preemptionissues raised by the Supreme Court’sremand of American Electric PowerCompany v. Connecticut are resolved – itwould be unwise to underestimate theenvironmental movement’s pursuit ofstate common law, statutes, andconstitutional provisions to combatclimate change.* * *

Page 498 DEFENSE COUNSEL JOURNAL–October 2012NATIONWIDE FLUX: MENSING’SIMPACT ON STATE TORT CLAIMPRE-EMPTION AND GENERICPHARMACEUTICALSBy: Debra M. Perry andSara F. MerinThis article originally appeared in theAugust 2012 Drug, Device andBiotechnology Committee Newsletter.Since the United States SupremeCourt’s holding in PLIVA v. Mensing 1that federal regulations governinggeneric pharmaceuticals pre-empt statelaw failure-to-warn tort claims, the lawgoverning pre-emption in regard togeneric pharmaceuticals has been influx within United States courts. Thisarticle addresses Mensing itself, lowercourt decisions interpreting Mensing,and recent legislation proposed as aresponse to Mensing, which wouldchange the framework of the U.S. Foodand Drug Administration’s (FDA)regulation of generic pharmaceuticalmanufacturers.Mensing was the consolidation oftwo cases in which plaintiffs allegedstate law failure to warn claims againstgeneric pharmaceutical manufacturers. 2Each plaintiff claimed that her longtermuse of metoclopramide “caused hertardive dyskinesia and that the [genericmanufacturers of the metoclopramide]were liable under state law (specificallythat of Minnesota and Louisiana) for1 __ U.S. __, 131 S. Ct. 2567, 180 L. Ed. 2d580 (2011).2 Id. at 2573.Debra M. Perry is aPartner at McCarter &English, LLP in thefirm’s Newark, NewJersey office. Herpractice focusesprimarily on the areaof products liabilitylitigation with an emphasis on thenational defense of pharmaceuticalproducts and the coordination of masstort products liability litigationinvolving occupational exposures. SaraF. Merin is anassociate at McCarter& English, LLP in thefirm’s Newark, NewJersey office. Sheconcentrates herpractice in productliability litigation atthe trial and appellate levels and alsohandles other complex civil litigationmatters ranging from two-partydisputes to complex class actions,including multidistrict litigation.failing to provide adequatewarning labels.” 3 They argued that thegeneric drug manufacturers should haveand failed to change their labels in lightof “mounting evidence” showing thattardive dyskinesia was a larger risk thanwas stated on the metoclopramidelabel. 4 The generic manufacturerdefendants argued that plaintiffs’ statelaw tort claims were pre-empted byfederal statutes and FDA regulationsthat “required them to use the samesafety and efficacy labeling as their3 Id.4 Id.

Newsletters Page 499brand-name counterparts and that it wasimpossible to simultaneously complywith both federal law and any state tortlawduty that required them to use adifferent label.” 5In an opinion delivered by JusticeThomas, the Supreme Court held that“federal drug regulations applicable togeneric pharmaceutical manufacturersdirectly conflict with, and thus preempt,”state law failure to warn claims. 6Pre-emption occurs where “it is‘impossible for a private party tocomply with both state and federalrequirements.’” 7 As discussed below,there remains uncertainty as to thebreadth of the holding in Mensing,namely whether it is limited to failure towarn claims or if it causes state lawdesign defect product liability claims tobe pre-empted as well.The pre-emption question inMensing was framed as applying togeneric pharmaceutical manufacturersonly, because regulations governinglabeling for brand-name and genericmanufacturers differ. 8 “A brand-namemanufacturer seeking new drugapproval is responsible for the accuracyand adequacy of its label. ”9 “A5 Id.6 Id. at 2572.7 Mensing, 131 S. Ct. at 2577 (quotingFreightliner Corp. v. Myrick, 514 U.S. 230,287, 115 S. Ct. 1483, 131 L. Ed. 2d 385(1995)).8 Id. at 2574 (citations omitted); see also id.at 2581 (explaining how the state tort failureto warn claim in Wyeth v. Levine, 555 U.S.555, 559-560, 129 S. Ct. 1187, 173 L. Ed.2d 41 (2009), differed because a brand-namepharmaceutical manufacturer could complywith both federal and state law).9 Id. at 2574 (citations omitted).manufacturer seeking generic drugapproval, on the other hand, isresponsible for ensuring that its warninglabel is the same as the brand name’s.” 10Thus, federal regulations preventgeneric pharmaceutical manufacturers“from independently changing theirgeneric drugs’ safety labels.” 11The conflict in Mensing arosebecause, despite the federal regulations,the state tort law at issue (which hascorollaries throughout the country)“place[d] a duty directly on all drugmanufactures to adequately and safelylabel their products.” 12 As a result, itwas impossible for the genericpharmaceutical manufacturer defendantto comply with both federal and statelaw:If the [generic pharmaceuticalm]anufacturers had independentlychanged their labels to satisfy theirstate law duty, they would haveviolated federal law. . . . [S]tate lawimposed on the [genericpharmaceutical m]anufacturers aduty to attach a safer label to theirgeneric [pharmaceutical at issue].Federal law, however, demandedthat generic drug labels be the sameat all times as the correspondingbrand-name drug labels. See, e.g.,21 C.F.R. § 314.510(b)(10). Thus,it was impossible for the genericpharmaceutical manufacturers tocomply with both their state-lawduty to change the label and their10 Id. at 2574 (citations omitted).11 Id. at 2577.12 Id. at 2577.

Page 500 DEFENSE COUNSEL JOURNAL–October 2012federal law duty to keep the labelthe same. 13In so finding, the Court explainedthat, “[w]hen the ‘ordinary meaning’ offederal law blocks a private party fromindependently accomplishing what statelaw requires, that party has establishedpre-emption[,]” rejecting an argumentthat the generic pharmaceuticalmanufacturers had the ability to workwith the FDA to have the brand-nameproduct’s (and thus the genericproduct’s) label changed. 14 Specific tothe situation of generic pharmaceuticalmanufacturers, the Court statedthat“[b]efore the [genericpharmaceutical m]anufacturers couldsatisfy the state law, the FDA – afederal agency – had to undertake aspecial effort permitting them to do so.To decide these cases, it is enough tohold that when a party cannot satisfy itsstate duties without the FederalGovernment’s special permission andassistance, which is dependent on theexercise of judgment by a federalagency, that party cannot independentlysatisfy those state duties for preemptionpurposes.” 15The Court recognized thedivergence between its decision inMensing and its 2009 holding in Wyethv. Levine that found no pre-emption forbrand-name pharmaceuticals. Inexpressly pointing out the differenttreatment accorded to what arechemically the same products, the Courtrecognized that its holding in Mensing13 Id. at 2578.14 Id. at 2580.15 Mensing, 131 S. Ct. at 2580-2581.may “make[] little sense” to Plaintiffs. 16The Court explained that the differentoutcomes were based on the differentregulatory treatment of the twocategories of pharmaceuticals, whichresulted from the legislative choice toregulate generic drugs differently to“bring[] more drugs more quickly andcheaply to the public.” 17 The SupremeCourt has not addressed pre-emptionand generic pharmaceuticals since.The application of Mensing bylower courts has not been consistent.Most notably, lower courts are dividedon whether Mensing strictly applies tofailure to warn claims or if it extends tocause the pre-emption of design defectclaims against manufacturers ofgenerics, and that split continues todevelop. For example, the First Circuitin Bartlett v. Mutual Pharmacy, foundthat design defect claims were notpreempted, reasoning that the genericpharmaceutical manufacturer had achoice not to make the product at all: “ageneric maker can avoid defectivewarning lawsuits as well as designdefect lawsuits by not making the drug;and while PLIVA is itself a limiteddeparture from a general rule of Wyeth,an extension of PLIVA to design defectclaims would comprise a general rulefor generics (although not one PLIVAexpressly adopted).” 18 In so finding,the court stated that only the SupremeCourt can decide whether the Mensing16 Id. at 2582.17 Id. at 2582.18 Bartlett v. Mutual Pharm. Co., Inc., 678F.3d 30, 38 (1st Cir. 2012). On July 31,2012, Mutual Pharmaceutical Companypetitioned the Supreme Court for a writ ofcertiorari.

Newsletters Page 501pre-emption exception for failure towarn claims extends to design defectclaims and noted the split amongcourts. 19 Other courts have echoed thatthis is an “open question of law” andexplained that design and warningdefect cases raise different questions forpre-emption purposes. 20 However,Bartlett’s reasoning was expresslyrejected by the United States DistrictCourt for the Eastern District ofKentucky in In re Darvocet, Darvon &Propoxyphene Products LiabilityLitigation, 21 when it dismissed allremaining claims against genericpharmaceutical defendants in thatMDL. 22 Similarly, the United StatesDistrict Court for the District ofVermont dismissed design defect claimsas pre-empted after finding that “[t]heGeneric Defendants’ ‘federal duty ofsameness,’ [] therefore applies to thedesign or composition of the drug aswell as to its labeling. Applying theMensing holding requires dismissal of19 Id. at 37-38.20 See, e.g., Halperin v. Merck Sharp &Dohme Corp., Docket No. No. 11 C 9076,2012 U.S. Dist. LEXIS 50549, *11-*12(N.D. Ill. Apr. 10, 2012) (“Illinois law doesnot base [the wholesale drug distributor’s]potential liability on any failure to complywith a state law duty, like the affirmativeduty to warn at issue in Mensing” and notingthat the wholesale drug distributor is beingsued for its place in the chain of commerce,not “for violating a state law duty to designsafe pharmaceuticals and, thus, no conflictarises”).21 MDL Docket No. 2226, 2012 U.S. Dist.LEXIS 89994 (E.D. Ky. June 22, 2012).22 Id. at *38-*39.the Lymans’ design claims as well.” 23The Lyman court is not alone in soholding; other courts have similarlyfound that “the ‘federal duty of‘sameness,’’ [] also applies in thecontext of generic drug design, andfederal law preempts state lawsimposing a duty to change a drug’sdesign on generic drugmanufacturers.” 24Courts are also addressing otherquestions raised by Mensing, includingwhat constitutes a generic manufacturerunder Mensing. As an example, afederal district court in New Jerseyfound that Mensing extends to barfailure to warn claims againstauthorized distributors of a brandedproduct due to the authorized distributorhaving no power to change thepharmaceutical’s labeling. 25In a departure from what isdeveloping into a rule of general23 Lyman v. Pfizer, Inc., No. 2:09-cv-262,2012 U.S. Dist. LEXIS 13185, *12 (D. Vt.Feb. 3, 2012) (citations omitted).24 In re Pamidronate Prods. Liab. Litig.,Docket No. 09-MD-2120, 2012 U.S. Dist.LEXIS 10901, *11 (E.D.N.Y. Jan. 30,2012); see also, e.g., In re Darvocet, Darvon& Propoxyphene Prods. Liab. Litig., MDLNo. 2226, 2012 U.S. Dist. LEXIS 30593,*106-*107 (D. Ky. Mar. 5, 2012)(dismissing “wrongful marketing” claims“based on strict liability design defect,negligent design, negligent marketing, andbreach of implied warranty” after reasoningthat they “are all based on the allegedlydefective design of the drug” and preemptedunder the reasoning of Mensing).25In re Fosamax (Alendronate Sodium)Prods. Liab. Litig., MDL No. 2243, DocketNo. 08-cv-0008, 2012 U.S. Dist. LEXIS5817, *26-*27 (D.N.J. Jan. 17, 2012).

Page 502 DEFENSE COUNSEL JOURNAL–October 2012divergence, courts appear to beconsistently rejecting plaintiffs’attempts to use Mensing as a means ofcausing brand-name manufacturers tobe liable for other companies’ genericpharmaceutical products, which wouldresult in a reversal of courts’ generalrejection of innovator liability. 26 As the26 E.g., Smith v. Wyeth, Inc., 657 F.3d 420,423-424 (6th Cir. 2011); Phelps v. Wyeth,Inc., No. 09-CV-6168, 2011 U.S. Dist.LEXIS 154631, *4-*8 (D. Or. Nov. 11,2011) (Mensing does not change Oregon lawthat a manufacturer cannot be held liable forinjuries caused by its generic competitor’sproducts); Metz v. Wyeth LLC, No. 8:10-cv-2658, 2011 U.S. Dist. LEXIS 135667,*6-*7 (M.D. Fla. Nov. 18, 2011) (explainingthat the Fourth Circuit’s decision in Foster v.American Home Products Corp., 29 F.3d165 (4th Cir. 1994), remains good lawfollowing Mensing, and that Florida lawprovides that, “irrespective of whetherconsumers could recover from generic drugmanufacturers, a brand name manufacturersimply had no duty of care to individualconsumers that did not use the named brandmanufacturer’s product”); Coundouris v.Wyeth, ATL-L-1940-10 6-7 (N.J. Super.Law Div. June 26, 2012) (slip op. 6-7)(applying New Jersey law wherein “anessential element of a plaintiff’s prima facieproducts liability action case is proof thatthe manufacturer actually produced theproduct which gave rise to the plaintiff’sinjury[,]” to dismiss claims against brandnamemanufacturers of the genericpharmaceuticals ingested by plaintiffsstating that, “Mensing did not address orimpact . . . whether a brand-namemanufacturer owes a duty to a patient whoingested a drug that the brand-namemanufacturer did not make or sell. BecauseMensing did not alter New Jersey law, the[New Jersey Product Liability Act] and caselaw continue to govern”).Sixth Circuit plainly stated in Smith v.Wyeth, “[a]s have the majority of courtsto address this question, we reject theargument that a name-brand drugmanufacturer owes a duty of care toindividuals who have never taken thedrug actually manufactured by thatcompany.” 27While the courts continue toaddress the changed landscape causedby Mensing, a bill has been presented inboth houses of Congress that wouldlegislatively un-do the pre-emptionfound by the Supreme Court. 28 ThePatient Safety and Generic LabelingImprovement Act was filed in theSenate by Patrick Leahy of Vermontand a corollary was introduced byRepresentative Christopher Van Hollenof Maryland in the House ofRepresentatives. The bill proposesamending Section 505(j) of the federalFood, Drug, and Cosmetic Act 29 to addan additional section that expands thelabeling abilities of genericpharmaceutical manufacturers to permitthem to change the labeling of apharmaceutical. The bill proposingadding the following language to thestatute:(11)(A) Notwithstanding any otherprovision of this Act, the holder ofan approved application under thissubsection may change thelabeling of a drug so approved inthe same manner authorized byregulation for the holder of an27 Smith, 657 F.3d at 423-424.28 See 158 CONG. REC. No. 56, S2498 (dailyed. Apr. 18, 2012).29 21 U.S.C. 355(j).

Newsletters Page 503approved new drug applicationunder subsection (b).(B) In the event of a labelingchange made under subparagraph(A), the Secretary may orderconforming changes to the labelingof the equivalent listed drug andeach drug approved under thissubsection that corresponds tosuch listed drug. 30Thus, the bill authorizes genericpharmaceutical manufacturers to act onthe information that they are presentlyrequired to gather regarding theirproducts to change labels whennecessary. 31 The generic manufacturerwould be required to use the samemethods as the original manufacturer toimplement a labeling change, namelythe “Changes Being Effected” process,which allows a change to beimplemented while the proposal for thatchange is still undergoing FDAreview. 32 Additionally, after the changeis made, the bill authorizes the FDA to“order conforming changes acrossequivalent drugs to ensure consistentlabeling among products.” 33 As aresult, for a period of time at aminimum, the generic label could bedifferent from that of the brand-nameproduct. 3430 S. 2295; H.R. 4384.31 See S. 2295; 158 CONG. REC. No. 56, atS2498.32 See S. 2295; 158 CONG. REC. No. 56, atS2498.33 See S. 2295; 158 CONG. REC. No. 56, atS2498.34 See 158 CONG. REC. No. 56, at S2498.The bill is framed as a consumerprotection effort, with Senator Leahyexplaining in his introduction of the billon the Senate floor that it is a directresponse to Mensing’s creating “atroubling inconsistency in the lawgoverning prescription drugs[.]” 35Senator Leahy explained Mensing’seffect as:If a consumer takes the brandnameversion of drug, she can suethe manufacturer for inadequatewarnings. If the pharmacyhappens to give her the genericversion . . . she is unable to seekcompensation for her injuries. Theresult is a two-track system thatpenalizes consumers of genericdrugs even though manyconsumers have no control overwhich drug they take, becausetheir health insurance plan or statelaws require them to take genericsif they are available. 36Both bills were introduced on April18, 2012 and have been referred tocommittee. No action has been taken.The sponsor and all seven co-sponsorsof the Senate bill are Democrats, as arethe sponsor and the co-sponsor of theHouse bill. 37 While the partisansponsorship of the bill gives pause as toits likelihood of passage, it has strongsupport outside of Congress. Notably,the Attorney Generals of 41 states havecome out in support of the bill along35 Id.36 Id.37 S. 2295; H.R. 4384.

Page 504 DEFENSE COUNSEL JOURNAL–October 2012with the powerful interest groups,including the AARP. 38In summary, the full impact ofMensing remains undetermined. Absentthe unlikely enactment of the PatientSafety and Generic LabelingImprovement Act, the success of othernot-yet-proposed Congressional action,or the Supreme Court’s grantingcertiorari on a case that clarifiesMensing’s scope, courts will likely tocontinue to divergently apply thedoctrine of pre-emption to state law tortclaims involving genericpharmaceuticals. The most likelyoutcome is that the still nascentdevelopment of case law within theCourts of Appeals will likely providedifferent guidelines based on the Circuitwithin which a case is pending.* * *38 Letter from the National Association ofAttorneys General to Senator Patrick J.Leahy and Senator Al Franken (May 11,2012) (signed by 41 Attorneys General),available at http://www.naag.org/signon_archive.php;Letter from Joyce A.Rogers, Senior Vice President, GovernmentAffairs of AARP to Senator Patrick J. Leahy(Mar. 30, 2012),in 158 CONG. REC. No. 56,at S2498-99; Letter from Alliance forJustice, Consumer Action, ConsumerFederation of America, Consumers Union,Consumer Watchdog, National Associationof Consumer Advocates, and US PIRG toSenator Patrick J. Leahy (April 17, 2012), in158 CONG. REC. No. 56, at S2499; AllisonM. Zieve, Director, Public Citizen LitigationGroup and Sidney M. Wolfe, MD, Director,Public Citizen Health Research Group toSenator Patrick J. Leahy (April 18, 2012), in158 CONG. REC. No. 56, at S2499.

Defense Counsel JournalAnnual IndexVolume 79 (2012)This index covers the four issues ofDefense Counsel Journal published in2012 – Volume 79, including: January2012, April 2012, July 2012 and October2012.Defense Counsel Journal was publishedunder the title Insurance Counsel Journalfrom 1934 (Volume 1) through 1986(Volume 53) by the InternationalAssociation of Insurance Counsel. Thename of the organization was changedeffective in 1987 to InternationalAssociation of Defense Counsel and thename of the publication to DefenseCounsel Journal. There was no change inthe volume numbering system.General and cumulative indexes havebeen published as follows:Yearbooks, 1928-33Volumes 1-26 (1934-1959)Volumes 27-31 (1960-1964)Volumes 32-36 (1965-1969)Volumes 37-42 (1970-1975)Volumes 43-47 (1976-1980)Volumes 48-57 (1981-1990)Volumes 58-62 (1991-1995)Volumes 63-67 (1996-2000)Volumes 68-73 (2001-2006)Volumes 74-78 (2007-2011)SUBJECT MATTERAttorney-Client PrivilegeLegal Professional Privilege: ComparingDifferent Approaches Within the UnitedStates and the European UnionBy: Paul Lefebvre, David J. Rosenberg,Matthew R. Zwick and Chloe VialardJanuary 2012 at page 49.The Perils of Oversharing: Can theAttorney-Client Privilege be BroadlyWaived by Partially Disclosing AttorneyCommunications During Negotiations?By: Andrew Kopon, Jr. and Mary-Christine SungailaJuly 2012 at page 265.AviationProving the Details of the 9/11 Attacks:The Admissibility of the KeanCommission FindingsBy: Richard P. Campbell, Christopher R.Howe and Kathleen M. GuilfoyleJuly 2012 at page 278.Class ActionsInternational Class Actions in theCanadian Context: Understanding,Funding, Enforceability and TrialBy: Glenn M. Zakaib and Jeremy M.MartinJuly 2012 at page 296.

Page 506 DEFENSE COUNSEL JOURNAL–October 2012Federal Multidistrict Litigation:Background, Basics, Global Settlements,and Bellwether TrialsBy: Jeffrey R. Johnson and Tami BeckerGomezJanuary 2012 at page 21.Drug, Device and BiotechnologyManning the Daubert Gate: A DefensePrimer in Response to Milward v. AcuitySpecialty ProductsBy: Eric LaskerApril 2012 at page 128.Employment LawThe ADA Amendments Act of 2008:Practical Implications for Employers in2012 and BeyondBy: Molly Hughes Cherry and LawrenceD. SmithJanuary 2012 at page 32.Environmental LawDefending Marcellus Shale GroundwaterContamination Claims: The Case againstClass Actions and Other Theories ofLiabilityBy: Raymond G. Mullady, Jr., Sandra J.Doyle, Charles A. Fitzpatrick IV andAngela M. GuarinoApril 2012 at page 155.Health Care LawNew Healthcare Lien Recovery Theoriesby Third-Party Payors: Strategies andTactics for the DefenseBy: Matthew Keenan and Christopher J.KaufmanApril 2012 at page 140.Insurance LawRaising the Roof: What’s Hot inConstruction Defect LitigationBy: Kathleen J. Maus, Julius P. “Rick”Parker, Jr. and Michael HamiltonOctober 2012 at page 465.Splitting the File in Liability InsuranceBy: Douglas R. RichmondOctober 2012 at page 399.The Global Supply Chain:Understanding, Measuring, Mitigatingand Managing Exposure in a SupplyChain Dependent Globalized MarketBy: Daniel W. Gerber and Brian R.BiggieOctober 2012 at page 412.International LawIs There Still Room for the Coexistenceof Legal Systems in Today’s GlobalEconomy?By: Guy CanivertJuly 2012 at page 254.Products LiabilityA Legal Guessing Game: Does U.S.Common Law Require Manufacturersand Suppliers of Consumer Products toWarn in Languages Other than EnglishBy: Douglas J. Chumbley and David L.LuckApril 2012 at page 192.

Defense Counsel Journal Annual Index Page 507The Stabilization of Product LiabilityLaw by Statute: Mississippi as a CaseStudyBy: Stephanie M. Rippee and Everett E.WhiteJuly 2012 at page 329.ProcedureAdvisability and Practical Considerationsof Court-Imposed Time Limits on TrialBy: Andrew M. Goldman and J. WalterSinclairOctober 2012 at page 387.A New Argument Supporting Removal ofDiversity Cases Prior to ServiceBy: Zach HughesApril 2012 at page 205.Despite the Evidence, I Swear that theFacts I Allege are True: Confronting aPlaintiff’s Uncorroborated Testimony ona Factual Issue When Removing a Casebased on Fraudulent Joinder.By: Todd P. Davis and Geoffrey M.DrakeJuly 2012 at page 320.Fending off the Use of a Rule 12(f)Motion to Strike Affirmative DefensesBy: Peter M. Durney and Jonathan P.MichaudOctober 2012 at page 438.Where Do I Fit In? Citizenship Claimsand the § 1332 Diversity Statute inUnderwriters at Lloyd’s v. Osting-SchwinnBy: Terri K. BentonJanuary 2012 at page 67.TortsThe Enhanced Injury Doctrine: How theTheory of Liability is Addressed in aComparative Fault WorldBy: Shane T. Costello and Charles E.ReynoldsApril 2012 at page 181.Predictability in Punitive Damages:Considering The Use of Punitive DamageMultipliersBy: Sarah G. Cronan and J. BrittanyCrossOctober 2012 at page 454.White Collar/Criminal DefenseEnvironmental Prosecutions: CriminalLiability without Mens Rea and ExposureUnder the Responsible CriminalCorporate Officer DoctrineBy: Douglas S. Brooks and Thomas C.FrongilloJanuary 2012 at page 12.AUTHORSBenton, Terri K.Where Do I Fit In? Citizenship Claimsand the § 1332 Diversity Statute inUnderwriters at Lloyd’s v. Osting-SchwinnJanuary 2012 at page 67.Biggie, Brian R.The Global Supply Chain:Understanding, Measuring, Mitigatingand Managing Exposure in a SupplyChain Dependent Globalized MarketWith Daniel W. GerberOctober 2012 at page 412.

Page 508 DEFENSE COUNSEL JOURNAL–October 2012Brooks, Douglas S.Environmental Prosecutions: CriminalLiability without Mens Rea and ExposureUnder the Responsible CriminalCorporate Officer DoctrineWith Thomas C. FrongilloJanuary 2012 at page 12.Campbell, Richard P.Proving the Details of the 9/11 Attacks:The Admissibility of the KeanCommission FindingsWith Christopher R. Howe and KathleenM. GuilfoyleJuly 2012 at page 278.Canivet, GuyIs There Still Room for the Coexistenceof Legal Systems in Today’s GlobalEconomy?July 2012 at page 254.Cherry, Molly HughesThe ADA Amendments Act of 2008:Practical Implications for Employers in2012 and BeyondWith Lawrence D. SmithJanuary 2012 at page 32.Chumbley, Douglas J.A Legal Guessing Game: Does U.S.Common Law Require Manufacturersand Suppliers of Consumer Products toWarn in Languages Other than EnglishWith David L. LuckApril 2012 at page 192.Costello, Shane T.The Enhanced Injury Doctrine: How theTheory of Liability is Addressed in aComparative Fault WorldWith Charles E. ReynoldsApril 2012 at page 181.Cronan, Sarah G.Predictability in Punitive Damages:Considering the Use of Punitive DamageMultipliersWith J. Brittany CrossOctober 2012 at page 454.Cross, J. BrittanyPredictability in Punitive Damages:Considering The Use of Punitive DamageMultipliersWith Sarah G. CronanOctober 2012 at page 454.Davis, Todd P.Despite the Evidence, I Swear that theFacts I Allege are True: Confronting aPlaintiff’s Uncorroborated Testimony ona Factual Issue When Removing a Casebased on Fraudulent Joinder.With Geoffrey M. DrakeJuly 2012 at page 320.Drake, Geoffrey M.Despite the Evidence, I Swear that theFacts I Allege are True: Confronting aPlaintiff’s Uncorroborated Testimony ona Factual Issue When Removing a Casebased on Fraudulent Joinder.With Todd P. DavisJuly 2012 at page 320.Doyle, Sandra J.Defending Marcellus Shale GroundwaterContamination Claims: The Case againstClass Actions and Other Theories ofLiabilityWith Raymond G. Mullady, Jr., CharlesA. Fitzpatrick IV and Angela M. GuarinoApril 2012 at page 155.

Defense Counsel Journal Annual Index Page 509Durney, Peter M.Fending off the Use of a Rule 12(f)Motion to Strike Affirmative DefensesWith Jonathan P. MichaudOctober 2012 at page 438.Fitzpatrick, Charles A. IVDefending Marcellus Shale GroundwaterContamination Claims: The Case againstClass Actions and Other Theories ofLiabilityWith Raymond G. Mullady, Jr., Sandra J.Doyle and Angela M. GuarinoApril 2012 at page 155.Frongillo, Thomas C.Environmental Prosecutions: CriminalLiability without Mens Rea and ExposureUnder the Responsible CriminalCorporate Officer DoctrineWith Douglas S. BrooksJanuary 2012 at page 12.Gerber, Daniel W.The Global Supply Chain:Understanding, Measuring, Mitigatingand Managing Exposure in a SupplyChain Dependent Globalized MarketWith Brian R. BiggieOctober 2012 at page 412.Goldman, Andrew M.Advisability and Practical Considerationsof Court-Imposed Time Limits on TrialWith J. Walter SinclairOctober 2012 at page 387.Gomez, Tami BeckerFederal Multidistrict Litigation:Background, Basics, Global Settlements,and Bellwether TrialsWith Jeffrey R. JohnsonJanuary 2012 at page 21.Guarino, Angela M.Defending Marcellus Shale GroundwaterContamination Claims: The Case againstClass Actions and Other Theories ofLiabilityWith Raymond G. Mullady, Jr., Doyle,Sandra J and Charles A. Fitzpatrick IVApril 2012 at page 155.Guilfoyle, Kathleen M.Proving the Details of the 9/11 Attacks:The Admissibility of the KeanCommission FindingsWith Richard P. Campbell andChristopher R. HoweJuly 2012 at page 278.Hamilton, MichaelRaising the Roof: What’s Hot inConstruction Defect LitigationWith Kathleen J. Maus and Julius P.“Rick” Parker, Jr.October 2012 at page 465.Howe, Christopher R.Proving the Details of the 9/11 Attacks:The Admissibility of the KeanCommission FindingsWith Richard P. Campbell and KathleenM. GuilfoyleJuly 2012 at page 278.Hughes, ZachA New Argument Supporting Removal ofDiversity Cases Prior to ServiceApril 2012 at page 205.Johnson, Jeffrey R.Federal Multidistrict Litigation:Background, Basics, Global Settlements,and Bellwether TrialsWith Tami Becker GomezJanuary 2012 at page 21.

Page 510 DEFENSE COUNSEL JOURNAL–October 2012Kaufman, Christopher J.New Healthcare Lien Recovery Theoriesby Third-Party Payors: Strategies andTactics for the DefenseWith Matthew KeenanApril 2012 at page 140.Keenan, MatthewNew Healthcare Lien Recovery Theoriesby Third-Party Payors: Strategies andTactics for the DefenseWith Christopher J. KaufmanApril 2012 at page 140.Kopon, Andrew Jr.The Perils of Oversharing: Can theAttorney-Client Privilege be BroadlyWaived by Partially Disclosing AttorneyCommunications During Negotiations?With Mary-Christine SungailaJuly 2012 at page 265.Lasker, EricManning the Daubert Gate: A DefensePrimer in Response to Milward v. AcuitySpecialty ProductsApril 2012 at page 128.Lefebvre, PaulLegal Professional Privilege: ComparingDifferent Approaches Within the UnitedStates and the European UnionWith David J. Rosenberg, Matthew R.Zwick and Chloe VialardJanuary 2012 at page 49.Luck, David L.A Legal Guessing Game: Does U.S.Common Law Require Manufacturersand Suppliers of Consumer Products toWarn in Languages Other than EnglishWith Douglas J. ChumbleyApril 2012 at page 192.Martin, Jeremy M.International Class Actions in theCanadian Context: Understanding,Funding, Enforceability and TrialWith Glenn M. ZakaibJuly 2012 at page 296.Maus, Kathleen J.Raising the Roof: What’s Hot inConstruction Defect LitigationWith Michael Hamilton and Julius P.“Rick” Parker, Jr.October 2012 at page 465.Michaud, Jonathan P.Fending off the Use of a Rule 12(f)Motion to Strike Affirmative DefensesWith Peter M. DurneyOctober 2012 at page 438.Mullady, Raymond G Jr.Defending Marcellus Shale GroundwaterContamination Claims: The Case againstClass Actions and Other Theories ofLiabilityWith Sandra J. Doyle, Charles A.Fitzpatrick IV and Angela M. GuarinoApril 2012 at page 155.Parker, Julius P. “Rick” Jr.Raising the Roof: What’s Hot inConstruction Defect LitigationWith Kathleen J. Maus and MichaelHamiltonOctober 2012 at page 465.Reynolds, Charles E.The Enhanced Injury Doctrine: How theTheory of Liability is Addressed in aComparative Fault WorldWith Shane T. CostelloApril 2012 at page 181.

Defense Counsel Journal Annual Index Page 511Richmond, Douglas R.Splitting the File in Liability InsuranceOctober 2012 at page 399.Rippee, Stephanie M.The Stabilization of Product LiabilityLaw by Statute: Mississippi as a CaseStudyWith Everett E. WhiteJuly 2012 at page 329.Sinclair, J. WalterAdvisability and Practical Considerationsof Court-Imposed Time Limits on TrialWith Andrew M. GoldmanOctober 2012 at page 387.Smith, Lawrence D.The ADA Amendments Act of 2008:Practical Implications for Employers in2012 and BeyondWith Molly Hughes CherryJanuary 2012 at page 32.Rosenberg, David J.Legal Professional Privilege: ComparingDifferent Approaches Within the UnitedStates and the European UnionWith Paul Lefebvre, Matthew R.Zwick and Chloe VialardJanuary 2012 at page 49.White, Everett E.The Stabilization of Product LiabilityLaw by Statute: Mississippi as a CaseStudyWith Stephanie M. RippeeJuly 2012 at page 329.Vialard, ChloeLegal Professional Privilege: ComparingDifferent Approaches Within the UnitedStates and the European UnionWith Paul Lefebvre, David J. Rosenbergand Matthew R. ZwickJanuary 2012 at page 49.Zakaib, Glenn M.International Class Actions in theCanadian Context: Understanding,Funding, Enforceability and TrialWith Jeremy M. MartinJuly 2012 at page 296.Zwick, Matthew R.Legal Professional Privilege: ComparingDifferent Approaches Within the UnitedStates and the European UnionWith Paul Lefebvre, David J. Rosenberg,and Chloe VialardJanuary 2012 at page 49.Sungaila, Mary-ChristineThe Perils of Oversharing: Can theAttorney-Client Privilege be BroadlyWaived by Partially Disclosing AttorneyCommunications During Negotiations?With Andrew Kopon Jr.July 2012 at page 265.

U.S. Postal Service Statement of Ownership, Management, and Circulation(required by 39 U.S.C. 3685)1. Publication title: Defense Counsel Journal.2. Publication number: 0895‐0016.3. Filing date: October 1, 2012.4. Issue frequency: Quarterly (January, April, July, October).5. Number of issues published annually: Four.6. Annual subscription price: $90.00.7. Complete mailing address: 303 West Madison, Suite 925, Chicago, IL 60606. Contact person: Robert Greenlee, ManagingEditor. Telephone 312.368.3809.8. Complete mailing address of headquarters or general business office of publisher (not printer): Same as above.9. Publisher: International Association of Defense Counsel, 303 West Madison, Suite 925, Chicago, IL 60606. Managing Editor:Robert Greenlee, 303 West Madison, Suite 925, Chicago, IL 60606.10. Owner: International Association of Defense Counsel, 303 West Madison, Suite 925, Chicago, IL 60606.11. Known bondholders: None.12. Tax status: The purpose, function, and nonprofit status of this organization and the exempt status for federal income taxpurposes has not changed during the preceding 12 months.13. Publication title: Defense Counsel Journal.14. Issue date of circulation data below: October, 2012.15. Nature and extent of circulation:(a) Total number of copies (net press run): Average number of copies each issue duringpreceding 12 months: 2800; Actual number of copies of single issue published nearest to filing date: 2700.15(b)(1): Paid/requested outside county mail subscriptions stated on Form 3541: Average 12 months: 2736; Actual nearestfiling date: 2650.15(b)(2): Paid in‐county subscriptions: None.15(b)(3): Sales through dealers and carriers, street vendors, counter sales, and other non‐USPS paid distribution: None.15(b)(4): Other classes mailed through the USPS: Average number of copies each issue during preceding 12 months: 20;Actual number of copies of single issue published nearest to filing date: 10.15(c): Total paid and/or requested circulation: Average 12 months: 2756; Actual nearestfiling date: 2660.15(d)(1): Free Distribution by Mail: Outside‐county as stated on Form 3541: Average 12 months: 20; Actual nearest filingdate: 20.15(d)(2): Free Distribution by Mail: In‐county as stated on Form 3541: None.15(d)(3): Free Distribution by Mail: Other classes mailed through the USPS: None.15(d)(4): Free Distribution Outside the Mail: None.15(e): Total Free Distribution: Average 12 months: 20; Actual nearest filing date: 20.15(f): Total Distribution: Average 12 months: 2776; Actual nearest filing date: 2680.15(g): Copies not distributed: Average 12 months: 24; Actual nearest filing date: 20.15(h): Total: Average 12 months: 2800; Actual nearest filing date: 2700.15(j): Percent paid and/or requested circulation: Average 12 months: 99; Actual nearestfiling date: 99.16. Publication of statement of ownership will be printed in the October 2012 issue ofthis publication.17. Signature and title of publisher, business manager, or owner:Robert Greenlee, Managing Editor