• November 2018 – Fire “Camp” in Butte County, 153,336 acres destroyed, eighty-five deaths.
• January 2025 – Fire “Eaton” in Los Angeles County, 14,021 acres destroyed, eighteen deaths.
• January 2025 – Fire “Palisades” in Los Angeles County, 23,707 acres destroyed, twelve deaths.

If one expands the list to include the twenty deadliest fires in California’s history, eleven have occurred since 2018.[2] According to a report commissioned by the Southern California Leadership Council, the Palisades and Eaton fires alone resulted in an estimated $53.8 billion of damages.[3] Out east, North Carolina has also experienced some of the most devastating storms and flooding in its history in recent years:

• October 2016 – Hurricane Matthew, thirty-one deaths, $1.5 billion in damage, 100,000 homes, businesses, and governmental buildings damaged. [4]
• September 2018 – Hurricane Florence, fifty-one deaths, $17.3 billion in damage. 455,000 people evacuated, 11,386 homes with moderate or major damage. [5]
• September 2024 – Hurricane Helene, eighty-six deaths, $79 billion in damage.[6]

Unprecedented natural catastrophes occurring at increased rates, from California to the east coast, are threatening both public and private insurance markets in unprecedented ways. With such natural disasters occurring annually, the question on the minds of many is how to protect against such enormous risk.

This July 9, 2024 update was written with the invaluable follow up research and assistance of Mariah Patuel, one of our summer interns. It represents his views and not those of the firm or any of its clients.

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UPDATES REGARDING COVERAGE IMPLICATIONS ARISING FROM SOLAR EVENTS

So, what has happened in Solar Storms in the last twelve years since my previously published Article[1] in 2012 on solar events and insurance coverage? Too much to recite here!

It surprises no one that our Sun has a huge effect on our weather, setting aside the human made issues of global warming.

“There is no bad weather, just bad preparation,” according to Jake Bleacher, Chief Scientist, NASA Human Exploration and Operations Mission Directorate. If you are a business, homeowner, or insurer, it makes sense to read the insurance policy you purchase or issue to make sure there are no clauses that might affect coverage for a Sun event in a way that you would not anticipate without reading the insurance contract.

As noted by so many, solar activity moves between “high” – solar maximum – and “low” – solar minimum – periods.[2]  On September 15, 2020, NASA announced that “Solar Cycle 25” had begun, following the solar minimum in December 2019.[3] Each of these cycles lasts around eleven years, and the beginning of Solar Cycle 25 likely means there will be an increase in the Sun’s activity in the coming years.[4] This Cycle was predicted to peak between January and October 2024.[5]  While this was only a prediction, according to NASA, the impacts of a changing solar cycle bear the potential to immensely affect life on Earth – cutting off communication signals, damaging satellites, risking electrical grids, and corroding oil and gas pipelines.[6]

Inevitably, these earthly effects beg the question – what coverage implications may arise from solar events? It seems that, just as NASA believes in the importance of good preparation, so too should insurers and insureds when it comes to their preparation in assessing the potential implications of solar events on insurance coverage.

Solar Storms: Updates from 2012 to Present

Since my original article was published, there have been many solar storms and solar activities tracked by NASA.[7] The first notable solar storm since the article was the “St. Patrick’s Day” Solar Cycle 24 “super geomagnetic storm[8],” which resulted from “two significant eruptions of the sun’s corona” on March 15, 2015. This storm ranked as a “G4” on NOAA’s scale of one to five; storms of this level are common but can lead to widespread issues and directly impact Earth.[9] Then, in September 2017, NASA viewed “intense” solar activity, denoted as an “X8.2-class flare”; the “X” indicates it was one of the most intense flares, and the “8.2” means it was 8.2x as intense as an “X1” flare.[10] In February 2022, as Solar 25 Cycle was becoming more active, another powerful solar storm occurred, destroying forty SpaceX satellites in orbit and costing the company around $100 million. Scientists stated that, despite this immense damage, there are likely much stronger and more intense solar storms ahead.[11]  In May 2024, a huge solar storm – classified as a G5 – impacted Earth, keeping “power grid operations … busy and … working to keep proper, regulated current flowing without disruption.” Additionally, GPS systems and satellite operations strained to maintain function from the “severe-extreme geomagnetic storm.”[12]

Following the clear importance of good preparation, and as a result of these storms and those predicted to follow, NASA and other space companies continue to develop technology and research, hoping to better understand the impacts of such solar events. It seems to follow that insurers and insureds may also want to follow good preparation in assessing potential coverage implications as a result of solar storms because, according to NASA, “there is no bad weather, just bad �����貹�����پ��Dz�.”

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[1] Costantino P. Suriano & Marc Haas, “The Calm Before the Solar Storm: Coverage Implications Arising from Solar Events,” Bloomberg Law and Bloomberg’s Intellectual Property Report (January 30, 2012).

[2] SpaceWeather Live (2024), available at https://www.spaceweatherlive.com/en/solar-activity/solar-cycle/historical-solar-cycles.html.

[3][3] Nasa News & Events, Solar Cycle 25 Is Here, (Sept. 2020), available at https://www.nasa.gov/news-release/solar-cycle-25-is-here-nasa-noaa-scientists-explain-what-that-means/.

[4] BBC NewsRound, Solar Cycle 25: The Sun has started a new solar weather cycle, (Sept. 2020), available at https://www.bbc.co.uk/newsround/54174542.

[5] National Weather Service, NOAA Forecasts Quicker, Stronger Peak of Solar Activity, (Oct. 2023), available at https://www.weather.gov/news/102523-solar-cycle-25-update.

[6] Geoff Brumfiel & Willem Marx, NPR, The huge solar storm is keeping power grid and satellite operators on edge, (May 2024), available at https://www.npr.org/2024/05/10/1250515730/solar-storm-geomagnetic-g4.

[7] Nasa News & Events, How NASA Tracked the Most Intense Solar Storm in Decades, (May 2024), available at https://www.npr.org/2024/05/10/1250515730/solar-storm-geomagnetic-g4.

[8] Wu, CC., Liou, K., Lepping, R.P. et al. The first super geomagnetic storm of solar cycle 24: “The St. Patrick’s day event (17 March 2015),” Earth Planet Sp 68, 151 (2016). https://doi.org/10.1186/s40623-016-0525-y.

[9] “Severe solar storm may disrupt power, satellites (Update),” PhysOrg (2015).

[10] Jessica Evans, Nasa News & Events, Sun Erupts With Significant Flare, (Sept. 2017), available at https://www.nasa.gov/solar-system/sun-erupts-with-significant-flare/.

[11] “Solar Storm Destroys 40 New SpaceX Satellites in Orbit,” New York Times (2022), available at https://www.nytimes.com/2022/02/09/science/spacex-satellites-storm.html.

[12] Brumfiel, supra note 6.

In late May 2023, the Second Circuit Court of Appeals issued a detailed and complex decision that demonstrates in unusually lucid fashion that the interconnected worlds of U.S. and U.K. insurance and reinsurance law, despite being populated by a people “divided by a common language” and separated by the proverbial “pond”, remain forever conjoined. The Insurance Company of the State of Pennsylvania v. Equitas Insurance, Ltd., No. 20-3559 (Decided May 23, 2023, 2d Cir. 2023). The interconnected U.S. and U.K. insurance/reinsurance industries are governed by two independent legal systems, yet manage to co-exist in remarkable harmony, aided by able and diligent lawyers and jurists. This decision, in the authors’ view, also shows, yet again, that U.S. courts are more than capable of understanding, analyzing, and adjudicating complex insurance coverage issues and reinsurance disputes involving both U.S. and U.K. law.

Given the ubiquitous nature of arbitration clauses in reinsurance contracts (especially treaties), this type of public, reasoned, and articulate decision stands out as a significant benefit to both the U.S. and U.K. insurance and reinsurance business communities. Even were an arbitration panel qualified and able to render such a complex and multi-layered case law driven award/decision, it would almost surely remain confidential and thus be of no value to anyone beyond the parties to the dispute. Moreover, there are many federal court judges (and even some state court judges) familiar with and experienced in adjudicating complex insurance and reinsurance disputes. And, as discussed over many years at industry conferences, many of those judges have been tutored by reinsurance practitioners (including expert witnesses) and attorneys in some very high-stakes litigations, i.e., the very same professionals who populate the reinsurance arbitration community. Thus, much of the body of U.S. reinsurance case law developed over the last thirty-five years, as observed up close by these authors, has been derived from the joint efforts of astute counsel, their knowledgeable clients, expert witnesses, and able judges. It is clear that litigation remains an integral component of the insurance/reinsurance dispute resolution universe, rather than an alien process outside the industry it serves, and continues to be an important complement to the arbitration process.

The Underlying Dispute

The dispute in Equitas arose out of ICSOP’s umbrella liability coverage of Dole Foods from 1968-1971. In 2009, homeowners in Carson, California sued Dole for groundwater contamination and pollution of their soil. Dole and ICSOP settled the claims and allocated $20 million of their settlement to the ICSOP-Dole policy even though the alleged property damage continued long after the policy period. The insured and insurer/cedant applied the “all sums rule” in allocating the settlements. Under California law, the “all sums rule” “treats any insurer whose policy was in effect during any portion of the time during which the continuing harm occurred as jointly and severally liable (up to applicable policy limits) for all property damages or personal injuries caused by a pollutant.” The Insurance Company of the State of Pennsylvania v. Equitas Insurance, Ltd., No. 20-3559, at p. 3 (Decided May 23, 2023, 2d Cir. 2023).

Based on that allocation, ICSOP then billed its reinsurer, Equitas (successor to Lloyd’s syndicates), under a facultative reinsurance policy provided via Lloyd’s policy form J1 (the “Policy”). Lloyd’s policy form J1 is extremely brief and rather vague, at least compared to U.S. facultative certificates and London reinsurance slip policies of more recent vintage. The face sheet of the Policy bears the Lloyd’s seal with the assertion that the form is “approved by Lloyd’s Underwriters Fire and Non-Marine Association” and bears the legend at the bottom “Form J1(6.8.59)”. The Policy provides on its face sheet that, “[i]n the event of any occurrence likely to result in a claim under this Policy, immediate notice should be given to: [Underwriters].” This language is the entire notice of loss provision. The only other relevant term in the Policy is what most would consider a very brief, short-form “follow the settlements” clause, oddly not cited by the Court until almost the very end of the lengthy decision:

Now We the Underwriters hereby agree to reinsure against loss to the extent and in the manner hereinafter provided:

[Coverage] is “as Original” and will provide the “same gross rate, terms and conditions and to follow the settlements of the Company ….

Equitas denied the claim on the grounds that, under English law, the “all sums rule” does not apply and, further, that the six-year delay in notice of the claim barred recovery under the Policy. ICSOP disagreed on the grounds that English law would interpret the Policy as “back to back” with the reinsured policy, recognize the “all sums rule,” deem the notice of loss to be timely, and hold that, absent timely notice of loss being a condition precedent to coverage under the Policy, extreme prejudice must be shown to avoid reinsurance coverage, something Equitas could not demonstrate.

The district court therefore rejected Equitas’s defenses and granted summary judgment to ICSOP. On appeal, the Second Circuit conducted its review de novo and affirmed the district court decision in a detailed and exhaustive decision that combines an analysis of the “all sums rule” under California law, with an analysis of English insurance coverage law including the “all sums rule,” and an analysis of basic English reinsurance law.

The Appellate Ruling

The Court first addressed U.S. tort and insurance law. After a survey of the development of mass-tort law and the related insurance coverage issues that have arisen in the U.S., the Court concluded that a significant number of courts have adopted the “all sums rule,” including Hawaii and California, and that the ICSOP policy was governed by Hawaii law. The Court also explained that, while many courts have adopted a pro rata rule, many have not adopted either rule. As a Court sitting in alienage jurisdiction (i.e., jurisdiction of federal courts over U.S. citizens and citizens of foreign states under 28 U.S.C. Sec. 1332), it then set out to determine how an English court would rule “in the context of reinsurance law.” In doing so, the Court engaged in an analysis of how English courts have approached these thorny insurance coverage issues in the context of mass-tort liability.

The Court engaged in a survey of English tort law involving long term exposure to toxic substances, such as asbestos. The Court cited Fairchild v. Glen Haven Funeral Services Ltd., [2003] 1 AC 32 (HL) ¶¶ 3-5 (Lord Bingham), Barker v. Cory’s UK Ltd, Barker v. Corus UK Ltd., [2006] 2 AC 572 (HL), and the U.K. Compensation Act 2006 c. 29 § 3 (“Compensation Act”), which reversed part of Barker – a case that itself had rejected a rule that apportioned tort liability among several employers on a joint and several basis. Although the Compensation Act applies only to mesothelioma, the Act set the stage for adoption of the “all sums rule” by the U.K. courts, at least for certain types of mass torts:

[W]hen a victim contracts mesothelioma each person who has, in breach of duty, been responsible for exposing the victim to a significant quantity of asbestos dust and thus creating a material increase in risk of the victim contracting the disease will be held to be jointly and severally liable in respect of the disease.

Following the enactment of the Compensation Act of 2006, the U.K. Supreme Court held in a subsequent case, Trigger (Durham V. BAI (Run off) Ltd., [2012] UKSC 14 ¶ 78, that insurers providing coverage to employers who are liable under the Act are likewise liable under their policies for such claims against their insureds. And, in Trigger, the U.K. Supreme Court held that, “where two contracts are linked—as in the reinsurance contract—‘the law will try to read them consistently with each other.’” Then, in Zurich Ins. PLC Branch v. International Energy Group Ltd., [2015] UKSC 33 ¶¶ 45-51, 54, 94-97, the U.K. Supreme Court held that insurers are jointly and severally liable on an “all sums” basis for their insured’s liability when the insured is liable under the Compensation Act. The Court there held that, “once one accepts that causation equates with exposure, in tort and tort liability insurance law . . . there is no going back on this conclusion simply because there was exposure by the insured of the victim both within and outside the relevant insurance [coverage] period,” despite the fundamental importance under English law of the insurance policy period as Wasa Int’l Ins. Co, v. Lexington Ins. Co., [2010] 1 AC 180 (HL) ¶ 32, had made clear. The U.K. Supreme Court therefore held that the primary question concerned “the duty that the insurer owes to the insured – not the relative position between two insurers” and, thus, “there is . . . nothing illogical about a conclusion that each of successive insurers is potentially liable in full, with rights of contribution inter se.” But the Court noted, of course, that the Compensation Act did not apply in Equitas and, moreover, that the term or policy period of a policy is afforded fundamental respect and importance in English law.

The Second Circuit then turned to the matter at hand between the plaintiff-cedant and its reinsurer, and whether the U.K. Supreme Court would interpret the reinsurance contract as entitling ICSOP to recover from its reinsurer, even though, under English law, the “all sums” principle would not govern ICSOP’s liability under its policy. The critical issue was, however, whether under U.K. law, Equitas would be liable under the Policy for the payments ICSOP made to its insured. Citing Wasa, the Court stated that, under English law, facultative reinsurance is normally “back to back” with the reinsured insurance policy so that where the insurer is liable, the reinsurer pays its agreed proportion of the risk, and went so far as to call it a “strong presumption” in favor of coverage. Most critically, that presumption would follow even if the insured’s losses were payable in a foreign jurisdiction where the law varies from English law.

The Court noted that in Wasa, a case upon which Equitas relied, the original policy did not contain a choice of law clause and, therefore, it was not predictable at the time of issuance of the reinsurance contract that Pennsylvania law would govern its interpretation. But the ICSOP-Dole policy contained a Hawaii choice-of-law clause and, generally speaking, Hawaii law generally follows California law, including the “all sums rule” applied to multiple years of coverage for continuous and indivisible injuries. The absence of a choice of law clause in Wasa was critical and distinguished it from Equitas where there was, indeed, a choice of law clause in the reinsured policy.

The Court further pointed out that, under English law, reinsurers must accept the risk of a change in law after formation of the contract, i.e., the development of the “all sums” principle that did not exist when the subject reinsurance contract was formed decades earlier: “[t]hus when parties fail to define in their insurance agreements a term such as ‘all sums’ . . . they adopt the meaning a common law court will ascribe to it, and thereby bear the rewards and risks of the common law’s dynamic nature.” Equitas, No. 20-3559 at p. 41. The Court referred again to Trigger and Zurich, where the U.K. Supreme Court ruled as it did despite the relevant policies being issued prior to the relevant legal developments that formed the bases of those Courts’ decisions. The Court concluded that the U.K. Supreme Court would, in this instance, not rule contrary to how it had ruled in the past, mainly because the Policy expressly warranted coverage as “Original.” The Court stated:

Equitas therefore cannot confine its current obligations to what those obligations would have been had the dispute arisen fifty years ago. . . .This case unquestionably presents an issue that was left open in Wasa, and has not since been resolved by the [UK] Supreme Court. We thus cannot be certain that our prediction as to how that Court would resolve this case [in the UK] is correct. But it remains our [duty] to make our best considered judgement of how [the UK] court would decide the issue . . . and for the reasons set forth above, we conclude that under English law the back-to-back presumption [applied to facultative reinsurance] is strong, and we do not believe that the [UK] Supreme Court would condition that presumption on the importance of a policy term or the predictability of how a foreign court might later interpret that term. Accordingly, the back-to-back presumption [in construing a reinsurer’s obligations] applies to the reinsurance policy, thus rendering the parties’ obligations co-extensive.

Equitas, No. 20-3559 at pp. 41-42.

Late Notice Defense

The Court easily disposed of the reinsurers’ late notice defense because, under English law, unless prompt notice of loss is a condition precedent to coverage, extreme prejudice must be shown by the reinsurer. The Court concluded that the reinsurers could not demonstrate “extreme prejudice” and that there was, therefore, “no reason to go where no English court has gone.” Id. at p. 45.

Conclusion

The Equitas decision, while perhaps not entirely unprecedented, is nevertheless remarkable in vividly illustrating the interconnected legal and insurance/reinsurance arenas in the U.S. and the U.K. While the two legal systems have many differences, those systems and the inter-connected worlds of U.S. and U.K. insurance and reinsurance, remain closely bound and intertwined. And, despite the continued prevalence of arbitration in the reinsurance industry, this thorough and painstaking decision demonstrates the continued vitality and importance of litigation with its published reasoned and often valuable decisions.

On May 23, 2022, California Governor Gavin Newsom signed Assembly Bill 35 (“AB 35”) into law. This Bill provided sweeping reform to the longstanding Medical Injury Compensation Reform Act (MICRA). MICRA, which limits a plaintiff’s recovery for noneconomic damages in medical negligence cases, was initially signed into law in 1975 by then-Governor Jerry Brown. The cap was set at $250,000 and did not provide a mechanism for the cap to increase in order to account for inflation.

MICRA was initially enacted at a time when both insurance premiums and inflation were on the rise. Its purpose was to provide predictable malpractice awards, which would enable insurers to provide lower premiums to healthcare providers and to prevent physicians from fleeing the state to escape the cost of litigation. In turn, this was expected to incentivize providers to relocate to, or remain in, California and to ensure that consistent, affordable and high-quality healthcare remained accessible throughout the state.

AB 35 was first passed by the Senate on April 27, 2022, signaling that the status quo would soon change. The newly signed law expanded MICRA’s reach by subjecting healthcare institutions to the relevant limits. The new iteration also contains a separate recovery limit where the action includes a claim for wrongful death. Representatives from both the defense and plaintiff sides drafted AB 35 as a compromise to reform MICRA.

The revised MICRA (codified in CA CIVIL § 3333.2) took effect January 1, 2023. The new cap for recovery of noneconomic losses is $350,000, while matters involving wrongful death are capped at $500,000. The recovery limits for non-death cases will increase by $40,000 annually, from January 1, 2023 through January 1, 2033. The recovery limits for wrongful death cases will increase by $50,000 annually, from January 1, 2023 through January 1, 2033. As of January 1, 2033, the limits will be $750,000 for non-death cases, and $1,000,000 for wrongful death cases. Beginning January 1, 2034, the limits will increase by two percent annually, in an effort to keep pace with inflation. Economic damages, which are not capped, are designed to restore a plaintiff’s financial condition. Noneconomic damages, on the other hand, include pain and suffering, emotional distress, reduced quality of life, disfigurement, loss of society, loss of enjoyment of life, mental anguish, and loss of consortium. In wrongful death cases, noneconomic damages may also include damages related to the loss of the relationship, such as loss of guidance, support, comfort, instruction, and companionship.

Notably, the revised Act creates the potential for three possible caps in each case if all three categories of providers are involved. The three categories of providers that a plaintiff can now recover from are: (1) physicians and nonphysician providers (regardless of the number of providers or causes of action), (2) healthcare institutions (regardless of the number of institutions or causes of action), and (3) unaffiliated healthcare institutions or providers. Healthcare providers are defined as a person licensed or certified under Division 2 of the Business and Professions Code, county medical facilities, and any outpatient clinic, health dispensary, or health facility. A healthcare provider also includes the legal representatives of a healthcare provider and the healthcare provider’s employer, professional corporation, partnership, or other form of recognized professional practice organization. A healthcare institution is defined as a facility, place, or building that is organized, maintained, and operated for the diagnosis, care, prevention, and treatment of illness where persons are admitted for at least a twenty-four hour stay. Finally, unaffiliated health care providers or institutions are defined as those who are not employed by, performing under a contract with, an owner of, or in a joint venture with another specified entity, healthcare institution, healthcare provider, organized medical group, professional corporation, or partnership, or that is otherwise not in the same health system with that health care provider, healthcare institution, or other entity, or those who are not covered by the definition of affiliated under Corporations Code Section 150.

Therefore, three separate recovery caps could apply to a case. Notably, the limits are not fluid, and apply despite the number of healthcare providers or institutions involved within a category. This means in 2023, a plaintiff in a non-death case could recover a maximum of $1,050,000 from the three categories of providers ($350,000 cap per category of provider), and a maximum of $1,500,000 for wrongful death cases ($500,000 cap per category of provider). In 2033, a plaintiff in a non-death case will be able to recover a maximum of $2,250,000 from the three categories of providers ($750,000 cap per category of provider) and a maximum of $3,000,000 in a wrongful death case ($1,000,000 cap per category of provider). The creation of separate caps for separate categories of providers will likely encourage plaintiff’s attorneys to bring more defendants into cases to expand the potential recovery available.

Another noteworthy provision, which provides some evidentiary protection to providers, mandates that statements, writings, or benevolent gestures expressing sympathy, regret, a general sense of benevolence, or suggesting, reflecting, or accepting fault be kept confidential. This includes statements by providers relating to pain, suffering, or death of a person, or to an adverse patient safety event or unexpected healthcare outcome. This allows providers to accurately document their feelings without concern it will be used against them down the road in litigation.

Additionally, the recoverable contingency fees for plaintiff’s attorneys have been increased. Under the previous law, limitations on the contingency fee an attorney could collect were tied to the amount recovered. An attorney could collect forty percent of the first $50,000 recovered, thirty-three percent of the next $50,000, twenty-five percent of the next $500,000, and fifteen percent of anything that exceeded $600,000. Now, the recoverable contingency fees are tied to the stage of representation at which the amount is recovered. Where the recovery is made under a settlement agreement and release of claims executed by all parties prior to the filing of a civil complaint or arbitration demand, counsel can recover twenty-five percent. However, where settlement occurs subsequent to the filing of a civil complaint or arbitration demand, the attorney may recover up to thirty-three percent. This provision will likely contribute to an increase in lawsuits in the coming years and in the number of attorneys willing to take on medical malpractice lawsuits. This could also lead to a number of reputable malpractice defense attorneys switching sides. Additionally, the changes may provide leverage to the defense by increasing the backlogs in the judicial system. However plaintiff’s attorneys may be less willing to settle claims after they have filed suit since the fees they can recover rise after commencing formal litigation.

Finally, it is also worth noting that the minimum judgment of future damages required to request periodic payments increased from $50,000 to $250,000.Future damages is defined in the Act as including damages for future medical treatment, care or custody, loss of future earnings, loss of bodily function, or future pain and suffering.

The changes to MICRA will undoubtedly increase the rate and severity of medical malpractice lawsuits, which will in turn cause insurance premiums to rise. Increases to premiums will likely continue over the next few years, as premiums tend to be delayed in following claim trends. An increase in premiums could mean a higher cost for medical care in California, which could lead to a reduction of access to affordable healthcare. Additionally, these changes may cause insurance carriers to limit the amount of business they write in California until underwriters determine the rates which are adequate for the new risk environment. Further, the reinsurance industry could feel the effects of MICRA’s cap increase as more claims will likely trigger reinsurance policies as the dollar amount of possible recoveries grows. Ultimately, the increase in the number of claims and loss costs in 2023 will impact rates for 2024 and beyond. While it is not possible to predict the exact amount premiums will rise, it is safe to say medical malpractice liability insurance will gradually become more expensive in California, which could potentially cause physicians to leave the state.

The passing of AB 35, and its ultimate signing by Governor Newsom, avoided the Fairness for Injured Patients Act (FIPA) from appearing on the November 2022 ballot. FIPA would have increased the noneconomic damages cap to $1.2 million, introduced a broad “catastrophic injury” category with no cap, eliminated the caps on attorneys’ fees, required juries to be informed about the cap, and increased the statute of limitations. Additionally, FIPA would have implemented retroactive inflation adjustments from the time the cap was set in 1975. Critics of FIPA allege the Act would have all but removed safeguards for limiting recovery in medical lawsuits, and case values would have exponentially increased overnight resulting in skyrocketing healthcare costs and huge windfalls for attorneys which would have incentivized litigation. This likely would have caused medical costs to rise due to insurers demanding higher premiums. Whether FIPA would have received sufficient votes in the November election is unclear, but based on California’s current political and social climate, it likely would have been a close vote. A similar measure in 2014 known as Proposition 46 was defeated after a long political battle. However, it is safe to say MICRA is a more modest compromise compared to FIPA’s proposed drastic reforms.

Change has also come or is soon coming to other states across the country, mainly in reaction to rising inflation. For example, in Texas there is a $250,000 cap for all individual physicians or healthcare providers combined and a $250,000 cap for a hospital or facility, up to a maximum of $500,000 if there are multiple hospital or facility defendants. Since its inception in 2003, this cap has not been adjusted for inflation. However, there have been numerous challenges to Texas’ cap, including a 2022 class action lawsuit, Winnett et al v. Frank et al, which challenged the cap’s constitutionality, and House Bill 719, which proposed adjusting the caps to account for inflation. Additionally, in 2020, Colorado increased its noneconomic damages cap to account for the effects of inflation, and will continue to readjust the cap for inflation every two years. The new cap in Colorado is $642,180, which may be increased by the Court upon clear and convincing evidence up to a maximum of $1,284,370. Seven other states periodically adjust their damage caps for inflation: Idaho, Michigan, Maryland, Missouri, North Carolina, South Carolina, and West Virginia.

Although the landscape has changed and is continuing to change across the country, California’s gradual increase in the amount of non-economic damages a plaintiff can recover should permit insurers, providers, and institutions sufficient time to prepare and position themselves appropriately for the increased exposure they will face, allowing for premiums to rise gradually. This new framework only applies to cases filed, or arbitrations demanded, after January 1, 2023. Although there may be future legal challenges to MICRA, it is not anticipated that these challenges will be successful since there have been numerous court challenges throughout the years to MICRA, and courts have routinely upheld it as being constitutional.

While the changes seem to strike a prudent balance between the old statute and the proposed FIPA, the changes to the contingency fee percentages awarded to plaintiffs’ counsel, coupled with the increased amount available to plaintiffs, will likely lead to an increase in the number of lawsuits filed as well as higher settlements and awards. Although the full impact is still uncertain, it is clear that financing healthcare liability risks will become more expensive in California. As such, insurance carriers will need to explore new and proactive approaches of resolving these cases, ones which take into account the new caps and the increased costs of litigation.

In South Capitol Bridgebuilders (“SCB”) v. Lexington Insurance Co., No. 21-cv-1436 (RCL), 2023 U.S. Dist. LEXIS 176573, 2023 WL 6388974, (D.D.C. Sept. 29, 2023), the U.S. District Court for the District of Columbia in a case of first impression recently concluded that the LEG 3/06 Model “Improvement” Defects Wording is “ambiguous—egregiously so.” Not mincing its words, the district court found the LEG 3 wording to be “internally inconsistent and bordering incomprehensible.” The district court went on to state that the authors “managed to squeeze in a run-on sentence, an undefined term, several mispunctuations, and a scrivener’s error” in “just three sentences.”

The LEG 3 exclusion at issue provided that there was no coverage for:

All costs rendered necessary by defects of material workmanship, design, plan, or specification and should damage (which for the purposes of this exclusion shall include any patent detrimental change in the physical condition of the Insured Property) occur to any portion of the Insured Property containing any of the said defects, the cost of replacement or rectification which is hereby excluded is that cost incurred to improve the original material workmanship design plan or specification.

For the purpose of the policy and not merely this exclusion it is understood and agreed that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan, or specification.

The claim at issue in SCB was a claim under a builder’s risk policy that involved the construction of the Frederick Douglass Memorial Bridge in Washington, D.C.  The bridge design included cast-in-place concrete substructure elements and a composite deck supported by three consecutive steel arches on each side of the bridge, which in turn were supported by concrete abutments. The district court explained that “due to inadequate vibration of concrete during placement, once the concrete dried and workers removed the formwork, SCB observed structural deformities referred to as ‘honeycombing’ and ‘voiding’ in the concrete.” These deformities weakened the bridge and its support structures by causing a decrease in their weight-bearing capacity. Lexington declined to cover the cost to replace the flawed concrete, arguing that the bridge and supporting structures were not damaged and that the costs to correct the defects (i.e., the “honeycombing” and “voiding” in the concrete) were excluded by virtue of the LEG 3 exclusion.

Lexington contended that its position was supported by the second paragraph of the exclusion, which provided “that any portion of the Insured Property shall not be regarded as damaged solely by virtue of the existence of any defect of material workmanship, design, plan, or specification.” The court, however, rejected the argument that the flawed concrete did not constitute physical loss or damage because “insured property must be altered, not merely defectively constructed,” and, in this case, the honeycombed concrete components “were defective from the moment the concrete dried and the components became fabricated.” Looking to Black’s Law Dictionary, the court defined “damage” as “loss or injury to person or property” or “any bad effect on something.” It went on to explain that “[a] decreased weightbearing capacity is surely an injury, or at the very least a bad effect, on the bridge and its support structures,” and thus concluded that “a change that results in a reduction in the weightbearing capacity of a bridge is an ‘alteration’ to that bridge.”

Turning its attention to the remainder of the LEG 3 exclusion, the court concluded that the wording was ambiguous because both parties presented reasonable interpretations of what it means to improve the original workmanship. Even though it found both interpretations offered by the parties reasonable, the court all but rejected Lexington’s interpretation that any repair or replacement of the defective property constitutes an improvement because this interpretation would encompass the replacement of any defective component unless that component was replaced with something worse. Nonetheless, the court found that “Lexington’s argument—while far from convincing—me[t] the low bar of being reasonable in light of the mishmash of terms that comprise the LEG 3 Extension.”

In dicta, the court offered its own view, which was largely consistent with SCB’s interpretation, that “to improve means to make a thing better than it would have been if it were not defective work.” This would mean in effect that “if SCB decided to replace the defective concrete with solid gold, or otherwise upgrade it, SCB could not then seek reimbursement of those enhancements.” However, regardless of its own view on the matter, the court followed the well-worn maxim that policy wording that is subject to more than one reasonable interpretation is ambiguous and must be construed against the insurer. It thus held that SCB was entitled to coverage since it also found that the deformities qualified as a patent detrimental change in the physical condition of the insured property as required by the policy language because it resulted in a reduction in the weight-bearing capacity of the bridge.

The court also noted that there was a scrivener’s error in the LEG 3 wording concerning which defects exclusions in the policy the LEG 3 exclusion replaced. According to the court, “[w]hile a scrivener’s error is not dispositive of the existence of ambiguity in a contract provision, when viewed in light of the morass that is the LEG 3 Extension, the additional error reinforce[d] [its] conclusion that the text of the Extension is far from ‘clear, definite, and explicit.’” Given its many other pronouncements about how it found the model wording “convoluted,” it seems unlikely a different result would have been reached if the scrivener’s error did not exist at all.

As the first case to address the LEG 3 exclusion, this decision has the potential to have an outsized influence on how future courts interpret the model wording. We note that although the decision is largely unfavorable, it represents only one trial court’s view and does not constitute binding precedent. It thus remains to be seen whether this decision will be a harbinger of future decisions to come or merely a footnote in history.

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If you have any questions regarding this coverage alert, or would like to receive a copy of the decision, please contact Philip C. Silverberg, William D. Wilson, or Craig R. Rygiel.

Despite the long-standing federal law favoring arbitration, arbitration provisions in insurance policies recently have been facing a distinct challenge. Several U.S. states have adopted laws invalidating arbitration provisions––ostensibly to protect a resident’s “day in court” and right to a jury trial––in insurance disputes. But these statutes directly conflict with the FAA.[5] Generally, where a state law conflicts with a federal law, the federal law will govern under the Supremacy Clause of the United States Constitution.[6] There is, however, a limited exception for state laws that specifically regulate the insurance industry.

The McCarran-Ferguson Act[7] flips the typical mechanism of federal preemption. It provides that, where there is a conflict between state law relating to insurance regulation and an “Act of Congress,” the state law will govern. Thus, federal courts consistently have held that the FAA is “reverse-preempted” by McCarran-Ferguson when dealing with domestic insurers (that is, U.S.-based insurers).[8]

But this concept becomes complicated when a foreign (non-U.S.) insurer is involved because foreign insurers enforce their arbitration provisions differently than domestic insurers. Domestic insurers rely on Chapter 1 of the FAA to enforce arbitration agreements. Foreign insurers, by contrast, rely on Chapter 2, which implements an international treaty––The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, otherwise known as the New York Convention.[9] The question is whether McCarran-Ferguson also reverse preempts the New York Convention? Most federal circuit courts hold that it does not.

Most recently, the First Circuit (covering federal appeals from Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island) addressed this issue in Green Enterprises, LLC, v. Hiscox et al., agreeing with the majority of federal circuit courts.[10] At issue in Green was a Puerto Rican statute prohibiting arbitration provisions in insurance policies.[11] As an issue of first impression in the circuit, the First Circuit held that the New York Convention is not affected by McCarran-Ferguson, and affirmed the district court’s decision compelling the insured to arbitrate its claim.

While several federal appellate courts have reached the same outcome as the First Circuit, those courts differ in their reasoning. Some hold that McCarran-Ferguson applies only to statutes, not treaties.[12] According to these courts, an “Act of Congress” reverse-preempted by McCarran-Ferguson does not include “international agreements that this country has entered into and rendered judicially enforceable,” like the New York Convention.

Other courts hold that the New York Convention is a treaty but do not decide whether Congress intended to include a treaty within the scope of “Act of Congress” when it used those words in the McCarran–Ferguson Act.[13] Instead, these courts conclude that the New York Convention provides a clear and mandatory “directive to domestic courts” to compel arbitration.[14] And, because the New York Convention does not require any congressional action to implement it, it is “self-executing” and “leaves no discretion to the political branches of the federal government whether to make enforceable the agreement-enforcing rule it prescribes.”[15] Thus, it cannot be affected by McCarran-Ferguson. In Green Enterprises, the First Circuit follows the rationale of this second group of decisions.

Additionally, the First Circuit expressly rejected an almost thirty-year old decision from the Second Circuit (covering New York, Connecticut and Vermont), Stephens v. Am. Int’l Ins. Co.,[16] which held that the New York Convention was not self-executing. As the First Circuit explains, the Second Circuit decision predates a Supreme Court case that suggests the opposite, “offered no analysis of the text [], and contained little explanation for why it concluded that the Convention was in relevant part non-self-executing.”[17]

The First Circuit is not the only federal appellate court to question Stephens. The Fourth Circuit (covering Maryland, North Carolina, South Carolina, Virginia, and West Virginia) noted that, while “the [Second Circuit] concluded, without elaboration, that state laws precluding arbitration of disputes with a delinquent insurer reverse preempt the Convention Act,” even the Second Circuit has questioned––but not overruled––its holding that the New York Convention was not self-executing.^[18] Additionally, the United States Supreme Court has rejected petitions for a writ of certiorari in two cases, both of which held that the New York Convention is not reverse-preempted by McCarran-Ferguson.[19]

To date, only five federal circuit courts have ruled on this issue:

The lack of guidance from the other federal courts of appeal has caused federal district courts to take various approaches. District courts in Arkansas,[20] Florida,[21] Illinois,[22] and Indiana[23] have noted that the New York Convention is not reverse preempted by McCarran-Ferguson. But in Missouri, dueling district court opinions have reached contradictory results.[24]

Bottom line: besides reaching the “right” result, the First Circuit’s decision provides welcome clarity for foreign insurers seeking to arbitrate in those states. And until the other circuit courts––or the Supreme Court––weigh in, the enforceability of insurance policy arbitration provisions, at least in some states, remains in flux.

Jeffrey S. Weinstein and Diana E. McMonagle are partners at Mound Cotton Wollan & Greengrass. Jeff can be reached at 212-804-4226 or jweinstein@moundcotton.com. Diana can be reached at 212-804-4250 or dmcmonagle@moundcotton.com. Samuel B. Weiss was an associate at the firm. \

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[1] Int’l Bus. Machines Corp. v. Mueller, 2017 WL 4326114, at *6 (S.D.N.Y. Sept. 27, 2017).

[2] Curtis, Mallet-Prevost, Colt & Mosle, LLP v. Garza-Morales, 308 A.D.2d 261, 269 (1st Dep’t 2003); see also Smith Barney Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 49–50 (1997) (“New York courts interfere ‘as little as possible with the freedom of consenting parties’ to submit disputes to arbitration”).

[3] See, e.g., Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983) (noting the Federal Arbitration Act’s “liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary”); see also Morgan v. Sundance, Inc., 142 S. Ct. 1708, 1713 (2022) (“[A]rbitration agreements [are] as enforceable as other contracts, but not more so.”).

[4] 9 U.S.C.A. § 2.

[5] See, e.g., Ga. Code Ann. § 9-9-2; Wash. Rev. Code Ann. § 48.18.200; La. Stat. Ann. § 22:868.

[6] U.S. Const. art. VI, cl. 2; see also Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25, 30 (1996) (noting that Congress can enact laws that “set aside” conflicting state laws).

[7] 15 U.S.C § 1012(b); see also Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 48 (1987) (citing Union Lab. Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982)).

[8] See, e.g., McKnight v. Chicago Title Ins. Co., 358 F.3d 854, 857 (11th Cir. 2004) (“If the state has an anti-arbitration law enacted for the purpose of regulating the business of insurance, and if enforcing, pursuant to the Federal Arbitration Act, an arbitration clause would invalidate, impair, or supersede that state law, a court should refuse to enforce the arbitration clause.”); Am. Bankers Ins. Co. of Fla. v. Inman, 436 F.3d 490, 494 (5th Cir. 2006) (similar); Standard Sec. Life Ins. Co. of New York v. West, 267 F.3d 821, 823 (8th Cir. 2001) (similar).

[9] Convention Done at New York June 10, 1958, T.I.A.S. No. 6997 (Dec. 29, 1970), reprinted at 9 U.S.C.A. § 201.

[10] 2023 WL 3557919 (1st Cir. May 19, 2023).

[11] § 1119 Limiting actions on policies; jurisdiction, 26 L.P.R.A. § 1119.

[12] ESAB Grp., Inc. v. Zurich Ins. PLC, 685 F.3d 376, 390 (4th Cir. 2012); see also Safety Nat. Cas. Corp. v. Certain Underwriters at Lloyd’s, London, 587 F.3d 714, 724 (5th Cir. 2009) (“Congress did not intend the term ‘Act of Congress,’ as used in the McCarran–Ferguson Act, to reach a treaty such as the Convention.”).

[13] CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Ga., LLC, 8 F.4th 1007, 1013 (9th Cir. 2021); see also Safety Nat., 587 F.3d at 735 (Clement, J., concurring).

[14] Green Enterprises, 2023 WL 3557919 at *3 (citing Medellin v. Texas, 552 U.S. 491, 508 (2008)).

[15] Green Enterprises, 2023 WL 3557919 at *3 (citing CLMS, 8 F.4th at 1013).

[16] 66 F.3d 41, 44 (2d Cir. 1995).

[17] Green Enterprises, 2023 WL 3557919 at *3.

[18] ESAB Grp., 685 F.3d at 385 (citing Stephens, 69 F.3d at 1233 n. 6).

[19] See Louisiana Safety Ass’n of Timbermen–Self Insurers Fund v. Certain Underwriters at Lloyd’s, London, 562 U.S. 827 (2010); CLMS Mgmt. Servs. Ltd. P’ship v. Amwins Brokerage of Georgia, LLC, 142 S. Ct. 862 (2022). It is also interesting to note that Louisiana Safety and CLMS held that the New York Convention controlled for different reasons, and the Supreme Court rejected both appeals. In other words, it appears that the Supreme Court agrees with those decisions’ bottom line, regardless of their reasoning. There is therefore some irony in the fact that the Supreme Court’s acknowledgment of the New York Convention’s precedence over state anti-arbitration statutes still faces policyholder challenges in New York, a state that has historically embraced arbitration.

[20] J.B. Hunt Transp., Inc. v. Steadfast Ins. Co., 470 F. Supp. 3d 936, 943 (W.D. Ark. 2020).

[21] Goshawk Dedicated v. Portsmouth Settlement Co. I, 466 F. Supp. 2d 1293, 1304 (N.D. Ga. 2006) (citing Indus. Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434 (11th Cir. 1998), overruled on other grounds by Corporacion AIC, SA v. Hidroelectrica Santa Rita S.A., 66 F.4th 876 (11th Cir. 2023)); see also VVG Real Est. Invs. v. Underwriters at Lloyd’s, London, 317 F. Supp. 3d 1199, 1206 (S.D. Fla. 2018) (citing Antillean Marine Shipping Corp. v. Through Transport Mut. Ins., Ltd., 2002 WL 32075793 (S.D. Fla. 2002)).

[22] Catalina Holdings (Bermuda) Ltd. v. Hammer, 378 F. Supp. 3d 687, 694 (N.D. Ill. 2019) (citing Pine Top Receivables of Illinois, LLC v. Banco de Seguros del Estado, 771 F.3d 980, 986–87 (7th Cir. 2014) and noting that the 7th Circuit declined “to reach the merits of an argument that McCarran-Ferguson preempts the Foreign Sovereign Immunities Act”).

[23] Certain Underwriters at Lloyd’s, London v. Simon, 2007 WL 3047128, at *7 (S.D. Ind. Oct. 18, 2007) (citing Goshawk Dedicated, 466 F.Supp.2d at 1303).

[24] Compare Foresight Energy, LLC v. Ace Am. Ins. Co., 2023 WL 2585931, at *3 (E.D. Mo. Mar. 21, 2023) (New York Convention controls) with Foresight Energy, LLC v. Certain London Mkt. Ins. Companies, 311 F. Supp. 3d 1085 (E.D. Mo. 2018) (McCarran Ferguson controls).