LawyersandSettlements: What were the details of this case?
Richard B. Specter (RBS): This was an insurance bad faith case. The plaintiffs, my clients, Acacia Research Corporation and its then subsidiary, CombiMatrix Corporation, were insured under a directors and officers corporate insurance policy issued by the defendant, National Union Fire Insurance Company. CombiMatrix and one of its officers/directors were sued in late 2000, and immediately tendered the claim to National Union.
The underlying case was a patent and trade secrets case filed against CombiMatrix and its officer/director. I was also one of the defense counsel. National Union assigned an adjuster to the case for the first three months. Thereafter, National Union ceased having anyone assigned to the file, and ceased responding to the insureds, who were left to defend and settle the lawsuit on their own.
When National Union essentially abandoned the insureds, they were left to defend it on their own and pay their own costs, and ultimately they decided that they couldn't face the costs or a trial, so they turned around and settled.
LAS: What did the underlying case concern?
RBS: As I mentioned, CombiMatrix was a subsidiary of Acacia Research at the time, and the insurance policy was issued to cover Acacia and its subsidiaries. CombiMatrix is involved in developing life sciences products, and the product at issue in the underlying case was used for DNA analysis. It was cutting-edge stuff that can determine what kind of cancer you're prone to, what kind of diseases you're likely to develop. As a result of National Union's abandonment of its insureds, CombiMatix's scientific research was stunted because of having to devote so much time and money to the underlying case.
LAS: How did National Union show bad faith in the underlying case?
RBS: Well, National Union essentially abandoned my clients. It appears that they either lost track of the file or control over who was handling it, and failed to have systems in place to prevent this. About 18 months after the original adjuster left the file, a different adjuster discovered the file and contacted my clients, but they had already been forced to settle the underlying case.
There was undisputed evidence from National Union that for a period of a year and a half, no one was assigned to the file, and no one responded to the insureds. National Union offered no explanation as to why this happened.
But National Union's defense in the face of this evidence was that it had acted properly, that National Union had no obligation to do anything under the insurance policy's terms, including to respond to the insureds, and therefore abandonment was proper. National Union's contention was that there was no coverage, or alternatively, that it had no duties until it had received written proof that my clients had paid the self-insured retention, which is like a deductible.
This was a directors and officers policy, which requires the insurance company to reimburse the insured. In a standard liability policy, the insurer directly retains and pays counsel, whereas under a directors and officers policy, the insureds retain and pay counsel, and the insurer reimburses them. My clients immediately tendered the underlying case to National Union as required, they provided case documentation and information, and they ultimately requested National Union to reimburse the defense bills.
My clients also explicity asked National Union what needed to be provided to National Union to get reimbursement, and what case information National Union desired. National Union failed to ever respond, or to do anything to protect the insured. National Union claimed that it didn't have to do anything until it received written proof that the self-insured retention had been paid, even though neither the policy terms nor anything in law required that, nor did National Union ever request that.
LAS: It sounds like a pretty thin defense.
RBS: We thought so, but their defense essentially was that they didn't have to do anything until all those requirements were met. The award that we won in the verdict was broken down in terms of defense costs for the underlying case, which was $1.8 million; the settlement, approximately $20 million; prejudgement interest, approximately $11 million; and attorneys' fees and costs from the Bad Faith case of $3.6 million—in other words, reimbursement for my clients' costs, as we were talking about.
One of National Union's other defenses was that it was only a $10 million insurance policy. However, when the Court finds bad faith, it is entitled to go beyond the policy limits and compensate the plaintiff in full. If National Union hadn't abandoned the insureds, it could have saved itself a lot of money. Of course, if National Union had stepped up to begin with in the underlying case, my clients wouldn't have paid the settlement, and could have defended and won at trial.
LAS: Where does the case stand now?
RBS: The final Judgment should be signed within the next few weeks.
LAS: Do you expect an appeal?
RBS: National Union has posted a bond, which sounds like an appeal is forthcoming. National Union has also retained appellate counsel, so I think that National Union will continue its refusal to pay until the Court makes it pay.
Richard Specter, a 1974 graduate of Washington University, received a JD from George Washington University Law School in 1977. As a partner in Corbett, Steelman and Specter of Irvine, CA, he handles complex commercial and entertainment cases. He has been the subject of television interviews on NBC's Today Show, Extra, and the Discovery Channel.