CALIFORNIA SUPREME COURT DECIDES IN FAVOR OF INSURER CLAIM FOR REIMBURSEMENT

In a recent decision¹, the California Supreme Court held that when an insurer, uncertain about its defense obligations under a CGL policy, agrees to defend under reservation of rights, it can later recoup all of its defense costs if it shows that the third-party lawsuit against the insured never presented any potential for policy coverage. In Scottsdale, the insured (MV Transportation) was sued by a third party (Laidlaw Transit Services) for alleged improper use of Laidlaw's trade secrets to prepare tailored competitive bids for specific urban transportation contracts. The insurer (Scottsdale) defended under reservation of rights, including the right to seek reimbursement for uncovered claims under Buss v. Superior Court (1997) 16 Cal. 4th 35. After the case settled, the insurer sought reimbursement of all defense fees and costs expended, under the theory that the allegations of the third-party complaint did not constitute "advertising injury" under the two CGL policies issued to MV Transportation.

.The Court of Appeal agreed with Scottsdale that neither policy afforded coverage: the first policy did not insure individual customer solicitations, but rather required widespread promotional activities directed to the public at large; as for the second policy, the Laidlaw complaint failed to allege that information was broadcast or published by MV Transportation, as required under the policy. In spite of the court's conclusion that neither policy ever afforded potential coverage for the insured, the court nevertheless ruled that the insurer could not recoup fees and costs previously expended on behalf of the insured because once the insurer began defending, it could extinguish its duty only by a judicial determination that no potential for coverage existed. The Appellate Court ruled that this determination operated only prospectively, not retroactively, and therefore the insurer could not recover amounts already spent in defense of the insured.

The Supreme Court disagreed. Citing Buss, it held that the insurer should not be placed in a Catch-22 situation, whereby it must choose between refusing to defend from the onset, and subjecting itself to bad faith liability if its refusal is proven unreasonable--or defending without any recourse against the insured for costs and fees already expended, if it is later discovered that no duty was ever owed. The Court further held that the insurer should not be forced to file a declaratory relief action while the third-party action is pending in order to seek an adjudication as to its defense obligation, as often such an action will be stayed if its adjudication will decide issues that overlap with the third-party lawsuit and which may prejudice the insured.

What does this mean for insurers? The Scottsdale decision has two important implications for insurers. First, if the insurer can show that there was never any potential for coverage under the policy, it will be able to recoup all of the sums it expended in defense of a third-party lawsuit. Such a showing will depend on whether factually there was a potential for coverage at the time of the insurer's evaluation of the tender, and facts subsequently developed in the third-party lawsuit conclusively negated such potential--or whether there was never any potential for coverage, given the facts alleged in the complaint and extrinsic evidence relied upon by the insurer in its evaluation.² Under the reasoning of Scottsdale, in the former scenario the insurer may not recoup defense fees and costs, in the latter scenario it can. This means that the more the insurer is able to rely on legal grounds to later withdraw from a defense already assumed under reservation, which do not depend on facts developed in discovery from the third-party lawsuit, the more likely the insurer will be able to show there was never any potential for coverage and be able to recoup all defense expenditures.

The second implication of Scottsdale which is helpful for insurers is the Supreme Court's affirmation of the insurer's use of Buss-reservation language to recoup all defense fees and costs if it later is proven that there was never any potential for coverage. The insured had argued that reserving "Buss reimbursement rights" meant that the insurer could seek reimbursement only for uncovered claims in "mixed actions," where some claims are covered and some are not, and where the entire action is being defended from the onset. The Supreme Court disagreed, holding that reimbursement has always been possible where the entire action was uncovered, and Buss only extended this insurer right to "mixed actions." Therefore, using standard Buss reimbursement language in a reservation of rights letter is sufficient to reserve the right to recover all defense expenditures if it is later shown there was never any potential for policy coverage.

¹ Scottsdale Insurance Co. v. MV Transportation (Cal. Jul. 25, 2005) 2005 WL 1712889

² In Scottsdale, the insurer nevertheless initially accepted defense under reservation because it was uncertain about the law relevant to coverage.

GIFTING AS AN ESTATE PLANNING TOOL

The wisdom of making a will is well settled as sound legal advice, and rightly so. Less talked about, but equally advisable for many people, is the use of gifts during one's lifetime as a method for estate planning. Apart from the intangible benefits that flow from the fact that, as the saying goes, it is more blessed to give than to receive, gifting has favorable down-to-earth, dollars-and-cents ramifications.

Gifts reduce the size of the donor's estate that will be subject to court administration, thereby cutting probate costs and potential estate tax liability. Less obvious, but equally advantageous, is the way that gifts can provide savings on income taxes. This occurs when income-producing property is given by an individual in a high income tax bracket to someone in a lower tax bracket.

Gifts do not trigger income tax liability for the recipient. However, the original cost, or basis, of the gift remains for the recipient what it was for the donor. As a result, if the recipient later sells the property, he generally will owe capital gains tax on the difference between the donor's basis and the sales price.

As for the gift tax, the starting point to consider is that the federal Government levies the tax on transfers of real or personal property made during the giver's lifetime where something of similar value is not received in return. For tax purposes, the dollar value of a gift is the fair market value of the property when it is given, less the fair market value of anything received in return. The donor is liable for any gift tax that is due, but if the donor does not pay the tax the donee becomes personally liable.

An annual exclusion of up to $11,000 is available for transfers to other persons without payment of the federal gift tax. Rather than pay the gift tax on gifts over $11,000, the donor can choose to exempt as much as $1 million in gifts above this exclusion over his lifetime. The donor does not need to file a federal gift tax return for gift amounts less than $11,000. Because the exclusion amount is per donee, any one donor actually can make gifts in a large total amount, without incurring a gift tax, by giving to many different recipients. For a married couple, the annual exclusion is $22,000 per donee.

There is an unlimited marital deduction provision in the federal gift tax law, so that no gift tax is due, and no return need be filed, for gifts between spouses in any amount. Also excluded from the gift tax are amounts paid by a donor to a qualified educational institution for another's tuition, or to a health-care provider for someone's medical services. Gifts to qualified charitable, religious, and educational entities, government agencies, and many organizations with tax-free status are not subject to the gift tax.

This article merely introduces the subject of the gifting of property. Estate planning techniques and tax laws are complex. You should always consult with a qualified professional to assist you in such matters.

SAFEGUARDS FOR ELECTRONIC BANKING

In banking as in so many other areas, the trend is clear: We continue to move steadily away from traditional paper transactions toward high-tech means of conducting our business. It will not happen overnight, though, and even the most technophobic among us should be assured that there are some federal laws and regulations in place that will make the transition easier and more secure.

Electronic Fund Transfer Act

The methods for electronic fund transfers (EFTs) are already commonplace for many bank customers. They include ATMs, debit or check cards, preauthorized deposits and withdrawals, and telephone transfers. The federal Electronic Fund Transfer Act answers some basic questions about using EFT services. The Act is especially important when things go wrong, providing rules for the correction of errors and dealing with loss or theft.

Financial institutions must provide documentation of EFTs in two forms: terminal receipts and periodic statements. Among other pieces of information, both documents must include the type of transfer, the amount and date of the transaction, and the location of the terminal. For preauthorized transfers that occur at regular intervals, the institution must provide a notice that the transfer occurred as scheduled.

As with credit cards, financial institutions must investigate and promptly correct any EFT errors reported by the consumer, but there are some differences in the details. For errors like unauthorized or incorrect EFTs, or omission of an EFT from a statement, a consumer should contact the institution as soon as possible, and no later than 60 days after receiving the statement showing the error. As a general rule, the institution must promptly investigate and resolve the matter within 45 days. If more than 10 days pass, it must make the correction, subject to the results of the investigation. Such a recredit is made final if the institution finds an error; if it does not, it must explain the outcome of its investigation in writing to the consumer.

Loss Limits

If your credit card is lost or stolen, your loss is limited to $50 per card. That is also the general rule for an EFT card or code, but with the important caveat that procrastination in reporting a lost or stolen EFT card or code can be much more expensive. The exposure limit jumps to $500 for a consumer who does not report the loss or theft within two days of learning of it. Not only that, but failure to report an unauthorized transfer within the 60-day period for doing so creates unlimited exposure to losses from transfers made after the 60-day period.

Proceed with Caution

The federal Government provides some EFT protection for old hands and novices alike, but the best approach is to combine that protection with your own safe practices. Keep a low profile for thieves and scam artists by protecting your personal information, such as bank account numbers, passwords, and Social Security numbers. Never respond with such information to unsolicited telephone calls or e-mails. Verify the legitimacy of a website address before providing personal information on the site. It is a good idea to have virus protection and a "firewall" on your computer to keep hackers out. Finally, keep good banking records and review each bank statement promptly so that you can report anything suspicious you see in time for it to do you the most good.

RETIREMENT GUIDE FOR SMALL BUSINESSES

The Internal Revenue Service has created a free CD-ROM that is designed to help small businesses establish and maintain retirement plans for employees. Sections on setting up contributions, investments, and distributions have information not only from the IRS, but also from the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Social Security Administration. Some of the contents of the CD-ROM include:

* Rules for traditional and Roth IRAs, as well as other retirement plans;

* Investing your IRA;

* Publications and forms;

* Retirement calculator;

* Video clips on retirement planning;

* Frequently asked questions;

* Research material on IRAs; and

* Links to more retirement information on government websites.

You can order the CD-ROM online at www.irs.gov/retirement or call toll-free 800-829-3676 and request Publication 4395.

PROTECT YOUR HOME WITH TITLE INSURANCE

When someone buys a home, in addition to the land, bricks, and wood, the buyer receives the legal title to the property. If the title is defective, it could interfere with enjoyment of the property and result in financial loss. When title insurance is purchased by a property owner, the insurer guarantees that the owner has clear title to the property, free of claims or encumbrances.

Title insurance begins with a search of land records tracing the property's "chain of title" back in time through previous owners. A title search should reveal any legal documents that do not clearly pass title, such as where incorrect names or notary acknowledgments appear, as well as outstanding mortgages, judgments, or tax liens. Even a thorough search by an experienced title examiner cannot be absolutely certain to detect every problem, however. Title insurance protects against the unseen hazards that may not surface until long after property is purchased. Some of the risks against which title insurance gives protection include: a forged deed that transfers no title to the property; previously undisclosed heirs with claims against the property; and a legal document executed under an invalid or expired power of attorney.

A title insurance policy protects the insured party, such as the home buyer or the buyer's mortgage lender, against losses suffered if the title is found to be defective, even after a search of land records suggests no problems. Lenders' title insurance decreases and eventually is discontinued as the loan is paid off. Owners' title insurance, issued in the amount of the purchase price, lasts as long as the insured has an interest in the property.

As with any other insurance policy, the fine print in a title insurance policy must be examined with care. Typically, there are exclusions or exceptions from coverage. For example, the effects of governmental laws, ordinances, and regulations are generally excluded. You also should be aware of two other common policy provisions. The first is a standard arbitration clause, requiring binding arbitration to resolve any dispute under a specified dollar limit. The second provision, a "co-insurance" clause, states that the owner must obtain increased coverage if the insured property is improved in order to furnish the same level of protection.

Title insurance protection takes various forms. The insurer will negotiate with third parties about their claims against the insured property, pay for defending against an attack on the title, and pay claims if necessary. Title insurance also helps to make sure that a dream home will not become a legal nightmare for the home buyer.

QUOTABLE

"Supposing is good, but finding out is better."

Mark Twain

For more information, contact:
Robert L. Sallander, Jr
Managing Partner
6111 Bollinger Canyon Road, Suite 500
San Ramon, CA 94583-0010
Telephone: 925-866-1000
rsallander@gpsllp.com
www.gpsllp.com