INSURANCE INDUSTRY EXPERT TESTIMONY IS IT A LEGAL CONCLUSION OR CUSTOM AND PRACTICE?

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1 FDCC 2007 Annual Meeting Sun Valley Resort Sun Valley, Idaho July 22 July 29, 2007 INSURANCE INDUSTRY EXPERT TESTIMONY IS IT A LEGAL CONCLUSION OR CUSTOM AND PRACTICE? Insurance Coverage, Extra-Contractual Liability and Construction Joint Section Meeting Thursday, July 26, :00 AM 9:45 AM Presented by: Anthony J. Zarillo, Jr., Esq. Courter, Kobert & Cohen, P.C ROUTE TRINITY STREET HACKETTSTOWN, NEW JERSEY NEWTON, NEW JERSEY TEL.: TEL.: FAX: FAX:

2 ANTHONY J. ZARILLO, JR., ESQ. Anthony J. Zarillo, Jr. is a shareholder in the law firm of Courter, Kobert & Cohen, P.C., with offices in Hackettstown, Morristown, Trenton and Newton, New Jersey and New York City. Mr. Zarillo is a member of the firm's Litigation Department and chairs the Insurance and Reinsurance Practice Group. Mr. Zarillo's practice includes complex commercial and general civil litigation, with a specialization in insurance coverage counseling and litigation. Mr. Zarillo has extensive experience representing insurance companies in connection with first and third-party coverage, bad faith, intermediary and reinsurance disputes. Mr. Zarillo has also represented various clients in other types of complex commercial litigation, including warranty, contract, errors and omissions, and computer software lawsuits. In addition, Mr. Zarillo has an active practice defending clients involved in various forms of personal injury litigation. Mr. Zarillo also serves as general counsel to a county municipal utilities authority and represents clients in the areas of New Jersey local and state government law, election law and regulation and public utility and telecommunications law. Mr. Zarillo earned his law degree from Georgetown University, where he served as Assistant Business Editor of the Georgetown International Environmental Law Review. He received his B.A., magna cum laude, from Boston College. Mr. Zarillo is admitted to practice in the State and Federal Courts of New Jersey and the District of Columbia, the State Courts of New York and before the United States Court of Appeals for the Third Circuit. He is a member of the American, New Jersey State, and Morris County bar associations. He is also a member of the Federation of Defense and Corporate Counsel and the Defense Research Institute. His peers named Mr. Zarillo as one of New Jersey s Super Lawyers in 2006 and 2007.

3 INSURANCE INDUSTRY EXPERT TESTIMONY IS IT A LEGAL CONCLUSION OR CUSTOM AND PRACTICE? As a general matter, whether expert witness testimony is admissible is the subject of a number of challenges in a wide variety of cases in both Federal and state courts. The issues triggered by decisions such as Frye v. United States, 293 F (D.C. Cir. 1923), Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137 (1999) have equal application and importance to questions related to expert testimony provided by an expert in the insurance industry. In the Federal system, and in state courts that follow Daubert, the Daubert gate keeping function will require proof before the trial court that: (1) the insurance witness is qualified as an expert; (2) the insurance witness is testifying as to matters requiring technical or specialized knowledge; and (3) the proposed testimony fits the facts of the case. Gallatin Fuels, Inc. v. Westchester Fire Insurance Company, 410 F.Supp.2d 417, 419 (W.D.Pa. 2006). Of central importance when dealing with insurance industry experts is the additional proposition that otherwise admissible expert testimony may be excluded if it constitutes a legal conclusion or otherwise tell[s] the jury what conclusion to reach, as this in no way assists the trier of fact. [citation omitted]. In other words, the expert witness cannot substitute for the court in relating to the jury the applicable law. Cooper v. Pacific Life Insurance Company, 2007 WL (S.D.Ga. February 6, 2007). The nature of insurance industry litigation (including coverage and bad faith actions) and the proffered use of insurance industry experts trigger unique questions 1

4 related to this last point of law. On one hand, as noted above, it is well settled that an expert s testimony as to the law should ordinarily be barred as an invasion of the province of the court. Suter v. General Acc. Ins. Co. of America, 424 F. Supp.2d 781, 791 (D.N.J. 2006)( The district court must limit expert testimony so as to not allow experts to opine on what the law required or testify as to the governing law. )(citations omitted). On the other, testimony from an expert as to the custom and practice of an industry is often admissible. Id. Testimony from insurance industry experts often demonstrates the tension between these two well-known maxims. That tension, in insurance industry litigation, arises from the fact that, unlike other industries, a major portion of the insurance industry s business particularly the claims function directly involves the law. While many businesses come into contact with the legal system, and thus the law, only sparingly and as a result of their own litigation, the insurance industry (including life and disability carriers, as well as liability insurers and reinsurers) is in constant contact with the legal system. In a lawsuit concerning the coverage obligations of a reinsurer, the District Court in Suter addressed expert testimony related to whether the ceding company s handling of underlying claims was reasonable and its coverage determinations made in good faith. The Suter court succinctly summarized the problems posed by the expert testimony of an insurance expert on such issues: To some extent, [the expert s] opinions do, indeed, sound like legal conclusions. During his thirty-four years experience in the insurance/reinsurance industry, [the expert s] responsibilities included claims management, litigation management, and executive responsibility for both 2

5 direct insurance and assumed reinsurance claims. His professional duties thus required an understanding of the applicable laws and the ways in which their interpretation by the courts affects the insurance business. Since the custom and practice of the insurance industry includes periodic settlement of claims disputes by courts, [the expert s] testimony sounds less like an impermissible legal conclusion or personal viewpoint than like the type of knowledge that would be possessed, or the type of conclusion that might be reached, by any similarly situated insurance professional. Opinions that are based on this type of generalized understanding of the laws affecting a single business or industry are not necessarily the types of legal conclusions sought to be excluded from evidence. The District Court continued: [the expert s] chosen profession requires a certain understanding of a specialized area of law. Where an expert is opining as to the custom and practice of a particular business, and where someone who is an expert in a particular field would be expected to understand the ways in which the laws affect the business, such testimony should be admitted. Id. at In Suter, the District Court denied the motion to exclude the expert s opinions as to whether the ceding company s handling of the underlying claims was reasonable and its coverage determinations made in good faith. Similarly, a Federal Court in Florida allowed expert testimony as to an insurer s duty to defend and indemnify and the existence of a conflict of interest for retained defense counsel. See Travelers Indemnity Company of Illinois v. Royal Oak Enterprises, Inc., 2004 WL (M.D.Fla. August 20, 2004). In rejecting the carrier s motion to strike or limit the expert s testimony, the Court acknowledged that the expert s opinions as to custom and practice in the insurance industry have undoubtedly 3

6 been shaped by insurance law and, therefore, his statements reflect that reality. Slip copy at 3. However, where, as here, the substance of the expert s testimony concerns ordinary practices and trade customs which are helpful to the fact-finder s evaluation of the parties conduct against the standards of ordinary practice in the insurance industry, [the expert s] passing reference to a legal principal or assumption in an effort to place his opinions in some sort of context will not justify the outright exclusion of the expert s report in its entirety. Id. Other courts have come to similar conclusions. In Cooper, 2007 WL , the plaintiffs proposed expert testimony as to a life insurance company s alleged duties and subsequent breach of its duties related to the sales process of its policies. The defendant carrier alleged that the expert s opinions constituted improper legal conclusions and were not the product of reliable principles and methods. Plaintiffs countered that the expert s proposed testimony related to industry custom and practice and was reliable and relevant. Slip op. at 1. The District Court in Cooper recognized that the line between proper expert testimony (facts, inferences to draw there from, and the expert s opinion) and improper expert testimony (the actual requirements of the law) is often difficult to draw. The Court ruled that the expert could opine as to industry custom and practice without presenting bare conclusions of law. The Court was persuaded that insurance industry custom and practice is shaped by legal requirements, and [the expert] does opine that the law guides the standards Slip op. at 2. The District Court then ruled that the expert could testify as to the practice normally followed by insurance companies regulated by securities laws but could not 4

7 instruct the jury on the particular legal requirements of the statutes and regulations. In rendering an opinion on industry practice, the expert was entitled to state reasonable assumptions regarding the requirements of the applicable legal requirements. Id. (citations omitted). Furthermore, in allowing the expert s testimony, the Court noted that the defendants would have the opportunity to cross-examine the expert as to his assumptions. In addition, the Court would use appropriate jury instructions to prevent the jury from placing too much weight on the expert s legal conclusions. Id. See e.g. Jenkins v. All Nation Insurance Company, 852 F.2d 571, 1988 WL (9 th Cir. June 29, 1988)(trial court did not commit reversible error when it admitted expert testimony as to the insurer s bad faith as such evidence elucidated the standards and practices of the handling of personal injury claims by insurance companies ). Slip op. at 4. However, a number of other decisions have barred the introduction of expert testimony from insurance experts. For example, in Breezy Point Cooperative, Inc. v. Cigna Property and Casualty Company, 868 F. Supp. 33 (E.D.N.Y. 1994), the Court recited the standard rule that expert testimony cannot express legal conclusions as to the legal obligations of parties to a contract, offer conclusions concerning whether a defendant s behavior violates statutory provisions or offer conclusions as to the legal significance of various facts adduced at trial. Id. at 36 (citations omitted). As a result, the Court barred the introduction of an expert s opinion that a policyholder s alleged failure to provide timely notice of a claim violated the terms of the policy. Id. In Montoyo Lopez v. Allstate Insurance Company, 282 F. Supp. 2d 1095 (D.Ariz. 2003), a letter opinion submitted to the Court was deemed insufficient to prevent the 5

8 entry of summary judgment dismissing a claim for bad faith. In addition to admissibility and foundation issues, the District Court disregarded the letter opinion since it consists primarily of legal conclusions as to the reasonableness of Allstate s actions, which are not proper matters for an expert opinion... Id. at Similarly, a District Court refused to consider an expert s opinion as to: (1) the carrier s failure to define significant terms in the policy; (2) the ambiguity of the relevant exclusion; and (3) the alleged failure of the carrier to adequately investigate the claim. See Brooks v. J.C. Penney Life Insurance Co., 231 F. Supp. 2d 1136, 1141n.5 (N.D.Ala. 2002). The Court in Brooks observed that the expert affidavit in question appears to consist primarily of legal conclusions, which are the province of the court to make, along with a few factual observations that the court is capable of making without the assistance of an expert... [citation omitted] [The expert s] opinions thus do not help the court in analyzing the issues before it. In addition, insofar as the affidavit contains legal conclusions, it is inadmissible. [citation omitted] Id. at 1141n.5. A District Court struck an expert s opinions as to the policyholder s entitlement to life insurance proceeds in Old Line Life Insurance Company v. Brooks, 2007 WL (S.D.Miss. March 22, 2007). The Court s decision was based, in part, on the expert s citation to well-known legal treatises on insurance law. [A]llowing an expert to give his opinion on the legal conclusions to be drawn from the evidence both invades the court s province and is irrelevant. Slip op. at 8 (citation omitted). In Coregis Insurance Company v. City of Harrisburg, et al., 2005 WL (M.D.Pa. November 8, 2005), the Court was presented with an expert report, which purportedly was submitted to assist with the reconstruction of alleged lost policies. 6

9 However, the report went on to address the issue before the Court: namely whether the insurer was obligated to provide its insured with a defense and indemnity for the underlying claim. The District Court found that the expert s ultimate opinions represented inappropriate legal conclusions about the proper means of interpreting the insurance policies and whether they provided coverage for the underlying claim. Slip op. at 3. [the expert s] legal analysis reads as though it were stripped directly from [the insured s] legal papers filed in this case in order to bolster the [insured s ] argument that Anthem somehow represents binding law on the proper scope of bodily injury coverage. Id. at 4. See also Blickenstaff v. R.R. Donnelley & Sons Company Short Term Disability Plan, et al., 2002 WL (S.D.Ind. January 28, 2002)(expert may offer opinions as to facts that, if found, would support a conclusion that the legal standard at issue was satisfied, but cannot testify as to whether the legal standard has been satisfied). Slip op. at 4.; and Rigas v. Allstate Insurance Company, 1998 WL (C.D.Cal. April 16, 1998)( Legal conclusions are not helpful to the trier of fact... Further, although experts are not generally restricted from testifying as to ultimate issues in the case... they may not instruct the trier of fact on the law. ) Slip op. at 3n.1 (citations omitted). Some courts have allowed certain portions of an expert s testimony while excluding others. The Gallatin case is a good example. In Gallatin, the District Court was presented with expert testimony on a bad faith allegation arising out of a property insurance claim. The Court first noted that, while an insured is not required to present expert testimony in order to support a bad faith claim, such expert testimony may be admissible if it is related to claims adjusting procedure, compliance with industry 7

10 customs and standards or whether an insurer lacked a reasonable basis for denying an insured s claim. Gallatin, 410 F.Supp.2d at 421. As a result, the Court allowed testimony related to whether the carrier violated applicable insurance statutes and regulations. Id. at However, the Court barred any testimony related to whether the insurance policy applied to the subject loss, whether the insurer acted in bad faith and as to the subjective intent of the claims handler. Id. at A Delaware trial court refused to order a complete bar of proposed expert testimony in a coverage dispute. See North American Philips Corporation v. Aetna Casualty and Surety, et al WL (Del.Super.Ct. April 22, 1995). The Court there allowed the introduction of expert testimony as to contract terminology and the context from which the contracts derive. However, the Court ruled that the experts could not testify in a way that tells the jury what result to reach or to testify as to legal duties owed under the contracts at issue. Slip op. at 2-3. Similarly, in Cooper v. Pacific Life Insurance Company, the Court held that the expert can opine as to industry custom and practice, but cannot present bare conclusions of law. Cooper, 2007 WL , slip op. at 1. To the extent that a rule might be revealed by these cases, it may be that courts are more inclined to bar testimony in straight insurance coverage disputes. The rule against an expert providing testimony as to the law or bare legal conclusions can provide a powerful argument supporting the exclusion of expert testimony related to coverage issues, the interpretation of an insurance policy and whether or not a particular policy provides coverage for a particular claim. 8

11 On the other hand, courts have shown a willingness to allow expert testimony in cases involving bad faith claims. Often, the insurance expert s testimony as to bad faith claims is presented in terms reflecting that the expert is opining as to the custom and practice of the insurance industry and merely measuring the particular insurance company s decisions and actions against that custom and practice. 1 Another unreported Federal Court decision provides insight as to where trial courts might be persuaded to draw the line on the admissibility of insurance industry expert testimony. In McCrink v. Peoples Benefit Life Ins. Co., 2005 WL (E.D.Pa. March 29, 2005), the District Court addressed the admissibility issue in the context of a lawsuit involving a coverage dispute over accidental death benefits and a statutory bad faith claim under Pennsylvania law. The plaintiff submitted an expert report addressing both the coverage issues and construction of the accidental death policy as well as the bad faith claim. The District Court refused to consider the expert s report with respect to his proffered construction of the insurance policy and the application of his construction to the factual circumstances of the claim. The Court noted that the report was littered with impermissible legal conclusions on the issue of contract construction, such as [the expert s] finding that the term operating is ambiguous, that the Court should adopt the definition proffered by plaintiffs, and that defendant has not met it legal burden of proof concerning the motorcycle exclusion. 1 Another factor to take into account is whether the matter is to be tried before a court or a jury. Often courts will give more leeway to the introduction of insurance industry expert testimony in bench trials under the assumption that the court will be better able to weed out and ignore impermissible testimony. Suter, 424 F. Supp.2d at

12 Slip op. at 3 (citation omitted). The Court went on to conclude that the expert s construction of the insurance policy, although based on his understanding of insurance law, was not the proper subject of expert testimony. It would not assist the trier-of-fact to understand a technical issue and it was not based upon reliable scientific methodology, but rather on the expert s own subjective interpretation of case law and its application to the coverage dispute. Id. at 3-4. However, with respect to the expert s proffered testimony as to bad faith, the District Court reached a different conclusion. While expert testimony is not required to support a bad faith claim under Pennsylvania statutory law, it is permitted in claims involving complex or highly technical insurance issues. Id. at 4. The Court determined that the expert s testimony would assist the trier-of-fact in determining whether the insurance company acted in bad faith. Id. The use of insurance expert testimony in insurance industry litigation appears to be on the rise. Attorneys must be prepared to face the introduction of insurance expert testimony during summary judgment motions as well as at trial. The rule against an expert providing testimony as to the law or legal conclusions should be argued in support of excluding proposed testimony as to both bad faith claims as well as coverage issues and the interpretation of policy language. Even if insurance expert testimony is 10

13 allowed as to bad faith claims, attorneys should be prepared to argue that portions of the testimony do not reflect reliable opinions as to industry custom and practice, but rather seek to instruct the fact finder as to the law or the ultimate issue of the case. This paper was authored by Anthony J. Zarillo, Jr. Mr. Zarillo is a shareholder in the firm and Chair of the Insurance and Reinsurance Practice Group. The opinions expressed here are the author s alone and do not necessarily represent the views of any of the Firm s, or the author s, current or former clients. Actual resolution of legal issues depends on many factors, including variations of facts and relevant laws. This paper is not intended to provide legal advice, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel. 11