Insurance Industry Expert Testimony: Is It a Legal Conclusion or Custom and Practice?

Insurance Industry Expert Testimony Insurance Industry Expert Testimony: Is It a Legal Conclusion or Custom and Practice? Anthony J. Zarillo, Jr. I. Introduction As a general matter, whether expert witness testimony is admissible has been subject to challenge on a wide variety of issues throughout federal and state courts. The issues triggered by decisions such as Frye v. United States, 1 Daubert v. Merrell Dow Pharmaceuticals, Inc., 2 and Kumho Tire Co., v. Carmichael, 3 have particular application and importance as well to questions regarding testimony provided by experts 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. 4 II. Application of Admissibility Rules 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 Submitted by the author on behalf of the FDCC Extra-Contractual Liability Section. 1 293 F. 1013 (D.C. Cir. 1923). 2 509 U.S. 579 (1993). 3 526 U.S. 137 (1999). 4 Gallatin Fuels, Inc. v. Westchester Fire Ins. Co., 410 F. Supp.2d 417 (W.D. Pa. 2006). 355

FDCC Quarterly/Spring 2008 Anthony J. Zarillo, Jr. is a founding shareholder of the law firm of Bevan, Mosca, Giuditta & Zarillo, P.C., with offices in New Jersey, New York City and Washington, D.C. Mr. Zarillo has represented the insurance industry for more than eighteen years and his vast experience in insurance industry matters includes insurance coverage counseling and litigation, bad faith litigation, and the representation of clients in matters involving insurance intermediaries. In addition to the insurance industry, Mr. Zarillo has a varied practice which includes litigation, telecommunications, New Jersey local and state government law, election law and regulation, and public utility law. Mr. Zarillo earned his law degree from Georgetown University and his B.A., magna cum laude, from Boston College. Mr. Zarillo is admitted to practice in New Jersey, the District of Columbia, New York, the United States District Courts for the District of New Jersey, the District of Columbia, and the Eastern and Southern Districts of New York, and before the United States Courts of Appeal for the Second and Third Circuits. He is a member of the American, New Jersey State, New York 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. assists the trier of fact. In other words, the expert witness cannot substitute for the court in relating to the jury the applicable law. 5 The nature of insurance industry litigation (including coverage and bad faith actions) and the proffered use of insurance industry experts trigger unique questions related to this last point of law. On one hand, as noted above, it is well-settled that an expert s testimony regarding the law should be precluded ordinarily as an invasion of the judicial province. 6 On the other hand, testimony from an expert as to industry custom and practice is often admissible. 5 Cooper v. Pacific Life Ins. Co., No. CV203-131, 2007 WL 430730, at *1 (S.D. Ga. Feb. 6, 2007) (citation omitted). 6 Suter v. General Acc. Ins. Co. of Am., 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. ) (citation omitted). 356

Insurance Industry Expert Testimony Testimony from insurance industry experts often reflects the tension between these two related maxims. Within the context of insurance industry litigation, that tension derives from the fact that, unlike other industries, a significant portion of insurance industry 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 as a result of their own litigation, the insurance industry (whether life and disability carriers or 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 v. General Accident Ins. Co. of Am. addressed expert testimony related to whether the ceding company s treatment of underlying claims was reasonable and its coverage determinations made in good faith. 7 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 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. 8 The 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. 9 7 8 at 792 (citation omitted). 9 at 792-93. 357

FDCC Quarterly/Spring 2008 The district court thereafter denied the motion to exclude the expert s opinions as to whether the ceding company s treatment of the underlying claims was reasonable and its coverage determinations made in good faith. Similarly, a federal court in Florida allowed expert testimony regarding an insurer s duty to defend and indemnify and the existence of a conflict of interest for retained defense counsel. 10 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 been shaped by insurance law. Therefore, his statements reflected that reality. 11 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 principle 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. 12 Other courts have arrived at similar conclusions. In Cooper v. Pacific Life Ins. Co., 13 the plaintiffs proposed expert testimony regarding a life insurance company s alleged duties and subsequent breach of 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 was reliable and relevant as related to industry custom and practice. The district court in Cooper recognized that the line between proper expert testimony (facts, inferences to draw therefrom, and the opinion derived) and improper expert testimony (the actual requirements of the law) is often difficult to draw. 14 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. 15 The district court then ruled that the expert could testify as to the practice usually followed by 10 See Travelers Indem. Co. v. Royal Oak Enterprises, Inc., No. 5:02-CV-58-DC-10TGRJ, 2004 WL 3770571 (M.D. Fla. Aug. 20, 2004). 11 at *2. 12 13 Cooper v. Pacific Life Ins. Co., No. CV203-131, 2007 WL 430730 (S.D. Ga. Feb. 6, 2007). 14 at *1. 15 at *2 (citation omitted). 358

Insurance Industry Expert Testimony insurance companies as regulated by securities laws but could not 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. 16 Furthermore, in allowing for introduction of the expert s testimony, the court noted that the defendants would have an equal opportunity to cross-examine the expert as to his assumptions. 17 In addition, the court would issue appropriate jury instructions to prevent the jury from placing too much weight on the expert s legal conclusions. 18 Contrary to these, 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 & Casualty Co., 19 the court recited the standard rule that expert testimony cannot express legal conclusions regarding the legal obligations of parties to a contract, offer conclusions as to whether a defendant s behavior violates statutory provisions, or offer conclusions about the legal significance of various facts adduced at trial. As a result, the court precluded 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. In Montoyo Lopez v. Allstate Insurance Co., 20 a letter opinion submitted to the court was deemed insufficient to prevent the entry of summary judgment dismissing a claim for bad faith. For reasons beyond the admissibility and foundation issues, the district court disregarded the letter opinion since it consist[ed] primarily of legal conclusions as to the reasonableness of Allstate s actions, which are not proper matters for an expert opinion.... 21 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. 22 The court in Brooks v. J.C. Penny Life Ins. Co. 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. [The expert s] opinions thus do not help the 16 (citation omitted). 17 18 See, e.g., Jenkins v. All Nation Ins. Co., 852 F.2d 571 (table), 1988 WL 72864, at *4 (9th Cir. June 29, 1988) (trial court did not commit reversible error when it admitted expert testimony as to the insurer s bad faith since such evidence elucidated the standards and practices of the handling of personal injury claims by insurance companies ). 19 868 F. Supp. 33 (E.D. N.Y. 1994). 20 282 F. Supp. 2d 1095 (D. Ariz. 2003). 21 at 1104-05. 22 See Brooks v. J.C. Penney Life Ins. Co., 231 F. Supp. 2d 1136 (N.D. Ala. 2002). 359

FDCC Quarterly/Spring 2008 court in analyzing the issues before it. In addition, insofar as the affidavit contains legal conclusions, it is inadmissible. 23 Another district court likewise struck an expert s opinions as to the policyholder s entitlement to life insurance proceeds in Old Line Life Insurance Co. v. Brooks. 24 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. 25 In Coregis Insurance Co. v. City of Harrisburg, 26 a Pennsylvania court was presented with an expert report which purportedly was submitted to assist with the reconstruction of alleged lost policies. 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 at issue and whether they provided coverage for the underlying claim. [T]he 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. 27 Some courts have allowed certain portions of an expert s testimony while excluding others. The determination in Gallatin Fuels, Inc. v. Westchester Fire Ins. Co. 28 provides a good example. In Gallatin, the 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 customs and standards, or whether an insurer lacked a reasonable basis for denying an insured s claim. As a result, the court allowed testimony regarding whether the 23 at 1141 n.5. (citations omitted) 24 No. 3:05-CV-722-DPJ-JCS, 2007 WL 892448 (S.D. Miss. Mar. 22, 2007). 25 at *8 (citation omitted). 26 No. Civ. A. 1:03-CV-920, 2005 WL 2990694 (M.D. Pa. Nov. 8, 2005). 27 at *3. See also Blickenstaff v. R.R. Donnelley & Sons Co. Short Term Disability Plan, No. IP 00-C- 983-B/S, 2002 WL 169320, at *4 (S.D. Ind. Jan. 28, 2002) ( expert may offer his opinion as to facts that, if found, would support a conclusion that the legal standard at issue was satisfied, but may not testify as to whether the legal standard has been satisfied ) (citation omitted); Rigas v. Allstate Ins. Co., No. CV-97-3919 BQRX, 1998 WL 422671, at *3 n.1 (C.D. Cal. Apr. 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. ) (citations omitted). 28 410 F. Supp. 2d 417 (W.D. Pa. 2006). 360

Insurance Industry Expert Testimony carrier violated applicable insurance statutes and regulations. However, the court barred any testimony related to whether the insurance policy applied to the subject loss, whether the insurer acted in bad faith, or how to interpret the subjective intent of the claims handler. A Delaware trial court likewise refused to order a complete bar of proposed expert testimony in a coverage dispute. 29 The court there allowed the introduction of expert testimony as to contract terminology and the context from which the contracts derive. 30 However, the court ruled that the experts could not testify in a way that would tell the jury what result to reach or testify as to legal duties owed under the contracts at issue. Similarly, in Cooper v. Pacific Life Insurance Co., 31 the court held that the expert could opine as to industry custom and practice, but could not present bare conclusions of law. To the extent that these cases might be construed to disclose a principle or rule, it may be that courts are more inclined to bar testimony in simple 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. On the other hand, courts have demonstrated a willingness to allow expert testimony in cases involving bad faith claims. 32 Often, the insurance expert s testimony as to bad faith claims is presented in terms indicating that the expert is opining as to the custom and practice of the insurance industry and simply measuring the particular insurance company s decisions and actions against that custom and practice. 33 Another unreported federal court decision provides insight about where trial courts might be persuaded to draw the line on the admissibility of insurance industry expert testimony. In McCrink v. Peoples Benefit Life Insurance Co., 34 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. 29 See N. Am. Philips Corp. v. Aetna Cas. & Sur. Co., C.A. No. 88C-JA-155, 1995 WL 628447 (Del. Super. Ct. Apr. 22, 1995). 30 at *2. 31 No. CV203-131, 2007 WL 430730 (S.D. Ga. Feb. 6, 2007). 32 See, e.g., Suter v. Gen. Accident. Ins. Co., 424 F. Supp. 2d 781 (D. N.J. 2006). 33 Another factor that bears consideration is whether the matter is to be tried before a court or a jury. Often courts will allow greater leeway to the introduction of insurance industry expert testimony in bench trials under the assumption that the court will be better able to distinguish and ignore impermissible testimony 34 No. 2:04-CV-01068-LDD, 2005 WL 730688 (E.D. Pa. Mar. 29, 2005). 361

FDCC Quarterly/Spring 2008 The district court refused to consider the expert s report with respect to his proffered construction of the insurance policy and the applicability of that 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 its legal burden of proof concerning the motorcycle exclusion. 35 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. Ultimately, his opinion would not assist the trier of fact to understand a technical issue, nor was it based upon reliable scientific methodology. Rather, it was based on the expert s own subjective interpretation of case law and its application to the coverage dispute. However, with respect to the expert s proffered testimony as to bad faith, the district court reached a different conclusion. 36 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. 37 The court therefore determined that the expert s testimony would assist the trier of fact in determining whether the insurance company acted in bad faith. III. Conclusion The use of insurance expert testimony in insurance industry litigation appears to be on the rise. 38 Attorneys must be prepared to face the introduction of insurance expert testimony during summary judgment motions as well as at trial. The rule precluding an expert from providing testimony as to the law or legal conclusions should be argued in support of excluding proposed testimony regarding both bad faith claims as well as coverage issues and the interpretation of policy language. Even if insurance expert testimony is 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, seeking to instruct the fact finder as to the law or the ultimate issue of the case instead. 35 at *4. 36 37 at *4. 38 Manual for Complex Litigation 23.1 (2007). 362