Legally Speaking

Legally Speaking, June 2010

In this issue:

  • A New Type Of Corporate Entity In Maryland
  • Insurance Companies’ Exposure Resulting From Appointment Of Independent Counsel
  • The Right To A Non-Suit In Virginia Is Not Absolute

A New Type Of Corporate Entity In Maryland

By Thomas McCally and Nat Calamis

On April 13, 2010, Maryland became the first State in the nation to enact legislation creating a new corporate entity known as the “benefit corporation.” The legislation will allow socially conscious entrepreneurs to form businesses with goals of benefiting society while still seeking to earn a profit. Under traditional corporate law, the overarching responsibility of a corporate director is to ensure maximum profits for the corporation’s shareholders. This responsibility can sometimes conflict with goals of benefiting the environment or society as a whole. Under the new Maryland legislation, however, directors of benefit corporations are legally required to consider the impact that their decisions will have on a number of factors in addition to maximizing profit for shareholders, including the potential benefits to employees, customers, the community, and the environment. This article provides a brief summary of the new legislation enabling the creation of benefit corporations.

Any Maryland corporation can elect to become a benefit corporation by including a statement in its charter stating that it is a benefit corporation. Pursuant to the statute, a benefit corporation is required to have as its purpose: the creation of a “general public benefit,” or “a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of specific public benefits.” A “Specific Public Benefit” that benefit corporations may promote include: “(1) providing individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (3) preserving the environment; (4) improving human health; (5) promoting the arts, sciences, or advancements of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; or (7) the accomplishment of any other particular benefit for society or the environment.”

The statute requires directors of benefit corporations to consider the effects of any decision on the stockholders; its employees; its subsidiaries and suppliers; the interests of customers; community and societal considerations; and, the local and global environment. Directors do not owe a duty to any person that is a beneficiary of the benefit corporation, and directors are immune from individual liability by reason of being a director of a corporation.

Benefit corporations are required to provide its stockholders with an annual report that describes the extent to which the benefit corporation pursued and created a general public benefit, the extent to which it pursued and created any specific public benefits and any circumstances that hindered the benefit corporation from creating a public benefit. The report must also include an assessment of the societal and environmental performance of the benefit corporation prepared in accordance with a third-party standard applied consistently with the prior year’s report. “Third Party Standard” is defined as a standard for defining, reporting, and assessing best practices in corporate, social and environmental practice that is developed by a person or entity that is independent of the benefit corporation, and that is transparent in that it discloses the factors considered when weighing performance, the weight given to those factors, and the identity of the persons who develop or change these standards. A benefit corporation’s most recent benefit report must be posted on the public portion of its website, or be available to the public free of charge.

In May of 2010, Vermont became the second state in the nation to pass legislation that allowed for the creation of benefit corporations. It is likely that other states will soon follow suit. In this age of corporate distrust following incidents such as the 2008 financial collapse and the recent British Petroleum oil spill, benefit corporations provide an important vehicle for permitting companies to seek to maximize profit while simultaneously looking to improve society.

Insurance Companies’ Exposure Resulting From Appointment Of Independent Counsel

By William J. Carter, Mariana D. Bravo and Juan M. Sempertegui

Often when a claim is made against an insured, the nature of the claim or the insured’s actions may raise questions regarding coverage available under a policy of insurance. Where that occurs, an insurer often provides a defense to its insured, but reserves its right under the policy concerning any coverage issues.

Under a reservation of rights, an insurer agrees to handle an insured’s claim, including selecting counsel to defend the insured, but reserves its right to deny coverage at a later date based on the insurance policy language. Such a “reservation of rights” may create an ethical conflict of interest between the insured and insurer, allowing the insured, not the insurer, to select counsel to be paid by the insurer. The right of the insured to select counsel was first addressed in a 1985 California decision1. In that case, the court held that, under a reservation of rights in a covered/uncovered count situation, and in the absence of an insured’s consent to representation by counsel appointed by insurer, the insured is entitled to select its own independent counsel at the expense of the insurer.

Allowing an insured the opportunity to select counsel exposes the insurer to two distinct complications. First, counsel selected by an insured may not possess the experience and/or skill necessary to effectively defend the insured. Insurers, in contrast, have the ability to select experienced litigators to effectively advocate for the insured, which may result in minimized financial exposure to the insurer. The second complication is the rates charged by counsel retained by the insurer. Insurers negotiate billing rates with counsel and are generally charged less than independently retained counsel may charge the insured. Without some check and balance mechanism in place, an insured may hire a high-priced firm and the insurer will be expected to cover such a cost. A recent example where this type of exposure became a reality involved a California case where a large law firm billed $450 an hour for an associate who had yet to pass the bar exam.2

Jurisdictions have taken varying approaches to address such complications. Some states have statutes providing guidelines for fees for counsel chosen by an insured. For example, California’s Civil Code §2860(c) grants the insurer the right to require the selected counsel to have at “least five years of civil litigation practice, which includes substantial defense experience in the subject at issue in the litigation” and E&O coverage. The statute also provides that the “insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rate which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” Other states address the attorney fee issue as a matter of common law, applying a reasonableness standard.

In Maryland, when a “reservation of rights” conflict of interest arises, the law requires that the insured be informed of the nature of the conflict and given the right either to accept an independent attorney selected by the insurer or to select an attorney to conduct his defense.3 If the insured “elects to choose his own attorney, the insurer must assume the reasonable costs of the defense provided.”4 In Virginia and D.C., the Independent Counsel issue has not been addressed directly but the general rule is that in cases of conflict of interest, the attorney “represents the insured not the insurer.”5

The Insurance Services Organization (“ISO”), which drafts policy language and obtains approval in the 50 states for insurers to use in its policy language, have drafted an independent counsel endorsement to help insurers address the potential complications.

Although choosing not to utilize the ISO form, some insurance companies have taken proactive steps to address exposure by including relevant provisions in their policies. For example, a major carrier has used the following language to address the complications of independently retained counsel:

“In the event the “insured” is entitled by law to select independent counsel to defend the “insured” at the Insurer’s expense, the attorney fees and all other litigation expenses the insurer must pay to that counsel are limited to the rates the Insurer actually pays to counsel the Insured retains in the ordinary course of business in the defense of similar claims or suits in the jurisdiction where the claim arose or is being defended. Additionally, the Insurer may exercise the right to require that such counsel have certain minimum qualifications with respect to their competency including experience in defending claims or suits similar to the one pending against the “insured” and to require such counsel to have errors and omissions insurance coverage. As respects any such counsel, the “insured” agrees that counsel will timely respond to the Insurer’s requests for information regarding the “claim” or suit.

This type of provision incorporates many of the safeguards addressed in the California statute as does the ISO form.

Despite, however, the potential complications and potential exposure, many insurers have not included the ISO endorsement in their policies nor have they included language of their own to address the issue. The insured, if the endorsement/language is included in the policy, would be bound by the language as part of the contract and prevented from challenging the terms. Requiring potential insureds to agree to such language – requiring that proper counsel is retained at a reasonable rate will substantially minimize any potential exposure that may exist upon the appointment of independent counsel in the event there exists no controlling state law. Insurers should include language in its insurance policies consistent with state statute or case law to avoid and minimize potential complications.

  1. San Diego Navy Fed. Credit Union v. Cumis Ins. Society, 162 Cal.App.3d 358, 208 Cal.Rptr. 494 (1984).
  2. Cobbs, Drew, Insurance Company Challenges Latham’s Fees in Toxic Tort Case, April 22, 2009, The American Lawyer.
  3. Brohawn v. Transamerica Ins. Co., 276 Md. 396, 347 A.2d 84 (1975) (the court did not define what would constitute “reasonable costs”).
  4. Id.
  5. In Re A.H. Robins Co., Inc., 880 F.2 709, 751 (4th Cir. 1989). See also Norman v. INA, 239 S.E.2d 902 (1978).

The Right To A Non-Suit In Virginia Is NOT Absolute

By Kelly M. Lippincott

Nothing is more professionally frustrating than preparing for trial for months to present a winning defense only to have the plaintiff stand up in the middle of the trial and announce that he is taking a voluntary nonsuit. Under Va. Code § 8.03-380, a party can nonsuit any cause of action: before a motion to strike the evidence has been sustained; before the jury retires from the bar; or, before the action has been submitted to the court for decision. Plaintiff then has six (6) months to re-file the same lawsuit and re-litigate the case. Plaintiff’s re-filing often results in his taking new discovery and designating new experts – and, therefore, more fees and costs for the defense.

A plaintiff is entitled to take a nonsuit as a matter of statutory right. Despite popular belief, however, that right is not absolute. Va. Code § 8.01-380(D) states:

[a] party shall not be allowed to nonsuit a cause of action, without the consent of the adverse party who has filed a counterclaim, cross claim or third-party claim which arises out the same transaction or occurrence as the claim of the party desiring to nonsuit unless the counterclaim, cross claim or third-party claim can remain pending for independent adjudication by the court.”

A counterclaim, cross claim or third-party claim can, therefore, block plaintiff from exercising his right to a nonsuit, if the claim cannot be independently adjudicated.

In Skinner v. Clements, 45 Va. Cir. 482 (1998), plaintiff sought to nonsuit her case. Defendant had filed a third-party claim for contribution and indemnification against John Doe. The Circuit Court for Spotsylvania County held that a third-party claim for contribution and indemnification cannot be independently adjudicated if the main claim is nonsuited. Therefore, plaintiff had no right to a nonsuit.

In Gilbreath v. Brewster, 250 Va. 436, 63 S.E.2d 836 (1995), plaintiff brought suit arising out of an automobile accident. Defendant asserted a counterclaim against plaintiff driver and a third-party claim for contribution from plaintiff passenger. The court held that the counterclaim and the third-party claim could not be independently adjudicated, and therefore, plaintiff did not have a right to a nonsuit. The court held that a third-party claim is a derivative claim. As such it cannot be independently adjudicated.

If a counterclaim involves the same issues as raised in the plaintiff’s claim, then the counterclaim cannot be independently adjudicated. Parsch v. Massey, 71 Va. Cir. 209, 5 (2006). The presence of at least one claim that cannot be adjudicated independently makes the counterclaim incapable of independent adjudication. Under this circumstance, therefore, nonsuit is impossible.

Accordingly, when faced with the maddening situation where Plaintiff attempts to nonsuit to avoid a winning defense, do not just assume you have no options. Always remember that Plaintiffs do not have an absolute right to a nonsuit – a counterclaim, cross-claim, or third-party claim might stand in plaintiffs’ way.

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