Re: The Sex.Com Chronicles, by Charles Carreon
Posted: Fri Jun 13, 2014 1:40 am
MAKING LEMONADE
We’re all familiar with the saying, “When life gives you lemons, make lemonade.” When my fax machine sprang to life, and started spewing out a lawsuit against Gary Kremen, alleging multiple tortuous acts, and seeking $9 million in damages, this was clearly an incoming shipment of lemons. This lawsuit was procedurally presented as a “counterclaim” by “counter-plaintiffs” Cohen, YNATA and Sandman Internacional. A counterclaim is no different in its effect upon the “counter-defendant” than a regular lawsuit, and gives the “counter-plaintiff” full rights of discovery and other procedural devices for wreaking havoc. As it was still spewing out of the fax machine, I called Gary and told him that Cohen was cross-claiming against him for $9 million for Defamation, Unfair Competition, and Cybersquatting. Then I had a question: “Gary, do you have insurance for your business activities?” Yes, he thought he did. I told him to fax me his policy immediately.
Gary may have had trouble finding some documents, but he had his State Farm insurance policies to me within hours. It looked very good. He had one policy for $1 million in coverage, and another for $300,000. They both covered slander, that is, defamation. I called Gary back with the happy news. We would be making lemonade, and State Farm was buying the sugar!
Of course, as the old adage goes, “there’s many a slip twixt the cup and the lip,” and State Farm might have very different ideas about springing for our lemonade party, but I knew once Gary understood the principles of insurance bad faith law, his burning sense of urgency would get us either a defense or a hell of a lawsuit against State Farm. Because insurance companies don’t always like to defend you when a guy like Cohen, worth maybe hundreds of millions, sues you because you called him a thief. Or they might not defend you very aggressively. The key to getting a good, vigorous defense, worth hundreds of thousands of dollars, is knowing the law of insurance bad faith.
I learned about insurance bad faith first from Steve Schiffrin, a much-published author on freedom of speech and the First Amendment who now teaches at Cornell Law School. Steve was brilliant, way too brilliant in fact to be fully appreciated by a classroom of 75 new law students lucky enough to learn basic tort law from a bona fide fucking genius. Steve was what you’d call pudgy, with thinning, sandy hair, and the complexion of a guy who rarely–if ever–goes to the beach. He was sweetly sarcastic, and enjoyed dealing legal propositions with a broad outward sweeping movement of his right arm, hand extended, palm upward, with a satisfied pursing of his lips, and eyebrows contracting to make the point.
Steve introduced us to insurance bad faith law as the place where the law of torts -- which deals with legal wrongs between strangers -- collides with the law of contracts, which deals with legal disputes between contracting parties. You often get more in damages for tort cases, where you recover the entire loss, including things like pain, suffering, and emotional distress, than in contract lawsuits, where damages are usually limited to the face amount of the contract.
Steve introduced us to the case of Crisci v. Security Insurance. In that case, an elderly Italian widow named Rosina Crisci owned a rental with a second floor walkup, which was insured by Security Insurance for $10,000. She also had a very hefty female tenant. One day the stairs broke and the hefty lady fell straight through, leaving her hanging in midair, which caused physical injury and a “severe psychosis.” She had no prior history of mental problems. The hefty lady’s lawyers sued the landlady, and Security Insurance appointed lawyers to defend Mrs. Crisci. The lawyers who Security hired scoffed at all of the plaintiff’s settlement demands, which started at $400,000, but dropped to $10,000, and even lower, to $9,000. Even though Security’s expert physicians predicted a verdict in excess of $100,000, the company offered only $3,000 for the physical injuries, refusing to pay “one cent” for the psychological injuries. Mrs. Crisci offered to kick in $2,500 if Security would pay the $6,500 difference between that and the final $9,000 demand, but Security rebuffed this opportunity as well.
The hefty lady went to trial and got the $100,000 trial verdict Security’s doctors had warned about. Her lawyers collected $10,000 from Security, the full amount of the insurance coverage, and then reached a settlement with poor Mrs. Crisci, who lost everything. As the California Supreme Court put it, Mrs. Crisci, “an immigrant widow of 70, became indigent. She worked as a babysitter, and her grandchildren paid her rent. The change in her physical condition was accompanied by a decline in physical health, hysteria and suicide attempts. She then brought this action.”
Mrs. Crisci sued Security for “breach of the covenant of good faith and fair dealing.” This “covenant” imposes a duty on the contracting parties to “do everything necessary to achieve the purposes of the contract, and nothing to defeat those contractual purposes.” The California Supreme Court held that the covenant of good faith and fair dealing was especially important when it comes to an insurance contract, because it is a contract for personal security and peace of mind. Thus, the court found that by rejecting a settlement demand within policy limits ($10,000 or less) when it was reasonably clear Mrs. Crisci would lose far more at trial, Security violated the covenant of good faith and fair dealing. Therefore, Security was subject to “extra-contractual damages,” that is, (gasp) the full $100,000 Mrs. Crisci got hit for at trial, plus Mrs. Crisci’s emotional distress, plus some punitive damages. This is now called “opening the policy,” and is justified on the grounds that it is the only way to teach insurance companies to not take risks with their insured’s interests, thinking “well, worst comes to worst, we just pay the policy limits.” Instead, they must settle every case as if they were going to have to pay the whole adverse verdict, for only then are they acting fairly.
During my first year at UCLA Law School, I completely missed the significance of Steve Schiffrin’s lecture on the Crisci case. But it became my daily bread at Mazursky, Schwartz & Angelo, where I worked on large claims, like Gary Lehto’s, who was rendered paraplegic when his car was rear ended by a car driven by a career drunk and owned by his drunken dad. Allstate screwed that case up when it refused to settle for the $25,000 policy unless Lehto gave a release to both father and son. Mr. Lehto’s final verdict was for $3.5 Million. An insurance company must treat these “over-limits” cases with the greatest solicitude, because if an insurance adjuster refuses to settle a multi-million dollar case for $25,000, Mrs. Crisci’s descendants may well have their way with the insurer’s assets.
At MS&A, we wanted them to refuse to settle. Sometimes we’d get a case on referral from other, no-name plaintiff lawyers who had been rebuffed by the insurers. When the adjusters saw MS&A on the case, their whole attitude would change. They would become eager to pay what had been out of the question before. My standard tough-guy response to these last-minute converts was, “In the future, always settle with a schmuck if you can. You missed your chance this time.”
Gary’s insurance policies for $300,000 and $1 Million were utterly dwarfed by the liability risk presented by Cohen’s $9 Million claim. Thus, even if Cohen only nicked Gary for a sixth of his total $9 million damages demand, it would exceed the value of both policies combined. You can see how that excess potential makes the risk of refusing to defend Gary one that State Farm would consider carefully. If Cohen got a $9 million verdict against Gary, because State Farm refused to defend him, Gary could sue State Farm for the loss, or even sell Cohen his right to sue State Farm. With this kind of leverage, the insurer must step up to the plate and defend.
The insurer then has one more decision to make -- whether or not to “reserve its rights.” By “reserving its rights” the insurance company says to its insured, “Okay, I’ll pay for your lawyer to defend this claim, but it may not really be covered under your policy, so I’m not promising to pay the verdict if you get hit, although I’ll defend you until then.” If an insurance carrier “reserves its rights,” their insured is actually benefited in two ways. First, the carrier must then pay for a lawyer, chosen by the insured, to advise the insured how to deal with the insurance carrier. Second, the insured also gets to pick their own lawyer for the main defense, rather than having the insurance carrier pick one of their “panel counsel.” So reserving rights can get expensive for an insurer.
State Farm at first denied coverage altogether under the $1 Million policy, and agreed to defend under the $300,000 policy, while reserving its rights. Thus, I tried to arrange to have State Farm retain the best First Amendment and speech law firm I knew of, Irell & Manella in Century City, Los Angeles. Irell & Manella thinks of itself as a firm that combines stellar intellectual firepower with a take-no-prisoners litigation ethic, basically promising to take your adversary on a rocket ride to hell. Actually, they are famous for delivering on this boast, and billing in a manner commensurate with their achievements. I clerked there when I was at UCLA, so I put a call through to partner Morgan Chu, who I figured was probably still representing ABC on speech issues. He put me in touch with his associate, David Codell, a 1999 magna cum laude Harvard graduate and a gem. David was interested in the case, so I started trying to get them onboard as Gary’s attorneys to defend against Cohen’s cross-complaint.
The plan to hire Irell & Manella was looking good until Jose Guillermo, the State Farm adjuster who had been assigned to the case, realized who they were and how much they charged. Their billing rates were way out of line with State Farm’s usual rates for insurance defense counsel. So State Farm withdrew its reservation of rights under the $300,000 policy. This decision was a no-brainer. Simple arithmetic. Better to be on the hook for $300,000 indemnity than pay for separate counsel, plus the cost of Irell & Manella’s rocket fuel. State Farm was then able to select one of its own panel attorneys, rather than have me make the choice for them.
State Farm hired Richard Diestel for the job. Initially, Rich was not taken with the case. I don’t think he had any intention of becoming involved in what he thought of as pornography law, and his involvement with defamation cases seemed neither deep nor extensive. However, it was my job to get him to spend abundantly from the great big bag of State Farm money, and Rich had an obligation to provide Gary with the best defense against Cohen’s counter-claims that could be mustered. It would not be long before he felt the sting of Gary’s emails, cell phone calls, and abrasive letters. He was in no way ready to start representing Gary Kremen in Cohen v. Kremen, but that had nothing to do with it. He was in the ring, Bob Dorband was in the other corner, and the bell had just rung. “Rich,” I told him, “you are going to make a lot of money on this case.”
We’re all familiar with the saying, “When life gives you lemons, make lemonade.” When my fax machine sprang to life, and started spewing out a lawsuit against Gary Kremen, alleging multiple tortuous acts, and seeking $9 million in damages, this was clearly an incoming shipment of lemons. This lawsuit was procedurally presented as a “counterclaim” by “counter-plaintiffs” Cohen, YNATA and Sandman Internacional. A counterclaim is no different in its effect upon the “counter-defendant” than a regular lawsuit, and gives the “counter-plaintiff” full rights of discovery and other procedural devices for wreaking havoc. As it was still spewing out of the fax machine, I called Gary and told him that Cohen was cross-claiming against him for $9 million for Defamation, Unfair Competition, and Cybersquatting. Then I had a question: “Gary, do you have insurance for your business activities?” Yes, he thought he did. I told him to fax me his policy immediately.
Gary may have had trouble finding some documents, but he had his State Farm insurance policies to me within hours. It looked very good. He had one policy for $1 million in coverage, and another for $300,000. They both covered slander, that is, defamation. I called Gary back with the happy news. We would be making lemonade, and State Farm was buying the sugar!
Of course, as the old adage goes, “there’s many a slip twixt the cup and the lip,” and State Farm might have very different ideas about springing for our lemonade party, but I knew once Gary understood the principles of insurance bad faith law, his burning sense of urgency would get us either a defense or a hell of a lawsuit against State Farm. Because insurance companies don’t always like to defend you when a guy like Cohen, worth maybe hundreds of millions, sues you because you called him a thief. Or they might not defend you very aggressively. The key to getting a good, vigorous defense, worth hundreds of thousands of dollars, is knowing the law of insurance bad faith.
I learned about insurance bad faith first from Steve Schiffrin, a much-published author on freedom of speech and the First Amendment who now teaches at Cornell Law School. Steve was brilliant, way too brilliant in fact to be fully appreciated by a classroom of 75 new law students lucky enough to learn basic tort law from a bona fide fucking genius. Steve was what you’d call pudgy, with thinning, sandy hair, and the complexion of a guy who rarely–if ever–goes to the beach. He was sweetly sarcastic, and enjoyed dealing legal propositions with a broad outward sweeping movement of his right arm, hand extended, palm upward, with a satisfied pursing of his lips, and eyebrows contracting to make the point.
Steve introduced us to insurance bad faith law as the place where the law of torts -- which deals with legal wrongs between strangers -- collides with the law of contracts, which deals with legal disputes between contracting parties. You often get more in damages for tort cases, where you recover the entire loss, including things like pain, suffering, and emotional distress, than in contract lawsuits, where damages are usually limited to the face amount of the contract.
Steve introduced us to the case of Crisci v. Security Insurance. In that case, an elderly Italian widow named Rosina Crisci owned a rental with a second floor walkup, which was insured by Security Insurance for $10,000. She also had a very hefty female tenant. One day the stairs broke and the hefty lady fell straight through, leaving her hanging in midair, which caused physical injury and a “severe psychosis.” She had no prior history of mental problems. The hefty lady’s lawyers sued the landlady, and Security Insurance appointed lawyers to defend Mrs. Crisci. The lawyers who Security hired scoffed at all of the plaintiff’s settlement demands, which started at $400,000, but dropped to $10,000, and even lower, to $9,000. Even though Security’s expert physicians predicted a verdict in excess of $100,000, the company offered only $3,000 for the physical injuries, refusing to pay “one cent” for the psychological injuries. Mrs. Crisci offered to kick in $2,500 if Security would pay the $6,500 difference between that and the final $9,000 demand, but Security rebuffed this opportunity as well.
The hefty lady went to trial and got the $100,000 trial verdict Security’s doctors had warned about. Her lawyers collected $10,000 from Security, the full amount of the insurance coverage, and then reached a settlement with poor Mrs. Crisci, who lost everything. As the California Supreme Court put it, Mrs. Crisci, “an immigrant widow of 70, became indigent. She worked as a babysitter, and her grandchildren paid her rent. The change in her physical condition was accompanied by a decline in physical health, hysteria and suicide attempts. She then brought this action.”
Mrs. Crisci sued Security for “breach of the covenant of good faith and fair dealing.” This “covenant” imposes a duty on the contracting parties to “do everything necessary to achieve the purposes of the contract, and nothing to defeat those contractual purposes.” The California Supreme Court held that the covenant of good faith and fair dealing was especially important when it comes to an insurance contract, because it is a contract for personal security and peace of mind. Thus, the court found that by rejecting a settlement demand within policy limits ($10,000 or less) when it was reasonably clear Mrs. Crisci would lose far more at trial, Security violated the covenant of good faith and fair dealing. Therefore, Security was subject to “extra-contractual damages,” that is, (gasp) the full $100,000 Mrs. Crisci got hit for at trial, plus Mrs. Crisci’s emotional distress, plus some punitive damages. This is now called “opening the policy,” and is justified on the grounds that it is the only way to teach insurance companies to not take risks with their insured’s interests, thinking “well, worst comes to worst, we just pay the policy limits.” Instead, they must settle every case as if they were going to have to pay the whole adverse verdict, for only then are they acting fairly.
During my first year at UCLA Law School, I completely missed the significance of Steve Schiffrin’s lecture on the Crisci case. But it became my daily bread at Mazursky, Schwartz & Angelo, where I worked on large claims, like Gary Lehto’s, who was rendered paraplegic when his car was rear ended by a car driven by a career drunk and owned by his drunken dad. Allstate screwed that case up when it refused to settle for the $25,000 policy unless Lehto gave a release to both father and son. Mr. Lehto’s final verdict was for $3.5 Million. An insurance company must treat these “over-limits” cases with the greatest solicitude, because if an insurance adjuster refuses to settle a multi-million dollar case for $25,000, Mrs. Crisci’s descendants may well have their way with the insurer’s assets.
At MS&A, we wanted them to refuse to settle. Sometimes we’d get a case on referral from other, no-name plaintiff lawyers who had been rebuffed by the insurers. When the adjusters saw MS&A on the case, their whole attitude would change. They would become eager to pay what had been out of the question before. My standard tough-guy response to these last-minute converts was, “In the future, always settle with a schmuck if you can. You missed your chance this time.”
Gary’s insurance policies for $300,000 and $1 Million were utterly dwarfed by the liability risk presented by Cohen’s $9 Million claim. Thus, even if Cohen only nicked Gary for a sixth of his total $9 million damages demand, it would exceed the value of both policies combined. You can see how that excess potential makes the risk of refusing to defend Gary one that State Farm would consider carefully. If Cohen got a $9 million verdict against Gary, because State Farm refused to defend him, Gary could sue State Farm for the loss, or even sell Cohen his right to sue State Farm. With this kind of leverage, the insurer must step up to the plate and defend.
The insurer then has one more decision to make -- whether or not to “reserve its rights.” By “reserving its rights” the insurance company says to its insured, “Okay, I’ll pay for your lawyer to defend this claim, but it may not really be covered under your policy, so I’m not promising to pay the verdict if you get hit, although I’ll defend you until then.” If an insurance carrier “reserves its rights,” their insured is actually benefited in two ways. First, the carrier must then pay for a lawyer, chosen by the insured, to advise the insured how to deal with the insurance carrier. Second, the insured also gets to pick their own lawyer for the main defense, rather than having the insurance carrier pick one of their “panel counsel.” So reserving rights can get expensive for an insurer.
State Farm at first denied coverage altogether under the $1 Million policy, and agreed to defend under the $300,000 policy, while reserving its rights. Thus, I tried to arrange to have State Farm retain the best First Amendment and speech law firm I knew of, Irell & Manella in Century City, Los Angeles. Irell & Manella thinks of itself as a firm that combines stellar intellectual firepower with a take-no-prisoners litigation ethic, basically promising to take your adversary on a rocket ride to hell. Actually, they are famous for delivering on this boast, and billing in a manner commensurate with their achievements. I clerked there when I was at UCLA, so I put a call through to partner Morgan Chu, who I figured was probably still representing ABC on speech issues. He put me in touch with his associate, David Codell, a 1999 magna cum laude Harvard graduate and a gem. David was interested in the case, so I started trying to get them onboard as Gary’s attorneys to defend against Cohen’s cross-complaint.
The plan to hire Irell & Manella was looking good until Jose Guillermo, the State Farm adjuster who had been assigned to the case, realized who they were and how much they charged. Their billing rates were way out of line with State Farm’s usual rates for insurance defense counsel. So State Farm withdrew its reservation of rights under the $300,000 policy. This decision was a no-brainer. Simple arithmetic. Better to be on the hook for $300,000 indemnity than pay for separate counsel, plus the cost of Irell & Manella’s rocket fuel. State Farm was then able to select one of its own panel attorneys, rather than have me make the choice for them.
State Farm hired Richard Diestel for the job. Initially, Rich was not taken with the case. I don’t think he had any intention of becoming involved in what he thought of as pornography law, and his involvement with defamation cases seemed neither deep nor extensive. However, it was my job to get him to spend abundantly from the great big bag of State Farm money, and Rich had an obligation to provide Gary with the best defense against Cohen’s counter-claims that could be mustered. It would not be long before he felt the sting of Gary’s emails, cell phone calls, and abrasive letters. He was in no way ready to start representing Gary Kremen in Cohen v. Kremen, but that had nothing to do with it. He was in the ring, Bob Dorband was in the other corner, and the bell had just rung. “Rich,” I told him, “you are going to make a lot of money on this case.”