My colleague, John Friedemann, and I recently spoke to a group of landlords and tenants at the Chamber in my hometown of Healdsburg. We addressed some of the many issues that arise in commercial leasing. The group we spoke to had some great questions about hypothetical and not-so-hypothetical situations. One of the topics we discussed was the “attorneys’ fees” section of a commercial lease.
An attorneys’ fees provision of a commercial lease will usually look something like this:
“Attorneys’ Fees: In case suit should be brought for recovery of the Premises or for any sum due hereunder or because of any act which may arise out of the possession of the Premises, by either party, the prevailing party shall be entitled to all costs incurred in connection with such action, including reasonable attorneys’ fees.”
The provision is often included in form leases, both residential and commercial, as well as in many leases that are custom drafted by attorneys. But, as with any agreement, just because a provision is included in a form or the first draft of a custom document, does not mean that it should be included in the final version.
An astute commercial lessor (“landlord”) would likely ask the following questions regarding each paragraph of the lease (before it is executed):
That same landlord might also consider:
A particularly astute commercial landlord might even go so far as to imagine the situation in which:
Although it seems fairly innocuous, the provision excerpted above could actually empower a tenant to wage a legal battle against the landlord.
This illustration underscores the basic point. Although form leases can be a helpful starting point, and seemingly cost-effective at the outset, they may prove to be extremely costly if the terms are unclear or uncertain. Both parties should carefully examine what each provision of a form lease (and even custom lease agreements) actually says. Both parties should also be sure to understand the meaning and possible ramifications. Unclear and uncertain terms in a commercial lease can easily lead to costly litigation.
An earlier post regarding insurance policies left off with insuring clauses. This last post in the series addresses the remaining key portions of your insurance policy and the defense of claims.Exclusions.
Exclusions describe matters not covered. Some exclusions are designed to avoid coverage for risks the insurer does not wish to insure at all (including risks that cannot legally be insured, such as protection from the consequences of your own fraud) and others are designed to limit coverage for risks normally covered by other insurance. To be given effect, an exclusion must be “conspicuous, plain and clear.” It is also normally interpreted strictly so that any ambiguity therein will be resolved against the insurer.
Some exclusions are subject to exceptions, which restore some of the coverage otherwise taken away by the exclusion. “Exceptions” to exclusions are somewhat analogous to coverage provisions for purposes of policy interpretation, and are therefore interpreted broadly in favor of coverage. Some exclusions apply only to particular insuring agreements in the policy while some exclusions apply to any and all coverages in the policy. Exclusions only come into play if the loss otherwise falls within the insuring agreement.
CGL policies commonly exclude coverage for intentional acts, contractually assumed liability, and dozens of others such as worker’s compensation, pollution, damage to the insured’s own property, and professional services.
D&O or E&O policies commonly exclude coverage for breach of contract; personal gain; dishonest, criminal or fraudulent conduct; willful or intentional wrongdoing; fines, penalties and punitive damages; and known wrongful acts already the subject of litigation.Conditions.
Conditions outline the general duties of the insured and insurer under the policy, including in connection with the issuance of the policy and the presentation and adjustment of the claim. They can be a trigger for coverage to even begin, or they can be obligations that continue throughout the existence of the claim.
Common conditions include:
These can be additional terms that apply to the policy which are wholly new, or they can be changes to the policy. For example, they can change a definition or even an insuring clause. Make sure you have all of the endorsements and forms identified by name or number on the declarations page!Duty to Defend versus Duty to Indemnify for Defense Costs.
Primary CGL policies frequently allocate the duty to defend to the insurer. The insurer must defend the claim if there is any possibility of coverage. And the costs of defense are generally separate from policy limits. But, the insurer controls the defense and will almost always appoint its own counsel of choice to defend the claim. The law is clear that the insurance company must defend even if the claim is only potentially covered by the policy and even if only some of the claims are covered, and the insurer ordinarily must defend the entire action even if uncovered claims are joined with the covered claims. So the duty to defend a claim is broader than the duty to ultimately pay out on a claim.
In contrast, D&O policies and E&O policies frequently allocate the duty to defend to the insured. That means you will be responsible for retaining counsel (subject to the insurance company’s approval) and “defense costs” reasonably incurred to defend against a covered claim will be defined in the policy as an element of loss. When there is no separate duty to defend, defense costs are considered an element of a covered loss and eat into the amount available to pay a claim.
We hope that this series has given you a better understanding about liability insurance and helps you navigate your own policies. And we doubly hope that your need to use your liability insurance never arises.
I read the New York Times. It is a fascinating source of information. While it is often criticized (usually by the political right wing and sometimes by the very far left), numerous examples of interesting and thought provoking articles are easily found.
The other day -- April 18 – I came across two very interesting articles that exemplified excellent, professional journalism.
The first article featured Steve Ballmer’s new website that tracks government spending at the local, state and federal level. Written by Andrew Ross Sorkin, in his Dealbook column, the article discussed Ballmer’s new website, USAFacts.org. As most people know, Mr. Ballmer is a retired Microsoft CEO, worth an estimated $24 billion. Three years ago, he set out to find out what happens to all tax dollars. Discovered and assembled at a cost of about $10,000,000, most of which came from Mr. Ballmer’s pocket (and not deducted, we are told), the website contains hundreds of facts about how tax dollars are spent at the local, state, and federal level. For example, there are 24,000,000 government employees, most of whom are teachers, doctors and in the military. I will confess that I spent a couple of minutes on the site and did not find it hugely rewarding. However, I think it may become an important source of factual information in the future for anyone interested in actually finding out facts about how tax dollars are spent.
The second article described a nascent criminal court in San Francisco charged with meting out justice to selected young adults who are charged with certain crimes. For example, a young African-American man, arrested for assault after a traffic altercation, was diverted to this court. The court required the young man to attend counseling sessions and to report weekly to the court for about a year. Ultimately, we find out that his case seems to be a success. Young adults court came about because neuroscience tells us that the brains of young adults are not fully formed. By diverting appropriate defendants to this court, the aim is to steer young adults into productive lives, rather than sending them to prisons where criminal behavior will likely be ingrained. The journalist interviewed experts on both sides of this experiment and we learn about arguments on both sides, allowing the reader to reach his or her own conclusions. The journalist may have revealed his own feelings with his concluding paragraphs which revealed the positive outcome of the young man – he ignores a racial epithet hurled at him, despite a rising anger.
There are any number of similar stories every day in the Times. Pick it up and see if you agree.
If you're interested in reading the New York Times articles Steve discussed, please click on the links below:
"We recognize that, under the rule we adopt, a trustee must take into account the possibility that its confidential communications with an attorney about trust administration may someday be disclosed to a successor trustee. This is, however, not unfair in light of the nature of a trust and the trustee's duties." Moeller v. Superior Court, 16 Cal. 4th 1125 (1997).
In Moeller, the California Supreme Court held that a predecessor trustee cannot assert the attorney-client privilege to prevent disclosure of documents to the successor trustee. The attorney-client privilege, in essence, travels with the office of the trustee and upon taking the office, all of the powers of the trustee, including the power to assert the attorney-client privilege, are assumed by the successor trustee. The Court focused on the unique and important role of a trustee finding that the right of access to attorney-client communications must belong to the successor trustee in order to allow for the effective and continuous administration of trusts. Moeller at 1133.
This invasion into the sanctity of the attorney-client privilege was discouraging to many trustees and attorneys alike. However, The Court left open an option for wary trustees: "If a predecessor trustee seeks legal advice in its personal capacity out of genuine concern for possible future charges of breach of fiduciary duty, the predecessor may be able to avoid disclosing the advice to a successor trustee by hiring a separate lawyer and paying for the advice out of its personal funds." Moeller, at 1134. Since Moeller, the prevailing opinion among attorneys has been that a trustee concerned about being removed and having his privileged communications go to his successor can protect that privilege by paying for the attorney with personal funds instead of trust funds.
In the 2017 decision, Fiduciary Trust International of California v. Klein, the Court of Appeals for the 1st Appellate District addressed the attorney-client privilege protection for a trustee then in office who is later removed. In Klein, the predecessor trustee claimed attorney-client privilege to certain communications that occurred prior to removal. Citing Moeller, the trustee took the position that communications sought by the trustee in connection with personal matters and personal liability are privileged from disclosure, whereas communications related to the administration of the trust are not privileged. The probate court permitted the trustee to withhold some documents.
The Court of Appeals considered how to distinguish between confidential communications occurring when the trustee seeks legal advice or guidance on matters of trust administration, and those occurring when the trustee seeks legal advice or guidance in its personal capacity out of genuine concern for possible future charges of breach of fiduciary duty.
In Klein, the Court held, "actual steps must be taken to identify a communication as privileged when the communication is 'sought' from the trustee's personal counsel." Thus, labeling a document as defensive after the fact does not satisfy the criteria described in Moeller.
The decision in Klein is useful guidance for attorneys and trustees alike in evaluating how to proceed with the attorney-client relationship when in the shadows of a potential removal action. While the rule may be imperfect, especially for prudent trustees who, faced with disgruntled beneficiaries, are forced to pay out-of-pocket for their attorney, Klein puts forth a more understandable standard for those circumstances when separate counsel may be needed.
Another outstanding issue from Moeller that remains to be tested is the statement in the decision that "a trust instrument may limit a trustee's statutory powers." Moeller at 1131. Estate planning attorneys might add language to address the powers of the trustee and either strengthen or undermine the attorney-client privilege between trustee and attorney.
Last time we reviewed the content of the declarations page. We pick up here with the coverage provisions of your liability policy. Next time, it’s coverage limitations and insurance company defenses.
The Insuring Clause
The insuring clause sets the scope of coverage. It is often deceptively short, as it relies on definitions elsewhere in the policy and it is qualified by conditions, exclusions, and endorsements. As you parse each insuring clause, maintain focus on the insured qualification (i.e. who is covered); the damages qualification (i.e. the type of loss or harm covered); and the activity qualification (i.e. the type of activity or peril covered).
Insuring clauses are given broad interpretation by the courts. But you will see that what the insuring clause giveth, conditions, exclusions (and, potentially, the endorsements) taketh away. An endorsement can be a stand-alone coverage or limitation, or it might be used to change a definition or even an entire insuring clause. When a coverage question arises, the burden is on the insured initially to demonstrate that the claimed loss is within the coverage provided by the policy’s insuring clause. If the insured satisfies this burden, the burden then shifts to the insurer to demonstrate that an exclusion applies.
Examples of a CGL insuring clause are:
Examples of D&O insuring clauses are:
“Management Liability Insuring Agreement”
An example of an E&O insuring clause is:
“PROFESSIONAL LIABILITY COVERAGE PART”
The articles on this site are for informational purposes only. Nothing on this internet site or affiliated social media sites can or should be regarded as legal advice. You should not take action on any legal matter without first consulting with an attorney.