For The Defense, March 2013 - DRI Today

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On The Record
Addressing Economic Realities to Help DRI Members Achieve Their Goals
Practice “Angst”
By J. Michael Weston, DRI President Elect
I have increasingly become a fan of the Urban Dictionary.
Some of the definitions are humorous, some topical,
and many more accurate than more established lexicons.
A good example is the Urban Dictionary definition of
“angst.” It says, “Angst, often confused with anxiety, is
a transcendent emotion in that it combines the unbearable
anguish of life with the hopes of overcoming this
seemingly impossible situation. Without the important
element of hope, then the emotion is anxiety, not angst.”
As I travel the country in my year as DRI President
Elect, I meet more and more of our members who are
experiencing “angst” in their daily lives and practices.
There have been tremendous changes in the relationship
between our members in private practice and our clients
over the past decade. The economic slowdown of 2008
has caused all businesses to look carefully at how they
produce goods and services. For our corporate clients,
the economic reality caused them to seek efficiencies
at every level. Six Sigma and lean processing exercises
abounded. Functions were combined, waste cut, and
businesses emerged leaner and more focused.
And the change was and is being felt by our private
practitioners. We have seen rather dramatic changes in
relationships with clients that we had worked with for
many years. Many insurance carriers left markets that
they had been in for years. Others consolidated their work
in fewer firms within the state or went to a regional or
national approach, taking all of the defense work outside
the state. In an effort to control costs, carriers and corporations
carefully scrutinized our rates and the staffing
of cases that we were defending. They questioned the
efficacy of our tactics and whether a motion or deposition
reduced the risk or improved the chances for success.
They demanded more from us at less cost. In effect,
they were asking us to do what they themselves had done.
As small business owners, we have to assimilate this
change in the context of our own organizations. We
are typically not as hierarchical as our corporate clients.
Change comes more slowly. We tend to vote on
things and do not like close votes. We want unanimity
or as close to it as we can get. We are not good at testing
things before we try something new, so we tend to
be risk averse. So at the end of the day we feel stuck—or
(new word) angstful
So what is DRI doing about our members’ plight We
are increasing our efforts to make certain that our private
practitioner members can set their aspiration goals
and achieve them. First, we have convened a task force
to focus on the needed skills of the twenty- first century
lawyer, a process that DRI President Mary Massaron
Ross initiated with her 2012 Annual Meeting theme.
Task force chair Chrys Martin and vice chair Craig Mayfield
expect to make specific recommendations in early
summer for new and innovative programming to assist
you in developing skills necessary to resolve disputes
both today and in the future.
Second, under the leadership of DRI Immediate Past
President Henry Sneath, DRI Law Practice Management
Committee Chair Jay Courie, and DRI Law Practice
Management Committee Vice Chair John Trimble,
we are developing programs to help you manage your
practices and law firms more efficiently, helping you
become more financially successful. The LPM Committee
will help you frame the business issues you face so
that you can make decisions more quickly and effectively,
understanding the legal environment and having
practice development assets at hand.
Third, we are producing a law practice management
book specifically geared to the defense practice of the
twenty- first century. Under the leadership of the DRI
Publications Board led by its chair, Tom Segalla, and vice
chair, Lise Spacapan, and with the able assistance of our
project editor, Stephen Acker, we will provide you with
a living volume that will give you practical solutions to
the business challenges that you face each day.
Fourth, our DRI For Life Task Force conceived by DRI
First Vice President John Parker Sweeney and chaired by
James Holland is working to bring value to your career
across its breadth and provide programming and opportunities
so you will always be ascending.
Finally, the 2013 Annual Meeting in Chicago, October
16–20, will focus on energizing your life and your
career. We expect to have an array of nationally known
speakers to provide you with powerful practice development
skills that you can take back to your offices and put
to use. DRI Annual Meeting Chair Lori Berke and DRI
Annual Meeting Vice Chair John Kuppens are putting
together an outstanding program.
In closing, know that the leadership of DRI is committed
to having all of our members follow and maintain a
successful career path, doing what we can to lessen the
angst and increase the hope and reality. We look forward
to working with you and hearing your thoughts and comments
as to what would benefit you going forward.
For The Defense ■ March 2013 ■ 1

DRI—The Voice
of the Defense Bar
Vol. 55, No. 3 March 2013
President
Mary Massaron Ross
Bloomfield Hills, Michigan
Immediate Past President Henry M. Sneath
Pittsburgh, Pennsylvania
In This Issue
1 On The Record
Addressing Economic Realities to Help DRI Members Achieve Their Goals: Practice “Angst”
By J. Michael Weston, DRI President Elect
4 DRI News
Members on the Move • DRI Calendar
6 DRI Center for Law and Public Policy
The Uniform Asset Freezing Orders Act: A Cause for Concern
President-Elect
1st Vice President
J. Michael Weston
Cedar Rapids, Iowa
John Parker Sweeney
Baltimore, Maryland
Employment and Labor Law
8 Big Bang Theory
Will the NFL’s Concussion Policy Expose the League to Massive Liability
By Joseph M. Hanna
2nd Vice President
Secretary-Treasurer
Executive Director
Laura E. Proctor
Nashville, Tennessee
John E. Cuttino
Columbia, South Carolina
John R. Kouris
Deputy Executive Director Tyler Howes
Lawyers’ Professionalism and Ethics
18 Protecting Against Waiver
Reconciling Federal Rule of Evidence 502 with Model Rule 1.6
By Steven M. Puiszis
Toxic Torts and Environmental Law
26 An Asbestos Parallel
Diesel Exhaust—Recent Developments
By David N. Lutz
Director of Publications
Editor
Production Manager
Contributing Editor
Advertising
Representative
Jay Ludlam
Michelle Parrini
Julia Bergerud
Marge Motluck
Laurie P. Mokry
Premises Liability
34 Watch Where You’re Going!
The New Defense of Texting and Tweeting in Personal Injury Lawsuits
By Robert D. Lang
Insurance Law
38 Ending Duty to Defend
Exhausting Policy Limits When Settling Less than All Lawsuits
By Thomas R. Newman
For The Defense, March 2013, Vol. 55, No. 3 (ISSN 0015-
6884). Copyright ©2013, DRI. All rights reserved.
Published monthly by DRI, 55 West Monroe Street ~
Suite 2000, Chicago, Illinois 60603. Telephone: (312)
795-1101. Fax: (312) 795-0747.
Periodicals postage paid at Chicago, Illinois, and at
additional mailing offices. Subscription price is $65.00
per year, and, for DRI members, is included in the membership
dues. Individual copies are $7.00 for DRI members
and $12.00 for non-members, plus postage and
handling.
POSTMASTER: Send address changes to For The
Defense, DRI, 55 West Monroe Street ~ Suite 2000, Chicago,
Illinois 60603.
Correspondence and manuscripts should be sent to
the Editor.
All views, opinions and conclusions expressed in this
magazine are those of the authors, and do not necessarily
reflect the opinion and/or policy of DRI and its
leadership.
Fidelity and Surety
44 From the Chair
Choose Your Path—
Enjoy the Experience
By Jerome M. Joseph
46 Contract Surety vs. Insurance
Functional Differences and Why They Matter
By Laurence P. Jortner
50 Payment Bond Sureties Have a Viable Defense
Labor Management Relations
Act Preemption
By James A. Knox
57 Payment Bond Claims
When Does the Statute
of Limitations Run
By Cynthia E. Rodgers-Waire
63 Navigating the Quagmire
The Computer Crime
Coverage Conundrum
By John R. Felice
68 It’s Not Just About Priority
Subrogation Rights Against a Bank
By Carlos H. Garcia
73 Think Globally
A New Test: Update on Assumption of Jurisdiction by Canadian Courts
By Margaret A. Ross
74 Defense Ethics and Professionalism
Twenty-first Century Obligations: Ethics for the Tech
Savvy (and Not So Tech Savvy) Lawyer
By David L. Campbell
80 Advocates and New Members
2 ■ For The Defense ■ March 2013

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© 2012 Thomson Reuters L-378819/10-12

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4 ■ For The Defense ■ March 2013
Members on the Move
Tucker Ellis LLP attorneys Clifford Mendelsohn
and Sanford Watson have been elected to the firm’s
partnership effective January 1, 2013. Mr. Mendelsohn,
a member of the firm’s trial group, focuses
his practice on defending pharmaceutical, medical
device, chemical, automobile, and consumer products
manufacturers in a wide range of product liability
matters, including toxic torts, mass torts,
class actions, multidistrict litigation, and product
recalls. Mr. Watson practices primarily in the areas
of pharmaceutical and medical device defense and
business litigation. A former director of public
safety for the City of Cleveland, he has experience
in the areas of commercial litigation, criminal law,
government contracts, and municipal law.
National law firm Wilson Elser is pleased to
announce their joining with Houston law firm Powers
& Frost LLP, nearly doubling the number of
attorneys in Wilson Elser’s Houston office. Sharla
J. Frost, one of the founding partners of Powers
& Frost, has been named the regional managing
partner of the newly combined office. On January
1, 2013, eight Powers & Frost attorneys and staff
started working under the Wilson Elser moniker,
creating a litigation powerhouse in Texas that now
includes 20 attorneys in Houston and 35 in Dallas.
In addition to Ms. Frost, DRI member attorneys
who have joined Wilson Elser include James
H. Powers, Gwendolyn S. Frost, Shawn David
Golden, R. Clive Markland, and Linda P. Wills.
Indianapolis law firm Lewis Wagner is pleased
to announce that Robert M. Baker IV has been
elected partner. Since joining the firm as an associate
2007, Mr. Baker has been a member of the
firm’s litigation group. He concentrates his practice
in complex litigation, handling individual and
class action lawsuits in federal and state court at
the trial and appellate level. Mr. Baker represents
clients from several industries, including insurance,
telecommunications, real estate develop-
ment, and construction, as well as members of the
legal profession.
Bullivant Houser Bailey PC, a nationally recognized
law firm with offices in Washington, Oregon,
and California, is pleased to announce that
Norm Ronnerberg has been awarded designation
as a Certified Specialist in Admiralty and Maritime
Law by the State Bar of California Board of Legal
Specialization. The legal certification program is
the first for admiralty and maritime lawyers west
of the Mississippi. To earn the certification, the
bar imposes a rigorous application process based
on experience handling maritime cases (e.g., trials,
transactions, etc.) and 45 hours of legal education
or teaching experience.
Roerig, Oliveira & Fisher L.L.P., located in South
Texas with offices in Brownsville and McAllen, is
pleased to announce the addition of Zuleida Lopez-
Habbouche as a partner. Ms. Lopez- Habbouche
joined the firm in 2005. She is admitted to practice
before all courts in the State of Texas, the United
States District Court for the Southern District of
Texas, the United States Court of Appeals for the
Fifth Circuit, and the United States Supreme Court.
Ms. Lopez- Habbouche’s practice is centered on personal
injury defense, first-party litigation, commercial
litigation, product liability, premises liability,
and civil litigation.
The Providence, Rhode Island, law firm of Hanson
Curran announced that two of its associates,
Sara Fontes and Nicholas R Mancini, have been
named as partners of the firm as of January 1, 2013.
Ms. Fontes is an experienced civil litigator, focusing
her practice on the defense of a variety of civil litigation
matters, including personal injury defense,
toxic torts, professional liability, and product liability.
She has particular expertise in providing
counsel for insurance coverage issues, premises
liability actions, and psychological injuries. Mr.
Mancini concentrates his practice in civil litiga-
Diversity and Inclusion in DRI: A Statement of Principle
DRI is the largest international membership organization of attorneys defending the
interests of business and individuals in civil litigation.
Diversity is a core value at DRI. Indeed, diversity is fundamental to the success of
the organization, and we seek out and embrace the innumerable benefits and contributions
that the perspectives, backgrounds, cultures, and life experiences a diverse membership provides.
Inclusiveness is the chief means to increase the diversity of DRI’s membership and leadership positions.
DRI’s members and potential leaders are often also members and leaders of other defense organizations.
Accordingly, DRI encourages all national, state, and local defense organizations to promote diversity and
inclusion in their membership and leadership.

Calendar
Upcoming events
of interest to
DRI members and
other defense lawyers
For more information
about any of these events,
call DRI Customer Service
at (312) 795-1101,
or visit our website at
www.dri.org.
March 13–15 Women in the Law Seminar Miami Beach
March 20–22 Trial Tactics Seminar Las Vegas
March 21–22 Medical Liability and Health Care Law Seminar Miami Beach
March 26 Catastrophe Cleanup: Regulatory and Legal
Webcast
Challenges After Hurricane Sandy
April 3–5 Product Liability Conference National Harbor, MD
April 10–12 Insurance Coverage and Claims Institute Chicago
April 24–26 Life, Health, Disability and ERISA Claims Seminar Boston
May 1–3 Employment and Labor Law Seminar Phoenix
May 3 Fidelity and Surety Roundtable Chicago
May 9–10 Business Litigation Seminar Chicago
May 9–10 Intellectual Property Seminar Chicago
May 16–17 Drug and Medical Device Seminar New York City
May 16–17 Retail and Hospitality Litigation and Claims Management Seminar Chicago
May 30–31 Diversity for Success Seminar Chicago
June 6–7 Insurance Bad Faith and Extra-Contractual Liability Seminar Boston
June 13–14 DRI International Seminar Prague, Czech
Republic
June 20–21 Young Lawyers Seminar Las Vegas
June 27–28 Government Enforcement and Corporate Compliance Seminar Washington, DC
September 19–20 Nursing Home/ALF Litigation Seminar Scottsdale, AZ
September 19–20 Strictly Automotive Seminar Dearborn, MI
September 26–27 Construction Law Seminar Las Vegas
DRI Calendar
tion, with an emphasis on personal injury,
professional liability and workers’ compensation
defense. He regularly appears
before the Rhode Island Superior Court,
the Rhode Island Workers’ Compensation
Court, and the United States District Court
for the District of Rhode Island.
Whiteford Taylor & Preston LLP is very
gratified to announce that the firm’s product
liability group has been ranked in the
top tier nationally by U.S. News & World
Report’s ranking of law firms. Only 32
firms nationwide received this recognition.
To be ranked at the very highest level
by U.S. News is a testament to the quality
of the lawyers in the firm’s product liability
group. What makes this especially gratifying
is that the group is also one of the most
diverse in the nation. It includes Harry S.
Johnson, the first (and so far only) African
American president of the Maryland
State Bar Association, and Thurman W.
Zollicoffer, Jr., a former city solicitor for
Baltimore. The group’s co-chair is Warren
Weaver, a member of the board of directors
of the Maryland General Health Systems,
Maryland General Hospital, and the Maryland
General Community Health Foundation.
Hearty congratulations are extended
to the entire team.
Butler, Snow, O’Mara, Stevens & Cannada
PLLC attorney Adam J. Spicer has
been appointed co-chair of the Pharmaceutical
and Medical Subcommittee of the
American Bar Association’s Section of Litigation
Mass Torts committee for 2013–14.
Mr. Spicer is a member of the firm’s pharmaceutical,
medical device, and health
care group. He focuses his practice on
mass torts and multidistrict litigation,
product liability law, personal injury law,
and drug and medical device litigation.
Mr. Spicer served his country as an active
duty member of the U.S. Navy from 1998–
2002, receiving the Navy and Marine Corps
Achievement Medals and a Navy Letter of
Commendation.
Congratulations to Joseph M. Hanna,
chair of Goldberg Segalla LLP’s Sports and
Entertainment Practice Group and founder
of the nonprofit Bunkers in Baghdad, for
collecting and shipping over four million
golf balls and 75,000 golf clubs to U.S. soldiers
and wounded warriors across the
world. His story recounting the inspiration
that drove him to launch and lead the charity
has been featured in Golf Digest’s “Golf
Saved My Life” column, February 2013.
Marge Motluck
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For The Defense ■ March 2013 ■ 5

DRI Center for Law and Public Policy
The Uniform Asset Freezing Orders Act:
A Cause for Concern
By Steven M. Puiszis
The DRI Center for Law and Public Policy,
through scholarship, legal expertise, and advocacy,
provides a meaningful voice for the
defense bar in the national discussion on issues
of substantive law. The center’s mission
is to intervene on those occasions when it determines
that a development may jeopardize
the fairness and the balance of the judicial
system. The Uniform Asset Freezing Orders
Act drafted by the National Conference of
Commissioners on Uniform State Laws (NC-
CUSL) presents such an issue.
The NCCUSL recently completed drafting
a Uniform Asset Freezing Orders Act.
In 2013 sponsors will place the act on the
legislative agendas of eight states (Colorado,
Indiana, Kentucky, Nevada, New
York, North Dakota, Tennessee, and Utah)
and the District of Columbia. The act has
already been introduced in bills pending
in Colorado and North Dakota.
Breathtaking in Scope
The act is breathtaking in scope. It would
authorize the issuance of an asset freezing
order in any type of action “in which monetary
damages are sought.” The only exemptions
from the act’s coverage are claims
against an individual for a consumer debt,
defined as a debt incurred primarily for
personal, family, or household purposes,
and actions arising under a state’s family
or domestic relations law.
The act would allow a plaintiff potentially
to freeze a defendant’s assets, which are not
exempt from execution under state law, long
before a court enters a judgment against a
defendant or a jury makes a determination
of fault. An asset freezing order can be entered
even before any discovery occurs.
The act broadly defines “assets” to
include “anything that may be subject of
ownership, whether real or personal, tangible
or intangible, legal or equitable, or
any interest therein.” It would even allow a
plaintiff to freeze assets in which an innocent
coowner has an interest.
Draconian in Nature
The draconian nature of the act is reflected
by the requirement that a party that is subjected
to an asset freezing order must apply
for a court order permitting the payment of
the party’s “ordinary living expenses, business
expenses, and legal representation.”
And, the act provides that the party subjected
to the freezing order “bears the burden
of establishing the amount of those
expenses.”
■■
Steven M. Puiszis is a partner in the Chicago office of Hinshaw & Culbertson
LLP. He serves on the DRI Board of Directors, is the chair of the DRI
Judicial Task Force, and is the board liaison to the DRI Lawyers’ Professionalism
and Ethics Committee. Mr. Puiszis is a past president of the Illinois
Association of Defense Counsel. He is a member of the ADTA and the IADC
and is a fellow of the American Bar Foundation.
The act is modeled on a preliminary
injunction platform. To grant an asset
freezing order, a court must find that (1) a
substantial likelihood exists that the plaintiff
will prevail on the merits of the underlying
claim; (2) a substantial likelihood
exists that the assets of the defendant will
be “dissipated” so that the moving party
will be unable to receive satisfaction of a
judgment; (3) the harm caused by an asset
freezing order is “clearly outweighed” by the
harm to the moving party if the court did
not issue the order; and (4) the order would
not be adverse to the public interest. “Dissipate”
is defined to include any action “with
regard to the asset to defeat satisfaction of
an existing or future judgment, including
“selling removing, alienating, transferring,
assigning, encumbering or similarly dealing
with an asset.” The act would allow an
asset freezing order to be entered without
notice to the defendant for a defined period.
Nonparties and Extraterritoriality
The act authorizes the service of an asset
freezing order on a nonparty that has “custody
or control” of an asset subject to the
order. It provides that once served, a nonparty
“shall freeze” the assets of the party
“until further order of the court.” A nonparty
can be held in contempt for failing to
comply with an asset freezing order.
The act would require a court to recognize
an asset freezing order issued by a
court in another state unless such recognition
would violate the forum state’s public
policy, the order was issued without notice,
or the issuing court did not employ procedures
substantially similar to those in the
act. It would also require a court to recognize
an asset freezing order issued by a
court outside the United States unless certain
grounds for nonrecognition of the order
are established. However, the act places
the burden of proving a ground for nonrecognition
on the party resisting the order.
Section 10 of the act literally provides
that an asset freezing order is entitled to
full faith and credit in the same manner as
a judgment.
6 ■ For The Defense ■ March 2013

DRI Center for Law and Public Policy
Many Causes for Concern
DRI and the DRI Center for Law and Public
Policy oppose the act for a number of
reasons.
• No fraudulent intent or attempt to hide
assets is required to obtain an asset
freezing order. The act potentially can
be applied to anyone with insufficient
assets to satisfy a future verdict.
• A party’s assets should not be frozen
based on a court’s best guess about the
potential value of a cause of action. How
will the value of a tort claim be established,
and how can a court possibly
address the impact of comparative fault
or contributory fault principles on the
value of a claim before any discovery has
occurred
• The term “ordinary business expenses”
is undefined. Many types of critical
business transactions needed to keep a
company solvent in today’s tough economy
may be blocked by the act. The act
will limit a company’s ability to sell or
transfer its assets in the ordinary course
of its business.
• Will a company under a freeze order be
allowed to raise capital, enter into transactions,
or incur expenses that might
expand its business The comment to
Section 3 of the act states that once an order
is in place, “any person with notice of
the order could not cooperate… to place
a new mortgage on the asset or enter into
a new contract containing rights of setoff.”
The cost of running a small business
could skyrocket if a court must be consulted
every time a company seeks to acquire
or convey an asset.
• The term “ordinary living expenses” is
also undefined. Will the act preclude a
family from buying a new car, putting a
new roof on the house, taking a vacation,
or paying for a child’s college education
The head of a household who is subject of
an asset freezing order may need to seek
a court approval to pay for these type of
expenses.
• In some jurisdictions it can take four to
five years before a lawsuit receives a verdict.
It is unfair to permit a defendant’s
assets be frozen before the merits of a
claim against it is resolved.
• Generally, a defendant’s assets are not
subject to discovery. The act may require
a defendant to disclose assets in an
attempt to defeat or to dissolve an asset
freezing order.
• The value of an insurance policy meets
the definition of an asset. If a claim’s
potential value exceeds the insurance
policy limits, the plaintiff can freeze the
assets of an individual or business. Thus,
the act may create new conflicts of interest
between an insured, perhaps wanting
to settle for the policy limits to get
out from under a freezing order, and a
carrier that believes that the case should
be defended.
• Imposing an asset freezing order will
likely cause defendants to settle more
cases for reasons having nothing to do
with the merits of the claims.
The act can be found at http://www.uniformlaws.org/shared/docs/asset_freezing_
orders/2012_afo_final.pdf.
The DRI Center for Law and Public Policy
has formed a Task Force on Asset Freezing
Orders to work with state and local
defense organizations and other interested
groups where the act has been or will be
introduced. The task force is composed
of Steven Puiszis, Sky Woodward, John
Cuttino, Jill Rice, Julie Walker, and Neva
Lusk. If you have questions or would like
additional information about the Uniform
Asset Freezing Orders Act or the DRI Task
Force on Asset Freezing Orders, please contact
DRI Director of Communications Tim
Kolly at tkolly@dri.org.
DRI’s amicus efforts
increase year after
year. As a member,
your interests are
protected. DRI is
your advocate.
dri.org
For The Defense ■ March 2013 ■ 7

Employment and Labor Law
Big Bang Theory
By Joseph M. Hanna
The survival of the
National Football League
could very well depend
on the outcome of
litigation to determine
the league’s ultimate
liability for its actions.
Will the NFL’s
Concussion Policy
Expose the League
to Massive
Liability
8 ■ For The Defense ■ March 2013
■ Joseph M. Hanna is a partner of Goldberg Segalla LLP practicing from the Buffalo, New York, office. He leads the firm’s
Sports and Entertainment Practice Group and is the marketing chair for the DRI 2013 Annual Meeting. Mr. Hanna represents
professional athletes, along with management, ownership, and companies that serve the sports and entertainment industries, in
commercial and litigation matters. He is the founder of Bunkers in Baghdad, a nonprofit that collects and ships golf equipment to
U.S. soldiers and Wounded Warriors across the world.

The plight of National Football League (NFL) players suffering
from concussion- related injuries has long been the
subject of widespread media coverage, scientific debate,
and fan interest. Jeanne Marie Laskas, Game Brain, GQ
(Oct. 2009); Malcolm Gladwell, Offensive
Play: How Different are Dogfighting and
Football, The New Yorker (Oct. 19, 2009);
Bob Simon, A Blow to the Brain, 60 Minutes
(Oct. 11, 2009). Still, recent events, such as
the suicides of several NFL alumni, groundbreaking
clinical studies, and a giant class
action lawsuit that threatens the financial
livelihood of the league, have once again
brought the topic to the forefront of national
attention. What is the question
on everyone’s mind Whether
the NFL will face
liability for its
arguably deficient
eff
o r t s t o
inform players
of the risks
associated with
football- induced
head trauma.
While the league is
not without defenses to
liability, it will still be interesting to see how
the lawsuit unfolds in the months to come.
Game-Changing Science
In 2005, clinical studies performed by independent
scientists determined that multiple
NFL- derived concussions cause problems
such as depression and early- onset dementia.
Dr. Bennett Omalu and Dr. Robert
Cantu examined the brain tissue of three
deceased NFL players Mike Webster, Terry
Long, and Andre Waters, who had suffered
multiple concussions throughout their NFL
careers. See Bennet I. Omalu et al., Chronic
Traumatic Encephalopathy in a National
Football League Player, 57 Neurosurgery
128 (2005); Bennet I. Omalu et al., Chronic
Traumatic Encephalopathy in a National
Football League Player: Part II, 59 Neurosurgery
1086 (2006); Robert C. Cantu,
Chronic Traumatic Encephalopathy in the
National Football League Player, 61 Neurosurgery
223 (2007). Before their premature
deaths, all three had presented symptoms
of sharply deteriorated cognitive functioning
and psychiatric symptoms
such as paranoia, panic attacks, and
major depression. Cantu, supra, at
223. Noting that the brain tissue
of all three presented with neurofibrillary
tangles, neurotrophil
threads, and cell dropout,
Omalu concluded that chronic
traumatic encephalopathy
(CTE) triggered by multiple
NFL- derived concussions
represented a partial cause
of their deaths. Id.
CTE is a neurological
disorder first discovered in
athletes such as boxers who sustained
multiple blows to the head. Initially,
CTE presents through symptoms
such as poor concentration or memory, dizziness,
and headaches, but it can result in
increased irritability, outbursts of violent
behavior, and general confusion. Michael
Saulle & Brian D. Greenwald, Chronic Trau-
matic Encephalopathy: A Review, Rehabilitation
Review and Practice 3–4 (2012).
Later, the disorder may progress into
dementia or Parkinsonism with symptoms
such as a general slowing in muscle movement,
hesitancy in speech, and tremors of
the hands. Cantu, supra, at 223.
In response, the internal NFL concussion
committee, at that time called the “mild
traumatic brain injury committee,” denied
a link between concussions and cognitive
decline, claimed that more research was
needed to reach a definitive conclusion, and
asked the editor of Neurosurgery to retract
Omalu’s article in July 2005. Jeanne Marie
Laskas, Game Brain, GQ (Oct. 2009). The
NFL concussion committee’s stance on the
issue was clear: “We own this field. We are
not going to bow to some no-name Nigerian
with some bullshit theory.” Id. Noting that
ironically none of the committee members
were neuropathologists, Omalu questioned
the integrity of the NFL concussion committee,
quipping “[h]ow can doctors who
are not neuropathologists interpret neuropathological
findings better than neuropathologists”
Id.
Another 2005 clinical study conducted
by Dr. Kevin Guskiewicz surveyed over
2,550 former NFL athletes and found that
retired NFL players who had sustained
three or more concussions in the league
had a fivefold prevalence of mild cognitive
impairment diagnosis compared to
NFL alumni without concussion histories.
Kevin M. Guskiewicz et al., Association
between Recurrent Concussion and Late-
Life Cognitive Impairment in Retired Professional
Football Players, 57 Neurosurgery
722 (2005). The NFL concussion committee
did not address this study. Alan Schwarz,
Expert Ties Ex- Player’s Suicide to Brain
Damage from Football, N.Y. Times (Jan. 18,
2007), at A1.
Later, mounting media pressure compelled
the NFL to address the long-term effects
of player concussions, prompting the
league’s first “Concussion Summit” in June
of 2007. Independent scientists were invited
to represent their findings to team medical
staffs and NFL Players Association representatives.
Still, the league remained largely
unresponsive: the concussion pamphlet that
it issued to players in August 2007 merely
stated that “there is no magic number for
how many concussions is too many.” Press
For The Defense ■ March 2013 ■ 9

Employment and Labor Law
Arguably… resolvingthe
state law claims requires
interpreting a collective
bargaining agreement, so
this is a labor dispute.
Release, National Football League, NFL
Outlines for Players Steps Taken to Address
Concussions (Aug. 14, 2007).
Later, in 2008, Dr. Ann McKee of Boston
University studied the brain tissue of
deceased NFL alumni John Grimsely and
Tom McHale, finding that both exhibited
distinct signs of CTE. Ann McKee et al.,
Chronic Traumatic Encephalopathy in Athletes:
Progressive Tauopathy After Repetitive
Head Injury, 68 J Neuropathology Exp
Neurol. 709, 732 (2009). McKee believed
that decreasing the number of concussions
would decrease the incidence of athlete
CTE, stating “[t]here is overwhelming
evidence that [CTE] is the result of repeated
sublethal brain trauma.” Id. (emphasis
added). Even after the results of this study
were published in 2009, Dr. Ira Casson,
the former NFL concussion committee’s
cochair, maintained that “there is not
enough valid, reliable or objective scientific
evidence at present to determine whether…
repeat head impacts in professional football
result in long[-]term brain damage.”
Legal Issues Relating to Football Head Injuries
(Part II): Hearing Before the H. Comm.
on the Judiciary, 111th Cong. 334–36 (2010)
(statement of Dr. Ira R. Casson).
Watershed Congressional Hearing
The debate over the long-term effects of
NFL- derived concussions reached a boiling
point in September 2009 when an
NFL- commissioned University of Michigan
study found that NFL alumni are diagnosed
with Alzheimer’s disease or other
similar memory- related disorders vastly
more often than the national population—
a rate of 19 times the normal rate for men
ages 30 through 49! Alan Schwarz, Dementia
Risk Seen in Players in N.F.L. Study, N.Y.
10 ■ For The Defense ■ March 2013
Times (Sept. 30, 2009), at A1. Shortly after,
Congress announced that it would hold a
hearing to discuss “legal issues relating to
football head injuries.” Alan Schwarz, Congress
to Hold Hearing on N.F.L. Head Injuries,
N.Y. Times (Oct. 3, 2009), at D2; Legal
Issues Relating to Football Head Injuries
(Part I): Hearing Before the H. Comm. on
the Judiciary, 111th Cong. (2010).
On October 28, 2009, members of the
House Judiciary Committee sharply criticized
the NFL’s concussion policy. NFL
Commissioner Roger Goodell was directly
asked whether multiple NFL concussions
contributed to the early onset of cognitive
decline, but he wisely deferred to medical
judgment on the issue. Legal Issues Relating
to Football Head Injuries (Part I): Hearing
Before the H. Comm. on the Judiciary, 111th
Cong. 86 (2010) (inquiry of Rep. Conyers,
Chair, House Comm. on the Judiciary).
Though the NFL’s leading medical voice
on the subject, Casson, was not present to
answer this critical query, the committee
played an HBO Real Sports recording of
Casson denying all potential links between
multiple head injuries and later- life cognitive
decline. Legal Issues Relating to Football
Head Injuries (Part I): Hearing Before
the H. Comm. on the Judiciary, 111th Cong.
113 (2010) (statement of Rep. Sanchez,
Member, House Comm. on the Judiciary);
Toni Monkovic, Concussions and Congress
and the Future Game, N.Y. Times 5th down
blog (Nov. 1, 2009) (providing video footage
of Rep. Sanchez).
The most poignant moment of the hearing
occurred when Representative Linda
Sanchez of California analogized the NFL’s
denial of a causal link between NFL- derived
concussions and cognitive decline to the tobacco
industry’s denial of the link between
cigarette consumption and ill health effects.
Id. Sanchez encouraged Goodell to
get “ahead on this issue, if only to cover
[the NFL] legally,” suggesting that the NFL
might avoid liability if it simply issued adequate
warning to NFL players. Id.
Remedial Measures in NFL
Concussion Policy
The NFL took several remedial measures
after the 2009 House Judiciary Committee
hearing. First, Casson and fellow cochair
Dr. David Viano both resigned from their
NFL concussion committee positions. Alan
Schwarz, Concussion Expert’s Removal is
Sought, N.Y. Times (Nov. 20, 2009); Alan
Schwarz, N.F.L. Head Injury Study Leaders
Quit, N.Y. Times (Nov. 25, 2009), at
B11. NFL Commissioner Goodell replaced
Casson and Viano with well- credentialed
neurologists Dr. H. Hunt Batjer and Dr.
Richard G. Ellenbogen. Alan Schwarz, NFL
Picks New Chairmen for Panel on Concussions,
N.Y. Times (Mar. 17, 2010), at B1.
Second, the NFL partnered with the Center
for the Study of Traumatic Encephalopathy
by pledging to donate $1 million to
support its research. Alan Schwarz, N.F.L.
Gives $1 Million to Brain Researchers, N.Y.
Times (Apr. 21, 2009), at B14. Third, NFL
spokesperson Greg Aiello made the following
admission: “[i]t’s quite obvious from the
medical research that’s been done that concussions…
lead to long-term problems[.]”
Id. Fourth, each team was required to make
an independent doctor available to examine
players and determine whether a player
should return to play after sustaining a concussion.
Bruce Klopfleisch, NFL Announces
New Concussion Policies, SUITE 101.COM.
Legal Implications of
Previous NFL Policies
Since at least 2005, the NFL has known
of multiple medical studies linking NFLderived
head injuries to later- life cognitive
decline. Still, in 2007, the NFL released the
following statement: “Current research…
has not shown that having more than one or
two concussions leads to permanent problems.”
National Football League, Press Release,
supra. (emphasis added). While it
eventually reversed its stance, it now faces
huge potential liabilities for its previous
statement. Recently, over 3,000 NFL alumni
joined a single, class action lawsuit, arguing
that the league should be liable to them for
failing to provide adequate warning about
the causal link between multiple NFLderived
concussions and later- life cognitive
decline. Sam Farmer, Former NFL Players
to Consolidate Concussion Lawsuits Against
NFL, L.A. Times (June 6, 2012). However,
because the NFL has several defenses at its
disposal, predictions regarding the disposition
of this litigation are speculative at best.
Preemption
Initially, the NFL has sought the dismissal
of the concussion litigation on the grounds

that it is preempted by §301 of the federal
Labor Management Relations Act
under the NFL players’ collective bargaining
agreement and the NFL Constitution
and bylaws. Mot. to Dismiss, Nov. 11, 2011.
Arguably, because the plaintiffs allege that
the league has breached its duty to minimize
the risk of concussion- related harm
to NFL players, and since the NFL players’
collective bargaining agreement and
the NFL Constitution and bylaws outline
the obligations of the NFL regarding issuing
warnings and player safety, resolving
the state law claims requires interpreting
a collective bargaining agreement, so this
is a labor dispute. 48B Am. Jur. 2d Labor
and Labor Relations §2428. Therefore, federal
labor law principles preempt the state
law principles, and because the NFL players’
collective bargaining agreement and
the NFL Constitution and bylaws stipulated
to arbitration proceedings in the event of
a dispute, the league has argued that the
plaintiffs must arbitrate. Id. See, e.g., Singh
v. Estate of Lunalilo, 779 F. Supp. 1265, 1269
(D. Haw. 1991).
The league’s motion to dismiss stated,
“[t]he claims here are fundamentally about
workplace safety in a unionized setting in
which workplace safety issues loom large
and have long been the subject of bargaining.”
Greg Ryan, NFL Taps Clement for Concussion
MDL, LAW360.com (Dec. 20, 2012).
Based on previous lawsuits against the NFL,
it appears that the NFL has support for this
defense. See, e.g., Givens v. Tennessee Football,
Inc., 684 F. Supp. 2d 985, 990–91 (M.D.
Tenn. 2010) (holding that a lawsuit by a
player alleging that team withheld medical
scan information about his injured knee
was preempted by Labor Management Relations
Act §301); Stringer v. National Football
League, 474 F. Supp. 2d 894, 909–11 (S.D.
Ohio 2007) (holding that a wrongful death
lawsuit brought by the wife of a player who
died due to heat stroke during NFL practice
was preempted by Labor Management
Relations Act §301); Sherwin v. Indianapolis
Colts, Inc., 752 F. Supp. 1172, 1177–79
(N.D. N.Y. 1990) (holding that a lawsuit of
a former player alleging that the team as an
employer failed to provide adequate medical
care and withheld medical information
was preempted by Labor Management Relations
Act §301). Still, the success of this request
for arbitration will hinge on whether
or not the court accepts that premise that
the plaintiffs’ claims “arise under” the NFL
players’ collective bargaining agreement
and the NFL Constitution and bylaws.
Failure to Warn
A duty to warn arises when someone should
realize through special facts known to that
person or due to a special relationship that
an act or omission exposes another to an
unreasonable risk of harm through the
conduct of a third party. Restatement (Second)
of Torts §302B (1965). The NFL has
had constructive notice of medical studies
linking multiple head injuries with laterlife
cognitive decline since at least 2005.
Further, evidence from NFL retirement
and disability plan board hearings indicate
that the league had some level of knowledge
regarding the harmful effects of head
trauma as early as 1999 when it concluded
that Hall of Fame center Mike Webster
had brain damage from the time that he
spent playing in the league. Steve Fainaru,
Mixed Messages on Brain Injuries, EPSN.
com (Nov. 16, 2012). Unfortunately, this
knowledge can cut both ways. Because the
NFL retirement and disability plan board,
which reviews disability requests, contains
members from the NFL Players Association,
the league could argue that the players
had this knowledge as well, vitiating any
failure to warn claim. Ken Belson, Brain
Injuries Drew Millions from N.F.L., Report
Says, N.Y. Times (Nov. 17, 2012), at D4.
Still, by fostering a misconception in the
minds of players that “there is no magic
number for how many concussions is too
many,” the league arguably encouraged
players to treat their concussive conditions
with less than due care. National Football
League, Press Release, supra. (emphasis
added). Thus, several players might have
aggravated their concussive injuries by
returning to play because they relied on the
NFL’s arguably inadequate warning.
Duty
The NFL might argue that the NFL concussion
committee’s mere awareness of independent
studies did not by itself impose a
legal duty to warn players about the studies.
Restatement (Second) of Torts §314 (1965).
Since it did not have some special relationship
or special duty, the NFL will argue that
it did not have an affirmative duty to warn
Several playersmight
have aggravated their
concussive injuries
by returning to play
because they relied
on the NFL’s arguably
inadequate warning.
league players about the cognitive consequences
of concussions such as chronic
traumatic encephalopathy, dementia, and
depression. Courts have suggested that the
respective NFL teams employ the NFL players,
not the league. See, e.g., N. Am. Soccer
League v. NFL, 670 F.2d 1249, 1252 (2d Cir.
1982). Consequently, the NFL might argue
that the league does not have a special relationship
stemming from employment that
would generate an affirmative duty to warn
NFL players about the long-term risks associated
with NFL- derived concussions.
The players might argue that the NFL’s
voluntary creation of an internal concussion
committee created a duty on the part
of the NFL to exercise reasonable care. Once
an actor begins voluntarily to render assistance
to a third party, the actor undertakes
a duty to proceed with reasonable care
when the third party relies on the actor’s
assistance. Restatement (Third) of Torts
§42 (2005). Arguably, the NFL assumed a
duty to proceed with reasonable care in its
dealings with league players when it voluntarily
created the internal committee
on concussions. Players relied on the information
contained in the NFL’s August 14,
2007, concussion pamphlet to represent a
complete and accurate synopsis of “current
research” on the topic: “[w]e want
to make sure all NFL players… are fully
informed and take advantage of the most
up-to-date information and resources as
we continue to study the long-term impact
of concussions.” National Football League,
Press Release, supra. (emphasis added).
If the NFL wanted to make players “fully
For The Defense ■ March 2013 ■ 11

Employment and Labor Law
informed” about the “long-term impact of
concussions,” players may argue, why did
it withhold from players the findings of
Guskiewicz, Cantu, and Omalu indicating
a causal link existed between multiple concussions
and later- life cognitive decline
Arguably, the NFL
assumed a duty to proceed
with reasonable care in
its dealings with league
players when it voluntarily
created the internal
committee on concussions.
Cause
An actor’s tortious conduct must be a factual
cause of another’s physical harm to
impose liability on that actor. Restatement
(Third) of Torts §26 (2002). Conduct
is a factual cause of harm when the
harm would not have occurred “but for”
the tortious conduct. Id. The NFL might
point to any number of causes that could
have contributed to an injured NFL players’
cognitive decline. For example, Pittsburgh
Steelers’ trainer and NFL concussion
summit and committee member Dr. Joseph
Maroon argued that steroids, drug abuse,
and other substances caused the damaged
brain tissue of former NFL players Webster,
Long, and Waters. Les Carpenter, Compromise
Reigns at Summit on Concussions,
Wash. Post (June 20, 2007), at E1.
Players might rebut this causation defense
by arguing that the NFL’s failure to
warn does not need to be the sole cause of
their cognitive injuries. See Restatement
(Third) of Torts §26, cmt. c. (2002) (emphasis
added). See, e.g., Alaska v. Abbott,
498 P.2d 712, 726 (Alaska 1972); Peterson v.
Gray, 628 A.2d 244, 246 (N.H. 1993) (holding
that a defendant’s tortious conduct must
be a cause of harm, not “the” cause); Dedes
v. Asch, 521 N.W.2d 488, 490–92 (Mich.
1994) (rejecting the argument that statutory
12 ■ For The Defense ■ March 2013
language, “the proximate cause,” meant
that defendant’s conduct must be the only
cause of harm). When multiple actions or
sources can cause harm, each of which is
sufficient to cause a plaintiff harm, a court
appropriately can supplement the “but-for”
standard. Restatement (Third) of Torts §27
(2005). The NFL players may concede that
they sustained concussions “swimming” or
in a variety of other contexts. However, if
the players can prove that the NFL’s failure
to warn aggravated their cognitive injuries,
then a court appropriately can supplement
the “but-for” standard. Again, by relying on
the statement that “there is no magic number
for how many concussions is too many,”
players likely returned to play after sustaining
two or more concussions in one NFL
season. In other words, the NFL concussion
committee’s concussion management likely
caused players to aggravate their cognitive
injuries. See National Football League, Press
Release, supra. (emphasis added).
Assumption of Risk
The NFL could argue that the players
assumed the risk of all injuries inherent
in football. Generally, athletes assume the
risks of injuries normally associated with
the sport. See, e.g., Niemcyzk v. Burleson,
538 S.W.2d 737, 740 (Mo. Ct. App. 1976).
However, plaintiffs must have actual knowledge—not
constructive notice—of the
specific risk at issue to invoke the assumption
of risk doctrine. Prosser, Law of Torts
3d. See also Restatement (Second) of Torts
§466 (1965).
NFL alumni concede that they knew of
the risks normally associated with professional
football, which ranged from broken
bones to torn ligaments and even concussions.
However, the players lacked actual
knowledge of the long-term cognitive consequences
of sustaining multiple NFLderived
concussions. Still, a court could
conclude that this general knowledge of
inherent danger, coupled with the fact
that the players arguably received notice
of potential cognitive effects following the
disability hearings mentioned above, were
sufficient to put the NFL alumni on notice
of the risk posed by playing football.
Contributory Negligence
Contributory negligence—the defense that
an injured person cannot recover damages
for negligence if the injured person,
by his or her own negligence, proximately
contributed to the injury—is the strongest
argument at the NFL’s disposal in this
litigation. See 38 Am. Jur. 2d Negligence
§174. The NFL could argue that the players
negligently contributed to their own
injuries by (1) failing to report their concussive
conditions to team doctors; and
(2) returning to play before their concussion
symptoms completely disappeared.
The NFL’s August 14, 2007, informational
pamphlet instructs players to self- report
their concussion symptoms, indicating that
they should report concussion symptoms
immediately to team medical personnel
and that the players should be asymptomatic
before returning to play. See National
Football League, Press Release, supra.
Thirty of 160 NFL players surveyed by
the Associated Press (AP) in November of
2009 replied that they either failed to report
or underreported concussion symptoms.
Howard Fendrich, AP Impact: NFL Players
Hide, Fear Concussions, ABC News; Associated
Press, Survey: Concussions Inevitable,
ESPN.COM. Further, some players admitted
that they returned to play despite “feeling
‘dazed’ or ‘woozy’ or having blurred
vision.” Id. The NFL could argue that the
players negligently contributed to their
own cognitive injuries by failing to report
these concussion symptoms and returning
to play before becoming symptom free. Id.
The players could respond by arguing
that the NFL’s contractual scheme incentivizes
them to withhold their concussion
symptoms from team managers. NFL
player contracts do not guarantee player
payment beyond the season in which an
injury occurs. National Football League
Collective Bargaining Agreement (2006)
app. c, §9 at 251. This contractual structure
maximizes the risk that players will incur
permanent cognitive problems because it
incentivizes the players to withhold their
concussion symptoms and to play through
multiple head injuries.
Even if the players are found contributorily
negligent, they could still recover
damages in jurisdictions that adhere to
comparative negligence principles. While
traditionally a plaintiff’s contributory negligence
served to bar him or her totally from
recovering damages, most jurisdictions
adhere to a fairer comparative negligence

mandate. Under a “pure comparative negligence”
approach, damages are apportioned
between a negligent defendant and a contributorily
negligent plaintiff, regardless
of the extent to which either party’s negligence
contributed to the plaintiff’s harm.
Thus, if a jury finds a player contributorily
negligent for withholding symptoms and
returning to play before becoming asymptomatic
but also finds the NFL at least one
percent to blame for a player’s cognitive
injuries, the player can recover damages in
an amount that represents that one percent.
“88 Benefit” and Indemnification
The “88 Benefit” amended to the 2006 NFL
collective bargaining agreement provided
that NFL alumni could receive payment
of up to $88,000 per year for their medical
claims specifically “related to dementia.”
National Football League Collective Bargaining
Agreement, art. XLVIII-D (2006)
(“88 Benefit”). The “88 Plan,” as it is called,
is funded by the various NFL clubs and
“jointly administer[ed]” by the NFL Players
Association and the NFL. Id. Defense
attorneys might argue that a player’s acceptance
of “88 Benefit” funds indemnifies
the league against future civil liability.
However, this defense is not persuasive
given that the section in the NFL collective
bargaining agreement delineating the
“88 Benefit” does not contain indemnification
language. League attorneys have confirmed
this point.
Statute of Limitations—
“Discovery Rule”
Football-related head trauma can be likened
to asbestos exposure in that damage
caused by both can take years to manifest.
One study noted that while the average age
of onset for CTE symptoms was 42.8 (on
average, approximately eight years after
an athlete had retired), CTE symptoms
were first exhibited in patients as young
as 25, and as old as 76 years of age. Brandon
E. Gavett et al., Chronic Traumatic
Encephalopathy: A Potential Late Effect of
Sport- Related Concussive and Subconcussive
Head Trauma, Clinical Sports medicine
(Jan. 2011).
This indeterminate “gestation” period
appears problematic. Normally, a cause of
action for personal injury will accrue at
the time of injury, and a plaintiff will have
only two to four years to file a claim based
in tort. However, to be fair to people with
latent injuries, most states have adopted
what is known as the “discovery rule.”
Under the discovery rule a cause of action
does not accrue until a plaintiff knows or
reasonably should have known that he or
she was injured as a result of a defendant’s
conduct. See, e.g., Cornell v. E.I. Du Pont
de Nemours & Co., 841 F.2d 23, 24 (1st Cir.
1988). NFL alumni should be able to invoke
the discovery rule here because cognitive
illnesses caused by multiple concussions,
such as CTE or dementia, represent exactly
the type of latent injuries that the rule was
intended to address.
Recent Developments
On December 17, 2009, Cincinnati Bengals
receiver Chris Henry, 26, died after
falling or jumping out of the back of a
pickup truck. Alan Schwarz, Former Bengal
Henry Found to Have Had Brain Damage,
N.Y. Times (June 29, 2010), at B10. When
Omalu and Dr. Julian Bailes performed a
postmortem study on Henry’s brain tissue,
they discovered trademark signs of CTE.
Id. Madison Park, Young Player Had Brain
Damage More Often Seen in NFL Veterans,
CNN.COM. Notably, the accident did not
cause these signs as signs of CTE develop
slowly over time. Id. This finding was significant:
Henry, the twenty- second professional
football player diagnosed with CTE,
died while still active in the NFL, developed
it by his mid-20s. Id. This raises the
question of how many current NFL players
might have the condition without knowing
it.
Shortly after, the NFL selected prominent
neurologists Batjer and Ellenbogen as
cochairs of a new NFL committee: the NFL
head, neck and spine medical committee,
which replaced the previous concussion
committee, the mild traumatic brain injury
committee. Alan Schwarz, N.F.L. Picks New
Chairmen for Panel on Concussions, N.Y.
Times (Mar. 17, 2010), at B11. To eliminate
the potential conflicts of interest that jeopardized
the integrity of the previous committee’s
findings, the NFL chose Batjer and
Ellenbogen because they had no ties to any
NFL teams, and they did not receive compensation
other than their expenses. Id.
Both Batjer and Ellenbogen were zealously
committed to distancing themselves from
the old NFL concussion committee. At one
point Batjers stated:
We all had issues with some of the methodologies…,
the inherent conflict of
interest… that was not acceptable by
any modern standards or not acceptable
to us… we don’t want our professional
reputations damaged by conflicts that
were put upon us.
A court could conclude
that this general knowledge
of inherent danger,
coupled with the fact
that the players arguably
received notice of potential
cognitive effects following
the disability hearings
mentioned above, were
sufficient to put the NFL
alumni on notice of the risk
posed by playing football.
Alan Schwarz, Concussion Committee
Breaks with Predecessor, N.Y. Times (June 2,
2010), at B12. During a May 2010 Congressional
hearing, Representative Anthony
Weiner (New York) addressed Batjer and
Ellenbogen with the following comment:
“[y]ou have years of an infected system here,
[and] your job is… to mop [it] up.” Alan
Schwarz, House Panel Criticizes New N.F.L.
Doctors, N.Y. Times (May 25, 2010), at B10.
A Step in the Right Direction
In June of 2010, the New York Times hinted
that the NFL was working with the NFL
Players Association and the Centers for
Disease Control and Prevention (CDC) on
a concussion brochure worded far more
strongly than the one given to players since
2007. Alan Schwarz, Former Bengal Henry
For The Defense ■ March 2013 ■ 13

Employment and Labor Law
Found to Have Had Brain Damage, N.Y.
Times (June 29, 2010), at B10. Later, the
NFL shocked the concussion study community
by conceding for the first time that
multiple NFL- derived head injuries can
cause severe cognitive health problems:
[T]raumatic brain injury can cause a
wide range of short- or long-term changes
affecting thinking, sensation, language,
The NFL could argue
that the players negligently
contributed to their own
injuries by (1) failing to
report their concussive
conditions to team
doctors; and (2) returning
to play before their
concussion symptoms
completely disappeared.
or emotions.’ These changes may lead to
problems with memory and communication,
personality changes, as well as depression
and the early onset of dementia.
Concussions and conditions resulting
from repeated brain injury can change
your life and your family’s life forever.
Press Release, National Football League,
Concussion: A Must Read for NFL Players
(July 26, 2010) (emphasis added); Alan
Schwarz, N.F.L. Asserts Greater Risks of
Head Injury, N.Y. Times (July 27, 2010), at
A1. While this warning was overdue, the
NFL deserves credit for finally embracing
the findings of independent scientists.
The NFL has since taken several measures
to prevent concussion- related injuries.
In February 2011, the successor NFL
concussion committee announced that
team medical personnel would implement
a standardized sideline concussion assessment
protocol consisting of a limited neurological
cognitive examination and a
14 ■ For The Defense ■ March 2013
balance assessment. See NFL Announces
New Sideline Concussion Assessment Protocol,
NFL.COM. Following an incident in
December of 2011, when Cleveland Browns
quarterback Colt McCoy suffered a concussion
after an illegal hit but was returned to
the game after two plays, the NFL issued
a memo stating that third-party athletic
trainers would be placed in each stadium
to help monitor player concussions. Jason
La Confora, NFL Stationing Trainers in Stadiums
to Monitor Concussions, NFL.COM.
In July of 2012, NFL Commissioner Goodell
hinted that the league was developing a
test for a tablet and an iPad, which, when
used on the sidelines, could help determine
whether or not a player had suffered
a concussion. Peter King, Goodell Focused
on Helping Players During and After Their
Careers, Sports Illustrated.
Still, the NFL took these measures after
the players filed the class action lawsuits
against the NFL, and not everyone is truly
convinced of the league’s commitment
to protecting its players. Recently, Terry
Bradshaw noted that “[t]hey’re forced to
care now because it’s politically correct to
care. Lawsuits make you care. I think the
PR makes you care.” Cindy Boren, Terry
Bradshaw: “In the next decade, we will
not see football as it is,” The Early Lead,
WASH.POST.COM (June 14, 2012) (reporting
on Bradshaw appearance on the Jay
Leno show).
Further, evidence has surfaced that may
prevent the NFL from claiming ignorance
regarding the long-term health effects of
multiple concussions. One recent investigation
revealed that the NFL’s retirement
and disability board had, as early as the
1999, awarded at least $2 million in disability
payments to several former players
after concluding that their mental impairments
were caused by “repetitive trauma
to the head or brain from League football
activities.” Steve Fainaru, Mixed Messages
on Brain Injuries, ESPN.COM (Nov.
16, 2012). These awards resulted from the
findings of Dr. Edward L. Westbrook, the
neurologist retained by the NFL retirement
and disability board to evaluate the
disability claims brought by at least six
players alleging football- related traumatic
brain injuries from 1999 to the early 2000s.
Westbrook was quoted as being “horrified
by… the degree of injury” in the players
that he evaluated, and he insisted that
the injuries were caused by “multiple hits”
endured throughout the course of their
football careers. Id.
In fact, the cases described by Westbrook
may not have been the only instances
when the NFL learned that footballinduced
head injuries could lead to laterlife
cognitive decline. In a 2005 lawsuit
brought by Webster’s estate, which sought
to recover wrongfully withheld disability
benefits, the Fourth Circuit Court of
Appeals mentioned “eight other cases of
[total and permanent] disability due to
brain damage” confirmed by examining
physicians reviewing disability claims for
the NFL retirement and disability board.
Id. Although the identities of these mystery
players has not surfaced yet, one can safely
assume that the NFL retirement and disability
board records will make prime targets
for discovery should the former NFL
players’ class action lawsuit survive the
pleading stage.
The Tragedy Continues
Sadly, Henry’s death and subsequent diagnosis
with chronic traumatic encephalopathy
was not an isolated incident. In
February 2011, former Chicago Bears defenseman
Dave Duerson shot himself fatally in
the chest after experiencing deteriorating
cognitive symptoms that he believed were
linked to CTE. Alan Schwarz, Before Suicide,
Duerson Said he Wanted Brain Study,
N.Y. Times (Feb. 19, 2011), SP1. Before his
death, Duerson left specific instructions
to his family: “Please, see that my brain is
given to the N.F.L.’s brain bank,” presumably
to confirm his self- diagnosed suspicions.
Id. In May 2011, the Center for the
Study of Traumatic Encephalopathy confirmed
that Duerson had “indisputable”
evidence of CTE in his brain tissue samples,
also noting that there was “no evidence
of any other disorder.” Alan Schwarz,
Duerson’s Brain Trauma Diagnosed, N.Y.
Times (May 3, 2011), at B11.
Later, in April of 2012, NFL alumnus
Ray Easterling, a former Atlanta Falcons
safety, also committed suicide, dying of a
self- inflicted gunshot wound at his home in
Virginia. Ray Easterling, of Atlanta’s Grits
Blitz, Dies at 62, N.Y. Times (Apr. 22, 2012),
at A22. Before his death, Easterling had
experienced a variety of classic CTE symp-

toms and suffered from memory loss, hand
tremors, personality changes, and eventually
dementia. Mike Tearney, Former Player’s
Suicide Won’t End His Widows Fight,
N.Y. Times (May 4, 2012), at B9. Notably,
Easterling had been the lead plaintiff in
the ongoing concussion- related class action
filed against the NFL. Gary Mihoces, Hearing
Signals Start of Fight Between Players,
NFL, USA TODAY (Apr. 24, 2012).
Just two weeks after Easterling’s death,
in an incident frighteningly reminiscent of
Duerson’s suicide, Junior Seau, a 20-year
veteran of the NFL and the San Diego
Chargers, also committed suicide by a selfinflicted
gunshot wound to the chest. Mary
Pilon, Family of Seau Decides to Give Brain
for Study, N.Y. Times (May 5, 2012), at
D3. Before his death, Seau had struggled
with depression and other personal problems,
going as far as driving his car off
a cliff following an argument with his
girlfriend. Marty Graham, Former NFL
Linebacker Junior Seau Dies in Apparent
Suicide, Chicago Tribune (May 2, 2012).
After Seau’s family agreed to donate his
brain to researchers to look for signs of
trauma and CTE, researchers from the
National Institutes of Health confirmed
that Seau did in fact suffer from the disease
before his untimely death. Sean Gregory,
Will Junior Seau’s Diagnosis Cause More
Ex- Players to Sue the NFL, Time Sports
(Jan. 11, 2013). Seau’s family filed a lengthy
and detailed wrongful death complaint
against the NFL in the California state
courts earlier this year, a lawsuit that the
NFL will likely remove to the federal courts
and which will become combined with the
ongoing class action. Gary Mihoces, Junior
Seau’s Family Sues NFL Over Brain Injuries,
USA TODAY Sports (Jan. 23, 2012).
Unfortunately, the concussion problem
probably extends further than the
current media hype. Though the suicides
and ongoing litigation have brought the
issue to the forefront of national attention,
the progressive nature of the disease
and the unstated societal stigma toward
mental illness has undoubtedly resulted
in the under- reporting of concussionrelated
afflictions. One study of 34 retired
NFL players conducted by the Center for
Brain Health at the University of Texas
revealed that these individuals suffered
higher instances of cognitive defects and
depression compared to the control subjects.
Robert Wilonsky, UT Dallas Brain
Prof Discovers Some Ex-NFL Players living
in North Texas Are Depressed —and Didn’t
Even Know It, The Scoop Blog, DALLAS-
NEWS.COM (June 30, 2012). While this
is not surprising in light of Omalu’s findings,
it is significant because many of the
players were clinically depressed—exhibiting
symptoms such as difficulty sleeping,
weight gain or loss, decreased energy
levels—and had no idea. Id. Interestingly,
“because concussion- associated depression
has no mood component,” affected
players wouldn’t necessarily experience
the emotional volatility traditionally associated
with the disorder. Id. In effect, many
CTE sufferers may not know that a problem
exists until the disease has progressed into
more advanced stages.
Scientific Research Takes Off
Still, all of the hype and media attention
surrounding concussions garnered significant
attention for CTE in the scientific community.
One study of over 100 active and
retired NFL players indicated that these athletes
face a significantly higher risk of incurring
permanent brain damage, including
a susceptibility to dementia much higher
than the national average. Daniel G. Amen,
Impact of Playing American Professional
Football on Long-Term Brain Function, 23
J. Neuropsychiatry & Clinical Neuroscience
98–106 (Winter 2011).
In contrast, a different study conducted
at the University of Texas at Dallas—which
sought to “assess cognitive impairment and
depression in aging former [NFL] players
and to identify neuroimaging correlates
of these dysfunctions”—achieved different
results. John Hart, et al, Neuroimaging
of Cognitive Dysfunction and Depression
in Aging Retired National Football League
Players: A Cross Sectional Study, JAMA
Neurology (Jan. 7, 2013). Among the NFL
retirees studied, it found that “the number
of individuals with dementia was not different
than expected in the general population
at [the study group’s] age.” Id. Still, the
study indicated that the NFL retirees did
experience depression- related symptoms
at a higher incidence rate than normal and
noted that these same individuals “may be
more likely to develop cognitive impairments
(problems with memory, naming,
and word finding)… as they age compared
with the general population.” Id. Further,
researchers opined that the lower incidence
of dementia could have been due to
the small sample size or the relatively high
IQ of the study group. Id.
A third study conducted by Boston University
researchers discovered 28 new cases
of brain damage and CTE in dead football
Football-relatedhead
trauma can be likened to
asbestos exposure in that
damage caused by both
can take years to manifest.
players. McKee et al., The Spectrum of Disease
in Chronic Traumatic Encephalopathy,
Brain (Dec. 2012); Steve Fainaru and
Mark Fainare-Wada, Researchers Discover
28 New Cases of Brain Damage in Deceased
Football Players, PBS.ORG (Dec. 3, 2012).
Of the 85 individuals exposed to repetitive
head trauma studied in all—a group that
included military veterans, boxers, and
football players—68 were found to have
CTE. Incredibly, when coupled with the
findings of other studies, this experiment
indicated that, of the 34 brains of former
NFL players that have been examined in
all, 33 were found to have CTE. Id. Commenting
on the results, Robert C. Cantu,
a director at the Center for the Study of
Traumatic Encephalopathy and NFL advisor,
noted, “[t]he sheer volume of cases [ ]
is going to just overwhelm anybody that
wants to be in denial about the existence
of this problem.” Id.
Elsewhere, the NFL has supported the
scientific push to understand better the
causes, effects, symptoms, and possible
treatments of CTE. In the fall of 2011,
with league support, the Center for the
Study of Traumatic Encephalopathy began
recruiting participants for the Diagnosing
and Evaluating Traumatic Encephalopathy
Using Clinical Tests (DETECT) study,
an experiment that will include 150 former
NFL players and hopes to develop methods
For The Defense ■ March 2013 ■ 15

Employment and Labor Law
for diagnosing CTE during life through a
variety of medical procedures. Clinical
Studies, Boston University Center for the
Study of Traumatic Encephalopathy.
Another study conducted by researchers
at the Albert Einstein College of Medicine
of Yeshiva University has made
progress in the area of diagnosing CTErelated
conditions. Michael L. Lipton, et
In the coming years,
the issue will be not
whether concussions
are linked to footballinduced
head trauma,
but what, if anything, can
be done to reduce player
susceptibility to CTE and
related conditions.
al., Robust Detection of Traumatic Axonal
Injury in Individual Mild Traumatic
Brain Injury Patients: Intersubject Variation,
Change Over Time and Bidirectional
Changes in Anisotropy, 6 Brain Imaging
and Behavior 329–42 (2012). Using a new
technology known as diffuse tensor imaging
(DTI), researchers were able to detect
unique abnormalities in the brains of those
who had a concussion when other methods
of detection—CT scans or MRIs—
had failed to do so. Id. Unfortunately, the
study also revealed that damaged regions
of brain tissue could retain a reduced level
of structural integrity for up to an entire
year following a concussive injury. Concussion
Victims Have Unique Spatial Patterns
of Brain Abnormalities that Change Over
Time, News Medical (June 8, 2012).
Other researchers have made progress
on the diagnostic front as well. Recently,
scientists at UCLA used positron emission
tomography (PET) scans to identify
pathological deposits of tau proteins in
the brains—a condition that has thus far
16 ■ For The Defense ■ March 2013
been diagnosed only post- mortem through
autopsy and has been linked to numerous
cognitive ailments such as CTE—in five
NFL retirees. Gary W. Small, et al, PET
Scanning of Brain Tau in Retired National
Football League Players: Preliminary Findings,
21 Am. J. Geriatr. Psychiatry 138–44
(2013). Though the small sample size of the
study warrants additional research, the
results demonstrated that researchers may
soon be able to diagnose those living with
traumatic brain injuries before the associated
life- altering symptoms present themselves.
Id.
All in all, current research appears to
support the initial findings of Omalu and
has bolstered the effort to raise awareness
for effects of CTE. However, because much
of the definitive research linking footballrelated
head trauma to CTE was released
after the NFL began taking affirmative
steps to address the issue, it seems doubtful
that these studies will be used against
the league in the ongoing litigation. Further,
current research doesn’t necessarily
propose a solution so much as it defines a
problem. In the coming years, the issue will
be not whether concussions are linked to
football- induced head trauma, but what, if
anything, can be done to reduce player susceptibility
to CTE and related conditions.
One recent story suggests that certain
experimental treatments may provide former
players with some relief from the symptoms
of football- induced head trauma. In
early January of 2013, ex- Cleveland Browns
quarterback Bernie Kosar gave his personal
endorsement to the treatment that he
received from Dr. Rick Sponaugle, a Florida
physician specializing in experimental
brain therapies. Press, Kosar Happy
to Find Treatment, ESPN.COM (Jan. 11,
2013). Before his treatment with Sponaugle,
Kosar suffered from various cognitive
symptoms including persistent inner ear
ringing, slurred speech, and poor memory
recall, conditions that he attributes to
the multiple concussions that he sustained
throughout his career. After Dr. Sponaugle’s
treatment, which included intravenous
therapies to improve blood flow to the
brain and a dietary supplement regimen,
Kosar noted, “I feel 20 years younger…. It
was a gift from God to find this and feel like
this… I see all the symptoms go away.” Id.
Kosar, who had been friends with Duerson
and Seau, later promoted Sponaugle’s treatment
to NFL Commissioner Goodell, stating,
“I hope if there are people and players
out there suffering, they have an option and
something that can genuinely help them
get better in a short amount of time.” Id.
NFL Players Class Action Lawsuit
Recently, thousands of former NFL
alumni have taken legal action, filing lawsuits
against the NFL in several locations
throughout the country, alleging in part
that the league “deliberately and fraudulently
concealed from its players the link
between football- related head impacts
and long-term neurological injuries.” Sam
Farmer, Former NFL Players to Consolidate
Concussion Lawsuits Against NFL, L.A.
Times (June 6, 2012). The football helmet
manufacturer Riddell, Inc. is also named
as a defendant in the action, likely due to
certain advertisements stating that Riddell
football helmets reduced the risk of
concussions. Darren Heitner, Why Football
Helmet Manufacturer Riddell Should
Be Very Concerned About Concussion Litigation,
Forbes. Eventually, these lawsuits
were collapsed into one “master complaint”
filed in the U.S. District Court, Eastern District
of Pennsylvania. Id.
Given the legal complexities of the case
and the growing size of this litigation,
it seems likely that the NFL and Riddell
would be inclined to settle the case to avoid
Big Tobacco- like liabilities, if, of course,
the lawsuit survives the motion to dismiss.
Still, not everyone is convinced that drawing
comparisons to the Big Tobacco cases
is necessarily an accurate read of the situation.
For one thing, unlike tobacco use, the
effect of individual concussions on a football
player remains unclear. Concussion
Lawsuits Are Next Big U.S. Litigation, USA
TODAY (July 1, 2012). Further, the NFL
retains trainers and medical personnel on
the sideline who are employed specifically
to detect and to prevent player injuries,
whereas smoker plaintiffs received no such
attention. Id. Lastly, because the NFL players
could have sustained permanent mental
injuries at any point throughout their
careers, such as during pee-wee league or
high school, college, or professional play,
the causal chain—the NFL’s failure to warn
resulting in injury—is weak, and muddy
Concussion, continued on page 78

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Lawyers’ Professionalism and Ethics
Protecting Against
Waiver
By Steven M. Puiszis
Reconciling Federal
Rule of Evidence 502
with Model Rule 1.6
Practice points to
help you avoid not
only professional
embarrassment, but
also loss of clients, a
disciplinary complaint, or
even a malpractice claim.
18 ■ For The Defense ■ March 2013
■ Steven M. Puiszis is a partner in the Chicago office of Hinshaw & Culbertson LLP. He is on the DRI Board of Directors, is the
chair of the DRI Judicial Task Force, and is the board liaison to the Lawyers’ Professionalism and Ethics Committee. Mr. Puiszis
is a past president of the Illinois Association of Defense Counsel. He is a member of the ADTA, the IADC and is a fellow of the
American Bar Foundation.

Federal Rule of Evidence 502 provides lawyers with several
tools to protect against a waiver of attorney- client privilege
or work product immunity. From a risk management perspective,
using Federal Rule of Evidence 502(d) nonwaiver
orders and Rule 502(e) nonwaiver agreements
makes sense for clients, lawyers, and
their firms. However, ethical issues surround
the use of Federal Rule 502’s nonwaiver
tools.
Judges and commentators have suggested,
based on statements in the advisory committee
note to Federal Rule of Evidence 502,
that the rule’s nonwaiver tools provide a vehicle
to reduce discovery costs by eliminating
the need to review information for privilege
before producing it. Those suggestions,
however, fail to consider the duty of confidentiality
found in Rule 1.6(a) of the Model
Rules of Professional Conduct. Model Rule
1.6 was amended in 2012 to add a new subsection
(c), which specifically requires “reasonable
efforts to prevent the inadvertent or
unauthorized disclosure of, or unauthorized
access to, information relating to the representation
of the client.” See Model Rules of
Prof’l Conduct R. 1.6(c) (2012).
This article explains that using Federal
Rule of Evidence 502(d) nonwaiver orders
and Federal Rule 502(e) nonwaiver agreements
to avoid the cost of pre- production
screening for privilege may run afoul of
Model Rule 1.6’s mandate and could trigger
an ethical problem for the attorney who
employs that strategy. An attorney always
should obtain informed consent from a client
before engaging in the type of strategy
suggested in the advisory committee note
to Federal Rule of Evidence 502.
Federal Rule of Evidence 502 Combats
Waiver in the E-discovery World
Federal Rule of Evidence 502 was enacted
in response to the concern that protecting
against waiver of attorney- client privilege
or work product immunity in today’s digital
age had become cost prohibitive. As two
respected authorities observed:
The volume of information produced by
electronic discovery has made the process
of reviewing that information, to
ascertain whether any of it is privileged
from disclosure, so expensive that the
result of the lawsuit may be a function
of who can afford it. The volume also
threatens the ability to accurately identify
and describe relevant and privileged
documents so that the system of claims
and adjudication teeters on the brink of
effective failure.
Hon. John M. Facciola & Jonathan M. Redgrave,
Asserting and Challenging Privilege
Claims in Modern Litigation: The Facciola-
Redgrave Framework, 2009. Fed. Cts. L.
Rev. 4, 19 (Nov. 2009), available at http://
www.fclr.org/fclr/articles/. Hopson v. Mayor
of Baltimore, 232 F.R.D. 228, 244 (D. Md.
2005), similarly noted that “insist[ing]
in every case upon ‘old world’ record- byrecord
pre- production privilege review,
on pain of subject matter waiver, would
impose upon parties costs of production
that bear no proportionality to what is at
stake in the litigation.”
Federal Rule 502 attacks the problem
in two ways. The advisory committee note
to Federal Rule of Evidence 502 explains
that subdivisions (a) and (b) first resolved
several “longstanding disputes in the
courts… involving inadvertent disclosure
and subject- matter waiver.” Federal Rule of
Evidence 502(a) specifically limits subjectmatter
waiver to “intentional” disclosures
when “the disclosed and undisclosed communications
or information concern the
same subject matter” and fairness dictates
that they ought to be considered together.
The advisory committee note explains that
subject- matter waiver under Federal Rule
of Evidence 502(a) “is limited to situations
in which a party intentionally puts protected
information into the litigation in a
selective, misleading and unfair manner.”
The advisory committee note further elaborates:
“It follows that an inadvertent disclosure
of protected information can never
result in a subject matter waiver.”
Federal Rule of Evidence 502(b) provides
that the inadvertent disclosure of information
“in a federal proceeding or to a
federal office or agency” does not constitute
a waiver of attorney- client privilege or
work product protection when the holder
of the privilege “took reasonable steps to
prevent disclosure” before it occurred and
“promptly took reasonable steps to rectify
the error” after it occurred, including when
applicable, the use of Federal Rule of Civil
Procedure 26(b)(5)(B). The advisory committee
note indicates that Federal Rule of
Evidence 502(b) “does not require the producing
party to engage in a post- production
review” to determine if any privileged or
protected information “has been produced
by mistake,” but the note states that the
producing party is required “to follow up
on any obvious indications” that protected
information was inadvertently produced.
Second, Federal Rule of Evidence 502
provides attorneys with several nonwaiver
tools. Subdivisions (d) and (e) of Federal
Rule 502 authorize the use of court orders
and party agreements to protect against
waivers of attorney- client privilege or work
product immunity resulting from the disclosure
of privileged or protected information
in discovery. Federal Rule of Evidence
502(d) empowers a federal court to enter a
“nonwaiver” order and provides that following
the entry of such an order, any
disclosure of privileged or protected information
in that proceeding will not constitute
a waiver of attorney- client privilege or
work product in that matter or in any other
state or federal proceeding.
While Federal Rule of Evidence 502(e)
recognizes the enforceability of nonwaiver
agreements, it provides that an agreement
binds only the parties to the agreement. One
of the benefits of a Federal Rule of Evidence
502(d) nonwaiver order is that it does not
require agreement of the parties. See Rajala
v. McGuire Woods, LLP, 2010 WL 2949582,
at *4 (D. Kan. July 22, 2010) (quoting Fed.
R. Evid. 502(d)’s advisory committee note).
Another benefit is that a court can enforce a
nonwaiver order against third parties. Federal
Rule 502’s advisory committee note to
subdivision (e) clarifies that “if parties want
protection against non- parties from a finding
of waiver by disclosure, the agreement
must be made part of a court order.”
Federal Rules of Evidence 502(d)
and (e) Do Not Require Taking
“Reasonable Precaution”
The advisory committee note to Federal
For The Defense ■ March 2013 ■ 19

Lawyers’ Professionalism and Ethics
Rule of Evidence 502 suggests that a nonwaiver
order under Federal Rule 502(d)
“may provide for return of documents
without waiver irrespective of the care
taken by the disclosing party.” The note
cites Zubulake v. UBS Warburg LLC, 216
F.R.D. 280, 290 (S.D. N.Y. 2003), in which
the court observed that parties could enter
into “so-called ‘claw-back’ agreements
The advisory committee
note… states that the
producing party is required
“to follow up on any
obvious indications” that
protected information was
inadvertently produced.
that allow the parties to forego privilege
review altogether in favor of an agreement
to return inadvertently produced privileged
documents.” Additionally, a member
of the Federal Advisory Committee on Civil
Rules has written:
[N]othing in the text of either Rule 502(e)
or Rule 16(b) or 26(f) requires parties to
undertake ‘reasonable’ precautions to
avoid disclosure of privileged or protected
information as part of a clawback,
quick peek or other non- waiver
agreement. To the contrary, these rules
would permit the parties to agree that
discovery material could be produced
without any pre- production screening
at all, but be ‘clawed’ back upon demand
after production.
Paul W. Grimm, Lisa Yurwit Bergstrom &
Matthew P. Kraeuter, Federal Rule of Evidence
502: Has It Lived UP to Its Potential
17 Rich. J.L. & Tech. 8, 62–3 (2011).
Some commentators have suggested that
Federal Rule of Evidence 502 has “not lived
up to its promise” of reducing the cost associated
with protecting against privilege
waivers. Id. at 2. They have advanced two
reasons for that conclusion. One is “that a
disappointingly small number of lawyers
20 ■ For The Defense ■ March 2013
seem to be aware of the rule and its potential.”
The other is that “courts have not
interpreted Rule 502 with sufficient consistency…
to enable practitioners and their
clients to predict how they will fare if they
attempt to take advantage of the rule.” Id.
While those suggestions certainly have
merit, there is a third more likely reason
why lawyers have not used Federal Rule of
Evidence 502 as frequently or enthusiastically
as its drafters had envisioned. It is the
duty of confidentiality imposed by Model
Rule 1.6(a), which potentially encompasses
any information relating to a lawyer’s representation
of a client unless an exception
recognized in the Model Rules can
be invoked. See Geoffrey C. Hazard Jr., W.
William Hodes, & Peter R. Jarvis, The Law
of Lawyering 9–64 (3d ed. 2012) (“Model
Rule 1.6(a) expresses the basic principle
of professional ethics that all information
‘relating to’ a lawyer’s professional relationship
with a client is presumptively confidential
and therefore must not be disclosed
unless an exception applies”).
While the Model Rule 1.6(a) duty of
confidentiality is closely related to the
attorney- client privilege, it is broader in
scope than the attorney- client privilege,
“which is a rule of evidence,” or “the work
product immunity, which is a rule of procedure.”
Thus, one treatise has noted: “Confusion
over the relationship between these
doctrines is not limited to lay persons; it
frequently confounds lawyers and judges
as well.” Id. at 9–6.
Model Rule 1.6 Limits the Use of
Federal Rule of Evidence 502
Rule 1.6(a) of the Model Rules of Professional
Conduct imposes an ethical duty to
maintain the confidentiality of all information
relating to the representation of a
client. Unless the client provides informed
consent to its release, the disclosure is
“impliedly authorized” because it is necessary
to carry out the representation, or
an exception found in Model Rule 1.6(b)
applies. While in most instances an attorney
should have a client’s implied authorization
to produce relevant, nonprivileged
information in discovery under Model Rule
1.6, producing privileged or confidential
information is another matter.
The duty of confidentiality imposed by
Model Rule 1.6 reaches far beyond the
written or oral communications protected
by the attorney- client privilege. Hazard,
Hodes, & Jarvis, supra, at 9–7 (observing
that “the ethical rule of confidentiality is
more protective than the attorney- client
privilege, because the latter only protects
against compelled disclosure, and only
against disclosure of information communicated
between client and lawyer”). Comment
3 to Model Rule 1.6 explains that the
duty of confidentiality generally extends
to any information in an attorney’s possession
relating to the representation of a
client, irrespective of its source, its format,
or how the attorney came into its possession.
For years, comment 16 to Model Rule
1.6 has explained that an attorney’s ethical
responsibility to provide competent representation
includes the obligation to protect
against the inadvertent or unauthorized
disclosure of client information.
In August 2012, the ABA amended several
provisions of the Model Rules “to provide
guidance regarding lawyers’ use of
technology and confidentiality.” See A.B.A.
Resolution 105A Revised. Model Rule 1.6
was amended to add a new paragraph (c):
“A lawyer shall make reasonable efforts
to prevent the inadvertent or unauthorized
disclosure of, or unauthorized access
to, information relating to the representation
of the client.” Comment 16 was also
expanded and now explains:
Paragraph (c) requires a lawyer to act
competently to safeguard information
relating to the representation of a client
against unauthorized access by third
parties and against inadvertent or unauthorized
disclosure by the lawyer or
other persons who are participating in
the representation of the client or who
are subject to the lawyer’s supervision….
The unauthorized access to, or the inadvertent
or unauthorized disclosure of,
information relating to the representation
of a client does not constitute a
violation of paragraph (c) if the lawyer
has made reasonable efforts to prevent
the access or disclosure. Factors to be
considered in determining the reasonableness
of the lawyer’s efforts include,
but are not limited to, the sensitivity of
the information, the likelihood of disclosure
if additional safeguards are not
employed, the cost of employing additional
safeguards, the difficulty imple-

menting the safeguards, and the extent
to which the safeguards adversely affect
the lawyer’s ability to represent clients
(e.g., by making the device or important
piece of software excessively difficult
to use). A client may require the lawyer
to implement special security measures
not required by this Rule or may
give informed consent to forego security
measures that would otherwise be
required by the Rule.
Model Rules of Prof’l Conduct R. 1.6(c)
(2012).
Thus, while Federal Rules of Evidence
502(d) and (e) may not require an attorney
to take reasonable precautions before producing
a client’s information covered by a
Federal Rule 502(d) nonwaiver order or a
Federal Rule 502(e) nonwaiver agreement,
Model Rule 1.6(c) requires “reasonable efforts”
to prevent an unauthorized or inadvertent
disclosure from occurring. Even
before the 2012 amendment to Model Rule
1.6, comment 16 explained that an attorney
had an ethical obligation to act competently
to safeguard a client’s information.
While the entry of a Federal Rule of Evidence
502(d) nonwaiver order or a Federal
Rule 502(e) nonwaiver agreement may allow
an attorney to recover privileged or protected
information produced in discovery,
an unauthorized disclosure has nonetheless
occurred. Model Rule 1.6(c) requires an
attorney to make reasonable efforts to prevent
an unauthorized or inadvertent disclosure
of a client’s information. Accordingly,
a disciplinary tribunal could conclude that
the mere entry of a nonwaiver order does
not qualify as a reasonable attempt to prevent
disclosure as required by Model Rule
1.6(c). See Spieker v. Quest Cherokee, LLC,
2009 WL 2168892, at *3 (D. Kan. July 21,
2009) (“Simply turning over all the ESI materials
does not show that a party has taken
‘the reasonable steps’ to prevent disclosure
of its privileged materials”); Grimm, Bergstrom,
& Kraeuter, supra, at 69 (observing
that while parties could enter into a
nonwaiver agreement permitting production
without any pre- production review
for privilege, “[t]his procedure would not
pass muster under Rule 502(b)(2) because
it cannot be seriously argued that doing no
pre- production review at all meets the requirement
of Rule 502(b) to take ‘reasonable
steps to prevent disclosure’”).
Model Rule 1.6 and Federal Rule of Evidence
502 operate in different playing
fields, one legal and the other disciplinary.
The problem for practitioners is that permissible
strategies in the legal arena could
potentially trigger an ethical complaint in
the disciplinary arena. The aims of Model
Rule 1.6 and Federal Rule of Evidence 502
are different. Model Rule 1.6 seeks to prevent
an inadvertent or unauthorized disclosure
from occurring, whereas Federal
Rules of Evidence 502(d) and (e) permit the
disclosure of client information and only
protect against a waiver of privilege resulting
from the disclosure.
The protection of attorney- client privilege
is obviously encompassed by Model
Rule 1.6, but the scope of the obligation imposed
by Model Rule 1.6 is not limited to
merely protecting against waivers of privileged
communications. See Hazard, Hodes,
& Jarvis, supra, at 9–6 (“Rule 1.6 applies
most insistently to prevent lawyers from
volunteering information about a client (to
anyone)”). As a result, the ethical duty imposed
by Model Rule 1.6 appears to diverge
from what Federal Rules of Evidence 502(d)
and (e) will permit. Thus, the obligation imposed
by Model Rule 1.6 may constrict the
ability to use Federal Rule of Evidence 502
to limit the cost of privilege reviews.
Obtain Informed Consent Before Using
502(d) and (e) to Reduce Review Costs
An attorney can ethically accomplish
avoiding the costs associated with the preproduction
review of e-mails, electronic
information, and paper documents for
privilege, as contemplated by the advisory
committee note to Federal Rule of Evidence
502, by obtaining a client’s “informed consent”
to that strategy. Comment 16 to
Model Rule 1.6(c) recognizes that a client
can forego security measures that the
Model Rule would otherwise require. However,
it requires that an attorney first obtain
a client’s informed consent. While the communication
necessary to obtain a client’s
informed consent will vary depending on
the client, the issue, and the circumstances
presented, a lawyer is obliged to explain a
matter to the extent reasonably necessary
to permit the client to make an informed
decision on the issue.
Obviously, an attorney should discuss
these types of strategy issues with a client.
Informed consent, however, requires more
than merely discussing how the attorney
can use Federal Rule of Evidence 502(d) or
(e) strategically. Informed consent requires
explaining the circumstances that underlie
using one of these evidentiary tools and
explaining the material risks of the proposed
strategy and reasonable alternatives.
See Mode Rules of Prof’l Conduct R. 1.0(e)
While the Model Rule
1.6(a) duty of confidentiality
is closely related to the
attorney-client privilege,
it is broader in scope
than the attorney- client
privilege, “which is a rule
of evidence,” or “the work
product immunity, which
is a rule of procedure.”
(2012). In other words, an attorney should
discuss the pros and cons of the proposed
strategy and the available alternatives with
a client. In this setting, that would include
discussing the costs associated with alternative
approaches to screening a client’s
information for privilege.
In some instances, protecting the substance
of privileged or protected communications
may not be of much concern to
a client, or reducing the costs associated
with e- discovery privilege reviews may
outweigh that concern. Some clients may
be more risk tolerant than others. A client’s
record- keeping system may provide
an adequate internal screening mechanism
for privileged communications and confidential
information. However, producing
electronic information or paper documents
without completing any review at all after
a court enters a Federal Rule 502(d) nonwaiver
order or the parties reach a clawback
or quick peek agreement may result in
For The Defense ■ March 2013 ■ 21

Lawyers’ Professionalism and Ethics
the disclosure of information that the client
would prefer to keep confidential. Moreover,
because a Federal Rule 502(e) nonwaiver
agreement binds only the parties to
the agreement, a stranger to the agreement
who may have a similar claim against a client
could claim entitlement to the inadvertently
produced documents by arguing the
privilege was waived by the failure to take
The problem for
practitioners is that
permissible strategies in the
legal arena could potentially
trigger an ethical complaint
in the disciplinary arena.
22 ■ For The Defense ■ March 2013
“reasonable steps” to prevent the disclosure
from occurring.
While a Federal Rule of Evidence 502(d)
nonwaiver order may preserve a claim of
privilege or work product and reduce the
cost of privilege reviews, opposing counsel
may learn the substance of a client’s
privileged or protected communications
before returning the information. Even if
an opponent returns a privileged or a confidential
document, the knowledge gained
from its review will provide the opponent
with an opportunity to formulate discovery
and trial strategies based on the disclosed
information. Additionally, an opponent
can more easily challenge whether a document
is in fact privileged after reviewing it.
Once a disclosure has occurred, “confidentiality
cannot be restored.” Mt. Hawley
Ins. Co. v. Felman Production, Inc., 271
F.R.D. 125, 136 (S.D. W.Va. 2010). A court
order requiring the return of confidential
documents “at best, can only attempt
to restrain further erosion.” MSP Real
Estate Inc. v. City of New Berlin, 2011 WL
3047687, at *5 (E.D. Wis. July 22, 2011). An
attorney should explain these issues and
risks, preferably in writing, when seeking
the client’s informed consent to use a
Federal Rule 502(d) nonwaiver order or
a 502(e) nonwaiver agreement to strategically
reduce the cost of pre- production
privilege reviews.
Deliberate Production Without
Review May Eliminate the Model
Rule 4.4(b) Notification Obligation
Model Rule 4.4(b) provides: “A lawyer who
receives a document relating to the representation
of the lawyer’s client and knows
the document was inadvertently sent shall
promptly notify the sender.” By its express
terms, Model Rule 4.4(b) only applies to
information that someone inadvertently
produces.
The ABA Committee on Ethics and Professional
Responsibility has taken the position
in a formal ethics opinion that Model
Rule 4.4(b) “does not require refraining
from reviewing the materials or abiding by
instructions of the sender.” Additionally,
that ethics opinion indicates that when the
provision of documents:
is not the result of the sender’s inadvertence,
Rule 4.4(b) does not apply…
[and]… [the] lawyer receiving materials
under such circumstances is therefore
not required to notify another party or
that party’s lawyer of receipt as a matter
of compliance with the Model Rules.
See ABA Comm. on Ethics & Prof’l Responsibility,
Formal Op. 06-440 (2006).
As a result, when a lawyer makes a conscious
decision to produce a client’s information
with a nonwaiver agreement or
nonwaiver order under Federal Rules of
Evidence 502(d) or (e) without any review
for privilege or work product and opposing
counsel knows of that strategy, the opponent
arguably does not need to observe the Model
Rule 4.4(b) obligation to notify the producing
party about the production of privileged
or protected information. See Mt. Hawley,
271 F.R.D. at 131 (refusing to rule that the
defendants misused an allegedly privileged
email by failing to notify the opposing party
about its production before using it). An attorney
can preserve the obligation by including
a notification requirement similar
to Model Rule 4.4(b) in a Federal Rule 502
nonwaiver order or agreement.
Might Inadvertent Waivers of Attorney-
Client Privilege Breach Model Rule 1.6(c)
The 2012 amendment to Model Rule 1.6(c),
has raised another potential consequence
that could result from the inadvertent
waiver of attorney- client privilege. The advisory
committee note to Federal Rule of
Evidence 502(b) explains that the rule applies
an intermediate balancing approach
to claims of inadvertent waiver of privilege
or work product under the rule. See also
United States v. Sensient Colors, Inc., 2009
WL 2905474, at *3 (D.N.J. Sept. 9, 2009) (explaining
that “FRE 502(b) opts for a middle
ground approach to determine if an inadvertent
disclosure operates as a waiver”).
Many states employ a similar balancing approach
to the issue of inadvertent waiver.
One of the factors that courts consider
under an intermediate balancing approach
and under Federal Rule of Evidence 502(b)
(2) is whether “reasonable steps were taken
to prevent disclosure” of privileged information.
Model Rule 1.6(c) asks whether an
attorney took “reasonable efforts” to prevent
an inadvertent or unauthorized disclosure.
These standards are substantially
similar. Accordingly, when a court finds
that a client has waived the attorney- client
privilege because the client’s attorney failed
to take reasonable steps to prevent the
inadvertent disclosure of protected information,
the client may complain that the
attorney failed to meet the Model Rule
1.6(c) reasonable efforts standard.
What Constitutes Reasonable Steps to
Prevent an Inadvertent Disclosure
The advisory committee note to Federal
Rule of Evidence 502(b) recognizes that
before the rule was enacted federal decisions
addressing the inadvertent waiver of
attorney- client privilege employed a multifactor
test for determining when an inadvertent
disclosure resulted in a waiver of
privilege. These factors, none of which were
individually dispositive, addressed “the
reasonableness of [the] precautions taken,
the time to rectify the error, the scope of
the discovery, the extent of the disclosure
and the overriding issue of fairness.” The
advisory committee note further explains
that Federal Rule of Evidence 502(b):
does not explicitly codify that [multifactor]
test, because it is really a set of
non- determinative guidelines that vary
from case to case. The rule is flexible
enough to accommodate any of those
listed factors. Other considerations
bearing on the reasonableness of a producing
party’s efforts include the num-

er of documents to be reviewed and the
time constraints for production.
Echoing this point, Judge Paul Grimm
observed that the:
pre-502 case law that adopted a multifactor
test for determining whether
inadvertent production of privileged
or protected information constituted
a waiver is not automatically incorporated
into Rule 502(b). Rather, the rule
is intended to allow additional factors
to be considered. Thus, the prior case
law is relevant, but not dispositive, and
courts should feel free to adopt a flexible
approach that considers all facts relevant
to determining the reasonableness of the
producing party’s efforts to avoid disclosure
of privileged or work product protected
information.
Grimm, Bergstrom, & Kraeuter, supra, at 35.
The scope of a discovery request “is a
logical starting point” for a court’s analysis
under Federal Rule of Evidence 502(b)
(2). Coburn Group LLC v. Whitecap Advisors
LLC, 640 F. Supp. 2d 1032, 1039 (N.D.
Ill. 2009). The Seventh Circuit has recognized
that “[w]here discovery is extensive,
mistakes are inevitable and claims of inadvertence
are properly honored so long as
appropriate precautions are taken.” Judson
Atkinson Candies, Inc. v. Latini- Hohberger
Dhimantec, 529 F.3d 371, 388 (7th Cir.
2008); Sensient Colors, 2009 WL 2905474,
at *4 (addressing production of 45,000 documents
and observing that “[g]iven this
volume mistakes were bound to occur”).
Conversely, the smaller the scope of
the required discovery response, the more
likely a court will find a waiver. Sidney
I v. Focused Retail Property I, LLC, 274
F.R.D. 212, 217 (N.D. Ill. 2011) (addressing
the production of 588 documents and
concluding that “this small size weighs
in favor of waiver”). In other words, “the
broader the scope of discovery, the more
extensive a party’s disclosure of confidential
materials may be without waiving the
privilege and vice versa.” Kmart Corp. v.
Footstar, Inc., 2010 WL 4512337, at *4 (N.D.
Ill. Nov. 2, 2010). As one court wrote, “This
approach reflects the undeniable truth that
the greater the possibility of errors, the
more likely errors will occur.” Heriot v.
Byrne, 257 F.R.D. 645, 659 (N.D. Ill. 2009).
When evaluating waiver of attorneyclient
privilege courts consider how many
privileged documents an attorney mistakenly
produced relative to both how many
total documents he or she produced in discovery
and the overall number of privileged
documents. Kmart Corp., 2010 WL
4512337, at *4 (characterizing the disclosure
of 130 pages of privileged documents,
which constituted less than three percent
of the total production, as not a “significant
mistake”); Heriot, 257 F.R.D. at 660 (noting
that while 13 percent of the privileged
documents were mistakenly produced “the
weight of the factors tips the balance in
favor of inadvertent disclosure”).
Courts will also consider the “obviousness”
of the privileged nature of the
documents. Sidney I, 274 F.R.D. at 217
(observing “the number of privileged documents
disclosed suggests waiver, especially
since they were obviously privileged”); Victor
Stanley, Inc. v. Creative Pipe, Inc., 250
F.R.D. 251, 263 (D. Md. 2008) (observing
that many inadvertently produced documents
were communications between defendants
and their counsel).
Courts will also consider the time constraints
placed on a party when evaluating
the process used to screen a production for
privilege. Kmart Corp., 2010 WL 4512337, at
*4. When a time constraint is self- imposed,
however, a court will assign little weight to
that argument. Id. at *5; Rhoads Industries,
Inc. v. Building Materials Corp. of America.
254 F.R.D. 216, 225 (E.D. Pa. 2008) (noting
the time crunch resulted from the “plaintiff
not providing adequate resources to the
privileged communication issue”). Additionally,
“the relevant time constraints are
those relating to [the] discovery, not an
attorney’s schedule.” Sidney I, 274 F.R.D.
at 217.
The nature and extent of procedures
that an attorney uses to screen for privilege
will play a critical part in any court’s
analysis. Failing to use either “an organized
screening procedure” when an attorney
initially reviewed the documents, or failing
to review the production before sending
it to an opposing counsel suggests that
the attorney did not take reasonable steps
to protect against inadvertently producing
privileged information. Id. Developing protocols
for reviewing and screening for privilege
has received favorable reviews from
courts. See Coburn Group, 640 F. Supp. 2d
at 1039 (addressing a six-step document
review protocol to identify responsive documents
and segregate for attorney review
potentially privileged documents); Heriot,
257 F.R.D. at 651, 661 (concluding that a
multistep process of reviewing and coding
documents in a database “entailed reasonable
precautions”).
A court will carefully consider whether
or not an attorney was involved in the
Developing protocols
for reviewing and
screening for privilege
has received favorable
reviews from courts.
review process, or supervised trained
reviewers. Compare MSP Real Estate, 2011
WL 3047687, at *7 (noting that “the absence
of attorney involvement and supervision in
the initial review process supports a finding
the precautions were not reasonable”),
with Coburn Group, 640 F. Supp. 2d at 1039
(concluding that “use of experienced paralegals
who were given specific direction
and supervision” by the lead counsel was
reasonable).
Equally important, however, is providing
a court with a clear and detailed explanation
of the procedures used and how an
inadvertent production occurred. Amobi v.
District of Columbia Dept. of Corrections,
262 F.R.D. 45, 54–55 (D.D.C. 2009) (ruling
that privilege was waived because there
was “no indication of what specific efforts
were taken to prevent disclosure, let alone
any explanation of why these efforts were…
reasonable in the context of the demands
made”). Victor Stanley, 250 F.R.D. at 259–
60 (noting that the defendants failed to
identify the keywords used, the rationale
for their selection, the qualifications of the
person who designed the keyword search,
whether Boolean proximity operators were
used, and whether the results were analyzed
to assess the reliability of the keywords
for that task).
Courts have found a waiver occurred
when the party claiming privilege either
For The Defense ■ March 2013 ■ 23

Lawyers’ Professionalism and Ethics
failed to provide a detailed description of
how the process used to screen for privilege
was supposed to work or how the mistake
occurred. Kmart Corp., 2010 WL 4512337, at
*4 (finding an explanation that an attorney
reviewed documents “‘with an eye toward
identifying any ‘attorney- client’ or ‘work
product’ privilege issues’” provided “insufficient
facts” to conclude the steps taken
Courts have found a
waiver occurred when the
party claiming privilege
either failed to provide
a detailed description of
how the process used to
screen for privilege was
supposed to work or how
the mistake occurred.
“were reasonable”) (quoting attorney affidavit);
Thorncreek Apartments III, LLC v. Village
of Park Forest, 2011 WL 3489828, at *7
(N.D. Ill. Aug. 9, 2011) (ruling a description
that “countless hours” were spent reviewing
documents marking them responsive, nonresponsive,
or privileged fell “well short of
what we expect for an adequate account of
the review procedure”).
Several decisions suggest that the simple
use of keyword searches to screen for
privilege, without more, will not meet Federal
Rule 502(b)(2)’s “reasonable steps”
threshold. See Mt. Hawley, 271 F.R.D. at
136 (concluding that “the failure to test the
reliability of keyword searches [for privilege]
by appropriate sampling is imprudent”);
Victor Stanley, 250 F.R.D. at 257
(observing that “[t]he only prudent way to
test the reliability of the keyword search is
to perform some appropriate sampling of
the documents determined to be privileged
and those not to be in order to arrive at a
comfort level that the categories are neither
over-inclusive nor under-inclusive”).
24 ■ For The Defense ■ March 2013
Addressing the use of technology to
screen for privilege, the advisory committee
note to Federal Rule of Evidence 502
attempts to provide some guidance:
Depending on the circumstances, a
party that uses advance analytical software
applications and linguistic tools in
screening for privilege and work product
may be found to have taken ‘reasonable
steps’ to prevent inadvertent disclosure.
The implementation of an efficient system
of records management may also
be relevant.
While a court may be willing to forgive a
mistake that results from using technology
to screen for privilege in light of the
advisory committee note, an attorney will
want to consider using quality assurance
sampling to convince a court, if necessary,
that the attorney took reasonable measures
to prevent the disclosure of privileged
information.
Does Model Rule 1.6(c) Take
“Proportionality” into Account
The recently amended comment 16 to
Model Rule 1.6(c) includes a nonexclusive
list of factors for disciplinary bodies to
consider when assessing if attorneys took
reasonable measures to prevent the inadvertent
disclosure of information. Because
comment 16 indicates that the potentially
relevant factors are not limited to those
outlined in the comment, disciplinary tribunals
addressing purported Model Rule
1.6(c) violations likely will consider the
factors that courts have considered when
assessing if attorneys took reasonable steps
to prevent inadvertent disclosures under
Federal Rule of Evidence 502(b)(2).
The factors listed in comment 16 as relevant
considerations to a Model Rule 1.6(c)
analysis include the sensitivity of the information,
the cost of additional safeguards,
the likelihood that an inadvertent disclosure
might occur without additional safeguards,
the difficulty of implementing those
safeguards, and the impact those safeguards
have on a lawyer’s ability to represent
his or her clients. In other words, the
duty of confidentiality under the Model
Rule 1.6(c) reasonable effort standard includes
a cost- benefit analysis of procedures
used to screen for privilege. This disciplinary
approach is similar to the proportionality
analysis applicable to discovery issues
under Federal Rule of Civil Procedure 26(b)
(2)(C)(iii), which mandates limiting discovery
when “the burden or expense of the
proposed discovery outweighs its likely
benefit, considering the needs of the case,
the amount in controversy, the parties resources,
the importance of the issues at
stake in the action and the importance of
the discovery in resolving the issues.”
This point underscores the importance
of discussing with a client the various options
available to screen for privilege and
providing a reasonable estimate of the cost
of those options so that the client can decide
the appropriate option to select. And, it affirms
that obtaining the informed consent
of a client is key to harmonizing the Model
Rule 1.6(c) requirements with the nonwaiver
tools of Federal Rule of Evidence 502.
Practice Points
Inadvertently waiving privilege can have
disastrous results for lawyers and their
firms. Not only is it professionally embarrassing,
it can lead to the loss of a valued
client, a disciplinary complaint, and even
a malpractice claim. Accordingly, bear in
mind seven practice points.
Point 1: Seek a Nonwaiver
Order or Agreement
Seek a Federal Rule of Evidence 502(d) nonwaiver
order or a 502(e) nonwaiver agreement
whenever possible to minimize the
risk of waiving the attorney- client privilege
or work product immunity. From a law
firm risk management perspective, they
are indispensable. A Federal Rule of 502(d)
nonwaiver order is preferable to a 502(e)
nonwaiver agreement due to the additional
protection it provides.
Point 2: Carefully Draft the
Order or Agreement
Use care in drafting a nonwaiver order
or a nonwaiver agreement. Some courts
have strictly construed a nonwaiver agreement
and applied Federal Rule of Evidence
502(b) rather than the terms of an agreement
when a dispute between the parties
arose because the agreement was ambiguous,
failed to address what pre- production
review parties would undertake, or did not
include what steps would be taken if a disclosure
of privileged information occurred.
See Grim, Bergstrom, & Kraeuter, supra, at

63–79 (discussing cases); Maxtena, Inc. v.
Marks, 2012 WL 6190298, at *14 n.16 (D.
Md. Dec. 11. 2012) (noting that “the Confidentiality
Order does not define ‘inadvertence’
and is silent as to either the parties
precautionary or post- production responsibilities
to avoid waiver. Hence, all three
prongs of Rule 502(b) govern this dispute”).
Point 3: Seek a Nonwaiver Agreement
Over an Opponent’s Objection
Seek to incorporate any nonwaiver agreement
into a court order even when opposing
counsel does not agree to it. Agreement
of the parties is not a prerequisite to the
entry of a nonwaiver order according to
Federal Rule 502’s advisory committee
note. If an agreement is incorporated into
an order, it will strengthen a client’s protection
against waiver. Even if a court rejects
the motion for an order, a client may benefit
because the court will have an opportunity
to review the agreement and flag concerns
that it has with the terms.
Point 4: Remember the Ethical Obligation
to Protect Client Information
Never forget the ethical obligation to safeguard
a client’s information competently
when reviewing it for privilege and producing
it in discovery. The options can range
between doing an “old- fashioned” review of
every document to using advanced analytical
software with mathematical algorithms
or linguistic tools that screen for privilege.
The size of the production, as well as a client’s
records management and information
systems will affect the method selection, so
it is important to learn the client’s systems.
Point 5: Discuss the Available
Options with a Client
Discuss with a client available options for
reviewing, screening, and producing information
in discovery and attempt to provide
a reasonable estimate of the costs and
benefits of those options. Then obtain the
client’s informed consent on the selected
methods.
Point 6: Document a Client’s
Options in Writing
Whenever possible, document a client’s
options and confirm the client’s choice in
writing. Memories fade and personnel may
change over time. Having the agreed upon
approach and the supporting reasons documented
will help to prevent a messy disagreement
over why a particular option
was selected and minimize the potential
of a conflict of interest developing between
an attorney and the client if an opponent
claims that a waiver occurred or moves for
sanctions months or years later.
Point 7: Seek Legal Advice When a Vendor
or a Client Reviews Discovery Documents
Some clients now do the document review
“in house” or employ a third-party vendor
to review information for responsiveness
and privilege in an attempt to reduce the
cost of e- discovery. The disaggregation of
legal services complicates the ability of outside
counsel to sign a discovery response
and ethically certify under Federal Rule
of Civil Procedure 26(g) that the response
is complete. When this situation occurs,
the attorney should consult with his or her
firm’s general counsel or ethics counsel
about how to proceed. There are options to
consider, all of which will require discussion
with a client.
SEMINAR
Employment
and Labor
Law
May 1–3, 2013
Arizona Biltmore
Phoenix, Arizona
Don’t miss the definitive
educational and networking
event for management-side
labor and employment
attorneys, in-house counsel,
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Visit http://dri.org/
Events/Seminars or call
312.795.1101 to register or
for more information.
For The Defense ■ March 2013 ■ 25

Toxic Torts and Environmental Law
An Asbestos Parallel
By David N. Lutz
Diesel Exhaust—
Recent
Developments
To attempt to find
ways around existing
precedent, mass tort
plaintiffs’ lawyers will
no doubt take a closer
look at diesel exhaust
after the DEMS and the
IARC proclamation.
26 ■ For The Defense ■ March 2013
■ David N. Lutz is a partner in the Minneapolis office of Bowman and Brooke LLP. He is national counsel for three equipment
manufacturers in asbestos litigation and regional or local counsel for over a dozen asbestos defendants. Mr. Lutz is a member of
the DRI Product Liability Committee and the webcast vice chair for the DRI Toxic Torts and Environmental Law Committee. The
author would like to thank his colleague, Anne M. Dwyer, for her assistance in researching and writing this article.

On June 12, 2012, the World Health Organization’s International
Agency for Research on Cancer (IARC) declared
diesel exhaust a Group 1 “known carcinogen.” See World
Health Org., Int’l Agency for Res. on Cancer, IARC: Diesel
Engine Exhaust Carcinogenic (2012). It did
so based in part on the latest installment of
the Diesel Exhaust in Miners Study (DEMS),
published on June 6, 2012, by the National
Institute for Occupational Safety (NIOSH)
and the National Cancer Institute (NCI),
which found an elevated risk of lung cancer
in miners. IARC found “inadequate” evidence
that gasoline engine exhaust is carcinogenic
and it retains a Group 2B (“possibly
carcinogenic”) classification.
This pronouncement comes as the filing
of asbestos cases has peaked and mass
tort plaintiffs’ lawyers are no doubt looking
for the next toxic mass tort. The IARC pronouncement
and the DEMS may prompt a
reevaluation of diesel exhaust by the plaintiffs’
bar. As a follow up to an article published
here in November 2005, this article
will summarize the recent developments.
What Is in Diesel Exhaust
and Who Is Exposed
The diesel engine, which Rudolph Diesel
patented in Germany in 1892, revolutionized
transportation. Well known for its
excellent fuel economy, the diesel engine is
used in trucks, buses, agricultural equipment,
off-road heavy equipment, railroad
locomotives, farm equipment, and ships.
NIOSH has estimated that 1.35 million
workers in the United States are exposed
to diesel exhaust. Given the prevalence of
cancer in our society and the frequency
of smoking, many of these workers will
develop lung cancer.
The emissions from diesel exhaust
include gas constituents and particulate
matter. Gas constituents include carbon
monoxide, carbon dioxide, nitric oxide,
nitrogen oxides, sulfur dioxides, aldehydes
(formaldehyde), and hydrocarbons, including
benzene, toluene, and polynuclear
aromatic hydrocarbons (PAHs). Particulate
matter consists primarily of carbon, but it
also includes organic compounds adsorbed
from fuel and oil, sulfates from fuel sulfur,
and trace metals. Particulate matter results
mostly from incomplete combustion of fuel
hydrocarbons. The focus on diesel exhaust
has concerned this particulate matter, not
the gas constituents, which have not been
shown to be carcinogenic.
The IARC Pronouncement
and the DEMS
After summarizing various epidemiologic
studies in a June 2012 meeting, IARC concluded
that “[t]hese epidemiological studies
support a causal association between
exposure to diesel- engine exhaust and
lung cancer.” Lamia Benbrahim- Tallaa et
al., Carcinogenicity of Diesel- Engine and
Gasoline- Engine Exhausts and Some Nitroarenes,
13 Lancet 663, 663 (2012).
Before 2012, a meta- analysis of epidemiological
studies found a relative risk for
lung cancer of 1.47 for those most likely to
have been exposed to diesel exhaust and
1.64 among those with more than 10 years
of exposure to diesel exhaust. See M. Lipsett
& S. Campleman, Occupational Exposure
to Diesel Exhaust and Lung Cancer: A
Meta- Analysis, 89 Am. J. Pub. Health 1009,
1009–17 (1999). The EPA concluded that a
relative risk of 1.4 was a reasonable estimate
of occupational lung cancer risk. In
June 2012, however, the DEMS provided
additional data concerning exposures and
incidence of disease.
Summary of the DEMS
The DEMS analyzed historical diesel
exhaust exposure and lung cancer effects
from diesel exhaust in a cohort of 12,315
workers in non- metal mining facilities. The
study, published June 6, 2012, in the Journal
of the National Cancer Institute, was
carried out by the National Cancer Institute
and NIOSH. Debra T. Silverman et
al., The Diesel Exhaust in Miners Study: A
Nested Case- Control Study of Lung Cancer
and Diesel Exhaust, 104 J. Nat’l Cancer Inst.
855, 857 (2012).
The DEMS dates back to 1992–1995,
when NIOSH and the NCI, both part of the
For The Defense ■ March 2013 ■ 27

Toxic Torts and Environmental Law
U.S. Department of Health and Human
Services, (DHHS), began developing the
protocol for the study. See Akzo Nobel Inc.
v. United States, No. 11-30812, 2012 WL
1889419, at * 2–8 (5th Cir. May 24, 2012)
(summarizing the history of the DEMS and
litigation over whether the DHHS properly
provided required materials to interested
parties and for peer review).
As to the admissibility
of expert testimony that
diesel exhaust causes
multiple myeloma, a
cancer originating in bone
marrow plasma cells, there
is a split of authority.
The DEMS began with a series of published
articles in 2010 that quantified exposure
to diesel exhaust in eight mines—three
potash, three trona, one limestone, and one
salt mine. The study found "a strong and
consistent relation between quantitative
exposure to diesel exhaust and increased
risk of dying from lung cancer." Silverman,
supra, at 863. It also found a doseresponse
relationship, noting that “[a]mong
heavily exposed workers, the risk of dying
from lung cancer was approximately three
times greater than that among workers in
the lowest quartile of exposure.” Id. at 865.
The study confirmed that a link between
smoking and an exponentially greater
risk of lung cancer: the risk of lung cancer
among smokers smoking two or more
packs of cigarettes per day was 12.41 times
higher than the risk of lung cancer among
people who never smoked. Id. at 860.
After controlling for smoking the study
found a consistent increase in relative risk
based on intensity, duration, and cumulative
respirable elemental carbon (REC),
a surrogate for diesel exhaust exposure.
Individuals falling in the highest quartile
of diesel exhaust exposure intensity were
2.28–2.40 times more likely to develop lung
28 ■ For The Defense ■ March 2013
cancer than in the quartile with the least
intensity of exposure. Id. at 862. The quartile
with the most cumulative exposure had
relative risks of 1.75–2.83 times more lung
cancer risk than the quartile with the least
cumulative exposure. Id. The quartile with
the longest duration of diesel exhaust exposure
had a 2.09 times higher risk of lung
cancer than the group with the least exposure.
Id. Among underground workers, the
comparable relative risks were 3.69–5.43,
1.93–5.10, and 2.08. Id. at 864.
Weaknesses of the DEMS
The principal anomaly of the study was
that the higher incidence of lung cancer
occurred in the surface miners who experienced
less diesel exhaust exposure than
underground miners. Overall deaths from
any cause were lower in the cohort than
the general population, with underground
workers having an even lower overall death
rate than surface workers. Matthew D. Attfield
et al., The Diesel Exhaust in Miners
Study: A Cohort Mortality Study With Emphasis
on Lung Cancer, 104 J. Nat’l Cancer
Inst. 869, 870 (2012). There were, however,
elevated rates of lung cancer in the overall
cohort (Standardized Mortality Ratio
(SMR) = 1.26) and in both the underground
workers (SMR = 1.21) and the surface workers
(SMR = 1.33). Id. at 874. The lower end
of the confidence interval was above 1.0 for
all three groups. Although the lower rate for
underground workers initially obscured a
relationship, further review found a doseresponse
within each group.
The DEMS measured much higher diesel
exhaust exposures in the underground
mines since they are enclosed areas with
worse ventilation than the surface. The
underground group had nearly an order of
magnitude higher REC exposure than the
surface. Id. at 876–78, Tables 4, 5. Yet, the
overall incidence of lung cancer was lower
in the underground workers than in the
surface workers despite higher and more
intense REC exposure. When looking at the
entire cohort, there was only a weak correlation
for average REC intensity and no
association for cumulative REC. In longterm
workers, there was some correlation,
but it was not completely linear.
The study did not explain why the rate of
lung cancer was higher in the surface workers
than in the underground workers with
substantially higher exposure rates. The
study speculated that the anomaly “may be
attributable to aging and transformation of
DE by sunlight, ozone, and other factors,”
which can make some exhaust components
more toxic. Id. at 880. That the higher exposure
group had less lung cancer is a major
anomaly.
Another anomaly between the underground
workers and surface workers relates
to the nature of the apparent association
between REC and lung cancer. Among
underground workers, the association is
with cumulative REC exposure, but not
with average REC intensity. Among surface
workers, however, the association is with
average REC intensity, but not with cumulative
REC exposure. Id. at 876–78, Tables
4, 5. The study has flaws that will no doubt
be debated in expert depositions.
Occupations at Increased Risk
Increased incidence of lung cancer has been
reported in several groups that work around
diesel engines. A study of railroad workers
found that their relative risk of lung cancer
varied from 1.3 to 1.77. Francine Laden et
al., Historical Estimation of Diesel Exhaust
Exposure in a Cohort Study of U.S. Railroad
Workers and Lung Cancer, 17 Cancer Causes
Control 911, 911–19 (2006). A cohort of
5,862 German potash miners had an overall
relative of lung cancer of less than 1, but
internal comparison of subcohorts showed
a relative risk of up to 2.47 for groups with
more exposure, although the trend is not
fully linear. Angela Neumeyer- Gromen et
al., Diesel Motor Emissions and Lung Cancer
Mortality—Results of the Second Followup
of a Cohort Study in Potash Miners, 124
Int’l J. Cancer 1990, 1900–06 (2009). Other
studies found increased risks of lung cancer
in miners, heavy equipment operators,
dock workers, forklift operators, port workers,
railroad workers, and bus garage workers.
Id. at 1904.
A meta- analysis of 11 case- control studies
in Canada and Europe found that the
highest group of diesel exhaust exposure
had an odds ratio (OR) of 1.31 compared
with the lowest group of exposure.
Ann C. Olsson et al., Exposure to Diesel
Motor Exhaust and Lung Cancer Risk in a
Pooled Analysis from Case- Control Studies
in Europe and Canada, 183 Am. J. Respir.
Crit. Care Med. 941 941–48 (2011). It was

only in the top quartile of exposure, however,
that the lower end of the confidence
interval was above 1.0. Id. at 944, Table 3.
The Olsson study pooled analysis did not
demonstrate a clear linear relationship, and
the confidence interval range included 1.0
for all exposure levels. Id. As the authors
noted, there was a “small consistent association”
between diesel exhaust exposure
and lung cancer. Id. at 947.
A cohort of 31,135 workers in the trucking
industry did not demonstrate increased
risk of lung cancer in mechanics or hostlers.
Eric Garshick et al., Lung Cancer and
Vehicle Exhaust in Trucking Industry Workers,
116 Envtl. Health Perspectives 1327,
1327, 1331 (2008). The likely explanation
was that when mechanics are near trucks
and equipment, the engines are off. Id. at
1331. The occupations found to be at highest
risk were dock workers (Hazard Ratio
(HR) = 1.30) and workers who did a combination
of dock work and pickup and delivery
work (HR = 1.40). Id. at 1329.
Diseases Other than Lung Cancer
There has been discussion of other studies
and cases about whether other cancers
or diseases are linked to diesel exhaust,
and there are opportunities for Daubert
motions.
Bladder Cancer
Studies have shown an increase in bladder
cancer among truck drivers and suspected
causes include smoking and drinking coffee.
For one, “[a]n increased risk for bladder
cancer was… noted in many but not
all available case- control studies. However,
such risks were not observed in cohort
studies.” World Health Org., IARC, supra,
at 1. In the DEMS, the SMRs for bladder
cancer were 1.09 in the overall cohort but
.69 in the underground workers who had
the highest exposure to diesel exhaust. The
study found no association between diesel
exhaust and bladder cancer. Attfield,
supra, at 874.
In Seaman v. Seacor Marine LLC, 326
F. App’x 721 (5th Cir. 2009), a ship captain
alleged that his bladder cancer was caused
by diesel exhaust exposure. The trial court
granted a motion to exclude expert testimony
and then granted a summary judgment.
The plaintiff’s medical expert relied
on two articles to support her opinions
that diesel exhaust exposure causes bladder
cancer. One of those studies found that
smoking is the main risk for bladder cancer
and that it is difficult to separate smokingcaused
from exposure- caused bladder cancer.
Id. The court found that the expert did
not demonstrate general causation and
affirmed the testimony exclusion and the
summary judgment. Id. at 730.
Multiple Myeloma
As to the admissibility of expert testimony
that diesel exhaust causes multiple
myeloma, a cancer originating in bone
marrow plasma cells, there is a split of
authority. In King v. Burlington Northern
Santa Fe Ry. Co., 16 Neb. App. 544 (Neb.
2008), the trial court excluded testimony
by the plaintiff’s medical expert that the
decedent’s multiple myeloma was caused
by 28 years of exposure to diesel exhaust.
Id. at 546–58. The trial court granted the
defense motion to exclude the expert and
then granted a summary judgment, and
the court of appeals affirmed both rulings.
Id. at 558. But the Nebraska Supreme Court
reversed. See King v. Burlington Northern
Santa Fe Ry. Co., 277 Neb. 203, 239 (Neb.
2009). After an extensive discussion of
epidemiology, general and specific causation,
and the Sir Bradford Hill criteria, the
court, applying Daubert, held that requiring
a study to show a relative risk of 2.0 or
higher was too restrictive when the expert
relied on a study to support general causation.
The court noted that a study need only
show a relative risk of greater than 1.0. Id. at
215–33.The court held that the weakness of
the association goes to weight, not admissibility,
and an expert may rely on studies
to support causation even if an underlying
study itself did not reach a definitive causation
conclusion. Id. at 224. In determining
specific causation, the expert must perform
a reliable differential etiology by first
“ruling in” potential causes to consider and
then reliably ruling out potential causes to
reach the most likely cause. Id. at 238.
In Arkansas, however, expert testimony
linking diesel exhaust to multiple myeloma
is not scientifically reliable. In Richardson
v. Union Pacific R.R. Co., No. CA 10-591,
2011 WL 4477791 (Ark. Ct. App. Sept. 28,
2011), the Federal Employers Liability Act
(FELA) plaintiff alleged that his multiple
myeloma resulted from exposure to various
toxins, including diesel exhaust, creosote,
and pesticides. Id. at *1. The trial court excluded
the plaintiff’s industrial hygiene and
medical testimony and granted a summary
judgment. The court of appeals affirmed
these rulings. The court analyzed various
studies evaluating multiple myeloma and
concluded that it had not been confirmed
to be an established health risk for railroad
workers. Id. at *13–15. The court held
that the experts’ opinions did not meet the
Daubert standards because their literature
citations were selective and misconstrued,
they failed to consider contrary studies or
explain why they did not consider such
studies, and they relied on studies whose
authors themselves qualified their conclusions.
Id. at* 18. The court also noted that
the experts could not estimate the plaintiff’s
actual exposure levels. Id. The court held
that “[t]he fact that some studies showed
that higher levels of benzene could cause
multiple myeloma does not prove that the
lower levels of that chemical found in diesel
exhaust and fuel played a role in causing
appellant’s disease.” Id. at *34. The court
held that the experts’ opinions were “nothing
more than guesswork” and were unreliable
and unhelpful. Id. at *19.
In Aurand v. Norfolk Southern Ry. Co.,
802 F. Supp. 2d 950 (N.D. Ind. 2011), two
plaintiffs had multiple myeloma and one
had leukemia. The plaintiffs’ expert opined
that the diseases were caused by chemical
exposures, including several constituents
of diesel exhaust, including PAHs, benzene,
and carbon tetrachloride. Id. at 955.
The court found that the expert could not
identify any studies showing that railroad
workers had an increased risk of developing
multiple myeloma and the expert could
not quantify the plaintiffs’ exposures. Id. at
957, 960. The court excluded the expert testimony
and granted a summary judgment.
Id. at 964–65.
Other Diseases
There have been a few cases alleging nonmalignant
disease. In Shiver v. Georgia
& Florida Railnet, Inc., 287 Ga. App. 828
(Ga. Ct. App. 2007), the Georgia Court of
Appeals affirmed the exclusion of expert
testimony that diesel exhaust caused reactive
airways disease and affirmed a summary
judgment, finding that the expert
did not adequately investigate the exposure
For The Defense ■ March 2013 ■ 29

Toxic Torts and Environmental Law
history and did not fully consider other
potential causes. Id. at 831.
Government Regulation
The government has established various
regulations relevant to diesel exhaust.
Although the Clean Air
Actallows California to
adopt its own regulations
that are more stringent than
the federal regulations…
California may do so only
with EPA approval.
Regulation of Employer Air Quality
Occupational Safety and Health Administration
(OSHA) permissible exposure limits,
NIOSH recommended exposure limits,
and American Conference of Government
Industrial Hygienists (ACGIH) threshold
limit values apply to an employer, and
they exist for certain constituents of diesel
exhaust, such as carbon monoxide, carbon
dioxide, nitrogen dioxide, nitric oxide,
formaldehyde, and sulfur dioxide, though
not for “diesel exhaust” per se.
The Mine Safety and Health Administration
first published diesel regulations
for underground non-coal mines in 2001,
implementing an interim limit for diesel
exhaust particulate of 400 mg/m 3 effective
July 2002 and a final 160 mg/m 3 as of
January 2006. Particulate was measured
as total carbon (TC), which includes both
elemental carbon (EC) and organic carbon
(OC). In rulemaking completed in 2005,
the Mine Safety and Health Administration
converted the diesel particulate matter
limit of 400 mg/m 3 of TC to 308 mg/
m 3 for EC, effective January 2007. The May
2006 Mine Safety and Health Administration
final rule changed the interim limit to
350 mg/m 3 EC, effective January 2007, and
extended the effective date of the 160 mg/
m 3 TC standard to May 2008. Courts have
30 ■ For The Defense ■ March 2013
since upheld the Mine Safety and Health
Administration regulations of particulate
as valid. Kennecott Greens Creek Mining
Co. v. Mine Safety and Health Admin., 476
F.3d 946, 961 (D.C. Cir. 2007); Nat’l Mining
Ass’n v. Mine Safety and Health Admin., 599
F.3d 662, 673 (D.C. Cir. 2010).
Regulation of Emissions
from Diesel Engines
The U.S. Environmental Protection Agency
(EPA) has implemented regulations of certain
emissions from diesel engines under
authority of the Clean Air Act, which
was passed by Congress in 1963 and was
amended by the Motor Vehicle Air Pollution
Control Act of 1965 and other subsequent
amendments. These standards vary
depending on the type of vehicle or equipment
and engine size.
With respect to on-road engines, regulation
began with the EPA smoke standard
applicable to 1970s vehicles. The EPA added
a carbon monoxide standard and a nitrogen
oxides (NO X ) standard in 1974. The EPA first
regulated particulate from on-road diesel
engines in 1988, and regulations were tightened
in 1991 and 1994 for truck and bus engines,
in 1996 for bus engines, and again in
1998 for all on-road diesel engines. In 2004,
the EPA further regulated non- methane hydrocarbons
and No x .
For off-road diesel engines, regulation
first began after Congress amended the
Clean Air Act in 1990. See Pacific Merchant
Shipping Ass’n v. Goldstone, 517 F.3d
1108, 1110 (9th Cir. 2008). Regulations followed
in the 1990s, including, depending
on engine size, limits on hydrocarbons,
carbon monoxide, and No x . Additional regulations
limited emissions of CO and particulate
and hydrocarbons and applied to
engines of larger than 175 horsepower. By
1998, the EPA regulated carbon monoxide,
particulate, and the combination of NO x
and non- methane hydrocarbons.
The first standards for railroad locomotive
engines were adopted in 1997 and
became effective in 2000. The 2008 regulation
required that locomotives meet Tier
3 standards by 2011–2012 and meet Tier 4
standards effective in 2015. The EPA first
regulated marine engines in 1999, and in
2003 the EPA developed No x emission limits
for Category 3 engines. In 2008, the
EPA introduced Tier 3 and 4 emissions
standards for marine diesel engines that
are modeled on the Tier 4 on-road and offroad
standards.
Regulation of Diesel Fuel
Section 7545 of the Clean Air Act regulates
the sulfur content of diesel fuel. As of October
1, 1993, it prohibited the sale, manufacture,
supply, or transport of motor vehicle
diesel fuel “which contains a concentration
of sulfur in excess of 0.05 percent (by
weight) or which fails to meet a cetane index
minimum of 40.” 42 U.S.C. §7545(i)(1).
The cetane index measures the ignition
quality of diesel fuel; a higher number indicates
easier starting and less initial smoking
and knocking from the engine. “Cetane Index,”
Glossary, BP.COM, http://www.bp.com/
glossarylinks.docontentId=6000459&alphabetId
=3&categoryId=6126007 (last visited Feb. 7,
2013). Heavy- duty diesel vehicles and engines
from model years 1991 through 1993
require a sulfur content of 0.10 percent (by
weight). 42 U.S.C. §7545(i)(3). Alaska and
Hawaii may be exempted from these requirements
with the approval of the administrator
of the EPA. Id. at §7545(i)(4).
Section 7545 also requires the EPA to
issue its own regulations regarding sulfur
content requirements for motor vehicle
diesel fuel, which can be found at 40
C.F.R. §80, subpart I. Under those regulations,
motor vehicle diesel fuel must
not have a sulfur content in excess of 15
parts per million (ppm). Sulfur content of
500 ppm is allowed, however, under the
limited circumstances listed in sections
80.530–80.532, 80.552(a), 80.560–80.561,
and 80.620. Id. at §80.520(c).
The EPA regulations further provide
that motor vehicle diesel fuel must either
have a minimum cetane index of 40 or
a maximum aromatic content of 35 volume
percent and must be free of certain
red and yellow dye solvents, with limited
exceptions listed in section 80.520(b). Id.
at §80.520(a),(b). Additional provisions
regarding small refineries, non-road- and
nonhighway- use diesel, kerosene blenders,
labeling requirements, and the EPA’s diesel
fuel credit program can be found throughout
40 C.F.R. §80, Subpart I and accessed at
http://www.ecfr.gov/cgi-bin/text-idxc=ecfr&sid=
f4a7603e124963d6b62b453c42cb6492&rgn=div6
&view=text&node=40:17.0.1.1.9.9&idno=40 (last
visited Feb. 7, 2013).

Preemption
The successful defense of diesel exhaust litigation
begins with preemption.
Off-road Equipment
If an engine is smaller than 175 horsepower,
or if the equipment is a railroad
locomotive, Clean Air Act §209(e)(1) provides
that no state “shall adopt or attempt
to enforce any standard or other requirement
relating to the control of emissions
from either of the following new nonroad
engines or nonroad vehicles subject to
regulation under this chapter.” 42 U.S.C.
§7543(e)(1). Thus, federal law expressly preempts
state law.
For off-road equipment that §209(e)(1)
does not encompass because it is larger
than 175 horsepower and not a railroad
locomotive, §209(e)(2) of the Clean Air Act
provides that the EPA “shall” allow California
to adopt more stringent regulations
as long as it is not done arbitrarily, subject
to EPA approval. 42 U.S.C. §7543(e)(2).
Other states are allowed to adopt California’s
more stringent emissions standards.
42 U.S.C. §7543(e)(2)(B). The fact that California
cannot regulate in this area without
the EPA’s authorization confirms that preemption
applies. See Engine Mfrs. Ass’n v.
U.S. Envt’l Protection Agency, 88 F.3d 1075,
1087 (D.C. Cir. 1996).
Courts have also found preemption
under §209(e)(2) of the Clean Air Act in
cases alleging diesel exhaust exposure from
railroad locomotives. In Middlesex Cnty.
Health Dep’t v. Consolidated Rail Corp.,
No. 08-4547, 2009 WL 62444 (D. N.J. Jan.
9, 2009), the plaintiff alleged that Conrail
violated New Jersey health laws by allowing
locomotives to idle in a yard. Id. at *1.
The court granted the defense motion to
dismiss, finding that federal law preempted
the claims in the case. Id. at *3.
Although these provisions apply to
“new” vehicles and equipment, the court in
Engine Mfrs. Ass’n found that the implied
preemption of §209(e)(2) applies not only to
new vehicles and engines but also to existing
vehicles and engines that were not new.
Id. at 1087–93.
In Ctr. for Cmty. Action and Envt’l Justice
v. Union Pacific Corp., No. CV 11-08608,
2012 WL 2086603 (C.D. Cal. May 29, 2012),
the plaintiffs alleged that the rail yard was
a source of diesel particulate and alleged
violation of the federal Resource Conservation
and Recovery Act. Id. at *2. Since the
Clean Air Act was not amended until 1990
to include locomotive emissions expressly
and since the “locomotive rule” regulations
did not pass until 1998, the plaintiff
argued that if the Resource Conservation
and Recovery Act did not apply, a “regulatory
gap” would leave pre- regulation locomotives
unregulated. The court granted
the motion to dismiss, finding that the
claims pertaining to both new and existing
locomotives were preempted. The court
rejected the plaintiff’s argument that the
emissions standards did not apply to locomotives
already in service, finding that
“[i]t is fanciful to suggest that, because
Congress directed EPA to regulate emissions
only from ‘new’ locomotives, it must
have silently intended to authorize courts
to impose additional regulation of all locomotives
through RCRA [Resource Conservation
and Recovery Act] citizen suits.” Id.
at *5 (internal quotation marks omitted).
A California court also struck down
regulation of diesel exhaust from ships. In
Pacific Merchant Shipping Ass’n v. Cackette,
ocean shippers challenged California
Air Resources Board regulations of particulate,
nitrogen oxide, and sulfur oxide.
No. Civ. S-06-2791, 2007 WL 2492681 (E.D.
Cal. Aug. 30, 2007), aff’d, Pacific Merchant
Shipping Ass’n v. Goldstene, 517 F.3d 1108,
1113 (9th Cir. 2008). The court examined
the issue under Clean Air Act §209(e)(2),
which the court concluded impliedly preempted
state action. Id. at *7. The court
reiterated that the implied preemption of
§209(e)(2) applied both to new and existing
engines that pre-dated the regulations.
Id. *7–8. Although the Clean Air Act allows
California to adopt its own regulations that
are more stringent than the federal regulations,
as mentioned, California may do so
only with EPA approval. The court found
that these regulations did not have EPA
approval. Therefore, on the basis of preemption,
the court enjoined enforcement of
the regulations. The Ninth Circuit affirmed
the holding, finding that §209(e)(2) preemption
applied both to new and existing
ship engines. Goldstene, 517 F.3d at 1115.
On-road Vehicles
On-road trucks are governed by §209(a)
of the Clean Air Act, which provides that
Presumably because of
the preemption problems
that the plaintiffs’ bar
faces in claims against
manufacturers, plaintiffs
have sought to assert claims
in a way that might skirt
Clean Air Act preemption.
no state “shall adopt or attempt to enforce
any standard relating to the control of
emissions from new motor vehicles or
new motor vehicle engines….” 42 U.S.C.
§7543(a). The regulations took effect in
1970. However, Congress preempted such
claims as of 1967. See Green Mountain
Chrysler v. Crombie, 508 F. Supp. 2d 295,
304 (D. Vt. 2007); Pacific Merchant Shipping
Ass’n, 2007 WL 2492681, at *3.
In Engine Mfrs. Ass’n v. South Coast Air
Quality Mgmt. Dist., 541 U.S. 246 (2004),
the U.S. Supreme Court evaluated air quality
district rules that required local fleet
operators including cars, trucks, public
transit busses, garbage trucks, taxis, and
heavy-duty on-road trucks to buy or lease
only vehicles that met state motor vehicle
pollution standards. The U.S. Supreme
Court held that §209(a) of the Clean Air
Act preempted the rules. Id. at 257–59. The
U.S. Supreme Court specifically noted that
it was not determining whether applying
such rules to existing vehicles, “e.g., to lease
arrangements or to the purchase of used
vehicles,” was preempted under §209(a).
Id. at 259. On remand, the district court
found that the Clean Air Act did not preempt
the rules because they fell within the
market participant doctrine and therefore
§209(a) did not cover them. Engine Mfrs.
Ass’n v. South Coast Air Quality Mgmt.
Dist., No. CV00-09065, 2005 WL 1163437,
at *11 (C.D. Cal. May 5, 2005). The court
specifically noted that it was not addressing
whether the rules were preempted to
For The Defense ■ March 2013 ■ 31

Toxic Torts and Environmental Law
Unfortunately,it appears,
at least on the surface,
to the plaintiffs’ bar, that
asbestos and diesel exhaust
litigation have some parallel.
the extent that they applied to existing,
used vehicles. In addition, “CAA [Clean Air
Act] §209(a), which while very similar in
its language, only preempts new road vehicles
and engines. The [Supreme Court’s]
concern that regulations have effects on
manufacturers in order to be preempted is
understandable given the more limited preemptive
effect of CAA §209(a).” Pacific Merchant
Shipping Ass’n, 2007 WL 2492681, at
*10 (citation omitted).
In In re Jackson v. General Motors Corp.,
770 F. Supp. 2d. 570 (S.D. N.Y. 2011), city
transit workers alleged injuries from diesel
exhaust and sued various manufacturers
of buses and diesel engines contained
in them. The defendants brought a motion
for judgment on the pleadings on the basis
of preemption. Id. at 571. The plaintiffs
abandoned claims of defectively designed
engines, but they alleged that the defendants
were negligent because their products
did not meet the Clean Air Act standards
and that the defendants negligently
failed to warn about the dangers of diesel
exhaust. The court granted the motion to
dismiss. Id. at 579.
The Jackson court first noted that the
Clean Air Act does not allow a private
right of action for damages. Id. at 574. The
court also found that a state common law
claim that a manufacturer did not comply
with the Clean Air Act is a state attempt
to enforce the federal act, so the Clean Air
Act preempts such a state claim. Id. at 574.
The court found that §209(a) of the Clean
Air Act preempted the plaintiffs’ failure to
warn claims as those claims “related to” the
control of emissions. Id. at 577. Although
Clean Air Act §209(d) allows states to regulate
the use of motor vehicles, the court
rejected the plaintiffs’ argument that this
32 ■ For The Defense ■ March 2013
provision allows lawsuits concerning emissions,
distinguishing these claims from the
states’ rights to regulate the use of vehicles.
Id. at 577. The court dismissed the case
in its entirety and did not carve out any
claims based on the vintage of the engine
or the vehicle. The Second Circuit affirmed
this district court decision on July 11, 2012.
See Butnick v. General Motors Corp., No.
11-1068, 2012 WL 2819330, at *2 (2d Cir.
July 11, 2012).
Daubert Challenges to Experts
Under Daubert, a trial court provides a
gate- keeping function to ensure that expert
testimony is reliable and relevant and that
the underlying reasoning or methodology
is scientifically valid. Even the risks identified
in the DEMS are relatively modest
and occur only in the most highly exposed
groups. By the time the studies divided the
miners into such small subgroups, the bottom
range of the confidence interval typically
was below 1.0, and, therefore, it was
statistically suspect. Attorneys may have
opportunities to strike an expert testifying
on general causation who proposes
that diesel exhaust can cause a disease, and
certainly on specific causation when the
expert proposes that diesel exhaust caused
a specific plaintiff’s disease.
In Brooks v. Ingram Barge Co., No.
4:07CV62, 2008 WL 5070243 (N.D. Miss.
Nov 21, 2008), the lung cancer plaintiff had
worked on Mississippi River vessels for 28
years. The defense moved to exclude the
plaintiff’s expert under Daubert. The court
first examined the issue of general causation
and took note of the various epidemiologic
studies showing a relative of generally
1.3 to 1.7. Id. at *2. The court concluded
that evidence that diesel exhaust can cause
lung cancer was sufficient under Daubert.
Id. at *4. The court noted, however, that the
expert could not quantify the precise dose
response or quantify the plaintiff’s exposure.
Id. at *5–6. Since the plaintiff had
smoked for 50 years, the plaintiff’s expert
had to admit that smoking was a cause, but
he opined that diesel exhaust and smoking
have a synergistic effect—that the combined
effect was more than just the sum of
each risk separately. The expert based his
opinion on one study, but the court noted
concerns with the validity of that study and
held that the theory that diesel exhaust and
cigarette smoke have a synergistic effect on
lung cancer did not pass the Daubert criteria.
The court held that “[n]o reliable science
has been presented to this court to
support an opinion that an individual in
the highest risk category was exposed to
some unknown amount of a moderate carcinogen
and to then find that the moderate
carcinogen caused his cancer is simply
unreliable.” Id. at *6. The court held that the
expert could “not bridge the gap between
general and specific causation.” Id. at *7.
Smoking and Attribution
The primary cause of lung cancer is
smoking. It is unusual to find a lung cancer
patient who did not smoke. In the Olsson
study, which pooled the results of 11
case- control studies in Canada, only six
percent of the 13,304 individuals with lung
cancer had never smoked, compared with
over 29 percent of the individuals in the
control group. Olsson, supra, at 943. In the
cohort of German potash miners, only two
of 61 lung cancer cases occurred in individuals
who did not smoke. Neumeyer-
Gromen, supra, at 1902. In the DEMS, only
14 of the 198 lung cancer cases consisted of
individuals who had never smoked, compared
with 178 of the 666 individuals in
the control group. Silverman, supra, at 861,
Table 2.
If plaintiffs allege a synergistic effect
between diesel exhaust exposure and
smoking, defendants should cite Brooks,
2008 WL 5070243 (N.D. Miss. Nov 21,
2008). In addition, in the German potash
miner cohort, scientists saw no synergistic
effect, finding an overall relative
risk for high exposure and smoking combined
of 22.25, with the individual effects
of 21.09 relative risk for smoking and 4.21
relative risk for diesel exhaust exposure.
Neumeyer-Gromen, supra, at 1903.
The DEMS does not support synergism,
either. In the category of greatest diesel
exhaust exposure and the greatest smoking
history, the diesel exhaust exposure raised
the relative risk to 7.3 in individuals who
never smoked, and smoking two packs
per day among the group with least diesel
exhaust exposure involved a relative
risk of 26.79. Silverman, supra, at 865. The
combined risk of the highest exposure to
diesel exhaust and cigarettes, however,
was 17.38, which is less than additive and

does not indicate synergism. Id. Review of
the six combinations of smoking history
and diesel exhaust exposure in the DEMS
reveals that two of the categories actually
would have a lower combined risk than the
sum of the individual relative risk of each.
In two categories the numbers were virtually
identical, indicating no synergism,
and only in two categories did the combined
risk exceed the sum of the individual
risk of each. For those two categories, the
confidence intervals showed that the combined
effect could be less than the sum of
the individual exposures.
Current Status of Litigation
and the Effect of the DEMS
Presumably because of the preemption
problems that the plaintiffs’ bar faces in
claims against manufacturers, plaintiffs
have sought to assert claims in a way that
might skirt Clean Air Act preemption.
Plaintiffs have alleged Federal Employers
Liability Act (FELA) claims against
railroads for failure to provide safe workplaces.
On June 13, 2012, within a week of
the IARC finding release, plaintiffs filed
a lawsuit in California against refiners
and sellers of diesel fuel, citing the IARC
pronouncement.
Plaintiffs have also attempted to create
a diesel exhaust class action, and anyone
defending a client against such an effort
should review Taylor v. CSX Transp., Inc.,
264 F.R.D. 281 (N.D. Ohio 2007). In that
Federal Employers Liability Act case, plaintiff
railroad employees moved for class certification
to include over 40 engineers and
conductors who had been diagnosed with
asthma, chronic obstructive pulmonary
disease, or emphysema. Id. at 286. Applying
the Federal Rule of Civil Procedure
23(a) prerequisites for class certification,
the court found that the plaintiffs met the
requirements of numerosity, commonality,
and typicality and that the lead plaintiff
adequately represented the class. Id. at
288–92. The court found, however, class
certification was not appropriate under
Federal Rule of Civil Procedure 23(b)
because the predominant relief sought was
money damages, and resolving the claims
would involve many plaintiff- specific
issues of injury, causation, and comparative
fault, among others. Id. at 294. These
issues that were unique to each plaintiff
Construction Expertise
Mark E. Williams, AIA, NCARB
mwilliams@robsonforensic.com
“overwhelm[ed] the common questions”
that the plaintiffs sought to certify. Id.
Although the courts have shut down diesel
exhaust litigation concerning certain
categories of defendants, mass tort plaintiffs’
lawyers will no doubt take a closer
look at diesel exhaust after the DEMS and
the IARC proclamation to attempt to find
ways around existing precedent. Unfortunately,
it appears, at least on the surface,
to the plaintiffs’ bar, that asbestos
and diesel exhaust litigation have some
parallel. Both involve airborne inhalants
that have become increasingly regulated.
Both involve the opportunity for revisionist
“historians” to find evidence that someone,
somewhere, long ago recognized a possible
hazard and, therefore, everyone should
have foreseen a hazard long ago. Through
continued motion practice and further
evaluation of DEMS weaknesses, however,
diesel exhaust litigation should not become
the next mass tort.
This article was submitted for publication
several months ago, but was in the
queue behind other articles. In the six
months since these two important developments
in diesel exhaust litigation, there
has been little activity in case filings and
court rules. There have been only a handful
of case filings, most of them FELA railroad
cases. There have also been few cases
decided with respect to the issues discussed
in this article. See Lukesh v. Illinois Workers’
Compensation Commission, 2012 WL
6862927 (Ill Ct. App. 1st Dist. Dec. 28, 2012)
(upholding the denial of workers compensation
benefits where insufficient evidence
linking lung cancer to diesel exhaust); Hillsdale
Environmental Loss Prevention, Inc. v.
United States Army Corps of Engineers, 702
F.3d 1156 (10th Cir. Nov. 28, 2012) (Army
Corps methodology in assessing cancer
risk from diesel exhaust had a rational
basis, Corps was not required to use the
methodology it had used in assessing a
California permit and affirming decision
to issue a dredge/fill permit).
Mark Williams heads the Construction Claims practice at Robson Forensic.
He is a broadly experienced architect with a diverse career that included
new construction, adaptive-reuse, and renovation projects on a wide range
of building types and occupancies. Contact Mark directly to discuss your
case and how Construction Experts at Robson Forensic can assist.
Architecture . Structural Engineering
Civil Engineering . Fire Protection
Plumbing . HVAC . Electrical Engineering
Land Development . Cost Estimating
Engineers, Architects, Scientists & Fire Investigators
Professional Liability . CPM Scheduling
Geology . Hydrology . Water Resources
www.robsonforensic.com | 866.235.2370
For The Defense ■ March 2013 ■ 33

Premises Liability
Watch Where
You’re Going!
By Robert D. Lang
As the number of
accidents caused by
inattentiveness due
to hand-held device
use increases, so will
reported cases, which
thus far indicate that
both judges and juries
recognize questions of
comparative fault and
material fact issues.
The New Defense of
Texting and
Tweeting in
Personal
Injury
Lawsuits
34 ■ For The Defense ■ March 2013
We have all seen them and perhaps have been ourselves
among them: people walking but not looking. Their gait,
unlike those who have overstayed at happy hour, is steady.
Their eyes are not wander-
■ Robert D. (Bob) Lang is a member of the firm of D’Amato & Lynch LLP in
New York City, where he is the head of the Casualty Department. He is an
active member of DRI and its Alternative Dispute Resolution, Retail and Hospitality,
Product Liability, and Toxic Torts and Environmental Law Committees.
He claims not to text or e-mail while walking to and from court.
ing but are fixed on a small, hand-held
device. As opposed to those using cell
phones, they are not loud or even speaking.
Instead, they are focused on the mobile

device that they hold, often furiously tapping
away to send a message that is of
such great importance that they do not see
where they are going. In this quasi- zombie
state, it is not surprising that they do not
pay close attention to their surroundings,
which includes motor vehicles, pedestrians,
and shoppers, to say nothing of cracks or
holes in the sidewalks, barriers, and other
people and things over which they can
trip, slip, bump, and fall. When someone
is so preoccupied with texting, tweeting,
and e- mailing, he or she may not appreciate
or even see any of the many conditions
that may cause accidents, to say nothing of
“open and obvious” conditions.
Considerable attention has already
focused on the dangers and problems arising
from cell phone usage while driving a
car. These same problems arise when shoppers
and pedestrians occupy their hands
with a whole host of other mobile device
diversions of every grade and order. The
case law has started to address this new
area of law. Court decisions indicate that
with more frequency defendants argue the
defense that plaintiffs were preoccupied
with mobile technology.
It is startling to consider the statistics
about distracted drivers of motor vehicles
because, similar to inattention that
produces injuries on the road, pedestrian
mobile device use can result in accidents
in the workplace, in stores, and simply
walking down the street. The United States
Department of Transportation, in September
2010, issued a report, “Distracted Driving
2009,” which found that over 450,000
people were injured in 2009 in motor vehicle
crashes that involved distracted driving,
and 18 percent of the fatalities involved cell
phones as distractions. The age group with
the greatest proportion of distracted drivers
was the under- 20 age group. Cell phone
using 30- to 39-year-old drivers fell into
the group with the highest proportion of
crashes resulting in fatalities. And the percentage
of people using cell phones, smart
phones, and other mobile devices has
increased in people of all age groups since
2009. The National Safety Council issued a
report in March 2010, “Understanding the
Distracted Brain,” referencing more than
30 scientific studies and reports describing
how a cell phone, whether hands-free
or handheld, requires the brain to multitask,
a process that it cannot do safely while
driving. The same multitasking, of course,
applies when e- mailing or texting. A driver
using a hands-free cell phone at least looks
at the road while speaking to another. However,
to e-mail or to text, someone looks
down at the mobile device rather than at
the road or surroundings, whether in a car
or on foot, increasing the danger. The brain
multitasking difficulty applies as equally to
walking while using mobile devices as to
driving while using them.
In April 2012, the National Safety Council
issued another report, “Understanding
the Distracted Brain,” pointing out
that when drivers use cell phones, even
hands-free, they have a tendency to “look
at” but not “see” objects. Distracted drivers
experience what researchers refer to as
“inattention blindness” similar to that of
tunnel vision. Smart people using smart
phones while they walk can become considerably
less than smart when they look
down at their devices rather than at their
surroundings.
The type and variety of accidents that
happen vary as much as people do. For
example, Boston Red Sox Manager Bobby
Valentine, while in New York during the
final days of this past painful season for
the Red Sox, was injured while riding his
bicycle near the New York Central Park
Reservoir and reading a text from his second
baseman Dustin Pedroia. Valentine
admitted, “I shouldn’t have been reading
a text while I was riding. That’s the wrong
thing to do, but at least I was wearing my
helmet.” N.Y. Times, Oct. 3, 2012, at B13. A
few days later, Bobby Valentine was fired
as manager of the Red Sox. As a long-time
Yankee fan, I defer further comment.
The number of fatalities involving drivers,
bikers, and walkers on New York City
streets rose 23 percent through July 2012
compared with the previous one-year
period. N.Y. Times, Sept. 27, 2012, at A22.
New York City Public Transportation Commissioner
Janette Sadik-Kahn stated that
the rise may have been caused, at least in
part, by an increase in distractive driving
and distractive walking, “I don’t think that
the IPhone has invented an App yet that
would ping you when you hit a crosswalk.
That breakup text can wait.” Id.
To help reduce the more than 11,000
pedestrian motor vehicle accidents each
year, New York City has partnered with the
design firm Pentagram to create LOOKERS
followed by exclamation signs inside the
stripes of busy crosswalks. N.Y. Mag., Oct.
1, 2012, at 12. These stenciled warnings will
appear at more than 100 of New York City’s
most dangerous intersections.
Luxury car manufacturers advertise that
“[i]t brings the Internet to your dashboard.
The brain multitasking
difficulty applies as equally
to walking while using
mobile devices as to
driving while using them.
Connects you to your car from smart phone
or computer.” Quite true—however, it also
brings a host of distractions to the driving
experience and connects smart phones and
computers to litigation claims and defenses.
Some automakers now have and others
plan to introduce connected, in-car systems
that bring apps to the dashboard to
provide drivers with the entertainment and
communication features of a phone while
avoiding the distraction of picking it up
behind the wheel. Motoring in the Age of
the Smartphone, N.Y. Times, Oct. 12, 2012,
at F8. Decidedly a mixed blessing, both in
personal life and in litigation, their use,
or misuse, can form a persuasive basis for
establishing or denying liability in litigation
by savvy defense counsel.
Among other questions, defense counsel
will need to decide which type of juror
will be most receptive to the “text” defense.
Those who text and e-mail frequently
while waiting for a traffic control signal
to change, while walking aimlessly down
streets, while shopping in retail stores,
tend to be forgiving since they themselves
similarly subscribe to the lure of “I am so
important,” “This is so important,” or “It
cannot wait” type of thinking. A better profile
for the defense would be a juror who
frowns when people talk, in their opinion,
too loudly when entering elevators, in
buses, in waiting rooms, or in restaurants.
For The Defense ■ March 2013 ■ 35

Premises Liability
Some individuals shake their heads from
side to side when people sit down in restaurants
and take out their mobile devices and
place them on the table so that they are at
the ready. Those individuals will likely be
receptive to the “text” defense.
A Look at Some Recent Cases
The reported cases indicate that both
When a plaintiff has used
his or her cell phone to his
or her advantage, defense
counsel should press for
evidence that could show
that the plaintiff had used
the cell phone before an
incident, not just afterwards.
36 ■ For The Defense ■ March 2013
judges and juries recognize that inattentiveness
due to mobile device use by injured
parties raises questions of comparative
fault and material fact issues, and courts
will deny summary judgments on liability
to plaintiffs.
In Glen v. Murphy, 4 Misc. 3d 970, 781
N.Y.S.2d 230 (N.Y. Sup. Ct. Nassau Co.
2004), a motor vehicle personal injury case,
the defendant claimed that the plaintiff did
not see the car that hit her because she was
talking on her cell phone, which she held to
her ear with her left hand. Judge Palmieri
felt that the plaintiff could be held comparatively
negligent and denied the plaintiff’s
motion for a summary judgment.
In Goppel v. Chiarella, 2009 NI Misc.
Lexis 6212, 2009 N.I. Slip Op. 32357U (N.Y.
Sup. Ct. N.Y. Co. 2009), the plaintiff was
injured while crossing a Manhattan street
within the crosswalk. Following the completion
of discovery, the plaintiff moved for
a summary judgment on the issue of liability.
Among others, the defendant alleged
the triable issue of material fact that the
plaintiff was crossing the street while using
a cell phone and, therefore, was not attentive
to the traffic conditions, including
that the traffic control signal was flashing
“do not cross.” The plaintiff denied using
her cell phone at the time of the accident
although she did admit that she used her
cell phone to call her friend shortly after
the accident. The court denied the motion
for a summary judgment.
In Matthews v. Vlad Restoration Ltd.,
74 A.D.3d 692, 904 N.I.S.2d 391 (N.Y. App.
Div. 2010), the plaintiff was talking on her
cell phone while hurrying across a scaffold
to catch a bus when she tripped and
fell on a lower horizontal brace. The court
granted the defendants’ motion for a summary
judgment. Although the court did
not rely on the cell phone use to support
the decision, the fact that the plaintiff was
on her cell phone supported the defendants’
position that the scaffold was open
and obvious, and the plaintiff should have
recognized it had she exercised due care.
In Prego v. Falcioni, 2006 Conn. Super.
Lexis 471 (Conn. Superior Ct. 2006), the
court found that defendant to be 90 percent
responsible for an automobile accident and
that the plaintiff’s 10 percent comparative
negligence was due to “her failure to maintain
a proper lookout,” citing the fact that
“[s]he was operating her cell phone within
seconds of the collision.”
In Rhoney v. United States, 2010 U.S.
Dist. Lexis 14303 (W.D. N.Y. 2010), the
plaintiff moved for a summary judgment
on liability in an automobile personal
injury lawsuit. In opposition, the defendant
stated that he observed the plaintiff talking
on her telephone while driving and,
in fact, following the incident, he waited
approximately 10–15 seconds for the plaintiff
to finish her telephone call after he
approached the plaintiff’s vehicle after the
collision. U.S. Magistrate Judge Schroeder
denied the plaintiff’s motion for a summary
judgment, finding that the allegation
that the plaintiff may have been talking
on a cell phone at the time of the accident
raised a triable issue of fact whether the
plaintiff’s inattentiveness contributed to
the accident.
In Sapsai v. Timar Construction Co., 2007
U.S. Dist. Lexis 101504 (M.D. Pa. 2007), the
plaintiff sustained personal injury when
she fell into a trench while walking on the
defendant’s property. The plaintiff filed a
motion in limine requesting that the court
preclude the defendant from alleging that
the plaintiff was comparatively negligent.
One of the points that the defendant sought
to raise was that evidence from a neighbor
suggested that the plaintiff was on her cell
phone at the time of the incident. The court
denied the plaintiff’s motion in limine because
if the evidence established that the
plaintiff knowingly choose “a path through
the construction site while in the dark and
on her cell phone,” the jury should decide
whether she was comparatively negligent.
In Wilkerson v. Kansas City Southern
Railway, 772 So. 2d 268 (La. Ct. App. 2000),
a personal injury lawsuit resulting from a
fatality when a car was struck by a train,
the decedent was observed talking and
laughing on her cell phone. Before the accident,
the decedent never slowed, looked, or
stopped before she drove onto the tracks
in front of the train. In the opinion of the
train engineer who was driving the train,
the driver was not trying to “beat” the
train. She just did not see the train. She was
engrossed in her cell phone call.
The jury found the driver 60 percent at
fault and the railway 40 percent responsible.
The appellate court reversed and found
that the railway was not liable and that
the primary cause of the accident was the
plaintiff’s inattention. Using the cell phone,
which diminished or prohibited her ability
to proceed and react to the approaching
train, contributed. The court concluded:
Although Wilkerson was proceeding
slowly, she was distracted by her
cell phone conversation and did not
approach the crossing with heightened
caution. Tragically for herself and her
loved ones, she did not see what she
could have seen, nor heard what she
could have heard, had she looked and
listened. Wilkerson’s sad and untimely
death was caused by her own inattention
and not by any actions or inactions
on the part of the railway or the engineer,
Lewis.
772 So. 2d at 280.
In Mathew v. A.J. Richard & Sons, 84
A.D.3d 1038, 923 N.Y.S.2d 218 (N.Y. App.
Div. 2011), the plaintiff sued for personal
injuries sustained when the lid of a barbeque
grill, which was on display on the
showroom floor, closed and struck her
on the back as she leaned against the grill
while making a cell phone call. The de-

fendants moved for a summary judgment,
which the Supreme Court, Kings County,
denied. On appeal, the appeal court unanimously
reversed, finding that the open lid
of the barbeque was an open and obvious
condition and not inherently dangerous.
The fact that the plaintiff was making a cell
phone call, and leaning against the grill
while doing so, was noted as pointing to
the conclusion that the plaintiff had failed
to observe the open and obvious condition.
In Deljanin v. St. Nicholas Cathedral of
Russian Orthodox Church in North America,
12 Misc. 3d 1158A, 819 N.Y.S.2d 209
(N.Y. Sup. Ct. N.Y. Co. 2006), the plaintiff
sustained personal injury when, while
walking on a sidewalk in Manhattan, she
was struck in the forehead by the arm of a
large cherry picker. It was undisputed that
at the time of the accident the plaintiff was
searching for her cell phone. After discovery
was complete, the defendants moved
for a summary judgment. The court held
that the jury would decide whether the
plaintiff had walked down the street inattentively
and apportion liability under an
implied assumption of risk.
In Dessasore v. New York City Housing
Authority, 70 A.D.3d 440, 895 N.Y.S.2d 44
(N.Y. App. Div. 2010), the plaintiff recovered
$5 million in a trial after he fell down
a stairway in the defendant’s building, having
tripped on a handrail that had partially
loosened from the wall that was resting at
the top of the steps. Some evidence had
indicated that the plaintiff may have been
talking on his cell phone at the time of
the accident. The jury found that both the
plaintiff and the defendant were negligent
but that the plaintiff’s comparative negligence
was not a substantial factor in causing
his injuries.
On appeal, the appellate division court
found that the jury’s finding of liability
was “irreconcilably inconsistent” because
the evidence indicated that the plaintiff
did not look down before he proceeded to
descend the stairs, did not pay attention
to his surroundings, and talked on his cell
phone just before he fell. In these circumstances,
the appellate division court found
that “the issues of negligence and approximate
causation were so inextricably interwoven
as to make it largely impossible to
find negligence without also finding proximate
cause.” Two judges dissented, finding
that the jury had enough evidence to conclude
rationally that although the plaintiff
was negligent in talking on the cell phone
and not looking down as he approached the
stairs, his negligence was not a proximate
cause of his accident and that the sole proximate
cause of the accident was the handrail
on the floor. 70 A.D.3d at 442.
These cases point out the significance
of obtaining cell phone and e-mail records
of those who claim injury when crafting a
defense. In some instances, including those
involving retail establishments, CCTV film
of an incident may show a plaintiff using a
mobile device at the time of an accident,
which will allow defense counsel to argue
that the plaintiff failed to notice the condition
that caused the injury because using
a cell phone made him or her inattentive.
Some plaintiffs now quickly snap photos
with their cell phone cameras of conditions
that they state caused accidents. Cell phone
evidence is fair play. When a plaintiff has
used his or her cell phone to his or her
advantage, defense counsel should press for
evidence that could show that the plaintiff
had used the cell phone before an incident,
not just afterwards, to prove comparative
negligence on the part of the plaintiff.
As the accidents caused by inattentiveness
due to hand-held device use increase,
the reported cases will increase as well.
Like it or not, texts, e-mails, and cell
phones are here to stay.
SEMINAR
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May 16–17, 2013
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Events/Seminars
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to register or for
more information.
For The Defense ■ March 2013 ■ 37

Insurance Law
Ending Duty to Defend
By Thomas R. Newman
Exhausting Policy
Limits When
Settling Less than
All Lawsuits
When dealing with
multiple claims and
insufficient limits to
cover an insured’s total
potential exposure, the
insurer must be extremely
cautious in settling less
than all of the claims.
38 ■ For The Defense ■ March 2013
■ Thomas R. Newman is of counsel for Duane Morris LLP in New York City. He practices in the areas of insurance and reinsurance
law, including coverage, claims handling, contract drafting, arbitration, and litigation. Mr. Newman has served as lead
counsel in more than 55 reinsurance arbitrations, representing both cedents and reinsurers. He is often called on to act as an
expert witness in insurance cases in the United States and in London. Mr. Newman has been a member of DRI since 1976.

A liability insurer’s duty to defend its insured against covered
lawsuits seeking damages is purely contractual. There
is no common law duty to defend. All-Star Ins. Corp. v.
Steel Bar, Inc., 324 F. Supp. 160, 163 (N.D. Ind. 1971).
Accordingly, courts will look to the language
of the policy at issue to determine
whether an insurer has a defense obligation
and, if so, the extent of that obligation.
Since 1986 the present Insurance Services
Office (ISO) standard form Commercial
General Liability policy (CGL) expressly
states that
[o]ur right and duty to defend ends when
we have used up the applicable limit
of insurance in the payment of judgments
or settlements under Coverages
A [bodily injury and property damage]
or B [personal injury and advertising liability]
or medical expenses under Coverage
C [Form CG 00 01 12 07].
The ISO 1966 and 1973 CGL policies
achieved the same result by using somewhat
different wording “the company shall
not be obligated to pay any claim or judgment
or to defend any suit after the applicable
limit of the company’s liability has been
exhausted by the payment of judgments or
settlements.” Form GL 00 02 01 73.
The previous ISO wording made the
underwriting intent clear and unambiguous:
an insurer does not have a duty to
defend after paying judgments or settlements
that exhaust the policy limits. See,
e.g., American States Ins. Co. v. Arnold,
930 S.W.2d 196, 201 (Tex. App. 1996). But
several important issues remained for the
courts to weigh in on.
Is an insurer’s duty to defend terminated
by settlements that, while exhausting
the applicable policy limits, do not settle
all outstanding lawsuits, or claims within
a lawsuit, against the insured May an
insurer terminate its duty to defend by paying
its policy limits to get one insured out
of an action, to the detriment of another insured
who remains in the action
Must an insurer wait until all potential
claimants have filed all potential claims
against one or more insureds before settling
with a particular claimant
Would a non- settling claimant have a
cause for complaint because a settlement
would deplete or exhaust coverage otherwise
available for his or her injuries
What constitutes an insurer’s good faith
when it settles some but not all of the lawsuits
or claims against the insured
“First in Time, First in Right”
When multiple claimants bring lawsuits
against one or more insured defendants
seeking damages for bodily injuries or
death arising from a single occurrence
and, based on a reasonable evaluation,
the policy limits are plainly insufficient to
cover the insured’s total potential exposure,
courts generally apply the rule “first
in time, first in right.” Voccio v. Reliance
Ins. Cos., 703 F.2d 1, 3 (1st Cir. 1983). This
principle “applies regardless of whether the
priority is by way of judgment or by way of
settlement.” World Trade Ctr. Props. LLC v.
Certain Underwriters at Lloyd’s of London,
650 F.3d 145, 151 (2d Cir. 2011); Allstate Ins.
Co. v. Russell, 13 A.D.3d 617, 788 N.Y.S.2d
401, 402 (N.Y. App. Div. 2004); Castoreno v.
Western Indemnity Co., 213 Kan. 103, 110,
515 P.2d 789, 794 (Kan. 1973).
A liability insurer “has discretion to
settle whenever and with whomever it
chooses, provided it does not act in bad
faith.” World Trade Ctr. Props. LLC v. Certain
Underwriters at Lloyd’s of London,
650 F.3d 145, 151 (2d Cir. 2011); Allstate
Ins. Co. v. Russell, 13 A.D.3d 617 (N.Y. App.
Div. 2004). Unless someone alleges bad
faith with respect to settlement negotiations,
an insurer can agree to a settlement
that will release some but not all of the
insureds. Anglo- American Ins. Co. v. Molin,
670 A.2d 194, 198 (Pa. Commw. Ct. 1995).
The insurer “has no duty to pay out claims
ratably and/or consolidate them.” Allstate
Ins. Co. v. Russell, 13 A.D.3d 617 (N.Y. App.
Div. 2004). It can settle less than all claims
even if a settlement exhausts policy limits
so that the insured and other claimants
are left without coverage under the policy.
Liquori v. Allstate Ins. Co., 76 N.J. Super.
204, 208, 184 A.2d 12, 17 (N.J. Super. Ct.
For The Defense ■ March 2013 ■ 39

Insurance Law
1962). When an insurer “has paid the full
monetary limits set forth in the policy,
its duties under the contract of insurance
cease.” Boris v. Flaherty, 242 A.D.2d 9, 12,
672 N.Y.S.2d 177, 180 (N.Y. App. Div. 1998).
When a covered occurrence gives rise to
multiple claims, the insurer does not need
to wait until all of the claimants have filed
all potential claims against its insureds
When a covered
occurrence gives rise
to multiple claims, the
insurer does not need
to wait until all of the
claimants have filed all
potential claims against
its insureds before settling
with a particular claimant.
before settling with a particular claimant.
Hartford Casualty Ins. Co. v. Dodd, 416 F.
Supp. 1216, 1219 (D. Md. 1976); State Farm
Mutual Auto Ins. Co. v. Hamilton, 326 F.
Supp. 931, 934 (D. S.C. 1971). As one court
explained, “[w]hether multiple claims are
to be treated one at a time or collected and
evaluated together, is a choice solely within
the discretion of the insurer.” Liquori v. Allstate
Ins. Co., 184 A.2d 12, 17 (N.J. Super.
Ct. 1962).
As long as an insurer does not act in bad
faith, it does not need to notify non- settling
third-parties of a proposed settlement.
Arrow Exterminators, Inc. v. Zurich American
Ins. Co., 136 F. Supp. 2d 1340, 1355
(N.D. Ga. 2001). When “a presumptively
valid and adequate award has been made
to one of several claimants, the fact that the
remaining claimants, or any one of them,
have not been taken into the confidence of
the settling parties falls far short of establishing
an adequate ground for equitable
relief.” Liquori v. Allstate Ins. Co., 184 A.2d
12, 17 (N.J. Super. Ct. 1962). If an insurer
40 ■ For The Defense ■ March 2013
cannot obtain a global settlement and settles
less than all of the claims, it would face
a bad faith lawsuit only if it did not undertake
the settlement in good faith.
The strong public policy encouraging
speedy settlements supports the “first in
time, first in right” rule. Harmon v. State
Farm Mut. Auto. Ins. Co., 232 So. 2d 206,
208 (Fla. Dist. Ct. App. 1970); Richard v.
Southern Farm Bureau Cas. Ins. Co., 212
So. 2d 471, 479 (La. Ct. App. 1968), aff’d,
223 So. 2d 858 (La. 1969). If insurers were
required to know of and evaluate all potential
claims against their insureds before
settling any individual claim, then insurers
could only settle if they were willing to
assume the risk that the remaining coverage
would not be sufficient to cover a future
claim arising from the same occurrence.
Such a rule would discourage insurers from
accepting reasonable settlement offers at an
early litigation stage. As the Texas Supreme
Court wrote,
when faced with a settlement demand
arising out of multiple claims and inadequate
proceeds, an insurer may enter
into a reasonable settlement with one of
the several claimants even though such
settlement exhausts or diminishes the
proceeds available to satisfy other claims.
Such an approach, we believe, promotes
settlement of lawsuits and encourages
claimants to make their claims promptly.
Texas Farmers Ins. Co. v. Soriano, 881
S.W.2d 312 (Tex. 1994).
As a general rule, non- settling thirdparty
claimants do not have grounds for
complaining that a settlement depleted
or exhausted policy proceeds that otherwise
would have been available to them
and left them without recourse against the
insurer. An insurer’s duty “is to its insured.
It owes no correlative contractual duty to
third-party claimants.” Peckham v. Continental
Cas. Ins. Co., 895 F.2d 830, 835 (1st
Cir. 1990). As the Supreme Court of Kansas
explained:
The insurer certainly could not be
enjoined by plaintiffs from settling with
other persons injured in the same accident
and thereby exhausting the fund to
the exclusion of plaintiffs…. If we were
to follow plaintiffs’ theory it could lead
us to a result where one injured person
could enjoin the compromise and settlement
by an insurer of the claim of
another injured person in the same accident.
This would be in direct conflict
with what has just been stated. The better
rule is that where, as here, an insurer
settles two of five claims arising out
of an automobile accident, such settlement
is not contrary to public policy as
against the remaining three claimants
who reduced their claims to judgment.
Bennett v. Conrady, 180 Kan. 485, 491–92,
305 P.2d 823, 828 (Kan. 1957).
Similarly, a liability insurer may settle
claims against one insured under a
particular policy even if the settlement
exhausts the policy proceeds to the detriment
of another named insured or an
additional insured. An insurer is “free to
settle suits against one of its insureds without
being hindered by potential liability to
co- insured parties who have not yet been
sued.” Travelers Indem. Co. v. Citgo Petroleum
Corp., 166 F.3d 761, 764–65 (5th Cir.
1999) (interpreting Texas law).
The New York Supreme Court, Appellate
Division took a contrary position, followed
by a minority of courts, without
passing on the merits, upholding as legally
sufficient a complaint alleging that the defendant
insurer
attempted to force and coerce the plaintiff
to accept an offer of settlement in
the amount of $6,250… combined with
an allegation of a threat that if the offer
should be rejected by the plaintiff, the
defendant would conduct individual settlement
negotiations with other claimants
and “thereby reduce the amount
of money which would have otherwise
been available for the payment of any
judgment, which the said plaintiff herein
might recover against the [insureds].”
Obad v. Allstate Ins. Co., 27 A.D.2d 795, 279
N.Y.S.2d 128 (N.Y. App. Div. 1967).
A Texas Court of Appeals was presented
with a case in which a primary insurer,
having settled up to its policy limits and
obtained a release on behalf of its named
insured, refused to defend an additional
insured in a separate action arising from
the same accident. The additional insured’s
excess insurer assumed the defense and
then sued the primary insurer to recover
its costs. The Texas Court of Appeals found
that the primary insurer had not breached
a duty in obtaining the settlement for
its named insured, and its duties to the

additional insured terminated when that
settlement exhausted the policy limits.
American States Ins. Co. of Texas v. Arnold,
930 S.W.2d at 202–203.
Good Faith
An insurer has a duty to act in good faith
when dispersing the proceeds of a liability
insurance policy, and the insurer’s
“termination of its duty to defend, like all
transactions between insurer and insured,
requires the insurer to have acted in good
faith.” NIA Learning Center, Inc. v. Empire
Fire & Marine Ins. Cos., 2009 U.S. Dist.
Lexis 92991, at *19 (E.D. Pa. 2009). When
an insured has surrendered all control over
the handling of a claim to the insurer, the
insurer assumes “a duty to exercise such
control and make such decisions in good
faith and with due regard for the interests
of the insured.” Boston Old Colony Ins. Co.
v. Gutierrez, 386 So. 2d 783, 785 (Fla. 1980).
The duty of good faith requires one of two
things of an insurer. An insurer must give
“the interest of the insured” consideration
“equal to that consideration given its own
interest,” Voccio v. Reliance Ins. Cos., 703
F.2d 1, 3 (1st Cir. 1983); Liberty Mut. Ins. Co.
v. Davis, 412 F.2d 475, 483 [5th Cir. 1969]).
Or the insurer must “ treat the claim as if
it were alone liable for the entire amount.”
Bell v. Commercial Ins. Co. of Newark, 280
F.2d 514, 515 (3d Cir. 1960); Brown v. United
States Fid. & Guar. Co., 314 F.2d 675, 678
(2d Cir. 1963). When the policy limits are
less than an insured’s potential exposure,
“the insurer cannot put its own interests
first, but must negotiate as it would if its
liability limits were unbounded.” Peckham
v. Continental Cas. Ins. Co., 895 F.2d 830,
834–35 (1st Cir. 1990).
In Peckham, the court summarized the
insurer’s obligation in a multiclaim, limited
coverage situation as follows:
The insurer has both the right and the
duty to exercise its professional judgment
in settling, or refusing to settle,
such claims—but it must do so mindful
of the insured’s best interests and in
good faith. The insurer’s goal should be
to try to effect settlement of all or some
of the multiple claims so as to relieve its
insured of so much of his potential liability
as is reasonably possible, considering
the paucity of the policy limits…. So
long as it acts in good faith, the insurer
is not held to standards of omniscience
or perfection; it has leeway to use, and
should consistently employ, its honest
business judgment…. The carrier, in
fine, “will not be held to prophesy.”
Peckham, 895 F.2d at 835.
An insurer may not “dump its limits”
by settling a claim for more than it is reasonably
worth simply to avoid or terminate
its duty to defend. In re East 51st St.
Crane Collapse Litigation, 2010 N.Y. Misc.
Lexis 6310, at *10 (Sup. Ct. N.Y. Co. 2010),
aff’d, 84 A.D.3d 512, 923 N.Y.S.2d 64 (N.Y.
App. Div. 2011); Maguire v. Ohio Cas. Co.,
412 Pa. Super. 59, 65–66, 602 A.2d 893,
896 (Pa. Super. 1992), appeal denied, 532
Pa. 656, 615 A.2d 1312 (Pa. 1992). As one
court wrote,
The exercise of good faith prevents an
insurer from entering into a dubious
release in order to quickly exhaust the
limit of its liability to the insured. “An
insurer which hastily enters a questionable
settlement simply to avoid further
defense obligations under the policy
clearly is not acting in good faith and
may be held liable for damages caused
to its insured.”
Maguire v. Ohio Cas. Co., 412 Pa. Super.
at 65, 602 A.2d at 896. See also, Shuster
v. South Broward Hosp. Dist. Physicians’
Prof’l Liab. Ins. Trust, 591 So. 2d 174,
177 (Fla. 1992) (“Clearly, the intent of the
parties would not have been to allow the
insurer to escape its primary duty to defend
and indemnify the insured merely by paying
out the full sum of the policy limits in
bad faith.”).
Illustrative Cases
In Farinas v. Florida Farm Bureau Gen.
Ins. Co., 850 So. 2d 555, 561 (Fla. Dist. Ct.
App. 2003), Farm Bureau’s insured, Copertino,
lost control of his car, crossed a
median, and hit an oncoming car, causing
the deaths of five teenagers and severe injuries
to seven others, including a 14-year-old
girl who was rendered a quadriplegic. The
policy limits were $100,000 per claim and
$300,000 per accident.
Within two weeks of the accident, Farm
Bureau settled for the policy limits with
the driver of the other car and in two of
the death actions. It then filed a declaratory
judgment action against the insured
to determine whether it had any further
duty to defend after having paid the policy
limits. The remaining claimants intervened
and ultimately filed third-party bad-faith
actions alleging that Farm Bureau entered
into settlements without due regard for the
interests of the insured.
While the trial court granted a summary
judgment to Farm Bureau concerning
all the appellants, the Florida District
An insurer may not
“dump its limits” by settling
a claim for more than it is
reasonably worth simply
to avoid or terminate
its duty to defend.
Court of Appeal reversed the decision and
remanded the case for a jury trial to decide
whether the insurer had met its goodfaith
duty and had undertaken a reasonable
claims settlement strategy. The court
stated:
Farm Bureau’s good faith duty to the insured
requires it to fully investigate all
claims arising from a multiple claim
accident, keep the insured informed of
the claim resolution process, and minimize
the magnitude of possible excess
judgments against the insured by reasoned
claim settlement. This does not
mean that Farm Bureau has no discretion
in how it elects to settle claims, and
may even choose to settle certain claims
to the exclusion of others, provided this
decision is reasonable and in keeping
with its good faith duty.
Id.
The Florida District Court of Appeal
held that a jury needed to decide whether
Farm Bureau had met its good-faith duty
and undertook a reasonable claims settlement
strategy.
[T]here are many factual issues for the
jury to resolve, including whether Farm
Bureau’s quick settlement with three
of the possible claimants was reasonable,
whether Farm Bureau’s rejection
For The Defense ■ March 2013 ■ 41

Insurance Law
of global and other settlement options
contemplated the best interests of the
insured, whether Farm Bureau adequately
investigated the facts of all of
the claims, and whether Farm Bureau
properly rejected advice of legal counsel
and suggested settlement strategies proposed
by Farm Bureau employees.
Id.
Even if the insurerknows
that it will exhaust its policy
limits, it must still conduct
a thorough investigation,
retaining whatever experts
may be necessary.
42 ■ For The Defense ■ March 2013
This is a very questionable decision. The
insurer paid its $300,000 per accident limit
to settle three claims against its insured in
a case that in the end could have had a verdict
potentially far in excess of that limit
and the insurer could not have settled a
quadriplegic case for the policy’s $100,000
per claim limit.
In re East 51st St. Crane Collapse Litigation
involved multiple, consolidated
wrongful death, personal injury, and property
damage claims arising from a construction
crane collapse. 2010 N.Y. Misc.
Lexis 6310, at *10 (Sup. Ct. N.Y. Co. 2010),
aff’d, 84 A.D.3d 512, 923 N.Y.S.2d 64 (N.Y.
App. Div. 2011). Lincoln, primary insurer
of the project’s construction manager, Joy,
sought to intervene in the action to settle
the claim of Rite Aid, a store in the vicinity
of the accident that was damaged when
the crane collapsed, for $1,000,000, or to
deposit $1,000,000 with the court. That
sum represented the full amount of coverage
provided by Lincoln to Joy and to
the owner of the property as well as to the
developer of the property and the general
contractor as additional named insureds.
Lincoln also moved for a declaration that
upon paying its full policy limits, either in
settling Rite Aid’s claims or by depositing
the limits with the court, Lincoln’s obligation
to pay the defense costs of its insured
and additional named insureds was completed
according to the terms of the applicable
insurance policy.
The insured defendants opposed Lincoln’s
motion, arguing that the proposed
settlement with Rite Aid was not in good
faith but only undertaken to relieve Lincoln
of its obligation to defend the actions
against the insureds and additional
insureds and that, in any case, neither the
settlement, nor a deposit with the court,
relieved Lincoln of its continuing obligation
to defend.
The court found nothing in the terms of
the contract permitting Lincoln to deposit
the full amount of its coverage with the
court without the consent of the named insured.
Rather, the insurance policy clearly
predicated extinguishment of Lincoln’s
obligation to defend on payment by Lincoln
of the full amount of the policy coverage
solely in satisfaction of a judgment
or a settlement. Because the court did not
find a New York case directly on point, the
court considered cases in other jurisdictions
where the courts had allowed insurers
to do what Lincoln sought to do, while
emphasizing that for the insurer to be
relieved of its duty to defend, based on full
payment of the insurance proceeds in settlement,
the insurer must have acted in
“good faith” and “not attempted to ‘artificially
exhaust’ its obligations by tendering
its policy during the litigation.” Id. at *7.
The court found Lincoln’s policy language
terminating its duty to defend was
unambiguous and that
[t]here is no provision that such payment
must cover all judgments or settlements
in a multi- party litigation, nor
can the policy language be construed
in that manner. Absent an allegation of
bad faith, or a claim that a settlement is
unreasonable, an insurer who pays the
entire proceeds of its policy in settlement
of a claim in multi- party litigation,
can be released from the continuing
obligation to defend where the policy’s
language clearly and unambiguously
provides for such result.
Id. at *8–*9
The court rejected Lincoln’s proposed
settlement with Rite-Aid, finding that
where a substantial portion of discovery
involving questions of liability has yet
to be completed, such a large settlement
that would deplete the entire primary
insurance at this stage of the litigation
without the settlement of even one of
the personal injury plaintiffs, is not in
the best interests of the insureds, nor the
litigation as a whole.
Id. at *11.
Lincoln then proposed another settlement:
it would pay its $1,000,000 policy
limit to the estate of a deceased construction
worker, who was unmarried and had
no children, solely based on the estate’s
claim for pre- impact terror. The estate had
not presented evidence at that point to
demonstrate whether and, if so, for how
long, the construction worker had suffered
pre- impact terror. After the court rejected
that proposed settlement as far in excess
of amounts awarded in similar cases, Lincoln
proposed yet another settlement: the
settlement would divide Lincoln’s policy
limit between Rite Aid ($450,000), and a
severely injured construction worker, Perez
($550,000), who underwent three separate
surgeries to repair multiple fractures and
had incurred $160,000 in medical expenses
and a $189,000 Worker’s Compensation lien.
This time the court found the settlement
was fair and reasonable and made by Lincoln
in good faith. It granted Lincoln’s application
to intervene and declared that on
paying the full amount of the settlement,
Lincoln was released from its obligation to
provide any further defense to the defendants.
Id. at *15. In a subsequent appeal in
the same case, the Appellate Division noted
that, “The motion court found no indication
that the settlement had been entered into as
a means to inappropriately exhaust the policy.”
Slip op. 7–8 (Feb. 5, 2013).
In Liberty Mut. Ins. Co. v. Davis, 412 F.2d
475 (5th Cir. 1969), Liberty’s insured driver,
Bess, a penniless, itinerant fruit picker,
struck the rear end of a car occupied by Mr.
and Mrs. Rawls. Bess’ car then careened
head-on into a car occupied by plaintiffs,
Mr. and Mrs. Davis and their three children.
The double collision resulted in serious injury
to the five Davises and the two Rawlses.
It was soon evident to all concerned
that the injuries to two Davises alone would
exceed Liberty’s $20,000 per accident policy
limit, and the Rawls’ claim also would
exceed $20,000. The Davises’ attorney offered
to compromise for $20,000.

Although Liberty recognized that
it would have to pay the policy limit, it
refused the offer to compromise for fear
that it would be liable to the Rawls if it
depleted the entire amount of the insurance
proceeds by settling with the Davises.
House counsel for Liberty offered
the practical suggestion that all potential
claimants involved in the 10 P.M.
episode, or their attorneys, be notified
that the value of claims will doubtless
exceed limits, and that these people be
invited to participate jointly in efforts
to reach agreement as to disposition
of available funds. If agreement cannot
be reached after expenditure of reasonable
effort, then I can see no present
reason why individual claims could not
thereafter be disposed of individually
on the basis of fair value, first come,
first served.
Id. at 478.
Liberty ignored this advice and filed an
interpleader action. Meanwhile, state court
proceedings resulted in an affirmed default
judgment in favor of Mr. and Mrs. Davis for
$48,500 against Bess, which Liberty could
have settled for the policy limits, but it did
not because of its concern about the Rawlses’
claims. Eventually, Liberty paid a garnishment
judgment of $27,526.85, its policy
limits, plus interest and expenses. The
Davises then obtained an assignment from
Bess, who was in prison, of any claim that
Bess might have against Liberty for damage
to Bess resulting from the company’s
refusal to settle the Davises’ claim. In consideration
of this assignment, the Davises
released their claim to the unpaid portion
of Bess’ judgment debt.
When the assignees sued based on a
refusal- to- settle claim, Liberty removed
the case to the U.S. District Court for the
Middle District of Florida. After reviewing
all of the evidence, the district court denied
the insurer’s motion for a directed verdict
on the issue of bad faith in the refusal to
settle. The jury returned a verdict in favor
of the Davises for $27,593, plus interest, and
the court added $10,000 for attorneys’ fees.
The United States Court of Appeals for
the Fifth Circuit affirmed the judgment,
finding that while, undoubtedly, Liberty’s
concerns about having to pay more than
its policy limits were relevant to the ultimate
jury question of bad faith, they did
not, as a matter of law, justify the trial
court’s directing a verdict for the insurer.
It was for the jury to decide whether Liberty’s
refusal to settle was primarily in its
own interests and with too little regard for
its insured’s interests.
When several claimants are involved,
and liability is evident, rejection of a single
offer to compromise within policy
limits does not necessarily conflict with
the interest of the insured. He hopes to
see the insurance fund used to compromise
as much of his potential liability as
possible. Of course, if the fund is needlessly
exhausted on one claim, when it
might cancel out others as well, the insured
suffers from the company’s readiness
to settle. To put the point another
way, even if liability be conceded, plaintiffs
will usually settle for less than they
would ultimately recover after trial, if
only to save time and attorney’s fees.
Each settlement dollar will thus cancel
out more than a dollar’s worth of
potential liability. Insured defendants
will want their policy funds to blot out
as large a share of the potential claim
against them as possible. It follows that,
insofar as the insureds’ interest governs,
the fund should not be exhausted without
an attempt to settle as many claims
as possible. But where the insurance
proceeds are so slight compared with
the totality of claims as to preclude any
chance of comprehensive settlement,
the insurer’s insistence upon such a settlement
profits the insured nothing. He
would do better to have the leverage of
his insurance money applied to at least
some of the claims, to the end of reducing
his ultimate judgment debt.
Id. at 480–481.
The Fifth Circuit concluded that
efforts to achieve a prorated, comprehensive
settlement may excuse an insurer’s
reluctance to settle with less than all
of the claimants, but need not do so. The
question is for the jury to decide. As this
Court put it in Springer v. Citizens Casualty
Company, 5 Cir. 1957, 246 F.2d 123,
128–129, it is “a question for jury decision
whether the insurer had not acted
too much for its own protection and with
too little regard for the rights of the insured
in refusing to settle within the policy
limits”. [sic] Here, bearing in mind
the existence of multiple claims and the
insured’s exposure to heavy damages,
did the insurer act in good faith in managing
the proceeds in a manner reasonably
calculated to protect the insured by
minimizing his total liability In many
cases, efforts to achieve an overall agreement,
even though entailing a refusal
to settle immediately with one or more
An insurer always should
consult an insured and the
insured’s counsel about
the priority of claims for
settlement purposes.
parties, will accord with the insurer’s
duty. In other cases, use of the whole
fund to cancel out a single claim will
best serve to minimize the defendant’s
liability. Considerable leeway, of course,
must be made for the insurer’s honest
business judgment, short of mismanagement
tantamount to bad faith.
Id. at 481.
Practical Considerations
As shown above, when a liability insurer
with a duty to defend deals with multiple
claims arising from a single covered
occurrence, and a reasonable assessment of
the injuries suffered by one or more of the
claimants indicates that the total value of
the claims will exceed the aggregate policy
limits, the insurer must treat the claims as
if its policy was unlimited. In practice, this
means the following.
First, an insurer must not skimp on the
defense that it provides to its insureds. Even
if the insurer knows that it will exhaust its
policy limits, it must still conduct a thorough
investigation, retaining whatever
experts may be necessary.
Second, an insurer must provide an insured
with experienced defense counsel,
qualified to handle the particular type of
case, and it must pay the prevailing rate
in the community for the counsel’s serv-
Policy Limits, continued on page 76
For The Defense ■ March 2013 ■ 43

Fidelity and Surety
From the Chair
By Jerome M. Joseph
Choose Your
Path—
Enjoy the
Experience
Events like the Fidelity
and Surety Roundtable
and our Annual Meeting
programming—
along with a bounty
of networking
and publication
opportunities—
demonstrate how
our committee, like
DRI in general, has
a place for you.
44 ■ For The Defense ■ March 2013
■ Jerome M. “Jerry” Joseph is a principal of Godin & Baity LLC in Denver. He has expertise in construction litigation and surety
bonds. He has handled large cases involving construction and design defects, claims against performance and payment bonds,
delay damages, cost overruns, incomplete projects, failure to pay for materials or services, and mechanics liens. He has advised
clients on commercial, residential, industrial, office, senior living and mining projects.

In October 2012, I attended the DRI Annual Meeting
Awards Luncheon and heard journalist- scholar Roy
Blount, Jr., discuss a Mississippi criminal case where a
man was charged with disorderly conduct for throwing a
pig over a hotel reception counter. In January
2013, I attended the DRI Leadership
Conference where Dr. Gene Griessman, an
Abraham Lincoln enthusiast, reminded us
about the toil and sacrifice that gave birth
to the words “government of the people, by
the people, for the people.” Conclusion: DRI
has a place for everyone—those who aspire
to lofty goals; and those who think kicking
up your heels a little doesn’t hurt. There is
a place for you here. Join DRI. Choose your
path. Enjoy the experience.
The DRI Fidelity and Surety Committee
entered 2013 with the great momentum
and vigor created by the past chairs
of the committee. I thank immediate past
chair Denise Puente for her excellent example,
along with past chairs Larry Moelman,
Steve Strawbridge, Jim Knox, Shannon Briglia,
Mark Aronson, Kevin Russell, and
Rich Pledger, for their countless hours
of hard work. I also welcome Vice Chair
Harry McKee and the energy he brings to
the task.
I invite all surety practitioners to the
annual Fidelity and Surety Roundtable
to be held in Chicago on May 3, 2013, at
the Conrad Hotel. See http://www.dri.org/
Event/2013SURETY for registration information.
You can also contact DRI Director of
Education Jennifer Cout (jcout@dri.org) to
obtain the seminar brochure and registration
materials. Certain large conventions
are being held in Chicago during the first
week of May, so I urge you to reserve your
hotel space as soon as possible. As always,
the roundtable will involve a lively discussion
of issues relevant to surety law. We
have committed to avoid lengthy lecturestyle
presentations, and will draw on the
vast experience of the committee members.
Roundtable Program Chair Jeff Grossman
and I have identified developments that we
need to discuss to keep our members on the
leading edge of the law. The roundtable tradition
is one of cordial, healthy debate. See
you in Chicago.
In the pages that follow, our 2013 committee
authors begin our preparation for
the roundtable. They address a variety of
topics providing practical guidance, principled
analysis, and surety law fundamentals.
Larry Jortner provides us with the
functional differences between contract
suretyship and insurance, distinctions that
are not always fully appreciated by decision
makers. We are also able to feature two
articles on payment bonds. James Knox
analyzes the use of preemption theory
under the Labor Management Relations
Act in response to payment bond claims
by unions. Cynthia Rodgers- Waire digs
into the question, “When Does the Statute
of Limitations Run on Payment Bond
Claims” Never afraid of advancing technology,
John Felice enlightens us about
what constitutes the use of a computer
under commercial crime and computer
fraud coverages. Carlos Garcia contributes
a fine article entitled, “It’s Not Just
About Priority: Subrogation Rights Against
a Bank.” For the presentation of these fine
articles, we owe a great deal of thanks to
surety practitioner Ralph J. Kooy, a partner
of Tressler LLP in Chicago, who serves
as our articles editor.
Please also note that the DRI Annual
Meeting will be held October 16–20, 2013,
at the Sheraton Chicago Hotel & Towers in
the heart of downtown Chicago, near Lake
Shore Drive. Stay tuned for more information
about surety events at the Annual
Meeting. I urge you to consider attending.
You will be refreshed by the tremendous
speakers, and Chicago is beautiful in mid-
October. You might even learn something
about throwing pigs over a counter.
For The Defense ■ March 2013 ■ 45

Fidelity and Surety
Contract Surety
vs. Insurance
By Laurence P. Jortner
Functional
Differences and
Why They Matter
The functional differences
between surety and
insurance and the
personalized, symbiotic
relationship between the
surety and construction
industries need to be
appreciated properly by all
the involved communities.
Michigan Judge Michael Warren said that “Perhaps as
important as our past achievements is our everlasting
desire to improve our society.” For the last 125 years, largescale
construction projects ranging from roads, buildings,
and bridges to canals and space exploration
has not only fueled the most ambitious
imaginations but also represented an
important segment of the U.S. economy
by traditionally generating more than five
percent of both domestic product and jobs.
However, the grand rewards of construction
come with inherent and substantial
risks. For example, the legendary
Panama Canal was built at the cost of
5,600 construction- related deaths and the
economic ruin of many, and public construction
projects left the U.S. government
holding some $35 million in bad debt before
the dawn of the twentieth century. Therefore,
to safeguard large-scale and especially
public financing of these projects,
both insurance policies and surety bonding
became legally mandatory. This article
will discuss the important functional
differences between insurance and surety
and argue that these differences need to
be maintained and in some cases rescued
from historical, administrative, and judicial
muddling of surety with insurance.
Perhaps the best way to understand
how surety is functionally different from
insurance is to consider that surety’s very
purpose is to cover risks that are not only
uninsurable but that have defied insurability
before recorded time. Insurance
protects through indemnification against
injury to the insured and other persons
and property. However, insurance cannot
protect through indemnification against
self- induced damage to someone’s own
construction work or for not paying subcontractors
hired to help perform contracts.
To do so would be a moral hazard
because it would make it advantageous for
someone not to keep his or her work and
monetary commitments. Therefore, filling
this gap requires a guarantee instrument
under which the contractor remains liable.
However, the contractor’s commitments
are secured by a third party with greater
financial resources than the contractor.
However, there are two problems with
guarantees. First, many require collateral
or, if they can be underwritten to a contrac-
46 ■ For The Defense ■ March 2013
■ Laurence P. Jortner has 23 years of insurance and surety claims experience with major carriers and currently is at CNA in Chicago
as a senior surety claims counsel. He earned his JD from St. John’s University and L.L.M. with Honors in Insurance Law
from the University of Connecticut. For further reading, a Kindle version of Mr. Jortner’s thesis: “The Treatment of the Construction
Contract Surety as Insurer and Why It Matters” is available at amazon.com.

tor existing on limited margins at all, are
prohibitively expensive. Second, the person
or business taking the guarantee, whether
an owner- obligee wanting its project down
according to specification, or a subcontractor
or supplier waiting for payment, first
has to sue the contractor before getting to
a traditional guarantor.
A surety bond tailors itself neatly to the
needs of large construction by taking a
percentage of the contract as a service fee
or premium along with equitable rights to
any remaining contract balance left after
default of the contractor, who is called a
principal on the bond, and is jointly and
severally answerable with its principal.
This second characteristic prompted Professor
Barlow Burke to describe sureties as
“super guarantors” as follows:
the guarantor says, ‘Sue the principal
first, and if the judgment from this suit
is not satisfied, I will pay.’ A guarantor
cannot in this sense be sued jointly and
severally as a defendant with the principal.
A surety can be so joined because it
says and does more. A surety joins with
the principal in…contract and becomes
immediately more than a guarantor, but
undertakes absolutely the principal’s
obligation, whether or not the latter can
pay or perform or is solvent.
These qualities make surety bonds able
to respond to contractor defaults by completing
projects. And, in fact, sureties often
agree to complete projects in default. However,
unlike an insurance policy, which is a
bilateral contract between an insurer and
an insured, a surety is one of three parties
in a tripartite contract: the surety is
between an owner claiming default and
wanting action from the surety, and also
between a principal who may deny the
default allegation and want the surety to
resist the claim. The stakes are high as the
owner- obligee needs a project completed,
and the contractor- principal faces loss of
bonding capacity—if not its business—if it
defaults on a contract and the bond. Therefore,
emotionally there is inherent pressure
and temptation to expect a surety to act as
a type of insurer and not as a specialized
guarantor by the owner.
However, if it does act, a surety is often
accused of having acted as a volunteer by
its bond principal, and the bond principal
may refuse to indemnify the surety. This
attitude is complicated because while the
bond obligee pays the bond premium either
directly or indirectly as part of a line item
within the principal’s bid price, the contractor
is personally underwritten as a client
of the surety and expects his or her
surety to stand behind its word, let him or
her fight his or her own battles, and generally
take note of a personalized relationship
that often developed over many years.
Another contributor to creating a mindset
that surety is insurance rather than
guaranty is the fact that regulation of sureties
has historically somewhat mirrored
regulation of insurance, and it is most
often classified and administered within
state statutory schemes as the business
of insurance. However, this has little to
do with the way that a surety bond actually
functions. The initial genesis for this
was the enthusiasm embracing ambitious
public works coupled with the federal government’s
angst over being stuck with a tremendous
amount of bad debt on defaulting
surety bonds guaranteed by individuals.
After the Panic of 1893, the U.S. government
essentially created the modern
commercial surety industry by requiring
performance bonds from a U.S. Treasury
list of approved sureties by the Heard
Act, which was replaced by the Miller Act
in 1935, which added a requirement for
coverage by a separate payment bond of
entities furnishing labor and materials to
contractors and their direct subcontractors.
The Miller Act governs all federal
jobs of substantial size to this day. States
quickly followed suit with their own “little
Miller Acts” and other bond laws and
requirements.
This did several things. First, commercial
surety demand grew because bonds were legally
mandatory. Second, federal and state
governments became active in calling for
regulation aimed at insuring solvency of the
fledgling industry and creating state uniformity.
This led to the surety industry voluntarily
instituting its own rating industry.
Third, the inclusion of payment bonds on
federal projects made for easy credit and favorable
pricing by subcontractors and suppliers.
However, it also made these entities
a publicly protected class by federal statute,
making their status seem in certain respects
analogous to that of third-party insurance
policy beneficiaries.
However, two factors probably led most
directly to surety being administered as
part of insurance statutory schemes. First,
the commercial sureties that dominated
the early market gave way to sureties that
were primarily insurers and looked at
surety, from a marketing perspective, as a
specialized line, although recognizing that
it functioned as a type of guaranty. Second,
The stakes are high as
the owner- obligee needs
a project completed, and
the contractor-principal
faces loss of bonding
capacity—if not its
business—if it defaults on
a contract and the bond.
after a joint effort by sureties, insurers, and
state regulators in the form of the National
Association of Insurance Commissioners
(NAIC), the McCarran- Ferguson Act was
passed in 1945, which essentially made the
business of insurance subject to state law.
This left the surety industry with
a choice. Sureties could either fend for
themselves in defending antitrust lawsuits
attacking their rating bureau methodology
or seek protection with the insurers, which
were often their affiliated and parent companies,
within state statutory insurance
statutory schemes. Not surprisingly, the
surety industry chose the latter and supported
the NAIC’s Model Rule language including
surety as a subset of the “business
of insurance.” The NAIC Model Rules were
subsequently accepted, in some form, by
virtually every state.
Therefore, surety found its way into
insurance statutory schemes, not because
of any review of its functioning, but as a
marriage of convenience. Since the 1980s,
the surety industry has struggled with litigation
seeking extension of bad faith to
surety based upon perceptions of com-
For The Defense ■ March 2013 ■ 47

Fidelity and Surety
monality with insurance that does not
exist. This litigation damages the profitability
of both the surety and construction
industries by straining the personalized
underwriting mechanism unique to surety
and effecting the leverage and profitability
of contractors in dealing with disputes
between both owners and their subcontractors
and suppliers.
Another contributor
to creating a mindset
that surety is insurance
rather than guaranty is
the fact that regulation of
sureties has historically
somewhat mirrored
regulation of insurance.
One example involves the handling of
performance bond disputes between project
owners and sureties. Starting in the
1980s, courts began to find the common
law tort of bad faith against construction
sureties with the cases Dodge v. Fidelity
& Deposit Co. of Maryland, 161 Ariz. 344,
778 P.2d 1240 (Ariz. 1989), and Transamerica
Premier Ins. v. Brighton School Dist.,
940 P.2d 348 (Col. 1997), arguing, among
other things, that inclusion in the insurance
codes of their respective states suggested
a legislative intent to regulate surety
as a type of insurance and that the functional
differences of surety from insurance
were insufficient to prevent sureties from
being deemed to have a special or fiduciary
relationship with performance bond obligees
and payment bond claimants in the
same way that insurance has with its firstor
third-party insureds.
This tide of extending bad-faith tort
against contract surety has been somewhat
reversed by other courts refusing to
extend the tort, and in some cases, through
specific state legislation excluding sureties
from common law bad faith. Probably
48 ■ For The Defense ■ March 2013
the most influential case with this position
is Cates Constr., Inc. v. Talbot Partners, 21
Cal. 4th 28, 45, 980 P.2d 407 (Cal. 2001).
Cates found that while surety is within
California’s insurance code, substantive
aspects unique to surety are treated differently
by California statutes as well. More
importantly, Cates challenged the Dodge
and Transamerica analysis that surety was
similar enough to insurance, and instead
analyzed the functional differences. Later
cases, including Masterclean, Inc. v. Star
Ins. Co., 347 S.C. 405, 410–11, 556 S.E.2d
371, 374 (S.C. 2001), also challenge the legislative
intent argument on the theory that
remedies against a misbehaving surety
were meant by a legislature to be administrative
and not to subject sureties to the
tort of bad faith.
A key difference cited by Cates was that
insurance contracts are generally contracts
of adhesion, while surety bonds are clearly
not. Surety bond forms, if imposed by
anyone, are generally imposed by project
owners and are often specified in the
bid documents. Furthermore, almost all
performance bonds also incorporate the
underlying construction contracts, which
are again often part of the bid packages
and negotiated between the owners and the
contractors. The surety primarily underwrites
bonds based upon the merits of the
contractor account. The accuracy of this
can easily be established by any number
of quite onerous bond forms accepted by
sureties from public owners throughout the
country. As for payment bonds, the same is
generally true and, in any event, on public
jobs, sureties generally cannot enforce coverage
requirements that restrict a claimant
class or claim conditions beyond those
mandated in public bond statutes on public
projects.
Another more subjective disagreement
between the Cates decision and both the
Dodge and Transamerica courts deals with
whether refusal of a surety to pay a claim
constitutes a calamitous event equivalent
to that of an insurer refusing to pay a claim
to its insured. The Dodge and Transamerica
courts argue that it is and has large scale
ramifications for an owner, particularly
when public money is at stake. Cates distinguishes
this from an insurance situation
because the loss to an owner is mitigated by
not only the unused contract balance, but
also the extra five or 10 percent retainage
held by the owner throughout most of the
life of the construction process.
Cates also observed that an obligee can
go into the marketplace to find a completion
contractor and can pursue both the
contractor- principal and surety for its loss
and that a surety, unlike an insurer, does
not write bonds with an expectation of
loss. Another point to consider is that the
owner is in the best position to protect the
work and mitigate damage and that if these
duties are transferred to the surety, then
this might create a moral hazard to owner
accountability in administering the contract
properly.
Another area where bad faith takes
center stage is when a surety pays claims
over the objections of its principal and
seeks indemnification. Since the principalcontractor
is often a poor source of reimbursement,
and to promote accountability
of its bonded accounts, a surety has the
key people involved with the contracting
business—and often their spouses, other
business affiliates, and other family members—personally
guarantee that a surety
will not suffer loss through a document
known as a “general indemnity agreement”
or “GIA.” However, bad faith here is based
upon contract, not upon common law tort
theory. The GIA is generally a “take it or
leave it” document of adhesion required by
the surety in exchange for issuing bonds to
a given bond principal. A GIA gives a surety
broad powers to settle claims independently
and bind the signing indemnitors to
pay for all monetary expenses incurred by
the surety as the result of writing any bond.
Some of a surety’s major purposes for
requiring this document include making
clear that the surety is to be reimbursed
for all monetary expenditures that it incurs
and to ensure that it can pay claims that
it considers valid without being secondguessed
and having to litigate with the
principal the merits of the claims that it
paid. Due to the comprehensive nature of
a GIA, usually the only practical defense
for indemnitors to use to avoid liability to
the surety is to allege that the surety violated
the duty of good faith and fair dealing
implied in all contracts, meaning that
the surety acted in bad faith, and the GIA
should not be enforced against the indemnitors
as a result. Generally, courts reject

attempts by indemnitors to obtain damages
against a surety suing the indemnitors
under the GIA based upon common
law tort theory.
Recent state case law—with the exception
of that of Rhode Island, where the
courts will enforce a GIA absolutely unless
the surety has committed actual fraud or
collusion—has imposed two basic standards
to ascertain whether a surety has
acted in good faith and fair dealing under a
GIA. One standard requires an affirmative
showing by the indemnitors of “improper
motive” by the surety in the payment of
claims, enforcement of the GIA, or both.
If no improper motive is proved, the GIA
is enforceable against the indemnitors
regardless of whether the claim or the claim
amount paid by the surety was correctly
paid. In other words, the surety’s actions do
not have to be necessarily right under this
analysis. They merely have to not be the
product of “improper motive.” The other
standard holds that bad faith under a GIA
is mere negligence by the surety in paying
a claim. The objection of the surety industry
to this standard is that it essentially
eviscerates the GIA’s standard “settlements
clause,” allowing the surety to settle as it,
and not its principal, deems best based
upon its own independent review and judgment.
This standard also serves as a disincentive
for a surety to settle claims when a
principal objects, even if the surety thinks
that the principal’s position is unfair or
impractical, because the surety will need to
litigate the underlying merits of the claims
with the indemnitors even if it settles with
the party making the bond claims. In other
words, if a surety is “damned if it does, and
damned if it doesn’t,” it probably won’t settle
a claim over its principal’s objections.
Therefore, the “bad faith equals negligence”
standard not only promotes tighter
underwriting of contractors seeking bonds,
it also hurts a surety’s independence in
paying claims that should be paid. Further,
underlying this analysis is the mistaken
notion that a surety is supposed to protect
the principal in the same manner that an
insurer is required to protect the insured.
However, in fact, the bond is in place to
protect others—whether the construction
project’s owner or the subcontractors and
suppliers furnishing labor and materials—
from the defalcations of the bond principal.
Conclusion
While surety and insurance are administratively
governed within insurance codes,
surety is functionally different from insurance
and is best understood and classified
as a specialized guarantee instrument. It
provides security for activities that have
been uninsurable throughout recorded history
and shall remain uninsurable. Unlike
insurance, a surety expects its contractorprincipal
not to cause a loss.
Furthermore, because liability of a surety
and its principal is, with limited exceptions,
coextensive, surety bonding circumstances
affect the construction industry,
including the pool of bondable contractors
and the pricing of public works. In effect,
approximately six sureties write approximately
60 percent of contract surety bonds
at this writing, and consolidation and occasional
insolvency of sureties, both large
and small, has been a trend for roughly
the last quarter century. For the economic
health of both the construction industry
and the commercial surety industry that
supports large construction improvements,
the functional differences between surety
and insurance and the personalized, symbiotic
relationship between the surety and
construction industries needs to be appreciated
properly by all the involved communities.
Fidelity and Surety
Roundtable
May 3, 2013 | Conrad Chicago
A majority of past attendees
agree that our Roundtable is the
most informative and interactive
surety program that they have
ever attended.
The 2013 Roundtable will focus on
current issues facing surety and
fidelity claims counsel and claims
professionals, including:
the surety’s
response to a
default/cure
notice;
discovery of
mobile device
data and other
social media in
claims litigation;
the current
law on policy
stacking in
For more information visit dri.org.
fidelity claims
and related
strategies;
and an
overview of
current surety
claims trends,
emerging
issues, and
tips to
maximize surety
recoveries.
For The Defense ■ March 2013 ■ 49

Fidelity and Surety
Payment Bond Sureties
Have a Viable Defense
By James A. Knox
Labor Management
Relations Act
Preemption
Unions should not be
permitted to bypass
federal law regulating
resolution of collective
bargaining agreement
disputes by going
after sureties.
Unions and their trust funds traditionally obtained some
protection against contractors failing to make wage and
fringe benefit contributions by requiring the contractors to
post bonds specifically covering the risk. As specified by
the collective bargaining agreement, the
size of the bond typically would be very
small, $10,000. The union would need to
keep a close watch on whether a contractor
was meeting its obligations and move
quickly if it did not want its members to
suffer losses in excess of the bond penalty.
Usually these bonds by their own terms
require the union or trust funds to exhaust
their remedies under the collective bargaining
agreement before any claim on the
bond can even be made.
Lately, however, unions have tried to
score much higher by making claims on
behalf of their members against sureties
of the ordinary payment bonds that contractors
are required by state law to post
on specific public projects. The penal sum
is much higher under these bonds, and
it almost seems that unions deliberately
have attempted to take advantage of sureties.
Union employees are allowed to go on
working month after month for contractors
that fail to pay them in full, or slack
off on benefit contributions, racking up
large past due amounts. The unions sit back
while these sums pile up. Then they try to
recover the grand totals from the payment
bond sureties.
A surety may have various legitimate
defenses to these claims, including standing,
notice, and failure to mitigate. Unions
do not have standing to make wage claims.
U.S. ex rel. United Brotherhood of Carpenters
& Joiners Local Union v. Woerfel, 541
F.2d 1148 (8th Cir. 1976); United Union
of Roofers, Waterproofers & Allied Trades
v. Ins. Co. of Am., 919 F.2d 1398 (9th Cir.
1990). But courts have allowed fringe benefit
claims. Forsberg v. Bovis Lend Lease,
Inc., 184 P.3d 610 (Utah App. 2008); Divane
v. Smith, 774 N.E.2d 361 (Ill. App. 2002)
(mechanics lien); U.S. ex rel. Sherman
v. Carter, 353 U.S. 210 (1957). In Central
Laborers Pension Fund v. Nicholas & Assoc.,
956 N.E.2d 609 (Ill. App. 2011), mechanics
lien defendants revived ERISA preemption
as a defense to fringe benefit claims in the
trial court, but the Second District shot this
down on appeal.
50 ■ For The Defense ■ March 2013
■ James A. Knox is a partner based in the Chicago office of Tressler LLP. He focuses his practice on fidelity, surety, insurance,
commercial, and construction law. He has extensive negotiation, trial, and appellate experience. Mr. Knox is a former chair of the
DRI Fidelity and Surety Committee. He frequently lectures on fidelity and surety bond topics and has published more than 35
articles and book chapters.

This article will explain another defense
to claims by unions asserted against state
law payment bonds. Although relatively
untested by sureties, parties have litigated
it in hundreds of analogous cases, and it
should apply both to wage and to fringe
benefit claims. The defense is Labor Management
Relations Act preemption. The
Labor Management Relations Act, is also
known as the Taft- Hartley Act. 29 U.S.C.
§141 et seq. It amended the National Labor
Relations Act, one of the New Deal measures
that began to federalize labor law
back in the 1930s. Passed over President
Truman’s veto in 1947 in a climate of unrest
after World War II, the Labor Management
Relations Act was intended to rein in labor.
Senator Robert Taft, one of its sponsors,
was a conservative. The Labor Management
Relations Act imposed restrictions
on strikes, boycotts, picketing, and political
activity by unions. It allowed states to
pass right to work laws and authorized federal
injunctions to break strikes.
But the Labor Management Relations Act
feature that we are concerned with here is
its creation of federal jurisdiction over collective
bargaining agreements. A collective
bargaining agreement is the product of a
negotiation between union and management
representatives. The agreement can be
with a whole industry, with a contractors’
association, for example, or with a single
employer. The agreement sets forth requirements
that the employers must follow when
hiring labor with respect to wages, benefits,
hours, training, and workplace conditions,
among other things, along with grievance
mechanisms. What the Labor Management
Relations Act did was create a preference for
arbitration, along with recourse to federal
courts, to resolve labor disputes between
unions and employers in a uniform manner
nationwide.
Preemption
State law payment bond statutes such as the
Illinois Public Construction Bond Act, 30
Ill. Comp. Stat. 550/1 et seq., require contractors
and their sureties to pay for labor
and material furnished to bonded projects.
Absent federal preemption, the understanding
generally is that not just subcontractors
but also individual employees of the contractor
can sue the surety on the bond in
state court for wages or other compensation
earned on the bonded job. The question
is whether a union or any of its fringe
benefit trust funds can sue on behalf of its
members, assuming for sake of argument it
had standing to do so at all. This article does
not address whether union members themselves
can sue, even if the union cannot, but
some of the cases discussed below do hold
that claims by individual union members
can be preempted as well.
Labor Management Relations Act
§301(a), 29 U.S.C. §185)(a) provides:
Suits for violation of contracts between
an employer and a labor organization
representing employees in an industry
affecting commerce as defined in this
Act, or between any such labor organization,
may be brought in any district
court of the United States having jurisdiction
of the parties, without respect to
the amount in controversy or without
regard to the citizenship of the parties.
The United States Supreme Court has
repeatedly made clear that Labor Management
Relations Act §301 preempts all state
law claims alleging violation of a collective
bargaining agreement. All such claims
must instead be resolved through the grievance
and arbitration process or brought
under §301. Allis- Chalmers Corp. v. Lueck,
471 U.S. 202, 219–20 (1985). A collective
bargaining agreement may specify a grievance
or arbitration procedure that unions
or fringe benefit trust funds must exhaust
before they may seek judicial relief. McCoy
v. Maytag Corp., 495 F.3d 515, 524 (7th Cir.
2007). The Labor Management Relations
Act preempts a state law claim for breach
of a collective bargaining agreement. Stably
v. Amal. Transit Union, 2012 U.S. Dist.
Lexis 10475 (N.D. Ind. Jan. 27, 2012). The
act also preempts all claims substantially
dependent on interpretation of collective
bargaining agreements. Caterpillar, Inc. v.
Williams, 482 U.S. 386, 394–95 (1987).
To allow a court to interpret a collective
bargaining agreement under state law could
frustrate the congressional goal of orderly
and consistent labor dispute handling. Lingle
v. Norge Div. of Magic Chef, Inc., 486 U.S.
399, 404 n.3 (1988). Such claims are governed
exclusively by federal labor law, not
by state law, to ensure that courts uniformly
interpret collective bargaining agreements.
Gelb v. Air Con Refrigeration & Heating, Inc.,
356 Ill. App. 3d 686, 700 (Ill. App. Ct. 2005).
The scope of Labor Management Relations
Act preemption is broad: “The
preemptive force of LMRA [Labor Management
Relations Act] §301 is so powerful
as to displace entirely any state cause of
action ‘for violation of contracts between
an employer and a labor organization.’”
Beneficial Nat. Bank v. Anderson, 539 U.S.
1, 7 (2003) (internal citation omitted). The
To allow a court to
interpret a collective
bargaining agreement under
state law could frustrate
the congressional goal
of orderly and consistent
labor dispute handling.
Labor Management Relations Act “reaches
not only suits on labor contracts, but suits
seeking remedies for violation of such contracts.”
Wilkes-Barre Pub. Co. v. Newspaper
Guild of Wilkes-Barre, 647 F.2d 372, 380
(3d Cir. 1981). As explained by the Third
Circuit, “The issue is not the nature of the
remedy sought for the alleged violation, but
whether the remedy sought may require
that the court from which it is sought, state
or federal, interpret a collective bargaining
agreement.” Id.
Again, Labor Management Relations
Act preemption applies not only to claims
founded directly on rights created by a collective
bargaining agreement, but also to
claims that substantially depend on analyzing
a collective bargaining agreement.
Tifft v. Commonwealth Edison Co., 366 F.3d
513, 516 (7th Cir. 2004). If the resolution of
a state law claim will require a “substantive
examination of” a collective bargaining
agreement to determine if an employer
“failed to comply with the terms,” the Labor
Management Relations Act controls. Tifft,
366 F.3d at 519. And “[s]tate law claims that
have their root in a specific clause of a CBA
[collective bargaining agreement] arise under
federal law.” Thigpen v. Ill. Bell Tel. Co.,
For The Defense ■ March 2013 ■ 51

Fidelity and Surety
10 C 5889, 2010 U.S. Dist. Lexis 134979 (Dec.
21, 2010). This is so whether or not the complaint
mentions the Labor Management Relations
Act. IBEW v. Hechler, 481 U.S. 851,
859 n.3 (1987). As Gelb puts it, “[w]here
claims are predicated on rights addressed
by a collective bargaining agreement, and
depend on the meaning of, or require interpretation
of its terms, an action brought
Labor Management
Relations Actpreemption
has greatest force when
the entitlement to or the
amount of wages or other
employee compensation
under a collective bargaining
agreement is at issue.
pursuant to state law will be preempted by
federal labor laws.” 356 Ill. App. 3d at 693.
Labor Management Relations Act preemption
has greatest force when the entitlement
to or the amount of wages or other
employee compensation under a collective
bargaining agreement is at issue. Thigpen,
2010 U.S. Dist. Lexis 134979. Court
decisions have agreed that “it is wellunderstood
that a claim for breach of a
collective bargaining agreement is preempted.”
In re Bentz Metal Prods. Co., Inc.,
253 F.3d 283, 286 (7th Cir. 2001). Interpreting
the collective bargaining agreement is
necessary to resolve such a dispute. Id. This
is so even if the collective bargaining agreement
breach is clear. National Metalcrafters
v. McNeil, 784 F.2d 817, 823 (7th Cir.
1986). In addition, “a determination that
a contract is so clear as to make a breach
willful… is an interpretation of the contract.”
Id. Moreover, “[d]e fenses, as well as
claims, must be considered in determining
whether resolution of a state-law claim
requires construing of the relevant collective
bargaining agreement.” Gelb, 356 Ill.
App. 3d at 693.
52 ■ For The Defense ■ March 2013
State law requirements that depend on
agreement, such as a contract, are preempted.
Allis- Chalmers Corp. v. Lueck,
471 U.S. 202 (1985). But in addition, a
state could create a remedy that, although
nonnegotiable, nonetheless turned on the
interpretation of a collective bargaining
agreement. Such a remedy would be preempted
by Labor Management Relations
Act §301. Similarly, if a law applied to
all state workers but required, at least in
certain instances, a collective bargaining
agreement interpretation, “the application
of the laws in those instances would be preempted.”
Lingle v. Norge Div. of Magic Chef,
Inc., 486 U.S. 399, 407 n.7 (1988).
The Mere Reference
Exception and Bentz
Some outer limits to Labor Management
Relations Act preemption do exist. If a
state law claim requires only “mere reference”
to a collective bargaining agreement,
then federal law will not preempt the claim.
Livadas v. Bradshaw, 512 U.S. 107, 124
(1994) (holding that a wrongful discharge
claim was not preempted when reference
to the collective bargaining agreement was
needed only to calculate damages). As the
Seventh Circuit explained, “for preemption
to exist, resolution of a claim must require
interpretation of a CBA, not a mere glance
at it.” In re Bentz Metal Prod. Co., 253 F.3d
283, 289 (7th Cir. 2001). But “not every dispute
concerning the terms of employment,
or tangentially involving a provision of a
collective bargaining agreement, is preempted
by federal labor laws.” Allis Chalmers,
471 U.S. at 211. A court must examine
the character of the state law claim. A claim
may proceed if and only if it is “entirely
independent” of any understanding of the
terms of the collective bargaining agreement.
Gelb, 356 Ill. App. 3d 686, 700 (Ill.
App. Ct. 2005); Livadas, 512 U.S. at 124–25.
Bentz applied this doctrine to Indiana
mechanics lien claims that had reached a
certain stage without opposition. Twenty
union members filed liens for vacation pay
earned in connection with labor provided to
a project. The source for their entitlement to
the vacation pay was a collective bargaining
agreement. Their employer filed bankruptcy,
did not dispute the liens, and stipulated to
the amount due. However, a secured creditor
of the employer raised Labor Management
Relations Act preemption as a means
of obtaining priority. The court saw this as
not requiring it to interpret the collective
bargaining agreement. It was a question
strictly of priority among creditors. Had entitlement
to or the amount of employment
compensation been at issue, the court would
have had to analyze the collective bargaining
agreement, and preemption would have
applied. If the parties had not stipulated the
amount due, preemption would have applied
until they resolved the contract issues, either
by arbitration or a Labor Management
Relations Act lawsuit. Only then could the
employees present their separate claims in
bankruptcy court as lien claims with whatever
priority such claims were entitled to.
As the court put it:
In summary, the overriding principle is
that for preemption to apply, interpretation
of the CBA [collective bargaining
agreement] and not simply a reference to
it is required. If the entitlement to wages
(or other employee pay) or the amount
due were at issue, the CBA would control;
almost certainly, interpretation of
the agreement would be necessary and
would be subject to the arbitration procedures
in the contract. So as to that
determination, preemption would apply.
The mechanic’s lien, however, is a benefit
provided to workers based on a state
policy protecting workers; it is a separate
claim, not dependent on interpretation
of the agreement for its existence even
though the amount of the pay is dependent
on the CBA. In this situation, the
claim is not preempted.
253 F.3d at 289.
Unfortunately, the court also supposed
that it “perhaps” could have rested its opinion
on the following “dicta in a footnote”
from Lingle v. Norge Div. of Magic Chef,
Inc., 486 U.S. 399, 404 n.3 (1988):
A collective- bargaining agreement may,
of course, contain information such as
rate of pay and other economic benefits
that might be helpful in determining the
damages to which a worker prevailing
in a state-law suit is entitled. Although
federal law would govern the interpretation
of the agreement to determine the
proper damages, the underlying statelaw
claim, not otherwise pre-empted,
would stand. Thus, as a general proposition,
a state-law claim may depend for

its resolution upon both the interpretation
of a collective- bargaining agreement
and a separate state-law analysis
that does not turn on the agreement. In
such a case, federal law would govern the
interpretation of the agreement, but the
separate state-law analysis would not be
thereby pre-empted.
Out of context these remarks could
muddy the waters, but they actually can
be reconciled with the rest of what the Supreme
Court has written by interpreting
them to mean that Labor Management Relations
Act preemption would apply until a
court had resolved disputes about a collective
bargaining agreement interpretation.
Only then could a union employee proceed
with a state law claim. At a minimum, a
court would have to stay a state law claim.
In Wisconsin Central Ltd v. Shannon,
539 F.3d 751 (7th Cir. 2008), the Seventh
Circuit provided some semi- helpful clarification.
The court stated that Labor Management
Relations Act preemption was not
warranted when (1) the collective bargaining
term was so clear that it precluded all
possible disputes over its meaning; (2) the
parties did not dispute the interpretation
of the relevant collective bargaining agreement
provisions; or (3) the only reason to
refer to the collective bargaining agreement
was to compute damages. Parties will differ
on whether a case involves a preempted
“determination” of damages or a not preempted
“computation” of damages.
Post-Bentz Developments
The question then is a whether a disputed
state law claim against a payment bond
surety by or on behalf of union members
could be resolved without interpreting the
collective bargaining agreement. If not,
then preemption applies. Numerous analogous
post-Bentz cases that do not involve
bonds suggest that the Labor Management
Relations Act will preempt a bond claim as
long as entitlement or damages are genuinely
contested by the principal, the surety,
or both.
For instance, in Hoskin v. Premier Security,
10 C 3018, 2011 U.S. Dist. Lexis 79194
(N.D. Ill. July 21, 2011), the Northern District
of Illinois held that a union member’s
claim for underpayment of wages was preempted.
The exception to preemption when
referring to the collective bargaining agreement
is needed merely to compute damages
and applies only when the parties do not
dispute the meaning of contract terms in
the lawsuit. Baker v. Kingsley, 387 F.3d 648,
657 (7th Cir. 2004) (holding that the Labor
Management Relations Act preempted
an Illinois Wage Payment Collection Act
claim). If a “defendant’s interpretation is
plausible, and demonstrates a genuine dispute
between the parties that can affect liability,
it is a sufficient basis for preemption.”
Id. at 659. Preemption exists as long as entitlement
is “fairly debatable.” National Metalcrafters
v. McNeil, 784 F.2d 817, 823 (7th
Cir. 1986) (involving vacation benefits).
In Thigpen v. Ill. Bell Tel. Co., 10 C 5889,
2010 U.S. Dist. Lexis 134979 (Dec. 21, 2010),
the court held that the Labor Management
Relations Act preempted a claim asserted
under the Illinois Minimum Wage Law. The
claim inherently required analyzing and
interpreting a collective bargaining agreement,
not merely glancing at one. To determine
whether the plaintiff was entitled to
overtime required interpreting the collective
bargaining agreement because it governed
“the type of work she perform[ed], her
hours, her compensable work, and her rate
of pay.” The defendant disputed her eligibility
and entitlement. Interpreting the collective
bargaining agreement was necessary to
determine the dispute. This involved more
than merely reviewing the collective bargaining
agreement to compute the damages.
In Mitchell v. JCG Indus., 10 CV 6847,
2011 U.S. Dist. Lexis 57933 (N.D. Ill. May
31, 2011), the court dismissed a class action
by union members seeking relief under the
Illinois Minimum Wage Law. The Labor
Management Relations Act preempted the
claim and required the class to exhaust
their collective bargaining agreement
grievance and arbitration remedies.
Gelb v. Air Con Refrigeration & Heating,
Inc., 356 Ill. App. 3d 686 (2005), also
involved the Illinois Minimum Wage Law.
Union members alleged underpaid and unpaid
overtime wages. They argued that their
claims were based on the wage law, not the
collective bargaining agreement. The court
disagreed. The collective bargaining agreement
specified sample wages for various pay
schedules and fringe benefits. Thus, “to determine
whether [the] defendants had violated
the Wage law, a finder of fact would
have no choice but to refer to the collective
bargaining agreement in order to determine
the amount of wages that were due and owing
to the individual plaintiffs and the other
members of the proposed class.” The claim
was inextricably bound up with the terms
of the collective bargaining agreement, and
a court would have to interpret the agreement
to resolve the claim if the defendants
asserted compliance as a defense:
A plaintiff is “master”
of his or her claim so when
a plaintiff invokes a right
created by a collective
bargaining agreement,
the plaintiff has chosen
to plead a federal claim.
Where claims are predicated on rights
addressed by a collective bargaining
agreement, and depend on the meaning
of, or require interpretation of its terms,
an action brought pursuant to state law
will be preempted by federal labor laws.
[Citation omitted]. Defenses, as well as
claims, must be considered in determining
whether resolution of a state-law
claim requires construing of the relevant
collective bargaining agreement.
Id. at 693. Thus the Labor Management
Relations Act preempted the claims.
In Shales v. Asphalt Maintenance, Inc.,
No. 03 C 8250, 2004 U.S. Dist. Lexis 19394
(N.D. Ill. Sept. 28, 2004), a union’s fringe
benefit trust funds asserted Employee Retirement
Income Security Act (ERISA), the
Labor Management Relations Act, and the
Illinois Wage Payment and Collection Act
claims against a contractor. As an employer
subject to a collective bargaining agreement,
the contractor was obligated to make
monthly contributions to the funds on behalf
of employees identified in monthly remittance
reports. The funds alleged failure
to correctly report and pay the contributions.
The court observed that the Illinois
Wage Payment and Collection Act requires
For The Defense ■ March 2013 ■ 53

Fidelity and Surety
an employer to honor its contract. This requires
interpreting the contract. In this
case that contract was a collective bargaining
agreement. The trust funds’ claims were
predicated on rights created by the collective
bargaining agreement. They depended
on the meaning of the collective bargaining
agreement to determine “whether [the
employer] should have paid money to the
funds, how he should have paid, and to
whom he should have made payment.” Thus
the Labor Management Relations Act preempted
the Illinois Wage Payment and Collection
Act claim.
Of course when a union asserting a
claim itself refers to a collective bargaining
agreement as the basis for the claim, as
it can hardly avoid doing, the Labor Management
Relations Act will govern. A plaintiff
is “master” of his or her claim so when
a plaintiff invokes a right created by a collective
bargaining agreement, the plaintiff
has chosen to plead a federal claim. Caterpillar,
Inc. v. Williams, 482 U.S. 386 (1987).
Treatment to Date of Bond Claims
Several cases dealing with claims asserted
against bonds require understanding.
Sprinkler Fitters Local Union
v. First Indemnity
In Sprinkler Fitters Local Union No. 692 v.
First Indem. Ins. Co., 840 F. Supp. 38 (E.D.
Pa. 1993), the court applied these principles
in favor of payment bond sureties. A
union and its fringe benefit trust funds
sued the sureties on several projects. The
plaintiffs alleged that the contractor principal
had violated a collective bargaining
agreement. The court held that it did not
have jurisdiction because the Labor Management
Relations Act preempted the bond
claims. Labor Management Relations Act
preemption does not depend on whether
the parties to a lawsuit are signatories to
the collective bargaining agreement. Plaintiffs
would have had to prove that the contractor
as the bond principal violated the
terms of the collective bargaining agreement
and that the sureties guaranteed that
obligation. So “resolution of this controversy
necessarily involves interpreting and
applying a contract between an employer
and a labor organization.”
Ample case law supports the observation
in Sprinkler Fitters that a surety may
54 ■ For The Defense ■ March 2013
assert Labor Management Relations Act
preemption even though it is not a party to
the collective bargaining agreement. The
Labor Management Relations Act would
preempt a state law claim even if the defendant
is not a signatory to a collective
bargaining agreement as long as the lawsuit
implicates provisions of the agreement.
Cespuglio v. Ward, 2004 U.S. Dist. Lexis
8586 (S.D. N.Y. May 12, 2004) (citing Woodell
v. IBEW, 502 U.S. 93, 100–01 (1991));
Milne Employees Ass’n v. Sun Carriers,
960 F.2d 1401 (9th Cir. 1991). A party cannot
sue another party that has not signed
a labor agreement for a claim preempted
by the Labor Management Relations Act
because the claim would depend substantially
on the terms of the labor agreement.
Brown v. Keystone Consol. Indus., Inc., 680
F. Supp. 1212, 1221 (N.D. Ill. 1989).
Greenblatt v. Delta Plumbing & Heating
In Greenblatt v. Delta Plumbing & Heating
Corp., 68 F.3d 561 (2d Cir. 1995), the Second
Circuit acknowledged that the Labor Management
Relations Act generally preempts
state law remedies for breach of a duty created
by a collective bargaining agreement.
Nevertheless, the court concluded that it
did not have jurisdiction to resolve a claim
on a fringe benefit bond even though a collective
bargaining agreement had required
the bond. The court also held that the
Labor Management Relations Act did not
preempt state surety law. Supposedly, a
bond claim for fringe benefits due under
a collective bargaining agreement only
“tangentially” involves the agreement. The
court further commented that state surety
law “does not affect the interpretation of
a labor contract or provide relief against
a defendant who breaches a duty created
by that contract.” Supposedly, a state law
claim that depends on both a collective
bargaining agreement interpretation and
a separate state law analysis so the Labor
Management Relations Act does not preempt
the claim.
The Greenblatt holding is wrong. A surety’s
liability for wages, fringe benefits, or
other compensation due under a collective
bargaining agreement cannot be determined
without ascertaining the bonded
principal’s liability—the employer’s liability—which
makes the collective bargaining
agreement directly involved. The
Labor Management Relations Act clearly
governs an employer’s liability under a
collective bargaining agreement, and the
federal law preempts any state law remedy
to establish that liability. The employer’s
surety, as the surety, is entitled to that
same protection as a fundamental precept
of surety law.
It is well settled that a payment bond
surety is not liable unless its principal, or
whoever is in privity with the claimant, is
liable on the underlying obligation. Premier
Electrical Const. Co. v. Am. Nat. Bank
of Chicago, 276 Ill. App. 816 (Ill. App. Ct.
1995); Painters Local Union No. 171 v. Williams
& Kelly, Inc., 605 F.2d 535, 539 (10th
Cir. 1979); Cinci. Ins. Co. v. Putnam, 335 So.
2d 855, 856 (Fla. Dist. Ct. App. 1976); Mestek,
Inc. v. United Pac. Ins. Co., 667 N.E.2d
292, 294 (Mass. App. Ct. 1996). The obligation
of the surety under a payment bond is
coextensive with that of its principal. This
means generally the surety may assert any
contractual or legal defenses that the principal
might have against that underlying
obligation. Premier Electrical, 276 Ill. App.
816 (1995).
In other words, payment bonding is
true suretyship, and the surety’s liability is
strictly derivative:
Because the surety’s obligation is derived
from that of the principal debtor, the liability
of the surety is ordinarily measured
by the liability of the principal. If
the principal is not liable to the claimant,
then the surety is not liable either.
In addition, the surety may normally set
up any defense available to the principal.
Riley Constr. Co. v. Schillmoeller & Krofl
Co., 236 N.W.2d 195, 198 (Wis. 1975).
As another court put it, “It is a fundamental
precept of suretyship law that the
liability of the surety is conditioned on
accrual of some obligation on the part of
the principal; the surety will not be liable
on the surety contract if the principal
has not incurred liability on the primary
contract.” Star Contracting Corp. v. Manway
Constr. Co., 337 A.2d 669, 670 (Conn.
Super. Ct. 1973).
Statutory payment bonds are no
exception:
[C]onstruing the liability of the surety
as coextensive with that of the principal
does not subvert the public policy effected
by [the payment bond statute] because

that statute was not intended to afford
legal recourse against a surety when no
such recourse existed against the principal,
i.e., the statute does not give the
subcontractor something that he is not
entitled to under his primary contract.
Star Contracting, 337 A.2d at 671.
The obligation created by the bond is
measured by the underlying contractual
obligation that it secures. That underlying
obligation can only be ascertained by referring
to the subcontract or supply contract
under which the labor or material has been
furnished. U.S. ex rel. Fireman’s Fund. Ins.
Co. v. Frank Briscoe Co., 462 F. Supp. 114,
116–17 (E.D. La. 1978). This incorporation
may be express, implied, or by operation
of law. Frequently, for example, the bond
or bond statute requires payment only of
what is “justly due” to the bond claimant.
See, e.g., the Illinois Public Construction
Bond Act, 30 ILCS 550/1 (requiring principal
and surety on the bond to pay “all just
claims due [to the claimants] under the
provisions of such contractors for labor
performed or materials furnished in the
performance of the contract on account of
which this bond is given….”). This requires
assessing a claimant’s contractual performance.
If the principal has a valid defense to
the claimant’s contractual claim, nothing
is “justly due,” and the surety is not liable.
Riley, 236 N.W.2d at 198. For more on this
subject, see James A. Knox and Stacy Hipsak
Goetz, Defenses, in The Law of Payment
Bonds 556–61 (ABA 2d ed. 2011).
Greenblatt also can be distinguished
from any case in which the contractor or
surety genuinely contests the contractor’s
obligations under a collective bargaining
agreement, which would require a court
to interpret the agreement. In Greenblatt,
“there was no real dispute over [the contractor’s]
liabilities under the collective
bargaining agreement, and certainly none
that required resort to the federal common
law.” 68 F.3d at 571. The court even admitted
“that in some circumstances a federal question
might arise” in a suit “on a surety bond
guaranteeing a signatory’s obligation under
a collective bargaining agreement….” Id.
International Union of Bricklayers v. ICW
In International Union of Bricklayers and
Allied Craftworkers v. Ins. Co. of the West,
366 F. Supp. 2d 33 (D.D.C. 2005), the court
refused to allow removal of a fringe benefit
bond claim as subject to the Labor Management
Relations Act even though the bond
had been specified by a collective bargaining
agreement. The complaint did not cite
the Labor Management Relations Act. The
union would have to prove that the contractor
principal “defaulted on its obligations
under the collective bargaining agreement,”
but this was insufficient to confer
jurisdiction. That an element of the union’s
bond claim would require construction of
the collective bargaining agreement did not
create a substantial federal question.
How the court reached this result is difficult
to understand. The court acknowledged
that “[t]he preemptive force of [Labor Management
Relations Act] §301 is so powerful
as to displace entirely any state cause of action
‘for violations of contracts between an
employer and a labor organization.” Franchise
Tax Bd. of the State of Cal. v. Contract
Laborers Vacation Trust for S. Cal., 463
U.S. 1, 23 (1983). The court also admitted
that when resolving a state law claim depends
substantially on analyzing the terms
of a labor contract, the claim must be either
treated as a §301 claim or dismissed
as preempted. The court also professed to
comprehend that state law is preempted if
its application requires the interpretation
of a collective bargaining agreement. At
a minimum federal law would govern the
interpretation of the collective bargaining
agreement. If that interpretation would
have to be resolved before liability under
state law could be established, then the state
law claim should be stayed.
The court went astray in finding it significant
that the union was a party to the collective
bargaining agreement but the surety
was not. It also should not have mattered
that the union did not sue the principal. As
explained above, courts have allowed nonparties
to a collective bargaining agreement
to assert Labor Management Relations Act
preemption, as in Woodell v. IBEW, 502
U.S. 93 (1991), but the district court believed
that this extended only to individual
union members as beneficiaries of the
agreement. As an example the court cited
Bush v. Clark Constr. & Concrete Corp., 267
F. Supp. 2d 43 (D.D.C. 2003). In that case, an
employee alleged that his employer failed to
pay his wages under the terms of a collective
bargaining agreement between the employer
and the employee’s union. The claim
in that case depended on the collective bargaining
agreement, and the agreement had
to be construed to resolve the claim.
In the case before the court, however,
the collective bargaining agreement did not
refer to the surety or its bond obligations.
The surety was not a beneficiary of the collective
bargaining agreement either. The
court wrote, “The bond is… the only document
which establishes the duties and
obligations of [the surety], and it clearly
sets forth the conditions giving rise to [the
surety’s] liability.” The bond had a penal
sum so “the extent of the surety’s liability
[was] well defined by the bond,” and “[t]he
argument that it [was] impossible to determine
the appropriate damages from the
bond alone [was] groundless.” The contributions
that the employer failed to make
would simply have to be determined.
Somehow the court missed altogether the
simple fact that the most fundamental condition
to any liability of the surety on a bond
For The Defense ■ March 2013 ■ 55

Fidelity and Surety
is that the principal is liable on the underlying
contract, in this case, on the collective
bargaining agreement. Thus, any adjudication
of the surety’s liability would require
interpreting the collective bargaining
agreement. Yes, resolving the case would require
determining the contributions that
the employer did not make, but that is true
under the Labor Management Relations Act
The most fundamental
conditionto any liability
of the surety on a bond
is that the principal is
liable on the underlying
contract… on the collective
bargaining agreement.
as well. The court, applying the Labor Management
Relations Act correctly, should
have allowed removal, found that federal
law preempted the claim, or both.
56 ■ For The Defense ■ March 2013
Bricklayers of Western Pennsylvania
v. Scott’s Development
Bricklayers of Western Pennsylvania Combined
Funds, Inc. v. Scott’s Development
Co., 2012 PA Super 4 (Pa. Super. Ct. 2012),
did not involve a bond claim, but a union
trust fund asserted a mechanics lien on
a project for fringe benefits due from the
project’s contractor under a collective bargaining
agreement. After concluding that
the union qualified as a “subcontractor”
under the lien statute, the court rejected
the Labor Management Relations Act
preemption argument. The lien was not
founded on the collective bargaining agreement.
The lien attached to the property and
was only for labor; it would not settle contractual
obligations. Moreover, the employees
on whose behalf the lien was asserted
did not provide their labor under the collective
bargaining agreement. They provided
it under their own contracts with the
employer. Finally, because the court was
reviewing a demurrer, it viewed the allegations
of the complaint as undisputed. The
“mere glance” exception to Labor Management
Relations Act preemption therefore
supposedly applied. The collective bargaining
agreement would not need to be consulted
except to compute damages, and
anyway, the litigants had stipulated the
amount due so the court would not have
needed to interpret the collective bargaining
agreement, at least not “at this stage.”
Bricklayers does not apply if a surety can
assert contractual defenses under the collective
bargaining agreement or if the litigants
dispute the entitlement or amount
due under the agreement. A surety may
assert contractual defenses and dispute
both entitlement and damages under the
collective bargaining agreement. The mere
glance exception to Labor Management
Relations Act preemption will not apply if
a surety disputes the principal’s liability,
and thus its own liability, under a collective
bargaining agreement.
As for the Bricklayers’ observation that
union members or a union on their behalf
suing for labor to a specific project do not
sue on the collective bargaining agreement
but on their own contract with the employer,
the simple rejoinder is that the collective
bargaining agreement still controls. It is
incorporated by reference into the contract
between each employee and the employer.
Preemption applies not only to lawsuits
grounded in collective bargaining agreement
disputes but also to those requiring reference
to collective bargaining agreements
for interpretation of the agreement terms.
International Union of Bricklayers v. Acuity
In Illinois Dist. Council No. 1 of the International
Union of Bricklayers & Allied Craftworkers
v. Acuity, 2002 U.S. Dist. Lexis 2733
(N.D. Ill. Feb. 12, 2002), a union and a contractor
were parties to a collective bargaining
agreement under which a fringe benefit
bond had been issued. An arbitration panel
ruled that the contractor was liable for unpaid
fringe benefits. The union and the
contractor settled their dispute, but the contractor
breached the settlement. The union
obtained a judgment against the contractor
and made a bond claim in federal court under
the Labor Management Relations Act.
The surety moved to dismiss the claim on
the basis that the Labor Management Relations
Act did not apply because the surety
was not a party to the collective bargaining
agreement or an employer. The court agreed
and dismissed the lawsuit.
The court noted that older cases such as
Chicago Dist. Council of Carpenters Pension
Fund v. Safeco Ins. Co., 1995 U.S. Dist. Lexis
14598 (N.D. Ill. Oct. 5, 1995), had relied on
Loss v. Blankenship, 673 F.2d 942 (7th Cir.
1982), to dismiss claims against nonparties,
but in 1985 the U.S. Supreme Court
had commanded in Allis-Chalmers that all
claims that substantially depended on analyzing
a collective bargaining agreement
would be subject to federal jurisdiction. Nevertheless
the court rejected the argument
that the case before it required interpretation
of a collective bargaining agreement.
The liability of the contractor had already
been determined. The only remaining issue
was whether the surety was also liable. That
issue required interpreting the bond but not
the collective bargaining agreement.
Making a distinction, however, the
court cited Sprinkler Fitters Local Union
No. 692 v. First Indem. Ins. Co., 840 F. Supp.
38 (E.D. Pa. 1993), with no disapproval.
The court thus acknowledged indirectly
that a union’s claim against an employer’s
surety, if disputed on the underlying
merits, and disputed against the principal,
too, would require a collective bargaining
agreement interpretation and thus the
Labor Management Relations Act would
apply if the employer’s liability had not yet
been determined.
Conclusion
Defense attorneys have neglected Labor
Management Relations Act preemption
too long as a viable defense against contestable
wage and fringe benefit claims by
union members. The fact that a few courts
have ruled against sureties in different situations
should not deter attorneys from
asserting premption. The Labor Management
Relations Act may not permanently
preempt a completely undisputed and liquidated
claim if the surety has had an
opportunity to contest the claim and Labor
Management Relations Act remedies have
been exhausted. But courts cannot permit
unions to bypass federal law regulating resolution
of collective bargaining agreement
disputes by going after sureties as if everyone
can simply ignore the Labor Management
Relations Act.

Fidelity and Surety
Payment Bond Claims
By Cynthia E. Rodgers-Waire
When Does
the Statute of
Limitations Run
With the right set of facts
and proper preparation,
a successful limitations
defense is still a difficult
challenge, but not an
insurmountable one.
Upon receipt of a payment bond claim, one of a surety’s
primary analysis areas should involve reviewing the factual
information presented by the claimant and the bond
principal, if available, to determine whether the surety has
a legal defense to the claim based upon
the statute of limitations. Whether such a
defense exists often depends on the nature
of the underlying project and the bond
principal’s role in the project. A bond
issued for a public project on behalf of
a general contractor bond principal will
almost always be governed by a specific
statutory limitations provision, whereas a
bond issued for a public project on behalf
of a subcontractor bond principal or a bond
of any type issued on a private contract will
likely be governed by a general state limitations
provision or common law.
The most well-known payment bond
is a statutory bond issued pursuant to the
requirements of the federal Miller Act, 40
U.S.C. §§3133–3134, which requires contractors
constructing, altering, or repairing
a federal building under a contract valued
in excess of $100,000 to provide a payment
bond for the protection of those supplying
labor or materials in performance of the
work. Most if not all states have statutory
counterparts known as “Little Miller Acts.”
Statutory bonds typically involve express
limitations provisions, usually found in the
language of the underlying statute rather
than the actual bond form. For example,
the Miller Act contains a one-year statute
of limitations provision. Most state “Little
Miller Acts” also contain one-year limitations
provisions, but some have limitations
periods as short as six months, and some
have periods of several years. The bonds
for private jobs have the most diverse limitations
periods, as the limitations period
may be governed by a contractual provision
contained in the bond form or a statute,
which may be either a general limitations
statute for contract actions or one specific
to actions on bonds. Comprehensively
reviewing each state’s bond limitations for
public bonds and private bonds is beyond
the scope of this article but is addressed in
detail in Courtney Turnage Walker, Eric H.
Loeffler, & Bradford R. Carver, Suit Limitations,
Chapter 6 in The Law of Payment
Bonds, (Kevin L. Lybeck, Wayne D. Lambert,
& John E. Sebastian, eds., 2d ed. 2011).
■ Cynthia E. Rodgers-Waire is a partner in the law firm of Wright, Constable & Skeen in Baltimore, practicing in the areas of
surety, fidelity, and construction law. She is a member of the ABA Tort Trial & Insurance Practice Section Fidelity & Surety Law
Committee and the Forum on the Construction Industry, the Maryland State Bar Association Construction Law Section, and the
Baltimore Building Congress & Exchange.
For The Defense ■ March 2013 ■ 57

Fidelity and Surety
Although the state
Miller Act counterparts
are usually referred to as
“Little Miller Acts,” they
do not necessarily mimic
the federal statute in all
aspects, including the
limitations provisions.
This article will discuss what triggers the
commencement of the limitations period,
regardless of whether the applicable limitations
period is six months or 20 years,
analyze the various arguments raised by
claimants seeking to overcome a surety’s
potential limitations defense, and discuss
practical tips for increasing the surety’s
odds of success in presenting a limitations
defense. Given the highly factual
nature of a limitations defense, a substantial
amount of case law addresses the limitations
defense, and courts have diverged
a good deal in analyzing it.
What Event or Occurrence
Triggers the Commencement
of the Limitations Period
To determine whether a payment bond
claim is time barred, it must first be determined
when the clock begins to run for
limitations purposes. As discussed in detail
below, payment bonds do not have one,
universal trigger that will begin a claim
limitations period. The bond may describe
the trigger, or a statute or case law may
dictate it. The bond may contain language
that conflicts with an applicable statute,
thereby requiring further analysis to determine
whether a court would enforce the
bond language. Because the trigger will
vary by jurisdiction, analysis requires carefully
reviewing the bond for any contractual
limitations language, recognizing the
type of bond at issue to determine whether
a statute or which statutory provision may
58 ■ For The Defense ■ March 2013
apply, and determining which law governs,
federal or state, and in the case of a potential
conflict, which state’s law. As with most
commentary addressing surety bonds, a
primary focus of this article will be the
Miller Act. This long- established statute
has a well- developed and fairly uniform
body of case law. In addition, state courts
will often review the Miller Act precedent
for guidance when confronted with a
dearth of state-level case authority.
Completion of a Payment Bond Claimant’s
Work as the Limitations Period Trigger
The most common trigger for commencement
of the limitations period is the claimant’s
completion of work on the bonded
project. This is the limitations found in the
Miller Act, which reads, “no such suit shall
be commenced after the expiration of one
year after the day on which the last of the
labor was performed or material was supplied”
by the payment bond claimant. 40
U.S.C. §3133(b)(4). Under most statutory
interpretations, work consists of either providing
labor or furnishing equipment or
materials. Work performed “by the claimant,”
for limitations purposes, also includes
any work performed by the claimant’s subcontractors
and suppliers. See U.S. ex. rel.
H.T. Sweeney & Son, Inc. v. E.J.T. Constr. Co.,
415 F. Supp. 1328, 1332 (D. Del. 1976). The
period begins the day after the last day that
a claimant provided work, meaning labor,
materials or equipment, on the project, even
if the work performed on the last day is not
work for which the claimant seeks payment
from the surety. Gen. Elec. Co. v. Southern
Constr. Co., 383 F.2d 135, 138–39 (5th Cir.
1967), cert. denied, 390 U.S. 955 (1968).
Although the state Miller Act counterparts
are usually referred to as “Little
Miller Acts,” they do not necessarily mimic
the federal statute in all aspects, including
the limitations provisions. One reason for
this is that an earlier version of the Miller
Act contained a different limitations provision,
and less than half of the states have
amended their statutes to reflect the Miller
Act’s current limitations provision. For
those states adopting the current Miller
Act limitations provision, recent Miller Act
case law addressing limitations offers very
useful guidance when the applicable state
case authority does not offer it. Courts construing
“Little Miller Acts” that still use the
earlier Miller Act language or similar language
may use older Miller Act case law.
For a complete list of the states’ statutory
provisions, see The Law of Payment Bonds,
Chapter 6 at 235.
The Due Date of Final Payment
to a Payment Bond Claimant as
the Limitations Period Trigger
A few of the state “Little Miller Acts” and
some bond forms provide that the limitations
period begins on the date that the
final payment becomes due to the payment
bond claimant. See Idaho Code Section
54-1927. Courts then need to determine
from the facts of each case when such
payment became due. For example, one
court construing New York’s Finance Law
before it was recently amended interpreted
this language to mean when the subcontractor
had submitted an invoice for final
payment or some “functional equivalent
thereof.” Windsor Metal Fabricators, Ltd.
v. Gen. Accident Ins. Co., 722 N.E.2d 58, 61
(N.Y. 1999).
Acts by an Obligee as the
Limitations Period Trigger
A significant number of state “Little Miller
Acts” still follow the previous Miller Act
language that the commencement of the
payment bond limitations period is based
upon an action taken by the public obligeeowner,
using terms such as “final acceptance”
of the prime contractor’s work, “final
settlement” of the prime contract, or “final
payment.” “Final settlement” is usually
defined as the date when the public owner
determines the final contract amount owed
to the prime contractor, which is not necessarily
the same as the final payment date.
See, e.g., Zimmerman’s Elec., Inc. v. Fid. &
Deposit Co. of Md., 231 N.W.2d 342, 345
(Neb. 1975).
As the various terms are often not
defined in the statutes, uncertainty can
arise in applying the limitations defense to
a particular payment bond claim, thereby
spawning litigation. For example, the
Maryland “Little Miller Act” provides that
the statute of limitations begins to run
one year after final acceptance. Md. Code
Ann., State Fin. & Proc. §17-109(b) (1988).
In U.S.F.&G. Co. v. Hamilton & Spiegel, Inc.,
215 A.2d 735, 737 (Md. 1966), the Maryland
appellate court held that “final acceptance”

occurred on the project at issue when the
project architect issued a certificate of
final completion even though the architect
issued the certificate more than two years
after the public owner began occupying the
space. A few years later, the same court,
addressing a project for which the underlying
prime contract did not require an
architect’s certification of final completion,
determined that final acceptance occurred
on the date that the public owner approved
the release of final payment. Joseph J. Hock,
Inc. v. Balt. Contractors, Inc., 249 A.2d 135,
140 (Md. 1969).
Given the imprecise definition, different
parties to the same project may reach
different conclusions about when the limitations
period began to run. As a result, it
can be difficult for a surety faced with this
limitations standard to determine whether
it has a viable limitations defense and particularly
so when the surety may need to
obtain information from the obligee, who
may be reluctant to volunteer information
or to provide an affidavit in an ongoing lawsuit
regarding the obligee’s own determination
about when “final acceptance” or “final
settlement” occurred.
The Date That a Principal Last Performed
Work as the Limitations Period Trigger
A handful of state “Little Miller Acts” provide
that the limitations period begins
when the bond principal completes all of its
work or provides notice of completion, but
courts have not uniformly interpreted the
meaning of the term “completion.” Some
courts interpret this term to mean what the
construction industry recognizes as “substantial
completion,” which means that
although some “punch list” work remains
incomplete, the bond principal completed
sufficient work so that the owner can use
space for the intended purpose, while other
courts construe the degree of work necessary
to trigger limitations as equivalent
to a “final completion” standard. Compare
Hensel Phelps Constr. Co. v. Gen. Signal
Corp., 460 F.2d 109 (10th Cir. 1972)
(holding that the term “completion” in the
Colorado statute means substantial completion),
and Henry v. Fid. & Dep. Co. of
Md., 1999 WL 258460 (N.D. Ill. April 16,
1999) (discussing receipt of certificates of
acceptance as sufficient evidence of completion
of work).
Limitations Periods Based upon
General Limitations Statutes or
Contractual Limitations Provisions
Some “Little Miller Acts” do not contain
limitations periods and instead rely on
other limitations provisions found in other
statutes such as those applicable to all
breach of contract claims. Montana, for
example, relies on the eight-year statute of
limitations applicable to all written contracts.
See Mont. Code Ann. §27-2-202(1).
Private bond forms may be entirely silent
on the deadlines to bring actions against
the bonds. In such cases, state general limitations
statutes also govern the permissible
time periods for filing lawsuits.
Many bond forms do, however, contain
contractual limitations provisions that
define both the triggers and the limitations
periods. Such bond forms are typically
used for private projects, but they
also may be used for nonfederal public
projects if the particular public obligee
does not have or does not require use of its
own bond form. The American Institute of
Architects (AIA), the Associated General
Contractors of America (AGC), and ConsensusDOCS
publish some of the widely
used bond forms. The AIA no longer distributes
the AIA A311 bond form, but it
still crops up occasionally. This bond form
requires a claimant to file a lawsuit within
one year after the bond principal last provided
work on the project. The purported
replacement for the A311, the AIA A312,
was introduced in 1984 and most recently
revised and rereleased in 2010. This bond
form requires the claimant to file a lawsuit
within one year of whichever occurs first,
the date that the claimant sent notice of its
claim to the surety as required by the bond
terms, or the last date of work performed
by anyone on the project.
The ConsensusDOCS bond forms follow
the language of the Miller Act, and
the AGC bond form is similar to the A312
bond form. Parties that choose to use their
own bond forms can create whatever contractual
limitations provisions that they
choose; however, as noted below, this does
not guarantee that the courts will enforce
the contractual limitations periods.
A handful of states
prohibit contractual
limitations provisions of any
kind as contravening public
policy and therefore void.
Conflicts Between Statutory and
Contractual Limitations Provisions
What happens when an applicable statutory
bond limitations provision conflicts
with a contractual limitations provision
The federal government has eliminated this
potential problem on federal projects by
requiring that the Miller Act bond form be
used on all projects governed by the statute.
Such a conflict can arise with state or local
public projects governed by “Little Miller
Act” bonds because not all state public entities
have their own bond forms or mandate
the use of a particular bond form. Conflicts
in private bond situations happen more
rarely and only occur in those states where
statutes or case law mandate that a specific
limitations provision applies to private
bonds. A handful of states prohibit contractual
limitations provisions of any kind as
contravening public policy and therefore
void. See, e.g., Mo. Rev. Stat. §431.030. As a
result, most widely used bond forms have a
savings clause that provides that if the contractual
limitations provision is unenforceable,
the minimum period available under
applicable law is the limitations provision.
Absent a blanket statutory prohibition
against enforcement of contractual limitations
provisions, states’ treatment of conflicts
between statutory and contractual
limitations provisions varies. Some state
courts take the position that the statutory
limitations provision found in a “Little
Miller Act” always controls regardless
of the nature of the conflict. See, e.g., E.L.
Burns Co., Inc. v. Cashio, 302 So. 2d 297, 300
(La. 1974); Joseph F. Hughes & Co. v. George
H. Robinson Corp., 175 S.E.2d 413, 415 (Va.
1970). In other states, the courts will honor
a contractual limitations provision that is
longer than that required by the statute, as
in the ruling in A.C. Legnetto Constr. Inc. v.
Hartford Fire Ins. Co.., 702 N.E.2d 830, 830
(N.Y. 1998), but they will prohibit one that
For The Defense ■ March 2013 ■ 59

Fidelity and Surety
Even when a surety
is successful at the trial
court level, that success
can be short-lived.
is shorter than the statutory requirement.
Compare Nat’l Sur. Corp. v. Fischer Steel
Corp., 374 S.W.2d 372, 377 (Tenn. 1964)
(holding parties may extend the limitation
period contractually beyond that required
by the statute), and Pyco Supply Co., Inc. v.
American Centennial Ins. Co., 354 S.E.2d
360, 362 (N.C. Ct. App. 1987), rev’d on other
grounds, 364 S.E.2d 380 (N.C. 1988) (holding
parties may not reduce the limitations
period of a payment bond contractually).
Finally, yet other states allow the parties
to agree contractually to a shorter limitations
period as long as the period is a reasonable
length. Robert F. Simmons Constr.
Co. v. Am. States Ins. Co., 426 S.W.2d 441,
443 (Ky. Ct. App. 1968) (holding that parties
can shorten a limitations period to a
period shorter than the 15-year statutory
limitations period as long as the shorter
period is reasonable).
60 ■ For The Defense ■ March 2013
Frequently Arising Factual
Issues in Limitations Disputes
Given the prevalence of statutorily required
bonds over private bonds, it is not surprising
that the predominant case authority
on the topic of payment bond limitations
is found in Miller Act cases and their state
counterparts. Frequently, these statutory
bonds have shorter limitations periods
than private bonds or general breach
of contract limitations provisions, which
enhances the opportunities to argue limitations
defenses.
At first blush, the Miller Act limitations
standard appears straightforward; however,
it has proved otherwise in practice
when the parties dispute what constitutes
performance of work on a bonded project.
Parties have frequently litigated when
a claimant or principal ceased performing
work on a project, often in the context of
a surety’s dispositive motion on the limitation
period issue. Despite the longevity
of the Miller Act, case law suggests that
the courts have not resolved these issues
over time.
Common themes arise in the litigation:
• Does punch list or other incidental
work constitute performance sufficient
to postpone the commencement of the
limitations period
• Does performance of repairs on defective
work or warranty work restart the
limitations clock
• Does work performed on the bonded
project but at the direction of another
party affect the limitations period, for
instance, if the claimant performs work
for the obligee, or the completion contractor,
among others
Original Contract Work vs.
Corrective or Repair Work
Most construction contracts contain reference
to a substantial completion deadline;
therefore, it should be fairly easy to determine
when a payment bond claimant completed
work on a bonded project. Objective
evidence of substantial completion exists
in the form of such documents as architect
certificates of substantial completion, certificates
of occupancy from public agencies
allowing the project owner to use the project
facilities, and the claimant’s own payment
applications containing the claimant’s
own statement of the percentage of the work
completed. In the case of supplier claims, a
combination of invoices and delivery tickets
provide proof of when materials were
last delivered or when equipment was last
used on the bonded project.
However, what happens when a claimant
performs some small amount of additional
work after the date of substantial completion,
sometimes to complete items on a
punch list Is that work sufficient to suspend
the running of the limitations period
In federal case law, most courts attempt to
resolve the issue by determining whether
the additional punch list work consists of
completing base contract work or repairing
defective work. If it involves contract
work, the courts generally find that the
work will toll the statute of limitations. See
U.S. ex rel. Austin v. Western Elec. Co., 337
F.2d 568 (9th Cir. 1964). In the recent case
of Arch Ins. Co. v. Precision Stone, Inc., 584
F.3d 33, 39–40 (2d Cir. 2009), the appellate
court upheld the trial judge’s decision holding
that the case was timely because the
punch list work performed within one year
of the lawsuit filing involved completion of
previously omitted original contract work
rather than repairs of defective or nonconforming
work. A few of the appellate circuits
make a distinction between whether
the contract work performed is substantial
or not, finding that the statute of limitations
continues to run if the work is insubstantial.
Compare Highland Renov. Corp v.
Hanover Ins. Co., 620 F. Supp. 2d 79, 84–85
(D. D.C. 2009) (holding that the claim was
time barred), and Evco Sound & Electronics,
Inc. v. Seaboard Surety Co., 223 P.3d
740, 746 (2009) (rejecting the surety’s lack
of timely notice defense).
As the Fifth Circuit noted many years
ago, “each case must be judged by its own
facts and… sweeping rules about ‘repairs’
offer little help in the analysis.” Johnson
Service Co. v. Transamerica Ins. Co., 485
F.2d 164, 173 (5th Cir. 1973). It is not surprising,
then, that when confronted with a
motion based upon a limitations defense,
many courts determine that it is a factual
dispute best left in the hands of the trier of
fact. In U.S. ex. rel. Graybar Elec. Co., Inc. v.
Overstreet Elec. Co., Inc., 2005 WL 2431272
(E.D. Wash. October 3, 2005), the claimant
challenged the surety’s limitations defense
by arguing that it had provided contractually
required O & M manuals within the
one-year period preceding the filing of the
lawsuit. The court declined to grant summary
judgment to either party, stating that
the issue was a fact dispute.
Even when a surety is successful at the
trial court level, that success can be shortlived.
In Preferred Fire Protection, Inc. v.
Joseph Davis, Inc., 954 A.2d 20 (Pa. Super.
2008), the claimant billed for 100 percent
of its subcontract price. After it received
only a partial payment from the prime contractor,
the claimant wrote to the prime
contractor and surety stating that the balance
was due and the work had been substantially
completed on a certain date.
After the claimant filed a lawsuit more
than one year after the completion date
noted in its own correspondence, the trial
court granted the surety’s motion for summary
judgment on limitations grounds.
The claimant appealed, arguing that its attendance
at a re-test of the fire sprinkler

system, which did not uncover defects in
the system so the claimant did not perform
further work, was the actual completion
date. In a split decision, the appellate
court reversed, finding that a genuine issue
of fact existed about when the claimant’s
final work was performed for purposes of
determining when the statute of limitations
period began.
The recent case, Hercon Mgmt., Inc. v.
Travelers Cas. & Sur. Co. of Am., 2009
WL 4894472 (Mass. Super. Nov. 20, 2009),
exemplifies the courts’ ongoing struggle
with this issue. In Hercon, the subcontractor
claimant argued that its demobilization
from the job occurred within one year of
the lawsuit filing. The court characterized
whether demobilization constituted labor
or materials under the contract to toll the
running of the limitations period as disputed
facts. As a result, the court denied
both parties’ dispositive motions.
Not all surety dispositive motions on
limitations are unsuccessful. In Dunn Constr.,
L.L.C. v. Gray Ins. Co., 2010 WL 231742
(W.D. La. Jan. 13, 2010), the Miller Act
surety presented as evidence the subcontractor’s
payment application showing that
the work was substantially complete, letters
from the claimant and its counsel,
and the owner’s quality assurance reports
and punch list records. After determining
that the punch list work performed by
the claimant during the one-year period
before filing the lawsuit was merely corrective
work that did not extend the time
that the claimant had to file a lawsuit, the
court granted the surety’s summary judgment
motion. Similarly, in U.S. ex. rel.
Miller Proctor Nickolas, Inc. v. Lumbermens
Mut. Cas. Co., 2009 WL 962273 (E.D.
N.Y. Mar. 31, 2009), the court had to decide
whether training the obligee’s personnel
and equipment testing and adjustment
constituted contract work or corrective
work. After reviewing the facts that the
claimant had billed its work as 100 percent
complete and had returned to the job site
only after receiving complaints and did not
charge for the training, testing, and adjustment,
the court determined that the work
was corrective work and granted the surety’s
summary judgment motion. See also
U.S. ex. rel. East Coast Contracting, Inc. v.
United States Fidelity and Guarantee (sic.)
Co., 2004 WL 1686496 (D. Md. July 23,
2004), aff’d, 133 F. App’x 58 (4th Cir. May
26, 2005)(granting summary judgment to
the surety because the claimant’s return to
the project site merely to inspect its work
and advise the completion contractor that
someone else had damaged its work did not
restart the Miller Act limitations period).
In contrast, in Evco Sound & Elec., Inc.
v. Seaboard Sur. Co., 223 P.3d 740, 744–46
(Idaho 2009), the appellate court affirmed
the trial court’s judgment in favor of the
claimant, agreeing with the lower court’s
analysis that training sessions, as-built
drawings, and installation of a part for the
television system were original contract
work, not repair or corrective work.
Work Done for Another Party or
Under a Different Contract
While it would seem that work performed
for someone other than the original principal
would not toll the limitations period,
the recent case law does not reflect consensus
on this issue. In Assemblers, Inc. v. Am.
Mfr. Mut. Ins. Co., 761 N.W.2d 399 (Mich.
App. Ct. 2008), a second tier subcontractor
on a public project sued both the first tier
subcontractor’s and the prime contractor’s
sureties. The facts reflected that the claimant
had returned to the project site to perform
work at the public owner’s request
after the prime contractor’s default termination.
The lower court granted summary
judgment to both sureties. On appeal, the
appellate court sustained the summary
judgment ruling on limitations grounds
as to the subcontractor’s bond containing
a contractual limitations provision but
reversed as to the public bond, finding a
dispute of fact as to whether the work constituted
performance under the contract
for limitations purposes.
In Casey Indus., Inc. v. Seaboard Sur.
Co., 2006 WL 2850652 (E.D. Va. October
2, 2006), a subcontractor had returned
to the project site following the contractor’s
default termination and performed
some work at the completion contractor’s
request. The subcontractor and completion
contractor did not execute a new subcontract
or purchase order. The claimant
argued that the work was under its original
subcontract even though the prime
contractor had already been terminated
when the work was performed. The surety
argued that the claimant had previously
represented that its work was complete and
that the work was performed under the
takeover agreement. The court held that
whether the work that the claimant did on
returning to the job was under the original
subcontract or not involved a genuine
fact issue and denied the surety’s motion
to dismiss.
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For The Defense ■ March 2013 ■ 61

Fidelity and Surety
In a slightly different twist to the argument,
a claimant acknowledged that more
than one year had passed since it had performed
work on the Miller Act project, but
it argued that it had performed work at the
project site for the principal under a different
contract. The surety had not bonded the
other contract. Finding that the Miller Act
bond only covered the one project and that
Proactively seekthe
best limitations period
available under applicable
law, meaning the shortest
period, by attempting to
control the bond form.
none of the work performed during the previous
year was for the bonded project, the
court granted the surety’s motion to dismiss.
Subterranean Constr. Co., Inc. v. W.D.
Curran & Assoc., Inc., 2005 WL 2065231 (D.
Md. Aug. 23, 2005).
Practice Tips for Successful
Limitations Arguments
While any favorable judgment for a surety
on limitations grounds is a victory, the
sooner it happens the better given the costs
of litigation. How does a surety increase its
odds of winning a limitations argument at
an early litigation stage
1. When possible, control the bond form.
2. Be proactive in getting the best (i.e.,
shortest) limitations period available.
3. After a party makes a claim, sufficiently
investigate and gather the necessary
project paperwork to establish the last
date for performance of work and the
specific nature of that work.
4. Take steps to avoid successful estoppel
arguments.
These practice tips are discussed more
below.
Controlling the Bond Form
When possible, control the bond form. Proactively
seek the best limitations period
62 ■ For The Defense ■ March 2013
available under applicable law, meaning
the shortest period, by attempting to control
the bond form. While it is not possible
to do this for projects subject to the Miller
Act or some other public projects, it is possible
in many other instances. When such
an opportunity exists, propose using a
bond form with the most favorable enforceable
contractual limitations provision for
the applicable jurisdiction. Investigate the
applicable statutory provision, and never
use a bond form that contains a longer contractual
limitations period than the applicable
statute.
Reviewing Bond Form Provisions and
Underlying Contract Provisions
Review contractual provisions in both the
proposed bond form and underlying contract
that may affect which limitations
period governs. State limitations provisions
applicable to payment bonds vary widely,
with some states having statutory limitations
provisions as long as 15 to 20 years.
Most often, the law of the project location
will govern, but sometimes the parties may
choose contractually which law will apply.
A surety wants to guard against thinking
that a favorable jurisdiction’s limitations
period applies when, in fact, it does
not due to a contractual choice of law provision.
On the flip side, when a surety confronts
a project located in a jurisdiction
with unfavorable statutory limitations provisions,
sometimes it might use a choice of
law provision in the bond or the contract
to avoid the unfavorable statutory limitations
provisions.
Sufficiently Investigating and
Gathering Project Paperwork
After a party makes a claim, sufficiently
investigate and gather the necessary project
paperwork to establish the last date for performance
of work and the specific nature of
that work. A surety should not lose a dispositive
motion due to insufficient evidence
regarding when the claimant or the principal,
depending on the applicable standard,
last performed work on the bonded project
and the nature of the work performed.
Many project records are sources of useful
evidence. These include daily reports and
logs, certified payroll records on public
projects, job cost reports, payment applications,
invoices, delivery tickets, bills of
lading, certificates of substantial and final
completion, punch lists, various obligee
and project lender reports, and job site
progress photographs. Other sources of
information are notice and demand letters
from the claimant to the surety, the principal,
or the owner; the claimant’s affidavit
of the claim; and representations made by
the claimant in pleadings in related litigation
such as mechanic’s lien filings. Unless
the claimant’s lack of timeliness is patently
obvious from the allegations, the surety
will need to obtain and review these documents
to present an effective summary
judgment motion.
Taking Steps to Prevent
Successful Estoppel
Take steps to avoid successful estoppel
arguments. Many claimants, when faced
with notice of an untimely filing, will argue
that estoppel prevents the surety from
arguing limitations as a defense. These
arguments can be easily defeated if the
surety takes certain precautions such as
timely responding to all of the claimant’s
communications and adhering to a reasonable
investigative period. The surety
should always include reservation of rights
language in all communications with the
claimant and never make promises or representations
regarding payment or resolution
of the claim particularly while
also asking the claimant to forego filing a
lawsuit.
Conclusion
It is difficult to draw sweeping conclusions
because a unique combination of law
and facts determines every payment bond
limitations case. When possible, a surety
should try to create a situation upfront that
will apply the most favorable limitations
provision legally available to any claims.
On the back end, after claims arise, a surety
must conduct a thorough but prompt investigation
so that it understands how the
courts in that jurisdiction have addressed
limitations so that it can gather all the necessary
facts to present as evidence. While
mounting a successful limitations defense
to a payment bond claim is a difficult challenge,
with the right set of facts and proper
preparation, it is not an insurmountable
task.

Fidelity and Surety
Navigating the
Quagmire
By John R. Felice
The Computer
Crime Coverage
Conundrum
The scope of coverage
for losses resulting from
“use of a computer”
will remain vague
and complicated until
additional definitions
are established.
Many of you may be reading this article on your handheld
device, your laptop, or your desktop computer. In fact,
most of you would feel lost if you had to go even one hour
without those electronic devices. All of those devices
simplify your lives, yet they complicate
the lives of those in the insurance industry
because, despite how much computerized
devices infiltrate every aspect of
our daily lives, computer crime insurance
policies remain vague and complicated.
Language contained in those policies
has failed to keep pace with technological
advances, leaving insureds and insurers
in a netherworld of determining the scope
of necessary insurance protection and the
protection policies provide. The boundless
creativity of individuals seeking to exploit
opportunities made possible by our electronic
freedom leaves financial institutions
and businesses, and the insurers that cover
their losses, significantly burdened by this
ambiguity.
There are several computer- related
insuring agreements, all of which purport
to provide coverage for crimes committed
while using a computer, but none of which
define the term “computer” or the phrase
“use of a computer.” What constitutes a
computer is obvious, you would think. But
does a smartphone fall within the definition
of computer What about a simple cell
phone from which someone could send a
text message to set a chain of events into
action that leads to a loss Is a fax machine
a computer Does the simple act of reading
an e-mail with instructions on how
to perpetrate a crime constitute the use of
a computer This article examines all of
these issues and offers practical solutions
for both policyholders and insurance companies
to navigate their way through this
coverage abyss.
Insuring Agreements
The Insurance Services Office (ISO) has two
forms that provide coverage for computer
fraud. Both forms specify that the loss must
result directly from the use of a computer.
See sections of forms ISO CR 00 22 05 06,
“Commercial Crime Policy” and ISO CR 00
07 10 90, “Computer Fraud Coverage Form”
on page 64.
■ John R. Felice is a shareholder of Hermes Netburn O’Connor & Spearing PC in Boston. He has substantial experience representing
insurers, insurance claim administrators, and other stakeholders in connection with complex insurance coverage matters.
His experience also includes representing manufacturers and distributors of asbestos and asbestos- containing products in
toxic tort cases pending in multiple jurisdictions; representing clients in product and premises liability claims; and representing
surety companies and contractors in a wide variety of commercial surety and construction- related litigation.
For The Defense ■ March 2013 ■ 63

Fidelity and Surety
These insuring agreements intend to
protect an insured when an individual uses
a computer fraudulently to gain access to
an insured’s internal computer system and
transfers funds from the insured’s premises.
These coverage forms make clear that
the loss or damage must be caused directly
by the use of a computer. As discussed in
greater detail below, the phrase “use of a
computer” is not defined, and the degree
of use required to prompt coverage is open
to interpretation.
Commercial Crime Policy, ISO CR 00 22 05 06
6. Computer Fraud
We will pay for loss of or damage to “money”, “securities” and “other property” resulting
directly from the use of any computer to fraudulently cause a transfer of that property from
inside the “premises” or “banking premises”:
a. To a person (other than a “messenger”) outside those “premises”; or
b. To a place outside those “premises.”
Computer Fraud Coverage Form, ISO CR 00 07 10 90
A. COVERAGE—We will pay for loss of, and loss from damage to, Covered Property resulting
directly from the Covered Cause of Loss.
1. Covered Property: “Money,” “Securities” and “Property Other Than Money and
Securities.”
***
D. ADDITIONAL EXCLUSIONS, CONDITIONS AND DEFINITIONS:
3. Additional Definitions
b. “Computer Fraud” means “theft” of property following and directly related to the
use of any computer to fraudulently cause a transfer of that property from inside
the “premises” or “banking premises” to a person (other than a “messenger”) outside
those “premises” or to a place outside those “premises.”
ISO Financial Institution Computer Crime Policy, FI 00 20 09 12
A. Insuring Agreements
1. Computer Fraud
a. We will pay for loss resulting directly from a fraudulent:
(1) Entry of “electronic data” or “computer program” into; or
(2) Change of “electronic data” or “computer program” within; any “computer system”
owned, leased or operated by you or your contracted electronic data processing
firm, provided the fraudulent entry or fraudulent change causes with
regard to Paragraphs 1.a.(1) and 1.a.(2):
(a) “Property” to be transferred, paid or delivered;
(b) An account of yours, or of a “customer” to be added, deleted, debited or
credited; or
(c) An unauthorized account or a fictitious account to be debited or credited.
SSA Computer Crime Policy for Financial Institutions
1. Computer Systems Fraud
Loss resulting directly from a fraudulent
(1) entry of Electronic Data or Computer Program into, or
(2) change of Electronic Data or Computer Program within any Computer System operated
by the Insured, whether owned or leased; or any Computer System identified in the application
for this policy; or a Computer System first used by the Insured during the policy
period, as provided by General Agreement A; provided the entry or change causes
(i) property to be transferred, paid or delivered,
(ii) an account of the Insured, or of its customer, to be added, deleted, debited or credited,
or
(iii) an unauthorized account or a fictitious account to be debited or credited.
ISO and the Surety Association of America
(SAA) have computer crime policies
that are substantially similar. Neither policy
uses the phrase “use of a computer,” but
both provide coverage for losses involving
“computer systems,” and envisioning how
the covered acts would not involve the use
of a computer is hard. Both policies define
the phrase “computer system,” but the definition
in the SAA form is narrower than
that in the ISO form. See sections of forms
FI 00 20 09 12 “ISO Financial Institution
Computer Crime Policy” and “SSA Computer
Crime Policy for Financial Institutions,”
below left.
The coverage afforded by these insuring
agreements differs from the computer
fraud coverage provided by a Commercial
Crime Policy or Computer Fraud Coverage
Form because the insuring agreements do
not state that the loss has to be caused by
the “use of a computer.” Those seeking coverage
will argue that coverage applies when
a computer is involved to directly cause the
loss, not just when the use of the computer
itself causes the loss. In other words, entering
data into the computer system can be
the first step in a process that directly leads
to a loss, and the financial institution coverage
would apply. Those contesting coverage
will argue that for the loss to result
directly from a fraudulent act involving a
computer system requires “use of a computer”
immediately preceding the loss,
rather than use at some remote time in a
long process leading to a loss.
Computer
Only a few cases analyze computer fraud
coverage, and the majority of those cases
involve the use of a traditional computer.
See, e.g., Methodist Health System Foundation,
Inc. v. Hartford Fire Insurance Company,
834 F. Supp. 2d 493 (E.D. La. 2011)
(involving use of a computer to generate
false documents that misled investors and
gave the appearance of a legitimate investment
operation). As mentioned earlier, a
computer isn’t just an electronic box that
sits on a desk anymore. Computers come in
different shapes, sizes, colors, and capacities.
Someone who commits a crime using
an electronic device is just as likely to use
a handheld device, such as a smartphone,
as a traditional computer. None of the coverage
forms specifically include handheld
64 ■ For The Defense ■ March 2013

devices, such as a smartphone, in the definition
of “computer.”
The ISO Financial Institution Computer
Crime Policy defines “computer system”
to mean “computers, including Personal
Digital Assistants (PDAs) and other transportable
or handheld devices, electronic
storage devices and related peripheral components”
by which “‘electronic data’ is collected,
transmitted, processed, stored or
retrieved.” Similarly, the SAA Computer
Crime Policy for Financial Institutions
defines “computer system” to mean “computers
with related peripheral components,
including storage components wherever
located… by which ‘electronic data’ is collected,
transmitted, processed, stored or
retrieved.” The major difference is that
the SAA definition does not include PDAs.
The ISO Commercial Crime Policy defines
“computer system” to mean “computers
and related peripheral components… by
which ‘electronic data’ is collected, transmitted,
processed, stored and retrieved.”
Even if someone did look outside of the
computer crime coverage realm, the definition
of “computer” would not include
the majority of what most of us consider
a computer to be. For example, the United
States Code defines “computer” in connection
with fraud and related activity to mean
an electronic, magnetic, optical, electrochemical,
or other high speed data
processing device performing logical,
arithmetic, or storage functions, and
includes any data storage facility or
communications facility directly related
to or operating in conjunction with such
device, but such term does not include
any automated typewriter or typesetter,
a portable hand held calculator, or other
similar device.
18 U.S.C.A. §1030. Is a smartphone a “data
processing device,” or does it fall into the
“other similar device” category to exclude
it from the definition of computer The
case law does not examine this issue, and
someone could make a reasonable argument
either way.
So looking back at the questions posed
at the outset, does a smartphone fall within
the definition of computer What about a
traditional cell phone, or a “dumb phone”
as some might call it All of the definitions
mentioned here are ambiguous, and courts
usually resolve ambiguities in favor of an
insured. The FICP definition most nearly
includes modern technology because it
includes PDAs and “other transportable or
handheld devices.” But newer technologies,
such as smartphones, basically have rendered
PDAs obsolete. Those seeking coverage
should argue that “other transportable
or handheld devices” is broad and could
include a smartphone or even a cell phone.
Those contesting coverage should argue
that the “other transportable or handheld
devices” refers to devices such as PDAs, and
smartphones are functionally distinct from
those devices.
It is important to read closely the insuring
agreements, definitions, and exclusions
used by a particular insurer because
slight changes or additions to the standard
form language could make a big difference.
For example, in Brightpoint, Inc.
v. Zurich American Insurance Company,
2006 WL 693377, at *1 (S.D. Ind. Mar.
10, 2006), the insured experienced a loss
at one of its subsidiaries in the Philippines
as a result of a scam involving prepaid
telephone cards. The scam was set
in motion when Brightpoint received, by
fax machine, copies of purchase orders,
post-dated checks, and bank guarantees.
Brightpoint was the insured under a crime
policy issued by Zurich. The Zurich policy
followed ISO form CR 00 07 10 90, defining
“computer fraud” as “‘theft’ of property
following and directly related to the
use of any computer to fraudulently cause a
transfer of that property from inside the…
premises’ or ‘banking premises’ to a person
(other than a ‘messenger’) outside those
‘premises’ or to a place outside those ‘premises.’”
The Zurich policy added a sentence
to the computer fraud definition, which
stated that the “means by which a fraudulent
transfer is initiated includes: written,
telephonic, telegraphic, telefacsimile,
electronic, cable, or teletype instructions.”
This additional sentence may have caused
the court to accept the insured’s position
that a facsimile machine was a computer
more easily.
Brightpoint argued that “the facsimile
it received (which it alleges constitutes the
use of a computer) of the checks and bank
guarantees caused it to take actions which
eventually led to it being defrauded when
it released the phone cards to the defrauding
party.” Id. at *4. In discussing whether
Despite how much
computerized devices
infiltrate every aspect of our
daily lives, computer crime
insurance policies remain
vague and complicated.
the receipt of the fraudulent checks caused
the loss, the court stated:
The fraud in this instance occurred
through the use of the unauthorized
checks and guaranties, not the manipulation
of numbers or events through the
use of a computer, facsimile machine
or other similar device. The facsimile
transmission caused Brightpoint to purchase
the cards from its supplier, not to
transfer them to its purchaser, and the
use of the fax thus cannot be viewed as
having directly or proximately caused
the theft.
Id. at *7. In reaching its decision, the
court apparently assumed that a facsimile
machine constituted a computer, perhaps
because the Zurich policy specifically made
reference to a telefacsimile machine in the
definition of computer fraud. Smartphones
are capable of performing many more
functions than a fax machine and, therefore,
an argument could be made that, if a
fax machine is considered a computer, then
a smartphone is too.
Use of a Computer
Which types of electronic equipment the
parties to an insurance contract intended to
be viewed as a “computer” for purposes of
fraud coverage is not always clear. Equally
challenging is determining whether a computer
actually was used in perpetrating the
allegedly fraudulent activity. Does “use”
mean communicating manipulated and
stored electronic information to a third
party at some remote location Or is it simply
a few keystrokes on a keyboard in place
of a typewriter Might it involve exploiting
knowledge about how an entity’s computer
For The Defense ■ March 2013 ■ 65

Fidelity and Surety
system operates The answers are not easily
found in this minimally charted territory.
The insuring agreement itself serves as
the first source of information about what
the parties meant when they included the
limiting phrase “use of a computer” in the
computer fraud coverage insurance. Clear
expressions of what the parties intended
may end the inquiry there. As noted above,
Only a few cases analyze
computer fraud coverage,
and the majority of those
cases involve the use of
a traditional computer.
however, most policies do not define the
phrase. When the policy language does not
define the phrase’s meaning, insureds and
insurers must turn to judicial interpretation
and legal and professional commentary
for guidance.
Few cases have addressed this issue
directly and none with precision. What
the case law does make clear is that ambiguity
of the often undefined phrase “use of
a computer” is construed against the drafting
insurer consistent with standard rules
of contract interpretation. In Owens, the
plaintiff insured sought indemnity from
its insurer under a crime insurance policy
that covered computer fraud. Owens,
2010 WL 4226958, at *1, 50 Conn. L. Rptr.
at 665. E-mails and electronic wire transfers
were used to perpetrate the fraud. Relying
on the Brightpoint decision, the insurer
moved for a summary judgment arguing,
among other things, that the claim did not
constitute computer fraud under the policy
because “for computer fraud to exist,
the transfer must occur by way of a ‘computer
hacking’ incident, such as the manipulation
of numbers or events through the
use of a computer.” The insured in the
Owens case disagreed with the elevated
standard that the insurer sought to impose
and responded that “the only required level
of computer usage to constitute Computer
Fraud under the subject insurance policy is
66 ■ For The Defense ■ March 2013
‘the use of any computer’ and the word ‘use’
is not further defined or described under
the policy.” Id. at *7. The trial court agreed
and held that “the policy is ambiguous as
to the amount of usage necessary to constitute
computer fraud. This ambiguity is
resolved in favor of the plaintiff [insured].”
Id. at *7. The trial court in Owens also concluded
that the holding in Brightpoint did
not require a showing of something such
as a “computer hacking incident.” Owens,
2010 WL 4226958, at *7.
It should be noted that, in April, 2012, an
order of vacatur was entered on the docket
indicating that, among other things, the
September 17, 2010, memorandum of decision,
published September 20, 2010, was
vacated by stipulation of the parties. On
May 5, 2012, the judge who wrote the September
17, 2010, memorandum of decision,
Judge Richard E. Arnold, objected to the
order of vacatur, stating, “The trial court,
Arnold J., does not consent to the vacating
of its decision denying the defendant’s
Motion for Summary Judgment, said decision
being dated September 17, 2010. It is
the trial court’s position that the court issuing
the Order of Vacatur lacks the authority
to order the vacating of the trial court’s
decision dated Sept. 17, 2010 and has not
presented legal authority for its Order. See
U.S. v. Munsingware, 340 U.S. 36, 40–41
(1950); Private Healthcare Systems, Inc.
v. Torres, 278 Conn 291, 303 (2006); State
v. Singleton, 274 Conn. 426, 439 (2005);
Comm. Motor Vehicles v. DeMilo, 233 Conn.
254, 272–73 (1995).” As of the date of this
article, the Owens docket has not received
further entries.
In Brightpoint, the insured sought coverage
from its insurer under a crime policy
for a multimillion dollar loss occasioned by
a scam involving prepaid telephone cards.
2006 WL 693377, at *1 (S.D. Ind. Mar. 10,
2006). The trial court determined that the
insured had not suffered a covered loss,
finding that “there is nothing in the Proof
of Loss that proves that a computer was
used to fraudulently cause a transfer of the
phone cards.” Id. at *3. Although the policy
defined the “means by which a fraudulent
transfer is initiated” to include “telefacsimile,”
the trial court concluded that it was
not the facsimile that caused the fraudulent
transfer; rather, the facsimile simply
alerted the insured that the distributer
“wished to place an order.” Id. at *1, *7.
The order would be processed on receiving
the faxed documents in hand, and the
exchange of the cards occurred in person.
It was the release of the phone cards after
receiving the physical documents and the
use of unauthorized checks and guaranties
that caused the loss. The trial court concluded
that the fraud in that case did not
occur through “the manipulation of numbers
or events through the use of computer,
facsimile machine or other similar device.”
Id. at *7. The fact that a fax machine—an
electronic device apparently viewed by the
court as a computer—was used during one
step in a series of events that culminated in
the fraudulent activity for which coverage
was sought was not enough to bring the
loss within the coverage.
Consider another situation. An employee
uses a bank’s computer as part of his fraudulent
scheme, not by directly accessing data
contained in that computer, but instead by
using the employee’s intimate knowledge
of the way the bank’s computer operates.
Does that constitute “use” that results in
a covered loss See Frank L. Skillern, Jr.,
Recent Developments Under the Bankers
Blanket Bond (Summer 1982) (referencing
the MAPS- Harold Smith/Wells Fargo Bank
transactions). The MAPS- Harold Smith/
Wells Fargo Bank transactions involved a
bank manager who manipulated a settlement
account by debiting the account and
then submitting offsetting credits within
the time designated by the computer system
to detect the missing funds and under
a dollar amount that would prompt notice
to another banking department. Id. at
10–11. The scheme was detected when the
manager erroneously submitted a credit
instead of a debit. The computer was not
used to transmit information to a thirdparty
source, but it was the bank manager’s
knowledge of the computer operating
system that permitted him to commit this
fraud. Id. Under the Brightpoint standard
requiring manipulation of numbers or
events, such a claim arguably involves use
of a computer that may present a covered
loss. However, under policies requiring
computer transmission outside the premises,
such as the ISO CR 00 22 05 06 and 00
07 10 90 forms discussed above, the use of
the computer—though fraudulent—may
Computer Crime, continued on page 77

Fidelity and Surety
It’s Not Just
About Priority
By Carlos H. Garcia
Subrogation
Rights Against
a Bank
A prudent practitioner
should always consider
a surety’s subrogation
rights against a bank
when attempting to
recoup the surety’s losses.
68 ■ For The Defense ■ March 2013
Sureties and banks are often adverse to one another. This
conflict usually arises in the context of priority rights to
outstanding contract funds on a construction project.
Pearlman and its progeny deal with the rights of priority
between a surety, through subrogation,
and other creditors, including banks. However,
a surety’s rights of subrogation are not
always limited to these remaining contract
balances. To the extent that these claims
exist, they typically arise out of a financing
bank’s control and distribution of the
construction project’s funds. Such conduct
may give rise to a number of potential
claims against the financing bank,
including claims for negligent inspection,
negligent disbursement, wrongful setoff, or
general lender liability.
This article seeks to examine a surety’s
potential equitable subrogation rights
against a bank. Although a surety may have
numerous subrogation rights against its
principal’s bank, this article will not focus
on them. For a detailed description of these
potential direct claims, refer to Christopher
R. Ward & Nicholas Hyslop, Right of the
Surety to Pursue Claims Against Third Parties,
in The Law of Performance Bonds 351–
429 (Lawrence R. Moelmann, Matthew M.
Horowitz, & Kevin L. Lybeck eds., 2d ed.
■ Carlos H. Garcia is an associate in the Dallas law firm of Strasburger &
Price LLP. Mr. Garcia counsels and represents his clients in litigation matters
with an emphasis on surety claims, construction and insurance coverage
matters.
2009); Christopher R. Ward & Ronald F.
Goetsch, Deciding to Litigate: The Surety’s
Resource Against Third Parties, in Managing
and Litigating the Complex Surety
Case 173–258 (Philip L. Burner & Tracey
L. Haley eds., 2d ed. 2007); Robert J. Heyne
& Scott O. Reed, Third Party Liability to the
Surety (unpublished paper submitted at the
ABA/TIPS Fid. & Sur. Law Comm. annual
meeting, Aug. 8, 1988).
A Surety’s Subrogation Rights
A payment and performance bond surety
that has responded to the default of its principal
acquires certain equitable rights. The
leading case on this issue is undoubtedly
Pearlman v. Reliance Ins. Co. In that case,
the United States Supreme Court held that a
“surety who pays the debt of another is entitled
to all the rights of the person he paid to
enforce his right to be reimbursed. This rule
is generally known as the right of subrogation.”
Pearlman v. Reliance Ins. Co., 371 U.S.
132, 137 (1962); Prairie State Bank v. United
States, 164 U.S. 227, 231 (1896). Subrogation
is a common law right that arises independently
of contract. Pearlman, 371 U.S. at
137. In the surety relationship, subrogation
rights arise at the time that the surety makes
payment and relate back to the date that the
surety originally entered into its agreement

with its principal. United Bonding Ins. Co.
v. Catalytic Constr. Co., 533 F.2d 469, 474
(9th Cir. 1976); Trinity Universal Ins. Co. v.
Bellmead State Bank of Waco, 396 S.W.2d
163, 167–69 (Tex. App. 1965); Fed. Ins. Co.
v. Constructora Maza, Inc., 500 F. Supp. 246,
248 (D.P.R. 1979). It is well established that
a compensated surety gains these subrogation
rights by paying its principal’s obligations
under both the relevant contract and
the payment and performance bonds. Pearlman,
371 U.S. at 137; InterFirst Bank Dallas,
N.A. v. U.S. Fidelity and Guaranty Co.,
774 S.W.2d 391, 397 (Tex. App. 1989); McAtee
v. Fidelity & Guar. Co., 401 F. Supp. 11,
14 (N.D. Fla. 1975); Fed. Ins. Co. v. Constructora
Maza, Inc., 500 F. Supp. 246, 248–49
(D.P.R. 1979); United Bonding Ins. Co. v. Catalytic
Constr. Co., 533 F.2d 469, 471 (9th Cir.
1976); In re Monroe County Housing Corp.
v. First Fed. Savings Loan Ass’n, 18 B.R. 741,
744 (S.D. Fla. 1982); Trinity Universal Ins.
Co. v. United States, 382 F.2d 317, 320 (5th
Cir. 1967); Framingham Trust Co. v. Gould-
Nat’l Batteries, Inc., 427 F.2d 856, 857 (1st
Cir. 1970); Am. Fid. Co. v. Nat’l City Bank of
Evansville, 266 F.2d 910, 915 (D.C. Cir. 1959).
A surety’s subrogation rights are threepronged.
First, a surety is subrogated to
the rights of those whose claims it has
paid. Pearlman, 317 U.S. at 137. Therefore,
it gains the rights of those subcontractors
or material persons who have received payment.
Id. Second, a surety is subrogated
to the right of the obligee to use contract
funds not yet expended to complete a project.
Id. These are the contract funds held
by the owner whose projects the surety has
completed. Finally, a surety is subrogated
to any rights of its principal for payment
under the defaulted contract. Pearlman,
317 U.S. at 137; Transamerica Ins. Co. v.
Barnett Bank of Marion County, N.A., 540
So. 2d 113, 115 (Fla. 1989). These subrogation
rights prevail over competing claims
of other creditors of the principal. See generally
Pearlman, 37 U.S. at 138; Henningsen
v. United States Fidelity and Guaranty
Co., 164 U.S. 227 (1896). It is also clear that
these subrogation rights extend not only to
the remaining contract balances but also to
any claims these parties have against third
parties, including a financing bank. Am.
Fid. Co. v. Nat’l City Bank of Evansville, 266
F.2d 910, 915 (D.C. Cir. 1959). See also Md.
Cas. Co. v. Wash. Nat’l Bank, 159 P. 689,
690 (Wash. 1916); Fed. Ins. Co. v. Fifth Third
Bank, 867 F.2d 330, 331 (6th Cir. 1989);
Nat’l Sur. Corp. v. Fishkill Nat’l. Bank, 306
N.Y.S.2d 122, 130–31 (N.Y. Supp. Ct. 1969).
Although most of the cases interpreting
these subrogation rights are priority
cases, as explained below, many of these
same rights and concepts may also apply
to causes of action, asserted through subrogation,
against a bank.
Potential Subrogation
Claims Against a Bank
The potential claims of a surety against a
bank will depend on numerous factors.
These include the relationship with the
debtor, the nature of the defaulted obligation,
and ultimately the bank’s actions.
Furthermore, when a surety asserts its subrogation
rights, it takes them subject to all
potential defenses. Hartford Accident &
Indem. Co. v. First Nat’l Bank & Trust Co.,
287 F.2d 69, 72 (10th Cir. 1961). The viability
of these potential claims will depend
largely on the jurisdiction. While a bank’s
potential liability for causes of action arising
from general lender liability is almost
universally recognized, the availability of
a cause of action for negligent inspection,
negligent disbursement, or wrongful setoff
will be specific to the case law and statutes
of the region, as well as to the specific facts.
A surety, therefore, should always consider
the jurisdiction as well as the subrogee’s actions
when contemplating and evaluating
these claims. However, when a surety has
suffered a loss, a bank’s actions against a
third party may provide the surety with an
action against the bank. When these claims
exist, they typically arise from one of three
potential scenarios: (1) when a financing
bank exerts control over the disbursement
of contract funds, (2) when a financing bank
attempts to use its right of setoff on trust
funds, or (3) when a bank wrongly withholds
previously promised funds or otherwise
tortiously treats its customer.
Negligent Inspection or Disbursement
One of the most developed and recognized
subrogation causes of action of a
surety against a bank is negligence due to
a financing bank’s negligent inspection of a
construction project or negligent disbursement
of contract funds. An owner will typically
need a construction loan to fund a
construction project. Financing banks will
often require that the contractors submit
payment applications directly to the bank,
rather than simply disbursing loan proceeds
to the owner of the project. This control
over the project funds helps protect a
bank from potential fraud. When a bank
receives these payment applications, it will
typically visit the project before issuing the
A financing bank’s
exercise of control over
project funds can, in the
proper case, expose the
bank to potential liability.
applicable payment to ensure that the labor
actually was completed or that the material
actually was delivered. Most banks are
not equipped to inspect and monitor a construction
project accurately. They cannot
accurately determine whether the relevant
contractors have adequately performed
their obligations. As a result, a bank may
make payments for inadequate or defective
work. This can result in payment for
defective work, under or over payment of
a contractor, its subcontractor, or both,
and the potential misuse of trust funds. In
short, a financing bank’s exercise of control
over project funds can, in the proper
case, expose the bank to potential liability.
Some jurisdictions impose a duty on a
bank to exercise reasonable care in disbursing
construction funds. Garbish, 17 Pa. D.
& C.3d at 203; Gill v. Mission Sav. & Loan
Ass’n, 46 Cal Rptr. 456, 457–58 (Cal. Ct.
App. 1965); Cambridge Acceptance Corp.
v. Hockstein, 246 A.2d 138, 141 (N.J. Super.
Ct. App. Div. 1968); Fikes v. First Fed. Sav. &
Loan Ass’n, 533 P.2d 251, 261 (Alaska 1975);
Sec. & Inv. Corp. v. Droege, 529 So. 2d 799,
802 (Fla. Dist. Ct. App. 1988); Cook v. Citizens
Sav. & Loan Ass’n, 346 So. 2d 370, 372
(Miss. 1977). In these jurisdictions, a bank
breaches this duty by either negligently
inspecting a construction project or negligently
disbursing the obligee’s funds to
unworthy contractors. In Garbish v. Mal-
For The Defense ■ March 2013 ■ 69

Fidelity and Surety
bern Fed. Sav. & Loan Ass’n, for instance,
the Pennsylvania Court of Common Pleas
held that when a financing bank insisted on
absolute control over the disbursement of
funds that it had already loaned to the borrower,
the bank had a responsibility to the
borrower to disburse these funds reasonably
and accurately. See generally Garbish v.
Malbern Fed. Sav. & Loan Ass’n, 17 Pa. D. &
A bank may open itself to
a claim for wrongful setoff
when it uses its self-help
rights to access money that
it holds for its customer.
70 ■ For The Defense ■ March 2013
C.3d at 206. The court found that the bank
in this case breached this duty by making
unwarranted payments to contractors. Id.
at 207. This court, which acknowledged
that this was a matter of first impression
in Pennsylvania, reasoned that “[i]t is, after
all, the borrower’s money, and yet the realities
of the private residence mortgage market
are such that the borrower is virtually
powerless to alter the situation if the lender
insists on controlling the funds.” Id.
A few jurisdictions have gone even further
to declare that a financing bank in this
scenario is an agent of the borrower owner.
Prudential Ins. Co. v. Executive Estates, Inc.,
369 N.E.2d 1117, 1124–28 (Ind. Ct. App.
1977); Bollinger v. Livingston State Bank &
Trust Co., 187 So. 2d 784, 787 (La. Ct. App.
1966); M.S.M. Corp. v. Knutson Co., 167
N.W.2d 66, 68 (Minn. 1969); Daniels v. Big
Horn Fed. Sav. & Loan Ass’n, 604 P.2d 1046,
1048 (Wyo. 1980). In these jurisdictions, a
financing bank has a heightened standard
of care due to this agency relationship. The
bank owes a fiduciary duty to these borrowers.
Prudential Ins. Co., 369 N.E.2d at 1126.
Not only does a financing bank have a duty
to apply all of the proceeds appropriately, but
this bank also must account for all the sums
expended and to maintain “adequate proof
of the amount paid and the purpose of the
disbursement.” M.S.M. Corp., 167 N.W.2d at
68. When the bank admits that it has disbursed
proceeds, it “has the burden of proving
by a fair preponderance of the evidence
that the mortgagor ultimately received the
benefit of all the proceeds of the mortgage.”
Id. at 68. While this obviously places a difficult
burden on the bank, the Indianapolis
Court of Appeals in Prudential Ins. Co.
of Am. v. Executive Estates reasoned that a
mortgagee- lender who insists on controlling
disbursement of the loan
proceeds in order to protect its own
interest…, deprives the mortgagor of
the loan proceeds for which he has bargained,
and in doing so must equitably
be considered as the mortgagor’s agent
saddled with a duty to use reasonable
care to protect the principal’s interest.
369 N.E.2d at 1128. In these jurisdictions
a financing bank’s negligent inspection or
disbursement may permit a surety to claim
that the bank breached a fiduciary duty by
subrogating to the rights of the owner.
Certain jurisdictions have also held that a
financing bank is not only an agent but also
a trustee for its borrower when a financing
bank chooses to make these disbursements
on behalf of the borrower. Falls Lumber Co.
v. Heman, 181 N.E.2d 713, 716 (Ohio Ct.
App. 1961). When a bank is an agent for the
borrower, it effectively holds these funds in
trust for the borrower. Id. The bank, therefore,
owes the borrowers the same duties as
any other trustee or agent of the borrower:
Just as a trustee who has failed to properly
administer a trust, thereby causing
a loss to the trust, may be charged with
such loss, so should an agent be held liable
to his principal for a loss due to the
neglect of the agent to properly conduct
the business undertaken for his principal.
Id. at 716. In these jurisdictions, a financing
bank may also be liable for negligence
in this trustee capacity.
Not all jurisdictions, however, share
these theories on a financing bank’s liability
for negligent inspection and disbursement.
The case law of some jurisdictions may provide
banks with certain defenses for negligent
inspection or wrongful disbursement.
For instance, the Kansas Supreme Court has
held that when the loan documents do not
contain a provision requiring inspection before
disbursement, the bank does not have
a duty to inspect the construction to ensure
that a requested disbursement is appropriate.
Daniels v. Army Nat’l Bank, 822
P.2d 39, 42 (Kan. 1991). Other courts have
held that a financing bank’s inspection,
before disbursement, is only a safety precaution
for the bank’s own protection and,
without a contractual provision to the contrary,
the bank does not have a duty to inspect
construction accurately or to ensure
that payments made to contractors were appropriate.
Butts v. Atlanta Fed. Sav. & Loan
Ass’n, 262 S.E.2d 230, 232 (Ga. Ct. App.
1979); Armetta v. Clevetrust Realty Investors,
359 So. 2d 540, 543 (Fla. Dist. Ct. App.
1978); Goff v. Am. Sav. Ass’n, 561 P.2d 897,
900 (Kan. Ct. App. 1977); Parker v. Columbia
Bank, 604 A.2d 521, 531 (Md. Ct. Spec.
App. 1992); Goodner v. Lawson, 232 S.W.2d
587, 591 (Tenn. Ct. App. 1950). In some instances,
a bank may also require that the
borrower owner approve all disbursements.
See generally U.S. Fid. & Guar. Co. v. N. J. B.
Prime Investors, 377 N.E.2d 440, 443 (Mass.
App. Ct. 1978). The bank may then allege
that the surety is not entitled to a recovery
because of the owner’s contributory negligence.
Id. It is, therefore, important for a
surety to analyze the facts as well as the law
of the relevant jurisdiction before asserting
these subrogation rights.
Wrongful Setoff
A bank may open itself to a claim for
wrongful setoff when it uses its self-help
rights to access money that it holds for its
customer. When a claim exists due to a
bank’s wrongful setoff it typically will be
because the bank served as either the project
owner’s financing bank or the principal’s
depository bank.
Banks generally have rights of “setoff.”
Prairie State Bank v. United States, 164
U.S. 227, 229 (1896); Anderson Nat’l Bank
v. Luckett, 321 U.S. 233, 241 (1944); Straus v.
Tradesmen’s Nat’l Bank, 25 N.E. 372, 372–
73 (N.Y. 1890). That is, if a bank is holding
the funds of a debtor and that debtor has defaulted
on its obligations owed to the bank,
the bank is empowered to offset its own
debt with the amounts it is holding for this
debtor. Luckett, 321 U.S. at 241; Friedman
v. First Nat’l Bank, 183 N.E.2d 722, 724–25
(Mass. 1962). However, if the funds in the
debtor’s possession are owed to another,
this exercise in self-help may give rise to a
cause of action against the bank and potential
liability. Morrison Steel Co. v. Gurtman,
274 A.2d 306, 311–13 (N.J. Supp. Ct. App.

Div. 1971); Acuity v. Planters Bank, Inc., 362
F. Supp. 2d 885, 890 (W.D. Ky. 2005); Nat’l
City Bank of Evansville, 266 F.2d at 915. See
also In re Constructora Maza, Inc., 93 B.R.
838, 849 (Bankr. D.P.R. 1988); Commercial
Standard Ins. Co. v. Bryce Street Apartments,
Ltd., 703 F.2d 904, 907 (5th Cir. 1983). As
one court explained, “It is everywhere recognized
that where a bank has knowledge
that deposits made by a debtor in his own
name are in fact the property of a third person,
or that some third person has an interest
therein, then no right of setoff may be
properly asserted.” Morrison Steel, 274 A.2d
at 311–13. So, “[i]n that case, the bank may
not offset the trust funds against the depositor’s
individual debt, and the bank becomes
liable for conversion if it does so.” Hodge v.
N. Trust Bank of Tex., 54 S.W.3d 518, 522
(Tex. App. 2001. In the construction context,
a bank may hold funds that are owned
by another when these funds are held in
trust by either the owner or the principal.
An owner’s financing bank may open
itself to this type of liability by exercising
the owner’s right to withhold contractual
retainage. An owner is often permitted to
withhold a portion of the payments due to
its contractors, typically 10 percent, for its
protection in the event that a contractor
fails to fulfill its relevant obligations on the
construction project. However, this withheld
money is held in trust for these contractors.
The contractors then receive these
withheld amounts upon completion of the
project. Blair v. Trafco Products, Inc., 369
N.W.2d 900, 903 (Mich. App. 1985). If any
of these amounts are later wrongfully redirected,
it may open the financing bank to
liability in the form of causes of action for
wrongful setoff, conversion, or trust fund violations.
As such, when a bank has knowledge
of the character of these funds, courts
almost universally view these funds as exceptions
to funds for which the bank can lay
claim to as a general right of setoff. Acuity
v. Planters Bank, Inc., 362 F. Supp. 2d 885,
892 (W.D. Ky. 2005). Certain cases have held
that an owner’s bank may be exposed to liability
to claims by a surety through subrogation
to the principal’s or subcontractor’s
rights to this retainage. See In re Constructora
Maza, Inc., 93 B.R. 838, 849 (Bankr.
D.P.R. 1988); Commercial Standard Ins. Co.
v. Bryce Street Apartments, Ltd., 703 F.2d
904, 907 (5th Cir. 1983).
Similarly, a surety may also be able to
subrogate to the rights of either its principal
or a subcontractor against the principal’s
bank when the bank has wrongfully
set off against the banks account of the
principal. Depending on a principal’s role
in a construction project, it may contract
with material persons and subcontractors.
Often the owner or the general contractor
will pay the principal amounts representing
trust funds under the law of the applicable
jurisdiction owed to material persons
and subcontractors. If the bank attempts
to set off amounts held by the principal
on behalf of these parties, with knowledge
of the trust character of these funds,
the surety may be able to subrogate to the
rights of the principal or the subcontractor
to assert a claim for wrongful setoff against
the bank. See Acuity, 362 F. Supp. 2d at 895.
Furthermore, some jurisdictions follow
the “equitable rule,” which provides that a
bank cannot set off any trust funds even
when it does not know of the character of
these funds. Atlanta & St. A.B. Ry. v. Barnes,
95 F.2d 273, 278 (5th Cir. 1938); George D.
Harter Bank v. Inglis, 6 F.2d 841, 843 (6th
Cir. 1925); Nat’l Indem. Co. v. Spring Branch
State Bank, 348 S.W.2d 528 (Tex. 1961); Shotwell
v. Sioux Falls Sav. Bank, 147 N.W. 288,
290–91 (1914). The equitable rule does not
require a surety pursuing a claim against a
bank to show that a bank had knowledge of
the character of these funds. Spring Branch,
348 S.W.2d at 529–31. It effectively shifts
this burden to the bank. Under the equitable
rule, the bank can escape liability only
by demonstrating that it changed its position
to its detriment because it did not have
notice about the trust character of these
funds and it relied on the debtor’s apparent
ownership of them. Id. In Federal Ins.
Co. v. Fifth Third Bank, the United States
Court of Appeals for the Sixth Circuit permitted
a surety to recover construction proceeds
set off by its principal’s bank under
the equitable rule. 967 F.2d 330, 336 (6th
Cir. 1989). The court recognized the bank’s
general right of offset against its depositor’s
funds, but it recognized that this was not a
universal right when the funds were held
in a fiduciary capacity. Id. at 332–36. The
court found that the bank was precluded
from offsetting contract progress payments
from the principal’s account because they
were subject to a trust, created by the principal’s
construction contracts with the State
of Ohio. Id. at 334. Because the court found
that the bank had not presented evidence
of any detrimental change in position, the
surety was, therefore, entitled to recover the
offset funds from the bank. Id. at 335–36.
Although Fifth Third Bank involved a surety’s
direct cause of action against a principal’s
bank, these principles also apply
to a potential claim through subrogation
against an owner’s financing bank.
In addition, certain states have enacted
specific construction trust fund acts. For
example, the legislatures of states such as
Maryland, Michigan, New Jersey, and Texas
have enacted trust fund acts. See generally
Md. Real Prop. Code §9-201 et seq.; N.J. Stat.
Ann. §2A:44-148 et seq.; Mich. Comp. Laws
570.151 et seq.; Tex. Prop. Code §162.001 et
seq. These trust fund acts provide an additional
statutory cause of action in these
wrongful setoff scenarios. Under some of
these statutes, a bank is specifically prohibited
from setting off its own debt with funds
that it actually or constructively knows to
be trust funds. In others, a bank is specifically
excluded from these prohibitions.
See, e.g., Tex. Prop. Code §162.004. However,
even in these jurisdictions, a bank may
still be liable for certain trust funds established
under the agreement of indemnity or
otherwise. Other jurisdictions, which have
not formally enacted trust fund acts, have
enacted individual statutes as part of their
general lien laws that convert construction
proceeds to “trust funds” for payment of
lienable claims. See, e.g., Okla. Stat. tit. 42
§152 (2012). To maintain an action against
a bank, a party need only establish that
“valid lienable claims remain unsatisfied
and that trust funds are either unaccountable
or have been applied to purposes other
than the payment of valid lienable claims.”
Sandpiper N. Apts., Ltd v. Am. Nat’l Bank
& Trust Co., 680 P.2d 983, 992 (Okla. 1984).
In these jurisdictions, banks may be liable
for certain penalties by failing to adhere to
these statutes and acts.
General Lender Liability
When a bank begins to become involved
in the decisions of its customer, it begins
potentially to expose itself to liability. Exercises
of domination and control over a customer
may give rise to claims by a third
party in contract or tort. While it is impos-
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Fidelity and Surety
sible to outline all potential situations that
permit a surety to subrogate to another
party’s rights against a bank for general
lender liability, below are a few examples.
A surety may be able to subrogate to the
rights of the owner or its principal when a
bank wrongly fails to extend loan proceeds
to that party that were previously promised.
There are few relationships more vital
The equitable rule
does not require a surety
pursuing a claim against a
bank to show that a bank
had knowledge of the
character of these funds.
to a business than its lender relationship.
This is especially true in the construction
where retainage and other payment delays
may prevent a business from being paid
when it has completed its work. Many of
these businesses cannot meet their operational
obligations without loans from their
banks. When a construction business is
denied these funds, the results can be devastating.
In certain instances this denial
may also give rise to an action against the
bank. If a bank’s failure to advance a loan
to a surety’s principal causes the business
to fail and the surety to pay losses, the
surety should consider whether the bank’s
action was wrongful. If so, the action may
give the surety a potential subrogation
cause of action against the bank.
A bank may be liable for damages if
it refuses to make a loan after formally,
or even informally, agreeing to extend
that loan. Courts often find a lender liable
when a bank breaches its promise to extend
financing to a party. Crystal Springs Trout
Co. v. First State Bank, 732 P.2d 819, 824–
25 (Mont. 1987); Equitable Mortg. Co. v.
Weddington, 21 S.W. 576, 576–78 (Tex. Civ.
App. 1893). When this promise is memorialized
in a formal loan document, a court
will require strict compliance with the loan
document. Alaska State Bank v. Fairco, 674
72 ■ For The Defense ■ March 2013
P.2d 288 293 (Alaska 1983). In the event
that a bank has deviated from a loan document,
the bank may be liable for damages.
Id. If there is no formal loan document with
dueling signatures, a bank may attempt to
rely upon a statute of frauds defense; however,
the lender may be liable even when
this promise is not in writing if the borrower
can demonstrate that an enforceable
promise was made or that a promise was
established through its course of business
with the bank. See generally Unique Staff
Leasing, LLC v. Onder, cause no. 13-09-
00213-cv, 2010 Tex. App. Lexis 9751, at
*18–21 (Tex. App. 2010); Remainders, Inc.
v. Bartlett, 30 Cal. Rptr. 191, 194 (Cal. Dist.
Ct. App. 1963). Furthermore, when a lender’s
improper denial of these loan proceeds
is unjustified and interferes with a party’s
relationship with a third party, the bank
may be liable for a claim of tortious interference.
See generally Bank One Tex. N.A.
v. Arcadia Fin. Ltd., 219 F.3d 494 (5th Cir.
2000). For example, the denial of a loan
may cause a project or a contractor to fail,
generating a potential claim against the
bank if the denial was wrongful.
In addition to the actions stated above, a
surety may also be able to subrogate to the
rights of a subcontractor if the subcontractor
has relied on misrepresentations by a principal’s
or owner’s bank. It is not uncommon
for a bank to be asked to make a representation
concerning its customer’s financial condition.
For instance, before contracting with
a principal, a subcontractor may request a
disclosure from the principal’s bank regarding
the principal’s financial condition. The
subcontractor may ask the bank to represent
that the principal has funds available
to cover the subcontractor’s potential work.
While a bank should not overlook its own direct
causes of action for misrepresentations
made to it during its underwriting process, a
surety should review the potential representations
made by a bank to the parties from
which it has gained its subrogation rights.
If the bank has made an intentional or negligent
misrepresentation to this party, the
surety may be able to maintain a cause of
action against the bank for fraud through
its general surety rights. See generally Gilbert
Cent. Corp. v. Overland Nat’l Bank,
442 N.W.2d 372, 377 (Neb. 1989); Great W.
Sav. Bank v. George W. Easley Co., 778 P.2d
569, 577 (Alaska 1989). In these instances, a
surety must consider the disclosure in light
of the bank’s actual knowledge. In certain
instances, a bank may be liable for a negligent
misrepresentation.
The bank’s loan documents typically
contain waivers and exculpatory clauses
that inoculate the bank from liability connected
with its funding of a project and
potential control over the disbursement
of the project’s funds. Even cases that recognize
a duty of a bank to act reasonably
on behalf of its customer acknowledge
the potential existence of these exculpatory
clauses. Garbish v. Malvern Fed. Sav.
& Loan Assoc., 17 Pa. D. & C.3d 202, 207
(Pa. Comm. Pleas 1980). However, in such
instance a bank must follow that jurisdiction’s
requirements for such a clause carefully.
Id. at 208–09. In Garbish, the court
recognized that because a borrower is often
helpless in altering these terms in a meaningful
way, public policy often favors strict
enforcement of the jurisdiction’s requirements
limiting the scope and enforceability
of such claims. Id. at 210. The court in that
case stated that when a bank did not follow
these requirements, it would not hesitate
to strike such a clause. Id. Therefore,
when a bank fails to meet one of the elements
required for an exculpatory clause,
some courts will not hesitate to deny the
bank these protections. Id. at 210–12.
Conclusion
After a surety suffers losses, the surety may
find itself with competing claims with a
financing bank. These competing claims
often make the surety adverse to the bank
regarding remaining contract balances. A
surety, however, may also find itself succeeding
to the rights of other parties that
have claims against the financing bank
because of the relationship of this bank to
the construction project. Although atypical,
it does happen. A prudent practitioner
should always consider a surety’s subrogation
rights against a bank when attempting
to recoup the surety’s losses. In certain
instances a surety may have subrogation
claims against a financing bank for negligent
inspection, negligent disbursement,
wrongful setoff, or general lender liability.
While a bank may have certain defenses to
these causes of action, any surety hoping
to recoup its losses still should investigate
these avenues of potential liability.

Think Globally
A New Test
Update on Assumption of
Jurisdiction by Canadian Courts
By Margaret A. Ross
The practice of medicine generally has become less
dependent on traditional geographic borders. At one
time, patients typically would be limited to seeing their
family physicians in their communities. Those requiring
specialized care would have to travel to tertiary care
centers.
Modern medicine and the technological developments
in medicine delivery offer patients greater choice
in medical services and mobility in seeking them,
including having practitioners in other international
jurisdictions perform services. The proliferation of telemedicine,
remote surgeries using robotics, and websites
to disseminate information to the public, among other
things, has enabled patients and providers to access
international expertise and super- specialized services
that were previously unavailable.
Health-care professionals increasingly provide care
to nonresident patients due to referrals from colleagues
in other countries, patients seeking elective procedures
only available in other countries, or long wait times in
the patients’ home jurisdictions. Recent studies suggest
that many Canadians travel to obtain private medical
services abroad, bypassing the universal health-care
system in Canada. Angus Reid, Some Canadians Willing
to Pay, Travel for Health Care, Angus Reid Public Opinion
(Feb. 19, 2010).
Offering greater access to specialized services requires
balancing the legal risks to health-care providers practicing
medicine across international borders. The most significant
of these risks is that a provider may be named in
a legal proceeding in a foreign jurisdiction for care provided
to a nonresident. In these circumstances a court
will often evaluate complex issues to decide which court
is the proper jurisdiction for a civil tort claim.
Among the factors that Canadian courts will consider
when determining whether to assume jurisdiction
over a negligence claim against a foreign health-care
provider for care of a Canadian resident is whether the
defendant actively marketed to or solicited referrals of
Canadian patients. In the event of a legal claim following
remote surgery or telemedicine performed on a Canadian
patient by a physician practicing outside of Canada,
the Canadian court might also agree to hear the matter
because the tort was committed in Canada even though
the physician was located elsewhere.
In April 2012, the Supreme Court of Canada refined
the Canadian approach for assuming jurisdiction in an
international tort action. The decision was discussed in
detail by Sandra L. Corbett and Ryan P. Krushelnitzky in
the July 2012 issue of For The Defense. To recap, the Court
replaced the case-by-case approach, which had led to an
inconsistent application of its “real and substantial connection
test,” with a revised test that requires the plaintiff
to prove that (1) the defendant lives in the Canadian
province, (2) the defendant carries on business in the
province, (3) the tort was committed in the province, or
(4) the contract connected with the dispute was made in
the Canadian province. If a plaintiff establishes one or
more of these factors, then the burden shifts to the defendant
to prove that it would be inappropriate for the
Canadian court to assume jurisdiction.
Although no reported cases to date appear to have
applied the new test to a medical malpractice lawsuit,
some of the recent jurisprudence provides insight into
the circumstances in which a Canadian court might
assume jurisdiction in such a case. While it may be premature
to draw conclusions based only on the handful
of cases that have applied the new test, it appears that
a more predictable and efficient approach will emerge
among Canadian courts assuming jurisdiction of civil
actions with international elements.
Although Canadian courts seem more inclined to
hear a matter if one of the above factors exists, they generally
continue to defer to any applicable governing law
and forum agreement. The cases indicate that a Canadian
court will ignore an agreement only when there is
“strong cause” or “exceptional circumstances,” such as
fraud, or an unexpected application of a forum selection
clause.
As to health-care providers with clinical websites containing
health information or advertisements for med-
■■
Margaret A. Ross is a partner of Gowling Lafleur Henderson LLP in Ottawa,
Canada. She has practiced in all areas of civil litigation. In her role as general
counsel for the Canadian Medical Protective Association, her focus is on the areas ical services, the Supreme Court of Canada has stated
of medical litigation, professional discipline matters, and professional negligence. Think Globally, continued on page 78
For The Defense ■ March 2013 ■ 73

Defense Ethics and Professionalism
Twenty-first Century Obligations
Ethics for the Tech Savvy (and
Not So Tech Savvy) Lawyer
By David L. Campbell
to protect your client’s communications and disclosing
any data breach that could affect electronically stored
information.
Misplacing 20 banker boxes can be difficult. The same
cannot be said for a tiny flash drive or other storage
media that can store 10 times the data and more. Computers,
smart phones, and tablets contain vast amounts
of client documentation and communications that you
must protect. Model Rule 1.6 requires lawyers to make
“reasonable efforts to prevent the inadvertent or unauthorized
disclosure of… information relating to the representation
of a client.” Model Rules of Prof’l Conduct R.
1.6. The comment to Model Rule 1.6 confirms that lawyers
must “act competently to safeguard information
relating to the representation of a client….” Model Rules
of Prof’l Conduct R. 1.6 cmt. 17. This can be challenging
in a mobile world where we carry around dozens if not
hundreds of banker boxes in our pockets and briefcases.
Does your firm use encryption technology Software
is now widely available that will automatically encrypt
any storage drive that is connected to your firm’s network.
Are our mobile devices—laptop, smartphone, or
tablet—password protected This should be mandatory
for all employees with access to client documents and
communications. Unlocking your device after 15 minutes
of temporary disuse may be irritating, but just think
how pleased your clients will feel knowing that their data
is protected should your device disappear during a business
trip. Technology can allow any size IT department
remotely to wipe your device instantly if you lose it or
someone steals it, and you can even set up an automatic
wipe when multiple incorrect passwords are entered.
Password protection should be combined with strong
encryption. If a hacker gets his or her hands on your
laptop, he or she may be able to bypass your password
by simply removing the hard drive and installing it in
another computer.
What happens when you conclude a case, the retention
period has expired, and you’re finally ready to
get rid of those electronic banker boxes of client data
Florida Bar Opinion 10-2, one of many recent opinions
in this arena, specifically addresses a lawyer’s eth-
■■
David L. Campbell is an experienced cross- border trial lawyer with Bowman
and Brooke LLP in Troy, Michigan. Licensed in Michigan and Ontario, Canada, Mr.
Campbell defends national manufacturers and other corporate clients in product
liability and commercial matters across North America. He is an active member of
the DRI Lawyers’ Professionalism and Ethics and Alternative Dispute Resolution ical obligations regarding destruction of storage media
Committees, and DRI International. Ethics, continued on page 78
74 ■ For The Defense ■ March 2013
Smartphones were introduced 10 years ago, and law
firm use of tablets, cloud storage, and electronic data has
grown exponentially. Some lawyers have wholeheartedly
embraced these changes with paperless offices, while
others continue to prefer typewriters and carbon paper.
Regardless of where you fall in this spectrum, it’s critical
to understand the ethical obligations connected with
embracing or rejecting new technology.
Competent representation uses technology. Model
Rule of Professional Conduct 1.1 states that “[a] lawyer
shall provide competent representation to a client.”
Model Rules of Prof’l Conduct R. 1.1. The ABA
recently amended the comments to Model Rule 1.1 to
confirm that competence includes not only practicerelated
knowledge and skills but also understanding
the “benefits and risks associated with relevant technology….”
Model Rules of Prof’l Conduct R. 1.1 cmt. 6. It’s
not enough to be a good lawyer anymore. Even seasoned
practitioners must appreciate necessary technology and
use it. This doesn’t require a computer science degree,
but you must have basic knowledge and surround yourself
with individuals who have a strong competence in
this area. Even if your firm’s technology is limited to
rudimentary e-mail, your cocounsel, opposing lawyers,
clients, and the courts all use and transmit electronic
data. Recognizing the challenges and risks associated
with these technologies is a focus of state bar ethics committees
across the country.
Keeping clients informed is foundational to a lawyer’s
ethical obligations. Model Rule 1.4 requires a lawyer
to communicate with his or her clients “about the
means by which the client’s objectives are to be accomplished.”
Model Rules of Prof’l Conduct R. 1.4. In addition
to promptly responding to client communications,
you must keep your clients apprised of your use of
technology and its impact on the work that you do for
them. This includes having security protocols in place

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Policy Limits, from page 43
ices. It may not minimize its defense costs
by seeking out an inexperienced, newly
minted lawyer eager for clients who is willing
to work for considerably less.
Third, an insurer should not make any
settlement offer whatsoever until it has sufficient
facts about liability and damages,
obtained through discovery or otherwise,
to enable it to understand, evaluate, and
quantify fairly an insured’s exposure and
the likelihood of an adverse trial result.
Fourth, if possible, an insurer should
defer making any settlement decisions
until after all potential claimants have
made all potential claims or until after the
claimants have filed lawsuits against the
insureds. This may not always be possible
if an insurer receives a policy limits settlement
demand that will not settle everything
globally but that the insurer must
respond to or else risk a potential bad-faith
lawsuit in the event of an excess judgment.
In such a case, an insurer’s dilemma is
that it
has a duty to settle claims where it
receives reasonable offers to do so,
although settling may exhaust the policy
limit and expose the non- settling
insureds to personal liability; yet, by
not settling, the insurer may subject
itself to greater liability beyond the policy
limit—an “excess verdict”—if it
loses and is found to have unreasonably
refused settlement.
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76 ■ For The Defense ■ March 2013
NIA Learning Center, Inc. v. Empire Fire
& Marine Ins. Cos., 2009 U.S. Dist. Lexis
92991, at *22 (E.D. Pa. 2009). This is where
the “first in time, first in right” rule protects
an insurer if, in good faith, it has seriously
considered and accepted a reasonable
settlement offer.
Fifth, when claims against an insured
have a total value that amounts to more
than the limits of the policy, and the
insured may be personally liable to others,
the insurer must inform the insured
in writing of its conflicting interests, advise
the insured of its rights, and keep it fully
abreast of all settlement demands and
offers and meaningful developments in
the negotiations. Peckham v. Continental
Cas. Ins. Co., 895 F.2d at 834. Keeping an
insured fully informed of all settlement
demands and offers is especially important
in cases involving multiple claimants
and an insufficient limit “for payment to
one claimant, exhausting or unreasonably
depleting the available fund, may leave the
insured unprotected—or nearly so—in
respect to other claimants.” Id. at 835.
Sixth, an insurer always should consult
an insured and the insured’s counsel
about the priority of claims for settlement
purposes. Which claims present the greatest
excess exposure To which claims do an
insured and the insured’s counsel believe
that the available policy limits should be
allocated While an insurer is not bound
by an insured’s wishes, if it does not follow
them, it should have a well- documented,
sound reason for its decision.
Seventh, if an insurer achieves less than
a global settlement that exhausts the policy
limits, the insurer must take steps to transfer
control of the defense to the insured. ISO
has a standard form endorsement to the
CGL coverage part, “New York Changes—
Transfer of Duties When a Limit of Insurance
Is Used Up,” CG 26 21 10 91, that sets
out what is expected of each of the parties
to facilitate the transfer of the defense
to the insured. The steps that an insurer
should take, as outlined in this endorsement,
are good practices that should be followed
throughout the country, not merely
in New York. They include:
An insurer must notify the first named
insured in writing as soon as practicable
that the applicable policy limit has actually
been used up to pay a settlement and that
its duty to defend lawsuits seeking damages
subject to that limit has ended.
The insurer then should initiate and
cooperate in the transfer of control to any
appropriate insured of all claims and lawsuits
seeking damages that are subject to
that limit and that were reported to the
insurer before that limit was used up.
The insured must cooperate in the transfer
of control of those claims and lawsuits.
The insurer must take such steps as it
deems appropriate to avoid a default and
continue the defense of lawsuits until an
orderly transfer is completed, provided that
the insured is cooperating with it in completing
the transfer to new defense counsel.
The first named insured and any other
insured involved in a lawsuit seeking damages
subject to the exhausted limit must
arrange for the defense of the lawsuit
within a time period agreed to between the
insured and the insurer. Without such an
agreement, arrangements for the continued
defense of the lawsuit should be made
as soon as practicable.
In Summary
Although courts have found the policy
wording by which an insurer’s duty to
defend is terminated on exhausting its limits
by paying covered claims to be clear and
unambiguous, when dealing with multiple
claims and insufficient limits to cover
an insured’s total potential exposure, the
insurer must be extremely cautious in settling
less than all of the claims. When a
defendant’s policy limits are insufficient,
a plaintiff’s attorney always looks out for
a potential bad-faith claim in an attempt
to take the cap off the policy limits and
increase the amount available to compensate
the injured plaintiff. The “first in
time, first in right” rule will protect an
insurer if, in good faith, it has consulted
with the insured on the priority for settling
claims and has carefully considered
and then accepted a reasonable settlement
offer. But until such a settlement is reached
and its policy limits exhausted, the insurer
must not skimp on its investigation or
the defense that it provides to the insured
even when it knows from the outset that
it is only a matter of time before its policy
limits are exhausted and that those limits
are insufficient to settle all of the claims
against its insured.

Computer Crime, from page 66
not constitute a use that gives rise to a covered
loss.
Most recently, the Supreme Court of New
York examined a similar situation and held
that the Computer Systems Fraud policy
did not cover the insured’s losses. In Universal
American Corp. v. National Union
Fire Insurance Company of Pittsburgh, PA,
2013 WL 69241, Universal American submitted
a proof of loss in which it claimed
that it suffered more than $18 million in
losses from fraudulent claims made against
one of its plans. The losses were caused by
providers, who were authorized to use the
Universal American computer system, submitting
fraudulent claims through that
computer system. National Union issued
a Computer Systems ‐Fraud Rider to Universal
American using ISO form FI 00 20
09 12. Universal American relied upon
the Owens case to argue that the clause
in the insuring agreement, “loss resulting
directly from a fraudulent … entry of Electronic
Data… into [Universal’s] proprietary
Computer System…,” was vague and therefore
covered the entry of fraudulent information,
even by an authorized user such as
a provider. The Universal American court
refused to adopt the plaintiff’s argument,
finding that the clause at issue in Owens
was much broader because it did not define
how much computer use was required or in
what manner the computer had to be used.
Id. at *3. Therefore, “Plaintiff’s interpretation
of the policy would expand coverage
to any fraudulent underlying claim that
was entered into its computer system by
any user, even by an authorized user. This
interpretation is not supported by the language
of the Rider.” Id. at *4. Instead, the
court concluded, “Nothing in this clause
indicates that coverage was intended where
an unauthorized user utilized the system as
intended, i.e. to submit claims, but where
the claims themselves were fraudulent.” Id.
The case law leaves open the question
whether some manipulation of numbers
or events as the Brightpoint case suggests
or something less as allowed in the Owens
case is necessary to establish a covered loss.
Insurers that want to protect themselves
should incorporate in their crime policies
a definition for “use of a computer” because
the trend remains to construe ambiguities
in an insurance policy against the insurer.
Until such a definition appears, insureds
likely will rely on cases such as Owens to
highlight the ambiguities in the undefined
terms and gain the interpretive benefit
of those ambiguities. Insurers are left
then with the uphill battle of arguing that
the words “use of a computer” cannot simply
mean whatever the inventive insureds
wish them to mean, but instead they logically
require some Brightpoint-like activities
to demonstrate a covered loss.
Direct Cause and Loss
Even more confusing than the question
of what constitutes the use of a computer
is whether the use directly caused the
loss—that is, did the use of a computer or
computer system cause damage to some
tangible property As the Owens judge
wrote, “A direct causation requirement in a
crime policy or fidelity bond requires more
than a ‘but for’ or factual causation alone,
but requires a ‘direct’ causation.” Owens,
2010 WL 4226958, at *7. Additionally, “‘[i]t
is well settled that the words ‘direct cause’
ordinarily are synonymous in legal intendment
with ‘proximate cause,’ a rule applicable
to causes involving the construction
of an insurance policy.” Id. at *7 (quoting
Steiner v. Middlesex Mutual Assurance
Company, 44 Conn. App. 415, 434,
689 A.2d 1154 (1997)). And “proximate
cause” does not mean “that which is last in
time or place, not merely that which was in
activity at the consummation of the injury,
but that which is the procuring, efficient,
and predominant cause.’” Owens, 2010 WL
4226958, at *7 (quoting Frontis v. Milwaukee
Insurance Company, 156 Conn. 492,
497–98, 242 A.2d 749 (1968)).
The case law offers very little information
about what constitutes a direct
loss, and it is not the aim of this article
to address the topic in full here. See,
e.g., Linda G. Robinson & Jack P. Gibson,
Commercial Property Insurance (International
Risk Management Institute, Inc.
Dallas, Tex. Feb. 2005) and Skillern, supra
(comprehensively discussing the direct
loss issue). However, the fact that a computer
must be used in bringing about the
fraud cannot be underscored with more
emphasis. Losses due to computer vandalism
through introduction of a computer
virus or theft of trade secrets are not covered
activities under most policies requiring
evidence of a direct loss. See Robinson,
supra, at XII.D.9, and comments on Coverage
for Computer Crime. Indeed, “[m]any,
perhaps most, insurers would argue that
the information stored on a computer cannot
suffer direct physical loss or damage
and therefore does not qualify as tangible
property.” Id.
Conclusion
What constitutes “use of a computer” is not
easily defined. As technology advances, the
potential that newly developed electronic
equipment will be characterized as a “computer”
and that electronic activity will fall
within the “use” penumbra grows exponentially.
Navigating this quagmire will
continue to present challenges that can be
overcome by the addition of definitions
establishing the scope of the coverage provided.
Until such time, the arguments for
and against finding a covered loss resulting
from “use of a computer” remain as broad
as the imagination will allow.
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For The Defense ■ March 2013 ■ 77

Concussion, from page 16
at best. Id. While unlikely, this scenario
could change should either side run across
a smoking gun in discovery.
What is clear is that the testimony of
physicians will likely play a significant role
in this litigation. Travis Leach, a sports law
attorney from Arizona, commented: “[t]he
crux of these cases is: What did medical
professionals know historically about concussions,
and what was the common medical
practice 10, 20 years ago when these
issues started arising” Alicia Gallegos,
Doctors Key Players in NFL Concussion Litigation,
AMEDNEWS.COM (July 30, 2012).
Conclusion
Unfortunately, cognitive illnesses are significantly
more prevalent among NFL
alumni in comparison to the national population.
Studies performed by the nation’s
scientists confirm a causal link between
multiple NFL- derived concussions and
later- life cognitive decline. Presently,
researchers are actively pursuing diagnostic
techniques in attempts to combat further
injuries caused by athletes who suffer
unnoticed head injuries. Still, the NFL has
known of these causal studies since at least
2005. Despite knowing of such studies, the
NFL failed to issue adequate warning to
league players from 2005 to 2010, and its
current efforts to combat chronic traumatic
encephalopathy cannot rectify the harm
suffered by many of these severely injured
players. As a result, NFL alumni have targeted
the league with tobacco- like failure
to warn claims to recover for their cognitive
injuries. Still, the NFL has a number of
persuasive—and potentially exonerating—
defenses at its disposal. In any event, the
outcome of this litigation will determine
the NFL’s ultimate liability for its actions,
and it could very well determine the survival
or financial failure of the league.
Ethics, from page 74
that contains client information. The opinion
requires: (1) identification of potential
threats and the creation of policies to protect
confidentiality; (2) an inventory of firm
storage media; (3) adequate supervision
over nonlawyers; and (4) use of vendors
that can certify sanitation at the time of
destruction. Professional Ethics of the Florida
Bar Opinion 10-2 (September 24, 2010).
In a world where data recovery is commonplace,
simply “deleting” client data from
your storage media is wholly insufficient.
If the ethical challenges associated with
storage media are giving you heartburn,
another option is to store client data in the
cloud. This means no flash drives to lose
and no hard drives to inventory. Instead,
the client data is stored on remote servers
outside a lawyer’s direct control that can be
accessed by the lawyer or the client through
the Internet with a secure password. This
lack of direct control creates its own set of
ethical challenges, with more than a dozen
states having issued formal ethics opinions
on cloud computing. The use of the
cloud is generally permitted, subject to
the exercise of reasonable care, which can
include (1) periodically reviewing security
measures; (2) choosing a qualified provider;
(3) knowing how the provider handles
the data; (4) ensuring that the data is
readily available when needed; and (5) following
your client’s express instructions
on storage.
Twenty-first century lawyers face unique
ethical obligations that cannot be discharged
by sticking their heads in the sand.
Regardless of whether you’re tech savvy or
a neophyte, check your local rules, ensure
that you’re taking reasonable efforts to protect
your client’s electronic data, and try
not to lose that critical flash drive.
Think Globally, from page 73
that merely maintaining a website accessible
by individuals in a particular province
does not necessarily amount to “carrying
on business in the province.” However,
when a health-care provider actively solicits
patients or maintains a presence in or
travels to a Canadian jurisdiction regularly,
the Court’s decision suggests that the
health-care provider might be considered
as “carrying on business in the province,”
which may result in the Canadian court
assuming jurisdiction of a lawsuit related
to the provider’s activities in that province
or territory.
The Ontario Superior Court of Justice in
Colavecchia v. The Berkeley Hotel Ltd., 2012
ONSC 4747, considered jurisdiction over
a lawsuit involving a “virtual” or “online
presence” in Canada when the defendant’s
website was accessible in Canada. In that
case, the Canadian plaintiffs made a reservation
online at the Berkeley Hotel in
England. After checking in, the husband
was injured when he slipped and fell in
the bathroom. He was treated for his injuries
at a local hospital and returned home
the next day for follow- up medical care.
The plaintiffs brought a lawsuit in Ontario
against the hotel. The hotel successfully had
the action dismissed for lack of jurisdiction.
The court found that the hotel did not
carry on business in Ontario, in part based
on the fact that the hotel had no office or
other premises in Ontario, hotel employees
did not regularly visit Ontario, and the
hotel did not engage in a marketing campaign
specifically targeting Ontario residents.
The court commented that this was
precisely the type of case that the Supreme
Court of Canada intended to capture by
stating that “mere access to a website is not
sufficient to establish that a defendant carries
on business.”
The new and limited list of factors provides
welcome clarification for determining
when a Canadian court will assume
jurisdiction over an international tort.
While the case law to date suggests that
health-care providers must do more than
maintain a website accessible in Canada
to become subject to Canadian laws, precisely
what level of online activity within a
province or a territory might lead a Canadian
court to assume jurisdiction over an
action without a governing law and jurisdiction
agreement still remains unclear.
The weight assigned by the courts to such
agreements underscores the importance of
requiring nonresident patients to sign these
agreements before undergoing treatment
whenever possible.
78 ■ For The Defense ■ March 2013

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Advocates
Charles H. Abbott, New
Orleans, LA
David M. Axelrad, Encino, CA
Veronica M. Bates,
Dallas, TX
P. Ryan Beckett,
Ridgeland, MS
Christopher A. Bottcher,
Birmingham, AL
Lawrence T. Bowman,
Dallas, TX
Brennan Tyler Brooks,
Raleigh, NC
Craig Brown, Manchester, NH
Hugh W. Buyck,
Mount Pleasant, SC
Joseph R. Carnicella,
Pittsburgh, PA
Timothy F. Casey,
Southfield, MI
Timothy E. Congrove,
Kansas City, MO
Thomas C. Cowan,
New Orleans, LA
Daniel K. Cray, Chicago, IL
Greg W. Curry, Dallas, TX
Michael R. Daglio,
Richmond, VA
Thomas Joseph D’Amato,
San Francisco, CA
Michele Hale DeShazo,
New Orleans, LA
Mark A. Dombroff,
McLean, VA
Teresa M. Dufort, Toronto, ON
David E. Dukes, Columbia, SC
Jennifer Eggers,
Minneapolis, MN
Amy R. Folsom,
Colorado Springs, CO
Dana L. Frese,
Jefferson City, MO
Mel J. Garofalo, Charlotte, NC
Karen R. Glickstein,
Kansas City, MO
Tamara B. Goorevitz,
Baltimore, MD
Dena Greenwood, Dallas, TX
Duke Riley Groover,
Macon, GA
John J. Haggerty,
Warrington, PA
James R. Hankle,
Pittsburgh, PA
Jeffrey V. Hill, Portland, OR
Michael D. Hostetter,
Atlanta, GA
Robert L. Jones III,
Fayetteville, AR
80 ■ For The Defense ■ March 2013
Advocates and New Members
Each month, DRI welcomes new members from the United States and Canada and abroad. Some of these new
members have been recommended by current members actively involved in advancing goals shared by DRI. Any
individual who recommends a new member is recognized as an “Advocate” for DRI.
Nicholas A. Karacostas,
Jersey City, NJ
Robert David Kaufman,
Jackson, MS
Edward K. Kimball,
Woburn, MA
Taryn B. Kindred,
Philadelphia, PA
Johannes Kingma,
Atlanta, GA
David W. Kloss, Buffalo, NY
Kathleen A. Lang,
Detroit, MI
Terry R. Levy, Jackson, MS
Mark Raleigh Lightfoot,
Washington, DC
Anthony W. Livoti,
Columbia, SC
Daniel M. Long,
Indianapolis, IN
Kara R. Masters, Seattle, WA
Brad McCormick, Miami, FL
Daniel W. McGrath,
Chicago, IL
Robert F. Parker,
Merrillville, IN
Steven W. Quattlebaum,
Little Rock, AR
Michael Scott Rainey,
Raleigh, NC
William F. Ray, Jackson, MS
Clayton L. Riddle,
Milwaukee, WI
Eric A. Riegner,
Indianapolis, IN
Thomas R. Schultz,
Indianapolis, IN
James M. Skelly,
New York, NY
Catherine Verona, Tampa, FL
Jeffrey D. Van Volkenburg,
Clarksburg, WV
Sean P. Wajert,
Philadelphia, PA
Kathleen M. Waters,
Westlake Village, CA
J. Michael Webster,
Los Angeles, CA
Karen Whatley,
Little Rock, AR
Sally Wignall, Indianapolis, IN
Richard T. Woulfe,
Fort Lauderdale, FL
Bradley A. Wright, Akron, OH
Glenn M. Zakaib,
Toronto, ON
New Members
Alabama
Ellen Presley, Birmingham
Alaska
Linda J. Johnson, Anchorage
Arizona
Robert Hyde, Phoenix
Cristine Boschee, Scottsdale
J. Robert Sonne, Scottsdale
Arkansas
Vicki Bronson, Fayetteville
Jane W. Duke, Little Rock
Sarah Keith-Bolden,
Little Rock
California
Dean A. Bochner, Encino
Jacqueline Pons-Bunney,
Laguna Hills
Carmen Jeannine Cole,
Los Angeles
Michael J. Iafe, Los Angeles
Robert McLay, Redwood City
Matthew Dart, San Diego
Adam M. Koss, San Francisco
Colorado
Diana May, Colorado Springs
Andrea Bronson, Denver
Elizabeth J.M. Howard,
Denver
Kimberly C. Perdue, Denver
J. Lee Gray,
Greenwood Village
Connecticut
Michael Pohorylo, Hartford
District of Columbia
Ramona R. Cotca,
Washington
Rebecca Jayne Fiebig,
Washington
Michael A. Graziano,
Washington
David K. Tochen, Washington
Florida
Ronald W. Warner,
Fort Lauderdale
Richard B. Akin II, Fort Myers
Franklin Duke Regan,
Jacksonville
Francesca Alexandra
Ippolito-Craven, Miami
Elizabeth Anne Parsons,
Pensacola
Brian Todd Dunmire,
Tallahassee
Jessica Kirkwood Alley,
Tampa
Robert Maxim Stoler, Tampa
Georgia
Noshay Collins Cancelo,
Atlanta
Shelley A. Driskell, Atlanta
Jeffrey W. Melcher, Atlanta
Scott D. Nader, Atlanta
Brian Spitler, Atlanta
Terri K. Benton, Macon
Corrie Elizabeth Holton,
Macon
Marty K. Senn, Macon
Key A. Wynn, Marietta
Illinois
Jonathan A. Cipriani,
Chicago
Kyle T. Geiger, Chicago
Kelly V. Milam, Chicago
Allison A. Torrence, Chicago
Jonny A. Zajac, Chicago
Jon Steven Faletto, Peoria
Indiana
Izabela Bebekoski, Gary
Anne Hayes, Indianapolis
Brandon M. Kimura,
Indianapolis
Larissa E. Koshatka,
Indianapolis
Tonya Lengar, Indianapolis
Richard W. Castleton,
Merrillville
Iowa
Chris Landherr,
Cedar Rapids
Kansas
Benjamin Winters, Wichita
Kentucky
Christina D. Hajjar, Ashland
Derrick T. Wright, Lexington
Louisiana
Michael H. Abraham,
New Orleans
McGready L. Richeson,
New Orleans
Ryan Christian Wallis,
New Orleans
Maryland
Pamela T. Broache,
Baltimore
Kevin A. Dunne, Baltimore
Michael W. Fox, Baltimore
Sarah N. Koop, Baltimore
Stephen J. Marshall,
Baltimore
Thomas E. Neary, Baltimore
Viktoriya M. Shpigelman,
Baltimore
Mark C. Talty, Baltimore
James X. Crogan, Jr.,
Owings Mills
Matthew J. Pavlides,
Rockville
Douglas W. Biser, Towson
Caroline B. Cathell, Towson
Massachusetts
Jonathan I. Handler, Boston
Andrew R. McConville,
Boston
Mark Heinzelman, Braintree
Andrew Dunning, Sharon
Adam C. Ponte,
Southborough
Edward A. Prisby,
Southborough
Peter Scavongelli, Woburn
Michigan
Stephen A. Lang, Detroit
Kimberly K. Seibert, Detroit
Samantha Murray, Lansing
Patrick D. Crandell,
Southfield
Matthew P. Allen, Troy
Minnesota
James Jorissen, Minneapolis
Mississippi
Nancy Siples Brumbeloe,
Gulfport
Matthew Wade Allen,
Jackson
J. Mitchell Carrington II,
Jackson
Betty Ruth Fox, Jackson
Thomas R. Julian, Jackson
Spencer M. Ritchie, Jackson
John Thomas Rouse,
Jackson
Keith W. Turner, Jackson
Missouri
Rachel H. Baker, Kansas City
Sarah Yehle Fulkerson,
Kansas City
Latrice Nicole McDowell,
Kansas City
New Jersey
Michael P. Beckley, Cranford
John E. Ursin, Florham Park
Paul A. Lisovicz, Morristown
Melissa DeHonney, Newark
Nicole Denise Bearce,
Roseland

New York
Alan J. DePeters, Buffalo
Thomas A. Digati, Buffalo
Melissa A. Foti, Buffalo
Joshua M. Henry, Buffalo
Justin Kloss, Buffalo
Nancy A. Long, Buffalo
Amanda L. Machacek,
Buffalo
Marissa J. Sweet, Buffalo
Cynthia L. Thompson,
Buffalo
Claudia L. Cinardo, New York
Nicoletta Del Vecchio,
New York
Eric M. Falkenberry,
New York
Charles Gura, New York
Laura L. Spring, Syracuse
North Carolina
C. Rob Wilson, Charlotte
Brodie Erwin, Raleigh
Julie Yates, Raleigh
Jason Phillip Luther,
Columbia
Darren Kent Sanders, Mount
Pleasant
Tennessee
Elizabeth R. McClellan,
Murfreesboro
Texas
Stacie Lyn Bennett, Austin
Alissa Kirksey Christopher,
Dallas
Susan O. Martin, Dallas
Dena B. Mastrogiovanni,
Dallas
Alan L. Rucker, Dallas
Matthew Thomas McLain,
Fort Worth
Sara Katharine Kimbrough,
Houston
Andrew J. Yoder, Houston
Elizabeth G. Hill,
Lubbock
Utah
Kurt M. Frankenburg,
Salt Lake City
Vermont
Molly Reis, Burlington
Virginia
Marcus Smatlak, Arlington
Mitchell Kirks Morris,
Richmond
Jonathan A. Wolfson,
Richmond
Christopher S. Dadak,
Roanoke
Washington
Alan David Schuchman,
Seattle
West Virginia
Allison Suzanne McClure,
Clarksburg
Elizabeth D. Walker,
Morgantown
Wisconsin
Maria Elaina DelPizzo
Sanders, Milwaukee
Brian C. Spahn,
Milwaukee
Wyoming
Susan L. Combs,
Jackson
Canada
Alberta
Andrew Edward Stead,
Calgary
New Brunswick
Howard Allan Spalding,
Saint John
Nova Scotia
Philip Chapman, Halifax
Ontario
Calie Adamson, Toronto
Geoffrey B. Shaw, Toronto
Randy Sutton, Toronto
Prince Edward Island
Shannon Farrell,
Charlottetown
Mexico
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Ricardo Rios Ferrer,
Col. San Jose Insurgentes
North Dakota
Douglas Wade Gigler, Fargo
Robert J. Hovland, Rugby
Ohio
Tiffany M. Sovik, Akron
Danielle N. Linert, Cleveland
Nina Ilene Webb-Lawton,
Columbus
Oregon
Bryana Blessinger, Portland
Bradford Lamb, Portland
Pennsylvania
Susan Ellis Wild, Allentown
David K. Sheppard, King of
Prussia
Joseph N. Bongiovanni,
Philadelphia
Morgan Sack, Philadelphia
Joanna T. Vassallo,
Philadelphia
Beverly A. Block, Pittsburgh
John B. Cromer, Pittsburgh
Gregory M. Monaco,
Pittsburgh
John Arthur Schwab,
Pittsburgh
Stephanie B. Fineman,
Warrington
Rhode Island
Nicole J. Benjamin,
Providence
Laurel Byerly, Providence
South Carolina
Renee S. Dankner,
Columbia
George V. Hanna IV,
Columbia
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