RCM TECHNOLOGIES, INC v. ACE AMERICAN INSURANCE COMPANY Plaintiff Memo in Reply to SJ

8/7/2019 RCM TECHNOLOGIES, INC v. ACE AMERICAN INSURANCE COMPANY Plaintiff Memo in Reply to SJ

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THE UNDERLYING LITIGATION

This coverage dispute arose out of ACE's handling of a lawsuit brought against RCM by

one of its customers, Topa Insurance Group ("Topa"). Topa had contracted with RCM for the

development of a custom software system for use in Topa's insurance business (sometimes

referred to as the "CAPRI" Project). In late 2007, the CAPRI project ran into some difficulties

(Remer Deposition, Ex. KK hereto, p. 65), and in early 2008 Topa and RCM engaged in

negotiations over how to get the project back on track. Although RCM believed the negotiations

were proceeding well and that things would be resolved amicably, Topa was not satisfied and

unexpectedly commenced litigation against RCM in California in June 2008.

Pre-Litigation Negotiations Between Topa and RCM

Extensive negotiations between Topa and RCM were triggered in early 2008 when Topa's

outside counsel, Eric Sinrod, of the Duane Morris law firm, wrote to RCM's managers for the

CAPRI project. Mr. Sinrod's February 8, 2008, letter (Ex. LL) was then forwarded by RCM's

project team to RCM's corporate headquarters. Thereafter, RCM and Topa engaged in months of

serious negotiations including detailed proposals on how to remedy the perceived deficiencies

with the project. Neither Topa's lawyer, Mr. Sinrod, nor RCM's general outside counsel at White

& Williams was directly involved in these negotiations. (Sinrod Dep., Ex MM, p. 32-34) The

discussions and proposals concerned technical and project issues, not legal matters.

RCM management viewed the letter from Mr. Sinrod and the ensuing negotiations with

Topa as part of the ordinary give and take that occurs when the nature of a project changes or a

project runs into difficulty. (Remer Dep., Ex. KK, p. 113; Miller Dep., Ex. NN, p. 135) RCM

management believed that these were contractual issues which were being worked out and did not

think that litigation would ensue. (Remer Dep., Ex. KK, p. 65; Miller Dep., Ex. NN, p. 151-52)

Case 2:09-cv-04789-AB Document 45 Filed 09/28/10 Page 3 of 72


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At some point in early 2009, Lange transferred the case to another ACE claims adjuster in

New York who did no work on the case for some unspecified period of time and then transferred

it back to Lange. (Levine Dep., Ex. ZZ, p. 71-73) Finally, Lange transferred responsibility for

the case to yet another ACE claims adjuster, Inna Kogan, in April 2009 (Lange Dep., Ex. TT, p.

80). During the entire time that he was assigned the case for ACE, Mr. Lange did not do anything

to oversee it. (Lange Dep., Ex. TT, p. 82) In particular, Mr. Lange took no steps towards

evaluating the case for settlement and justified his inaction on that important front with the

assertion that he had no responsibility to take any settlement initiative; if the insured wanted his

input about settlement, the insured should have contacted him. (Lange Dep., Ex. TT, p. 86-87).

Lange's conduct evidently was guided by the goal of protecting ACE dollars, not seeing to

it that its policyholder had a good defense regardless of whose money was at risk. Lange

conceded that had he realized that the likely exposure in the Topa case would be well over $1

million (most of which would come from ACE's pockets), he might have taken a more active role

early on. (Lange Dep., Ex. TT, p. 101).

ACE Finally Pays Attention to the Topa Litigation

In April 2009, ACE finally woke up to the need to deal with Topa lawsuit. At about that

time, Lange transferred the responsibility for the Topa suit to Inna Kogan, a very junior claims

adjuster in New York. Ms. Kogan was a 2005 law school graduate who had joined ACE just a

few months earlier after working at a large firm where she had no exposure to insurance

coverage. (Kogan Dep., Ex. EEE, p. 14 - 16). She received no formal training in insurance

coverage when she started working at ACE but relied on her supervisor to explain basic concepts

such as "what is a deductible" and "what is a claim." (Kogan Dep., Ex. EEE, p. 23). She was

initially given "simple matters where the exposure for ACE was not very likely." (Kogan Dep.,



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ACE had its coverage lawyer, John Lee, Esquire of the Wilson Elser firm, assume the role of

primary contact person with RCM.

Mr. Lee was even less forthcoming than Ms. Kogan in communicating ACE's settlement

strategy or its coverage positions. Mr. Lee's recollection of his role was remarkably deficient: he

could recall virtually no details of his conversations with RCM's coverage counsel during the

crucial weeks after the July 8, 2009 settlement conference and leading up to the August 24, 2009

trial date. (Lee. Dep., Ex. RRR, p. 66-69, 93). He also could not remember anything that AC

did to try to settle the case during the month following the unsuccessful settlement conference

(Lee Dep., Ex. RRR, 105), despite the fact that RCM's counsel was pressing ACE to take action.

(Lee Dep., Ex. RRR, p. 111).

Prior to the settlement conference, RCM made the eminently reasonable request that ACE

share its strategy and let RCM know in advance what it was prepared to offer at the conference.10

Such information was particularly important to RCM inasmuch as ACE was repeatedly insisting,

in one form or another, that RCM "get out its checkbook" and RCM needed to know how much

of check ACE was willing to write and how much of a check RCM was being asked to write so

that RCM could evaluate how to proceed. (Ex. SSS, p. 4) Instead, ACE stonewalled its

policyholder and refused to tell RCM's coverage counsel what position it was going to take at the

conference. (Lee Dep., p. 41). "You'll find out tomorrow," was all that ACE's counsel would

say to RCM's counsel the day before the conference. (Ex. SSS, p. 4)

At the settlement conference, Judge Owen Kwong informed ACE's representative that he

believed the case could be settled in the $1 million to $2 million range. (Ex. HHH, p. 09157).

10 ACE well understood that it was important to know what contributions others would maketowards settlement, seeking that information from Blue Ally and from RCM. (Dep. Ex. 1 atACE 09154).



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According to the Murchison attorneys, "Judge Kwong pressed Mr. Lee for a settlement offer, but

none was made by Mr. Lee on behalf of ACE." (Ex. TTT, p. 2).

Instead of using the settlement conference in the Topa case as an opportunity to protect its

policyholder's interests by trying to resolve the case, ACE used it as a platform for trying to

extract concessions from RCM on coverage issues.11

Although ACE's coverage counsel, John

Lee, did not make any offer to settle the Topa case at the settlement conference, he used the

conference to advance his arguments regarding coverage and to push for RCM to shoulder 60%

of any ultimate settlement. (Ex. UUU) Inasmuch as ACE made no settlement offer at the

conference, Topa did not move down from its initial $4.5 million demand. (Id).

ACE knew the case was a loser, knew it should be settled, yet continued to drag its heels

on trying to settle with Topa while escalating the pressure on RCM to contribute toward a

settlement. RCM clearly and repeatedly communicated its position to ACE: that ACE should

settle the case within policy limits and then ACE and RCM could resolve any coverage issues

without the pressure of the looming trial date and the prospect of a much higher adverse verdict.

(Ex. SSS, p..6-7) Instead, ACE continued to use its control over the settlement process (and the

resulting threat of an adverse jury verdict) as a means to pressure RCM to give in on its

settlement position.

The inner workings of ACE's claims department show that its objective was first and

foremost to minimize the cost to ACE and only secondarily to protect RCM's interest. For

example, in the midst of the 11th hour negotiations, rather than merely consider what it would

11 To be clear, the July 8 conference in Los Angeles was a proceeding in the Topa litigationheld to address settlement of that litigation. It was completely separate from an August 18thmediation at JAMS in New York with David Geronemus that involved only RCM and ACE andwas addressed to the coverage dispute.



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early July 2008. To explain this evident fabrication, Lange claimed in his deposition that the file

note was made months after the fact (Lange Dep., Ex, TT, p. 139-41) notwithstanding that every

other file note in the case appears to be contemporaneous (Ex. HHH), and that ACE employees

were instructed to keep careful notes of important contacts ("if you didn't put it in the note, it is

like it didn't happen," Kogan Dep., Ex. EEE, p. 50-51). Furthermore, the conversation recited in

the September 12th file note refers to the "numerous exclusions I would be reserving" which was

an obvious reference to the September 12th letter that Lange sent to Mooney. The explanation

did not fit with the facts.14

Ms. Kogan's memoranda, also, were edited to insert references to "Cumis counsel" where

none had existed in prior versions. (Compare Ex. PPP with Ex. GGG; Kogan Dep., Ex. EEE,

152-54). Despite all of the suspicious internal ACE documents labeling the Murchison firm as

"Cumis counsel," Mr. Lange did not once write to either RCM or to the Murchison firm to advise

them of this view. (Seitz Dep., Ex. XX, p. 15-17)

Mr. Mooney confirmed that he and Lange did not discuss coverage in their July

conversation. (Mooney Dep., Ex. PP, p. 22)] And at his deposition, Lange retreated from his file

note and conceded that Mr. Mooney may not have demanded "Cumis counsel" in their phone call,

contrary to what he had written in the ACE internal document. (Lange Dep., Ex.TT, p. 139-40,

194). Lange's new explanation for his inaction was that he "deferred" management of the case to

RCM's outside counsel, although he conceded that he did not say anything to that effect to RCM's

14 Indeed, as Mr. Lange reconstructed the events at his deposition, he had in hand at the timeof his early July conversation with Mr. Mooney all of the information he needed for thereservation of rights letter and asserted that shortly after the conversation he began drafting it.(Lange Dep., Ex. TT, p. 76). He could not explain why it took over two months to complete thatroutine task. (Lange Dep., Ex. TT, 112; 185)



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outside counsel (Lange Dep., Ex. TT, p. 82-83) and could not explain how he could have deferred

a case to someone without alerting that person. (Lange Dep., Ex. TT, p. 135).

Nor did ACE treat the Murchison firm as Cumis counsel. ACE's coverage counsel, John

Lee, claimed that he viewed the Murchison firm as Cumis counsel, although he refused to explain

why he believed that (Lee Dep., Ex. RRRR, p.32). He apparently never discussed with anyone at

the Murchison firm his view that they were Cumis counsel (Lee Dep., Ex. RRR, p. 34) , and his

actions were inconsistent with the Murchison firm being Cumis counsel. For example, in the

run-up to the July 8th settlement conference, Mr. Lee focused his efforts not on formulating a

way to settle the case with Topa but with obtaining information from the Murchison attorneys

about the strength of the claims that Mr. Lee deemed to be uncovered, the fraud and negligent

misrepresentation claims. (Ex. AAAA). Thus, far from treating the Murchison firm as "Cumis

counsel" from whom the insurer should not seek information bearing on its coverage defenses,

ACE's counsel did not refrain from discussing any subject with the Murchison lawyers. (Lee

Dep., Ex. RRR, p. 35-36) Similarly, Ms. Kogan acknowledged that there was no topic about the

underlying litigation that the Murchison firm declined to discuss with her or that she refrained

from questioning them about, including issues such as fraud that were cited as grounds for

denying coverage. (Kogan Dep., Ex. EEE, p. 113-14).

Even had the Murchison firm been Cumis counsel, that would not have justified ACE's

inaction on the settlement front. Ms. Kogan' supervisor acknowledged that when ACE has the

duty to defend, it has the ability to control settlement, "[t]o analyze and steer the file towards a

cost effective resolution for the insured." (Levine Dep., Ex. ZZ, p. 110-111). ACE viewed it

duty to pursue settlement as the same regardless of whether the case was being handled by panel

counsel or "Cumis counsel". (Levine Dep., Ex. ZZ, p. 116). As Ms. Kogan's supervisor



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described the process, trial counsel should be actively involved in the settlement conference and

should be informed by ACE of how much monetary authority ACE is extending to settle the case.

(Levine Dep., Ex. ZZ, p. 127). He could not offer any reason why RCM and its coverage

counsel would not be informed of ACE's settlement strategy and the coverage rationale which

guided it. (Levine Dep., Ex. ZZ, p. 128-30) In this case, however, ACE kept both its

policyholder and trial counsel at arms length and in the dark, conduct that would have been

improper even had the Murchison firm's status as Cumis counsel been fact, not fiction.

ARGUMENT

I. NEW JERSEY LAW DOES NOT EXCUSE ACE FROM ITS VIOLATION

OF LONG-STANDING REQUIREMENTS THAT AN INSURER MUST

INFORM ITS INSURED THAT IT CAN REJECT A DEFENSE OFFERED

UNDER A RESERVATION OF RIGHTS IF THAT RESERVATION

IS TO BE EFFECTIVE._____________________________________________

In its opening memorandum, RCM showed that ever since the decision in Merchants

Indem. Corp. v. Eggleston, 179 A.2d 505, 511 (N.J. 1962), New Jersey courts have held that an

insurer offering to defend under a reservation of rights must expressly tell its insured that it does

not have to accept the conditional offer to defend.15 When an insurer does not abide by this rule,

its attempted reservation of rights is ineffective, [p]rejudice to the insured [is] assumed because

the course cannot be rerun so as to determine whether the insured would in fact have fared

15 RCM Technologies, Inc.s Memorandum in Support of its Motion for Partial SummaryJudgment. (RCM Memo), at 1415.



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This is exactly the sort of provision that Merchants and its progeny require an insurer that

is proposing to proceed under a reservation of rights tell its insured it can avoid by rejecting the

insureds offer and proceeding on its own. The time when compliance with Merchants is required

is when the insurer issues its reservation of rights letter, and not later in the case, as ACE

contends.24

In other words, the insured must be told at the time the insurer is attempting to

reserve its rights that there is a choice between travelling down the litigation path with the

insurer, subject to the reservation, or going on its own, in which case the insured can control

defense and settlement. ACE admittedly did not do that. And once ACE failed to comply with

Merchants when it sent out its reservation of rights letter, Merchantsconclusive prejudice rule

applied because of the contractual provision that precluded RCM from settling the case on its

own.25

24 While Merchants and its progeny dont require a showing of prejudice, ACEs retentionof the right to go first in settling the Topa lawsuit was not academic. This could have been the

sort of case that the Merchants court contemplated when it wrote, Personal counsel mayseize opportunities to settle which might be ignored or overlooked by a carrier . . . 179A.2d at 511. On June 5, 2009, ACE stated in an internal document that damages in the Topalawsuit could reach $4.5 million and that [t]here is no chance that RCM will be successful attrial and therefore it is crucial to settle this matter. (RCM Memo, at 11, 37; ACE response,at 1.) And although ACE admits that RCM repeatedly insisted that it try to settle theTopalawsuit (ACE Opp. Memo, at 19, 8182), ACE does not deny (but instead avoidsresponding to) RCMs assertion that ACE did not make any settlement offers to Topa untilshortly before trial and even offers evidence that ACE actually refused to disclaim coverageso that RCM could settle on its own. (RCM Memo, at 11, 38; ACE response, at 34; ACE Exs.47, 48.)25 And as a matter of fact, Ms. Kogan' supervisor acknowledged that when ACE has theduty to defend, it has the ability to control settlement, "[t]o analyze and steer the file towards acost effective resolution for the insured." ACE viewed its duty to pursue settlement as the sameregardless of whether the case was being handled by panel counsel or "Cumis counsel". (Ex.KKK (Levine Dep.), at 110-11,116)



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One more point in ACEs Merchants argument about control of the settlement should be

addressed, however its contention that the Merchants issue is affected by its agreement with

RCM that no action to settle the [Topa] Lawsuit taken or not taken by either of them may be

used as evidence in the Coverage Dispute to show that one or the other controlled the defense in

the CAPRI Lawsuit.26

First, by relying on the agreement, ACE proves too much because it also

takes RCMs involvement in and approval of the settlement, upon which ACE heavily relies,27

out of the equation. More importantly, the agreement also states that it doesnt affect the rights

or positions that either party would have had if there had been no agreement.28

Thus, at best, this

portion of the agreement removes from the picture the fact that ACE formulated and made all the

settlement offers to Topa.29

ACE is still left with the dispositive facts that it did not effectively

reserve its rights underMerchants and its progeny and that RCM was contractually precluded

from settling the case on its own without ACEs approval -- in other words, that only ACE, and

not RCM, could attempt to settle with Topa.

If a new exception to the Merchants conclusive prejudice rule is to be created, as ACE

requests, it must meet the standard that the New Jersey Supreme Court has set out that the

insurers conduct did not constitute a material encroachment upon the rights of an insured to

protect itself by handling the claim directly and independently of the insurer . . . . Griggs v.

Bertram, 443 A.2d at 169. Without regard to the dispute over whether ACE or RCM controlled

the defense itself (and RCM is confident that, if tried, the outcome on that issue would be in its

26 ACE Opp. Memo, at 24, quoting the agreement (ACEs Ex. 51).27 See ACE Opp. Memo, at 24.28 ACE Ex. 51, II.A.1II.A.3, at ACE 0013031.29 RCM Memo, at 11, 38.



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that policyholders know about their rights when a defense under a reservation is offered,

California actually hopes that its policyholders will remain ignorant of their right to reject

the insurers conditional offer of a defense and therefore wont exercise it. But unless

California has that implausible policy, the first three California interests that ACE claims

would be harmed by the application of the Merchants rule dont hold water.

The last California interest that ACE contends is at odds with the application of

Merchants is Californias interest in limiting the estoppel doctrine because the New Jersey

rulewould compromise Californias policy that an insured should receive only the

coverage it paid for.35 This is essentially a claim that California is interested because its

law is different, a point thatHammersmith explicitly rejects. See 480 F.3d at 22930 (noting

that false conflict analysis is distinct from determination of whether differences exist);

Lacey v. Cessna Aircraft Co., 932 F.2d 170, 18788 (3d Cir. 1991) (finding false conflict

between Pennyslvania strict liability and British Columbia negligence standards).

California may well have a policy that insureds should receive only the coverage they pay

for, but ACE says little to explain why California would be interested in applying that policy

to a New Jersey contract between a Pennsylvania insurer and a New Jersey insured.

In addition, the argument proves too much, because it would also excuse an insurer

that defended without attempting to reserve its rights but also had coverage defenses. That

is not the law, however, as Miller v. Elite Ins. Co., 100 Cal. App. 3d 739 (Cal. Ct. App. 1980),

one of the cases that ACE relies upon for its argument, shows:

Estoppel cannot be used to create coverage under an insurance policywhere such coverage did not originally exist. . . . While this statementof the rule is generally applicable, there is a wellestablished

35 Id., at 3334.



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authorities.42 So, ACEs vice president of underwriting testified, ACE went out of its way and

took special measures to issue the Policy to RCM on admitted paper by employing specific

New Jersey regulations after doing research to ensure that it was complying with New

Jersey law:43

Q. Was this policy issued on admitted paper?A. Yes. This policy was issued on admitted paper.Q. Admitted paper in New Jersey; is that correct?A. That is correct. . . . We used we were able to issue it on admittedpaper New Jersey is a what they call a deregulation state, whichmeans if an account meets certain requirements, typically revenuesize, number of employees, industry type, it varies by certain states,but if it meets those requirements, the state insurance department

allows you to issue the policy on admitted paper provided theres anadmitted carrier in that allowed to do business in that state, issue[sic] the policy even though the form and rates are not filed and arenot admitted.Q. And I take it that ACE American Insurance Company was anadmitted company in New Jersey; is that correct?A. Yes.44

Additionally, when ACE sent RCM a notice of nonrenewal of the Policy, it wrote that

[t]he reason for nonrenewal is to ensure compliance with state insurance laws and

regulations and told RCM that it could complain to the New Jersey insurance authorities in

Trenton.45. And when ACE was arguing that this present litigation should be transferred to

42 Id., at 48, ll. 1315.43 Id., at 51, ll. 1325 through 56, l. 12 (underwriter would have had to reviewregulations); Ex. DDDD hereo (Ex. 67 to Cibulskas Dep.)(summary of state laws for New

Jersey, from underwriting file for the Policy).44 Id., at 49, l. 350, l. 6.45 Ex. W to RCM Motion (Notice of Nonrenewal of Insurance); see also RCM Memo, at3435.



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omitted.) When all the facts upon which the Third Circuit relied are taken into account, far

from supporting ACEs position, NL Industries actually supports RCMs.

Importantly, ACE ignores the parallels between this case and Hammersmith. There,

the Third Circuit, applying Pennsylvania choice of law principles, held that New York was

the place of contracting because the insureds headquarters were in New York (just as

RCMs headquarters are in New Jersey), the insurance policy listed a New York address for

the insured (just as the Policy here lists a New Jersey address for RCM), and the policy was

sent to the insured in New York for final review (just as it was indisputably sent to RCM for

final review), a fact that ACE ignores.57 See Hammersmith, 480 F.3d at 23334. Moreover,

unlike Hammersmith, where there was nothing in the record about the place of delivery,

ACEs Policy actually states that delivery was to RCM.

Under J.C. Penneyand Hammersmith, the place of contracting was New Jersey.

b. Place of Negotiation

The Second Restatement, comment (e) to section 188, says:

The place of negotiation. . . . This contact is of less importance where thereis no single place of negotiation and agreement, as for example, when theparties do not meet but rather conduct their negotiations from separatestates by mail or telephone.

In its opening memorandum, RCM cited this authority and also pointed to the

evidence that shows that the communications leading to the Policy took place by phone,

mail and email among Georgia (where the ACE underwriting personnel were located),

California (where the brokers were located), New Jersey (the location of Stanton Remer,

RCMs chief financial officer, who dealt with its brokers personnel, gave direction to them

57 RCM Memo, at 8, 17; ACE response to RCMs undisputed facts, at 1.



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of ease of determination of application of the law68 do not withstand scrutiny. There has

to be one law that governs the contract, and it has to be possible to determine that law

before a loss is sustained. The law of the place of the underlying litigation makes very little

sense: the parties cannot determine itex ante, and the principle that ACE advances implies

that no law governs until a loss is sustained. If the Court were to accept this argument, the

contract would be subject to multiple unpredictable laws. This is exactly the result that

sections 6(e) and (g) seek to avoid, not promote.

4. ACES Tort Arguments

ACE makes two tortrelated choice of law arguments in its briefs. First, it contends

that the estoppel thatMerchants requires is an equitable remedy which operates to bar

application of contractual policy terms based on alleged postcontract misconduct in

handling the Topa claim.69 But the Merchants rule is based upon the insurers contractual

right and duty to defend a claim and what it must do if its exercise of that right is only

conditioned upon a reservation. Griggs v. Bertram, 88 N.J. at 356 (Merchants estoppel

doctrine arises from the insurers contractual right to control the defense under the

policy); see also Merchants, 179 A.2d at 511 (Carriers contract for control . . . .).

Equitable estoppel does not create any new rights. It is not an independent cause of

action. PTI Services, Inc. v. Quotron Sys., Inc., 1995 U.S. Dist. LEXIS 5477, *25 (E.D. Pa.

1995), affd, 135 F.3d 766 (3d Cir. Pa. 1997). Consequently, the question is whether rights

related to the contract can be asserted or not, and that is a claim arising from a contract.

68 ACE Opp. Memo, at 41; ACE Choice Memo, at 4445.69 ACE Opp. Memo, at 35.



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Thus, a plaintiff may raise equitable estoppel arguments as part of its contract claims . . . .

Id. Accord, Continental Ins. Co., 1991 U.S. Dist. LEXIS 5655, 1112 (E.D. Pa. 1991).

ACEs second tortrelated argument is that a tort choice of law analysis under Second

Restatement of Conflicts of Laws 145(2) should apply. TheMerchants issue is

contractsbased, however, and ACEs breach in that regard was not a tort. But even if it

were, section 145(2) does not help ACE. The injurycausing event here was ACEs sending

of the ineffective reservation of rights letter from Georgia to RCM in New Jersey (through its

White and Williams attorney). Thus, the first section 145(2) factor, the place where the

injury occurred was New Jersey, where RCM received and acted upon the letter. Likewise,

the second factor, the place where the conduct causing the injury occurred, was Georgia.

The last factor, the place where the relationship, if any, between the parties is centered is

also New Jersey, the principal place of business of the insured under this multirisk, multi

state policy. (The third factor, domicile, is no different from the domicile factor in the

contract choice of law analysis.)

At bottom, ACEs tort effort is aimed at persuading the Court that RCMs Merchants

issue is really a complaint about the handling of the case in California. To the extent that

ACEs conduct during the Topa litigation itself creates extracontractual claims, it might well

be governed by California law, as discussed in the next section of this memorandum. But

the Merchants estoppel issue has no connection at all to California, but relates to ACEs

attempt to preserve its contractual rights while defending the case and controlling

settlement through a letter that was aimed at a New Jersey headquartered corporation that

had made an insurance contract under New Jersey law obviously the sort of insured New

Jersey is trying to protect through its notice requirement.



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B. Choice of Law as to Bad Faith

Bad faith in New Jersey sounds in contract. Robeson Industries Corp. v. Hartford Acc.

& Indem. Co., 178 F. 3d 160, 16869 (3d Cir. 1999); see also Nelson v. State Farm Ins. Co., 988

F. Supp. 527, 53334 (E.D. Pa. 1993). California treats bad faith as a tort.Gruenberg v.

Aetna, 510 P. 2d 1032 (CA 1973) (en banc).

But for choice of law purposes, characterization of a claim as sounding in tort or

contract is ordinarily done under forum law, here Pennsylvanias. See, e.g., In re Complaint

of Bankers Trust, 752 F.2d 874, 881 (3d Cir. 1984). Do bad faith claims sound in tort or

contract under Pennsylvania law? Pennsylvania has a statutory cause of action for bad

faith, and the Pennsylvania Supreme Court has characterized the bad faith action as a

statutorilycreated tort action. Ash v. Continental Ins. Co., 593 Pa. 523, 531536, 932 A.2d

877, 882885 (Pa. 2007). So a suit under that statute is clearly considered a tort claim. But

Pennsylvanias statute may not apply to RCMs bad faith claims. InDAmbrosio v.

Pennsylvania National Mutual Cas. Ins Co., 494 Pa. 501, 431 A.2d 966 (Pa. 1981), decided

before the Pennsylvania statute was enacted, the Pennsylvania Supreme Court declined to

recognize an independent tort claim for bad faith. Accordingly, it is unclear whether

Pennsylvania views bad faith claims as contract claims if there is no statutorily created tort

or, conversely, ifDAmbrosio should be read to suggest that if such a claim exists at all, its a

tort claim, regardless of whether its created by the legislature or a state supreme court.

The Third Circuit has predicted, Pennsylvania's choice of law analysis

employs depecage, the principle whereby different states' laws may apply to different

issues in a single case." Taylor v. Mooney Aircraft Corp., 265 Fed. Appx. 87, 91 (3d Cir.

2008).Given the complexity and uncertainty of the bad faith choice of law issue, and in



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order to simplify the proceedings, RCM is amenable to the application of California law to

the bad faith claim, but we want to make it absolutely clear that this accommodation has no

implications for the contractual choice of law issue, including the actively disputed issue of

whether New Jersey or California law applies to the effective reservation of rights, nor does

this accommodation impact the factual dispute over whether Murchison & Cumming was

independent counsel.

C. Other Choice of Law Issues that ACE Raises

1. Choice of Law on Negligent Misrepresentation

And on Burden of Proof on Exclusions___________

The sixth count in Topas Complaint against RCM was for negligent

misrepresentation.70 California says that negligent misrepresentation falls under the fraud

exclusion in an insurance policy71 (an exclusion that is present in the ACE Policy72); New

Jersey is to the contrary, and provides coverage for that cause of action. McClellan v. Feit,

870 A.2d 644, 65152 (N.J. Super. Ct. App. Div. 2005).

In its choice of law motion, ACE argues that California law applies to the Policy and,

accordingly, Topas negligent misrepresentation claim is not covered.73 (Of course, if

Merchants is held to apply, the Court need not reach this issue because ACE would be barred

70 Ex. 29 to ACEs motion, at ACE 01521.

71 Se, e.g., Allstate Ins. Co. v. Chaney, 804 F. Supp. 1219, 122122 (N.D. Cal. 1992).72 Ex. A to RCM motion (Policy), III.A (RCM 000011).73 See ACE Choice Memo, at 28, 45 4.



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from disputing the claim, covered or not.) But in any event, there is coverage under the

Policy for Topas negligent misrepresentation claim.

PhotoMedex, Inc. v. St. Paul Fire & Marine Ins. Co., 2008 U.S. Dist. LEXIS 8526 (E.D. Pa.

2008), involving a claim for malicious prosecution, provides guiding precedent. There, the

insurer argued that the malicious prosecution claim, filed in California, was not covered

under California law. Id., at *2, 2021. After determining that Pennsylvania law applied to

the interpretation and coverage of the policy and that Pennsylvania allows coverage for

malicious prosecution, Judge Yohn held that there was, accordingly, coverage for the claim.

Id., at *53. Here, because New Jersey law governs the interpretation of the Policy and the

coverage it provides, and because New Jersey allows coverage for negligent

misrepresentation, ACE was required to defend and indemnify against that claim.

The answer to another of the choice of law issues that ACE raises whether the

insured or the insurer bears the burden of proof on certain exclusions74 also flows from

the decision about which states law governs the interpretation of, and coverage under, the

Policy. None of the parties summary judgment requests turn on this issue. Rather, ACE is

seeking a ruling on the burden of proof at trial. But since ACE has raised the issue, the

answer is that New Jerseys burden of proof on exclusions.

2. Choice of Law on Rescission and Responsibility for the Defense

RCM moved for summary judgment on ACEs claim for rescission of the Policy

because, under New Jersey law, an insurer that knew or should have known of the grounds

74 ACE Choice Memo, at 2728.



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This is simply not a case of nonmonetary damages. As ACE notes, the language

should be interpreted in the context of the policy as a whole using common sense.94 The

term nonmonetary damages generally refers to noneconomic damages, such as pain and

suffering (see, e.g., Durosky v. United States, 2008 U.S. Dist. LEXIS 14730, at *4 (M.D. Pa.

2008) or confusion and other sorts of nonmonetary injury in trademark and copyright

cases. See Liberty Lincoln-Mercury, Inc. v. Fette Ford, Inc., 562 F.3d 553, 708 (3d Cir. 2009).

Among the things for which ACEs DigiTech Policy provides coverage is Electronic Media

Activities, which includes electronic publishing, webcasting, and the like and specifically

protects against claims for noneconomic damages, such as emotional distress, mental

anguish, and infringement of copyright, domain name, trademark, trade name, and the

like.95 While RCM did not purchase this coverage, others undoubtedly did, and its

availability explains why ACE would include a written demand for nonmonetary damages

in its definition of Claim in this form policy.96

But even if the February 8, 2008 letter were a Claim under the Policy and fell

within the time covered by the 20072008 policy, there is coverage because RCM tendered

the Topa complaint. See Professionals Direct Ins. Co. v. Wiles, Boyle, Burkholder & Bringarder

Co., 2009 U.S. Dist. LEXIS 109998 (S.D. Ohio, 2009) (policys provision that there is coverage

for wrongful acts committed before beginning of policy period when there is continuous

94 ACE Opp. Memo, at 46.95 Ex. A to RCM motion (Policy), I.B, III.N, SS.2, at RCM 000004, 06, 09.96 At worst for RCM, the term nonmonetary damages is ambiguous. That would notresult in summary judgment for ACE, however. Rather, the Court would have to resolve theambiguity by performing the sort of analysis mandated by Mellon Bank, N.A. v. AetnaBusiness Credit, Inc., 619 F.2d 1001 (1980).



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coverage conflicts with requirement that notice be provided during policy period). RCMs

insurance policies with ACE also have those provisions.97

C. ACEs No Responsibility Defense

During his deposition, Matthew Lange, who handled the claim for ACE for nearly a

year, and who paid little, if any, attention to it, contended that his inaction was justifiable

because ACE had no duty to defend until RCM had paid the retention in the Policy. Mr.

Lange was unable to point to any provision in the Policy that said that the duty to defend

didnt arise until the retention had been satisfied. He didnt write anything about that in his

September 12, 2008 letter purporting to reserve rights. And he didnt discuss this claimed

belief with anyone at ACE. In fact, Mr. Langes supervisor, Jeffrey Sorkin, now third in

command of ACEs claims operation, disagree with Mr. Langes belief that ACE had no duty

to defend until RCM had spent $250,000.

Despite all this, and looking for an excuse for Mr. Langes inattention to Topas multi

million dollar claim, ACE has adopted his position as its own and has asked the Court for a

summary judgment ruling that ACE owed no obligation to defend the Topa suit before RCM

paid its $250,000 retention.98 But such a ruling would not advance the disposition of the

case. ACE and Mr. Lange are, in fact, wrong as a matter of law. The Policy provides that

[t]he Insurer shall have the right and duty to defend any covered Claim . . . brought against

the Insured even if such Claim is groundless, false or fraudulent.99 The provision upon

which ACE and Mr. Lange rely says, The liability of the Insurer shall apply only to that part

97 Ex. A to RCM motion (Policy), III.K, at RCM 000012.98 ACE Coverage Memo, at 23; see also id., at 2123.99 Ex. A to RCM motion (Policy), IX.A, at RCM 000017.



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not say that, and ACEs request for summary judgment on its no responsibility defense

should be denied.

D. Exclusions to the Policy

ACE contends that the return of fees and product repair exclusions excuse it from

providing coverage for the Topa settlement. Even if those exclusions apply and they do

not the exclusions are not grounds for summary judgment for that reasons that when a

settlement involves both covered and uncovered claims, a court must make an allocation

between them by determining what the decisionmakers for the settlement intended. See,

Am. Home Assurance Co. v. Libbey-Owens-Ford Co., 786 F.2d 22, 33 (1st Cir. 1986) (Thus,

despite the problems that are inherent in any post facto analysis of settlement [of] claims, if

the district court is to make an allocation of the settlement amount, it should accept

whatever evidence is available regarding the intent behind the settlement decision.

(Emphasis added.) See also, id., at 3132 and cases cited therein; Cooper Lab., Inc.v. Intl

Surplus Lines Ins. Co., 802 F.2d 667, 674 (3d Cir. 1986) (following Libbey-Owens-Fordwith

approval); Armkel v. Pfizer Inc., 2005 U.S. Dist. LEXIS 22877, *55 (D.N.J. 2005) (court should

make allocation based on such evidence as was available, despite the potential for

testimony colored by hindsight and selfinterest) (emphasis added); cf. Isaacson v. Calif. Ins.

. . . footnote contd from previous page

second, the insurer lays out the money and then gets reimbursement from the insured) and

held that it would be wholly unreasonable for an insured to expect that selfinsuredretention means selfinsured (id., at 460), which is what ACE is now claiming. InLandmarkAm. Ins. Co. v. Rider Univ., 2009 U.S. Dist. LEXIS 55398 (D.N.J. 2009), Rider had a primarygeneral liability policy, and the policy from Landmark that was at issue specifically providedthat it was excess insurance and also that Landmark had no duty to defend any claimcovered by other insurance. Id., at * 1215. ACEs California case, although irrelevant to apolicy governed by New Jersey, also involve insurance that was explicitly excess.



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software.107

In its motion for partial summary judgment on coverage, ACE does not contend that

there is no coverage for Topas internal costs for remediating the software, nor could it. In

Hofing v. CNA Ins. Co., 588 A.2d 864 (N.J. Super. Ct. App. 1991), a case upon which ACE

relies,108 the court held that, under a professional liability insurance policy for legal

malpractice, there was no coverage for the difference between the quantum meruitvalue of

the services received and the fees paid. Id,, at 868. It went on to hold, however, that there

was coverage for the amounts that the underlying plaintiff had paid:

. . . for fees paid to its new counsel in connection with the costs of takingover the case and review the file or repayment of fees for services tocorrect problems in the case caused by the [insured law firms] allegednegligence. As consequential damages to [the underlying plaintiff]because of [the insureds] wrongful conduct, these damages wouldcome within the coverage provisions of the policy.

Id., at 869. So here, Topas internal costs were consequential damages that the Policy

covered.

ACE does argue that its exclusions for the return of fees . . . by the Insured (also

stated as an exclusion for claims alleging, based upon, arising out of or attributable to any

fees, expenses, or costs paid to or charged by the Insured), and its Recall Loss of Use

exclusion for

any costs or expenses incurred by any Insured or others to recall,repair, upgrade, supplement or remove the Insureds products,including products which incorporate the Insureds products, or

services from the marketplaceSee ACE Coverage Memo, at 2831.

107 See RCMs Ex. YY (summaries of depositions of RCM experts).108 ACE Coverage Memo, at 2829.



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. . . or the failure of the Insureds Technology Products to perform thefunction or serve the purpose intended.112

Because Topas complaints against RCM fall within these basic terms, the burden would be

on ACE to show how much, if anything, the parties to the Topa settlement intended to

attribute to the excluded item of money paid to [RCM] that exceeded the reasonable value

of the services that Topa received.

Likewise, even under ACEs theories of coverage, there was at least one covered

claim in the litigation. Similarly, underSL Indus. v. Am. Motorists Ins. Co., 607 A.2d 1266,

1280 (N.J. 1992), defense costs can be apportioned between covered and uncovered claims,

but when those costs cannot be apportioned, the insurer must assume the costs of the

defense for all claims. Id. Thus, even ifMerchants somehow doesnt apply, and even if some

of the claims in the Topa lawsuit are not covered, ACE would not be entitled to summary

judgment on its demand for reimbursement. A trial would be required.

IV. RCM CAN RECOVER ITS ATTORNEYS FEES FOR THIS COVERAGE LITIGATION.

ACE has moved for summary judgment on RCMs claim for attorneys fees and costs.

Those fees fall into two categories: (1) Fees and costs that RCM incurred before theTopa

lawsuit settled, which are the consequential damages that RCM suffered as a result of ACEs

bad faith. They will be discussed in the next section of this memorandum. (2) RCMs

attorneys fees and costs for this coverage litigation, which we address now.

New Jersey law governs the availability of attorneys fees in an insurance coverage

112 Ex. A to RCM motion (Policy), SS )RCM 000009).



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RCM TECHNOLOGIES, INC v. ACE AMERICAN INSURANCE COMPANY Plaintiff Memo in Reply to SJ

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Transcript of RCM TECHNOLOGIES, INC v. ACE AMERICAN INSURANCE COMPANY Plaintiff Memo in Reply to SJ