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

Case 2:09-cv-04789-AB Document 45 Filed 09/28/10 Page 1 of 72
IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA
RCM TECHNOLOGIES, INC.,
Plaintiff, Civil Action No. 09‐4789‐AB
v.
ACE AMERICAN INSURANCE JURY TRIAL DEMANDED

COMPANY,
Defendant.
RCM TECHNOLOGIES, INC.’S MEMORANDUM IN REPLY TO ACE AMERICAN

INSURANCE COMPANY’S OPPOSITION (DKT. 36) TO RCM’S MOTION FOR PARTIAL
SUMMARY JUDGMENT (DKT. 35) AND IN OPPOSITION TO ACE’S THREE MOTIONS
_______________FOR PARTIAL SUMMARY JUDGMENT (DKTS. 37, 40 & 44)_______________
Plaintiff, RCM Technologies, Inc. (“RCM”), submits this memorandum, its response to
ACE American Insurance Company’s (“ACE”) statements of facts1 and its additional exhibits in
reply to ACE’s opposition (dkt. 36) to RCM’s motion for partial summary judgment (dkt. 35) and
in opposition to ACE’s three motions for partial summary judgment (dkts. 37, 40 and 44).2
1 ACE filed a separate statement of undisputed facts with each of its three motions.
Although ACE has listed a total of 199 facts in its three briefs, there is a great deal of
redundancy among them. RCM has assembled all of ACE’s undisputed facts and RCM’s
responses into one document that also indicates which of the facts in ACE’s briefs are
repetitive or are modified between briefs. The document also includes RCM’s statement of
undisputed facts from its opening memorandum, and ACE’s responses. (ACE disputed only
four of the 40 material facts that RCM had listed.) This compendium of facts and responses
is being filed separately from this memorandum. The Facts section below is a summary of
what the evidence shows.
2 RCM obtained leave of Court to file a memorandum in excess of 50 pages to respond

to ACE’s 225 pages of briefing.
FACTS
INTRODUCTION
This case is an insurance coverage dispute between a software developer and its insurer
resulting from the insurer's handling of the defense of a multi-million dollar professional liability
lawsuit filed against the software developer by a dissatisfied customer. After agreeing to the
appointment of defense counsel while purporting to reserve its rights to dispute coverage, the
insurer virtually ignored the case for almost a year, made no meaningful effort to settle the case,
and used its control over the settlement process to improperly pressure the insured to contribute to
a settlement. When the insurer's efforts to coerce settlement funds from its policyholder failed,
the insurer finally took steps to settle the case on the very eve of trial, with the insurer and insured
agreeing to resolve their coverage dispute separately. This litigation followed, in which the
policyholder seeks to hold the insurer liable for its obligation to cover the settled case and for
damages resulting from the insurer's bad faith handling of the claim.
THE PARTIES
Plaintiff RCM Technologies, Inc. is a New Jersey based corporation engaged in the
consulting and staffing business, including information technology consulting and project
staffing. Its headquarters is in Pennsauken, New Jersey, and it has operations nationwide.
Defendant ACE American Insurance Company is a Philadelphia based insurance
company. ACE provided professional liability coverage to RCM pursuant to a digital technology
and professional liability policy that included coverage for software development projects.
2
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's
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)
3
Topa's commencement of litigation came as a surprise to RCM management. (Remer Dep., Ex.
KK, p. 84, 96; Miller Dep.NN, p. 138) Because RCM management viewed Mr. Sinrod's letter as
a means to get RCM to devote attention to the difficulties the project had encountered and not as
a claim for damages or a prelude to litigation, it did not report the letter to ACE as an insured
"claim". Only later, when RCM was served with Topa's complaint, did it view the situation to
have become a covered claim and, at that point, reported the lawsuit promptly to ACE.
RCM Is Sued By Topa and Tenders the Case to ACE
Topa filed suit in California against RCM on June 11, 2008. Upon being served with the
Topa complaint, RCM tendered defense of the suit to ACE. (Ex. OO) RCM was concerned that
appropriate counsel be in place promptly because Topa was pressing the litigation forward, so
RCM's outside general counsel at the Philadelphia law firm of White & Williams identified a
California defense firm -- Murchison & Cumming -- which it believed would be an appropriate
firm to defend the case. A White & Williams lawyer contacted the ACE claims adjuster who had
acknowledged receipt of the complaint and asked if the Murchison firm could be designated as
the defense counsel. The ACE claims adjuster agreed. (Mooney Dep., Ex. PP, p. 36, 34-35)
Thereafter, RCM understood that ACE was undertaking the defense of the case, having
authorized the engagement of the Murchison firm as defense counsel. RCM understood that its
only responsibilities were to pay the first $250,000 of defense costs pursuant to the insurance
policy's retention provision and to cooperate with the Murchison firm in discovery and other
aspects of the case. (Miller Dep., Ex. NN, p. 198, 202) No one at RCM actively managed the
defense of the Topa case because RCM's management understood that it was ACE's responsibility
4
to do so.3 (Miller Dep., Ex. NN, p. 210-13) There was no discussion at RCM about control over
the defense or about selecting counsel to act for RCM. (Miller Dep., Ex. NN, p. 182). RCM did
not separately retain the Murchison firm; RCM understood the Murchison firm to have been
retained by ACE, with only the payment of the first $250,000 of the firm's bills being the
responsibility of RCM. (Miller Dep., Ex. NN, p. 184-96, 210-13).
RCM understood that Topa was seeking several million dollars in damages, and realized
that the litigation was going to be complex and extensive. In view of the insurance policy's $5
million limit and $250,000 self-insured retention, RCM's management concluded that RCM
would inevitably have to pay the $250,000 deductible and that ACE would be responsible for the
remaining expense of defending and settling the suit. (Miller Dep., Ex. NN, p. 202) That is,
given the monetary parameters of the policy, the financial risk of the law suit was ACE's.
ACE's Initial Inaction
Upon receiving the Topa complaint in June 2008, ACE assigned the claim to one of its
claims adjusters, Matthew Lange. The case was originally slated to be assigned by Mr. Lange to
one of ACE's panel defense firms, Lewis Brisbois (Ex. QQ). Mr. Lange's initial
acknowledgement letter to RCM's outside general counsel, Peter Mooney, Esquire, asked Mr.
Mooney to call to discuss the appointment of defense counsel if it were time critical. When Mr.
Mooney called, Lange agreed to his suggestion that the Murchison firm be designated the defense
counsel. (Exs. RR, SS; Mooney Dep., Ex. PP, p. 16-17, 26; Lange Dep., Ex. TT, p. 139-40).
Although ACE's practice was to provide its policyholder with a statement of ACE's
coverage position within 30 days (Lange Dep., Ex. TT, p. 26, 184), Lange did not do so until
3 The ACE Policy contained a typical defense clause obligating ACE to defend any
potentially covered claim. (Ex. WW, ¶ IX(A))
5
September 12, 2008, nearly three months after receiving the complaint, when he sent a letter to
RCM which identified a few boilerplate coverage issues without any analysis of them or
application of the terms of the policy to the specific circumstances of the Topa case. (Ex. UU)
Mr. Lange's September 12th letter purported to reserve the right to disclaim coverage in the future
in the event any of the listed exclusions were found applicable, but nothing in the letter gave any
indication that ACE was not presently actively engaged in managing the defense of the lawsuit
pursuant to the defense obligation provision of the insurance policy. Nor did the September 12th
letter suggest that ACE was going to be handling the claim any differently because the defense
firm was the Murchison & Cumming firm suggested by RCM rather than some other firm that
ACE regularly hires.
Despite the fact that ACE had led its policyholder to believe that ACE was assuming its
contractual defense obligation, in fact, from the outset ACE took no steps to actively manage the
litigation. ACE's claims adjuster, Mr. Lange, did not ask the Murchison firm about the status of
the case, he did not ask the Murchison firm about its litigation plan, he did not seek any
information from the Murchison firm to enable ACE to evaluate the case for settlement. Lange
took no steps to evaluate the case for settlement himself or to develop a strategy for settling or
defending it.4 (Lange Dep., Ex. TT, 84 - 87). When Mr. Lange did not receive periodic written
status reports from the Murchison firm (as called for in the case handling Guidelines which ACE
provided), Lange was supposed to follow up and request them. (Levine Dep., Ex. ZZ, p. 50-51).
Mr. Lange's supervisor explained that Lange should have reached out to defense counsel to find
4 Although Lange received detailed monthly bills from the Murchison firm showing the
firm's activities (Lange Dep., Ex. TT, p. 78), he never asked for any additional information nor
did he actively provide any input.
6
out what was going on in the case. (Sorkin Dep., Ex. AAA, p. 82). Instead, Lange did nothing.
The only step of substance the Mr. Lange ever took was to send RCM the boilerplate reservation
of rights letter on September 12th.5
Mr. Lange basically ignored the case for almost a year. In his deposition in this case,
when pressed to explain his inaction despite the clear terms of the policy obligating ACE to
undertake the defense of the claim, Mr. Lange proffered the startling view that ACE had no
defense obligation during the entire ten months of his inattention because RCM had not yet paid
the full amount of its $250,000 retention. (Lange Dep., Ex. TT, p. 89-90). This position – that
ACE did not have a duty to defend RCM from the very outset -- was never communicated to
RCM until ACE filed its answer to this lawsuit. During the time at issue, RCM had continued to
believe, quite reasonably, that its insurer was looking after its interests. Mr. Lange's position --
that "ACE's duty to defend RCM did not commence until they had satisfied [their] retention ....”
(Lange Dep., Ex. TT, p. 89) -- was also at odds with his usual practice. Mr. Lange could not
recall any other case at ACE where he or any other claims person refrained from actively
managing litigation because a self-insured retention had not been satisfied. (Lange Dep., Ex. TT,
p. 152) Lange's position6 was later disavowed at deposition by his superior at ACE, the vice-
president for claims. (Sorkin Dep., Ex. AAA, p. 98).
5 Interestingly, Mr. Lange claims he communicated the list of potential coverage issues to
Mr. Mooney in their July telephone call, but he could not explain why he then waited two
additional months to set them down on paper. According to Mr. Lange's supervisor, Lange's
reservation of rights letters usually went out more quickly. (Sorkin Dep., Ex. AAA, p. 73)
6 Mr. Lange's "no duty" assertion was even at odds with the very few documents that he
generated in this case. Mr. Lange's September 12th letter to RCM certainly appeared to confirm
that ACE had assumed the duty to defend (See Lange Dep., Ex. TT, p. 191-92).
7
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.,
8
Ex. EEE, p. 23) Except, of course, the Topa claim. Her usual level of authority was $25,000.
(Kogan Dep., Ex. EEE, p. 25)
When Ms. Kogan received the Topa claim file, it contained only a few documents and a
single file note of Lange's. Ms. Kogan contacted Lange for more information and documents but
he could not provide any. (Kogan Dep., Ex. EEE, p. 83-84). Kogan then asked the Murchison
firm for a detailed status report and was promptly provided with one. (Ex. FFF) Kogan quickly
realized that the claim posed a multi-million dollar exposure and that RCM would almost
certainly be found liable,7 as set forth in her internal memoranda: "There is no chance that RCM
will be successful at trial and therefore it is crucial to settle this matter." (Ex. GGG at p. 03774)
Nevertheless, Kogan did not actively formulate a plan to attempt to settle the case. Instead, ACE
embarked on a course of conduct designed to force RCM to contribute substantially toward a
settlement. Ms. Kogan did not prepare an updated coverage letter to spell out in detail to RCM
what exclusions or coverage defenses ACE believed would justify RCM contributing to a
settlement, nor did she tell RCM how much money ACE was willing to offer to Topa in
settlement negotiations. Ms. Kogan recommended that ACE set a reserve on the case in the
amount of $600,000, which was simply the amount of projected attorneys fees. This reserve was
approved by her superiors at ACE. (Ex. BBB; Levine Dep., Ex. ZZ, p. 141-43)
There is no question that after Ms. Kogan took over as claims adjuster, ACE actively
controlled the litigation. For example, Ms. Kogan directed that the Murchison firm not take any
action to evaluate damages until Blue Ally was added as a defendant and until RCM had
7 The Murchison firm's review of the documentation of the CAPRI project revealed
numerous problems, many attributable to Blue Ally, a subcontractor used by RCM on the project,
and also various documents evidencing RCM's knowledge of the problems, some written in terms
that would make it virtually impossible for RCM to avoid liability.
9
informed ACE of how much it would contribute towards settlement.8 (Ex. HHH at p. 09155).
From time to time, ACE requested the Murchison firm to provide supplemental analysis of the
case, which it promptly provided. (Ex.III). Ms. Kogan requested the Murchison firm to provide
detailed budgetary estimates, which it did. (Id. at ACE 08516 – 19) ACE viewed itself as
having the right to authorize expert costs (Ex. KKK). For example, the Murchison firm sought
authority from Ms. Kogan9 to retain a jury consultant (Ex. LLL).
ACE Uses Its Control Over the Settlement Process to Pressure RCM to Contribute to Any
Settlement as A Condition of ACE Making a Serious Attempt to Settle
ACE's position was that the case could not be settled without a contribution from someone
other than ACE. (Levine Dep., Ex. ZZ, p. 151). Ms. Kogan's dealings with RCM reflected
ACE's strategy to pressure RCM to contribute. In her first telephone call to Mr. Miller of RCM
on June 10, 2009, Ms. Kogan took the position that the case needed to be settled, but that ACE
would not settle it without a significant contribution from RCM. (Miller Dep., Ex. NN, p. 256,
259, 317-18) Kogan subsequently denied insisting that RCM contribute towards settlement,
claiming instead that she was merely giving Mr. Miller "examples on contribution" and saying
only that "he should seriously consider making a contribution toward settlement." (Kogan Dep.,
Ex. EEE, p. 134-35; 140). However, ACE’s subsequent actions demonstrated that ACE was not
8 Thus, it seems that the directions ACE gave to defense counsel were intended not always
to further the defense of the claim against RCM but were designed to improve ACE's leverage
against its insured in the battle over settling the Topa case.
9 Although Ms. Kogan asserted that the firm did not need her "authority" to do so, she said
that was equally true of any panel firm ACE might retain to defend a covered claim. (Kogan
Dep., Ex. EEE, p. 267). Ms. Kogan's passive view of what control she could exercise, whether in
a case defended by panel counsel or by independent counsel, raises the question of what ACE
actually understood was its obligation beyond merely signing checks. It was plainly at odds with
the ACE Guidelines that ACE provided to the Murchison firm at the outset of the case (Ex.
MMM, p. 5-6).
10
willing to make an independent effort to settle the case but instead was conditioning its settlement
efforts on a substantial contribution from RCM. For example, despite RCM's repeated requests
that ACE inform RCM of how much ACE would pay to settle the case, ACE repeatedly
responded in terms of its "share" of the settlement, suggesting variously that the costs of
settlement with Topa be split 50-50 or 60-40 between ACE and RCM. Until the very eve of trial,
ACE refused to make any serious settlement proposal to Topa unless RCM would agree to pay a
substantial portion.
Upon realizing that ACE might not be acting to protect RCM's interests, RCM engaged
coverage counsel, William Herman, Esquire. When Mr. Herman contacted Ms. Kogan, she
informed him that ACE believed some of the pending claims against RCM were covered and
some were not. (Herman Dep., Ex. NNN, p. 92-93). In a telephone call, she took the position
that the claim for lost business revenue was covered (Herman Dep., Ex. NNN, p. 95-100), but
despite repeated prodding, ACE never updated Mr. Lange's September 12, 2008 letter to provide
RCM with a clear and comprehensive coverage position. ACE also rejected Mr. Herman's
request that it take immediate steps to try to settle the Topa case which, by then, ACE
acknowledged had to be settled. RCM repeatedly resisted ACE's efforts to condition meaningful
settlement efforts on RCM's surrender of its coverage position that the entire claim was covered,
but instead repeatedly urged ACE to settle with Topa, with RCM and ACE agreeing to resolve
their coverage differences afterwards. ACE refused and continued to condition its settlement
efforts on RCM's acceptance of a substantial share of the cost.
ACE was finally forced to address the issue of settlement by the California court's
requirement that an ACE representative attend a mandatory settlement conference in the Topa
case on July 8, 2009. Initially, ACE was not planning to be at the conference and did not provide
11
defense counsel from the Murchison firm with any authority or even guidance on settlement. (Ex.
OOO) Only when ACE was advised by defense counsel that California law required it to attend
the settlement conference did ACE agree to send a representative. However, instead of Ms.
Kogan or some other ACE claims adjuster who could participate in a meaningful effort at
settlement attending, ACE chose to send its coverage counsel, John Lee, Esquire, of the law firm
Wilson, Elser, Moskowitz, Edelman & Dicker, LLP in Los Angeles, whose role was to fend off
RCM's insistence that ACE make a good faith effort to settle the case.
ACE understood that the case could be settled within policy limits, but also knew there
was a danger of an excess verdict. (Sorkin Dep., Ex. AAA, p. 133). On June 5, 2009, Ms.
Kogan quantified the likely exposure at between $2.3 million and $4.5 million. (Ex. GGG). She
also concluded that the case was a loser for RCM and had to be settled. (Id.; Ex. PPP at p.
03589). However, instead of developing a strategy for ACE to settle the case, she took the
position that others should bear the financial burden of doing so, with ACE merely contributing
defense costs. ("The estimated settlement amount will depend on the outcome of the motion for
summary adjudication, the amount the Insured and Blue Ally are willing to contribute toward
settlement, and the litigation budget") (Ex. GGG).
ACE Drags Its Feet on Settling the Case While Escalating the Pressure on RCM o
Compromise on Coverage
ACE took no steps to settle the case during June, blaming the delay on the pendency of
motions addressed to the amount of damages (Kogan Dep., Ex. EEE, p. 97 - 100), despite the
fact that Ms. Kogan understood that even if the motions went well, the likely damages at trial
would be in excess of $2 million. (Ex. GGG, p. 03773). Once RCM retained coverage counsel,
12
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 ACE
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 make
towards settlement, seeking that information from Blue Ally and from RCM. (Dep. Ex. 1 at
ACE 09154).
13
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 litigation
held to address settlement of that litigation. It was completely separate from an August 18th
mediation at JAMS in New York with David Geronemus that involved only RCM and ACE and
was addressed to the coverage dispute.
14
take to settle the case, ACE was equally concerned with how much it might ultimately be able to
recover in subrogation from Blue Ally. (Ex. HHH, p. 09158) Similarly, in deciding on how
much to consider authorizing for settlement, ACE's primary consideration appeared to be its
bottom line, not what it would actually cost to settle the case and protect its policyholder. When
the Murchison firm told ACE that it estimated that defense costs going forward, through trial,
would total $600,000 (Ex. HHH), ACE decided that was the most it would offer in settlement.
(Kogan Dep., Ex. EEE, p. 166 – 69)
ACE Inexplicably Refused To Inform RCM of ACE's Coverage Position
When it became evident that ACE was resisting making any substantial effort to settle the
case, RCM's coverage counsel repeatedly demanded that ACE explain why. (Ex. VVV, p. 6; Ex
SSS, p. 8; Ex. OOO, p. 03049); Kogan Dep., Ex. EEE, p. 128-29). Although ACE knew it was
obliged to provide its insured with a prompt, clear and updated statement of ACE's coverage
position, ACE failed to do so despite repeated requests from RCM's counsel. (Lee Dep., Ex.
RRR, p. 75, 81-81). After several letters went unanswered, RCM's coverage counsel emailed Ms
Kogan: "ACE's refusal either to respond to the June 26th letter or to tell its insured what it
expects from it, but rather to withhold that information in order to maximize the pressure on its
insured at the mediation is extreme bad faith." (Ex. WWW). Yet the stonewalling continued.
ACE's coverage counsel, John Lee, Esquire, several times brushed off questions from RCM's
coverage counsel with a promise to provide a comprehensive coverage position "shortly." (Ex.
XXX). He never did so and when questioned on why not, could not offer a single excuse. (Lee
Dep., Ex. RRR, p. 81-83) Although the practice at ACE was to issue an amended reservation of
rights letter when new circumstances or issues came to light (Lange Dep., Ex. TT, p. 49-50), ACE
never did so in this case.
15
ACE Finally Settles the Case on The Eve Of Trial.
With the August 24th trial date fast approaching and RCM resolutely resisting ACE's
pressure, ACE finally took steps to settle the case. ACE understood that it would cost
$1 to $2 million to settle. Judge Kwong had opined as much as had the Murchison attorney
directly responsible for the defense. In late July ACE was informed that Topa had made a
settlement demand of $2.5 million. (Ex. HHH, p. 09158). With trial only a few weeks away,
ACE nonetheless waited until August 7th to make a counterproposal and then only offered
$150,000, which it had been told by the Murchison firm would not be viewed by Topa as a
serious offer. ACE never explained its rationale for such a low offer. By that time, it had
concluded that RCM was sure to be found liable, that the case had to be settled, and that damages
could exceed $4 million.
Predictably, Topa rejected the offer and increased its demand to $2.7 million to signal its
view that the $150,000 offer was a waste of time. (Ex. CCC) Topa informally told the
Murchison attorney defending the case that the settlement amount had to be at least $2 million.
An August 18th mediation between ACE and RCM failed to resolve their coverage dispute. ACE
then offered Topa $1 million and Topa countered at $2.45 million and reiterated informally to the
Murchison attorney that the settlement amount had to be at least $2 million. (Ex. HHH, p. 09160)
Having by then lost any opportunity to settle the case for less than $2 million, ACE finally did
what RCM had been asking it to do all along: it agreed to settle the case with Topa, with both
16
ACE and RCM reserving their positions on coverage.12 A settlement was negotiated with Topa in
the amount of $2 million, of which ACE paid $1 million up front with the other $1 million to be
paid later, with interest. ACE and RCM separately agreed that they would resolve their coverage
dispute after the Topa case was resolved. The Topa settlement was finally signed in September
2009, and this coverage action followed.
ACE Manufactured the "Cumis Counsel" Excuse to Justify Its Inaction
A central aspect of ACE's excuse for its conduct is its assertion that the Murchison firm
was "Cumis counsel,"13 i.e., independent counsel appointed under Cal. Civ.Code §2860 at the
demand of the policyholder because of potential conflict on coverage issues. RCM's outside
counsel, Peter Mooney, Esquire, was the person who contacted Mr. Lange on behalf of RCM, and
Mooney never discussed Cumis counsel with Mr. Lange. (Mooney Dep., Ex. PP, p. 16-17). His
suggestion of the Murchison firm was just that – a suggestion, not a demand under California law
or otherwise.
ACE's paper trail of references to a purported "Cumis" demand is suspicious in the
extreme. First and foremost is a file note dated September 12, 2008, authored by Matthew
Lange, purporting to memorialize his telephone conversation with Peter Mooney (of White &
Williams) in which Lange claims that Mooney made a "cumis demand" [sic] and Lange assented
to using the Murchison firm. (Ex. HHH, p. 09152). It is clear that this conversation could not
have occurred on or around September 12, 2008, because the Murchison firm was engaged in
12 In part, this may have been driven by ACE's concern that if the Topa case were allowed to
proceed to trial, ACE might be liable for the entire verdict, even as to claims which it asserted
might not be covered. (Ex. VV, p. 00932)
13 San Diego Navy Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984).
17
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 time
of his early July conversation with Mr. Mooney all of the information he needed for the
reservation 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 that
routine task. (Lange Dep., Ex. TT, 112; 185)
18
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 its
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
19
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 Summary
Judgment. (“RCM Memo”), at 14‐15.
20
better” by itself (Sneed v. Concord Ins. Co., 237 A.2d 289, 296 (N.J. Super. App. Div. 1967)),
and the insurer is barred from disputing liability, even for claims that are not covered.16
In opposing RCM’s motion for partial summary judgment, ACE contends that “there may
be only ‘a rebuttal [sic] presumption of prejudice when the insurer must disprove in order to
overcome the bar of estoppel.’” (ACE American Insurance Company’s Opposition to RCM
Technologies Inc.’s Motion for Partial Summary Judgment (“ACE Opp. Memo”), at 25,
quoting Griggs v. Bertram, 443 A.2d 163, 170 n. 3 (N.J. 1982)). But ACE sweeps too broadly.
Actually, here is what the New Jersey Supreme Court gave as its example of a possible exception
to conclusive prejudice: “a short delay before the insurer discloses its intentions regarding
coverage” Id.
Accordingly, New Jersey courts have, in fact, carved out a single exception to Merchants’
conclusive prejudice rule -- when an insurer participates in the underlying litigation only briefly.
Sussex Mut. Ins. Co. v. Hala Cleaners, Inc., 380 A.2d 693 (N.J. 1977), upon which ACE relies
heavily, is a case in point. There, the insurer notified the insured that it would file an answer
“without prejudice to our rights to determine the coverage question and the necessity for us to
defend the action” (id., at 696), answered the complaint, promptly instituted a declaratory
judgment action over coverage, and quickly obtained a stay of the underlying lawsuit. Id., at 694,
696.
In reversing the Appellate Division’s estoppel decision, the New Jersey Supreme Court
held that the insurer’s “action in filing an answer on [the insured’s] behalf and obtaining a stay
amounted to no more than what the trial judge called it: maintenance of the status quo of the
16 RCM Memo, at 16‐17.
21
[underlying] suit pending an adjudication of the coverage issue.” Id., at 697. The Supreme Court
stated: “[U]nder the circumstances of this case, the Appellate Division fell into error. We
emphasize “under the circumstances of this case” because we have no intention of disturbing the
rule restated in Merchants and explicitly acknowledged in this jurisdiction for almost fifty
years . . . .” Id., at 697. (Emphasis added.)
Similarly, in Am. Handling Equip. Co. v. T.C. Moffatt & Co., 445 A.2d 428 (N.J. Super.
App. Div. 1982), the only other case that ACE cited on the exception issue, the insurer filed an
answer in an accident case but immediately disclaimed when it discovered, four months later,
that the putative insured had no policy with it. Id., at 429. (The broker had not actually obtained
the insurance and had made up a policy number. Id., at 430.) The Appellate Division found that
the filing of the answer, without any additional activity by the insurer, was a stopgap measure
that did not bring the case within the Merchants rule. Id., at 432. See also, United States Cas.
Co. v. Home Ins. Co., 192 A.2d 169 (N.J. Super. App. Div.), certif. den., 195 A.2d 121 (1963)
(insurer disclaimed coverage five weeks after answer filed; no action in case by insurer after
filing of answer).
In its opposition to RCM’s motion, ACE does not contend that it fairly informed RCM
that it met Merchants’ requirements. By not disputing this point, ACE is simply recognizing
reality: Its September 12, 2008 “reservation of rights” letter17 says nothing about RCM’s right to
reject ACE’s offer and therefore precludes ACE from claiming that it complied with New Jersey
law on an effective reservation of rights. Saddled with an ineffective reservation, ACE argues
that the situation here is similar enough to Sussex Mutual and United States Casualty that the
17 Ex. E to RCM’s Motion.
22
narrow exception those cases carve out ought to apply. That is clearly wrong: Instead of the
short participation that turns the otherwise conclusive presumption of prejudice into a rebuttable
one, ACE was involved in the Topa lawsuit to the very end and never gave up its contractual
right to control settlement, which meant that RCM could not settle without ACE’s approval.18
(This latter point will be discussed at greater length soon.)
Since ACE appears not to have found any New Jersey cases that carve out other sorts of
exceptions to the Merchants conclusive prejudice rule (and we also have not found any), ACE is
really asking this Court to create a new exception for insurers who violate Merchants, claim that
the insured controlled the defense of the litigation and yet retain their contractual right to settle
the lawsuit.
As shown above in the statement of facts, RCM hotly disputes ACE’s claim that RCM
controlled the defense of the Topa litigation. RCM recognizes, however, that the thin reed of the
ACE claim handlers’ testimony is sufficient to create a factual dispute about the control of the
defense.
But, as RCM stated in its opening memorandum, the Merchants rule is not limited to
the defense of a claim but applies to “any significant phase of the handling of or resistance
18 ACE’s quotes at length from Sussex Mutual, from which it then attempts to draw
dispositive parallels to this case, claiming that Sussex Mutual didn’t control the defense and
neither did ACE; that the insured in Sussex Mutual was aware that coverage was in dispute, and
so was RCM; and that the insured in Sussex Mutual had its own attorneys, and so did RCM.
(ACE Opp. Memo, at 23.) But in attempting to draw these parallels, ACE ignores that these
facts were the underpinning for the Sussex Mutual’s court statement that the insured could not
have believed that the insurer’s filing of an answer “amounted to a retreat by the carrier on the
coverage question” (380 A.2d at 126), an issue that was separate from whether the Merchants
conclusive presumption of prejudice rule applied to the filing of an answer as a stopgap measure.
Moreover, if the insured’s awareness of a coverage dispute and its use of counsel -- the parallels
to Sussex Mutual upon which ACE relies -- were determinative factors, the exceptions to
Merchants would devour the rule.
23
to the claim . . . .” Sneed v. Concord Ins. Co., 237 A.2d at 295. Control over settlement is
among the “significant phases[s]” upon with the Merchant rule is premised. Id. See also
Griggs v. Bertram, 443 A.2d at 169 (emphasizing insured’s inability to try to settle the case
“without risking loss of coverage pursuant to the provision prohibiting it from voluntarily
compromising liability or independently settling the claim”).
ACE does not seriously dispute these propositions. Instead, it contends that its failure
should not matter for two reasons: first, because RCM participated in the ultimate settlement of
the Topa lawsuit;19 second, because the Policy required RCM’s approval of any settlement.20 (As
to the latter, RCM could only consent or not to what ACE had already done. Moreover, if RCM
refused, it would be severely penalized if a judgment or later settlement exceeded the
proposal.) 21
Both of ACE’s arguments miss the point. The Policy provides: “The Insured shall not
admit or assume liability or settle or negotiate to settle any Claim . . . without the prior written
consent of the Insurer.”22 With ACE proceeding under a reservation of rights, RCM had to wait
for ACE to settle the case and could not settle on its own without ACE’s permission.23
19 ACE Opp. Memo, at 24.
20 ACE Opp. Memo, at 20, ¶¶ 84, 87; ACE response to RCM’s statement of undisputed
facts, at 4‐5 (responding to RCM’s undisputed fact 39). RCM’s statement of undisputed facts
and ACE’s responses to them are included in the single document that RCM is submitting
that collects all of the parties’ lists of facts and the responses to them. See footnote 1, above.
21 See Ex. A (Policy) to RCM’s motion, amended § IX, at RCM 00032. This provision
hardly constitutes control of the settlement by RCM.
22 Policy (Ex. A to RCM’s motion), § IX.A, RCM 000017.
23 See ACE’s amended answer, (EX. D to RCM’s motion), ¶ 31, p. 7.
24
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
insured’s 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, Merchants’ conclusive 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 don’t require a showing of prejudice, ACE’s retention
of 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 may
seize opportunities to settle which might be ignored or overlooked by a carrier . . . “ 179
A.2d at 511. On June 5, 2009, ACE stated in an internal document that damages in the Topa
lawsuit could reach $4.5 million and that “[t]here is no chance that RCM will be successful at
trial 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 the Topa
lawsuit (ACE Opp. Memo, at 19, ¶¶ 81‐82), ACE does not deny (but instead avoids
responding to) RCM’s assertion that ACE did not make any settlement offers to Topa until
shortly before trial and even offers evidence that ACE actually refused to disclaim coverage
so that RCM could settle on its own. (RCM Memo, at 11, ¶ 38; ACE response, at 3‐4; ACE Exs.
47, 48.)
25 And as a matter of fact, 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." ACE viewed its duty to pursue settlement as the same
regardless of whether the case was being handled by panel counsel or "Cumis counsel". (Ex.
KKK (Levine Dep.), at 110-11,116)
25
One more point in ACE’s 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 RCM’s 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 doesn’t 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 under Merchants and its progeny and that RCM was contractually precluded
from settling the case on its own without ACE’s 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
insurer’s 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 (ACE’s Ex. 51).
27 See ACE Opp. Memo, at 24.
28 ACE Ex. 51, §§ II.A.1‐II.A.3, at ACE 00130‐31.
29 RCM Memo, at 11, ¶ 38.
26
favor), RCM could not handle the settlement of the lawsuit “directly and independently of the
insurer.” Accordingly, RCM should be granted partial summary judgment that ACE is barred
from disputing liability for the costs of defending and settling the Topa lawsuit.
II. CHOICE OF LAW
This case presents three main choice of law issues: First, is there a false or true conflict
between New Jersey and California law on the question of whether an insurer must explicitly
inform its insured that it can accept or reject its conditional offer to defend for an attempted
reservation of rights to be effective? Second, using the “deeper” choice of law analysis, does
New Jersey or California law apply to the interpretation of the Policy and ACE’s obligations
under it? Third, what law applies to RCM’s bad faith claim (which is a separate choice of law
question from deciding the law that applies to the Policy itself)? Additionally, ACE has raised
some subsidiary choice of law issues that also need to be addressed, including a contention that
tort choice of law principles should apply to the Merchants issue.
Although ACE’s choice of law arguments are scattered through several of its briefs, often
redundantly, we will respond to all of them in this section of the memorandum. 30
30 ACE intimates that all of the choice of law issues in this case are moot because of a
letter that RCM’s counsel wrote to ACE’s then‐counsel during the pendency of the Topa
lawsuit, well before the current litigation commenced, which said that “while the [P]olicy
must be interpreted in accordance with New Jersey law,” California law would apply to
claims handling in the Topa lawsuit, and went on to cite California statutory provisions in
that regard. (ACE Opp. Memo, at 27, selectively quoting July 20, 2009 letter from William R.
Herman to John C. Lee (Ex. 40 to ACE’s motion); see also ACE Choice Memo, at 29‐30). The
letter’s reference to California was, by its terms, limited to ACE’s actual handling of the
claim, and did not involve the effectiveness of ACE’s reservation of its contractual rights.
But, to the extent the letter could possibly be read to sweep more broadly, it is not binding.
Even though ACE urges the Court to take the letter into consideration somehow, it does not
argue that RCM is judicially estopped. And well it cannot, because judicial estoppel does not
apply here, where there has been no judicial decision upholding RCM’s arguments to ACE’s
footnote cont’d on next page
27
A. Choice of Law on Contract Issues
1. False Conflict
If there is a “false conflict” – that is, a situation in which “only one jurisdiction’s
governmental interests would be impaired by the application of the other jurisdiction’s law”
(Lyon v. Caterpillar, Inc., 194 F.R.D. 206, 211 (E.D. Pa. 2000)) ‐‐ a court “must apply the law
of the jurisdiction whose interests would be impaired.” Id., at 211; see also Hammersmith v.
TIG Ins. Co., 480 F. 3d 220, 230 (3d Cir. 2007).
New Jersey obviously allows an insured to reject its insurer’s offer to defend under a
reservation of rights. But so does California, although ACE misleadingly implies otherwise
through its repeated use of terms such as “unilateral reservation of rights.”31 In Buss v.
Superior Court, 939 P.2d 766 (Cal. 1997), the California Supreme Court wrote:
Through reservation, the insurer gives the insured notice of how it will, or
at least may, proceed and thereby provides it an opportunity to take any
steps that it may deem reasonable or necessary in response – including
whether to accept defense at the insurer’s hands and under the insurer’s
control . . . or, instead, to defend itself as it chooses.
Id., at 784 n. 27. (Emphasis added; citation omitted). Accord, Blue Ridge Ins. Co. v. Jacobsen,
22 P.3d 313, 320 (Cal. 2007). The only difference between the two states, then, is that New
Jersey requires that an insurer actually tell the insured that, as Buss says, it can “accept
. . . footnote cont’d from previous page

then‐counsel and because the statements were not even made to a court. Reed Elsevier, Inc.
v. Muchnick, 130 S. Ct. 1237, 1249 (2010); McCurrie ex rel. Town of Kearny v. Town of Kearny,
174 N.J. 523, 533‐34, 809 A.2d 789, 794 (2002).
31 ACE Memo, at 32; see also ACE American Insurance Company’s Motion for Partial
Summary Judgment Regarding Choice of Law (“ACE Choice Memo”), at 26‐27.
28
defense at the insurer’s hands and under the insurer’s control . . . or, instead, to defend itself
as it chooses,” 939 P.2d at 384, while California does not.
In its opening memorandum, RCM argued that the conflict is a false one. New Jersey has
a clearly expressed interest in protecting its insureds by making them aware of their rights.
While California may be interested in reducing the obligations of its domiciled insurers, or those
who contract in California in reliance on California law, California has little interest in protecting
a Pennsylvania insurer that contracted with a New Jersey insured. See Gen’l Star Nat’l Ins. Co. v.
Liberty Mut. Ins. Co., 960 F.2d 377, 379 (3d Cir. 1992); Hammersmith, 480 F.3d at 235;
Melville v. Am. Home Ins. Co., 584 F.2d 1306, 1313 (3rd Cir. 1978).
In response, ACE has put forward several interests that, it claims, would be harmed
by application of the Merchants rule. First, citing Blue Ridge, 22 P.3d at 317‐18, ACE says
that “allowing an insurer to reserve rights and settle without the insured’s agreement
operates to protect the interests of innocent California citizens . . . .“ In Blue Ridge, the
insureds, who had acquiesced to the insurer’s offer to defend under a reservation of rights,
were arguing that the insurer could not recover settlement payments made over their
objection. Id., at 537, 540. In other words, Blue Ridge addressed the question of whether a
California insured that accepts a defense under a properly issued reservation of rights letter
must, in the absence of a consent to settlement provision in the policy, also affirmatively
agree to a proposed settlement if the insurer is later to recover some or all of the settlement
payment. (The court found for the insurer.)
Put in terms of our case, the Blue Ridge interest in settlement would apply if ACE had
sent a reservation of rights letter to RCM that complied with Merchants (in other words,
expressly informing RCM that it could accept or reject ACE’s conditional offer), RCM had
29
acquiesced and then claimed that ACE could not seek to recover any part of the Topa
settlement because RCM had not additionally agreed to the settlement. Accordingly, the
interest in settlement that Blue Ridge identifies has nothing to do with the Merchants rule,
unless ACE is arguing that insureds that decide to reject the offer of a defense under a
reservation of rights are less likely to settle than insurers.32 But any such argument is
undermined both by the California insured’s right to reject a reservation of rights defense
and by Blue Ridge itself, which requires an insurer that proposes to settle a case over the
insured’s objection to make “an express offer to the insureds that they may assume their
own defense when the insurer and insureds disagree whether to accept the proposed
settlement.” Id., at 544. (Emphasis added.)
Moreover, ACE’s assertion of this interest in settlement, and the next two claimed
California interests that ACE advances – that “New Jersey’s rule would undercut
[California’s] policy [of encouraging insurers to defend cases] by encouraging an insured to
reject its insurer’s proffered defense under a reservation”33 and because the “insurer may
be ‘shut out’ of the defense and have no ability to control defense costs if the insured
refuses to agree to the defense under a reservation”34 – ignore the fact that an insured in
California, as in New Jersey, has the right to “accept defense at the insurer’s hands and
under the insurer’s control . . . or, instead, to defend itself as it chooses.” Buss v. Superior
Court, 939 P.2d at 784 n. 27. ACE, then, is really contending that while New Jersey ensures
32 New Jersey believes otherwise: “Personal counsel may seize opportunities to settle
which might be ignored or overlooked by a carrier . . . “ Merchants, 179 A.2d at 511
34 Id., at 33.
30
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 insurer’s conditional offer of a defense and therefore won’t 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 don’t hold water.
The last California interest that ACE contends is at odds with the application of
Merchants is “California’s interest in limiting the estoppel doctrine” because the New Jersey
rule “would compromise California’s 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 that Hammersmith explicitly rejects. See 480 F.3d at 229‐30 (noting
that false conflict analysis is distinct from determination of whether differences exist);
Lacey v. Cessna Aircraft Co., 932 F.2d 170, 187‐88 (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 policy

where such coverage did not originally exist. . . . While this statement
of the rule is generally applicable, there is a well‐established
35 Id., at 33‐34.
31
exception: “[I]f a liability insurer, with knowledge of a ground of

forfeiture or non‐coverage under the policy, assumes and conducts
the defense of an action brought against the insured, without
disclaiming liability and giving notice of its reservation of rights, it is
therefore precluded in an action for setting up such ground of
forfeiture or noncoverage. In other words, the insurer’s
unconditional defense of an action brought against its insured
constitutes a waiver of the terms of the policy and an estoppel of the
insurer to assert such grounds.”
Id., at 755. (Emphasis added; citation omitted)
Thus, both New Jersey and California require an effective reservation of rights if an
insurer is to preserve its coverage defenses, both states allow the insured to reject the
conditional defense, and both states provide the same remedy when the reservation is not
effective – the insurer is estopped from asserting its defenses. California’s law and interests
are the same as New Jersey’s on those points.
The only difference between the two states is that New Jersey requires insurers to
explicitly inform their insureds that a conditional defense can be accepted or rejected for a
reservation to be effective, while California does not. In other words, California apparently
feels that insured parties are adequately aware of their right to reject a defense proffered
under a reservation of rights, while New Jersey is more protective and requires explicit
notification on pain of estoppel. But this is additional requirement is about the relationship
between the insurer and the insured, and really has nothing to do with the location of the
underlying litigation.
So, at the end of the false conflicts argument, we return to the Third Circuit cases with
which we began ‐‐ Gen’l Star Nat’l Ins. Co. v. Liberty Mut. Ins. Co., 960 F.2d 377 at 379;
Hammersmith v. TIG Ins. Co., 480 F.3d at 235; and Melville v. Am. Home Ins. Co., 584 F.2d at
1313 – which teach that the state where the underlying lawsuit was filed has little interest in
32
protecting an out‐of‐state insurer that contracted with an out‐of‐state insured. More
specifically, when an insurer is not domiciled in California, California has a minimal interest,
if any, in standing in the way of New Jersey’s long‐standing decision to require insurers that
wish to make an effective reservation of rights to provide more information to New Jersey
insureds about their rights when a conditional defense is offered than California does. On
the other hand, application of California law on this point would impair New Jersey’s interest
in providing the required information and protecting its insureds. Accordingly, the conflict
here is a false one, and New Jersey law applies.
2. Deeper Choice of Law Analysis for Merchants and Other Issues

Relating to the Insurance Policy_____________________________________
Even if there were a true conflict, Pennsylvania’s choice of law principles mandate
the application of New Jersey law.
In its opening memorandum, RCM demonstrated that of the five Second Restatement
of Conflict of Laws § 188(2) contacts that come into play when an insurance policy covers a
group of risks that are scattered throughout two or more states, two (the place of
contracting and domicile) favor New Jersey, two (place of negotiation and subject matter of
the contract) are multi‐state and are therefore neutral and one (place of performance) is
neutral as between New Jersey and California because ACE received the premium for the
policy in a third state. None favors California.36
With respect to the governmental interests prong of the analysis, RCM pointed to
Third Circuit precedent holding that “the protection of insured parties is the primary public
36 See RCM Memo, at 27‐33.
33
policy behind laws governing duties owed by an insurer to an insured . . . .” Gen’l Star Nat’l
Ins. Co. v. Liberty Mut. Ins. Co., 960 F.2d at 379. Accord, Melville, 584 F. 2d at 1313‐14, which
New Jersey’s rule serves, while California’s does not.37
As already discussed in the opening memorandum and above, one way that New
Jersey protects the interests of its domiciled insureds is by requiring insurers to comply
with the Merchants rule. Whatever interests ACE might contend California has in not
imposing this requirement on insurers, they are not aimed at serving the primary public
policy of protecting the interests of insureds that the Third Circuit has identified.
RCM’s opening memorandum also demonstrated that ACE knew the Policy it issued
to RCM came within the protections that New Jersey provides to its domiciled insureds.
ACE listed the New Jersey Property and Liability Insurance Guaranty Fund charge on the
Policy and collected it from RCM.38 (ACE of course knew that Fund would be used by New
Jersey to pay the claims of RCM and other ACE policyholders if ACE were to become
insolvent.39) ACE issued the Policy to RCM on admitted paper, which usually means “the
policy form and/or rates for the policy were filed or approved with a state.”40 ACE didn’t
“usually write this class [ACE DigiTech insurance] on an admitted basis,”41 however, and the
ACE DigiTech policy form had not yet been approved by New Jersey regulatory
37 See id., at 34‐35.
38 Ex. A to RCM Motion (Policy), Declaration, Item 7, RCM 000002.
39 Deposition of Matthew Cibulskas, ACE’s vice president of professional underwriting, ,

July 28, 2009 (“Cibulskas Dep.”), attached as Ex. BBBB, at 46, ll. 4‐23.
40 Cibulskas Dep., (Ex. BBBB), at 42, ll. 21‐25.
41 Id., at 47, ll. 1‐25 through 48, ll. 1‐7.
34
authorities.42 So, ACE’s 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 admitted
paper – New Jersey is a – what they call a deregulation state, which
means if an account meets certain requirements, typically revenue
size, 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 there’s an
admitted carrier in that – allowed to do business in that state, issue
[sic] the policy even though the form and rates are not filed and are
not admitted.
Q. And I take it that ACE American Insurance Company was an
admitted 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. 13‐15.
43 Id., at 51, ll. 13‐25 through 56, l. 12 (underwriter would have had to review
regulations); 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. 3‐50, l. 6.
45 Ex. W to RCM Motion (Notice of Nonrenewal of Insurance); see also RCM Memo, at
34‐35.
35
California because RCM had not filed it in New Jersey, ACE admitted that the Policy had been
issued in New Jersey.46
Section 6 of the Restatement also comes into play in a choice of law analysis. Lyon v.
Caterpillar, Inc., 194 F.R.D. at 212 n. 8. Among the section 6 factors are “the protection of
justified expectations” and “certainty, predictability and uniformity of result.” Restatement,
§§ 6(2)(d) and (f). In its opening memorandum, RCM pointed out that the Policy contains
objective indications that ACE and RCM expected New Jersey law to apply – including a New
Jersey address as the named insured’s principal place of business and the address to which
notices were to be sent,47 the use of New Jersey time to govern the policy period, the
payment to the New Jersey Insurance Guaranty Fund, and a provision that any mediation or
arbitration would take place in New Jersey or New York.48
46 Ex. U to RCM’s motion (ACE transfer motion), at ¶ 4. In its opposition brief, ACE
claims that “this statement was based upon the allegations of RCM’s complaint . . . . “ (ACE
Opp. Memo, at 30.) But paragraphs 6 and 7 in RCM’s Complaint (Ex. C to RCM’s motion), the
ones that ACE cited when making its admission, say nothing about the issuance of the
Policy. And ACE’s admission made perfect sense, because the Policy itself says, “By signing
and delivering the policy to you [and the “you” here is RCM, in New Jersey], we state that it
is a valid contract.” Ex. A to RCM’s Motion (Policy), Signatures page (RCM 000023).
47 In its briefs, ACE refers to an April 4, 2007 email in which an employee of RCM’s
broker, Arthur J. Gallagher & Co., wrote to the wholesale broker, “I will let you know as soon
as we have established whether our NJ St [sic] license is resident or non‐resident. We can
always use a CA address as well.” ACE Opp. Memo, at 28; ACE Choice Memo, at 36‐37. The
fact of the matter, however, is that the Policy does use RCM’s New Jersey’s headquarters as
its principal address, and, as ACE’s vice president for underwriting testified, ACE went out
of its way to issue the Policy on New Jersey admitted paper. Moreover, the email was sent
during the discussions about the ACE 2007‐2008 insurance policy and not the Policy at
issue here.
48 See RCM Memo, at 35; Ex. A to RCM Motion (Policy), Items 1, 2 & 7 (RCM 000001‐
02), § VIII.C (RCM 000016), § XIX (RCM 000020).
36
In issuing the Policy on New Jersey admitted paper, ACE revealed its expectations.
Later, it confirmed them by using the New Jersey non‐renewal form, with its reference to
compliance with state laws and regulations in the form, and the direction to contact New
Jersey authorities in the event of a complaint. Cf. NL Indus., Inc. v. Commercial Union Ins. Co.,
65 F.3d 314, 317 (3d Cir. 1995) (state to which premium tax paid evidence of its objective
reasonable expectations). By contrast, aside from ACE’s self‐serving current statements
about what it thought,49 there is nothing in the Policy or in any other evidence that indicates
either RCM or ACE expected that California law would apply.
As RCM contended in its opening memorandum, the application of New Jersey law,
the state that every signpost in the Policy points toward and where RCM’s headquarters is
located, instead of the law of whatever state a piece of litigation against RCM happens to fall,
serves the section 6 interests of protecting justified expectations and “certainty,
predictability and uniformity of result.” Indeed, under ACE’s suggested approach, the law
that governs an insurance contract literally cannot be determined until (or, worse, changes
as soon as) the underlying litigation begins.
3. ACE’s Claims that California Law Governs the Policy
Two important things need to be kept in mind in evaluating the arguments that ACE
has made for the application of California law in order to avoid the consequences of
Merchants:
First, the location of the events that gave rise to the underlying claim or its litigation
has nothing to do with the decision about the law that applies to the interpretation of an
insurance policy or the enforcement of the rights that spring from it. Hammersmith, 480
49 ACE Opp. Memo, at 40‐41.
37
F.3d at 235; Gen’l Star Nat’l Ins. Co. v. Liberty Mut. Ins. Co., 960 F.2d at 379; Melville 584 F.2d
at 1313; Nationwide Mut. Ins. Co. v. West, 807 A.2d 916, 921 (Pa. Super. 2002); McCabe v.
Prudential Prop. & Cas. Ins. Co., 514 A.2d 582, 586 (Pa. Super. 1986). “’We are concerned
with the contract of insurance’ and not the underlying tort.” Hammersmith, at 239, quoting
McCabe, at 586. Second, ACE ignores the New Jersey references in the Policy and its own
actions in writing the Policy, which inexorably point to the conclusion that New Jersey law
applies.
a. Place of Contracting
After agreeing with RCM that section 188 of the Restatement applies and not section
193 because there is “no principal location of the risk,”50 ACE argues that the first section
188(2) factor, place of contracting, favors California by heavily relying on California cases
and statutes that, it claims, show that California is the place of contracting under California
law.51 But the Court must follow Pennsylvania law to identify and locate the contacts. See
Restatement 188, cmt. (e) (forum's rules of offer and acceptance employed to determine
place of contracting); see also, CBS, Inc. v. Film Corp. of America, 545 F.Supp. 1382, 1386 (E.D.
Pa. 1982) (following Restatement).
When ACE turns to Pennsylvania law, it dismisses as superseded by Hammersmith52
what the Third Circuit wrote in J.C. Penney Life Ins. Co. v. Pilosi, 393 F.3d 356 (3d Cir. 2004).
There, in applying Pennsylvania choice of law, the Court of Appeals wrote, “’An insurance
contract is ‘made” in the state in which the last act legally necessary to bring the contract
50 ACE Choice Memo, at 33, citing Hammersmith, 480 F.3d at 228 n. 4.
51 ACE Opp. Memo, at 36‐37; ACE Choice Memo, at 33‐34.
52 See ACE Opp. Memo, at 36.
38
into force takes place.’ . . . . ‘In most cases, this last act is delivery of the policy to the insured
and the payment of the first premium by him.’” Id., at 361. (Internal citations omitted.)
But ACE is confusing two issues here, perhaps because J.C. Penney said two different
things. First, it said that Pennsylvania follows lex locus contractus as a choice of law
approach, so that the law of the place of contracting governs contract claims. Id., at 360.
Second, it said that under Pennsylvania’s substantive contract law, the place of contracting
for an insurance contract is where the policy is delivered and where the insured pays the
premium. Id., at 361. Hammersmith predicts that Pennsylvania will follow the flexible
Griffiths choice of law approach for contract questions and disagrees with J.C. Penney on
that issue. But this disagreement on the proper choice of law approach is unrelated to J.C.
Penney’s correct statement of how Pennsylvania substantive law determines where an
insurance contract is formed, which Hammersmith did not question.
After incorrectly contending that J.C. Penney no longer applies, ACE simply ignores
the two facts that establish the “making” of the insurance contract in New Jersey under
Pennsylvania choice of law principles: ACE’s own statement in the Policy that “[b]y
delivering the policy to you, we [ACE] state that it is a valid contract”53 and the undisputed
fact that RCM paid the premium from New Jersey.54 Instead, ACE pretends that the place
where the RCM paid the premium – which J.C. Penney holds is the relevant act ‐‐ was not
53 See RCM Memo at 29, quoting Ex. A to RCM Motion (Policy), Signature page (RCM
000023). (Emphasis added.)
54 RCM Memo, at 9, ¶ 25; ACE response to RCM’s statement of undisputed facts, at 1.
39
where RCM wrote the check (indisputably New Jersey), nor where ACE received it (either
Illinois or Pennsylvania).55
ACE’s citation to the Third Circuit’s footnote about the location of brokers in N.L.
Industries, Inc. v. Commercial Union Ins. Co., 65 F.3d at 320 n. 4,56 is also inapposite. First,
the Third Circuit was applying New Jersey’s choice of law approach, which differs from
Pennsylvania’s, because the appealed case had been filed in the District of New Jersey. See
id., at 319. Moreover, Diamond Shamrock Chem. Co. v. Aetna Cas. & Sur. Co., 609 A.2d 440
(N.J. Super. App. Div. 1992), the only case cited in the N.L. Industries footnote for the
proposition upon which ACE relies, dealt with a situation where most of the 120‐plus
insurance contracts were actually executed in New York (id., at 465), as opposed to here,
where the policy was signed by ACE in Pennsylvania. Additionally, in NL Industries, while it
is true that the broker was in New York (whose law the Third Circuit decided should
govern), the insured’s national headquarters were also in New York, the insurer
countersigned the policies in New York and, the Third Circuit held, the insurer’s “objectively
reasonable expectations were that New York law would control any disputes involving
these contracts. . . . [because the insurer] coded these policies as New York contracts, and
premium taxes on the policies were paid in New York.” 65 F.3d at 317. (Citation to record
55 RCM Memo, at 9, ¶ 26. Although ACE didn’t include this paragraph in the long list of
RCM’s facts that it wasn’t disputing, it offered no contrary evidence or other objection to
RCM’s statement that “ACE directed that the premium for the Policy be sent to it either in
Illinois or Pennsylvania, depending on the manner of payment,” citing Ex. V to RCM’s Motion
(Terms of Trade).
56 ACE Opp. Memo, at 36; ACE Choice Memo, at 33.
40
omitted.) When all the facts upon which the Third Circuit relied are taken into account, far
from supporting ACE’s position, NL Industries actually supports RCM’s.
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 insured’s headquarters were in New York (just as
RCM’s 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 233‐34. Moreover,
unlike Hammersmith, where there was nothing in the record about the place of delivery,
ACE’s Policy actually states that delivery was to RCM.
Under J.C. Penney and 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 there

is no single place of negotiation and agreement, as for example, when the
parties do not meet but rather conduct their negotiations from separate
states 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,
RCM’s chief financial officer, who dealt with its broker’s personnel, gave direction to them
57 RCM Memo, at 8, ¶ 17; ACE response to RCM’s undisputed facts, at 1.
41
about RCM’s wish to increase the limits of the Policy, and authorized the purchase of the
Policy) and Pennsylvania, where ACE signed the Policy. 58 ACE did not dispute any of RCM’s
evidence.59 But, in an attempt to chalk up a California contact, ACE simply ignores what the
Second Restatement says, Mr. Remer’s New Jersey involvement and ACE’s Pennsylvania
action and contends that only California and Georgia are involved.60 ACE is wrong on the
issue, both legally and factually, and this contact factor is neutral as between New Jersey
and California.
c. Place of Performance
RCM cited Hammersmith in its opening memorandum on the issue of place of
performance. There the Third Circuit wrote, “Generally, an insurance contract is performed
where the premiums are received.” (480 F.3d at 234 n. 13.) Here, because ACE directed
that the premium for the Policy be sent to it in Illinois or Pennsylvania (depending on the
manner of payment), we said that the contact was neutral.61
ACE does not address this point from Hammersmith. Instead, it argues that the
decision about where it performed its reservation of rights letter obligation is analogous to
the place of performance decision the Third Circuit made in Hammersmith, which involved
a choice of law on late notice.62 There, the Third Circuit held that because the insured, a
59 See RCM Memo, at 6‐7, ¶¶ 7, 9‐15 and ACE response to RCM’s facts, at 1, admitting
that all of RCM’s undisputed facts that bear upon the issue are not disputed.
60 ACE Opp. Memo, at 37‐38; ACE Choice Memo, at 34.
61 RCM Memo, at 31.
62 ACE Opp. Memo, at 38; ACE Choice Memo, at 34‐35.

42
New York resident, was responsible for sending notice of claims to the insurer’s principal
place of business in Texas, “it is very likely that Texas was the state of performance.”
Hammersmith, 480 F.3d at 234.63
The “notice” in our case is the reservation of rights letter, which the Policy required
ACE to send to RCM in New Jersey, as with other “notices.”64 Accordingly, the outcome of
the analogy to Hammersmith, which looks to the state where the insurance policy required
the notice to be sent (there, the notice of claim; here, the reservation of rights letter), is that
the place of performance of ACE’s reservation of rights was New Jersey.
If ACE wants the Court to accept its Hammersmith analogy, so be it.65 Using that
analogy, the place of performance was New Jersey.
63 The court found, however, that because Texas was not involved in the choice of law
issue, but Pennsylvania and New York were, and because the notice was to have emanated
from New York, the factor favored New York. 480 F.3d at 234.
64 Ex. A. to RCM Motion, § VIII.C (RCM 000016). Matthew Lange, the ACE claims
handler, actually sent the letter from Georgia to White and Williams’ Peter Mooney in
Philadelphia, but the Policy required that it be sent to RCM in New Jersey, and the letter was
purportedly to inform RCM in New Jersey.
65 ACE raises two other “place of performance” issues. First, it contends that
performance with regard to its “late notice” contention was California. This is so, ACE
argues, because Topa’s counsel sent the letter that ACE incorrectly contends constituted a
“Claim” (as the Policy defines the term) to RCM’s project managers in California and also
because any notice to ACE should, ACE says, have come from RCM’s broker. But choice of
law is not an issue in ACE’s late notice claim and neither side has argued it in addressing
ACE’s “late notice” claim. The issue is simply a question of contract interpretation that
comes out the same way under New Jersey and California law. In any event, under ACE’s
Hammersmith analogy, the place of performance was Pennsylvania, where the Policy
requires notice to have been sent. Continuing with the Hammersmith analogy, however,
because Pennsylvania is not involved in the choice of law controversy, the factor would
favor New Jersey, where RCM, the party responsible for sending notice, is located.
43
d. Location of the Subject Matter of the Contract
The cases and the Restatement are crystal clear that where “the insured risk is
spread through numerous states and countries . . . this factor is neutral.” Hammersmith, 480
F.3d at 234. Accord, Compagnie des Bauxites de Guinee v. Argonaut-Midwest Ins. Co., 880 F.2d
685, 690 (3d Cir. 1989); Gould, Inc. v. Cont’l Ins. Co., 822 F. Supp. 1172, 1175‐76 (E.D. Pa.
1993). ACE concedes that “[b]ecause RCM’s business was nationwide, the risk was
nationwide.”66 Despite its inevitable concession, ACE is apparently unable to agree that a
single section 188(2) factor is neutral, so it spends time contending that the “location of the
subject matter” favors California. This argument is not only wrong; it is frivolous.
e. The “Domicile” Factor
RCM does not believe that any additional response is needed to the short argument
that ACE makes about the final section 188(2) factor, “the domicile, residence, nationality,
place of incorporation and place of business of the parties.”
ACE’s argument about “place of performance,” discussed above, relates to the
“domicile” factor, however. In Hammersmith, the Court of Appeals wrote, “’[t]he fact that
one of the parties is domiciled or does business in a particular state assumes greater
importance when combined with other factors, such as this state is the place of contracting
or of performance. . . .’” 480 F.3d at 235, quoting Restatement § 188, cmt. (e). (Emphasis
ACE’s other “place of performance” argument, relating to the defense and settlement
of the Topa lawsuit, goes to the choice of law for RCM’s claims of bad faith and breach of the
covenant of good faith and fair dealing, which will be discussed later.
66 ACE Opp. Memo, at 38; ACE Opp. Memo, at 35.
44
added.) If ACE’s suggested analogy to Hammersmith is followed with respect to the issue of
the adequacy of its reservation of rights, the place of performance was New Jersey, as
discussed above, and this factor gives added weight to RCM’s New Jersey domicile.
f. Governmental Interest
RCM has already addressed most of ACE’s “governmental interest” argument when it
responded to ACE’s position on false conflict. There are, however, a few additional points
that ACE makes later in its briefs:
First, ACE argues that application of New Jersey law to the Policy in general, and to
ACE’s reservation of rights letter in particular, would somehow be disruptive of California’s
interest in regulating RCM’s offices in that state.67 But this case is not about RCM’s business
in California; it is about a contract covering businesses in many states. There is no issue in
this insurance case (as opposed to the Topa case) about whether RCM abided by California
law.
Second, the California statues and decisions that ACE cites at pages 38 and 39 of its
choice of law brief bear only on the issue choice of law as to whether ACE acted in bad faith
during the pendency of the Topa lawsuit, which will be discussed below. They do not affect
the determination of which law applies to the Policy itself, including ACE’s obligation to
reserve its rights effectively.
Finally, ACE’s claims that applying California law would serve the Restatement
section 6(e) factor of “certainty, predictability and uniformity,” and the section 6(g) factor
45
of “ease of determination of application of the law”68 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 it ex 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. ACE’S Tort Arguments
ACE makes two tort‐related choice of law arguments in its briefs. First, it contends
that the estoppel that Merchants requires is “an equitable remedy which operates to bar
application of contractual policy terms based on alleged post‐contract misconduct in
handling the Topa claim.”69 But the Merchants rule is based upon the insurer’s 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 insurer’s 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), aff’d, 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 44‐45.
46
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, 11‐12 (E.D. Pa. 1991).
ACE’s second tort‐related argument is that a tort choice of law analysis under Second
Restatement of Conflicts of Laws § 145(2) should apply. The Merchants issue is
contracts‐based, however, and ACE’s breach in that regard was not a tort. But even if it
were, section 145(2) does not help ACE. The “injury‐causing” event here was ACE’s 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 multi‐risk, multi‐
state policy. (The third factor, “domicile,” is no different from the “domicile” factor in the
contract choice of law analysis.)
At bottom, ACE’s tort effort is aimed at persuading the Court that RCM’s Merchants
issue is really a complaint about the handling of the case in California. To the extent that
ACE’s conduct during the Topa litigation itself creates extra‐contractual 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 ACE’s
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.
47
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, 168‐69 (3d Cir. 1999); see also Nelson v. State Farm Ins. Co., 988
F. Supp. 527, 533‐34 (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 Pennsylvania’s. 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
statutorily‐created tort action.” Ash v. Continental Ins. Co., 593 Pa. 523, 531‐536, 932 A.2d
877, 882‐885 (Pa. 2007). So a suit under that statute is clearly considered a tort claim. But
Pennsylvania’s statute may not apply to RCM’s bad faith claims. In D’Ambrosio 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, if D’Ambrosio should be read to suggest that if such a claim exists at all, it’s a
tort claim, regardless of whether it’s 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
48
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 Topa’s 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, 651‐52 (N.J. Super. Ct. App. Div. 2005).
In its choice of law motion, ACE argues that California law applies to the Policy and,
accordingly, Topa’s 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 ACE’s motion, at ACE 01521.
71 Se, e.g., Allstate Ins. Co. v. Chaney, 804 F. Supp. 1219, 1221‐22 (N.D. Cal. 1992).
72 Ex. A to RCM motion (Policy), § III.A (RCM 000011).
73 See ACE Choice Memo, at 28, 45 ¶ 4.
49
from disputing the claim, covered or not.) But in any event, there is coverage under the
Policy for Topa’s 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, 20‐21. 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 state’s 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 Jersey’s burden of proof on exclusions.
2. Choice of Law on Rescission and Responsibility for the Defense
RCM moved for summary judgment on ACE’s 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 27‐28.
50
for rescission cannot continue to perform under the Policy and later attempt to rescind.75
We will address ACE’s response to that argument (or, rather, lack of response) later in this
memorandum. But in its first summary judgment motion, ACE also contends that there is a
choice of law issue if it can get beyond RCM’s motion for summary judgment on rescission.76
ACE is not itself moving for summary judgment on rescission. Comparably to its
request for a ruling on the burden of proof for exclusions, ACE is essentially seeking a ruling
on the instruction that the Court would give to a jury. But since ACE has raised the issue, we
will respond to it.
ACE’s rescission claim is based upon an insurance application that was completed
and signed in New Jersey, passed by email through the hands of the California brokers, and
ultimately went to ACE’s office in Roswell, Georgia, where the policy was underwritten.77
The relaying of the application from New Jersey through California before being sent to the
Georgia underwriter, who allegedly relied on it, makes the brokers’ California locations a
non‐factor on rescission. If the law of any state other than New Jersey could be argued to
apply, it would be Georgia’s. But Georgia’s law on the elements of rescission is the same as
New Jersey’s. Brown v. Techdata Corp., 234 S.E. 2d 787, 791 (Ga. Ct. App. 2000).78 Thus,
ACE’s request that California law apply to the rescission issue is both unnecessary at this
76 ACE Choice Memo, at 28, 46 ¶ 4.
77 RCM Memo, at 5‐6, ¶¶ 6‐7, 9‐11; ACE response to RCM facts, at 1 (admitting RCM’s
facts in these paragraphs).
78 The law is no different in Pennsylvania, where ACE signed the Policy. See United
Nat’l Ins. Co., v. J.H. France Refractories Co., 612 A.2d 1321, 1377 (Pa. Super. Ct. 1992).
51
point and fails to get ACE anyplace, because the elements of rescission are the same in New
Jersey and Georgia, the jurisdictions involved in the application process.
ACE’s request for a summary judgment ruling on “responsibility for the defense” has
even less to do with anything that the Court needs to decide at this point than its request for
advance rulings on the burden of proof for exclusions and for the jury instruction on
rescission. Whether or not Murchison & Cumming was “independent counsel” under the
California Civil Code or otherwise is a factual issue. It is worth noting, however, that in
Photomedex, Judge Yohn decided that the law of the state that governed the insurance policy
trumped the California statute upon which ACE relies when it came to deciding the
appropriateness of the fees charged by California Cumis counsel. 2008 U.S. Dist. LEXIS
8526, at * 68‐69. (And unlike here, there was no dispute about whether the attorney was, in
fact, independent counsel.)
III. ACE’S COVERAGE DEFENSES
Although Merchants estops ACE from raising the coverage defenses that it has
asserted, RCM will respond to ACE’s arguments about them here.
A. Rescission
ACE has contended that there is no coverage because it can rescind the Policy on the
basis of alleged misrepresentation in the application. First, there was no misrepresentation.
When the application was signed in early 2008, no RCM officer believed that the custom
software developer‐customer problems between Topa and RCM were any more serious
than the usual disputes in that industry.
52
Second, even if an applicant for insurance is required to tell an insurer about its
various business complaints from its customers or face rescission if one of them later sues,
ACE failed to act promptly, and is now barred from seeking rescission. Merchants holds that
“if a carrier receives information suggestion fraud or breach of contract, it must seek the
facts with reasonable diligence, and having acquired them, it must within a reasonable
period of time decide whether to continue to perform” or rescind. 179 A.2d at 513‐14.
RCM’s opening memorandum and exhibits showed that the Topa Complaint, which RCM had
put into ACE’s hands in June 2008, gave ACE the information that it now alleges RCM should
have told it about when applying for the insurance. Yet ACE did nothing to rescind until it
filed its counterclaim 17 months later. 79
Although admitting that it had the Topa Complaint when RCM said it did,80 ACE
weakly opposes RCM’s motion by saying that “a genuine issue of facts . . . exists as to
whether the allegations in the Topa complaint provided ACE with sufficient notice of RCM’s
concealment/misrepresentation as to trigger any obligation on the part of ACE [and] RCM
has produced no evidence whatsoever on the subject.”81 Even though ACE failed to explain
exactly what this “genuine issue of facts” is or what information is lacking, testimony that
ACE’s counsel elicited from ACE’s vice president for underwriting, Matthew Cibulskas,
disposes of ACE’s professed concerns.
80 See RCM Memo, at 10, ¶ 33; ACE response to RCM facts, at 1.
53
After reviewing the February 8, 2008 letter from Topa’s counsel,82 Mr. Cibulskas
testified that ACE would have acted differently with respect to the issuance of the Policy if it
had had the information contained in the letter.83 But the information in the letter is the
same as the information in the Complaint.84 Thus, ACE admittedly had the information
upon which it bases its rescission claim, yet waited 17 months before acting on it.
Merchants requires that summary judgment be granted against ACE on that claim.85
Additionally, Mr. Cibulskas testified that because RCM was asking to increase the
amount of its coverage from $4 million to $5 million, ACE required it to submit a “warranty
letter” that supplanted the prior application.86 The warranty letter provided that:
if any claim suit, action, investigation, knowledge or information

[about any ‘act error or omission which may reasonably be
expected to give rise to a claim, suit or action . . . under the
Policy’] exists, then (i) such claim, suit, action, investigation,
knowledge and information, and (ii) any future claim, suit, action
82 Ex. 30 to ACE’s motions 1, 2 and 3.
83 Cibulskas Dep. (Ex. BBBB), at 90, l. 12‐91, l. 24. (Although not germane to the
summary judgment motions, Mr. Cibulskas’ statement that ACE raised its premium the next
year because of the information that it then had about the Topa lawsuit was wrong, as ACE’s
claims vice president, Jeffrey Sorkin, admitted. See Deposition of Jeffrey Sorkin, July 29,
2010 (“Sorkin Dep.”), attached as Ex. AAA, at 101, l. 20‐105, l. 20).
84 Compare Ex. 30 to ACE’s motions 1, 2 and 3 (letter) with Ex. 29 (Topa Complaint).
85 ACE’s argument that Judge Simandle erred when he held in Granite State Ins. Co. v.
UJEX, Inc., 2005 U.S. Dist. LEXIS 13692, at *19‐20 (D.N.J. 2005), that an insurer seeking to
rescind must at least offer to return the premium does not require any response beyond
that contained in RCM’s opening memorandum. Its argument that the extended reporting
period doesn’t apply puts the proverbial rabbit in the hat by assuming that the February 8,
2008 letter was a “Claim.” But that is incorrect, as we will discuss in the next section. The
Claim was the Topa Complaint, and RCM would have been entitled to the coverage under
the extended reporting provision even if ACE had not renewed.
86 Ex. BBBB (Cibulskas Dep., at 64,l. 20‐66, l. 23). The “Exhibit 73” that was shown to
Mr. Cibulskas is identical to Exhibit 25 to ACE’s motions 1, 2 and 3.
54
and investigation arising therefrom, is excluded from coverage

under the proposed limit of liability of $1,000,000 in excess of
$4,000,000.
(Ex. 25 to ACE motions 1, 2 and 3 (May 1, 2008 letter.) So, even if rescission were available
to ACE, ACE could at most rescind the last million dollars of coverage.
B. Late Notice (Referred to by ACE as the Claim Having Been

Made Before the “Inception” of the Policy).___________________
RCM notified ACE promptly upon being served with the Topa complaint in June
2008. The February 2008 letter from Topa’s attorney Eric Sinrod was not a claim within the
meaning of the Policy and was not viewed as such by RCM. Rather, RCM viewed it as aimed
at prodding RCM to remediate the problems with the CAPRI software, and not as notice that
litigation would ensue. And, indeed, RCM and Topa spent the six months after RCM received
the letter in negotiations aimed at reaching agreement about how to get the project back on
track.
In any event, the letter is not grounds for a late notice defense. The Policy provides
coverage for “Claims first made against the Insured during the Policy Period and reported
to the Insurer pursuant to Section VIII, Notice . . . ”87 and defines a “Claim” for purposes
relevant here as: “a written demand against any Insured for monetary or non‐monetary
damages . . . . “88 ACE does not claim that mere knowledge of circumstances that might give
rise to a claim is sufficient to trigger this notice obligation. Nor does it contend that the
February 8, 2008 letter that Topa’s counsel wrote to RCM, which demanded that RCM
87 Id., §§ I.A. and B, RCM 000004 (boldface in original). The “Notice” section sets out
the mechanics for giving notice. Id., § VIII.C, ACE RCM 000017.
88 Ex. A to RCM’s motion (Policy), § II.E.1.a, ACE 08798.
55
correct the problems with the software at its own expense, was a “demand for monetary
damages.” Instead, in opposing RCM’s motion for summary judgment on ACE’s late notice
claim and moving for summary judgment of its own,89 ACE contends that the letter was a
“demand for non‐monetary damages.”90
In its opening memorandum, RCM made the point that the Policy does not provide
coverage for RCM’s fixing something that it has done for one of its customers (here, the
development and deployment of a custom‐built software program),91 and ACE fails to
dispute that. (Indeed, ACE contends in its motion papers that the Policy does not even cover
the amounts that Topa paid another company to correct the problems with the software, an
argument that we will address later in this memorandum.) Yet ACE contends that RCM
should lose its coverage for the Topa lawsuit because RCM didn’t notify it about something
that the Policy doesn’t cover.92 ACE’s position is wrong on its face.93
89 Here, too, Merchants estops ACE from asserting this defense.
90 See ACE Opp. Memo, at 46‐48; ACE Motion and Memorandum for Partial Summary
Judgment Regarding Coverage Issues (Motion No. 2) (“ACE Coverage Memo, at 26‐27.
92 ACE Opp. Memo, at 43‐45; ACE Coverage Memo, at 29‐31.
93 ACE slices and dices the Policy’s language to try to show that the February 8, 2008
letter was a “demand for non‐monetary damages.” But the cases upon which it relies do not
help it. In Westrec Marina Mgmt., Inc. v. Arrowood Indem. Co., 78 Cal. Rptr. 3d 264, 268‐69
(Cal. Ct. App. 2008), the court held that the letter at issue was “a settlement demand seeking
monetary damages.” Id., at 269. And in In re Marin Motor Oil Corp., 740 F.2d 220 (3d Cir.
1984) the issue was whether seller’s demand for reclamation under the Bankruptcy Code is
effective on dispatch or receipt of the demand.
56
This is simply not a case of non‐monetary damages. As ACE notes, “the language
should be interpreted in the context of the policy as a whole using common sense.”94 The
term “non‐monetary damages” generally refers to non‐economic 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 “non‐monetary 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 ACE’s Digi‐Tech Policy provides coverage is “Electronic Media
Activities,” which includes electronic publishing, webcasting, and the like and specifically
protects against claims for non‐economic 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 non‐monetary 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 2007‐2008 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) (policy’s provision that there is coverage
for wrongful acts committed before beginning of policy period when there is continuous

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 “non‐monetary damages” is ambiguous. That would not
result in summary judgment for ACE, however. Rather, the Court would have to resolve the
ambiguity by performing the sort of analysis mandated by Mellon Bank, N.A. v. Aetna
Business Credit, Inc., 619 F.2d 1001 (1980).
57
coverage conflicts with requirement that notice be provided during policy period). RCM’s
insurance policies with ACE also have those provisions.97
C. ACE’s “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
didn’t arise until the retention had been satisfied. He didn’t write anything about that in his
September 12, 2008 letter purporting to reserve rights. And he didn’t discuss this claimed
belief with anyone at ACE. In fact, Mr. Lange’s supervisor, Jeffrey Sorkin, now third in
command of ACE’s claims operation, disagree with Mr. Lange’s belief that ACE had no duty
to defend until RCM had spent $250,000.
Despite all this, and looking for an excuse for Mr. Lange’s inattention to Topa’s 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 21‐23.
99 Ex. A to RCM motion (Policy), § IX.A, at RCM 000017.
58
of Damages [and] Claims Expenses . . . which are in excess of the applicable Retention
amount shown.”100 But this affects only when ACE begins paying, and not when its duty to
defend begins.
In Cooper Lab., Inc. v. Int’l Surplus Lines Ins. Co., 802 F.2d 667 (3d Cir. 1986) (New
Jersey law), the insurer made the same argument as ACE, that “as a self‐insured, Cooper was
obligated to defend itself, at least until it had paid its million dollar retention.” Id., at 671.
The Court of Appeals wrote that “this contention can be dismissed rather quickly. Cooper is
neither a primary insurer nor an insurer at all. A duty to defend is a matter of contract, and
the reason why primary insurers provide a defense is that their policies require that they do
so.” Id., at 675. ACE was required to provide a defense, and the policy provision upon
which it and Mr. Lange rely only affects when ACE must begin to pay. As ACE concedes, “’a
self‐insured retention requires some payment as a condition to the insurer’s duty to pay
under the policy”101
If ACE had not wanted its duty to defend to commence until the retention had been
exhausted, it could readily have written a policy like the one in Clarendon Am. Ins. Co. v. N.
Am. Capacity Ins. Co., 2010 Cal. App. Unpub. LEXIS 4448 (Cal. Ct. App. 2010): “We have no
duty to defend or indemnify unless and until the amount of the ‘Retained Limit’ is exhausted
by payment of settlements, or ‘Claims Expenses’ by you.” Id., at * 7.102 But the Policy does
100 Id., § VII.A, at RCM 000016.
101 ACE Coverage Memo, at 22, quoting Moore v. Nayer, 729 A.2d 449, 460 (N.J. Super. Ct.
App. Div. 1999). (Emphasis added.)
102 The New Jersey cases upon which ACE relies are not helpful to it. In Moore v. Nayer,
729 A.2d 449 (N.J. Super. Ct. App. 1999), the court found that a retention is the equivalent of
a deductible (the only difference being that in the first, the insured pays, while in the
59
not say that, and ACE’s 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 decision‐makers 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 31‐32 and cases cited therein; Cooper Lab., Inc. v. Int’l
Surplus Lines Ins. Co., 802 F.2d 667, 674 (3d Cir. 1986) (following Libbey-Owens-Ford with
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 self‐interest”) (emphasis added); cf. Isaacson v. Calif. Ins.

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 self‐insured
retention means self‐insured” (id., at 460), which is what ACE is now claiming. In Landmark
Am. Ins. Co. v. Rider Univ., 2009 U.S. Dist. LEXIS 55398 (D.N.J. 2009), Rider had a primary
general liability policy, and the policy from Landmark that was at issue specifically provided
that it was excess insurance and also that Landmark had no duty to defend any claim
covered by other insurance. Id., at * 12‐15. ACE’s California case, although irrelevant to a
policy governed by New Jersey, also involve insurance that was explicitly excess.
60
Guar. Ass’n, 750 P.2d 297, 309 (Cal. 1988) (reasonableness of settlement offer must be
determined on the basis of information available at time of proposed settlement).
In its Complaint, Topa sought more than $3.5 million in damages.103 By the time of
the mandatory settlement conference before the California court in early July 2009, Topa
was saying that its damages were more than $4.5 million, including “the amounts it paid
RCM (approximately $2.4 million), loss of revenues due to lost business and damage to
reputation, its internal costs, and the costs it has had to incur to remediate CAPRI
(approximately $1 million).”104 (In actuality, Topa said, its costs to remediate the software
were well over $1 million: hundreds of thousands of dollars in internal costs, plus $1 million
or greater to an outside company.)105 About ten days before trial, Topa dropped its claims
for loss of revenues due to lost business and damage to reputation but was still putting at
least $4.165 million on the board ‐‐ $1.58 million for payments to RCM; at least $1.15
million in past and future payments to the company it had hired to remediate the software;
and at least $1.42 million in past and future internal costs (such as employee time, hiring
extra people, and the like) that, Topa contended, were the consequence of the problems
with the software.106 RCM disputed the validity of each of these numbers, including Topa’s
contention that it hadn’t received any value for what had it paid for the
103 See Ex. 29 to ACE’s motions 1, 2 and 3, passim.
104 Ex. 43 to ACE motions 1, 2 and 3 (Topa mandatory settlement conference statement),
at 15.
105 Id., at 15‐16.
106 Ex. 44 to ACE motions 1, 2 and 3, at RCM 002359; Ex. 45 (Topa trial brief), at 16.
61
software.107
In its motion for partial summary judgment on coverage, ACE does not contend that
there is no coverage for Topa’s 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 meruit value 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 taking
over the case and review the file or repayment of fees for services to
correct problems in the case caused by the [insured law firm’s] alleged
negligence. As consequential damages to [the underlying plaintiff]
because of [the insured’s] wrongful conduct, these damages would
come within the coverage provisions of the policy.
Id., at 869. So here, Topa’s 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 Insured’s products,
including products which incorporate the Insured’s products, or
services from the marketplace
See ACE Coverage Memo, at 28‐31.
107 See RCM’s Ex. YY (summaries of depositions of RCM experts).
108 ACE Coverage Memo, at 28‐29.
62
At best for ACE, and in language that ACE quotes at page 28 of its Coverage Memo,
the “fees” provision only excludes from coverage the “difference between the quantum
meruit value of the services and the amount paid,” that is to say, the “money paid to [the
insured] that exceeded the reasonable value of the services.” Hofing, 588 A.2d at 869. The
amount of the “fees” damages that Topa could recover was hotly contested. In opposition
to Topa’s claim that the software was worthless, RCM was prepared to put on expert
testimony that it could be fixed for around $200,000.109 So, if ACE gets past its violation of
Merchants, the issue is how much, if anything, the parties to the Topa settlement intended
to attribute to “money paid to [RCM] that exceeded the reasonable value of the services”
that Topa received. That is an issue for trial, not summary judgment.
In requesting summary judgment that the amounts that Topa paid to another
company to remediate the software are excluded, ACE ignores that RCM purchased coverage
for Technology and Internet Errors and Omissions liability, which includes “the Insured’s
rendering or failing to render Technology Services to others for a fee [and] the failure of the
Insured’s Technology Products to perform the function or serve the purpose intended.” The
definition of Technology Services includes “information technology consulting and
information system or network analysis, design, programming or integration [and] database
design . . . . ”110 There is no exclusion in the Policy for the amounts that others pay to
109 See summary of deposition of Mark Miller; see also summary of depositon of David
Weiner, collectively attached as Ex. YY.
110 Ex. A to RCM motion (Policy), Declarations, item 3.A (RCM 000001); § III.SS.1.a (RCM
000009); § IIII.NN.1‐2 (RCM 000008). “Technology Products means computer or
telecommunications hardware, software, or related electronic equipment, including the
design, development, manufacturing, assembly, distribution, licensing, leasing, sale,
installation, repair or maintenance thereof.” § III.MM (RCM 000008).
63
remediate the Technology Services that insureds have provided. And Technology Services
are what RCM was providing to Topa.111
Moreover, as RCM demonstrated in its opening memorandum, the exclusion
upon which ACE relies does not mention “Technology Products” but only includes generic
“products.” As such, “repair” costs for the defined term “Technology Products” are not
excluded. Weedo v. Stone-E-Brick, Inc., 405 A.2d 788, 789 (N.J. 1979), the only New Jersey
case that ACE cites in support of its argument, concerned a comprehensive general liability
policy and not, as here, as professional liability policy. “The purpose of the errors and
omissions policy is to protect an insured who commits an act of professional negligence.”
Search EDP, Inc. v. Monda, 632 A.2d 286, 290 (N.J. Sup. Ct. App. 1993).
At best for ACE, then, there must be a trial of how much, if anything, the parties to the
Topa settlement intended to attribute to “money paid to [RCM] that exceeded the
reasonable value of the services” that Topa received. As ACE contends, “the burden is on the
insured to bring the claim within the basic terms of the policy. . . . The carrier, however,
bears the burden of establishing that any matter falls within the exclusionary provisions of
the policy.” Reliance Ins. Co. v. Armstrong World Indus., Inc., 678 A.2d 1152 ,1158 (N.J. Super.
Ct. App. 1996). The “basic terms” of the Policy here provide coverage for
. . . any error, misstatement, misleading statement, act omission, neglect,

breach of duty, or Personal Injury offense actually or allegedly
committed or attempted to be committed by Insured . . . in the Insured’s
rendering or failing to render Technology Services to others for a fee;
111 See Ex. 29 to ACE motions 1, 2 and 3, ¶¶ 7, 11‐13, Exs. A, B and C (contract is one for
“consulting services”).
64
. . . or the failure of the Insured’s Technology Products to perform the

function or serve the purpose intended.112
Because Topa’s 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 ACE’s theories of coverage, there was at least one covered
claim in the litigation. Similarly, under SL 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 if Merchants somehow doesn’t 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 RCM’s claim for attorneys’ fees and costs.
Those fees fall into two categories: (1) Fees and costs that RCM incurred before the Topa
lawsuit settled, which are the consequential damages that RCM suffered as a result of ACE’s
bad faith. They will be discussed in the next section of this memorandum. (2) RCM’s
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).
65
case, which is substantive.113 New Jersey Civil Practice Rule 4:42‐9()(6) allows the
inclusion of “fees for legal services . . . in the taxed costs . . . [i]n an action upon a liability
policy of insurance, in favor of a successful claimant.” This is “an action upon a liability
policy of insurance,” in which RCM is fighting ACE’s efforts to recover the defense payments
and to require RCM to pay for the settlement. The language from Eagle Fire Protection Corp.
v. First Indem. of Am. Ins. Co., 678 A.2d 699, 708‐09 (N.J. 1996), that ACE relies upon to
contend this is not a Rule 4:42‐9(6) situation is inapposite, for the proposed “expansion” of
the Rule that the court was discussing involved efforts to have it apply to first‐party
insurance and surety bonds. But, the court said, the Rule plainly applies to the “’ordinary
situation where one buys insurance, to obtain protection against liability to third parties
and to be indemnified when called upon to pay.’” Id., at 709, quoting Fengya v. Fengya, 383
A.2d 1170, 1172 (N.J. Sup. Ct. App. 1978). This case comes squarely within that description,
and Rule 4:42‐9(6) permits RCM to recover its attorneys fees.
V. THE EVIDENCE REQUIRES A TRIAL ON ACE’S BAD FAITH.
The evidence of ACE’s insistence on an RCM contribution toward settlement, couples
with its contrived position on “independent counsel,” and its complete obligation of its
defense obligation for almost a year are more than sufficient to compel trial on RCM’s bad
faith claim. When an insurer proceeds under a reservation of rights, the duty of good faith
and fair dealing requires it to accept a reasonable settlement demand “whenever it is likely
113 See ACE’s Memorandum in Support of Its Motions for Partial Summary Judgment
Regarding RCM Bad Faith, Punitive Dames and Attorneys’ Fees Claims (Motion No. 3) (“ACE
Bad Faith Memo), at 34. And see Home Ins. Co. v. Perlberger, 900 F. Supp. 768, 776 (E.D. Pa.
1995) (Pollak, J.), citing First State Underwriters v. Travelers Ins. Co., 803 F.2d 1308, 1318
(3rd Cir.1986).
66
that the judgment against the insured will exceed policy limits.” Johansen v. Cal. State
Automobile Ass’n Inter‐Insurance Bur., 538 P.2d 744, 748 (Cal. 1975). Under California law,
an insurer proceeding under a reservation of right cannot consider coverage issues in
deciding whether to settle. See id., at 749. That means that “[s]uch factors as . . . a belief
that the policy does not provide coverage, should not affect a decision as to whether the
settlement offer in question is a reasonable one.” Id., at 748‐49. Rather, the insurer “must
conduct itself as though it alone were liable for the entire amount of the judgment.” Id., at
748., said: "The only permissible consideration in evaluating the reasonableness of a
settlement offer is whether in light of the probable liability of the insured, the ultimate
judgment is likely to exceed the offer." Twentieth Century-Fox Film Corp. v. Harbor Insurance
Co., 149 Cal.Rptr. 313, 317 (Cal. Ct.App.1978)
Finally, attempts by the insurer to induce the insured to contribute to a settlement
are evidence of bad faith conduct. See Fidelity & Guar. Ins. Co. v. Reddy, 2008 U.S. Dist. LEXIS
50419, at * 18 (E.D. Cal. 2008); Brown v. Guarantee Ins. Co., 319 P.2d 69, 75 (Cal. Ct. App.
1957). And see ACE Bad Faith Memo, at 24 (“a carrier may not . . . coerce a contribution”).
Under California law, bad faith does not equal positive misconduct of a malicious or
immoral nature; it simply means the insurer acted tortiously. Lunsford v. Am. Guar. & Liab.
Ins. Co., 775 F. Supp. 1574, 1583 (N.D. Cal. 1991), rev’d on other grounds, 18 F.3d 653 (9th
Cir. 1994). Using this negligence standard, “the litmus of good faith/bad faith is to be tested
against the background of the totality of the circumstances in which the insurer’s disputed
actions occurred.” Walbrook Ins. Co. v. Liberty Mut. Ins. Co., 5 Cal. Rptr. 2d 513, 518 (Cal. Ct.
App. 1992).
67
Here, it was likely that the judgment against RCM would exceed the policy limits. By
July 8th, ACE was acknowledging that there was no chance that RCM could prevail at trial.
(Ex. BBB.) Topa was seeking at least $4.5 million in damages,114 and the facts were bad for
RCM. (ACE itself was saying that the damages could be $4 million.) (Ex. GGG) Attorneys’
fees and other costs of defense were more than a half‐million dollars above the $250,000
retention,115 and because they would be subtracted from the $5 million coverage, the likely
high verdict in Topa’s favor would have exceeded the Policy limits.
Instead of “conduct[ing] itself as though it alone were liable for the entire amount of
the judgment” with a possible excess verdict looming, ACE refused to try to settle unless
RCM contributed and dropped its coverage arguments. And, ACE’S claim to the contrary
notwithstanding, ACE was insisting that RCM contribute; it was not, as it claims is
“undisputed,” merely “inviting” RCM to do so.
Moreover, despite repeated requests, ACE refused to tell RCM what thought was a
reasonable settlement or what it was proposing that RCM pay, other than as a percentage
(the basis for which ACE refused to explain, other than as “we believe that represents the
uncovered claims”) of some uncertain amount. And when RCM would not agree to
contribute, ACE refused to make any settlement offer to Topa, even though it had been
acknowledging since early July that it was “crucial to settle” the Topa case. (Exs. BBB, GGG.)
It was not until its months of pressure failed to get RCM to retreat from its coverage position
that ACE agreed on the very eve of trial to do what RCM had been suggesting all along –
114 Ex. 43 to ACE motions 1, 2 and 3 (Topa mandatory settlement conference statement),
at 15.
115 Ex. CCCC, attached (calculation of attorneys’ fees).
68
settle the Topa lawsuit and resolve the coverage issues later. But the months of insistence
on a contribution from RCM as a condition of settlement is proof enough of bad faith.
The first reason that ACE gives for its contention that it is entitled to summary
judgment is that it acted reasonably and that it handled the claim properly.116 But that is
exactly what is at issue in the bad faith claim. As RCM’s statement of facts in this
memorandum shows, there is real factual dispute about the reasonableness and propriety
of ACE’s actions. The same is true with other of ACE’s defenses to the bad faith claim – its
“no responsibility” defense (or, as ACE puts it “ACE did not become actively involved in the
Topa case prior to the time that RCM paid its retention);117 its position that Murchison &
Cumming was “independent counsel;”118 its claim that it merely “invited” (as opposed to
demanded) that RCM contribute to a settlement with Topa as a condition of ACE’s
attempting to settle Topa’s lawsuit;119 and its contentions about its conduct of settlement
negotiations and its communications with RCM.120 (ACE’s other defense for its actions –
that its position that some of Topa’s claims weren’t covered – is insufficient as a matter of
law. See Johansen v. Cal. State Automobile Ass’n Inter-Insurance Bur., 538 P.2d at 748‐49.)
Under the “totality of the circumstances” and the negligence standards that must be applied
to ACE’s argument that its actions could never be found to make it liable for bad faith, its
motion should be denied.
116 ACE Bad Faith Memo, at 21.
117 Id., at 22.
118 Id., at 22‐23.
119 Id., at 23‐24.
120 Id.., at 24‐25.
69
ACE also contends that it cannot be liable for bad faith because RCM suffered no
consequential damages because the Topa lawsuit settled within the limits of the Policy. But
an insurer is liable for the consequences of its unreasonable failure to settle, including other
economic loss, whether or not there is an excess verdict. Larraburu Bros., Inc. v. Royal
Indem. Co., 604 F.2d 1208, 11215 (9th Cir. 1979); Bodenhamer v. Superior Court, 238 Cal.
Rptr. 177, 181 (Cal. Ct. App. 1987). Here, RCM suffered two kinds of consequential
damages: First, it incurred legal fees and costs in its two‐plus months long struggle to try to
get ACE to stop coercing it into contributing to a settlement. See Declaration of William R.
Herman (“Herman Dec.’), attached as Exhibit YYY. Second, to the extent that RCM might be
required to reimburse ACE for any of the costs of the defending the Topa lawsuit, ACE’s
delay in settling increased those costs. These consequential damages preclude ACE from
obtaining summary judgment on the basis of its “no harm, no foul” argument.
Finally, ACE has requested dismissal of RCM’s punitive damages claim for ACE’s bad
faith. But the a jury could reasonably find that ACE’s conduct amounted to oppression, even
under a “clear and convincing” standard. ACE’s response – and the sole basis for arguing
that it is entitled to summary judgment regardless of whether it acted oppressively – is to
say, “Well, RCM is a corporation, too.” ACE has offered no reason why the Court shouldn’t
defer a decision on whether to submit the punitive damages question to the jury until after
it hears that evidence. Indeed, in Slottow v. Am. Cas. Co., 1 F.3d 912 (9th Cir. 1993), op.
replaced on other grounds, 10 F.3d 1355 (9th Cir. 1993), the decision that punitive damages
ought not to have been awarded was made only after trial, and not on summary judgment.
ACE’s request for summary judgment as to punitive damages should be denied.
70
CONCLUSION
For the foregoing reasons and those advanced in its opening memorandum, RCM
requests the Court to enter an Order granting it summary judgment on Count I of its
Complaint and against ACE on the first and second counts of its counterclaim and denying
all of ACE’s motions for partial summary judgment.
Respectfully submitted,
/s/ William R. Herman_________________

William R. Herman, Esquire
Pennsylvania attorney ID 36361
Law Offices of William R. Herman
59 Betts Drive – Suite 100
Washington Crossing, PA 18977‐1356
215‐751‐0262
Ralph A. Jacobs, Esquire

Pennsylvania attorney ID 21387
Jacobs & Singer LLC
1515 Market Street – Suite 705
Philadelphia PA 19102
215‐789‐3110
Dated: September 28, 2010 Attorneys for plaintiff, RCM Technologies
71
CERTIFICATE OF SERVICE
I, William R. Herman, hereby certify that on September 28, 2010, I caused a

copy of the foregoing Reply Memorandum of RCM Technologies, Inc., with Exhibits, to be
served by means of the Court's ECF system upon:
Patricia A. Fecile‐Moreland, Esquire

Marks, O'Neill, O'Brien & Courtney, P.C.
1800 JFK Blvd.
Suite 1900
Philadelphia, PA 19103
/s/ William R. Herman_________________

William R. Herman, Esquire

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

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Case 2:09-cv-04789-AB Document 45 Filed 09/28/10 Page 1 of 72

IN THE UNITED STATES DISTRICT COURT

RCM TECHNOLOGIES, INC.,

Plaintiff, Civil Action No. 09‐4789‐AB

ACE AMERICAN INSURANCE JURY TRIAL DEMANDED

RCM TECHNOLOGIES, INC.’S MEMORANDUM IN REPLY TO ACE AMERICAN

2 RCM obtained leave of Court to file a memorandum in excess of 50 pages to respond

Defendant ACE American Insurance Company is a Philadelphia based insurance

THE UNDERLYING LITIGATION

unexpectedly commenced litigation against RCM in California in June 2008.

Pre-Litigation Negotiations Between Topa and RCM

RCM Is Sued By Topa and Tenders the Case to ACE

responsibility of RCM. (Miller Dep., Ex. NN, p. 184-96, 210-13).

ACE's Initial Inaction

ACE regularly hires.

of rights letter on September 12th.5

president for claims. (Sorkin Dep., Ex. AAA, p. 98).

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

ACE Finally Pays Attention to the Topa Litigation

(Kogan Dep., Ex. EEE, p. 25)

embarked on a course of conduct designed to force RCM to contribute substantially toward a

authority from Ms. Kogan9 to retain a jury consultant (Ex. LLL).

efforts on RCM's acceptance of a substantial share of the cost.

settlement, and the litigation budget") (Ex. GGG).

primary contact person with RCM.

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

(Kogan Dep., Ex. EEE, p. 166 – 69)

ACE Inexplicably Refused To Inform RCM of ACE's Coverage Position

never did so in this case.

ACE Finally Settles the Case on The Eve Of Trial.

could exceed $4 million.

2009, and this coverage action followed.

ACE Manufactured the "Cumis Counsel" Excuse to Justify Its Inaction

ACE's paper trail of references to a purported "Cumis" demand is suspicious in the

did not fit with the facts.14

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

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

16 RCM Memo, at 16‐17.

years . . . .” Id., at 697. (Emphasis added.)

17 Ex. E to RCM’s Motion.

(This latter point will be discussed at greater length soon.)

compromising liability or independently settling the claim”).

refused, it would be severely penalized if a judgment or later settlement exceeded the

19 ACE Opp. Memo, at 24.

22 Policy (Ex. A to RCM’s motion), § IX.A, RCM 000017.

23 See ACE’s amended answer, (EX. D to RCM’s motion), ¶ 31, p. 7.

not RCM, could attempt to settle with Topa.

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

27 See ACE Opp. Memo, at 24.

28 ACE Ex. 51, §§ II.A.1‐II.A.3, at ACE 00130‐31.

29 RCM Memo, at 11, ¶ 38.

II. CHOICE OF LAW

tort choice of law principles should apply to the Merchants issue.

redundantly, we will respond to all of them in this section of the memorandum. 30

A. Choice of Law on Contract Issues

TIG Ins. Co., 480 F. 3d 220, 230 (3d Cir. 2007).

. . . footnote cont’d from previous page

as it chooses,” 939 P.2d at 384, while California does not.

payment. (The court found for the insurer.)

settlement.” Id., at 544. (Emphasis added.)

[California’s] policy [of encouraging insurers to defend cases] by encouraging an insured to

33 ACE Opp. Memo, at 32.