Insurance Litigation Law Blog | Regulatory Law | Bad Faith | California | Lawyer | Attorney | Barger & Wolen

California Assembly Bill 315 (pdf), signed into law by Governor Jerry Brown on July 13, 2011, conforms California law to the Nonadmitted and Reinsurance Reform Act (NRRA) that was part of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (signed into law by President Barack Obama on July 21, 2010).

AB 315’s provisions became operative on July 21, 2011.

It was important for California to enact AB 315 by July 21, 2011, because the NRRA, which went into effect on that date, pre-empts several aspects of state surplus line insurance regulation and taxation. 

The enactment of AB 315 preserves California’s authority to regulate surplus line insurance and to collect surplus line insurance taxes.

Here is a summary of key elements of AB 315. The cited sections are the California Insurance Code sections that are added or amended in the chaptered version of AB 315.

Home State

AB 315 introduces the concept of the “home state” of the insured. The concept of home state is especially important for determining whether California law governs a surplus line transaction (1761(a)), whether a producer must obtain a surplus line license (1761(a)), and whether a California tax is imposed on surplus line premiums (1774(a)).

AB 315’s description of home state mirrors the provisions of the NRRA.

If an insured is a business, the insured’s home state is the state where the insured maintains its principal place of business. If an insured is an individual, the insured’s home state is where the insured maintains his or her principal residence. However, if 100% of the insured risk is located outside the state where the insured maintains its principal place of business or principal residence, the home state is the state to which the greatest percentage of the insured’s taxable premium for the insurance contract is allocated (1760.1(e)(1)(A)and(B)).

If more than one insured from an affiliated group is named in a single non-admitted insurance contract, the home state is the home state of the member of the affiliated group that has the largest percentage of premium attributed to it under the insurance contract (1760.1(e)(4)). Existing Insurance Code section 1215(a) defines “affiliate.”

A surplus line broker has the responsibility to determine whether California is the insured’s home state (1760.2), and is required to maintain records that verify that the insured is a California home state insured (1768).

Premium Tax Payment

Under pre-AB 315 law, the surplus line insurance tax is imposed on the portion of the premium allocated to risks in California. AB 315 changes that system in order to conform California law to the NRRA.

AB 315 imposes a tax on 100% of the surplus line insurance premium when California is the home state of the insured (1775.5(b)).

AB 315 includes special transition rules. If a new policy or a renewal policy has an effective date on or before July 20, 2011, and is placed on or before July 20, 2011, the provisions of AB 315 do not apply (1774(d)(3)).

States are allowed to enter into interstate compacts to determine the allocation of surplus line premium taxes. California has not entered into any such compacts.

Insurer Eligibility

AB 315 sets eligibility requirements for a non-admitted insurer that wants to insure California home state insureds. 

First, if the insurer is a U.S.-domiciled insurer, the insurer must be licensed to write the type of insurance in its domiciliary jurisdiction and must have a capital and surplus that together total $45 million. 

Second, if the insurer is not domiciled in the U.S., the insurer must be listed on the NAIC International Insurers Department’s Quarterly Listing of Alien Insurers (1765.1(a) and (b)).

AB 315 includes detailed requirements that must be met in order to place insurance on a limited basis with an insurer that does not meet the bill’s eligibility requirements (1765.1(h)).

AB 315 repeals provisions in Insurance Code section 1765.1 that established the List of Eligible Surplus Line Insurers (LESLI). The bill replaces LESLI with the List of Approved Surplus Line Insurers (LASLI) (1765.2(f)). The requirements of LASLI are substantially the same as the requirements of LESLI. Surplus line insurers that are on LESLI as of July 21, 2011, are automatically on LASLI (1765.1(i)). In order to remain on LASLI, insurers will have to file required documents and pay filing fees (1765.2(c)-(e) and (j)).

Commercial Insured

AB 315 retains the general requirement that a surplus line broker may place business with a non-admitted insurer only after making a diligent search for coverage in the admitted market (1763(a)). 

However, AB 315 creates a new exception to the general requirement. The diligent search requirement does not apply to a commercial insured (1763(h)). 

In order to qualify as a commercial insured, an insured must employ or retain a qualified risk manager, must have paid nationwide commercial property/casualty insurance premiums in excess of $100,000 in the immediately preceding 12 months and must meet one of five listed criteria which include minimum standards relating to net worth, revenues and number of employees (1760.1(b)). The surplus line broker is responsible for ensuring that an applicant for insurance is a commercial insured (1763(h)(2)).

Administrative Services

AB 315 allows a California domiciled insurer to have common directors with an affiliated non-admitted insurer and permits a California domiciled insurer to perform administrative services for an affiliated non-admitted insurer (1761(b)).

• Email This
• Print
• Comments
• Trackbacks

By Larry Golub and Marina Karvelas

In Fairbanks v. Farmers New World Life Ins. Co., decided July 13, 2011, California's Second Appellate District, Division Three, upheld the trial court’s denial of class certification for a proposed nationwide class of universal life insurance policyholders. Plaintiffs sued Farmers New World Life Insurance Company and Farmers Group, Inc. (collectively, “Farmers”) alleging violations of the Unfair Competition Law (Bus. & Prof. Code, 17200, “UCL”) in the marketing and sale of universal life insurance policies.  

The decision, authored by Justice Walter Croskey, contains in its opening pages an extensive discussion of universal life insurance policies. Justice Croskey’s discussion is well worth the read as it presents in simple and understandable terms many of the intricacies of universal life insurance.

Plaintiffs alleged in their complaint numerous theories of wrongdoing against Farmers; however, their motion for class certification was narrowly tailored and based only on one of the three prongs of the UCL, that of a fraudulent business practices. 

Relying on a series of recent decisions (Knapp v. AT&T Wireless Services, Inc., 195 Cal. App. 4th 932 (2011); Kaldenbach v. Mutual of Omaha Life Ins. Co., 178 Cal. App. 4th 830 (2009), and Pfizer Inc. v. Superior Court, 182 Cal. App. 4th 622 (2010)), the Fairbanks opinion reiterates the requirements for class certification under the fraudulent prong of the UCL:

“[W]hen the class action is based on alleged misrepresentations, a class certification denial will be upheld when individual evidence will be required to determine whether the representations at issue were actually made to each member of the class.”

Finding the case “virtually identical” to Kaldenbach, the Court of Appeal upheld the trial court’s determination that the alleged misrepresentations were not commonly made to members of the class and thus class certification was properly denied.  (For a discussion of the Kaldenbach case, see our firm’s prior blog.)

Plaintiffs argued that the class action should proceed on the theory that the language in the policies was misleading. However, the class certification motion was not based on the theory that the policy language standing alone was misleading. Even if it were, “it is still impossible to consider the language of the policies without considering the information conveyed by the Farmers agents in the process of selling them.” 

In addition, the Fairbanks Court determined that the materiality of the alleged misrepresentation was likewise not subject to common proof. Relying on the Supreme Court’s recent decision in Kwikset Corp. v. Superior Court, 51 Cal. 4th 310, 332 (2011), the standard for materiality is whether “a reasonable man would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question.” While noting that the standard is objective, the Court of Appeal nonetheless agreed with the trial court that the materiality of the representations at issue in the case was a matter of individual proof for any given policyholder. 

In concluding, the Court of Appeal refused to address whether commonality existed with respect to any other purported classes. None of the alternative theories were presented to the trial court in the class certification motion. “[W]e leave it to the trial court’s discretion, on remand, to determine whether it should consider any subsequent motion for class certification, should plaintiffs choose to proceed on an alternative basis.”

As is often the case in the class certification context, plaintiffs will seek to define as narrow a class as possible to present a “common issue” for certification purposes, which attempt sometimes undercuts not only the ability to obtain certification (as in the Fairbanks situation) but, even if it does survive certification, sets up a defense motion for summary judgment.

• Email This
• Print
• Comments
• Trackbacks

Recently, the California Court of Appeal for the Second Appellate District Division Three issued its opinion in Fireman’s Fund Insurance Company v. Superior Court (Front Gate Plaza, LLC). The opinion resolved two issues, one involving the attorney-client privilege and the other the work product privilege.

The first issue resolved was whether the attorney-client privilege applies to only communications directly between an attorney and the client and not to communications between lawyers in the same firm. 

Surprisingly, the trial court held that the privilege only applied to communications directly between an attorney and his client. According to the trial court, the privilege provided no protection for communications between attorneys and staff in a firm. 

The notion that discussions between lawyers in the same firm regarding a case are not protected would, I believe, surprise most California lawyers. What we know is that the holding surprised Justice H. Walter Croskey, since he authored the Fireman’s Fund opinion which reversed the trial court ruling, holding:

Surely, third persons to whom the information (in this case, an attorney’s legal opinions) may be conveyed without destroying confidentiality include other attorneys in the law firm representing the client.

If the first holding of Fireman’s Fund was predictable, the second holding cannot be so labeled. 

The second issue was whether the absolute work product privilege of the California Code of Civil Procedure Section 2018.030(a) protects work product that is not contained in writing. 

The trial court found that unwritten work product was not protected by section 2018.030(a). 

In reaching this conclusion, the trial court seemed to be on solid ground as section 2018.030(a) states that:

a writing that reflects an attorney’s impressions, conclusions, opinions or legal research of theories is not discoverable under any circumstances.” (Emphasis added.) 

Despite that language, Division Three held that the absolute work product privilege does protect work product that has not been reduced to writing. 

Fireman’s Fund is an important decision explaining and seemingly expanding the protection given California lawyers by the attorney-client and work product privileges. Adding to the significance of the opinion is that its author, again Justice Croskey, is one of the most respected members of the Court of Appeal.

• Email This
• Print
• Comments
• Trackbacks