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

Last October, Charles Schwab & Company ("Schwab") began inserting into its customer Account Agreements a class action waiver clause.

Schwab's Account Agreements require arbitration of any dispute arising out of a customer's use of Schwab's services. The waiver language that Schwab began inserting states that:

You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court."

Schwab's insertion of this waiver language followed the United States Supreme Court's decision in AT&T Mobility v. Concepcion in which the Supreme Court held that the Federal Arbitration Act preempted state laws that might otherwise limit the ability of companies to include a class action waiver clause in an arbitration agreement. 

The AT&T Mobility decision invalidated a California Supreme Court decision, Discover Bank, which had placed some limits on the ability to enforce class action waiver clauses in arbitration agreements. The United States Supreme Court reasoned that the Federal Arbitration Action preempted such state laws.

The Financial Industry Regulatory Authority, Inc. ("FINRA") instituted a disciplinary proceeding against Schwab taking the position that the Schwab class action waiver clause violated FINRA's rules. 

It is FINRA's position that it:

has enacted, and the SEC has approved, two applicable rules:  first, that class actions cannot be arbitrated in the FINRA forum; and second, that member firms may not limit the rights of public investors to go to court for claims that cannot be arbitrated." 

On the same day that FINRA instituted the disciplinary proceeding, Schwab filed a lawsuit, Charles Schwab v. Financial Industry Regulatory Authority, Inc., in United States District Court, Northern District of California, seeking a declaration that FINRA may not enforce its rules to limit class action waiver clauses in arbitration agreements on the ground that such rules run afoul of the Federal Arbitration Act. 

FINRA has noticed a motion to dismiss Schwab's complaint that is currently scheduled for hearing on April 3, 2012. In turn, Schwab has filed a motion for a preliminary injunction against FINRA that is also scheduled for April 3, 2012.   

Barger & Wolen will continue to follow this case as it can impact other financial service and insurance companies. If you have any questions, please contact Gregory Eisenreich at geisenreich@bargerwolen.com.

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By John C. Holmes and Richard B. Hopkins

In an 11-0 en banc published decision, the Ninth Circuit Court of Appeals struck down California Code of Civil Procedure section 354.4 which purported to recognize the Armenian Genocide.

Section 354.4 revived the statute of limitations for claims made by “Armenian Genocide victims” or their heirs, voided contractual forum-selection clauses, and vested California courts with jurisdiction to hear disputes regarding such claims.

Overturning contrary rulings in the same case by the District Court and a 3-judge Ninth Circuit panel, the en banc panel in Movsesian v. Versicherung AG, Case No. 07-56722, held that because section 354.4 does not concern an area of traditional state responsibility and intrudes on the field of foreign affairs entrusted exclusively to the federal government, section 354.4 is preempted under the foreign affairs doctrine.

The Court found that section 354.4 “expresses a distinct point of view on a specific matter of foreign policy.” 

The Court also noted that the phrase “Armenian Genocide” is a "hotly contested matter of foreign policy” and that:

President Obama was careful to avoid using the word ‘genocide’ during a commemorative speech in an attempt to avoid alienating Turkey, a NATO ally, which adamantly rejects the genocide label.” 

Emphasizing the highly political nature of the statute, the Court noted that the California Legislature:

intended to send a political message on an issue of foreign affairs by providing relief and a friendly forum to a perceived class of foreign victims.” 

The Court distinguished the law from merely “expressive” government proclamations, such as commemorations of the Armenian Genocide, on the ground that section 354.4 imposes a concrete policy of redress for “Armenian Genocide victim[s],” subjecting foreign insurance companies to suit in California by overriding forum-selection provisions and greatly extending the statute of limitations for a narrowly defined class of claims. 

Moreover, the Court held that section 354.4:

has a direct impact upon foreign relations and may well adversely affect the power of the central government to deal with those problems.” 

Therefore, the Court concluded that section 354.4 intrudes on the federal government’s exclusive power to conduct and regulate foreign affairs.

Barger & Wolen has represented and currently represents life insurers in matters involving litigation brought by “Armenian Genocide victims” and similarly situated parties.

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Amid growing concern about their personal information being pulled by mobile applications (“apps”) and taking a lead from the Federal Trade Commission (“FTC”), whose recent report raised concerns about the lack of privacy information available to mobile app users before download, California Attorney General Kamala Harris announced a privacy agreement with the six largest mobile app providers – Amazon, Apple, Google, Hewlett-Packard, Microsoft and Research in Motion – that will impact how millions download apps to their smartphones, tablets, and other mobile devices.

The six companies have agreed to privacy principles designed to bring the industry in line with California’s Online Privacy Protection Act (“the Act”), most significantly requiring mobile apps that collect personal information to have a privacy policy, and to display it in prominent fashion and in easy to understand language before the app is downloaded. 

Two important features of the agreement are that consumers:

1. will be afforded the opportunity to review the app’s privacy policy before they download the app rather than after, and
2. will be offered a consistent location for finding the app’s privacy policy. 

The six companies will also be tasked with educating the app developers about their privacy obligations and will be providing users tools to report non-compliant apps.

Privacy policies are important consumer protections that allow for transparency into how companies collect and use personal information. Currently, most apps do not have privacy policies.

An important part of the agreement is the recognition that the Act applies to independent app developers as well as operators of commercial website and online services that sell and distribute them.

The Attorney General predicts that this agreement will have international impact as app developers will choose to comply with California law and the agreement because California is an important state (lots of app users here), and it will be administratively easier for the app developers to have one design that works everywhere.

At this point, it is uncertain whether the agreement will have the global impact the Attorney General predicts. That said, we have seen other California privacy laws assume a national impact. 

For example, the California Security Breach Notification law was one of the first in the country and, as such, many companies doing business in California had to comply with it not only in California, but, for public relations reasons, everywhere – how could a large national company provide security breach notification letters in California to California residents, but not in Arizona? 

In this example, the company would essentially being telling people in Arizona that their protection is less important than persons in California. Therefore, many companies simply decided to provide security breach notification letters everywhere it did business even before many states passed similar security breach notification laws. It is possible the same impact could happen with this new Act.

For more information or any questions, please contact Tim Moroney 415-743-3713 or tmoroney@bargerwolen.com.

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by Michael Rosenfield & Dennis Quinn

The New York Department of Financial Services (“DFS”) will audit the accuracy of the data used by insurers and health maintenance organizations to request health insurance rate increases (see press release). 

In connection therewith, health insurers must submit their rate increase proposals to the DFS for “prior approval.” The DFS can approve, reduce or reject the requests.

The audits will, among other things, allow the regulators to:

1. ascertain if insurers are accurately allocating administrative costs and producer commissions;
2. ensure that insurers have proper controls and oversight in place to make certain that data is reliable and accurate; and
3. assist in identifying areas where action can be taken to help control costs.

The DFS will conduct on-site audits of health insurers and HMOs selling health insurance plans regulated by the state – employer, small group and individual policies.

The DFS has announced that:

[t]he audits will review selected rate requests that have already been filed. Insurers will not know beforehand whether their proposals will be the subject of an audit. Data regarding claims, insurer administrative expenses, premiums and claims reserves will be examined. The Department will hire a private accounting firm to assist DFS personnel in conducting the audits.”

For further information, please contact Michael Rosenfield at 213-614-7321 | mrosenfield@bargerwolen.com, or Dennis Quinn at 212-655-3878 | dquinn@bargerwolen.com.

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by Dawn Valentine and Timothy Moroney

On January 1, 2012, the California Reader Privacy Act went into effect. The Act requires all “book service providers,” i.e., book sellers, in the State to take certain steps when responding to governmental requests for user information and to make specific reports and disclosures regarding those requests.

The Act protects unauthorized disclosure of private information regarding books and book readers.

California consumers are increasingly utilizing digital book services and providers and in connection therewith such entities may collect detailed personal information about consumers such as books browsed, how much time is spent reading each page, and digital notes made in the margins. The Act is meant to address implicated privacy issues and codify the privacy and free speech safeguards for expressive records guaranteed by the California Constitution. 

The Act prohibits book service providers—defined as any service that has as its primary purpose the “rental, purchase, borrowing, browsing, or viewing of books”—from knowingly disclosing the personal information of any of its users to a law enforcement agency except per a valid court order based on probable cause and a determination that the requesting agency has a compelling interest in obtaining the information that could not be obtained by less obtrusive means. 

Prior to issuing an order to disclose user information, the book service provider must have been provided “reasonable notice” to allow it the opportunity to appear and contest the issuance of the order. 

Once a book service provider receives a court order seeking disclosure of a user’s personal information, the service provider must notify the user so that he or she has a chance to appear or quash the order. 

The Act also imposes certain reporting requirements on all book service providers. If a book service provider discloses the personal information of 30 or more California users in a year it is required to prepare a report that is to be made publicly available in an online searchable format. A book service provider with a commercial web site is required to either create a prominent hyper link to the report required under this Act or state that no report was prepared because the service provider was exempt from the reporting requirement. (because less than 30 disclosures were made). 

The provisions of the Act are ignored at a book service provider’s peril. A service provider that violates the Act is subject to civil penalties to the user and/or Attorney General and the Act may be the basis of civil actions and liability brought by either the user or an attorney general or district attorney within two years of discovery of any violation of the Act. 

For more information or any questions regarding the requirements of the newly enacted Reader Privacy Act, please contact Dawn Valentine, 415-743-3731 dvalentine@bargerwolen.com or Tim Moroney, 415-743-3713, tmoroney@bargerwolen.com. 

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By Michael Rosenfield and Chris Burusco

Prior to the Dodd-Frank Act, California Insurance Code § 1011(c) required all California-admitted insurers to obtain prior approval from the California Department of Insurance for any reinsurance transaction that exceeded a 50% or 75% threshold.  

In other words, even if each insurer that was a party to the reinsurance agreement was only licensed in California and was domiciled elsewhere, § 1011(c) approval was nonetheless required.

On its face, the Dodd-Frank Act appears to preempt those California approval requirements as they pertain to reinsurance transactions involving only foreign insurers. 

The CDI appeared to acknowledge this preemptive effect in CDI Bulletin No. 2011-2 when the CDI stated that it:

will not exercise its discretion to conserve a non-domestic insurer for failure to obtain prior consent to such reinsurance transactions."

In the CDI’s view, however, assumption reinsurance transactions do not fall within the category of Dodd-Frank preempted reinsurance transactions. 

The CDI has confirmed to us that it does not view assumption reinsurance to be a true “reinsurance” transaction, but rather a “purchase” or “sale.” Moreover, assumption reinsurance transactions are expressly included within the definition of “sale” and “purchase” in California’s Reinsurance Oversight Regulations.

Accordingly, California-admitted insurers domiciled outside California appear, at least in the CDI’s view, to remain subject to the prior approval requirements of § 1011(c) with respect to any sale or purchase transaction (including a sale or purchase involving assumption reinsurance) that exceeds the regulatory specified thresholds.

For further information, please contact Michael Rosenfield at mrosenfield@bargerwolen.com | (213) 614-7321 or Chris Burusco at cburusco@bargerwolen.com | (213) 614-7332.

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By John M. LeBlanc and Jason C. Love

On Thursday February 9, 2012, California Insurance Commissioner Dave Jones announced that he had obtained approval from the California Office of Administrative Law to make permanent the emergency regulation issued in 2011 allowing the Department of Insurance (the “Department”) to enforce the medical loss ratio guidelines in the Patient Protection and Affordable Care Act of 2009 (“PPACA”) (which we previously discussed here). 

As of January 1, 2011, the PPACA required all health insurers in the individual market to maintain an 80% medical loss ratio.

The Department obtained approval to make permanent its amendment to 10 California Code of Regulations § 2222.12 to reflect this requirement. A copy of the text of the regulation can be viewed here. 

This permanent regulation went into effect on February 8, 2012. 

The regulation adopted by the Department contains more stringent requirements than PPACA, as it allows the Department to evaluate whether the 80% medical loss ratio will be met at the time a rate is filed with the Department, rather than waiting until the end of the year to determine if this ratio was satisfied.

Originally posted to Barger & Wolen's Life, Health and Disability Insurance Law blog.

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by Michael Rosenfield & Dennis Quinn

Insurance regulators across the nation from time-to-time focus their efforts on pursuing the joint investigation of a legal issue (e.g., brokers’ fees or title insurance matters) that is perceived by the regulators as representing an industry-wide compliance problem that is common to all states.

The latest subject of such a multi-jurisdiction investigation targets life insurance settlements. Regulators are in the midst of an extensive investigation and prosecution of life insurers’ practices with respect to the payment and settlement of life benefits.

The California Department of Insurance has just announced that it has negotiated a $17 million multi-state Regulatory Settlement Agreement with Prudential Insurance Company of America.

The settlement relates to Prudential’s alleged failure to pay benefits “even though they had knowledge of policyholder deaths from the Death Master file.” 

The settlement stems from a joint examination of Prudential’s settlement practices that was undertaken by a number of jurisdictions, including California, Florida, Illinois, New Hampshire, New Jersey, North Dakota and Pennsylvania. 

State insurance regulators have taken the position that life insurers are required by law to monitor the United States Social Security Administration’s Death Master File and other databases on a regular basis to ensure that beneficiaries receive prompt payment of their contract benefits when the holder of a life insurance policy or annuity dies. It is our understanding that similar settlements are to follow from the Florida Office of Insurance Regulation. 

In connection with the settlement, Prudential is required, among other things, to:

• Revise its business practices to better utilize the Death Master File.
• Return monies promptly to beneficiaries when located through revised search efforts.
• Report funds to the Unclaimed Property Bureau of the appropriate state when a beneficiary cannot be located after a thorough search.
• Provide quarterly reports to regulators for the next three years.

We are advising a number of life insurers related to their efforts to revise their settlement practices to comply with these developments. That includes responding to regulatory inquiries, developing records review procedures, conducting records reviews and handling benefit settlements and payments strategies.

If you have any questions or require any additional information, please contact Michael Rosenfield at mrosenfield@bargerwolen.com | (213) 614-7321 or Dennis C. Quinn at dquinn@bargerwolen.com | (212) 553-8121.

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On January 27, the California Department of Insurance (“DOI”) issued a news release that it had reached a settlement in its lawsuit that sought to require insurers to disclose investments in companies doing business with Iran. 

This blog has reported on the DOI’s continuing efforts to require such disclosures by insurers since July 2009 when prior Insurance Commissioner Steve Poizner first issued a Data Call to all insurers admitted in California seeking information on their investments in or related to Iran.  

On March 29, 2010, five insurance trade associations filed a petition with the Office of Administrative Law (“OAL”) contending that the Commissioner’s rule on Iran investment activity constituted an impermissible “underground” regulation.  

The OAL found, on October 11, 2010, that the DOI’s rule on Iranian investments was indeed such a “regulation” that should have been adopted pursuant to the procedures set forth in the California Administrative Procedure Act (“APA”).

On November 9, 2010, Commissioner Poizner filed an action in the Los Angeles Superior Court contesting the OAL’s determination and sought to clarify his authority to address insurer investments in companies doing business with Iran. The action also named the five insurance trade associations. At the time the action was filed, OAL Director Susan Lapsley issued a press release stating that the Commissioner did not follow the APA procedure “but rather simply imposed new rules unilaterally without any public input or comment,” something “the APA is designed to prevent.”

In the DOI’s news release issued January 27, 2012, current Commissioner Dave Jones announced the settlement of the litigation, which he advised will “permit the Commissioner to maintain a public list of businesses involved in volatile sectors of the Iranian economy,” and be able “to independently review and publicize the names of insurers with investments in Iran-related businesses.” 

However, the settlement also includes an agreement that “insurers will no longer be required to file quarterly reports regarding their Iran-related investment activities nor will such investments be disallowed for purposes of determining financial solvency of the insurers.”

The news release further states that the settlement will include the Commissioner withdrawing his lawsuit against OAL, and the trade associations withdrawing their challenge as to the Commissioner’s publicizing of insurer investments in companies engaged in business with Iran.

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