Insurance Litigation & Regulatory Law Blog : California Insurance Lawyer & Attorney : Barger & Wolen Law Firm : CA Insurance & Bad Faith Litigation

This week, the Administrative Director of the Division of Workers’ Compensation of the California Department of Industrial Relations (“DWC”) proposed a regulation, California Code of Regulations, title 8, Section 9789.70(c), that would completely exempt air ambulance companies from the Official Medical Fee Schedule (“OMFS”) that applies to all other providers who furnish medical services under the California workers’ compensation system.

The DWC’s purported impetus for this abrupt action was “to avoid the hazards and cost of litigation against the Division,” as stated in the DWC’s Initial Statement of Reasons. That Statement further advised that the DWC based its proposed regulation on the contention that the OMFS may likely be preempted by the Airline Deregulation Act of 1978, which it says “prohibits states from adopting or enforcing regulations which have any effect on airline rates of air carriers.”

This issue of preemption by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act of 1978 (“FAA/ADA”), was asserted in a lawsuit filed last year by California Shock Trauma Air Rescue (“CALSTAR”), an air ambulance company rendering services primarily in California. That action, filed in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers, is entitled California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al.  This blog reported on that case on July 30, 2009, after the federal district court dismissed the case, finding that the federal court lacked subject matter jurisdiction over CALSTAR’s claims.  

CALSTAR then appealed the action to the Ninth Circuit Court of Appeals, where the case is now fully briefed and awaiting oral argument.

Apparently not satisfied with the court's decision in its federal court action, CALSTAR threatened to sue the DWC unless it did something to offer relief to CALSTAR and other air ambulance companies.  In an article posted on workcompcentral.com, the president and chief executive officer of CALSTAR stated that, after having the federal trial court dismiss his company’s action, “we went back to the DWC and said, ‘We’ve been instructed to sue you,’ is what brought this action on their part.” It is clear that the threat of a lawsuit prompted the DWC to issue the proposed regulation and completely exempt CALSTAR and other air ambulance companies from the ambit of the OMFS.  

The defendants in the pending federal court action contend that the FAA/ADA does not preempt the OMFS as it applies to the medical services that air ambulance companies provide in California, and indeed exempting such companies from the scope of the OMFS on preemption ground is anathema to the legislative goals and purposes of the FAA/ADA. Larry Golub and Sandra Weishart of Barger & Wolen LLP represent a number of the defendants in the litigation.

The DWC will be holding a full-day hearing on the proposed regulation in Oakland on Tuesday, April 13, 2010, to receive statements and argument from all interested persons.

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In Nieto v. Blue Shield of California Life & Health Insurance Company (issued January 19, 2010), the California Court of Appeal found that an insurer properly rescinded an insured’s individual health insurance policy based on medical history misrepresentations contained in the application submitted to the insurer. The court also concluded that the insurer had no statutory duty to physically attach the application to the policy or to conduct further inquiries beyond the application during the underwriting process to ascertain the truthfulness of the insured’s representations before it issued the policy. The Nieto decision is addressed in Barger & Wolen’s Life, Health and Disability Insurance Law blog.

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A recent ruling by the California Court of Appeal in a UCL action will likely lead to a showdown in the California Supreme Court over the reach of Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287 (1988), the ruling that barred private actions seeking to enforce California’s Unfair Insurance Practices Act, namely, Insurance Code Section 790.03, et seq. (“Section 790.03”). 

For years plaintiffs’ lawyers and insurers have grappled over the question of whether causes of action for violation of California’s “Unfair Competition Law” (Business and Professions Code Section 17200, et seq., or “UCL”) may allege conduct that violates Section 790.03. Insurers have generally prevailed in demonstrating that to allow a UCL suit to include thinly-disguised Section 790.03 violations would be an impermissible circumvention or end run around Moradi-Shalal. The California Court of Appeal supported the insurers’ position on this issue in Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061 (2004).

Now, the Fourth Appellate District, in Zhang v. Superior Court (October 29, 2009), has rejected Textron, and held that because the UCL allows a plaintiff to allege unfair, unlawful, and misleading conduct against businesses generally (including insurers), the fact a plaintiff asserts what appear to be violations of Section 790.03 is not necessarily an end run around Moradi-Shalal.

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In Venoco, Inc. v. Gulf Underwriters Ins. Co., 2009 WL 1875640 (July 1, 2009), the Second District Court of Appeal affirmed a summary judgment entered in favor of Gulf Underwriters Insurance Company (“Gulf”) with regard to Venoco’s suit brought against Gulf for indemnification and a defense for lawsuits filed against it by former students and employees of Beverly Hills High School for personal injuries allegedly arising out of exposure to toxic pollution from Venoco’s oil and gas operations performed adjacent to the high school campus.

Gulf asserted that Venoco’s claim for a defense under the policy was not covered by virtue of an exclusion for instances of toxic pollution. However, an exception to the exclusion, a “buy-back” provision, provided that if Venoco notified Gulf of an occurrence within sixty (60) days of such occurrence, the toxic pollution exclusion would not apply so as to preclude coverage. 

Gulf moved for summary judgment in the trial court claiming it had no duty to defend or indemnify Venoco because it had failed to provide notice of the lawsuits brought by the former high school students and employees within the 60-day notice period. Venoco argued in part that the notice requirement was invalid, unfair and unusual because it was hidden in the policy, and it was also a violation of public policy.  It further argued that Gulf’s reliance on the notice requirement was barred by California’s “notice-prejudice” rule which operates to bar insurance companies from disavowing coverage on the basis of lack of timely notice unless the insurance company can show actual prejudice from the delay.  

Specifically, Venoco argued that because Gulf could not show it was actually prejudiced as a result of Venoco’s delay in reporting, that it could not rely on the notice requirement to deny coverage. The trial court granted Gulf’s motion finding that it was undisputed that Venoco did not comply with the 60-day notice requirement, that the 60-day requirement was not unusual or unfair under the law, and that the notice-prejudice rule did not bar Gulf’s disavowal of coverage. 

The Second District Court of Appeal affirmed. It held that pollution buy-back provisions containing reporting time limits were not unusual in the oil industry, and further were not unfair or against public policy. It further rejected Venoco’s argument that the 60-day reporting requirement was unenforceable because Gulf did not prove it would suffer prejudice if notice were given later than 60 days.  Rather, it held that where a policy provides that special coverage for a particular type of claim is conditioned on express compliance with a reporting requirement, the time limit is enforceable without proof of prejudice.

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In Kearns v. Ford Motor Company, --- F.3d ----, 2009 WL 1578535 (9thCir. June 8, 2009), plaintiff William Kearn sued Ford for alleged violations of California’s Consumers Legal Remedies Act (“CLRA”) and California’s Unfair Competition Law (“UCL”) arising out of Ford’s Certified Pre-Owned (“CPO”) vehicle program. Kearn’s complaint generically alleged that Ford had made false and misleading statements concerning the safety and reliability of its CPO vehicles (without identifying who made the statements, the specific content of the statements, or when and how Kearn was exposed to such statements), and failed to disclose to consumers Ford’s lack of actual oversight in determining whether used vehicles qualify for the CPO program.  Kearn alleged that he was harmed by the foregoing conduct because he had paid a higher price for a CPO vehicle then he would have paid for a non-CPO vehicle, even though there was no difference between the two. While Kearn alleged that Ford’s conduct constitutes an unfair business practice under California law, he did not assert any claims for fraud in the complaint.

In the district court, Ford brought a motion to dismiss Kearn’s complaint for failure to comply with the heightened pleading standards of Federal Rule of Civil Procedure 9(b). The district court granted the motion and Kearn appealed, principally arguing that Rule 9(b) does not apply to California’s consumer protection statutes because California courts have not applied Rule 9(b) to such statutes, and that Rule 9(b) does not apply to his CLRA and UCL claims because they are not grounded in fraud. 

In rejecting Kearn’s arguments, the Ninth Circuit held that it is well established that the Federal Rules of Civil Procedure – including Rule 9(b) – apply in federal court, “irrespective of the source of the subject matter jurisdiction, and irrespective of whether the substantive law at issue is state or federal.” The Court further noted that while a federal court examines state law to determine whether the elements of fraud have been sufficiently pled to state a cause of action, the Rule 9(b) requirement that fraud be pled with specificity is a federally imposed rule. The Court also held that, while fraud is not a necessary element of a claim under the CLRA or UCL, if the plaintiff nevertheless alleges a unified course of fraudulent conduct and relies entirely on that course of conduct as the basis of the CLRA or UCL claim, the CLRA or UCL claim is considered to be “grounded in fraud” or sounding in fraud such that the complaint as a whole must satisfy the particularity requirement of Rule 9(b).

Get a copy of the opinion here.

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The Supreme Court in Travelers Indemnity Company v. Bailey, 57 U.S. ___ (2009) last week reversed a Second Circuit opinion that could have caused insurance companies concerns when contributing to a settlement fund to resolve mass tort claims in Bankruptcy Court. 

More than 20 years ago, in 1986, a federal bankruptcy court issued an order that discharged one of the largest producers of products containing asbestos, Johns-Manville Corporation, and each of its insurers from all future tort liability arising under the company’s indemnity policies. Johns-Manville’s primary indemnity insurer, Travelers, deposited $80 million (the full value of their policies) into a settlement trust for all potential claimants, which was intended to cut-off all of Travelers’ future liability due to relationship with the company. 

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