Claims Handling and the Duty of Good Faith

Barger & Wolen partners Gregory Eisenreich and John  Holmes recently updated Chapter 13 of the California Insurance Law & Practice, Claims Handling and the Duty of Good Faith

The chapter revisions include:

  • The nature and scope of the insured’s duty of good faith;
  • General principles of bad faith actions;
  • The duration of the implied covenant extending from the policy’s inception and remaining in force during litigation;
  • Insured may impact their rights under their policies if they do not comply with policy conditions;
  • The burden of proving in bad faith actions that policy benefits were wrongfully withheld;
  • The use of litigation conduct and settlement offers to prove that policy benefits were wrongfully withheld;
  • Standards for finding bad faith and awarding punitive damages contrasted;
  • Tort damages are not available for an insurer’s breach of an obligation unrelated to claim handing, and
  • An insurer found liable to its insured based on estoppel rather than the contract’s terms of coverage cannot be liable for tortuous bad faith.


Reasoning Behind Punitive Damages Calculations Provided By California Appellate Court

Royal Oakes was quoted extensively in an Oct. 7, 2013, Claims Journal article, California Court Of Appeals Decision Provides Reasoning Behind Punitive Damages Calculations, about a significant insurance case where $19 million in punitive damages were awarded, then later shot down by the California Court of Appeals, which found the verdict excessive. The court capped the award at $350,000.

The case, Nickerson v. Stonebridge Life Ins. Co., involved a former Marine who sought payment for 109 days in the hospital due to a fall after his insurance company concluded that only 19 of the days were medically necessary. The jury awarded him $35,000 for emotional distress and $19 million in punitive damages.

Oakes told the publication that traditionally the way in which punitive damages have been calculated has varied.

“For years the appellate courts have been trying to interpret the various pronouncements by the U.S. Supreme Court about the issue of the size of punitive damages and specifically, the ratio of punitive damages to compensatory damages. The reason it has been a bit of a struggle on occasion is because of the high court and the appellate courts, in general, are not prepared to impose a strict bright line test, limiting punitive damages to a single digit ratio,” Oakes said.

“Having said that, this new case is one of many cases that have come very close to seeing that, in the absence of exceptionally reprehensible conduct, then it is a due process violation to exceed a ratio of 9 or 10 to 1. In fact, many appellate courts have suggested that far smaller ratios are appropriate in virtually all cases.”

Oakes also said that the decision is significant to insurers because it doesn’t include breach-of-contract damages.

“The significance of this decision is to reinforce the idea that though evidence of reprehensible conduct may have been found by a jury; nonetheless, it is almost impossible for an appellate court to find that a ratio of more than 10 to 1 between punitives and the compensatory damages satisfies constitutional due process requirements. There’s another very significant and separate aspect to this decision. When you figure out how much compensatory damages exist in order to come up with the punitives to compensatory ratio, do you have to decide what components of damages should be included in compensatory damages? This new Nickerson case reaffirms the idea that in computing compensatory damages, you do not include breach of contract damages. Instead, you only include damages for torts, such as bad faith and emotional distress,” he said.

According to Oakes, in Nickerson the court concluded that in determining compensatory damages, “for purposes of computing a ratio between punitive and compensatory, you do not include the breach of contract damages.

 “The reason for that is that punitive damages relate to tortuous conduct. You don’t get punitive for a breach of contract. You might get punitive for tort, depending on the tort and depending on whether the punitive damage standard is met, such as malice, oppression or fraud. And so, this case is an important reminder that in computing compensatory damages for purposes of arriving at a ratio between punitives and compensatory you exclude breach of contract damages and you include tort damages,” he said.

In general, if a contract is breached and the party who breached it is sued, damages are limited to contractor damages, the article notes.

“However, years ago, the courts decided that because of the special relationship between a policy holder and an insurance company that if a policyholder is suing for breach of contract and can also go beyond that and prove additional conduct such as bad faith or emotional distress then the policy holder is entitled to try to assert those causes of action,” Oakes said.

Oakes also told the Claims Journal that there have been several court decisions that have come close to saying it’s a due process violation to exceed the ratio of 9 or 10 to 1 between punitive and compensatory damages.

“I think that we have been moving in the direction of a bright line test limiting punitive damages to a single digit ratio. It may be that because every case is different and you occasionally see cases that suggest an extreme level of reprehensibility, there will continue to be a reluctance to impose a bright line test,” Oakes said.

California Court Clarifies What Triggers the Right to "Cumis Counsel"

Nearly 30 years ago, the California Court of Appeal announced its landmark decision in San Diego Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 3d 358 (1984), holding that if a conflict of interest exists between an insurer and its insured arising out of possible noncoverage under the insurer’s policy, the insurer is obligated to offer independent counsel to the insured, which is to be paid for by the insurer.  Shortly after the issuance of the Cumis case, the California Legislature passed Civil Code section 2860 to codify and clarify the rights and responsibilities of insureds and insurers when a claim of conflict of interest is asserted.

Since that time, a number of decisions have weighed in on the scope of the right to Cumis counsel and the meaning of section 2860, and the most recent decision is Federal Insurance Company v. MBL, Inc., decided August 26, 2013. Significantly, MBL confirms that not every reservation of rights entitles an insured to independent counsel.

Following the filing of an environmental remediation action against a dry cleaner for PCE contamination of soil and groundwater, the dry cleaner filed a third-party action against MBL, a supplier of dry cleaning products.  MBL retained defense counsel, who tendered MBL’s defense to multiple insurers and requested that the insurers provide MBL with Cumis counsel. 

While all of the insurers accepted the defense subject to various reservations of rights, only one, Great American Insurance Company, agreed to the retention of Cumis counsel. The rest of the insurers contended that their reservation of rights did not create a conflict of interest that required the appointment of independent Cumis counsel. /p> In June 2008, all of the insurers except Great American filed an action for declaratory relief against MBL, seeking a declaration that they were not obligated to provide independent counsel based on their various reservations of rights, which they contended did not create any conflict of interest between them and MBL. Shortly thereafter, Great American filed a separate action against MBL for declaratory relief also seeking to establish that it did not need to provide Cumis counsel, and it further filed a claim for contribution against the other insurers seeking to have them share in the cost of such counsel. The actions were later consolidated.

The trial court granted summary judgment to the insurers, finding there was no actual conflict of interest and thus no right to Cumis counsel. The Court of Appeal affirmed.

After detailing the development of the of the right to independent/Cumis counsel under California law, the Court of Appeal emphasized that

not every conflict of interest entitles an insured to insurer-paid independent counsel. Nor does every reservation of rights entitle[] an insured to select Cumis counsel.

For example, the court advised that where the coverage issue is independent of, or extrinsic to, the issues in the underlying case, or where the damages are only partially covered by the policy, there is no right to Cumis counsel. Rather, it is only when there is a reservation of rights and the outcome of that coverage issue can be controlled by the defense counsel retained by the insurer is independent counsel required to be appointed.

MBL contended that there were conflicts of interest because the insurers reserved their rights as to the applicability of various pollution exclusions, the policy limits for each accident or occurrence, and that there was no coverage for any damages outside of the insurers’ policy periods. In the context of this case, however, the court found that none of these reservations created a conflict of interest triggering the right to Cumis counsel under section 2860.  The court also found no conflict on interest merely because some of the insurers were defending other insureds that had interests adverse to MBL.

MBL further argued that the insurers’ “general reservation of rights” provided the basis for a conflict of interest. To this, the Court of Appeal concluded,

To the extent MBL contends the Insurers’ general reservations of rights gave rise to a conflict of interest, we reject that argument.  General reservations are just that: general reservations.  At most, they create a theoretical, potential conflict of interest – nothing more.

Finally, as to Great American, which had paid MBL’s independent counsel, subject to a reservation of the right to seek reimbursement from MBL, the court concluded that since Great American was not obligated to pay those fees in the first place, it could only seek reimbursement from MBL itself, and not from the other insurers who had no obligation to provide Cumis counsel to MBL.

Fingers Point to Different Defendants in Asiana Airlines Plane Crash

David McMahon, who represents insurers in litigation resulting from natural disasters and product liability lawsuits against the airline and cruise industry, was interviewed for an Aug. 6, 2013, Claims Journal article, Fingers Point to Different Defendants in Asiana Airlines Plane Crash, about the crash of Asiana Airlines Flight 214 and the different types of lawsuits resulting from it. McMahon told the publication that the Montreal Convention might limit the number of lawsuits that come out of the July 6 crash in San Francisco.

The Montreal Convention of 1999, among other things, prevents people “from filing a lawsuit in the United States if their final destination was outside of the country,” McMahon said. As such, if there were passengers on the flight who had round-trip tickets to South Korea, they would be prohibited from suing the airline in the U.S.

Under the Montreal Convention, I think what it’s designed to do is to give jurisdiction to the countries where someone is departing on a flight and ends up there. It makes sure that the place where the ticket was purchased and negotiated; the rules of that country apply to compensating the victims. In many countries, that kind of deprives the plaintiffs of a remedy, because very few countries have a tort system that is as advantageous as the tort system in the United States,” he said.

While the Montreal Convention may protect the airlines, it doesn't insulate the aircraft or aircraft part manufacturers from lawsuits, McMahon noted. One such suit has already been filed against Boeing by Asiana crash victims in Chicago. Lawyers for two other passengers on the plane have taken yet another approach, filing a lawsuit alleging that the flight crew were grossly negligent and reckless in their handling of the flight.

They sued Asiana in the United States district court for the Northern District of California. I think that there is likely jurisdiction here, and this would be at least one of the proper venues. They squarely bring their lawsuit under the Montreal Convention,” McMahon said of the suit. “Now, one of the other facets of the Montreal Convention is that it provides a damage limitation cap. That cap is about $150,000 for physical damages, unless the airline can show that the incident was not due to their negligence. Then they have a second cause of action for gross negligence. I think that would be designed to blow the potential cap on liability. Then they have a third cause of action for loss of consortium.”

McMahon told the publication that Asiana had roughly $2.2 billion in insurance coverage for liability, about $3 million more for the crew and roughly $130 million coverage for the plane itself. Because the plane hit a seawall, the City and County of San Francisco will likely submit a claim with its carrier who will cover the replacement cost or the cost minus depreciation.

That carrier, then, would pursue Asiana or Boeing, or both, for those claims,” McMahon said. “That’s a good example of an easy subrogation claim. Any of these carriers that end up paying will likely pursue additional claims against the party that’s predominantly culpable. A lot will be determined from the National Transportation Safety Board investigation and from discovery in the case.”

McMahon also predicted the lawsuits would take at least two years to get resolved.

Typically, in situations like this, most of the victims who are seriously hurt, there’s going to be settlements of those. The initial facts are suggesting that this didn’t happen without negligence. I mean, the pilots themselves and everything that’s pointing to them indicates negligence, if not gross negligence. One would think that the defense lawyers that get involved in this would start focusing on the amount of damages relatively quickly, just like in any big disaster like this. Three people were killed, so those would be the highest‑value claims. There are a lot of lower‑extremity and spinal‑injury claims because the plane spun on its wings and really slammed into the runway. Then, people that were more in the forward section of the plane, who weren’t that seriously injured. One would think that they would try to get the easier claims out of the way and then focus on the damages,” he said.

While it typically takes 12 to 18 months, the National Transportation Safety Board is attempting to complete its report in less than a year, according to McMahon.

“Obviously, the plaintiff’s lawyers will be very interested in getting that report,” he said.


Asiana Flight 214 Victims' Lawsuit Amounts Will Vary Widely

David McMahon was quoted in a July 28, 2013, San Jose Mercury News article, Asiana Flight 214 Victims' Lawsuit Amounts Will Vary Widely, about the Asiana Flight 214 plane crash and how, thanks to a treaty governing international airline accidents, American passengers stand to receive much more money in compensation for their injuries than those from China and South Korea.

While the American passengers can sue Asiana in the U.S., most non-U.S. plaintiffs can only sue in China or Korea. Three Chinese teenagers died and 182 other passengers were injured when the plane crashed landed in San Francisco on July 6.

To help bridge the wide gap, a number of foreign passengers injured in the accident are expected to sue the plane's manufacturer, Chicago-based Boeing Co. Even so, the newspaper notes, the most they could expect to received is $135,000.

On the other hand, an American passenger seriously injured in the crash who sues Asiana in U.S. court could be looking at “a pretty big number – many millions of dollars,” McMahon said.


Could Medpay Be The Latest Target In California Bad Faith Claims?

Marina Karvelas was quoted in a July 18, 2013, article published by Claims Journal, Could Medpay Be The Latest Target In California Bad Faith Claims, about a recent appeals court decision in California dealing with bad faith claims related to medical payments coverage.

The case, Justin Barnes v. Western Heritage Insurance Company, involved a plaintiff who was injured at 11 years old when a table fell on his back during a recreational program. A superior court found that the plaintiff could not sue the recreational program provider's insurance for bad faith for denying him coverage in part because the plaintiff had already settled a suit against the program provider. The appeals court reversed the trial court's decision.

Karvelas told the Claims Journal that she thought the decision could increase bad faith claims relating to medical payments coverage if the decision survives scrutiny by the California Supreme Court.

The Barnes decision muddies the waters on the collateral source rule which up until this decision was fairly clear in California,” she said. “An insurance policy taken out and maintained by the alleged wrongdoer, including its medpay provisions, is not wholly independent of him/her and thus cannot be considered to be a collateral source.

“Stated simply, the injured plaintiff cannot recover against the tortfeasor under the liability provisions of the tortfeasor’s insurance policy and then sue the insurance company under the medpay provision of that same policy. The Barnes court concluded differently. The medpay provision in a tortfeasor’s liability policy can be construed as a collateral source. As a third party beneficiary of the medpay provisions, all the injured plaintiff has to do is allege the insurance company committed a wrongful act against him/her when handling the medpay claim. In Barnes, Western Heritage allegedly failed to notify the injured plaintiff of the one-year time limit to present medpay claims. The alleged failure violated California’s regulations governing the fair settlement of claims,” Karvelas said. “The Barnes decision is problematic for insurers not only with respect to the collateral source rule but reflects an ever increasing effort by California’s plaintiff’s bar to create private rights of action for violation of the fair claims settlement regulations.”

Karvelas also told the publication that policy changes to medical payments coverage may be looming.

“It may behoove insurers to add provisions to their liability policies that the Barnes court found were missing in the policy at issue. These would include provisions that reflect an intent that payment under the liability provisions of the policy extinguishes the insurer’s obligation under the medpay provisions of that same policy,” Karvelas said.

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

California Supreme Court Finally Decides How a UCL Claim and First Party Bad Faith Claim Can Co-Exist

On August 1, 2013, the California Supreme Court issued its long-awaited decision in Zhang v. Superior Court, holding that an insured may assert a claim against an insurer based on California’s Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”) for conduct that allegedly constitutes common law bad faith, even if the alleged conduct also happens to violate the Unfair Insurance Practices Act (UIPA).   

The Supreme Court’s decision resolves a simmering conflict among lower court decisions. A number of courts held that the Supreme Court’s landmark ruling in Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287 (1988), which abolished any private right of action to enforce the UIPA, precluded UCL claims based on specific unfair practices prohibited by Insurance Code section 790.03(h), which is part of the UIPA. Other courts found that Moradi-Shalal did not bar UCL claims when the basis for the UCL claim was common law bad faith, as opposed to the UIPA – even though the asserted “bad faith” practices are also prohibited under the UIPA.  The Supreme Court adopted the latter position, concluding:

We hold that Moradi-Shalal does not preclude first party UCL actions based on grounds independent from section 790.03, even when the insurer’s conduct also violates section 790.03.

While the Court’s opinion does not dwell on the facts of the case, the claim involved an insured’s purchase of a liability policy to cover her commercial property. The insured disputed the insurer’s handling of her fire damage claim and sued the insurer for breach of contract, breach of the implied covenant of good faith and fair dealing (i.e., bad faith), and a violation of the UCL. 

The UCL claim alleged “unfair, deceptive, untrue, and/or misleading advertising” in that the insurer made promises as to coverage “when it had no intention of paying the true value of its insureds’ covered claims.”  The Court observed that the insured alleged “causes of action for false advertising and bad faith, both of which provide grounds for a UCL claim independent from the UIPA.”

The Zhang case was decided on demurrer. Thus, the Court considered only the allegations of the complaint, and it had to assume the truth of those factual allegations.

After presenting a thorough history of prior decisions over the last quarter century that have considered Moradi-Shalal’s effect on UCL lawsuits against insurers (and other defendants), the Supreme Court allowed the insured to pursue her UCL claim and observed,

Because Moradi-Shalal barred only claims brought under section 790.03, and expressly allowed first party [common law] bad faith actions, it preserved the gist of first party UCL claims based on allegations of [common law] bad faith. Moradi-Shalal imposed a formidable barrier, but not an insurmountable one.

As a result, the insured’s alleged claim of false advertising and “litany of bad faith practices” were “sufficient to support a claim of unlawful business practices.”

In summarizing its holding, the Court stated:

Private UIPA actions are absolutely barred, a litigant may not rely on the proscriptions of section 790.03 as the basis for a UCL claim. . . . However, when insurers engage in conduct that violates both the UIPA and obligations imposed by other statutes or the common law, a UCL action may lie.  The Legislature did not intend the UIPA to operate as a shield against any civil liability.

A concurring opinion written by Justice Werdegar and joined in by Justice Liu agreed with the majority conclusion that the insured should be allowed to pursue her UCL lawsuit against the insurer, but disagreed with the conclusion that no UCL claim could ever be based on violations of the UIPA unless the Legislature affirmatively intended to preclude such indirect enforcement.

While the Zhang decision is likely to generate much attention and be cited extensively in the future, the Court’s holding is nevertheless quite limited and the following points should be noted:

  • The decision is restricted to UCL claims brought by first parties; that is, by insureds.  The Court specifically advised two times that whether third parties may pursue UCL claims “is a matter beyond the scope of this case.”
  • The decision reiterated that while the scope of a UCL claim is broad (“any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising”), the remedies are very narrow – restitution and injunctions. Damages in any form are not recoverable.
  • The UCL does not allow for attorney’s fees (except in those cases where the plaintiff could qualify as a private attorney general under California Code of Civil Procedure section 1021.5).
  • Since the UCL is solely an equitable claim, the trial court possesses “broad discretion” in issuing orders or judgments with respect to any restitution or injunctive relief, and defendants are allowed to advance not only various defenses to the UCL claim but also “equitable considerations” that could minimize or even eliminate a finding of a UCL violation.
  • The restrictions to a UCL claim added by Proposition 64 (standing to assert a UCL cause of action and complying with the class action requirements in any UCL action brought on behalf of others) still apply.
  • The Court referenced another lingering issue in UCL claims – what is the standard for determining what business acts or practices are “unfair” mean in the consumer context under the UCL. This issue, however, remains unsettled and for the Court to decide another day.

Finally, the most likely consequence of the Zhang decision is that insureds may, as a matter of course, add UCL claims to bad faith cases as one more cause of action, incorporating by reference the prior alleged bad faith allegations. Since any UCL claim does not allow a damage remedy, and the only monetary remedy is restitution, the ultimate impact of adding a UCL claim may be minimal.

How has New York law on bad faith claims against insurers developed since the Bi-Economy and Panasia decisions?

R. Steven Anderson and Kyle M. Medley provide analysis and historical perspective of two 2008 decisions from New York’s highest court. The full article, Tempest in a Teapot: New York’s Bi-Economy Decision Five Years Later, appears in The Association of Insurance & Reinsurance Run-Off Companies (AIRROC) quarterly journal, an excerpt appears below:

New York courts have a general reputation as being insurer-friendly in their resistance to policyholder claims for damages beyond policy coverage terms and limits. Historically, New York courts refused to recognize contract-based bad faith claims for breach of a first-party insurance contract. Insureds have fared no better proceeding under a tort theory of bad faith liability, absent “egregious tortious conduct” and “a pattern of similar conduct directed at the public generally.” See Roconova v. Equitable Life Assurance Society, 83 N.Y. 603, 615 (N.Y. 1994).

In 2008, however, two decisions by New York’s highest court – Bi-Economy Market, Inc. v. Harleysville Insurance Co., 10 N.Y.3d 187 (N.Y. 2008), and a companion decision handed down on the same day, Panasia Estates, Inc. v. Hudson Insurance Co., 10 N.Y.3d 200 (N.Y. 2008) – threatened to alter the legal landscape in New York by recognizing a policyholder’s right to seek recovery of consequential damages beyond policy limits where such damages were the direct consequence of insurer claims  handling that violated the insurer’s obligation of good faith and fair dealing and were foreseeable by the parties at the time the policy was issued.

The Bi-Economy decision initially caused jurists and insurers to speculate as to whether the decision had opened the floodgates to claims against insurers beyond policy limits. Much of the speculation centered on Judge Robert S. Smith’s strongly-worded dissent in Bi-Economy, which predicted that the majority’s decision would “open the door” to punitive damage claims against insurers in New York ..."

Click here to continue reading the full article

5 Tips for Attorneys Turned Claims Investigators

Larry Golub was quoted in a May 31, 2013, article, 5 Tips for Attorneys Turned Claims Investigators (subs. req.) published on about the risks associated with lawyers stepping into the role of claims handler. The article also offered suggestions on what lawyers can do to make sure they protect themselves.

The article suggests that lawyers should know their boundaries, not assume that their communications are privileged and should educate staff that emails, letters and other communications may not be subject to attorney-client privilege.

Golub also told the publication that outside counsel should avoid making decisions about coverage and focus on providing advice.

The actual claims decisions should be made by the claims adjuster,” he said.

Golub added that outside counsel should avoid assuming any claims handling functions because their communications may become discoverable.

Most outside counsel, I would think would not want to be in that role,” he said. “The attorney-client privilege should not be waived unless there's an intentional determination to waive it.”


Insurer Has No Duty To Verify Accuracy of Insurance Application Representations

by James Hazlehurst

In American Way Cellular, Inc. v. Travelers Property Casualty Company of America, issued May 30, 2013, the California Court of Appeal for the Second Appellate District reaffirmed that insurers are not obligated to investigate and verify the accuracy of insurance application representations. 

American Way involved a commercial property policy issued by Travelers Property Casualty Company. American Way’s broker procured the policy and then submitted the application to Travelers’ agent on American Way’s behalf. The application, which had been completed by the broker, erroneously indicated that the subject property was equipped with smoke detectors, fire extinguishers and fire sprinklers. In fact, the property did not have fire sprinklers, and American Way’s principal purportedly never told the broker that the property was so equipped.

Travelers issued a policy to American Way which required it to maintain the fire sprinkler system as a condition of coverage. The policy further provided that Travelers had the right – but not the obligation – to inspect the property at any time.     

American Way subsequently made a claim on the policy for a fire loss. Travelers paid the claim pending its investigation of the loss; however, upon discovering that the property was not equipped with fire sprinklers, it informed American Way that the loss did not appear to be covered and that it would seek to recover the claim payment. 

American Way then sued Travelers for declaratory relief, breach of contract, bad faith and negligence. Travelers cross-complained for declaratory relief and reimbursement of the claim payment. The trial court granted summary judgment in favor of Travelers on both American Way’s complaint and Travelers’ cross-complaint. 

On appeal, American Way argued, among other things, that the trial court erred in granting summary judgment because Travelers negligently wrote an insurance policy without inspecting the premises and because there were triable issues of material fact regarding whether the broker was Travelers’ actual or ostensible agent. 

The appellate court disagreed, explaining that “an insurer does not have the duty to investigate the insured’s statements made in an insurance application and to verify the accuracy of the representations.” “Rather, it is the insured’s duty to divulge fully all he or she knows.” Moreover, while the policy permitted Travelers to inspect the property, it did not require that Travelers do so.   

Additionally, in order to prevail against Travelers, American Way had to show that the broker also acted as Travelers’ agent. The evidence presented to the trial court on summary judgment – including the broker’s own admission – showed that the broker acted on behalf of American Way only and was not Travelers’ agent. Accordingly, the appellate court concluded that Travelers could not be liable for the broker’s purported negligence.

Court of Appeal Applies Howell Rule to Future Medical Expenses and Noneconomic Damages

In Howell v. Hamilton Meats & Provisions, Inc., the California Supreme Court ruled that where a plaintiff’s medical care provider, pursuant to a prior agreement with the plaintiff’s health care provider, accepted less than the billed amount as full payment, evidence of the full amount billed is not relevant on the issue of past medical expenses. The Howell ruling is discussed in this post.

In its Howell ruling, the Supreme Court expressly declined to decide whether evidence of the full amount billed is relevant or admissible on the issues of future medical expenses and noneconomic damages.

The California Court of Appeal (Second Appellate District) addressed those issues in its April 30, 2013, decision in Corenbaum v. Lampkin. Guided by the reasoning in Howell, the Court of Appeal made these three key holdings:

  1. The full amount billed for past medical services is not relevant to the amount of future medical expenses and is inadmissible for that purpose.
  2. Evidence of the full amount billed for past medical services cannot support an expert opinion on the reasonable value of future medical services.
  3. Evidence of the full amount billed for past medical services is not admissible to determine the amount of noneconomic damages.

The Corenbaum decision is the latest appellate court case to apply the Howell ruling.

Last month, the Court of Appeal held in Luttrell v. Island Pacific Supermarkets Inc. that the Howell rule should be applied where the plaintiff’s health care was paid by Medicare. The court also explained how the Howell rule should be applied when the plaintiff’s recovery is reduced because of his failure to mitigate damages. The Luttrell case is discussed in this post.        

And, in March 2012, the Court of Appeal applied Howell’s holding to the analogous situation in which the insured employee’s medical expenses are paid through workers’ compensation. That decision, Sanchez v. Brooke, was the subject of this post.

Howell Rule Applies When Medical Services Were Paid by Medicare, Court of Appeal Concludes

In Howell v. Hamilton Meats & Provisions, Inc. the California Supreme Court ruled that a plaintiff’s recovery of medical damages is limited to the amount paid by the plaintiff’s health insurer and accepted by the health care provider as full payment. The Supreme Court’s ruling was discussed by Larry Golub in Collateral Source Rule Inapplicable When Injured Person's Medical Expenses are Discounted by Health Insurer.

In its April 8, 2013, decision in Luttrell v. Island Pacific Supermarkets, Inc., the California Court of Appeal, First Appellate District held that the Howell rule applied to a case where the plaintiff’s health care was paid by Medicare.

The Court of Appeal’s decision also explains how the Howell rule should be applied when the plaintiff’s recovery is reduced because of his failure to mitigate damages.

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Will Liability Insurers Have a Duty to Defend the NFL in Concussion Litigation?

The recent expanse of litigation against the National Football League for concussions and other brain injury related claims contains hall of fame names and headline worthy accusations of failed safety measures. The bigger fight, however, may be between the NFL and its liability insurers to determine what, if any, coverage and indemnity will be provided to the NFL.   

In fact, several coverage cases have already begun. Helmet manufacturer Riddell filed the first suit seeking declaratory relief against 13 insurers on April 12, 2012, in California Superior Court, Riddell v. Ace American Ins. Co.. On August 13, 2012, Alterra America Insurance Company filed suit against the NFL in New York Supreme Court seeking a declaration of its duty to defend the NFL in approximately 93 underlying concussion related claims, Alterra America Ins. Co. v. NFL

The NFL responded two days later with its own complaint in the California Superior Court against 32 insurers (dating back to the 1960s) seeking a declaration of the insurers’ duty to defend the NFL and indemnify it for damages in at least 143 concussion related suits, NFL v. Fireman’s Fund Ins. Co., Case No. BC490342. And finally, on August 22, 2012, subsidiaries of Travelers Companies Inc. filed an insurer-commenced declaratory judgment action against the NFL in New York Supreme Court, Discovery Prop. & Cas. Co. v. NFL, Case No. 652933/2013.      

Due to procedural motions, these cases are progressing slower than an NFL replay.

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When a Cruise Goes Off Course

Carnival Cruise Line’s Fascination vessel lost power while at sea on June 30th, 2010 with over 2000 passengers.David McMahon and Jack Pierce authored a column, When a Cruise Goes Off Course, that ran in the Claims Journal on Feb. 27, 2013, about the insurance coverage ramifications of the Carnival Triumph cruise ship saga that left passengers stranded without power or plumbing for days.

A class action was filed just one day after the ship was towed back to port alleging that conditions aboard the ship, which resulted from a fire in the engine room, caused severe “risk of injury or illness,” and that company officials should have known that the ship's systems could fail based on prior problems with the vessel.

In their column, McMahon and Pierce look at the unique liability and insurance issues surrounding the cruise ship fiasco and property and business interruption claims that may arise from it. The authors also note that Carnival's liability exposure under the facts alleged in the class action “does not seem extensive, particularly when compared to other recent cruise line accidents involving serious personal injuries and loss of life.”

The largest insurance claim Carnival is likely to seek, the authors wrote, involves the business interruption loss the company experienced.

This could be significant,” McMahon and Pierce wrote. “Not only did Carnival lose revenue for the cruise at issue, but the damaged vessel will likely be out of service for the foreseeable future, resulting in lostrevenue that the ship would have otherwise generated. The U.S. Coast Guard, and perhaps other agencies as well, can be expected to conduct potentially lengthy investigations into the cause of the engine room fire. The engines will have to be repaired and the vessel thoroughly cleaned and scrubbed prior to the next voyage, which may be a long time down the road.”


Sewage Cruise Suits Least of Carnival's Coverage Worries

Jack Pierce was quoted in a recent Law360 article, Sewage Cruise Suits Least Of Carnival's Coverage Worries (subscription req.), about Carnival Cruise Lines' recent troubles stemming from a fire aboard one of its ships. According to the article, published Feb. 19, the cruise line's biggest woes won't come from the suits filed by passengers who were stranded for five days aboard the Triumph, but rather from the business interruption.

Pierce told the publication that the Carnival's largest insurance claim would stem from the loss of use of Triumph as the result of an engine fire that knocked out power aboard the ship, leaving passengers without running water and working toilets.

There was a pretty significant fire in the engine room. It sounds to me like the sewage processing system is going to have to be significantly overhauled. The vessel is going to be cleaned,” he said. “There's a lot of work to be done on this vessel. I don't see it sailing for a couple of months, and that's a significant loss of use claim.”

The company paid refunds to the passengers, covered hotel rooms and cancelled 14 voyages through April 13, expenses that may be covered depending on the company's agreement with its protection and indemnity club, the article said. Piece told Law360 that coverage under those policies is fairly straightforward.

The owners of the club are the actual ship owner members. They're generally fairly generous with the cover,” Pierce said. “It's not like a domestic insurance company, which may dispute coverage and say 'I'm sorry, that type of claim is not covered.' There may be fine points that are disputed, but club managers are always willing to negotiate with one of the club's members.”

Courts Take Divergent Positions on "Disparagement" Under Advertising Injury Coverage

Within the last four months, two divisions of the California Court of Appeal’s Second Appellate District have taken different positions on the requirements for “disparage,” as that term is used in commercial liability insurance policies that provide coverage for “advertising injury.”

On June 21, 2012, Division One of the Second Appellate District decided Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. In that case, Travelers issued a commercial liability policy that promised to defend Charlotte Russe, a retailer, against any suit that sought damages for advertising injury claims. The policy provided that it covered claims alleging injury arising out of the publication of material that disparages a person’s goods, products or services.

Charlotte Russe had a contract to become the exclusive sales outlet for Versatile’s “People’s Liberation” brand of apparel. Displays in Charlotte Russe stores announced the sale of People’s Liberation jeans at 70% to 85% price markdowns. Versatile sued Charlotte Russe, alleging that the retailer’s pricing practices would result in significant and irreparable damage to the People’s Liberation brand. Charlotte Russe asked Travelers to defend the lawsuit. Travelers refused. The insurer maintained that coverage was not available because reduction of the price of a product is not a disparagement of the product.

The trial court granted Travelers’ motion for summary judgment, but Division One reversed the trial court’s ruling. (While initially unpublished, the appellate court’s decision was certified for publication on July 13, 2012.) The decision concluded that an allegation of disparagement may be implied. The Division One court held that the key issue is not whether Versatile expressly alleged that Charlotte Russe disparaged Versatile’s products, but instead whether Charlotte Russe’s statements and conduct could be understood to disparage Versatile’s products.

The Second Appellate District’s Division Three took an opposite view in its October 29, 2012, decision in Hartford Casualty Insurance Co. v. Swift Distribution, Inc.,which also involved a claim for coverage under a policy’s advertising injury coverage. The Division Three court ruled that the insurer in that case had no duty to defend because the lawsuit against the insured did not allege that the insured published an injurious falsehood directed at the plaintiff’s products. The court expressed disagreement “with the theory of disparagement apparently recognized in Charlotte Russe.” The court explained,

Charlotte Russe held that this reduced pricing was enough to constitute disparagement, which triggered the duty to defend. We fail to see how a reduction in price—even a steep reduction in price—constitutes disparagement.”

In September, the California Supreme Court denied review of the Charlotte Russe decision; the time to seek review in the Hartford Casualty has not yet run.

California Supreme Court Depublishes Decision that Found Claims Adjusters Not Exempt from California's Overtime Pay Requirement


By Larry Golub and Sam Sorich

On July 23, 2012, we reported that the California Court of Appeal (Second Appellate District) held in Harris v. Superior Court that claims adjusters for two insurers were not exempt from California’s overtime compensation laws. More specifically, the court concluded that the duties of those adjusters functioned as the day-to-day operations of the insurers and were not “directly related to management policies or general business operations” to fall within exempt status under California law.

The Court of Appeal’s earlier decision in the case was reversed and remanded by the Supreme Court on December 29, 2011, and the intermediate court was told to apply the correct analysis. Consequently, our prior report expected this second decision, as issued by a divided panel of the Court of Appeal, again to be presented to the Supreme Court seeking a petition for review.

Indeed, Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation, the insurers sued in the action, filed a Petition for Review on September 4, 2012, followed by a request to have the Court of Appeal’s decision depublished, as submitted by the California Employment Law Council.

On October 24, the Supreme Court ended the appellate proceedings in this case by (1) denying the Petition for Review and (2) depublishing the Court of Appeal decision. By this action, while the case is final as between the plaintiff claims adjusters and the insurers, the decision cannot be cited as authority in any other case.

With removal of this case from the precedential decisions of California law, the issue as to whether insurance adjusters in other cases and other contexts are exempt employees will continue to be litigated.

Du Two - Ninth Circuit Backs Off on Controversial Duty to Settle Decision


In June 2012, the Ninth Circuit Court of Appeals issued a decision in Du v. Allstate Insurance Company that asserted a liability insurer must “effectuate” or initiate a settlement within policy limits after liability has become reasonably clear. That decision generated extensive criticism, including on this blog.

Less than four months later, some semblance of balance has been restored with the issuance of the Ninth Circuit’s October 5, 2012 amended decision in Du. The amended decision replaces the court’s prior ruling and, most significantly, relegates its prior ruling as to the duty to “effectuate” settlement to merely raising the concept but concluding that it “need not resolve” this legal issue. 

Whatever the reason for the court’s retreat, the Ninth Circuit panel found, as it did in its original decision, that a jury instruction proffered by the plaintiff that raised the duty to “effectuate” settlement issue was not supported by the evidence and thus the trial court did not abuse its discretion in rejecting the instruction.

While the amended decision still references case law that it asserts extends “the duty to settle beyond mere acceptance of a reasonable settlement demand,” it also cites to California case law “suggesting no breach of the good faith duty to settle can be found in the absence of a settlement demand, the typical context in which the duty has been found.”  While this language will remain in the final decision, at most it is only dicta.

The amended decision also backtracked on another criticized finding, namely, that the “genuine dispute doctrine” does not apply to third party duty to settle cases.  Once again, while the original decision found the doctrine did not apply in third party cases, the amended decision advised: “[w]e need not resolve” this legal issue. 

Hopefully, with the issuance of the amended decision in Du, the parameters of the “duty to settle” under California law have been substantially restored.

State Supreme Court Rules Against Insurers in Stringfellow Acid Pits Case

Larry Golub was quoted in an Aug. 9, 2012, article by The Recorder (subscription required) on the state Supreme Court ruling in State of California v. Continental Insurance, involving the cleanup of the Stringfellow Acid Pits, a notorious hazardous waste site in Riverside County. The court ruled that the insurance company defendants must pay “all sums” due on the insurance policies. It also allowed for the “stacking” of policies.

While considered a blow to insurance companies, the court did say that insurers could include anti-stacking clauses in future policies and rules to limit indemnity.

"Assuming an insurance company puts that language in there, and it's clear and unambiguous ... that may be a way to solve the problem for insurance companies," Golub said. "But a lot of these cases go back a long time."

Click here to read Mr. Golub's full analysis of the decision.

California Supreme Court Adopts "All-Sums-With-Stacking" Rule for Continuous Injury Cases

In a unanimous and long-waited decision, the California Supreme Court today (August 9) adopted the “all-sums-with-stacking” approach to addressing indemnification for continuous injury cases. The decision is The State of California v. Continental Insurance Co., as authored by Justice Ming Chin.

The specific facts of the case addressed the State of California’s ability to obtain insurance coverage for environmental remediation at the Stringfellow Acid Pits waste site. The State operated the waste disposal site from 1956 to 1972, and the various insurers that were parties to the case provided the State with excess commercial liability insurance coverage from 1964 to 1976. Property damage occurred over the course of many years, including those in which the insurers provided coverage.

The Court addressed two issues: (1) when continuous property damage occurs during the periods of several successive liability policies, is each insurer liable for all damage both during and outside its period up to the amount of the insurer’s policy limits? and (2) if so, is the “stacking” of limits permitted?  

The Court of Appeal had answered both questions in the affirmative. An earlier Court of Appeal decision, FMC Corp. v. Plaisted & Cos., 61 Cal. App. 4th 1132 (1998), ruled that the State could not stack the policy limits of successive insurance policies, but rather had to pick a single policy year and recover the full amounts of the limits from that period. 

In deciding these issues, the Supreme Court relied on an interpretation of the policy language that was found in the insurers' commercial general liabilility policies, as well as rules announced in two of its past decisions, to find first that each insurer who provided coverage to the insured when some property damage occurred would be “on the loss” and its indemnity obligations triggered up to the extent of its policy limits:

We therefore conclude that the policies at issue obligate the insurers to pay all sums for property damage attributable to the Stringfellow site, up to their policy limits, if applicable, as long as some of the continuous property damage occurred while each policy was “on the loss.” The coverage extends to the entirety of the ensuing damage or injury . . . and best reflects the insurers’ indemnity obligation under the respective policies, the insured’s expectations, and the true character of the damages that flow from a long-tail injury.

The Court explained that it was not writing on a blank slate on this issue and observed that its decision was in line with a “growing number of states [that] have similarly adopted this interpretation of the all sums language.” It rejected a contrary line of cases from other jurisdictions that have adopted a pro rata allocation of the damage.

In terms of allocating that continuous loss among all similarly implicated insurers, the Court found that allowing the insured to “stack” its policies and recover up to the policy limits of all the triggered policies was not only the correct rule based on the policy language but also the equitable result and one that can be achieved “with a comparatively uncomplicated calculation.” In so doing, it expressly disapproved of the FMC Corp. decision. The Court did note, however, that insurers may be able to add “anti-stacking” provisions in their policies to avoid such a result, and indeed such provisions have been used for a number of years. 

The Court also accepted for review, but has held pending the decision in Continental, another Court of Appeal case in which the issue of “stacking” was not permitted, Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of PennsylvaniaWe commented on that case shortly after it was decided in June 2011. Presumably, now that the Continental decision has been issued, the Kaiser Cement case will be returned to the lower court to issue a decision in line with Continental.

Court of Appeal Affirms Buss Reimbursement of Non-Covered Settlement to Insurer

By Larry Golub and Sam Sorich

On August 3, 2012, the California Court of Appeal, Second Appellate District, after affirming a trial court’s ruling that a liability policy did not provide coverage for tenants’ claims against apartment owners for unsafe and unsanitary conditions at the apartments, further affirmed that the insurer was entitled to be reimbursed by the insureds for the full amount the insurer had paid in settlement of the tenants’ action.  The decision is Axis Surplus Ins. Co. v. Reinoso.

In so doing, the Court found that, having timely reserved its rights and having notified the insureds of the intent to accept a proposed settlement offer and affording the insureds the opportunity to assume the defense if the insureds did not agree to the proposed settlement offer, the insurer was entitled to be reimbursed by the insureds for the indemnity payment once it established the claim against the insureds was not covered. This is the procedure first provided for under the California Supreme Court’s decision in Buss v. Superior Court, 16 Cal. 4th 35, 50-51 (1997).

However, since the insurer was not able to meet its burden to show that there was never a “potential” for coverage, it was not able to recoup the defense costs it incurred in defending the claims against the insureds, again a procedure permitted under the Buss decision.

Edgar and Linda Reinoso were co-owners and managers of a number apartment buildings in Southern California. Tenants of one of these apartment building sued the Reinosos for alleged habitability deficiencies at the apartments.  The Reinosos sought coverage under their commercial general liability policies issued by Axis Surplus Lines Insurance Company. Axis agreed to represent the Reinosos under a reservation of rights.

The tenants’ lawsuit settled for $3 million, with Axis paying the majority of the settlement. Axis then sued the insured for the recovery of its settlement contribution and the defense costs it incurred. The trial court concluded that the Axis policy did not cover the tenants’ claims (since the policy and California law did not allow coverage for intentional and willful acts), and it ordered the Reinosos to pay back to Axis the insurer’s settlement contribution jointly and severally.  The couple appealed.  Edgar’s appeal was dismissed, but Linda’s claims went forward.

In her appeal, Linda argued that the trial court erred when it found that she was not an innocent insured entitled to benefits under the policy because the trial court wrongly applied the objective rather than the subjective standard in determining whether she knew about the conditions in the apartments. The Court of Appeal acknowledged that whether an injury is expected or intended under an insurance policy is determined by the insured’s subjective mental state. The appellate court concluded, however, that the trial court, in fact, did apply the subjective standard and found that there was substantial evidence that Linda knew about the conditions at the apartments and how the apartments were being managed.

Linda also challenged the trial court’s determination that she was jointly and severally liable with her husband for the repayment to Axis. The Court of Appeal rejected this argument as well, noting that, as co-owner of the apartments and as a participant in the management of the property, Linda had sufficient benefit from the settlement such that not to allocate to her joint and several liability to the insurer for the full amount paid by the insurer to settle the tenants’ lawsuit would amount to unjust enrichment.

The lesson for insurers is that reimbursement of liability policy proceeds may be possible with the issuance of a timely and comprehensive reservation of rights letter in those cases in which the claims can be shown not actually to be covered and/or a portion of the defense costs can be shown to have not even presented a potential for coverage.

Court of Appeal Again Finds Claims Adjusters Not Exempt from California's Overtime Pay Requirement

By Sam Sorich and Larry Golub

Finding that the duties of insurance claims adjusters function as the day-to-day operations of an insurer and not “directly related to management policies or general business operations,” a divided panel of the California Court of Appeal (Second Appellate District) held that such adjusters are not exempt from California’s overtime compensation laws.

The July 23, 2012 decision in Harris v. Superior Court is the latest – and potentially not the last word – in the saga as to whether adjusters employed by two insurance companies were entitled to overtime pay. As we earlier reported, the California Supreme Court, in a unanimous opinion issued December 29, 2011, had ruled that the Court of Appeal used an erroneous analysis when it decided that claims adjusters were non-exempt and thus sent the case back to the Court of Appeal to use a correct analysis.

Under the California Labor Code, employees are generally entitled to overtime pay for work in excess of eight hours in one workday or 40 hours in one week. However, the Code exempts administrative employees from the overtime pay requirement.

The Harris case involves claims adjusters employed by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation. The employees sued the companies for damages based on the failure to pay them for overtime work. The companies argued that the adjusters were administrative employees and thus were not entitled to overtime compensation.

The Court of Appeal originally ruled in favor of the employees. However, as noted above, that ruling was reversed by the Supreme Court, which directed the Court of Appeal to examine the question of whether the adjusters were entitled to overtime pay in light of federal regulations that guide the interpretation of California Wage Orders on the administrative exemption.

In its reconsideration of the case, the Court of Appeal noted that under the applicable California Wage Order, in order for an employee to be subject to the administrative exemption, the employee must be primarily engaged in work that qualitatively is “directly related to management policies or general business operations.” Federal regulations describe the “directly related” requirement.

The court conceded that the federal regulations’ description of “directly related” is not perfectly clear but concluded, “We take it to mean that only duties performed at the level of policy or general operations can satisfy the qualitative component of the ‘directly related’ requirement. In contrast, work duties that merely carry out the particular, day-to-day operations of the business are production, not administrative, work.”

Applying this interpretation to the Liberty Mutual and Golden Eagle adjusters, the Court of Appeal held:

The undisputed facts show that Adjusters are primarily engaged in work that fails to satisfy the qualitative component of the ‘directly related’ requirement because their primary duties are the day-to-day tasks involved in adjusting individual claims. They investigate and estimate claims, make coverage determinations, set reserves, negotiate settlements, make settlement recommendations for claims beyond their settlement authority, identify potential fraud, and the like. 

According to the court, none of that work was carried on at a level of management policy or general operations. Instead, it was all part of the day-to-day operation of the insurers’ business. Thus, the adjusters were not administrative employees and, as a result, they were entitled to overtime compensation.

In light of the importance of this decision, including the fact that the 2-1 opinion was issued by a divided panel of the Court of Appeal, one would expect another request to the Supreme Court that it review the Court of Appeal’s latest ruling.

California Supreme Court Rules that Court of Appeal Used Incorrect Legal Analysis in Deciding that Claims Adjusters Are Not Exempt from Overtime Pay Requirement

By Sam Sorich and Larry Golub

In a unanimous opinion handed down on December 29, 2011, the California Supreme Court ruled in Harris v. Superior Court that the Court of Appeal used an erroneous analysis when it decided that claims adjusters are not exempt from California’s overtime pay requirement. 

The California Labor Code sets forth a general requirement that employees are entitled to overtime pay for work in excess of eight hours in one workday or 40 hours in one week. However, the Code exempts administrative employees from the overtime pay requirement.

Claims adjusters employed by Liberty Mutual Insurance Company and Golden Eagle Insurance Corporation sued the companies for damages based on the failure to pay them for overtime work. The companies argued that the adjusters were administrative employees and thus were not entitled to overtime pay.

The California Court of Appeal rejected the insurance companies’ argument, primarily relying on a prior Court of Appeal decision in Bell v. Farmers Insurance Exchange, 87 Cal. App. 4th 805 (2001). The companies asked the California Supreme Court to review the Court of Appeal’s decision.

The Supreme Court’s ruling concluded that the Court of Appeal used an incorrect analysis when it rejected the argument that the adjusters were administrative employees. According to the Supreme Court, the Court of Appeal relied too heavily on the administrative/production worker dichotomy used in the Bell decision and failed to consider more recent regulations issued by the California Industrial Welfare Commission and applicable federal regulations which are supposed to guide California in applying the administrative employee exemption to the general overtime requirement.

In reversing the Court of Appeal’s decision, the Supreme Court remanded  the case back to the Court of Appeal with directions that it apply the legal standards that are set forth in the Supreme Court’s ruling.

Collateral Source Rule Inapplicable When Injured Person's Medical Expenses are Discounted by Health Insurer

In a long-awaited, and nearly unanimous decision, the California Supreme Court has held that an injured plaintiff whose medical expenses are paid through private health insurance may recover as economic damages no more than the amounts paid by the plaintiff’s insurer for those medical services, and that this discounted amount does not fall within the collateral source rule. The decision is Howell v. Hamilton Meats & Provisions, Inc., decided August 18, 2011.

Rebecca Howell was injured in an automobile accident caused by a driver of Hamilton Meats & Provisions, Inc. The total amount billed by her medical providers for her medical care up to the time of trial was $189,978.63, but due to the preexisting contracts those providers had entered into with Howell’s health insurer, the bills were reduced by $130,286.90, such that the amounts paid to (and accepted by) the providers was only $59,691.73. 

At trial, Howell sought to recover the full amount of her medical bills, not the amount that her medical providers had accepted. While allowing Howell to present her the full-billed amounts to the jury, the trial court reduced those amounts in post-trial motion to the $59,691.73 paid to and accepted by the providers.

The Fourth District Court of Appeal reversed the reduction order on the ground that it violated the collateral source rule, and the Supreme Court accepted review of the case to resolve the following issue: 

Is the negotiated rate differential – the difference between the full billed rate for medical care and the actual amount paid as negotiated between a medical provider and an insurer – a collateral source benefit under the collateral source rule, which allows a plaintiff to collect that amount as economic damages, or is the plaintiff limited in economic damages to the amount the medical provider accepts as payment?

After providing a detailed discussion of the history of the collateral source rule, as “unequivocally reaffirmed” by the Court’s in the decision Helfend v. Southern Cal. Rapid Transit Dist., 2 Cal.3d 1, 6 (1970), and how that rule has been addressed over the past 40 years in case law (mostly involving Medi-Cal benefits) or excepted by statute in limited contexts, the Supreme Court explained that none of the prior cases had “discussed the question, central to the arguments in this case, of whether restricting recovery to amounts actually paid by a plaintiff or on his or her behalf contravenes the collateral source rule.” 

The Court then proceeded to resolve the four issues necessary to answer this question:

First, based on certain California Civil Code sections and the provisions of the Restatement of Torts, and as guided by a prior Court of Appeal decision involving Medi-Cal benefits, Hanif v. Housing Authority, 200 Cal. App. 3d 635 (1988), the Court held that

“a plaintiff may recover as economic damages no more than the reasonable value of the medical services received and is not entitled to recover the reasonable value if his or her actual loss was less.” (Emphasis by Court.)  

This is based on the well-established rule that a plaintiff’s expenses, to be recoverable, must not only be incurred but reasonable, and that this rule “applies when a collateral source, such as the plaintiff’s health insurer, has obtained a discount for its payments on the plaintiff’s behalf.”

Second, the basis for the limitation on recovery as to Medi-Cal recipients, adopted in the Hanif case, similarly applies to plaintiffs like Howell who possess private medical insurance. Since, by the purchase of such insurance, Howell’s prospective liability was limited to the amounts her medical insurer had agreed to pay the providers for the medical services they were to render, Howell could not “meaningfully be said ever to have incurred the full charges” or ever been personally liable for the full charges. 

Third, as to the argument that the tortfeasor (Hamilton in this case) would obtain a windfall “merely because the injured person’s health insurer has negotiated a favorable rate of payment with the person’s medical provider,” the Court disagreed. After addressing the “complexities of contemporary pricing and reimbursement patterns for medical providers,” the Court observed that the “negotiated prices” medical providers accept from health insurers “makes at least as much sense, and arguably more, than” the full prices that are billed by such providers where there is no negotiation between buyer and seller. 

“Accordingly, a tortfeasor who pays only the discounted amount as damages does not generally receive a windfall and is not generally underdeterred from engaging in risky conduct.”

Finally, in response to the contention by Howell that the “negotiated rate differential” is a benefit provided to the insured plaintiff under her policy and should be recoverable under the collateral source rule, the Court disagreed with this assertion as well. 

Since Howell did not incur liability for the full bills generated by the medical providers, due to the fact that her providers had agreed with her insurer on a different price schedule, she could not recoup those full bills as damages for economic loss under the collateral source rule. Moreover, the rule does not apply to the negotiated rate differential since it is not primarily a benefit to the plaintiff but the “primary benefit of discounted rates for medical care goes to the payer of those rates – that is, in largest part, to the insurer.”

As noted above, the Court’s decision was not wholly unanimous, as one Justice dissented. That Justice’s position was that, while Howell should not be able to recoup “the gross amount of her potentially inflated medical bills,” neither should they “be capped at the discounted amount her medical providers agreed to accept as payment in full from her insurer.” Instead, the dissent opted for an intermediate position, claiming this is the majority rule across the country: “Howell should be entitled to recover the reasonable value or market value of such services, as determined by expert testimony at trial.”  

With six Justices signing off on the Court’s opinion, however, the collateral source rule will not require defendants (or their liability insurers) in California to pay any amount greater for medical expenses than the discounted amounts paid by the insured person’s health insurer and accepted by her medical providers.

California Courts Continue to Rein in Class Certification in the Marketing and Sale of Insurance

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.

Another Toehold in Using the UCL to Scale the Barriers of Moradi-Shalal

In 1988, the California Supreme Court issued its landmark decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287, disallowing private rights of action based on violations of the Unfair Insurance Practice Act (“UIPA”), otherwise known as third-party bad faith claims. Shortly thereafter, the prohibition was extended to first-party bad faith claims.

Most significantly, a series of Court of Appeal decisions disallowed violations of the UIPA to be brought as claims under the California’s “Unfair Competition Law” (Business and Professions Code Section 17200, et seq., or the “UCL”). 

As one court concluded:

we have no difficulty in [holding] the Business and Professions Code provides no toehold for scaling the barriers of Moradi-Shalal.” Safeco Ins. Co. v. Superior Court, 216 Cal. App. 3d 1491, 1494 (1990). 

More recently, another court held that “parties cannot plead around Moradi-Shalal’s holding by merely relabeling their cause of action as one for unfair competition.” Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061, 1070 (2004).

In November 2009, we reported on Zhang v. Superior Court, a case that 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 an insured asserts what appear to be violations of the UIPA is not necessarily an end run around Moradi-Shalal so long as the insured also alleges the insurer acted unfairly by engaging in false and deceptive advertising, suggesting it would provide coverage in the event of a loss, when it had no intent to do so. 

The case was short-lived, as the Supreme Court accepted review in February 2010 and the decision became depublished. While the Zhang case is fully briefed, the Supreme Court has not yet set oral argument.

On June 15, however, another Court of Appeal decision issued again sought to undercut the prohibition on using the UCL to pursue UIPA-like claims. 

In Hughes v. Progressive Direct Ins. Co., the plaintiff sued his insurer in a purported class action based on the automobile insurer’s alleged company-wide practice of steering its insureds to repair shops that were part of Progressive’s Direct Repair Program (DRP) and misrepresenting their ability to take their vehicle to a non-DRP repair shop. 

The sole claim alleged was under the UCL, but the predicate statute relied on to support the UCL claim was Insurance Code section 758.5.

That statute, which prohibits insurers from requiring an insured’s vehicle to be repaired at a specific repair shop, or suggesting a specific shop be used, unless the insured is informed in writing of his or her rights to select another repair shop, does not, just like the UIPA, permit a private right of action but only enforcement by the Insurance Commissioner pursuant to the UIPA. 

Accordingly, the trial court sustained the insurer’s demurrer to the complaint, concluding that just as the UCL could not be used to circumvent UIPA claims under Moradi-Shalal, neither could a UCL claim proceed based upon Section 758.5.    

The Court of Appeal reversed, and concluded that Moradi-Shalal does not bar a claim by an insured against an insurer under the UCL based solely on the allegations the insurer violated Section 758.5. 

After discussing in detail the decisions issued since the time of Moradi-Shalal vis-à-vis the UCL, as well as the legislative history of Section 758.5, and then relying on a parsed reading of the language of the UCL in which its remedies are “cumulative” to other laws unless otherwise “expressly” provided, the court found that an alleged violation of a statute like Section 758.5, so long as it does not involve conduct violating the UIPA, “may serve as the predicate for a UCL claim absent an express legislative direction to the contrary.”  

The decision, however, was not one of clear unanimity. One of the three Justices on the appellate panel issued his own concurring opinion, in which he expressed his “considerable misgivings” as to the majority opinion. After noting that the opinion “hangs precipitously on one word, namely ‘express,” Justice Fred Woods lamented that the social problems sought to be addressed by the Moradi-Shalal decision and various legislative remedies might now be undone, and that he saw “storm warnings on the horizon.”

Perhaps, just as the Supreme Court accepted review of the Zhang case last year to address that appellate decision seeking to create a chink in the armor of Moradi-Shalal, it will similarly accept review of Hughes to address this latest attack on the scope of Moradi-Shalal and bring some certainty to whether the reach of the UCL is as broad as these two lower appellate courts have held

14th Annual Insurance Forum in Chicago Sponsored by Barger & Wolen

Barger & Wolen is proud to join JVP Partners in sponsoring the 14th Annual Insurance Forum on November 9th, 2010 in Chicago. This complimentary event is open to all.

14th Annual Insurance Forum
Tuesday, November 9, 2010
7:30 a.m. - 5:30 p.m.
The Union League Club
65 West Jackson
Chicago, IL

What is the Insurance Forum? The Forum is an event presented by the Insurance Forum Committee, chaired by Kenneth M. Weine. This is an executive level program designed for insurance and risk management professionals, accountants, attorneys, corporate officers, financial examiners, and regulators.

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Take the Money or Rescind -- Not Both

In Village Northridge Homeowners Association v. State Farm Fire and Casualty Company (decided August 30, 2010), the California Supreme Court rejected an insured’s attempt to sue State Farm for fraud in inducing settlement of the insured’s property damage claim. The insured alleged the settlement was procured by State Farm’s undervaluing of the earthquake loss and misrepresentation of the policy limits to be only $4,979,900, while the limits were allegedly $11,905,500. 

While the settlement agreement between State Farm and the insured released all known and potential claims related to the Northridge Earthquake damage claims, the insured insisted it need not seek to rescind the settlement agreement but could instead elect to affirm the settlement and release, and also then sue for fraud damages. 

As noted by the Court, the insured “seeks to affirm those parts of the agreement that benefit it, but to invalidate a major part of the agreement that benefits State Farm.” This is a rescission remedy and the party seeking to rescind must restore benefits received under the contract.  Civ. Code § 1688 et seq. 

The Court recognized that other jurisdictions, relying on common law principles, have allowed a party challenging a settlement to “affirm and sue” for fraud in the inducement without restoring benefits.

In significant contrast, the California Legislature has spoken in this area and specifically rejected the “affirm and sue” principle.

Instead, the Civil Code requires the aggrieved party to rescind and restore consideration received in their original settlement and release with the caveat that any actual return of benefits may be delayed until final judgment unless it substantially prejudices the defendant. Civ. Code § 1693

The Court rejected public policy arguments that an “affirm and sue” principle was necessary to combat fraud in settlements. In closing, the Court stated: 

The Legislature has created a fair and equitable remedy to address the alleged fraud problem:  rescission of the release, followed by suit. When restoration is impossible because the settlement monies have been spent, the financially constrained parties can turn to section 1693 to delay restoration until judgment, unless the defendants can show substantial prejudice. Our statutory scheme therefore effectively ensures that plaintiffs who may have been defrauded in the settlement process will be allowed access to the courts.”


Insurer's Denial of Business Interruption Claim, Since There Was No "Accidental Direct Physical Loss," Affirmed by California Court of Appeal

On August 4, 2010, the California Court of Appeal for the Second Appellate District affirmed a summary judgment in favor of State Farm in connection with the insurer’s denial of a claim under a first party business interruption policy (MRI Healthcare Center v. State Farm General Insurance Company). The case involved a damage claim to an MRI machine and loss of income after the machine did not “ramp up” after it was voluntarily “ramped down.” 

The appellate court affirmed the trial court’s ruling that the MRI machine did not sustain “physical loss,” nor was the alleged loss the result of an “accident” as required under the policy.


MRI Healthcare Center of Glendale utilized an MRI machine for scanning purposes. To operate properly, the MRI machine had to be kept in a specially designed and constructed room to keep out electrical or radio wave interference. MRI Healthcare had used the MRI machine for more than 14 years before the claimed loss. 

As a result of storms, MRI Healthcare’s landlord was required to repair the roof over the room housing the MRI machine. These repairs could not be undertaken until the MRI machine was demagnetized, or “ramped down.” MRI Healthcare was informed that due to the age of the machine, there was no guarantee that the machine could be successfully “ramped up” again. 

After the MRI machine was ramped down and the repairs to the roof were made, the machine failed to ramp back up as previously warned. 

MRI Healthcare then submitted a claim to State Farm, alleging that the failure of the MRI machine to ramp back up constituted “damage” which was proximately caused by the storms that damaged the roof. State Farm denied the claim.


The appellate court found that, under the undisputed facts, MRI Healthcare could not meet the fundamental precondition to coverage of “accidental direct physical loss” to insured property. The court held that the ramp down procedure was the event that damaged the MRI machine, and that it did not cause “physical loss” to the machine. 

For there to be a “loss” under the meaning of the policy, the court stated that some external force must have acted upon the insured property to cause a physical change in the condition of the property. The court further found that ramping down of the MRI machine was intentional and not “accidental” as it was not “unintended and unexpected by the insured.” 

Finally, the court rejected MRI Healthcare’s contention that the storms were the “efficient proximate cause” of the loss. The court held that, even if the storms set in motion the course of events leading to the ramp down of the MRI machine, it ultimately was the ramping down procedure itself that was the sole, and predominate, cause of MRI Healthcare’s loss.

California Supreme Court Holds Treble Damages Not Permitted under the Unfair Competition Law - Restitution is the Sole Monetary Remedy

Earlier today, the California Supreme Court issued its unanimous opinion concluding that Civil Code section 3345, which allows treble damages to be awarded to seniors when a statute provides for a fine or penalty, is not permitted under the Unfair Competition Law, Business & Professions Code section 17200 (the “UCL”)

The decision, Clark v. Superior Court (National Western Life Insurance Company), confirms that the only monetary remedy available under the UCL is restitution, and that a claim for treble damages is not restitution, nor is the nature of restitution comparable to a penalty.

The plaintiffs in the case filed a class action lawsuit against National Western Life Insurance Company arising out of the sale of deferred annuities issued to California residents who were senior citizens. The trial court denied certification as to all claims except one under the UCL. In addition to seeking restitution in the UCL claim, the plaintiffs sought treble damages on their restitution claim under section 3345.

As reported in our earlier blog post last September when the Supreme Court accepted review, in the more than two decades since the enactment of section 3345, no case had ever permitted any sort of damages, be they compensatory, treble or punitive, under the UCL. The trial court dismissed the claim for treble damages, but the Court of Appeal reversed, finding that the plain meaning of section 3345 applied to a private action seeking restitution under the UCL.

In reversing the decision issued by the Court of Appeal, the Supreme Court focused on two issues. First, the Court considered whether a claim under section 3345 only applies to treble amounts awarded under the Consumer Legal Remedies Act (“CLRA”), since the first subsection of section 3345 makes reference to and cites language from the CLRA. The Court concluded that a claim under section 3345 is not so limited, observing that, if trebling was to apply only to a claim under the CLRA, there would have been no need for a separate statute (section 3345); the Legislature could have just amended the CLRA. Nevertheless, the Supreme Court did not articulate any other statutes that might be able to be trebled under section 3345.

After this, the Supreme Court specifically addressed whether section 3345 trebling was permitted under the UCL. The Court focused on the salient language of section 3345 where it requires the underlying statute to impose a “fine, or a civil penalty . . . or any other remedy the purpose of which is to punish or deter,” and found that it cannot refer to the UCL. First, citing to a number of its past decisions, the Court reiterated that the only monetary remedy under the UCL is restitution. 

Next, the Court relied on the well-established canon of statutory construction that when there is a general term followed by various specific terms, as is the case in the language of section 3345 just quoted, the general term must be limited to the nature of the specific terms. In other words, “any other remedy” must refer to a remedy in the nature of a penalty, and thus section 3345 trebling is only allowed when a statute permits a remedy that is in the nature of a penalty. The UCL, however, is not such a statute. Confirming that restitution only allows the restoration of something taken, or a return to the status quo, restitution under the UCL is not a penalty, which is a recovery without reference to the actual damage sustained. In sum, the Supreme Court concluded:

Because restitution in a private action brought under the unfair competition law is measured by what was taken from the plaintiff, that remedy is not a penalty and hence does not fall within the trebled recovery provision of Civil Code section 3345, subdivision (b).

Kent Keller and Larry Golub of Barger & Wolen represent National Western Life Insurance Company in the Clark case.

Imprecise Policy Language Results in Umbrella Policy Becoming Primary for Duty to Defend Purposes

On June 11, 2010, the California Court of Appeal for the Second Appellate District reissued its decision (following rehearing) in Legacy Vulcan v. Superior Court (Transport Insurance Company), and held that an umbrella insurer became a “primary umbrella” insurer and was obligated to defend its insured since no scheduled underlying insurance applied, and the $100,000 self-insured retention under the umbrella policy was applicable only to the insurer’s indemnity obligation. 

The decision, while providing a detailed analysis of the umbrella/excess policy issued by Transport, presents more of an isolated instance of an insurer not carefully limiting the scope of its defense obligation under a policy issued nearly 30 years ago, rather than an opinion providing any broad pronouncement that umbrella insurers are to provide a duty to defend from dollar one.

Vulcan was named in multiple lawsuits claiming environmental contamination and alleging damages occurring over a number of years, including when Transport’s Excess Catastrophe Liability Policy was in effect. Vulcan tendered the defense of the actions to several insurers, including Transport, but none of the insurers offered a defense. Vulcan paid for its own defense and settled the lawsuits. Transport filed a declaratory relief action against Vulcan to determine its rights and obligations under the policy.

The coverage action proceeded with the parties stipulating to resolve certain legal issues before trial, and many of the facts of the dispute (including the reasons why the underlying insurers did not provide a defense to Vulcan) did not make their way into the Court of Appeal’s decision. The trial court found that Transport had no duty to defend Vulcan until it established that the applicable underlying insurance had been exhausted and upon a showing that the claims were actually covered.  

In analyzing coverage under the Transport policy, the appellate court went into great detail examining the language used by Transport in its insuring agreements, limits of liability section, definitions, and conditions. The court held that the Transport policy provided both excess and umbrella coverage. With respect to the umbrella coverage portion, and based on the ambiguity of the policy’s use of the unqualified term “underlying insurance” in the insuring agreement, the court held that, under the facts of this case (where no primary or underlying insurer defended Vulcan), Transport’s umbrella coverage was primary umbrella defense coverage. 

Finding the umbrella coverage to be primary, the ordinary rules regarding a primary insurer’s duty to defend applied. As such, Transport was obligated to defend Vulcan regardless of the exhaustion of any underlying insurance and regardless of the provision for a $100,000 retained limit (which, in this case, was found to only apply to the duty to indemnify). Moreover, Vulcan did not need to establish that the claims were actually covered under the Transport policy to trigger the duty to defend, but merely show a potential for coverage. 

In its analysis, the court made clear that the result here was based on the policy language at issue. For example, the court observed that “the impact of a policy reference to a ‘self-insured retention’ or ‘retained limit’ on the duty to defend will depend on the language of a particular policy,” and it referenced cases where policy language expressly stated there was no duty to defend unless the retained limit was exhausted. 

This case therefore stands as another warning to insurers to be careful in drafting policy language, and this is especially true when it come to the duty to defend.

Los Angeles Jury Finds Health Insurer is Required to Pay for Out-of-State Liver Transplant

With the backdrop of the raging battle over healthcare reform, a Los Angeles jury rendered on Monday a verdict in favor of an insured against Anthem Blue Cross arising out of the health insurer’s refusal to provide coverage for an out-of-state liver transplant. The case, Ephram Nehme v. Wellpoint, Inc.; Blue Cross of California d/b/a/ Anthem Blue Cross, initially filed on August 14, 2008, has been closely followed in the legal and health insurance communities.

As reported in the Los Angeles Times, the jury found, by a vote of 10-2, that Anthem Blue Cross had breached its contract by refusing to pay for the cost of the out-of-state transplant operation, and by a vote of 9-3 that Anthem Blue Cross had acted in bad faith. Anthem Blue Cross stated in the article that its contract provides that transplants must be preformed in California and that it had approved Nehme for a transplant at UCLA Medical Center once his name came up on the UCLA waiting list. The same article stated that the jury awarded Nehme $206,000 for the cost of the operation, and that he would also be able to recoup his legal fees. (Under California law, pursuant to the decision in Brandt v. Superior Court, upon a finding that an insurer has acted in bad faith, the insured is able to seek to recover only those attorney’s fees incurred to obtain the contract benefits, but not the fees incurred to show bad faith.) The jury did not, however, award any punitive damages against Anthem Blue Cross.

The trial court proceedings are not yet concluded, with further post-trial motions to be filed, and it is unknown whether Anthem Blue Cross will appeal the jury’s verdict.

From Out of the Blue Comes a Proposed Exemption for Air Ambulance Companies to Avoid California Workers' Compensation Official Medical Fee Schedule


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, 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.

California Court of Appeal Upholds Insurer's Rescission of Health Insurance Policy

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.

Court of Appeal Hands UCL Win to Plaintiffs, Shrinks Impact of Moradi-Shalal

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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Court Holds Insurer Not Required to Prove Prejudice to Deny Coverage Based on Notice Condition

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.

Ninth Circuit Rules Complaint Must Specifically Allege Conduct Amounting To Fraud

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.

The United States Supreme Court Applies Equitable Principles in Favor of Insurers in Enforcing Settlement Trust Order by Bankruptcy Court of Questionable Jurisdiction

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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