Did the judge make the right call in XL Specialty v. St. Paul Mercury?

At first glance, the holding of the California 4th District Court of Appeal in XL Specialty Insurance Co. v. St. Paul Mercury Insurance Co. seems harsh. The court upheld the dismissal of XL Specialty Insurance Co.’s suit against one of two (D&O liability insurers seeking to recover its $9.3 million payment to a failed bank’s unsecured creditors. It did so on the primary ground that the $9.3 million was paid by XL not to protect the insureds from the claims of the unsecured creditors, but to extricate itself from the insureds’ own bad-faith claims against it.

In upholding the dismissal of XL’s claims, the court’s analysis focused on cases that were almost completely on point which XL failed to distinguish. It also focused on the obvious public policy concerns of allowing excess insurers to be more confident about refraining from initial settlement discussions because of the possibility of shifting later payouts to primary carriers on an equitable subrogation theory. In short, far from issuing a controversial ruling, the court had no real choice but to uphold the dismissal of XL’s claims after its analysis of the relevant authorities.

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Originally published in Westlaw Journal - Corporate Officers & Directors Liability, Volume 29 | Issue 15

One Policy Term, May Have Two Meanings

A California Court of Appeal held in Transport Ins. Co. v. Superior Ct. (R.R. Street & Co.) that a named insured’s reasonable expectations of coverage can be different from those of an additional insured’s. This ruling leaves open the possibility that the same policy language can be interpreted differently in the same lawsuit, depending upon whether the named insured or an additional insured is seeking coverage.

Transport issued an excess and umbrella commercial general liability policy to Legacy Vulcan Corp. R.R. Street & Co. was named as an additional insured by endorsement. These two companies were named as defendants in lawsuits alleging that they distributed and sold dry cleaning products that caused environmental contamination. 

A dispute arose between Transport and Legacy about the duty to defend. The dispute turned on whether the term “underlying insurance” included only the specifically scheduled policies identified in the Transport or all potentially applicable primary policies. 

In a previously published opinion, the Court of Appeal held that the term “underlying insurance” was ambiguous in the context of the Transport policy and should be construed in accordance with Legacy’s objectively reasonable expectations.

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Insurers Will Take Lead On Oil Rail Transport Safety Push

David McMahon was quoted in a Jan. 23, 2014, Law360 article, Insurers Will Take Lead On Oil Rail Transport Safety Push, about how a series of fiery derailments of trains carrying crude oil have not only led lawmakers to consider new rules, but also could push insurers to take action, forcing the oil and rail industry to improve safety to cut down on underwriting costs.

According to the article, rail transport of crude oil has grown significantly in recent years with the U.S. energy boom. Three recent crashes have highlighted safety problems: a Dec. 30, 2013, collision near Casselton, N.D.; a November derailment in rural Alabama; and a derailment in Lac-Megantic, Quebec in July. That accident set off massive blasts, destroyed part of the town and killed 47 people.

There was a real concern about the condition of the railroad’s assets in [the] Alabama [crash]. You might see carriers put inspection requirements on their own assets before writing the coverage,” McMahon said. “The carrier doesn’t want to write coverage where the assets of the railroad are dilapidated and haven’t been maintained.”

McMahon told the publication that the crashes and the resulting push for tougher rules governing the transport of oil by rail could lead insurers to limit what they are willing to underwrite.

You can see them saying, 'We’re not going to give you a blank check and allow you to carry 100 tanker cars with oil. We’re going to limit it to 40 to 50 cars,’” he said. “Or there could be outright exclusions of some particular activities.”

McMahon said insurers will not doubt embrace whatever rules regulators and lawmakers enact to improve safety.

The tighter the regulations are ... it can result in a safer environment, which insurers like,” he said. “They like things they can effectively evaluate — the safer it is, it tends to be safer to insure.”

 

Permits to test driverless vehicles pass DMV regulatory speed bumps

On January 14, 2014, the California Department of Motor Vehicles (DMV) held a hearing on proposed regulations governing the testing of autonomous vehicles on public roads in California. 

An autonomous vehicle is a vehicle that is equipped with technology which allows the vehicle to be operated without the active control or monitoring of a natural person. 

SB 1298, which was enacted in 2012, directs the DMV to adopt regulations on the testing of autonomous vehicles. The DMV’s proposed regulations set forth requirements which a vehicle manufacturer would have to satisfy in order to conduct testing of autonomous vehicles on public roads. 

The requirements include the obligation that the manufacturer provides evidence of its ability to respond to a judgment for damages or injuries arising from the operation of autonomous vehicles in the amount of five million dollars. The evidence may be in the form of a policy issued by an insurer, a surety bond, or a certificate of self-insurance.

During the hearing, representatives of Volkswagen and Google voiced general support for the regulations but urged the DMV to make several revisions before adopting the regulations. None of the revisions outlined at the hearing related to the manufacturer’s obligation to provide evidence of its ability to respond to damages.    

A representative of the Association of California Insurance Companies (ACIC) objected to the provision in proposed section 227.06 which states that the manufacturer’s evidence of insurance is in addition to the requirement that the driver must provide proof of insurance. ACIC argued that the testing of an autonomous vehicle should not involve personal insurance coverage.

At the close of the hearing, the DMV counsel said that the DMV hopes to attain final adoption of the regulations by early in the summer of 2014.          

Documents of note:

 

Homeowners and Related Policies

Barger & Wolen recently updated Chapter 36 of the California Insurance Law & Practice, Homeowners and Related Policies

The chapter revisions include:

  • Trigger of coverage rules;
  • Triggering first-party coverage vs. third-party coverage;
  • Continuing or progressive damage issues;
  • The known loss rule;
  • Recission of the policy;
  • The Residential Property Insurance Bill of Rights; and,
  • Personal property coverage and exclusions.

In addition, there are 28 new practice tips covering a wide range of issues attorneys may confront in regard to homeowners insurance and reports of several court decisions on point.

 

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.

 

California DMV to propose regulations on the testing of autonomous vehicles

On June 18, 2013, the California Department of Motor Vehicles (DMV) conducted a workshop on regulations that will govern the testing of autonomous vehicles on public roads. The workshop is a precursor to the drafting of regulations and the commencement of a rulemaking proceeding.

SB 1298, which was enacted last year, requires the DMV to adopt regulations on the testing of autonomous vehicles on public roads and the post-testing operation of autonomous vehicles by January 1, 2015.

SB 1298 defines “autonomous vehicle” as any vehicle that is equipped with autonomous technology that has been integrated into the vehicle. The law defines “autonomous technology” to mean “technology that has the capability to drive a vehicle without the active physical control or monitoring by a human operator.”

SB 1298 specifies the requirements that must be met in order to operate an autonomous vehicle on public roads for testing purposes:

  • The law mandates that the manufacturer of the autonomous technology performing the testing must obtain an instrument of insurance, surety bond, or proof of self-insurance in the amount of $5 million, and must provide evidence of insurance, surety bond, or self-insurance to the DMV in a form and manner set forth in regulations adopted by the DMV.
  • SB 1298 states that a driver must be seated in the vehicle’s driver seat during testing, and the driver must be an employee, contractor, or designee of the manufacturer.

Participants in the June 18 workshop included representatives of vehicle manufacturers, technology companies, insurers, and DMV staff. The discussion centered on permits that would have to be obtained in order to test autonomous vehicles, the certification of drivers, the registration of testing vehicles, and the financial responsibility requirement.

DMV staff opined that if a manufacturer complies with the financial responsibility requirement by obtaining an insurance policy, the policy must have a minimum policy limit of $5 million and must cover liability for bodily injury, death, and damage to property.  DMV plans to study the issue of whether the insurance coverage would have to be obtained from an insurer admitted to do business in California.

At the close of the workshop, DMV staff announced that the agency intends to propose regulations on the testing of autonomous vehicles in two months.

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.

Liability Insurers May Have Duty to Defend Against Federal Prosecutions, California Court of Appeal Holds

By James Hazlehurst

The Second Appellate District of California held on May 1 in Mt. Hawley Ins. Co. v. Lopez that California Insurance Code section 533.5(b) does not eliminate a liability insurer’s duty to defend against a federal prosecution where the policy provides for a defense against criminal proceedings. 

Section 533.5(b) precludes an insurer from defending against “any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to” California’s unfair competition law under Business and Profession Code section 17200 et seq. “in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor or any county counsel.” 

Mt. Hawley involved Dr. Richard Lopez’s federal criminal prosecution for his role in a liver transplant. Dr. Lopez was a medical director of St. Vincent’s Medical Center. He allegedly diverted a liver designated for one patient to another patient who was much farther down the transplant wait list in violation of regulations promulgated under the National Organ Transplant Act. Dr. Lopez then allegedly covered up his actions by conspiring with others, making false statements and falsifying records. 

Dr. Lopez was indicted by a grand jury and tendered his defense to Mt. Hawley, which declined to defend him on the basis that Section 533.5(b) precludes an insurer from providing a defense to a criminal prosecution. Mt. Hawley filed a declaratory relief action against Dr. Lopez and prevailed on summary judgment. 

In reversing the trial court, the appellate court examined in great detail the legislative history of section 533.5, as well as several maxims of construction of statutes, ultimately reasoning that the legislative purpose behind Section 533.5(b) was to preclude insurers from providing a defense only to civil and criminal actions brought under California’s unfair competition laws and false advertising laws, which could only be brought by state and local – not federal – agencies. The court therefore concluded that Section 533.5(b) did not apply to federal prosecutions. The court also relied on the Ninth Circuit’s decision in Bodell v. Walbrook Ins. Co. which reached the same conclusion regarding the applicability of Section 533.5(b) to federal prosecutions.

The court of appeal stated that its interpretation “allows insurers to contract to provide a defense to certain kind of criminal charges, as the Legislature has said insurers can do in the cases of corporate agents and government employees charged with crimes.” The court further noted that its interpretation was consistent with the goal of encouraging individuals to serve on the boards of directors of corporations or as trustees of charitable trusts, observing that “unless directors can rely on the protections given by D & O policies, good and competent men and women will be reluctant to serve on corporate boards.”

 

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.

California Court of Appeal Again Finds No Stacking of Liability Policy Limits

Nearly two years ago, the California Court of Appeal for the Second Appellate District issued a decision that upheld the concept of horizontal exhaustion of primary liability policy limits before triggering the obligation of an excess insurer, but also concluded that, in the context of that case, there was no stacking of liability insurance policies. The case was Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania, and we reported on it in this blog.

The California Supreme Court accepted review of Kaiser Cement, but then returned the case to the Court of Appeal after the Supreme Court issued its decision in State of California v. Continental Insurance Co., 55 Cal. 4th 186 (2012), a decision we also reported on in a prior blog

In Continental, the Supreme Court adopted the “all-sums-with-stacking” approach to addressing indemnification for continuous injury cases. With respect to the stacking issue, 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.” The Court, however, advised that insurers may be able to enforce “anti-stacking” provisions in their policies to avoid such a result.  

In the unanimous opinion of the Court of Appeal panel in Kaiser Cement, the primary policy considered in that case contained such language that precluding stacking of policy limits. Other than its addition of a brief section on the Continental decision (and some other minor revisions), the second opinion in Kaiser Cement, issued April 8, 2013, is virtually identical to the prior opinion issued June 3, 2011.

The underlying dispute involved coverage obligations for thousands of asbestos bodily injury claims brought against Kaiser, and in an even earlier decision, the appellate court held that asbestos bodily injury claims should be treated as multiple occurrences under the primary policies issued to Kaiser by Truck Insurance Exchange, rather than one single occurrence for multiple claimants. The primary policies all had non-aggregating per-occurrence limits, meaning the policies potentially could be on the hook for the total per-occurrence limit for each occurrence.

The present appeal addressed the situation as to whether, when an asbestos bodily injury claim exceeded the primary coverage issued by Truck in a particular year, the excess coverage issued by Insurance Company of the State of Pennsylvania (“ICSOP”) was triggered to provide indemnification to Kaiser. Because the case involved asbestos bodily injury, which continues to cause injury over time, even with a single claimant, a claim could trigger coverage in multiple policy years, and ICSOP argued that the insured had to exhaust all underlying primary policies for all years in which coverage was triggered. Kaiser and Truck both argued that the ICSOP excess policy was triggered upon exhaustion of the single $500,000 per occurrence limit.

The 2013 Kaiser Cement decision, just like the one in 2011, issued three holdings:

First, it held that the excess insurer ICSOP was entitled to horizontally exhaust all underlying primary insurance that was collectible and valid, and not just those policies directly underneath its excess policy.

The second holding, however, concluded that ICSOP was not able to “stack” the individual limits of the Truck primary policies. The court did not base this holding on judicially imposed anti-stacking principles, but rather concluded that under the particular language of the Truck policies, Truck could only be liable as a company for one per-occurrence limit for each occurrence. Specifically, the court cited the language in the insuring agreement stating that,

the Company’s liability as respects any occurrence . . . shall not exceed the per occurrence limit designated in the Declarations. (Italics added by court.) 

Thus, the court permitted horizontal exhaustion in principle but held that there was no valid and collectible insurance to horizontally exhaust in this case since Kaiser was only entitled to one per-occurrence limit for Truck as a whole for claims that exceeded the $500,000 per occurrence limit in the implicated Truck policy.

It was in this part of the Court’s analysis that it considered and analyzed the Continental decision, explaining that its “conclusion that Kaiser may not ‘stack’ Truck’s annual liability limits is consistent with the Supreme Court’s analysis in Continental” because Truck’s policy language was the type of provision envisioned by the Continental decision that precluded the stacking of policy limits for any one occurrence.  

Finally, as with the prior decision in Kaiser Cement, the Court of Appeal found that the summary judgment that had been issued by the trial court in favor of Kaiser had to be reversed because, on the present record, the appellate court could not determine if there was primary coverage issued to Kaiser by other insurers (outside of Truck) whose primary policies still needed to be exhausted under the court’s horizontal exhaustion ruling.

As of the moment, the Kaiser Cement decision remains citable law, though its status could change if review is sought from the Supreme Court and such review is accepted.

Barring such action, the case is helpful to excess insures as it affirms the obligation that horizontal exhaustion of all primary insurance is still the rule in the continuous occurrence context.

For primary insurers, the case affords the opportunity to avoid stacking of policy limits in those situations in which specific policy language precludes triggering more than one policy limit per occurrence. As we noted in our prior blog on the Kaiser Cement case, a careful review of the specific policy language found in each primary and excess policy at issue is required.

Judge Invalidates California Regulation on Estimating Replacement Costs for Homeowners Insurance

By Samuel Sorich and Larry Golub

On March 25, 2013, Los Angeles Superior Court Judge Gregory Alarcon issued a decision which found the California Department of Insurance’s regulation on estimating replacement costs for homeowners insurance to be invalid. The decision is Association of California Insurance Companies and Personal Insurance Federation of California v. Jones.

California Code of Regulation section 2695.183 was adopted by the insurance commissioner in 2010; the regulation went into effect on June 27, 2011. Section 2695.183 requires insurers to use a detailed method for estimating replacement costs for homeowners insurance. The regulation specifies that an insurer that communicates an estimate which does not comport with the regulation’s method makes a misleading statement in violation of Insurance Code section 790.03.

Two insurer trade associations, the Association of California Insurance Companies and Personal Insurance Federation of California, challenged the validity of section 2695.183. The associations petitioned the Los Angeles Superior Court for a judgment declaring section 2695.183 to be invalid because its adoption is beyond the insurance commissioner’s authority. Judge Alarcon granted the associations’ petition.

Insurance Code section 790.03 defines unfair and deceptive acts or practices in the business of insurance. Subdivision (b) of section 790.03 states that the definition of unfair or deceptive acts includes making a statement “which is known, or which by the exercise of reasonable care should be known, to be untrue, deceptive, or misleading.” The insurance commissioner relied on section 790.03(b) as authority to adopt section 2695.183, contending that the regulation simply interpreted section 790.03 by identifying one type of misleading statement.

Judge Alarcon rejected the commissioner’s reliance on section 790.03(b). The judge’s decision explains,

By characterizing all estimates of replacement costs as misleading (save the one provided by 10 CCR § 2695.183), Defendant, in exercising its authority under § 790.10, expands the meaning of something ‘known’ or which ‘should be known’ to be misleading beyond the parameters of § 790.03(b).”

Judge Alarcon’s decision notes that “[t]he limits of the authority granted by § 790.03 are underscored by Cal Ins Code § 790.06 which provides a special process which the commissioner can determine how acts not listed in § 790.03 can be defined as unfair or deceptive.”

The need to interpret the authority granted to the insurance commissioner by Insurance Code section 790.03 in light of Insurance Code section 790.06 was also central to the recent decision of California Administrative Law Judge Stephen J. Smith, who found that the Fair Claims Settlement Practices Regulations may not be used by the insurance commissioner to constitute unfair claims acts under section 790.03, which was discussed in this blog post.

An Employee's Umbrella Insurance Policy Must Be Exhausted Before Seeking Contribution From Policies Covering The Employer

When an employer is vicariously liable to a third party for its employee’s negligence, and both the employer and employee have primary and umbrella policies covering liability to the third party, the employee’s primary and umbrella policies must first be exhausted before the employer’s policies are implicated.

The California Court of Appeal, Fourth Appellate District in GuideOne Mutual Insurance Company v. Utica National Insurance Group recently held that priority of liability among primary and umbrella insurers of an employer and employee “is based upon principles of vicarious liability, not more general rules government primary and excess policies.” 

GuideOne was an equitable contribution action involving the following scenario: Gary West was a pastor who worked for Crosswinds Community Church (“Crosswinds”) and Christian Evangelical Assemblies (“CEA”). During the course of his work, West was driving and struck a motorcyclist, Robert Jester, who sustained severe injuries. Jester filed suit against West, Crosswinds and CEA for personal injuries, and the case settled for $4.5 million. The liability of Crosswinds and CEA was entirely vicarious to the liability of West.

GuideOne issued primary and umbrella policies to Crosswinds which covered negligent acts by an employee. Utica issued primary and umbrella policies to CEA that covered only the employer. After the underlying case settled, GuideOne filed an equitable contribution action against Utica seeking a pro rata share of the settlement amount

The Court of Appeals ruled that the trial court erred in awarding equitable contribution to GuideOne on a pro rata basis. In support of its decision, the Court held that an employer is only vicariously liable for the actions of the tortfeasor employee, and therefore all of the insurance policies covering the employee, primary and excess, must be exhausted before the umbrella policy of an insurer that covered only the employer must make a contribution. 

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.”

Winning Insurers Gain Clarity on Defense Duty During Appeals

Larry Golub was quoted in a Feb. 13, 2013, article by Law360, Winning Insurers Gain Clarity on Defense Duty During Appeals (subscription req.), about a recent federal court decision that found an insurer had not violated its contract when it ceased defending a policyholder after a trial court win on coverage, despite the fact that the victory was later overturned. The case is National Union Fire Insurance Co. of Pittsburgh, Pa., et al. v. Seagate Technology Inc.

Golub told the publication that carriers will sometimes continue to defend their policyholders after winning at the trial court level if a coverage win doesn't appear to be strong enough to survive an appeal. The reason is that they could end up paying high interest on defense costs they might ultimately owe, he said.

Maybe they should play it safe and just keep defending under a reservation of rights and ensure that they don't have ultimate exposure,” Golub said.

Golub also noted that if other courts agree with the decision, insurers who have won temporary victories will not have to face bad faith claims or punitive damages.

 

Barger & Wolen Launches Disability Insurance Industry Conference

We at Barger & Wolen have exciting news to share with you.

On May 16-17, 2013, we will host the inaugural Definitive Disability Conference in Boston, an industry conference designed for in-house counsel and experienced claim personnel. The conference will be chaired by Martin Rosen, who heads Barger & Wolen’s Disability, Life and Health practice group.

The primary objectives for the Definitive Disability Conference are: (1) to create a conference focused solely on disability insurance issues; (2) to design the conference with the experienced disability insurance professional in mind; (3) to limit the conference to industry-related personnel and their counsel; and (4) to ensure that the conference provides great value for the price.

To accomplish these goals, Marty has secured speakers from the following companies, law firms and other entities:

  • Ameritas
  • Berkshire Life Insurance Company of America
  • Cigna
  • Colonial Life Insurance Company
  • CSC Financial Services Group
  • Disability Management Services, Inc.
  • First Mediation Corporation
  • Funk & Bolton, P.A.
  • Kunz, Plitt, Hyland & Demlong PC
  • Metropolitan Life Insurance Company
  • Mutual of Omaha Insurance Company
  • Nawrocki Smith LLP
  • Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
  • Shipman & Goodwin LLP
  • Shutts & Bowen LLP
  • Sun Life Financial
  • Unum Group

We are very excited about the inaugural conference and look forward to seeing you in Boston next spring.

For more information, please click on the following hyperlinks:

Ÿ         Definitive Disability Conference

Ÿ         Conference Program and Agenda

Ÿ         Speakers

Ÿ         Sponsorship Opportunities

Ÿ         Fees

Ÿ         Registration Form

Ÿ         Hotel

Ÿ         FAQs

Musicians Lawyer Up Over Insurance "Exclusion"

Larry Golub was quoted in a recent Daily Journal article about the fact that businesses are finding they need additional insurance to protect them against suits involving claims related to entertainment. According to the Oct. 24, 2012, article, Musicians Lawyer Up Over Insurance "Exclusion," (subscription req.) although it may seem counter-intuitive that musicians or artists would not be covered for entertainment-related activities, “such an industry exclusion is not uncommon.”

Entertainment businesses often must buy additional insurance to protect them against copyright infringement and defamation, because of the heightened risk associated with show business.

Often an exclusion is an invitation to purchase another policy,” Golub told the Daily Journal. “For example, people buy malpractice insurance to cover professional liability and those policies exclude bodily injury, which are covered under general liability.”

 

Equitable Principles Guide Court In Self-Insured Retention Case

David McMahon wrote a Oct. 24, 2012, Daily Journal article, Equitable Principles Guide Court In Self-Insured Retention Case (subscription req.) about continuing discussions dealing with case law involving self-insured retention under a liability insurance policies and, in particular, a recent California Court of Appeal decision.

A self-insured retention, or SIR, is “a sum or loss percentage stated in a liability insurance contract that must be paid by an insured before the insurer's obligation are triggered of a loss.” According to McMahon, they are usually found in commercial liability insurance policies and require that the insured handle defense obligations until the case is settled, there is a judgment, or until the retention is satisfied.

McMahon writes in his article that SIRs can cause confusion in situations where courts must interpret and/or apply them in complex fact patterns. He cites as an example the recent Court of Appeal decision in Axis Surplus v. Glencoe Insurance LTD.

The SIR language typically states that the insured's payment of the SIR is a “condition precedent” to the insurer's obligation,” he wrote. “The actual timing of the insured's payment and satisfaction of the “condition precedent” can become contentious, particularly in cases involving equitable contribution.”

 

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.

More than 20 new insurance-related bills signed into law by Governor Brown

September 30, 2012, was the deadline for Governor Jerry Brown to take action on bills passed by the California Legislature during the 2012 regular legislative session.

Here are summaries of noteworthy insurance-related bills that were signed into law. All of these new laws will go into effect on January 1, 2013.

Senate Bills

SB 863 increases workers’ compensation permanent disability benefits by an estimated $750 million per year, phased in over a two-year period. The new law changes several aspects of the workers’ compensation system. Among other things, SB 863 creates an independent medical review process for resolving medical care disputes, establishes an independent bill review process for resolving medical billing disagreements, adopts a statute of limitations for workers’ compensation liens, and restricts the reasons that can be used to avoid obtaining treatment within a medical provider network.

SB 1216 conforms California law to the revisions made to the NAIC Credit for Reinsurance Model Law (adopted in 2011). Among other things, SB 1216 establishes criteria that the insurance commissioner is to use in certifying reinsurers; reinsurance provided by certified reinsurers qualifies as an asset or credit against the liabilities of a ceding insurer.

SB 1234 and SB 923 create the California Secure Choice Retirement Savings Investment Board which is charged with conducting a market analysis to determine if the necessary conditions for implementation can be met and then report to the Legislature as to whether a statewide retirement savings plan for private employees, who do not participate in any other type of employer-sponsored retirement savings plan, should be created. The Board’s analysis would have to be paid for by funds made available through a non-profit or private entity, federal funding, or an annual Budget Act appropriation.

SB 1298 establishes conditions for the operation of autonomous vehicles on public roadways for testing purposes. The bill defines “autonomous vehicle” as a vehicle equipped with technology that has the capability to drive a vehicle without the active physical control or monitoring by a human operator.

SB 1448 conforms California law to the revision to the NAIC Insurance Holding Company System Regulatory Model Act (adopted in 2010). Among other things, SB 1448 requires the board of directors of an insurer, which is part of a holding company system, to file a statement affirming that the board is responsible for overseeing corporate governance and internal controls. In addition, SB 1448 authorizes the insurance commissioner to evaluate the enterprise risk related to an insurer that is part of a holding company.

SB 1449 permits the approval of life insurance and annuity products that include the waiver of premium during periods of disability and the waiver of surrender charges if the insured encounters specified medical conditions, disability, or unemployment.

SB 1513 expands the investment options available to the State Compensation Insurance Fund.

Assembly Bills

AB 53 requires each admitted insurer with written California premiums of $100 million or more to submit a report to the insurance commissioner on its minority, women, and disabled veteran-owned business procurement efforts. The first report is due July 1, 2013. An insurer is required to update its report biennially. AB 53 includes a January 1, 2019 sunset date.

AB 999 revises the standards used by the insurance commissioner to approve the rates for long-term care insurance. AB 999 prohibits an insurer from using asset investment yield changes to justify a rate increase for long-term care policies unless the insurer can demonstrate that its return on investments is lower than the maximum valuation interest rate for contract reserves for those policies; or the insurance commissioner determines that a change in interest rates is justified due to changes in laws or regulations that are retroactively applicable to long-term care insurance previously sold in California. AB 999 requires all of the experience on all similar long-term care policy forms issued by an insurer and its affiliates and retained within the affiliated group to be pooled together and used as the basis for determining whether a rate increase is reasonable.

AB 1631 removes the January 1, 2013, repeal date for the existing law which permits a person admitted to the bar of another state to represent a party in a California arbitration proceeding.

AB 1708 authorizes auto insurers to provide proof of insurance coverage in an electronic format that may be displayed on a mobile electronic device. Proof of insurance in this format is allowed to be presented to a peace officer.

AB 1747 requires every life insurance policy to include a provision for a grace period of not less than 60 days from the premium due date; the provision must state that the policy remains in force during the grace period. AB 1747 requires an insurer to provide an applicant for an individual life insurance policy an opportunity to designate at least one person, in addition to the applicant, to receive notice of lapse or termination of a policy for nonpayment of premium. AB 1747 provides that a notice of pending lapse or termination of a life insurance policy is not effective unless the notice is mailed by the insurer to the named policy owner, a designee for an individual life insurance policy, and a known assignee or other person having an interest in the individual life insurance policy, at least 30 days prior to the effective date of policy termination if termination is for nonpayment of premium.

AB 1875 limits the civil deposition of any person to one day of seven hours. The bill specifies exceptions to this limit.

AB 1888 allows a person who has a commercial driver’s license to attend a traffic violator school for a traffic offense while operating a passenger car, a light duty truck, or a motorcycle.  Attendance at the school prevents the offense from being counted as a point for determining whether the driver is presumed to be a negligent operator who is subject to license revocation. However, attendance at the school does not bar the disclosure of the offense to insurers for underwriting or rating purposes.

AB 2084 establishes new permitted types of blanket insurance policies and expands the list of eligible policyholders who can purchase blanket insurance.  

AB 2138 gives the insurance commissioner the authority to require every admitted disability insurer, and every other entity liable for any loss due to health insurance fraud, to pay an annual maximum fee of 20 cents for each insured under an individual or group insurance policy it issues in California. The fee is to be used to fund increased investigation and prosecution of fraudulent disability insurance claims. Under current law, the maximum fee is 10 cents. AB 2138 allows an insurer to recoup the fee through a surcharge on premiums or by including the fee in the insurer’s rates.

AB 2160 requires the California insurance commissioner to treat a domestic insurer’s investment in a company that has business operations in Iran as a non-admitted asset. We recently blogged on the passage of AB 2160 here.

AB 2219 removes the January 1, 2013, repeal date for the existing law which requires a contractor with a C-39 roofing classification to obtain and maintain workers’ compensation insurance even if he or she has no employees. AB 2219 also removes the January 1, 2013, repeal date for the existing law which requires an insurer that issues a workers’ compensation insurance policy to a roofing contractor, who holds a C-39 license, to perform an annual payroll audit for the contractor. AB 2219 adds the requirement that the insurer’s audit must include an in-person visit to the place of business of the roofing contractor to verify whether the number of employees reported by the contractor is accurate.     

AB 2298 prohibits an insurer that issues or renews a private passenger auto insurance policy to a peace officer or a firefighter from increasing the premium for the policy because the peace officer or firefighter was involved in an accident while operating his or her private passenger auto in the performance of his or her duty at the request or direction of his or her employer. AB 2298 provides that in the event of a loss or injury that occurs as a result of an accident during any time period when the private passenger auto is operated by the peace officer or firefighter and is used by him or her at the request or direction of the employer in the performance of the employee’s duty, the auto’s owner shall have no liability.

AB 2301 modifies the definition of “covered claims” in the Insurance Code article relating to the California Insurance Guarantee Association (CIGA) to make clear that a covered claim is one which is presented to the liquidator in the state of domicile of the insolvent insurer or to CIGA.  

AB 2303 is the Department of Insurance’s omnibus bill which addresses a variety of matters, including applications for non-resident surplus lines broker licenses, pre-licensing requirements for bail agents, the creation of a limited lines license for crop insurance adjusters, and changes to the conservation and liquidation process. AB 2303 abolishes the advisory committee on automobile insurance fraud within the Fraud Division of the Department of Insurance. AB 2303 also repeals the provision that excludes policies that have been effect less than 60 days from the statute which governs the cancellation of private passenger auto insurance policies.

AB 2354 revises the licensing requirements for travel insurance agents.

AB 2406 requires the Department of Insurance to publish on the Department’s website all requests by a person or group representing the interests of consumers for compensation relating to intervention in a proceeding on an insurer rate filing or participation in other proceedings. Findings on such requests also must be published on the website.

Standard CGL Policy "Personal Injury" Coverage Excludes Defense for Housing Discrimination, But Broader Umbrella Policy Provides Duty to Defend

By Samuel Sorich and Larry Golub

In Federal Insurance Company v. Steadfast Insurance Company, issued September 24, the California Court of Appeal, Second Appellate District, held that two primary liability policies that provided “personal injury” coverage for wrongful eviction, wrongful entry and invasion of the right of private occupancy did not impose a duty to defend a complaint alleging discriminatory in housing. At the same time, an umbrella policy that specifically covered discrimination did obligate that insurer to defend the insured.

Sterling managed rental properties. The U.S. Department of Justice filed a complaint against Sterling alleging discrimination based on race, national origin and familial status in violation of the Fair Housing Act. The complaint alleged, among other things, that Sterling perpetuated an environment that was hostile to non-Korean tenants, provided inferior treatment to non-Korean tenants, and refused to rent and discriminated against African Americans. The Department of Justice asserted that Sterling’s discriminatory practices included entering a tenant’s apartment without notice or knocking.

Sterling had two primary liability policies, one for two years with Steadfast Insurance Company followed by three years of coverage with Liberty Surplus Insurance Corporation, and excess-umbrella policies for several years with Federal Insurance Company. The Steadfast and Liberty policies were standard primary policies and provided coverage for “personal injury” resulting from wrongful eviction, wrongful entry or invasion of the right of private occupancy. The umbrella portion of the Federal policies’ “personal injury” coverage not only defined such coverage to include wrongful eviction, wrongful entry and invasion of the right of private occupancy but also covered discrimination based on race or national origin.

Sterling tendered its defense of the Fair Housing Act complaint to the three insurers. When Steadfast and Liberty refused to defend the action, Federal defended under a reservation of rights and then brought a coverage action against the two primary insurers. Steadfast also brought a cross-action against Federal.  

Federal contended that Steadfast and Liberty, as primary insurers, had a duty to defend; and because the insurers had a duty to defend, Federal’s duty to defend under its umbrella coverage did not attach. Federal based its position on the argument that Sterling’s creation of a hostile environment for the tenants amounted to a claim of constructive eviction, thus falling under the personal injury coverage for wrongful eviction, wrongful entry, and the invasion of the right of private occupancy in the Steadfast and Liberty policies. 

The trial court, on cross-motions for summary judgment, found that only Federal’s umbrella policy provided coverage, and not the two primary policies. An appeal followed..

The Court of Appeal affirmed the trial court’s decision, holding that even though the complaint for discrimination alleged acts that might involve wrongful evictions, wrongful entries, or invasions of the right of private occupancy, the essential nature of the complaint was a Fair Housing Act enforcement action.

The court concluded the complaint “cannot be construed as asserting common law theories of wrongful eviction, wrongful entry, or invasion of the right of private occupancy. Only the tenant can claim wrongful eviction, wrongful entry, or invasion of the right of private occupancy.”

The court ruled that neither Steadfast nor Liberty had a duty to defend the Fair Housing Act action, but Federal did have a duty to defend Sterling. The court’s opinion explained,

Because the Sterling action was based on discrimination and only the Federal policies, and not the Steadfast or Liberty policies, provided coverage for discrimination claims, the umbrella coverage in the Federal policies ‘dropped down’ to fill the gap in the Steadfast and Liberty policies and provide primary coverage in the Sterling action.

California Legislative Committees Hold Hearing on Auto Insurance Initiative

On September 25, 2012, the Assembly Insurance Committee and Senate Insurance Committee held a two-hour joint informational hearing on Proposition 33 which will be on the November 2012 California ballot. The hearing was for information purposes only and therefore the committee took no action or vote on the proposition.

Proposition 33

Proposition 33 (click HERE for text) would allow insurers to use continuous automobile insurance coverage with any admitted insurer or insurers as a rating factor for private passenger automobile insurance. We last blogged on Proposition 33 in July and August 2012.

Under an existing California Department of Insurance regulation, an insurer may use continuous coverage as a rating factor when an individual is currently insured for automobile insurance with the insurer. The existing regulation prohibits an insurer from basing the continuous coverage rating factor on coverage provided by another non-affiliated insurer. Proposition 33 would override this existing prohibition.

Proposition 33 would add a new section to the Insurance Code which would expressly allow an insurer to use continuous coverage as an optional rating factor for private passenger automobile insurance policies. The section defines “continuous coverage” to mean:

uninterrupted automobile insurance coverage with any admitted insurer or insurers, including coverage provided pursuant to the California Assigned Risk Plan or the California Low-Cost Automobile Insurance Program.”

The proposition states that continuous coverage is deemed to exist if a lapse of coverage is due to an insured’s military service, if there is a lapse of up to 18 months due to loss of employment, or if there is a lapse of coverage for not more than 90 days for any reason.

Proposition 33 would grant children residing with a parent a continuous coverage discount based on the parent’s eligibility for a continuous coverage discount. Finally, Proposition 33 would grant a proportional discount to a driver who is unable to demonstrate continuous coverage; the discount would reflect the number of years in the preceding five years for which the driver was insured. 

Testimony at the Hearing  

Testimony at the committees’ joint hearing was presented by three panels. That testimony was followed by comments from the public.

Legislative Analyst’s Office

Representatives of the Legislative Analyst’s Office stated that Proposition 33 would not have a significant effect on state revenue. According to the Office, the reduction in insurance premium taxes paid by drivers who get the proposition’s discount would be offset by the increased insurance premium taxes paid by drivers who do not qualify for the discount.

Proponents of Proposition 33

Representatives of the American Agents Alliance argued that Proposition 33 would reward drivers who obey the law that requires drivers to obtain insurance coverage. The proposition will allow more drivers to qualify for discounts.

Proposition 17, which also related to continuous coverage, was rejected by California voters in 2010. The Alliance representatives pointed out that Proposition 33 is entirely new. USAA and the Greenlining Institute opposed Proposition 17, but both organizations are supporting Proposition 33. 

The Alliance representatives testified that Proposition 33 is better for consumers than the current law. Under current law, a driver loses his or her discount whenever there is a lapse of coverage. In contrast, Proposition 33 would preserve the continuous coverage discount when the lapse results from military service, unemployment, or for any reason when the lapse is not more than 90 days.

Opponents of Proposition 33 contend that in states that allow continuous coverage to be used as a rating factor, drivers who do not maintain continuous coverage pay significantly higher insurance premiums. The Alliance representatives countered that California’s highly regulated system for automobile insurance is unique and thus comparisons with other states are invalid and misleading.

A representative of Pinnacle Actuaries testified that the major benefit of Proposition 33 is that it will encourage competition. Under the proposition, more insurance companies will be able to offer discounts. This will benefit consumers who shop for insurance.

The Pinnacle representative disagreed with the proposition’s opponents who argue that Proposition 33 will result in huge surcharges for many drivers. The actuary pointed to the experience during 1995-2002 when continuous coverage was authorized as a rating factor in California. During that time, there were no big surcharges.

Opponents of Proposition 33

Consumer Watchdog’s fundamental objection to Proposition 33 is that the proposition conflicts with the statutory provision enacted by Proposition 103, which states,

the absence of prior insurance coverage in and of itself, shall not be a criterion for determining eligibility for a Good Driver Discount policy, or generally for automobile rates, premiums, or insurability.”

Consumer Watchdog contends that proof of prior insurance is required for Proposition 33’s continuous coverage and drivers who lack prior insurance will be charged higher rates. According to Consumer Watchdog, this use of prior insurance to determine rates is barred by Proposition 103.

The Consumer Watchdog representative argued that there is no statistical evidence that the maintenance of continuous insurance coverage is related to a lower risk of loss. The representative testified that the rating factor authorized by the current Department of Insurance regulation is really a loyalty discount which is based on lower administrative costs rather than on a lower risk of loss.

A representative of Public Advocates described the organization as an association of civil rights groups. The representative stated that the Proposition 103 provision highlighted by Consumer Watchdog was aimed at insurer redlining practices. According to Public Advocates, Proposition 103 would encourage insurers to redline low income communities and communities of color.

A representative of the Consumer Federation of California characterized the supporters’ argument that Proposition 33 rewards those who obey the law as inaccurate because many law-abiding consumers will not qualify for the proposition’s discount. He pointed to drivers who let their insurance coverage lapse because of extended disabilities or use of mass transit.

The Federation representative argued that Proposition 33 would allow insurers to use continuous coverage as a rating factor without having to establish that continuous coverage has a substantial relationship to the risk of loss.

Public Comment

A representative of four veteran groups expressed support for Proposition 33.

A representative of USAA explained that USAA opposed Proposition 17 but the company supports Proposition 33 because military personnel would be better off under the proposition than they are today.

A representative of the Greenling Institute said that the organization opposed Proposition 17 but it supports Proposition 33. The Greenling Institute was established to oppose redlining practices. The Institute disagrees with those who contend that Proposition 33 would hurt low income communities and communities of color. The Institute representative accused the opponents of Proposition 33 of engaging in selective use of statistics to reach misleading conclusions.   

 

Stacking of Policy Limits - Podcast interview regarding State of California v. Continental Insurance

Barger & Wolen partner Larry Golub breaks down a California Supreme Court decision, State of California v. Continental Insurance, involving the stacking of policy limits, and whether or not an insured can collect on damages over a period of many years.

Click here for the AM Best Podcast. Attorney Golub on Stacking of Policy Limits.

For a detailed analysis of the decision, please see California Supreme Court Adopts "All-Sums-With-Stacking" Rule for Continuous Injury Cases.

California Court Says Insureds Can Stack Policies For Max Coverage

Partner Larry Golub was quoted in a Law360 (subscription required) article published on Aug. 9, 2012, about a key California Supreme Court ruling that insurance policyholders with long-term property damage and personal injury claims could force carriers to cover damage outside their policy periods and stack coverage to maximize recovery.

The case, State of California v. Continental Insurance, stemmed from battle between the state of California and six excess insurance over an environmental cleanup estimated to cost as much as $700 million. The court found in the high-profile case that, “all sums” language in California's excess insurance policies means that carriers must cover all damage up to their policy limits and that stacking is allowed because the policies lacked language specifically prohibiting the practice.

Rather than stacking, the insurance companies involved in the case preferred a formula whereby carriers would be assigned a specific amount of damages to cover.

"There were other ways to allocate the loss other than saying basically all the policies, all the time, especially in the case where you had a sophisticated insured like the state of California that chose for a good portion of the time not to insure itself," Golub, who represents insurance companies but was not involved in the case, told the publication. He also said that he thought the ruling might prompt insurers to start including anti-stacking provisions in their policies.

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

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.

Supreme Court Rules Affordable Care Act is Constitutional

By John M. LeBlanc and Natalie J. Ferrall

In a 5-4 decision, the United States Supreme Court ruled that the Patient Protection and Affordable Care Act (“ACA”) is constitutional. The majority opinion, authored by Chief Justice Roberts, upheld the centerpiece of the ACA—the individual mandate—requiring citizens to obtain health insurance or pay a penalty to the IRS beginning in 2014. The Court construed the penalty as a tax on persons who choose not to purchase health insurance and thus within Congress’ taxing power. The Chief Justice, however, rejected the argument that the individual mandate was constitutional under the Commerce Clause. He stated that the Commerce Clause “authorizes Congress to regulate interstate commerce, not to order individuals to engage in it.” Justices Scalia, Kennedy, Thomas, and Alito filed a dissenting opinion in which they also found that the individual mandate could not be upheld under the Commerce Clause.

The Court further addressed the so-called Medicaid expansion provision, which required states to extend Medicaid coverage by 2014 to all individuals under the age of 65 with incomes below 133% of the federal poverty line; if a state fails to do so, the federal government could withdraw all of the state’s existing Medicaid funds. The Court held that it was unconstitutional under the Spending Clause for the federal government to coerce states into accepting changes to Medicaid, describing this financial threat as a “gun to the head”, leaving states with no meaningful choice but to accept the terms of the Medicaid expansion. The Court struck the provision, but left the remaining portions of the ACA intact.

Click here to read the full decision (pdf).

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

Auto Insurance Discount Initiative Okayed to Collect Signatures

On August 12, 2011, California Secretary of State Debra Bowen announced that supporters of a proposed initiative on automobile insurance rates may begin to collect signatures to put the measure before California voters. Supporters of the initiative have until January 9, 2012, to submit the 504,760 valid signatures needed to put the initiative on the June 5, 2012, statewide ballot.

The initiative, named the “2012 Automobile Insurance Discount Act,” would allow insurers to use continuous automobile insurance coverage with any admitted insurer or insurers as a rating factor for private passenger automobile insurance.

Under existing California Department of Insurance regulation 2632.5(d)(11), an insurer may use continuous coverage as a rating factor when an individual is currently insured for automobile insurance with his or her insurer or an affiliate insurer. The existing regulation prohibits an insurer from basing the continuous coverage rating factor on coverage provided by another non-affiliated insurer. The proposed initiative would override this existing regulatory prohibition.

Background

Actuarial analyses indicate that, in general, drivers who maintain continuous automobile insurance coverage have a lower risk of future insured losses. Over the past several years, there has been controversy in California over how this lower risk should be considered as a rating factor for private passenger automobile insurance.

Proposition 103

Proposition 103, which was passed by California voters in 1988, enacted Insurance Code Section 1861.02.

Section 1861.02(a) provides that private passenger automobile insurance rates must be determined, in decreasing order of importance, by 1) driving record; 2) number of miles driven; 3) years of driving experience; and 4) optional factors that the insurance commissioner may adopt by regulation. 

Section 1861.02(c) provides that the absence of automobile insurance, in and of itself, shall not be a criterion for determining automobile insurance rates. Proposition 103 declared that its provisions “shall not be amended by the Legislature except to further its purposes.”  

Quackenbush Regulation

In 1996, Insurance Commissioner Chuck Quackenbush exercised his power to adopt optional rating factors under Section 1861.02(a) and adopted a regulation that allowed insurers to use “persistency” as a rating factor.

The regulation did not define “persistency.” The term was interpreted differently by various insurers. Some insurers interpreted “persistency” to mean the number of years a customer has continued insurance coverage with his or her current insurer. Other insurers defined “persistency” more broadly to include continuous coverage with any insurer.

Low Regulation

In 2002, Insurance Commissioner Harry Low adopted a regulation that limited the scope of the persistency rating factor. The Low regulation, which is incorporated in the Department of Insurance’s existing regulatory section 2632.5(d)(11), requires that in applying the persistency rating factor, an insurer may consider only the length of time a driver has been continuously covered with his or her current insurance company or an affiliate of that company. 

SB 841

In 2003, the Legislature sought to override the Low regulation by expanding the scope of the persistency rating factor.

The Legislature passed SB 841, which amended Insurance Code Section 1861.02(c) to provide that an insurer may use continuous coverage with a driver’s current insurer or another insurer as an optional rating factor to determine the driver’s insurance premium. In passing SB 841, the Legislature declared that the bill “furthers the purpose of Proposition 103 to encourage competition among carriers so that coverage overall will be priced competitively.” Governor Gray Davis signed SB 841 into law on August 2, 2003.

In September 2005, the California Court of Appeal ruled in Foundation for Taxpayer & Consumer Rights v. Garamendi (2005) 132 Cal.App.4th 1354 that SB 841 was invalid because it did not further the purposes of Proposition 103. The ruling was based on two points.

  1. SB 841’s application of continuous coverage as a rating factor violated the proposition’s provision in Insurance Code Section 1861.02(c) prohibiting the use of the absence of prior insurance “in and of itself” as a criterion for determining rates. 
  2. The Legislature’s attempt to specify an optional rating factor was inconsistent with the proposition’s provision in Insurance Code Section 1861.02(a)(4) delegating the exclusive authority to adopt optional rating factors to the insurance commissioner. 

The court disregarded the Legislature’s declaration that SB 841 furthered Proposition 103’s purpose of encouraging competition.

The Court of Appeal’s ruling preserved the Low regulation which limits the application of the continuous coverage rating factor to coverage with a driver’s current insurer or an affiliate of the current insurer. That regulation remains in effect today.

Proposition 17

In 2010 there was an unsuccessful attempt to override the existing regulation with a voter initiative. Proposition 17 would have allowed a driver to demonstrate continuity of coverage by providing proof of coverage from his or her prior insurer or insurers. Proposition 17 failed to gain voter approval at the June 8, 2010, statewide primary election. 

Proposed Initiative

The proposed initiative, which was approved for signature gathering on August 12, 2011, also seeks to override the existing regulation but does not use the same language that was contained in Proposition 17. 

The proposed initiative would enact a new Insurance Code section that expressly allows a private passenger automobile insurer to use continuous coverage as an optional rating factor. 

The initiative defines “continuous coverage” to mean “uninterrupted automobile insurance coverage with any insurer or insurers, including coverage provided pursuant to the California Automobile Assigned Risk Program or the California Low Cost Automobile Program.”

The initiative specifies certain circumstances that qualify for continuous coverage, including a lapse in coverage due to an insured’s active military service or a lapse in coverage of up to 18 months in the last five years due to loss of employment resulting from a layoff or furlough.

The initiative grants a proportional discount to a driver who is unable to demonstrate continuous coverage; the discount reflects the number of years in the immediately preceding five years for which the driver was insured.

Barger & Wolen will continue to report on the state of this new initiative.

 

Horizontal Exhaustion Analyzed by California Court in Continuous Damage Case

By Larry M. Golub and Travis Wall

On June 3, 2011, the California Court of Appeal for the Second Appellate District issued a decision in Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania that should be of interest to insureds, primary insurers and excess insurers as to the issues of horizontal exhaustion and stacking of liability insurance policies.

The underlying dispute involved coverage obligations for thousands of asbestos bodily injury claims brought against Kaiser.

In a previous decision, the appellate court held that asbestos bodily injury claims should be treated as multiple occurrences under the primary policies issued to Kaiser by Truck Insurance Exchange, rather than one single occurrence for multiple claimants. The primary policies all had non-aggregating per-occurrence limits, meaning the policies potentially could be on the hook for the total per-occurrence limit for each occurrence

The present appeal addressed the situation as to whether, when an asbestos bodily injury claim exceeded the primary coverage issued by Truck in a particular year, the excess coverage issued by Insurance Company of the State of Pennsylvania (“ICSOP”) was triggered to provide indemnification to Kaiser. 

Because the case involved asbestos bodily injury, which continues to cause injury over time, even with a single claimant, a claim could trigger coverage in multiple policy years. ICSOP argued that the insured had to exhaust all underlying primary policies for all years in which coverage was triggered. Both Kaiser and Truck argued that the ICSOP excess policy was triggered upon exhaustion of the single $500,000 per occurrence limit.

The Kaiser court issued three holdings in its decision:

First, it held that the excess insurer ICSOP was entitled to horizontally exhaust all underlying primary insurance that was collectible and valid, and not just those policies directly underneath its excess policy. It advised that this ruling was consistent with prior California law addressing the issue of horizontal exhaustion. 

The second holding, however, concluded that ICSOP was not able to “stack” the individual limits of the Truck primary policies. The court did not base this holding on judicially imposed anti-stacking principles, but rather concluded that under the particular language of the Truck policies, Truck could only be liable as a company for one per-occurrence limit for each occurrence.

Specifically, the court cited the language in the insuring agreement stating that,

the Company's liability as respects to one occurrence . . . shall not exceed the per occurrence limit designated in the Declarations." (Italics added.)  

Thus, the court permitted horizontal exhaustion in principle but held that there was no valid and collectible insurance to horizontally exhaust in this case since Kaiser was only entitled to one per-occurrence limit for Truck as a whole for claims that exceeded the $500,000 per occurrence limit in the implicated Truck policy.

The final holding by the court was that the summary judgment that had been issued by the trial court in favor of Kaiser had to be reversed because, on the present record, the appellate court could not determine if there was primary coverage issued to Kaiser by other insurers (outside of Truck) whose primary policies still needed to be exhausted under the court’s horizontal exhaustion ruling.

For excess insurers, this case affirms the obligation that horizontal exhaustion of all primary insurance is still the rule in the continuous occurrence context. 

The anti-stacking ruling also should have a fairly limited scope -- it would only apply to situations in which there is a single insurer providing coverage under all triggered primary policies. 

And, above all, the case requires a careful review of the specific policy language found in each primary and excess policy at issue.

California Seeking Suitability Requirements Again

The California Department of Insurance (“CDI”) published, on March 11, 2011, proposed regulations containing suitability requirements to govern the sale of annuities (see Insurance Commissioner Jones' press release). This represents an attempt by the CDI to accomplish by regulation what it failed to accomplish several times by statute in the past decade.

The proposed regulations are based on the NAIC Suitability in Annuity Transactions Model Regulations, as revised by the NAIC in 2010, but include some revisions.

It is important to note that for many years the CDI has held the position that the prior versions of the NAIC Suitability Model did not go far enough in protecting consumers. The CDI supported unsuccessful legislation in California at least three times in the mid-2000s that sought to impose suitability requirements that were more onerous than the then current NAIC Suitability Model.

Thus, while most states have adopted laws that follow the NAIC Suitability Model, California currently lacks laws that provide specific suitability requirements that pertain to the sale of annuities.

Given the lack of express suitability requirements, the CDI has sought to regulate suitability in connection with the sale of annuities using other tools such as:

  1. general legal concepts of principal-agent responsibility;
  2. requirements relating to replacements; and,
  3. California Insurance Code Section 785(a)’s imposition of a duty of good faith and fair dealing in connection with the sale on an insurance product to a senior.

The regulations proposed by the CDI include a provision that would make them applicable only to sales of annuities to purchasers aged 65 and older. This is in contrast to the NAIC Suitability Model which applies to all sales of annuities.

Another important distinction between the CDI’s proposed regulations and the NAIC Suitability Model is that the CDI proposal does not include the “FINRA Safe Harbor” provisions which were some of the primary revisions made by the NAIC to the Suitability Model last year. A public hearing will be held on the CDI’s proposed regulations on April 25, 2011. 

It is interesting to note that the The National Conference of Insurance Legislators recently endorsed the NAIC Suitability Model. Also, the Senate Insurance Committee of the California Legislature introduced legislation, SB 715, on February 18, 2011, that seeks to codify the NAIC Suitability Model. SB 715’s draft language is the same as the NAIC Suitability Model that was revised by the NAIC last year. 

It is not clear at this point in time why the CDI has proposed the NAIC Suitability Model in the form of regulations when the Model is pending as a proposed statute. One thought is that the CDI is hedging its bets. One problem that the CDI may have is that it is unclear whether there is sufficient statutory authority for the CDI to promulgate the NAIC Suitability Model as a regulation.

Guidelines for Health Insurers Requesting Rate Increase Issued by California Insurance Commissioner (SB 1163)

On February 4, 2011, California Insurance Commissioner Dave Jones released draft guidelines for implementing SB 1163 (“Guidance 1163:2”).

SB 1163, signed by former Governor Schwarzenegger on September 30, 2010, responds to the federal Patient Protection and Affordable Care Act (“PPACA”), which requires the United States Secretary of Health and Human Services to establish a process for the annual review of “unreasonable” increases in premiums for health insurance coverage.

Under the federal act, health insurers must submit to the secretary, and the relevant state, a justification for an “unreasonable” premium increase prior to implementation of the increase.

SB 1163, effective January 1, 2011, requires health insurers to file with the California Department of Managed Health Care or the California Department of Insurance detailed rate information regarding proposed premium increases and requires that the rate information be certified by an independent actuary. 

The bill authorizes the departments to review these filings and issue guidance regarding compliance. It also requires the departments to consult with each other regarding specified actions as well as post certain findings on their Internet Web sites.

In his draft guidelines (“Guidance 1163:2”), Commissioner Jones lists several factors that will be used by the Department to determine if a rate is “unreasonable.”

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New Regulations for Replacement Cost Estimating in Homeowners' Insurance approved by California Office of Administrative Law

On December 29, 2010, the Office of Administrative Law ("OAL") approved California Insurance Commissioner Poizner's new regulations setting forth "Standards and Training for Estimating Replacement Value on Homeowners' Insurance." The regulations take effect on June 27, 2011. 

As discussed earlier in this blog here, the regulations encompass significant new obligations on producers and insurers:

  • Require all California resident fire and casualty broker-agents and personal lines broker-agents, who have not already done so, to satisfactorily complete one three-hour training course on homeowners’ insurance valuation prior to estimating the replacement value of structures in connection with, or explaining the various levels of coverage under, a homeowners’ insurance policy;
  • Require insurers, agents and brokers that provide replacement cost estimates to applicants and insureds to document who created the estimate and the sources or methods used to create the replacement cost estimate; and
  • Require that all replacement cost estimates communicated to applicants or insureds be complete, based upon specifically enumerated standards set forth in the regulations. [CDI 12/31/2010 Press Release]

The final regulations, as adopted by the OAL, address some of the criticisms from industry opponents.

For example, Section 2695.183(e) was amended to remove any reference to setting or recommending a policy limit. The Commissioner's Final Statement of Reasons explains that the language was removed in response to comments that it "could be interpreted as establishing an obligation on the part of licensees to set or recommend policy limits, which is not the intent of the regulations."

Issues concerning whether the new regulations exceed the authority of the enabling statute remain and may be the subject of litigation down the road.

 

The New and Improved California Residential Property Disclosure Form: A Harbinger of More Significant Reforms in Replacement Cost Estimating

On September 30, 2010, Governor Schwarzenegger signed AB 2022 into law (Chaptered copy).

Introduced by Assembly Member Ted Gaines (R), AB 2022 revamps California’s Residential Property Disclosure Form (current page 3; new page 10) and the accompanied California Residential Property Insurance Bill of Rights (current page 13; new page 15). The new disclosure form, drafted in plain and simple language, significantly improves the current form and makes understandable the differences in residential insurance coverages available to California insurance consumers. The changes, however, are much more than stylistic.

Commissioner Poizner, whose office helped craft AB 2022, has also drafted comprehensive regulations in an effort to respond to the under-insurance problems caused by the 2003, 2007 and 2008 California wildfires.

The Proposed Regulations establish standards for accurate replacement cost estimating, broker agent training on replacement cost estimating, and new record keeping requirements. The Proposed Regulations place the burden of accurately estimating replacement value of a home squarely on the insurance industry. The new disclosure form, the first step towards this regulatory reform, removes critical language found in the current disclosure form that obligates the consumer to determine and maintain the proper policy limits on their home. 

PART 1

California Residential Property Disclosure Form (July 1, 2011)

Effective July 1, 2011, insurance companies must use the new disclosure form. The new form eliminates the legalese that plagues the current form and presents the different coverage levels in a reader friendly manner. The new form calls specific attention to the fact that “actual cash value” coverage is “the most limited level of coverage listed,” while “guaranteed replacement cost” coverage is “the broadest level of coverage.” The new coverage definitions are as follows:

  • ACTUAL CASH VALUE COVERAGE pays the costs to repair the damaged dwelling minus a deduction for physical depreciation. If the dwelling is completely destroyed, this coverage pays the fair market value of the dwelling at the time of loss. In either case, coverage only pays for costs up to the limits specified in your policy.
  • REPLACEMENT COST COVERAGE is intended to provide for the cost to repair or replace the damaged or destroyed dwelling, without a deduction for physical depreciation. Many policies pay only the dwelling’s actual cash value until the insured has actually begun or completed repairs or reconstruction on the dwelling. Coverage only pays for replacement costs up to the limits specified in your policy.
  • EXTENDED REPLACEMENT COST COVERAGE is intended to provide for the cost to repair or replace the damaged or destroyed dwelling without a deduction for physical depreciation. Many policies pay only the dwelling’s actual cash value until the insured has actually begun or completed repairs or reconstruction on the dwelling. Extended Replacement Cost provides additional coverage above the dwelling limits up to a stated percentage or specific dollar amount. See your policy for the additional coverage that applies.
  • GUARANTEED REPLACEMENT COST COVERAGE covers the full cost to repair or replace the damaged or destroyed dwelling for a covered peril regardless of the dwelling limits shown on the policy declarations page.
  • BUILDING CODE UPGRADE COVERAGE, also called Ordinance and Law coverage, is an important option that covers additional costs to repair or replace a dwelling to comply with the building codes and zoning laws in effect at the time of loss or rebuilding. These costs may otherwise be excluded by your policy. Meeting current building code requirements can add significant costs to rebuilding your home. Refer to your policy or endorsement for the specific coverage provided and coverage limits that apply.

In addition, the new disclosure form removes the following statements from the replacement cost coverage definitions in the current disclosure form:

To be eligible for [this coverage], you must insure the dwelling to its full replacement cost at the time the policy is issued, with possible periodic increases in the amount of coverage to adjust for inflation and increases in building costs; you must permit inspections of the dwelling by the insurance company; and you must notify the insurance company about any alterations that increase the value of the insured dwelling by a certain amount (see your policy for that amount).”

To be eligible to recover this benefit, you must insure the dwelling to [company shall denote percentage] [ ] percent of its replacement cost at the time of loss.”

California Residential Property Insurance Bill of Rights (July 1, 2011)

The revised bill of rights that must accompany the new disclosure form eliminates the first 16 lines of the current disclosure form. The omitted lines include statements concerning the applicant’s/policyholder’s burden to determine and maintain proper policy limits such as: “Take time to determine the cost to rebuild or replace your property in today’s market.” “Once the policy is in force, contact your agent or insurance company immediately if you believe your policy limits may be inadequate.” 

The language deleted from the current versions of the disclosure form and bill of rights marks a significant change in California public policy. In Everett v. State Farm General Ins. Co., 162 Cal. App. 4th 649 (2008), the court held that the homeowner, rather than the property insurer, had the duty to maintain insurance policy limits equal to replacement costs. In reaching this conclusion, the court relied on the current version of the residential property disclosure which places the burden of determining whether a higher policy limit is needed on the homeowner.

AB 2022 and Commissioner Poizner’s proposed regulations effectively nullify Everett.

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.

Can I Earn Continuing Education Credit? Continuing Education credit is available for attorneys, AIRs, CPAs, CFEs, CIRs and other insurance designations. (Certain restrictions apply, so please verify that your designation is approved in the state(s) you require).

To register for this complimentary event, click here

For more information, click here

Panels & Speakers (order subject to change)

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California Court Determines No Coverage Based on Unambiguous Motor Vehicle Exclusion

The California Court of Appeal recently held that an insurer properly denied coverage and had no duty to defend its insured where the policy unambiguously excluded coverage for claims arising from the operation of a motor vehicle by an insured. 

In Sprinkles v. Associated Indemnity Corporation (published September 1, 2010), Plaintiffs were the heirs of a motorcyclist who died in an accident caused by an employee, Juan Bibinz (“Bibinz”), of Sinco Co., Inc. (“Sinco”). Plaintiffs sued Sinco and Bibinz (the “Sinco action”) alleging that Sinco negligently hired Bibinz, an uninsured and undocumented alien with a lengthy criminal record, who negligently drove his vehicle causing the death of Plaintiffs’ heir. Plaintiffs also alleged that Bibinz was an employee acting within the scope of his authority.

At the time of the accident, Sinco had a commercial automobile policy, an excess and umbrella policy, and a commercial general liability (“CGL”) policy, the latter issued by Fireman’s Fund Insurance Company.  While the auto policy and excess policy paid their limits toward settlement of the claim, Fireman’s Fund denied coverage and a duty to defend under the CGL policy. 

After an arbitrator awarded Plaintiffs more than $27 million in the underlying action, Plaintiffs took an assignment from Sinco and brought claims against Fireman’s Fund for bad faith, wrongful refusal to settle, wrongful failure to defend, and breach of contract, as well as a direct judgment creditor claim under Insurance Code section 11580

On demurrer, Fireman’s Fund contended that no coverage existed for Sinco because Bibinz was an insured under the CGL policy, and therefore the exclusion in the policy for claims arising out of the use of an automobile applied. 

Plaintiffs alleged that Bibinz was not an insured under the policy because, at the time of the accident, Bibinz was not performing duties related to the conduct of Sinco’s business and there was a potential for a finding that Bibinz was not acting in the scope of his employment with Sinco. 

The trial court sustained the demurrer without leave to amend, holding that the CGL policy provided no coverage for the automobile accident that caused Plaintiffs’ damages. 

The appellate court held that as an insured under the policy, Bibinz’s acts were not covered due to an exclusion for bodily injury or property damage “arising out of the . . . use . . . of any . . . acts by any insured.” The court deemed Bibnz’s use of the vehicle as “related to” the conduct of business, in that he was required to use his vehicle to reach various locations for maintenance work. 

The court accordingly upheld the dismissal of all claims against the insurer.

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.

California Supreme Court Resolves Coverage Dispute Over Interplay Between Intentional Acts Exclusion and Severability Clause

Scott Minkler sued David Schwartz and David’s mother, Betty Schwartz, alleging that David, an adult, sexually molested Scott, who was then a minor. The complaint alleged several causes of action against David, including sexual battery and intentional infliction of emotional distress, along with a single cause of action for negligent supervision against Betty, based on allegations that David molested Scott in Betty’s home, that Betty knew her son was molesting Scott, but that Betty failed to take reasonable steps to stop her son from doing so. Safeco Insurance Company of America insured Betty under a number of homeowners policies, in which David was an additional insured. Relying on the intentional acts exclusion, Safeco denied coverage as to both David and Betty.  This insurance coverage issue eventually made its way to the California Supreme Court.

Last week, the Supreme Court issued its decision in Minkler v. Safeco Insurance Company of America (June 17, 2010).  The Court determined that, despite the policy’s exclusion for injury that was “expected or intended” by “an” insured, or was the foreseeable result of “an” insured’s intentional act, the policy’s severability-of-interests clause (which provides that “[t]his insurance applies separately to each insured”) created an ambiguity with respect to a co-insured who did not act intentionally such that coverage would be resolved in favor of the co-insured.

After reiterating the rules by which insurance policies are to be interpreted under California law, the Supreme Court framed the issue as follows:

The issue presented is whether this severability or “separate insurance” clause created ambiguity as to the scope of the exclusion for intentional acts by “an” insured, and if so, whether the ambiguity must be resolved in favor of an interpretation whereby the exclusion applied only to the insured who committed such acts. We conclude that the answer to both questions is yes.  

In so concluding that the policy provided coverage for Betty, the Court disposed of a number of arguments raised by Safeco (such as the holding would encourage “householders to turn a ‘blind eye’ to acts of sexual abuse taking place in their homes”) as well as finding that the history of the introduction of the severability clause into liability policies in the 1950s further supported the Court’s determination of ambiguity. 

Moreover, the Court recognized that courts throughout the country have split over the issue, with the majority “concluding that a severability clause does not alter the collective application of an exclusion for intentional, criminal, or fraudulent acts by ‘an’ or ‘any’ insured.” Despite these “greater number of cases,” the Court found that its holding would preserve the objectively reasonable expectations of the insured that there would be coverage so long as the insured’s own conduct did not fall within the intentional acts exclusion.

Finally, the Court also sought to downplay the breadth of its holding by noting that many insurers’ policies contain an explicit exclusion for claims arising from sexual molestation, or that Safeco could have avoided this uncertainty to begin with by modifying its severability clause to only address the available limits under the policy rather than create an ambiguity between that clause and the intentional acts exclusion.

Staying an Insurer's Declaratory Relief Action - the Rules Clarified

A recent decision issued by the California Court of Appeal, Second Appellate District, analyzed under what circumstances a liability insurer’s declaratory relief action seeking to withdraw from the duty to defend an underlying lawsuit may be stayed – or allowed to proceed. 

In Great American Insurance Company v. Superior Court (Angeles Chemical Company, Inc.), issued October 9, 2009, the appellate court remanded the case back down to the trial court to re-evaluate whether the trial court had properly stayed the insurer’s declaratory relief action. In so doing, and in a case where there was no overlapping factual issues between the underlying action and the declaratory relief coverage action, the trial court was directed to exercise its discretion and balance the potential prejudice to both the insured and the insurer.

The underlying case involved a complex environmental claim against a number of insureds covered under a general liability policy issued by Great American. After settling a portion of the case and claiming that its $500,000 policy limits were exhausted, Great American sought to extricate itself from any further obligation to defend the insureds by bringing a declaratory relief action. The insureds moved to stay the declaratory relief action, claiming that there were factual issues that overlapped between the underlying action and the declaratory relief coverage action, such that trying the declaratory relief action would prejudice the insured’s rights in the underlying action. The trial court found the potential for some overlap and therefore issued a stay.

Great American filed a writ petition and the appellate court requested briefing on the propriety of the stay order. In analyzing three claims of “overlapping factual issues” asserted by the insureds, the appellate court found that two of those issues would not overlap between the underlying and declaratory relief actions, and that the third issue, involving some as-of-yet-unfiled bad faith claim, was premature, and thus the trial court had erred in staying the coverage action due to “overlapping factual issues.”

That did not end the dispute, however, as the appellate court then explained that even if “there is no such factual overlap and the declaratory relief action can be resolved on legal issues or factual issues unrelated to the issues in the underlying action, the question as to whether to stay the declaratory relief action is a matter entrusted to the trial court’s discretion,” and in “exercising such discretion, however, the trial court should consider the possibility of prejudice to both parties.” (Emphasis by court.) The court then set forth the three possible types of potential prejudice that could exist for an insured in having to fight a “two-front” war and the possible prejudice to an insurer in having to continue to pay defense costs indefinitely in a case where it no longer has any defense obligation.

Since the trial court had only issued its stay order on the factual overlap issue and not made any determination as to the balancing of possible prejudice to the insured and insurer, the appellate court remanded the case back to the trial court to exercise its discretion and perform the requisite balancing of prejudices. The appellate court also provided the trial court with its observations as to certain undisputed facts that may assist the trial court in making its determination.

This case presents an excellent primer on the subject of when an insurer’s declaratory relief action is to be stayed pending the resolution of an underlying liability lawsuit and when an insurer is to be allowed to attempt to show when its declaratory relief claim may proceed to determine if any duty to defend still exists.

Appellate Court Finds Insured's Failure to Allege the Actual Theory of Liability on Which the Trial Court Based Its Judgment Requires Reversal of Bad Faith Judgment

In a lengthy decision issued by the California Court of Appeal, Fourth Appellate District, and one that examined and summarized a whole host of liability insurance issues (including an insurer’s duty to defend, what constitutes “unreasonable” conduct for “bad faith” purposes, how changes in the law impact the issue of bad faith, and the ability of an insurer to recoup defense costs under a reservation of rights), the court reversed an $11 million judgment against an insurer and then ruled in favor of the insurer.

Griffin Dewatering Corp. v. Northern Ins. Co. of New York, issued July 31, 2009, involved a groundwater pumping and control company that purchased a CGL policy from Northern Insurance Company. In exchange for renewing that coverage, Northern orally promised during a meeting in 1997 that it would not rely on the policy’s total pollution exclusion with respect to “future” claims involving sewage. There had been a prior claim involving a faulty sewer bypass constructed by the insured that the insurer had denied. When there was a future claim that related to the prior claim, the insurer denied coverage again, and one of the questions was whether this future claim was covered by the oral promise. (The insurer shortly thereafter accepted coverage for the claim, but that did not short circuit the insured’s bad faith lawsuit.)

The insured prevailed at trial against the insurer based on the oral promise, and it obtained a judgment of $11 million, mostly in bad faith tort damages. The insurer appealed and prevailed.  The Court of Appeal based its decision in large part on the failure of insured to have actually pled in its complaint a cause of action based on the oral promise through which it had obtained the judgment.  Instead, the complaint was predicated on the straightforward coverage question as to whether the insurer had misconstrued the language of the exclusion provision so as to unreasonably deny coverage.  Moreover, the complaint had never been amended to include any “stand alone” cause of action based on the oral promise, and counsel for the insured conceded that it was only going to use the promise as a “concession” that the insurer’s “coverage position had been unreasonable all along.”

The Court of Appeal’s decision, while very detailed, makes for interesting reading as it effectively distills current California law as to a number of bad faith and duty to defend topics.   Further, the decision is interspersed with humor and a search for the real story, conceding in its opening words, “At first we did not know what to make of this case.”  By the end of the decision, the court had found the answer.  

 

California Supreme Court Finds No Duty to Defend Insured for Assault and Battery Claim Where Injured Party Alleged Insured Acted Under an Unreasonable Belief in the Need for Self-Defense

In a long-anticipated decision, the California Supreme Court issued its August 3, 2009 decision in Delgado v. Interinsurance Exchange of the Automobile Club of Southern California, finding that the contention (by the injured party) that the insured acted in self-defense when sued for assault and battery did not constitute an “accident” within the meaning of a liability policy and thus the insurer had no duty to defend the action. The decision is also noteworthy as it distinguished a number of prior cases, including Supreme Court cases, that had touched on similar issues.

Delgado arose out of altercation where the insured under a homeowner’s policy issued by Interinsurance Exchange of the Automobile Club of Southern California “hit and kicked 17-year old Jonathan Delgado.” Delgado sued the insured, setting forth two causes of action, one for intentional tort and one alleging that the insured “‘negligently and unreasonably believed’ he was engaging in self-defense ‘and unreasonably acted in self-defense . . . .’” 

The insured tendered the suit to his insurer, which denied coverage, including any duty to defend, on the basis that the claim did not constitute an “occurrence” under the policy, which term was defined as “an accident.” Delgado then dismissed the intentional tort claim and settled the remaining “negligent belief in self-defense” claim with the insured, who stipulated to judgment and assigned his rights to Delgado. Delgado then sued the insurer as a judgment creditor and for bad faith. While the trial court dismissed the action on demurrer, the Court of Appeal reversed, finding that the allegations potentially were an “accident” under the policy.

On review the Supreme Court first addressed the issue as to what constitutes “an accident” under a liability policy, which substantial case law had found to be “an unexpected, unforeseen, or undersigned happening or consequence from either a known or unknown case.” The Court rejected Delgado’s reliance on prior decisions of the Court that Delgado had contended held that the term “accident” was to be determined from the perspective of the injured party. The Court observed that, under such reasoning, plainly intentional acts like child molestation, arson and premeditated murder, if contended to be based on an unreasonable belief in the need for self-defense, could be considered an “accident” within the policy coverage. 

The Court also took the occasion to dismiss Delgado’s attempt to claim that prior decisions of the Court, such as Gray v. Zurich Insurance Co., 65 Cal. 2d 263 (1966), supported a duty to defend. The Court explained that Gray and cases like it involved situations whether the claim fell within the broad insuring provisions of the policy and the insurer sought to avoid a duty to defend based on the policy’s exclusion for injury “caused intentionally by or at the direction of the insured.” This is in contrast to the present case, where there was no exclusion at issue and the insured had the burden to demonstrate “an accident” and thereby fall within the policy’s insuring provision. 

In conclusion, the Court stated that “an insured unreasonable belief in the need for self-defense does not turn the resulting purposeful and intentional act of assault and battery into ‘an accident’ within the policy’s coverage clause . . .[and thus the insurer] had no duty to defend its insured in the lawsuit brought against him by the injured party.”

 

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.

Event Cancellation and Non-Appearance Insurance Questions Surrounding Michael Jackson's Death

Having spent my professional life representing insurers in disputes arising out of the various aspects of their businesses, I sometimes can't help but view current events such as Michael Jackson's premature death through a slightly different prism than the normal person.

For example, what do the PGA and Michael Jackson have in common? In all likelihood, event cancellation and non-appearance insurance has been purchased to insure against the risk that their various events are cancelled. I cannot help but think about all of the various insurance questions that Michael Jackson's death creates.

For example, currently pending in Los Angeles Superior Court is a lawsuit filed by Toni Braxton against Lloyd's of London. Ms. Braxton alleges that Lloyd's is refusing to pay for losses associated with her cancellation of live performances at Las Vegas' Flamingo Hotel when she was hospitalized for microvascular angina. According to Ms. Braxton's complaint, Lloyd's is refusing to pay because it asserts that the hospitalization was related to a pre-existing condition that was not disclosed to Lloyd's.

What similar insurance issues could arise out of Michael Jackson's death? Did he have any preexisting conditions that could be the basis for rescinding any insurance policies?   What was and what was not disclosed in the insurance applications? What questions were asked in the insurance applications?

Of course, the insurance questions will not be limited to just whether there is coverage or not. There will be questions regarding what exact losses were covered.

For example, late last year, Lloyd's won a legal battle with Defeat the Beat, a corporation that hosts annual marching band competitions for historically black colleges in Defeat the Beat v. Underwriters at Lloyd's of London, 669 S.E.2d 48 (2008). Weather had caused delays during the 2004 marching band competition and, as a result, a number of attendees left with attendance being down 35% from the prior year. Lloyd's paid Defeat the Beat approximately $37,000 for non-refundable costs and expenses due to the weather interruption but refused to reimburse Defeat the Beat for its lost revenue due to the low attendance. Lloyd's successfully argued that it had no contractual duty to pay for this lost profit because loss of revenue and/or profit was not listed on the schedule of benefits.

There will certainly be similar questions arising from The King of Pop's recent passing.