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

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.

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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.

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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.

For more information, please contact Randall Doctor.

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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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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.

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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.

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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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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.

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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.

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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.

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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.

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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.  

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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.”

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

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

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

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

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

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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.

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