California Court Upholds In-House Counsel Privilege

By Terrence P. McAvoy and Michael G. Ruff

Brief Summary

In Palmer v. Superior Court California's Second District Court of Appeal upheld the in-house counsel privilege for communications concerning a dispute with a current client and, in doing so, declined to adopt the "fiduciary duty" and the "current client" exceptions to the attorney-client privilege.

Complete Summary

Plaintiff brought a malpractice claim against an attorney and her firm as a result of their short-lived representation of him in an invasion of privacy claim. Two months into the representation, plaintiff began sending emails expressing dissatisfaction with the firm's billings and representation. Nevertheless, plaintiff stated that he continued to rely on defendants for legal advice about his matter. Shortly thereafter, plaintiff filed a malpractice action against defendants and substituted new counsel in the underlying litigation.

During the time of representation, the attorney consulted with other attorneys in her firm — the firm's general counsel, claims counsel, and another "deputized" attorney. The firm did not bill plaintiff for any of the other attorneys' time. In response to deposition questions and discovery requests, the attorney invoked the attorney client privilege for internal communications between the attorney and other firm lawyers acting in their capacity as counsel for the firm and/or documents prepared in anticipation of litigation. Plaintiff filed a motion to compel, which the trial court granted. Defendant filed a petition for writ of mandate or prohibition, requesting the trial court to set aside its order and enter a new order denying the motion to compel.

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Insurance Regulator Too 'Aggressive,' Insurers Say

Four insurance companies sued the California Department of Insurance, claiming the agency has become "increasingly aggressive" in its efforts to enforce the state's Unfair Insurance Practices Act.

The companies say the department is trying to enforce the UPA beyond the scope of the original statute, by wanting to impose "millions of dollars in monetary penalties" against insurance companies.

In statute form, the UPA outlines 16 unfair claims settlement practices that companies must avoid in order to be compliant with the law. Prohibited practices include misrepresenting pertinent facts or policy revisions to clients, compelling insured clients to pursue litigation to recover amounts due, and attempting to settle a claim for less than a "reasonable" amount.

But the four plaintiffs known as the Torchmark group of companies said the department has been adding to the original 16 practices, creating 25 "categories of acts" that outline specific conduct to be followed or prohibited in the settlement of claims.

The Torchmark group includes Globe Life and Accident Insurance Company, American Income Life Insurance Company, United American Insurance Company and United Investors Life Insurance Company and is represented in the suit by Robert Hogeboom of the Los Angeles firm Hinshaw & Culbertson.

READ MORE at Courthouse News Service

 

Esquenazi decision interprets the Foreign Corrupt Practices Act

By David McMahon and Robert G. Levy

Companies doing business internationally no doubt have heard about the rise in claims brought by government agencies against companies and individuals under the Foreign Corrupt Practices Act (FCPA). Our last article focused on ways expenses in defending against such claims — often substantially greater than the amount for which the claims are ultimately resolved — can be contained.

A new decision, U.S. v. Esquenazi, was issued by the 11th Circuit on May 16, 2014, that carefully examines the tests required to determine whether in a given situation the FCPA has, or has not, been violated. The decision, a rare one despite the burgeoning number of prosecutions under the FCPA, clarifies but yet does not simplify what the applicable criteria for prosecution and conviction are. Pertinent to the role of corporate counsel overseeing the defense of such investigations and prosecutions, the decision in fact demonstrates just how wide ranging and fact intensive such an investigation and prosecution might become.

READ MORE

Originally published by InsideCounsel, July 15, 2014

Recent Victory on Behalf of Medical Supplement Insurers against California Department of Insurance

As a result of the filing of a Writ of Mandate and Declaratory Relief Action by Barger & Wolen LLP Senior Regulatory Counsel Robert W. Hogeboom and Litigation Partner John Holmes, the California Department of Insurance (“CDI”) agreed to cease and desist its practice of requiring insurers to file and pay fees on insurer notices to policyholders policyholder “notices” in connection with Medicare supplement policies. Further, the CDI agreed to refund to each of the plaintiff insurers in the suit all filing fees that had been paid to the CDI since 2012.

The action was filed on behalf of five Torchmark Group insurers who issue Medicare supplement insurance policies in California. Under California Insurance Code (“CIC”) § 10192.14(c), each insurer is required to submit an annual rate filing for each Medicare supplement product to demonstrate compliance with a minimum lifetime loss ratio requirement.   

Since June 2012, the CDI has required insurers which issue Medicare supplement policies to file and seek approval for each form of “notice” to policyholders. The term “notice” was broadly defined by the CDI to include invoices, friendly reminder letters, changes in premium, lapse notices, etc. The CDI alleged that all of these notices were “policy forms” subject to approval under CIC § 10192.15(a). Each notice was subject to a filing fee of $460. 

The CDI also withheld approval of rate filings pending the filing of notices and payment of filing fees notwithstanding that actuarial approval had been given. The notice filing fees alone aggregated approximately $15,000 each year for the plaintiff insurers. 

A Writ of Mandate and complaint for Declaratory and Injunctive Relief was filed against the CDI alleging that the notices were not “policy forms” within the meaning of CIC § 10192.15(a). Further, we alleged the CDI had no authority to disapprove a rate filing based on failure to file notices for approval. 

Prior to a hearing on the action, the CDI agreed to discontinue the notice filing requirements and fee charges. The CDI also agreed to refund all filing fees that had been previously collected.

 

 

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Title Insurance

Barger & Wolen's James Hazlehurst recently updated Chapter 39 of the California Insurance Law & Practice, Title Insurance

The chapter features many new practice tips on such diverse matters such as:

  • Filing for litigation despite the equitable tolling rule;
  • Tolling agreements;
  • The notice-prejudice rule;
  • Quiet title actions;
  • The trigger of tripartite relationships;
  • The attorney-client privilege;
  • Attorney claims adjusters;
  • Informal representations about the status of title;
  • Bad faith actions;
  • Undisclosed liens or encumbrances;
  • Failure to file an amended title report;
  • Posting collateral for an indemnification agreement;
  • Access to property rights and the title report;
  • Equitable subrogation; and
  • "Hand-crafted" endorsements.

 

Claims Handling and the Duty of Good Faith

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

The chapter revisions include:

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

 

Barger & Wolen Partners Author "Insurance Practices and Coverage in Liability Defense"

Barger & Wolen partners David McMahon, Robert Levy and John (Jack) Pierce authored the second edition of Insurance Practices and Coverage in Liability Defense (formerly Defending the Insured). 

Intended for legal practitioners, researchers, courts, and other insurance industry professionals, the book provides the first comprehensive and objective analysis of the various duties and potential pitfalls confronting each party in a three-way relationship between insurance carrier, insured, and the appointed counsel in insurance defense.

Through national study and state-specific analysis, the book offers a detailed discussion of topics engendered by the duty to defend and the consequent obligations of each of the parties. Reference tables and appendices then survey the law in each state on those topics.

Our approach to writing this book was to provide our unique perspectives from our day-to-day knowledge of the laws and our industry experiences through our firm’s insurance defense practice,” said David McMahon. “We are confident it will be a valuable resource to the legal and insurance industries.”

David McMahon, the Managing Partner in Barger & Wolen's San Francisco office, is a co-editor of the firm’s Litigation Management & Attorney Fee Analysis blog, and a California State Chair for the Council on Litigation Management.

Jack Pierce is a nationally recognized author and an expert witness in the areas of legal fee disputes, fee and cost allocation, legal ethics, and issues related to legal and ethical responsibilities of lawyers that arise from the tripartite relationship between insurers, insureds and defense counsel.

Robert Levy is a frequent author and has more than 33 years of experience encompassing coverage and defense litigation on behalf of major commercial general liability and professional liability insurers throughout the United States

Insurance Practices and Coverage in Liability Defense, Second Edition, published by Wolters Kluwer Law & Business is available for purchase through Wolters Kluwer website here.

Genuine Dispute Doctrine Precludes Bad Faith Claim Reaffirmed by District Court

Barger & Wolen LLP Secures Summary Judgment On Behalf of Client

District Court Reaffirms “Genuine Dispute Doctrine,” Precludes Bad Faith Claim

LOS ANGELES –On November 29, 2013, United States District Court Judge Margaret M. Morrow granted summary judgment to Barger & Wolen LLP client Mitsui Sumitomo Insurance Company of America in Lucky Leather Inc. v. Mitsui Sumitomo (Case No. CV12-09510-MMM).  Lead attorneys Stephen Klein and Peter Sindhuphak were successful in convincing the Court that the insured had failed to raise a triable issue that benefits under the Mitsui Sumitomo policy were owed. 

The Court found that not only did plaintiff fail to produce evidence that the claimed loss of leather goods from water damage was covered, but that the insurer’s reasonableness in the claims-handling process was indisputable,” says Klein, a partner in the firm’s Los Angeles office. “Under the “genuine dispute” doctrine, absent any evidence that the insurer’s coverage determination was unreasonable, the insurer was not in violation of the covenant of good faith and fair dealing.”

Judge Morrow’s decision relies upon both state and federal California cases allowing a trial court to conclude, as a matter of law that an insurer’s denial of a claim is not unreasonable, so long as there existed a genuine issue as to the insurer’s liability at the time the claim decision was made. 

The Genuine Dispute Doctrine is designed for cases like this where there was clear evidence that the insurer’s coverage determination was based on a thorough investigation of the claim and its actions in concluding that there was no coverage were indisputably reasonable given the facts and the policy language,” said Stephen Klein.

 

The Potential Pitfalls of Joint Representation

A recent California Court of Appeal opinion, Yanez v. Plummer, provides a cautionary tale for in-house counsel or outside attorneys who jointly represent their institutional client’s employees or agents in depositions. If handled inappropriately, joint representation can result in liability for the lawyer and undercut the institution’s own interests.

Plaintiff Michael Yanez worked for a railroad. He was a witness with respect to a workplace accident that injured a co-employee, Robert Garcia. Yanez prepared two statements related to the incident – one directly after the accident and the other an hour later. 

In the first statement, he wrote: “I was watching motor come up while Boby went downstairs & went to retrieve tool had sliped & fell on concrete floor, soaked in oil & grease.” Yanez’s supervisor asked him to write a second statement because the first lacked details. In the second statement, Yanez wrote in relevant part: “I saw Boby slip & fall down on oil soaked floor . . . .”

The injured employee sued the railroad and deposed Yanez. The railroad assigned in-house counsel to defend the lawsuit. Prior to the deposition, Yanez met with the attorney to prepare for the testimony. Yanez told the attorney that he had not actually seen the slip and fall. Yanez expressed concern about his job security in giving testimony unfavorable to the railroad and sought assurances that the attorney would “protect” him at the deposition. Counsel assured Yanez that his job would not be affected as long as he told the truth. They did not discuss the discrepancies between the two witness statements or conflicts of interest between Yanez and the railroad.

At the deposition, the injured employee’s attorney elicited testimony that Yanez had not seen the fall. In addition, the attorney asked Yanez about several unsafe conditions at the site of the accident. In-house counsel also questioned Yanez. The attorney had Yanez confirm that his “testimony today” was that the accident was not within his “line of sight.”  Counsel then asked Yanez about the sentence in his second witness statement that he “saw Boby slip & fall.” Counsel did not provide Yanez an opportunity to explain the discrepancy or mark the other witness statement as an exhibit. Counsel’s reasons for impeaching Yanez are not entirely clear. Yanez contended that the attorney was attempting to undercut Yanez’s credibility and his other testimony about unsafe working conditions.

A railroad representative was present at the deposition. After listening to Yanez’s testimony, the representative recommended that the railroad initiate a disciplinary hearing for dishonesty, which eventually resulted in Yanez’s termination. At that proceeding, Yanez maintained that he simply miswrote his second witness statement and meant to state, “I saw Bobby had slipped and fell down on oil soaked floor.” 

Yanez sued the railroad for wrongful discharge and sued in-house counsel for malpractice, breach of fiduciary duty, and fraud. The attorney claimed that, since he had not prepared Yanez’s two witness statements or participated in the process leading to his termination, Yanez could not prove causation. The court of appeal disagreed.

 

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Reasoning Behind Punitive Damages Calculations Provided By California Appellate Court

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fingers Point to Different Defendants in Asiana Airlines Plane Crash

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

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

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

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

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

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

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

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

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

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

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

 

Zhang Ruling Yanks Insurer Shield Against UCL Claims

Larry Golub was quoted in an Aug. 2, 2013, Law360 article, Zhang Ruling Yanks Insurer Shield Against UCL Claims, (subscription required) about the California Supreme Court's ruling which found that consumers can accuse insurance companies of violations of California's unfair competition law.

Some court watchers believe the ruling could invite more class actions and give plaintiffs a new means of obtaining premium refunds, injunctions and attorneys' fees.

The ruling against California Capital Insurance Co. could also motivate attorneys to add unfair competition claims to breach-of-contract and bad faith claim lawsuits against insurers, the article said.

Although violators of the unfair competition law can be forced to pay restitution and potentially attorneys' fees, doing so is not an easy task, according to Golub. Policyholders would have to demonstrate that they had done something significant for the public interest.

“In the run-of-the-mill bad-faith case, I don't think you're going to be able to establish that just because you fought an insurance company, you've done something for the public good,” he said.

Mr. Golub recently reviewed the Zhang decision on this blog, California Supreme Court Finally Decides How a UCL Claim and First Party Bad Faith Claim Can Co-Exist.

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

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

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

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

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

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

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

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

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

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

In summarizing its holding, the Court stated:

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

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

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

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

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

Oppression and Surprise Render Arbitration Provision Unenforceable

By James Hazlehurst

In Vargas v. SAI Monrovia, the California Court of Appeal for the Second Appellate District addressed the enforceability of an arbitration provision in a vehicle purchase agreement. The court held that the arbitration provision was unenforceable because it was both procedurally and substantively unconscionable. The arbitration clause therefore could not be used to preclude a class action. 

The court ruled that the arbitration clause was procedurally unconscionable because elements of oppression and surprise existed in the formation of the contract. In particular, the arbitration provision was located on the back of the two-sided contract while the buyer’s signature lines were on the front of the contract. The sales manager also allegedly told the buyers where to sign and did not give them an opportunity to fully review the contract before signing. 

Substantively, the arbitration provisions were unconscionable because they were too one-sided, containing “overly harsh terms that favor the car dealer to the detriment of the buyer.” Certain provisions, such as limiting appeals to awards that exceed $100,000 and to awards of injunctive relief, primarily benefited the dealer. Similarly, the exclusion of self-help remedies – like vehicle repossession – from arbitration only had benefit to the dealer.    

Vargas reinforces that arbitration clauses in form contracts are more likely to be enforceable when the consumer is given clear notice of the clause and where the benefits of the arbitration clause apply equally to both parties.  

HP Inkjet Printer Litigation: Fee Award Fails to Comply With Provisions of the Class Action Fairness Act

By David McMahon

In In re: HP Inkjet Printer Litigation, 2013 DJDAR 6149 (2013) the Ninth Circuit Court of Appeals reversed the approval of an attorney's fee award. The Ninth Circuit concluded that the fee award did not comply with the provisions of the Class Action Fairness Act (CAFA)Specifically, the Ninth Circuit found that the district court awarded fees that were “attributable” to the coupon relief offered in the settlement, but failed to first calculate the redemption value of the coupons as required by applicable law.

Plaintiffs filed three class actions alleging that HP engaged in unfair business practices relating to the use of ink cartridges. HP reached a settlement with the consumers, who purchased inkjet printers. The district court approved the settlement, which provided for coupons for the class members as well as injunctive relief. In addition, the district court approved an award of attorney fees of $1.5 million and a significant award of costs. 

The district court reviewed the fee request and awarded lodestar fees based on its conclusion that the settlement value to the class was $1.5 million. Recognizing that it would be improper to award fees that were higher than the class benefit, the court ordered HP to pay a reduced lodestar of $1.5 million down from a potential of $7 million in fees. Two class members objected, contending the reduced fee award still violated the provisions of CAFA.

The Ninth Circuit reversed the lower court’s decision on fees. The Ninth Circuit noted that under CAFA, when a settlement provides for coupon relief, the court must first calculate the redemption value of the coupon, as a prerequisite to considering the claim for attorney fees. As such, the Ninth Circuit concluded that under the provisions of CAFA, the district court was required to first calculate the redemption value of the e-credits in making its determination of attorney fees. 

Because the record did not reflect such an analysis, the Ninth Circuit remanded the case to the District Court to make a determination consistent with the required analysis under CAFA.

Originally posted to Barger & Wolen's Litigation Management & Attorney Fee Analysis blog.

Judicial Notice Doctrine Bolstered by Court of Appeal Decision

A recent California decision should make it easier for insurers to attack allegations at the pleading stage in state court actions. 

In Scott v. JP Morgan Chase Bank, the California Court of Appeal clarified that, when ruling on the sufficiency of a plaintiff’s allegations, a trial court may take judicial notice not only of legally operative documents relevant to a plaintiff’s claims but also of facts that can be derived from the documents’ contents. This procedural holding should be useful to insurers when challenging complaints through a demurrer, motion to strike, or motion for judgment on the pleadings.

Federal courts have well-recognized procedures for considering documents outside the pleadings when ruling on motions to dismiss. District courts may take judicial notice of contracts or other key documents mentioned in the pleadings where there is no factual dispute about the documents’ authenticity or enforceability. In the Ninth Circuit, district courts may even take judicial notice of documents that the pleadings don’t mention, provided the documents are integral to the plaintiff’s claims. See, e.g., Parrino v. FHP, Inc., 146 F.3d 699 (1998).

In contrast to federal practice, California state court decisions have not provided clear guidance with respect to those facts that a court may consider at the pleading stage. A trial court does not have to accept the truth of allegations contradicted by documents incorporated into the pleading by reference. In many instances, however, parties do not attach contracts to complaints or expressly incorporate them by reference. Although some California decisions have permitted trial courts to take judicial notice of documents outside the pleadings, these authorities have not provided consistent guidance about what documents a court may consider and to what extent. 

The Scott decision provides some needed clarity.

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California Supreme Court Hears Argument on Whether Insurance Code Limits UCL Lawsuits Against Insurers

By Samuel Sorich and Larry Golub

On May 8, 2013, the California Supreme Court convened to hear oral argument in Zhang v. Superior Court. The case presents the issue of whether conduct of an insurer, which is related to conduct that would violate California’s Unfair Insurance Practices Act, Insurance Code, §790.03(h) et seq. (UIPA), can be the basis for a private civil cause of action against the insurer under California’s Unfair Competition Law, Business & Professions Code, §17200 et seq. (UCL).

The Court of Appeal in Zhang had ruled in October 2009 that an insurer may be sued by a private citizen for conduct prohibited by the UCL even though the conduct is within the scope of the UIPA. The Supreme Court accepted review of the matter in February 2010.

At the oral argument session, counsel for the insurer relied on the California Supreme Court’s 1988 ruling in Moradi-Shalal v. Fireman’s Fund Insurance Companies, which held that violations of the UIPA may be prosecuted only by administrative action taken by the Insurance Commissioner, not by civil action by private citizens. Counsel argued that the holding in Moradi-Shalal bars a UCL action against an insurer when the action is based on insurer conduct that is governed by the UIPA.

Counsel for the plaintiff insured responded that Moradi-Shalal does not preclude the insured’s UCL action against the insurer, pointing to language in the Moradi-Shalal decision which noted that “the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, infliction of emotional distress, and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing.”

We have monitored the Zhang case and other appellate court decisions on the interplay between the UIPA and the UCL in prior blogs. Please see here, here, here and here.

The Supreme Court is required to issue a written opinion in the Zhang case within 90 days of the date of the oral argument, or by August 6, 2013.

The Supreme Court focused on the UCL this week. On May 7, 2013, the Court heard oral argument in Rose v. Bank of America which presents an issue analogous to the issue in Zhang. The question in Rose is whether a cause of action under the UCL can be predicated on an alleged violation of the Truth in Savings Act (12 U.S.C. $4301 et seq.) despite Congress’s repeal of the private right of action initially provided for under that Act.

 

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.

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

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

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

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

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

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Canon Ruling May Spur Unfair Competition Claims In Calif.

Law360 quoted Larry Golub in a Jan. 24, 2013, article, Canon Ruling May Spur Unfair Competition Claims in Calif (subscription req.), about the California Supreme Court's ruling in Jamshid Aryeh v. Canon Business Solutions Inc.

The ruling, which is expected to spark similar cases, held that equitable tolling doctrines apply to claims brought under California's Unfair Competition Law.

Golub told Law360 that the ruling could encourage more plaintiffs to bring Unfair Competition Law claims against California businesses.

The decision opens up a limited door to avoiding the statute of limitations for UCL claims that involve a continuing or recurring business practice,” Golub said. “Plaintiffs bringing UCL claims in the future will try to characterize claims as a continuous practice to try to fall within the Aryeh rule.”

Click here to read Mr. Golub’s full analysis of the case.

 

Reconsidering the Fraud Exception to the Parol Evidence Rule

The California Supreme Court has removed a legal barrier for litigants seeking to invalidate contracts on the basis of fraud. 

Overruling a 75-year old decision, the Supreme Court ruled that the parol evidence rule does not exclude evidence of allegedly false promises or representations that directly contradict a contract’s written terms. See Riverisland Cold Storage, Inc. v. Fresno-Madera Production Credit Assoc. (filed Jan. 14, 2013). 

This case did not specifically concern insurance, but the ruling could have ramifications for contract disputes between insurers and insureds. 

Insurance coverage disputes sometimes involve allegations that the insurer or its agents misrepresented policy terms. Insurers have a number of potential defenses to respond to these claims, including the parol evidence rule. As applied prior to Riverisland, the rule excluded evidence of any alleged false promise that directly contradicted the express terms of the insurance policy. See, e.g., Diamond State Ins. Co. v. Marin County Bikes, 2012 U.S. Dist. LEXIS 181329 ** 39-41 (N.D. Cal. Dec. 21. 2012) (dismissing fraud claim because alleged misrepresentations about coverage contradicted policy terms).

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California Supreme Court Allows "Continuous Accrual" Doctrine to Avoid Statute of Limitations for "Unfair" UCL Claim

Seeking to clarify the extent to which the four-year statute of limitations applies to claims under the Unfair Competition Law, Business & Professions Code section 17200 et seq. (the “UCL”), a unanimous California Supreme Court today issued its decision in Aryeh v. Canon Business Solutions, Inc., allowing at least a portion of the plaintiff’s UCL claim to proceed beyond demurrer.

Relying on the continuous accrual doctrine, the Court explained that this equitable exception to the usual rules governing limitations periods would permit the plaintiff to pursue:

at least some [alleged unfair] acts within the four years preceding suit, [and thus] the suit is not entirely time-barred.”

Background

The plaintiff ran a copying business and entered into two agreements with Canon (one in November 2001 and one in February 2002) to lease copiers. The agreements required the plaintiff to pay monthly rent for each copier, subject to a maximum copy allowance. If plaintiff exceeded the monthly allowance, he had to pay an additional per copy charge. The agreements also provided that Canon would service the copiers. 

Beginning in 2002, plaintiff noticed discrepancies between meter readings taken by Canon employees and the actual number of copies made on each copier, and he began compiling independent records. Plaintiff alleged that Canon employees had run thousands of test copies during 17 service visits between February 2002 and November 2004, which he claimed resulted in him exceeding his monthly allowances and having to pay excess copy charges and fees to Canon.

Plaintiff delayed until January 2008 before he filed a single-claim complaint for violation of the UCL. In that complaint, plaintiff alleged that Canon’s practice of charging for test copies implicated both the unfair and fraudulent prong of the UCL.

Canon demurred to the complaint, contending that plaintiff’s claim was barred by the four-year statute of limitations for UCL claims. After permitting plaintiff leave to amend the complaint two times, the trial court dismissed the action. The Court of Appeal, in a 2-1 decision, affirmed the dismissal and held that neither the “delayed discovery” rule nor the “continuing violation doctrine” applied to avoid the statute of limitations. The dissenting opinion would have allowed plaintiff to proceed with a portion of his claim under the “continuous accrual” theory for those parts of the claim that were not time-barred.

Supreme Court Decision

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Insurance Cases to Watch in 2013

Larry Golub was quoted in a Jan. 1, 2013, article published on Law360, Insurance Cases to Watch in 2013 (subscription required) about key insurance cases lawyers, and those in the insurance industry, should keep an eye out for in 2013. Among other things, the article mentioned litigation filed over Hurricane Sandy losses, cyber liability claims and a much-anticipated California Supreme Court ruling on whether the state's unfair competition law can be used to accuse insurance companies of bad faith.

Golub's comments dealt with that case before the California Supreme Court, Zhang v. The Superior Court of San Bernardino County, which will decide whether policyholders can sue insurers for misrepresentation and false advertising for not promptly paying claims.

Golub told the publication that the state's courts have been split on the issue although insurers insist that Zhang is at odds with the California Supreme Court's decision in a 1988 case prohibiting private rights of action for violations of the Unfair Insurance Practices Act.

Prior to that ruling, insurance companies raised rates fearing they would be hit with private lawsuits brought under that law, a pattern that could repeat itself depending on what the Supreme Court decides, Golub said. The state's unfair competition law allows for restitution but not damages.

The remedies may be limited, but the breadth of the statute is very broad,” he said. “Since there are so many cases coming out on both sides of the issue, it's one that demands resolution.”

Another Decision Uses the UCL to Circumvent the Moradi-Shalal Restriction as to Private Rights of Action Against Insurers

In a decision issued October 24, 2012, the California Second Appellate District, Division Four became the most recent decision applying California’s unfair competition law, Business & Professional Code, § 17200 et seq. (“UCL”), to bring bad faith claims against insurers, undercutting a key aspect of the decision in Moradi-Shalal v. Fireman’s Fund Ins. Cos.

In Ocie E. Henderson v. Farmers Group, Inc., the court analyzed and rejected the determinations of one line of California decisions issued in the years since Moradi-Shalal that precluded a private right of action under the UCL against insurers for violations of California’s Unfair Insurance Practices Act (“UIPA”), Ins. Code, § 790.03(h) et seq. See Textron Financial Corp. v. National Union Fire Ins. Co., and Safeco Ins. Co. v. Superior Court, abrogated on other grounds by Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co.

Henderson instead followed the same reasoning applied by the Fourth Appellate District, Division Two in Zhang v. Superior Court (review granted Feb. 10, 2010).

Zhang held that a cause of action for violation of the UCL based on conduct that allegedly violates the UIPA is not an end-run around Moradi-Shalal so long as that conduct also supports a claim against the insurer for something other than a UIPA violation. 

The conduct at issue in Zhang involved alleged fraudulent misrepresentations and misleading advertising regarding coverage. 

The conduct at issue in Henderson involved denial of property damage claims based on the failure to submit a proof of loss and late notice.  

Both Zhang and Henderson rely on State Farm Fire & Casualty Co. v. Superior Court, which held that a breach of contract or bad faith cause of action could serve as a predicate for a UCL claim even if the conduct supporting the claim also constitutes a violation of the UIPA. 

Additional decisions following Zhang include: Hughes v. Progressive Direct Ins. Co., review granted September 28, 2011, but deferred pending consideration and disposition of Zhang; Williams v. Prudential Ins. Co., 2010 U.S. Dist. LEXIS 14566 (N.D. Cal. 2010); Burdick v. Union Sec. Ins. Co., 2009 U.S. Dist. LEXIS 121768 (C.D. Cal. 2009).  

In Sanders v. Choice Mfg. Co., 2011 U.S. Dist. LEXIS 137365 (N.D. Cal. 2011), the district court refused to apply Zhang because of its unpublished status but nonetheless applied reasoning similar to Zhang in holding that plaintiff’s allegations regarding untrue and deceptive statements alleged more than just a violation of the UIPA because the conduct also involved allegations of the sale of insurance without first obtaining a license or certificate. 

Despite these holdings, other recent decisions in the district courts continue to apply broadly Moradi-Shalal and Textron but have left open their decisions pending the California Supreme Court’s determination in Zhang. See Wayne Merritt Motor Co. v. N.H. Ins. Co., 2011 U.S. Dist LEXIS 122320 (N.D. Cal. 2011) (dismissal without prejudice of UCL claim based on allegations that the insurer misrepresented coverage by “burying” a limitation of liability clause in the endorsement); Willbanks v. Progressive Choice Ins. Co., 2010 U.S. Dist. LEXIS 128144 (E.D. Cal. 2010) (dismissed without prejudice of UCL claim based on unfair claims practices).

While Zhang has been fully briefed since June 2010, oral argument has yet to be set. Presumably, the Supreme Court’s long-awaited decision in Zhang will bring certainty to these conflicting decisions and reconcile the interplay of the UCL and the UIPA.

We will continue to report on the developments in this significant area of insurance litigation.

 

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

 

By Larry Golub and Sam Sorich

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

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

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

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

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

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

 

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

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

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

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

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

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

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.

A Duty (to Settle) Too Far

Larry Golub wrote an article that appeared in the Insurance Journal on September 10, 2012, A Duty (to Settle) Too Far, about a recent decision by the Ninth Circuit Court of Appeals that threatens to upend law developed decades ago involving a liability insurer's duty to settle third party claims.

According to Golub, the Ninth Circuit panel's July 11, 2012, ruling in Du v. Allstate Insurance Company would “open the floodgates to higher insurance premiums not to mention more (and wholly unnecessary) bad faith litigation. Indeed, such a rule change would make settlement less likely, contrary to the accepted public policy in favor of settlement and protecting insureds from personal liability.”

In its decision, the court stated that insurers have a duty to try to settle when the liability of the insured is fairly clear, even if the injured party has not made a settlement demand made. Without a demand from a third party, Golub notes, the insurer is left with little to base a settlement on.

“As a federal court decision seeking to apply California state law, but based on no actual state court authority, California courts are under no obligation to follow the Du reasoning and hopefully it will be ignored,” he wrote. “Better yet, when next confronted with a bad faith failure to settle case, perhaps the California Supreme Court or one of the panels of the California Court of Appeal will relegate Du to the graveyard of appellate decisions dead on arrival.”

Updated: California Legislature Passes Insurance-Related Bills Prior to Ending 2012 Session

The California Legislature’s regular 2012 session ended on August 31. In the last days of the session, legislators passed hundreds of bills, including several insurance-related measures. Here are noteworthy insurance-related bills that were passed by the Legislature and sent to Governor Jerry Brown. The governor has until September 30, 2012, to act on these bills.

Update: Please check back frequently for updates as the governor signs or vetoes the legislation.

Senate Bills

SB 863 is the sweeping 160-page workers’ compensation bill that was passed in the last hours of the legislative session. SB 863 would increase aggregate permanent disability benefits by approximately $740 million per year, phased in over a two-year period. The bill would change several aspects of the workers’ compensation system. Among other things, SB 863 would create an independent medical review process for resolving medical care disputes, establish an independent bill review process for resolving medical billing disagreements, adopt a statute of limitations for workers’ compensation liens, and restrict the reasons that can be used to avoid obtaining treatment within a medical provider network. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

SB 1216 would conform California law to the revision to the NAIC Credit for Reinsurance Model Law that was adopted in 2011. Among other things, SB 1216 would establish criteria that the insurance commissioner is to use in certifying reinsurers; reinsurance provided by certified reinsurers would be an asset or credit against the liabilities of a ceding insurer. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

SB 1234 would create the California Secure Choice Retirement Savings Investment Board which would be charged with conducting an analysis and reporting to the Legislature on 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 would establish conditions for the operation of autonomous vehicles on public roadways. 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 would conform California law to the revision to the NAIC Insurance Holding Company System Regulatory Model Act that was adopted in 2010. Among other things, SB 1448 would require the board of directors of an insurer that is part of a holding company system to file a statement affirming that the board is responsible for overseeing corporate governance and internal controls, and SB 1448 would authorize the insurance commissioner to evaluate the enterprise risk related to an insurer that is part of a holding company. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

SB 1449 would permit 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 would expand the investment options available to the State Compensation Insurance Fund.   

Assembly Bills

AB 53 would require 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 would be due July 1, 2013. An insurer would be required to update its report biennially. AB 53 includes a January 1, 2019 sunset date. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 1145 would create a supplemental job replacement benefit in the form of a voucher for up to $6,000 to cover skill enhancement expenses. The benefit would be available to an employee who is awarded workers compensation permanent partial disability benefits.

AB 1454 would allow doctors of audiology to be appointed as qualified medical evaluators by the administrative director of the Division of Workers’ Compensation.

AB 1687 would authorize the Workers’ Compensation Appeals Board to award attorney’s fees to an applicant who prevails in a dispute that arises in the course of the medical utilization review process.

AB 1708 would authorize 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 would be allowed to be presented to a peace officer. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

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. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.  

AB 1875 would limit the civil deposition of any person to one day of seven hours. The bill specifies exceptions to this limit. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 1888 would allow 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 would prevent 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 would not bar the disclosure of the offense to insurers for underwriting or rating purposes.

AB 2084 would expand the list of eligible policyholders who can purchase blanket insurance. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.   

AB 2138 would give 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 twenty 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 ten cents.SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 2152 would require a health plan that intends to terminate its contract with a provider group or a general acute care hospital to notify the Department of Managed Care at least 30 days prior to the termination of the contract. AB 2152 also would require a health insurer that intends to terminate its contract with a provider group or a general acute care hospital to provide services at alternative rates of payment to notify the Department of Insurance at least 30 days prior to the termination of the contract. AB 2152 would require health insurance policies to include additional notices and disclosures. 

AB 2160 would require 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. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.

AB 2298 would prohibit 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 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 would abolish the advisory committee on automobile insurance fraud within the Fraud Division of the Department of Insurance. AB 2303 also would repeal 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 would revise the licensing requirements for travel insurance agents. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.   

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. SIGNED BY GOVERNOR BROWN. This measure becomes effective on January 1, 2013.