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

By James Hazlehurst

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

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

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

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

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

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

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Barger & Wolen partner Robert Hogeboom was quoted in an article published on PropertyCasualty360.com on April 18, 2013, California Regulators Guide Insurer Through Demutualization, Acquisition, in regards to a recent deal he and Dennis Quinn worked on to help shore up a troubled homeowner's insurer through a mutual-to-stock conversion.

Hogeboom told the paper it was the first demutualization in California since 1997 and that the deal in which Merced Mutual Insurance Company was acquired by United Heritage Financial Group of Meridian, Idaho took 15 months. According to Hogeboom, a key component of the agreement was that it allowed regulators to keep the company in California.

For the deal to be attractive to both Merced members and United Heritage, the members had to receive from United Heritage more cash for their equity in Merced than the statute would allow Merced to pay,” he said. “In this case, the money came from a third party, leaving the capital and surplus in Merced.”

According to Hogeboom, Merced has been struggling financially because of the recession and housing bust, with led to foreclosures in a number of homes it insured. He estimated that the company had lost between a third and 40 percent of its business.

Hogeboom told the publication that Merced was looking for a company that specialized in auto so it could expand its offerings and would not have to rely as heavily on homeowner's insurance.

When you can offer both, you can sell both at a lower rate,” he said. “They were getting hurt because they couldn’t offer auto, and they didn’t have the resources or the expertise to start an auto company de novo.”

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On March 27th, 2013, Barger & Wolen partners Robert Hogeboom and Dennis Quinn received consent from California Insurance Commissioner Dave Jones for the conversion of Merced Mutual Insurance Company (Merced) from a mutual insurer to a stock insurer. The demutualization was California’s first since 1997 and its first property and casualty demutualization since 1985. 

The transaction was a sponsored demutualization that also required that the California Department of Insurance (CDI) provide Form A consent to the acquisition of Merced by United Heritage Financial Group, Inc. of Meridian, Idaho, (United Heritage) and an amendment of the company’s certificate of authority to change its name to “Merced Property & Casualty Company” and to add automobile as a new class of insurance. Merced, which was formed in 1906 and maintains its headquarters in Atwater, California, formerly specialized in the sale of homeowners and residential property insurance, will begin offering automobile insurance products.

The Form A consent order issued by the CDI allowed United Heritage to acquire over 94% of Merced’s stock. United Heritage owns three other insurers that are domiciled in Idaho and Oregon. Merced is the United Heritage group's first California domiciled subsidiary insurer.

The Plan of Conversion (Plan) involved a lengthy approval process with the CDI and included both a CDI public hearing on the application and a special meeting of the policyholders to approve the Plan. 

The Plan became effective on April 1 upon recording of Merced's new articles of incorporation converting it to a stock insurer.

Don Duran, President and CEO of Merced, engineered the demutualization and acquisition with United Heritage President and CEO, Dennis Johnson, in order to partner with a well capitalized insurance group that shared Merced’s mutual insurance company culture and possessed expertise in underwriting auto insurance. The sale of auto and packaged products is expected to complement Merced's existing homeowners line to further serve California's Central Valley.

Hogeboom, who over the span of 30 years has formed and worked on the acquisition of numerous insurers, described the sponsored demutualization as being the most complicated of all of the transactions that he has completed. Dennis Quinn, who specializes in corporate and regulatory transactions, worked on the securities aspects of the Plan and the drafting of its major documents. Hogeboom notes that CDI senior staff, John Finston, Al Bottalico, James Holmes and Jon Tomashoff were instrumental in bringing the plan to completion.

United Heritage Press Release

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San Francisco partner David McMahon will speak on Understanding the Scope and Limits of Duty to Defend, Duty to Settle, and Initiating Settlement Negotiations at the upcoming ACI Bad Faith Litigation Forum (April 29-30, 2013 | Union League, PA).

Joining Mr. McMahon on the panel are Daniel W. Maguire, Partner, Burke, Williams & Sorensen; Mark S. Shapiro, Shareholder, Akerman Senterfitt; Robert N. Kelly, Director and Shareholder, Jackson & Campbell; and, David B. Drummy, Partner, Kightlinger & Gray.

For more information on the conference, click here.

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David McMahon and Jack Pierce authored a column, When a Cruise Goes Off Course, that ran in the Claims Journal on Feb. 27, 2013, about the insurance coverage ramifications of the Carnival Triumph cruise ship saga that left passengers stranded without power or plumbing for days.

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

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

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

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

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The recent case of Greb v. Diamond International Corp. highlights the need for dissolved corporations and their insurers to consider the survival statute of their state of incorporation when defending against actions brought in California.

In Greb, the California Supreme Court held that California law does not preclude the application of a foreign jurisdiction’s survival statute. The defendant, a Delaware corporation, argued that Delaware’s three-year survival statute barred the action. Plaintiffs contended that California corporate law – which places no time limit on suits against dissolved corporations – governed their suit.

The trial court agreed with the defendant and sustained its demurrer with prejudice on the grounds that Delaware’s survival statute barred the action which was filed more than three years after defendant dissolved. The court of appeal affirmed.

The Supreme Court unanimously affirmed the appellate court’s judgment. The opinion, authored by Chief Justice Cantil-Sakauye, rejected plaintiffs’ arguments that foreign corporations that qualified to do business in California were thereby organized under the laws of California.

The court found “no evidence” that the legislature intended to accomplish that “dramatic result.” Furthermore, “such a scheme would require foreign corporations to ‘follow a litany of requirements regarding various corporate activities that their home state already regulates.’”

For more information on this matter, please contact the article authors: James Hazlehurst, Ed Oster or Robert Renner.

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

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

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

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

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

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

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

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

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

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

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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.

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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.”

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