California Insurance Litigation Blog

Court of Appeals Limits the Application of the Genuine Dispute Doctrine in Third Party Insurance Coverage Cases

sk@mslawllp.com (Scott Koller) — Tue, 24 Aug 2010 15:08:51 -0800

The genuine dispute doctrine received another blow as the California Court of Appeals held that the doctrine may not be used to refuse settlement in third party coverage cases. The recently decided case of Howard v. American National Fire Ins. Co., __Cal. App. 4^th __, 2010 WL 3156851 (decided August 11, 2010), involved allegations of priest molestation by an employee of the Roman Catholic Bishop of Stockton (“Bishop”). American National Fire Insurance Co. (“American”) provided liability insurance to Bishop that covered bodily injury caused by an employee’s battery. When Howard filed suit for negligent retention of the molesting priest, Bishop asked American to defend and indemnify against the suit. American refused on the grounds that the alleged molestation occurred after the policy had expired in November of 1979. In support, American relied on deposition testimony by Howard in which he stated that his first memory of being molested was when he was five or six years old, the earliest of which would have been seven months after the policy had expired. The case continued to trial and Bishop was found liable for negligent retention and directed to pay $5.5 million in compensatory and punitive damages. While the case was still on appeal, the parties settled and Howard agreed to join Bishop in a suit against American to recover on the judgment and for bad faith failure to defend, settle, and indemnify against the molestation case.

A number of issues and defenses were raised in the subsequent suit against American. Relevant for this discussion was American’s assertion of the genuine dispute doctrine as a defense against Howard’s allegations of bad faith. Under the genuine dispute doctrine, if the insurer can show that a genuine dispute existed as to coverage, then it is entitled to summary judgment on the insured’s bad-faith cause of action. Here, American argued, there was a genuine dispute as to whether the molestation occurred during the policy period. Although Howard alleged in his complaint that the molestation occurred sometime between 1977 and 1991, American argued that the only evidence presented at trial showed that the molestation occurred after the policy expiration. The weakness of this argument was that the underlying trial did not focus on when the molestation occurred, but rather whether it occurred. Therefore, the subsequent suit against American was not limited to the evidence offered at the previous trial. Further, the court held, the genuine dispute rule does not apply in all bad faith insurance contexts.

In first party cases, where payment is sought for the insured’s direct losses, an insurer may raise a reasonable dispute over coverage without being guilty of bad faith. But it has never been held that an insurer in a third party case may rely on a genuine dispute over coverage to refuse settlement. Instead, it is a long-standing rule that “the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.

Id. (internal citations omitted). Essentially, American’s dispute over coverage could not justify its failure to refuse settlement and should not affect its evaluation of whether a settlement offer is a reasonable one. American had a duty to the insured to evaluate and participate in the settlement negations despite the potential coverage issues. In addition, the court noted that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. Here, the court found that American distorted Howard’s deposition testimony by equating his memory of specific acts of molestation into an admission that no molestation occurred during the policy period. This, the court decided, was unreasonable and evidence of bad faith.

The key takeaway in this case is the narrowing of the genuine dispute doctrine. The court’s opinion essentially limits the doctrine’s use as a defense in bad faith failure-to-settle cases and reinforces the principle that the mere hint of potential coverage invokes the duty to defend.

Insurance Commissioner Poizner Publicly Denounces Lawsuit Over Rescission Regulations

sk@mslawllp.com (Scott Koller) — Mon, 23 Aug 2010 17:39:01 -0800

On July 19, 2010, Insurance Commissioner Poizner promulgated regulations designed to limit the practice of rescissions in the health insurance industry. See our blog article, New Regulations Take Aim at Policy Rescissions, on this. Last Monday, an insurance industry trade group filed a lawsuit in San Francisco to block the regulations, which would have been effective August 18, 2010. Poizner commented on the lawsuit stating: “I find it unconscionable that insurers would sue to keep the Department from stopping the horrific practice of illegal rescissions[.] Sometimes I think representatives in this industry have their heads permanently stuck in the sand. Illegal rescissions are a repugnant industry practice. In this current environment, this lawsuit is simply short-sighted and morally wrong.” The Association of California Life and Health Insurance Companies says the new rules would impose new costs and inconveniences on consumers and are unnecessary.

The Waiver Doctrine, Alive And Well in ERISA Cases

rm@mslawllp.com (Bob McKennon) — Wed, 11 Aug 2010 18:46:01 -0800

The Wednesday August 11, 2010 edition of the Los Angeles Daily Journal featured my article, entitled “The Waiver Doctrine, Alive And Well in ERISA Cases,” in the Perspective column. It explains a very recent case from the Ninth Circuit Court of Appeals in Mitchell v. CB Richard Ellis Long Term Disability Plan, 2010 DJDAR 11532 (9th Cir. July 26). The article is posted below with permission of Daily Journal Corp. (2010).

New Regulations Take Aim at Policy Rescissions

rm@mslawllp.com (Bob McKennon) — Wed, 11 Aug 2010 13:53:43 -0800

Insurance Commissioner Steve Poizner has announced new regulations that go into effect aimed at combating improper rescissions by insurance companies. These will go into effect on August 18, 2010. Poizner said in his press release of August 6, 2010: “Keeping your health insurance can literally be a matter of life and death, and I have zero tolerance for insurers who use pretexts to illegally rescind policies. These tough regulations embody my commitment to enforce the law and protect consumers who buy medically underwritten insurance coverage.”

Under current law, insurance policies can only be rescinded by a health insurer under very specific, limited circumstances.

The new regulations, according to Insurance Commissioner press release, will do the following:

Prohibit insurers from rescinding policies when they are not in compliance with specified underwriting practices regulations.
Restrict health condition and history questions on applications to those that are necessary for medical underwriting.
Require all questions on health insurance applications be clear, specific and understandable.
Require use of new and improved health history questionnaires approved by the Department before an insurer can rescind.
Allow consumers to indicate that they are unsure of or cannot remember the answer to a particular health history question.
Require that agents attest if they help applicants with a health insurance application.
Prohibit confusing phrasing of application questions like double-negatives and certain compound questions.
Require that consumers be given a copy of their application to check for discrepancies.
Require that insurers not rely solely on self-reported health history when possible.
Prohibit insurers from conducting certain rescission-focused investigations long after becoming aware of a possible misrepresentation or omission by the applicant. Also prohibits insurers from seeking information outside the scope of such an investigation.
Require that insurers give consumers the opportunity to respond during rescission investigations, and that insurers must listen to consumer-provided information.
Require that insurers identify and resolve any reasonable questions arising from the application. Insurers must document their effort to resolve these issues and make those documents available to the Commissioner

The new regulations, Article 11 Standards for Health History Questionnaires in Health Insurance Applications, Pre-Issuance Medical Underwriting and Rescission of Health Insurance Section 2274.72(b), requires insurers to apply a “reasonable layperson standard” which “recognizes and takes into account the level of understanding and appreciation of words and terms in a health history questionnaire by the average individual who lacks professional training and experience.” Health questionnaires will need to take into account the level of understanding of an individual who has no medical background or training. In addition, the questions asked on an application must be material to the underwriting process, and the consumer will be allowed to indicate they cannot remember, or are unsure of an answer to a particular health question.

With these new regulations, consumers should have an easier time obtaining and keeping their health insurance.

New Appeal Regulations For Health Plans Require Final Claims Decision To Be Made By External Reviewer

sk@mslawllp.com (Scott Koller) — Tue, 10 Aug 2010 11:22:11 -0800

The Department of Health and Human Services issued new appeal regulations under the recently enacted Patient Protection and Affordable Care Act (“Affordable Care Act”). These regulations give claimants the right to appeal decisions made by their health plan to an outside, independent decision maker, regardless of what state they live in or what type of health coverage they have, i.e., both group and individual coverage. If a particular health plan or insurance is governed by a state law, the state regulations will apply as long as the protections offered to consumers is at least as strong as the National Association of Insurance Commissioners (“NAIC”) Model Act. At a minimum, the state external review process must provide:

External Review of plan decisions to deny coverage for case based on medical necessity, appropriateness, health care setting, level of care, or effectiveness of a covered benefit.
Clear information for consumers about their right to both internet and external appeals – both in the standard plan materials, and at the time the company denies a claim.
Expedited access to external review in some cases – including emergency situation, or cases where their health plan did not follow the rules in the internal appeal.
Health plans must pay the cost of the external appeal under State law, and States may not require consumers to pay more than a nominal fee.
Review by an independent body assigned by the State. The State must also ensure that the reviewers meet certain standards, keep written records, and are not affected by conflict of interest.
Emergency process for urgent claims, and a process for experimental or investigational treatment.
Final decision must be binding so, if the consumer wins, the health plan is expected to pay for the benefit that was previously denied.[1]

For plans governed by ERISA or not otherwise covered by a state law external appeal process, a federal external review program will be required. Since these are still interim rules, a framework for the federal external review process has not been established. However, the federal review process will likely be modeled along the NAIC Model Act.

These regulations are clearly a win for consumers who have long complained that the internal appeals process is biased towards insurance companies. Unfortunately, it will take some time for consumers to reap the benefits of these changes. Health plans that were in effect on March 23, 2010 and have not been significantly modified since then are considered “grandfathered” and not subject to these regulations. However, over time, expect to see an external review process become a standard component of the claim review process.

[1] Source: “Fact Sheet: The Affordable Care Act: Protecting Consumers and Putting Patients Back in Charge of Their Care,” dated July 22, 2010.

Cell Phone Users Catch a Break

sk@mslawllp.com (Scott Koller) — Sat, 07 Aug 2010 10:58:13 -0800

The Thursday August 5, 2010 edition of the Los Angeles Daily Journal featured my article entitled “Cell Phone Users Catch a Break,” in the Perspective column. It discusses the U.S. Copyright Office's recent announcement regarding its decision to exempt wireless telephone handsets from the anti-circumvention provision under the Digital Millennium Copyright Act. The article is posted below with permission of Daily Journal Corp. (2010).

In a Case of First Impression, California Court of Appeal Extends the Duty to Defend Under a CGL Policy

rm@mslawllp.com (Bob McKennon) — Thu, 05 Aug 2010 13:01:01 -0800

Commercial General Liability (“CGL”) policies that cover personal injury and property damage require CGL carriers to defend “suits,” typically defined to mean “a civil proceeding in which damages . . . to which this insurance applies are alleged.” A question arises as to whether the process prescribed by the Calderon Act (the Calderon Process) is a” civil proceeding” within this definition. The Calderon Act requires a common interest development association to satisfy certain dispute resolution requirements with respect to the builder, developer, or general contractor before the association may file a complaint in court for construction or design defects. (Civil Code § 1375, subd. (a)) Although the Calderon Process occurs before a complaint is filed and itself does not result in a judgment or court-ordered payment of money, the Calderon Process is an integral part of construction defect litigation initiated by a common interest development association. In a case of first impression, the Fourth Appellate District in Clarendon America Insurance Co. v. StarNet Insurance Co., __ Cal. App. 4th ___ (decided July 27, 2010) held that a CGL insurer has a duty to defend its insured in such proceedings.

Centex Homes (Centex) was the developer of a residential development in Simi Valley known as Westwood Ranch. In July 2006, the Westwood Ranch Homeowners Association, Inc., served a notice of commencement of legal proceedings pursuant to section 1375 et seq. (Calderon Notice) on Centex that set forth a list of alleged construction defects at Westwood Ranch.

WSM Transportation doing business as Sam Hill & Sons, Inc. (Sam Hill), was a subcontractor on the Westwood Ranch development. StarNet Insurance Company (StarNet) issued two successive policies of CGL insurance (the StarNet CGL policies) to Sam Hill effective from June 12, 2002 to June 12, 2004. The StarNet CGL policies’ insuring agreement provides: “[StarNet] will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The StarNet CGL policies’ defense agreement provides: “We will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply. We may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.”

The StarNet CGL policies define the word “suit” as follows: “‘Suit’ means a civil proceeding in which damages because of ‘bodily injury[,’] ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged. ‘Suit’ includes: [¶] a. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or [¶] b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”

Centex filed a cross-complaint against Clarendon America Insurance Co. (“Clarendon”) in 2007 seeking payment for defending against the proceeding initiated by WRHA. Clarendon in turn cross-complained against StarNet Insurance Co. (“StarNet”) claiming StarNet was obligated to provide a defense for Centex. StarNet moved for a summary judgment asserting the Calderon Action was not a suit within the meaning of the defense agreement in StarNet’s commercial general liability (“CGL”) policy.

The trial court denied StarNet’s motion for summary judgment and found for Clarendon for which StarNet appealed. StarNet argued the Calderon Process is not a suit within the meaning of their insurance policy.

The Court of Appeal held “The Calderon Process is mandatory: The Calderon Act prohibits an association from filing a complaint for construction or design defects until it satisfies all of the requirements of the Calderon Process.” Further, the court explained:

“The Calderon Process is more than a prelitigation alternative dispute resolution requirement: It is part and parcel of construction or design defect litigation initiated by an association and, as such, cannot be divorced from a subsequent complaint.”

This decision reached the correct conclusion. One has to wonder why an insurer would even challenge whether a defense was owed in these circumstances.

Federal Insurance Office Is Now A Reality

sk@mslawllp.com (Scott Koller) — Mon, 26 Jul 2010 10:45:27 -0800

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173). The Act directs the U.S. Treasury Department to create a Federal Insurance Office ("FIO") The FIO has the authority to monitor all aspects of the insurance industry, establish Federal policy on international insurance matters, serve as a liaison between the Federal government and the several States regarding insurance matters, and serve as an advisory to the Treasury regarding the export promotion of United States insurance products and services. The scope of the FIO's authority extends to all lines of insurance, except health insurance. Also excluded from the FIO's authority is long-term care insurance, except long-term care insurance that is included with life or annuity insurance components.

This is a departure from an earlier bipartisan proposal by Congressmen Ed Royce (R-Calif.) and Melissa Bean (D-Ill.) that would have enacted a federal insurance charter designed to mandate a national framework of state based regulation or market conduct, licensing, the filing of new products and reinsurance.

The FIO is seen as a "win" by many State Insurance Commissioners who had been advocating for closer collaboration with the federal government in the regulation of insurance companies.

Dodd-Frank Wall Street Reform and Consumer Protection Act

The Continuous Injury Trigger: A Cat-and-Mouse Game

es@mslawllp.com (Eric Schindler) — Sun, 25 Jul 2010 11:58:44 -0800

The Thursday July 17, 2010 edition of the San Francisco Daily Journal featured my article, entitled “The Continuous Injury Trigger: A Cat-and-Mouse Game,” in the Perspective column. It explains a recent case from the California 4^th Appellate District which rejected a CGL insurer’s attempts to apply a “double trigger” to narrow the "continuous injury trigger" based on the standard "occurrence" definition in a CGL policy. The article is posted below with permission of Daily Journal Corp. (2010).

Ninth Circuit Applies New Hardt Decision to Deny ERISA Participant Attorney's Fees

rm@mslawllp.com (Bob McKennon) — Mon, 19 Jul 2010 11:52:05 -0800

Last month, the U.S. Supreme Court handed ERISA plan participants a big victory when they decided the important ERISA disability case of Hardt v. Reliance Standard Life Insurance, __ U.S. __ (Decided May 24, 2010)(see our blog discussion here) holding that an ERISA plan participant may be able to collect attorneys’ fees from a plan or claim administrator without obtaining a judgment in the action. It did not take long for the Ninth Circuit Court of Appeals to apply Hardt. In Simonia v. Glendale Nissan/Infiniti Disability Plan, __ F.3d __ (9th Cir. June 24, 2010), the court rejected a plan participant’s claim for attorney’s fees.

In Simonia, Aleck Simonia became physically disabled due to a herniated disc. He had disability insurance under his employer's group insurance plan, which was ultimately insured by the Hartford Insurance Co. Hartford concluded that Simonia was no longer physically disabled but had a mental disorder subject to his ERISA plan's twelve-month payment limit. Hartford also learned that Simonia had been awarded $1,551 per month in Social Security Disability Insurance (“SSDI”) benefits retroactively, which should have been offset against his payments from Hartford. Thus, Hartford informed Simonia he would be receiving payments subject to the plan's twelve-month mental disorder limit and that he owed Hartford $22,310.

Simonia sued Hartford for improperly reclassifying his disability as a mental disorder. Hartford filed a counterclaim to recover its overpayment. Simonia informed Hartford that the Social Security Administration had retroactively reduced his SSDI award, and he requested that Hartford recalculate the alleged overpayment. The parties later settled the counterclaim and stipulated to its dismissal. Simonia did not prevail in his claims against Hartford for continuing benefits. Simonia thereafter filed a motion seeking $63,745 in attorney’s fees because he “was successful as a counter-defendant in that the defendant dismissed its counterclaim.”

The district court, applying the five factors in Hummell v. S.E. Rykoff & Co., 634 F.2d 446 (9th Cir. 1980), denied the motion for fees. Simonia appealed. The Ninth Circuit affirmed.

The court initially explained that the Supreme Court in Hardt expressly declined to foreclose the possibility that, once a court has determined that a litigant has achieved some degree of success on the merits, it may then evaluate the traditional five factors under Hummell, before exercising its discretion to award attorney’s fees. Thus, once a court has found that a litigant has made the Hardt showing, it must consider, under Hummell, the opposing parties' culpability and ability to pay fees, whether an award would deter similar conduct, whether the claimant sought to benefit all beneficiaries or resolve a significant issue, and the merits of the parties' positions. The court held that even assuming Simonia achieved some degree of success on the merits, fees would be inappropriate according to the relevant factors. The court explained its rationale:

First, there is no “culpability” or “bad faith” evidenced by Hartford’s actions. Simonia began receiving retroactive SSDI benefits in 2006. Under Simonia’s policy, these benefits --when combined with certain forms of income--offset his award from Hartford. At the time Hartford filed its counterclaim, it had a good faith belief that Simonia had been overpaid by $22,309.51, and that the deduction of Simonia’s remaining mental disorder benefits would result in a balance due of $8,589. Hartford was then informed that Simonia’s SSDI benefits had been retroactively reduced. Hartford thereafter stipulated to a dismissal of the counterclaim. These actions evidence good faith.

Second, Hartford undoubtedly has the ability to satisfy an award of fees. However, no single Hummell factor is necessarily decisive. See Carpenters S. Cal. Admin. Corp. v. Russell, 726 F.2d 1410, 1416 (9th Cir. 1984). Third, given Hartford’s good faith actions, we do not wish to deter others from acting in the same manner. Fourth, in seeking to settle the counterclaim following the Social Security Administration’s retroactive reduction in benefits, Simonia did not seek “to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA.” Hummell, 634 F.2d at 453. Instead, as the district court found, Simonia sought to benefit only himself. Finally, the district court correctly noted that the counterclaim was meritorious when it was filed. When the Social Security Administration’s adjustment allegedly deprived the counterclaim of merit, Hartford settled and voluntarily dismissed. The district court did not exceed the permissible bounds of its discretion in determining that the Hummell factors weigh against an award of attorney’s fees.

Even assuming that, as Simonia argues, Hartford mistakenly calculated the amount of overpayment and the counterclaim was of questionable merit when filed, there is no evidence in the record to indicate that Hartford acted in bad faith. On the contrary, Hartford’s subsequent voluntary dismissal is indicative of its good faith in this matter. Simonia’s claim would therefore still fail after considering all of the factors.

This was an easy decision for the Ninth Circuit as there was not a good basis for the plaintiff to argue for attorney’s fees here. However, it is also a rare case where ERISA claimants applied for and do not receive an award of attorney’s fees in an ERISA action.