Insurance Litigation & Regulatory Law Blog

Medicare Secondary Payer Reporting (Update)

Marina Karvelas — Mon, 01 Mar 2010 15:30:09 -0800

As referenced in our February 23, 2010 blog, "Reprieve for Insurers: Medicare Secondary Payer Reporting Requirements Delayed," the CMS recently published several important alerts, including the latest version of the User Guide (3.0). A brief summary of the alerts and changes to the User Guide are described below. The documents are also linked in pdf for easy reference.

NGHP RRE Compliance Alert (2/24/2010): Specifies what CMS will consider to "be in compliance" with Section 111. Basically, compliance equals: (a) Registering with the CMS Coordination of Benefits Contractor ("COBC"); (b) Engaging in data exchange testing; (c) Beginning and continuing regular Section 111 production data exchanges with the COBC. In its 2/25/2010 Teleconference for NGHP Policy Questions and Answers, CMS emphasized that they are "not interested in civil monetary penalties but a good data exchange." The CMS Alert alleviates concerns over the $1,000 per day penalty provision.

NGHP RRE Who Must Report Alert (2/24/2010): Clarifies multiple scenarios in which questions have arisen as to who is an RRE, including corporate structure issues and siblings; deductibles versus self-insured retentions, self-insurance pools, subrogation, and workers compensation, among several others.

NGHP User Guide (Version 3.0) (2/22/2010): In connection with the first production of Claim Input Files for the first quarter of 2011, TPOC reporting begins 10/1/2010; ORM reporting goes back to 1/1/2010. CMS provides a summary of changes to the User Guide, which is set forth in Section 1 of the User Guide.

"Principal Place of Business" defined by Supreme Court in Hertz Corp vs. Melinda Friend

Barger & Wolen LLP — Tue, 23 Feb 2010 16:50:50 -0800

U.S. Supreme Court Holds "Principal Place of Business" for Federal Diversity of Citizenship Purposes Is Corporations' "Nerve Center"— Where Their Executives Direct and Control Corporate Activities

by Sandra I. Weishart

In a decision closely watched by multi-state corporations, including those in the insurance industry, the U.S. Supreme Court ruled today that a company’s “principal place of business” is where “a corporation’s officers direct, control, and coordinate the corporation’s activities.” Hertz Corp vs. Melinda Friend et al., a class action which the corporate defendant wished to remove to federal court, presented the following issue:

[w]hether, for purposes of determining principal place of business for diversity jurisdiction citizenship under 28 U.S.C. § 1332, a court can disregard the location of a nationwide corporation’s headquarters – i.e., its nerve center.

In analyzing the issue, the Court first reviewed the history of Section 1332, noting the increasing difficulty, in modern times, of defining a corporation's "principal place of business," which resulted in the application of different criteria and inconsistent precedents among the federal Circuits. Accordingly, in an unanimous opinion authored by Justice Breyer, the Court held:

In an effort to find a single, more uniform interpretation of the statutory phrase [“principal place of business”] this Court returns to the “nerve center” approach: “[P]rincipal place of business” is best read as referring to the place where a corporation’s officers direct, control, and coordinate the corporation’s activities. In practice it should normally be the place where the corporation maintains its headquarters — provided that the headquarters is the actual center of direction, control, and coordination, i.e., the “nerve center,” and not simply an office where the corporation holds its board meetings.

This decision is of particular interest to insurance companies and other corporations with a "nerve center" in another state but which, nevertheless, conduct a significant amount of business in California. In recent years, the Ninth Circuit has imposed increasingly more onerous requirements on corporate entities' ability to remove actions to federal court, if the corporation has employees, offices or property or otherwise conducts business activities here in California. Now, in most cases, removal to federal court will be far more easily accomplished.

Reprieve for Insurers: Medicare Secondary Payer Reporting Requirements Delayed

Marina Karvelas — Tue, 23 Feb 2010 15:58:51 -0800

by Steven Weinstein & Marina Karvelas

The U.S. Department of Health and Human Services (“HHS”) announced on February 16, 2010, that it will extend the deadline for reporting requirements under the Medicare Secondary Payer Act from April 1, 2010 to January 1, 2011. The news provides welcome relief for property and casualty insurers who have been working diligently to meet the new reporting requirements amidst significant uncertainties in implementation.

In addition, the HHS promised it will release during the week of February 22 the next version of its User Guide as well as provide an alert that describes the steps that reporting entities can take to assure their ongoing compliance with the new reporting requirements.

The Medicare Secondary Payer Mandatory Reporting Requirements

Over two years ago, Congress passed the Medicare, Medicaid and SCHIP Extension Act of 2007 (“MMSEA”) 42 U.S.C., § 1395y(b)(7)(8). Section 111 of MMSEA added new and significant mandatory reporting requirements for liability insurance (including self-insurance), no-fault auto insurance and workers’ compensation (collectively “NGHPs” or non group health plans) as well as group health plans (“GHPs”). Every settlement, judgment, award, or other payment from insurers to a Medicare beneficiary must be reported to the HHS through its Centers for Medicare & Medicaid Services (“CMS”). Likewise, individuals who receive ongoing reimbursement for medical care through no-fault insurance or workers’ compensation must be reported to CMS.

The new MMSEA reporting requirements do not change existing rules that determine whether Medicare or another payer is the primary or secondary payer with respect to the Medicare beneficiary. The goal behind the new reporting requirements is to enable the HHS through CMS to better obtain necessary information to determine when Medicare’s financial responsibility is secondary, and if so, reduce Medicare payments, or if already paid, recoup them. In this regard, Medicare may recover any conditional payments it has made that should have been paid by the primary insurance plan.

Take for example, an auto accident where the injured party is a Medicare beneficiary. If that Medicare beneficiary has available auto liability or no-fault auto insurance to cover medical expenses, payments under those policies are primary to any Medicare payments for such expenses. In fact, Medicare is always a secondary payer to liability insurance (including self-insurance), no-fault insurance, and workers’ compensation.

The HHS’ Stinger: Hefty Penalties

The new reporting law imposes hefty penalties for an insurer that fails to comply with the new requirements. The law allows for a civil penalty of $1,000 per day of noncompliance with respect to each individual for whom information should have been submitted.

Determining Medicare entitlement is the responsibility of the insurers, and, unfortunately, there are no standards in place for insurers to follow in making the proper entitlement determination. So if an insurer incorrectly identifies a claimant’s entitlement status and does not report, the insurer is subject to the stiff penalty.

Registration, Reporting and Data Collection

By now, insurers qualifying as “Responsible Reporting Entities” (“RREs”) should have registered with CMS and are either in or preparing for file testing status.

An RRE may not limit or transfer its MMSEA reporting responsibilities, but may contract with an unrelated third party to prepare and file reports to CMS as its agent. For example, ISO has developed the ISO ClaimSearch® Medicare Secondary Payer Reporting Service to help participants comply with mandatory claim reporting requirements.

Reporting is on a quarterly basis in electronic format. A Claim Input File requires insurers to report data for over 100 different data fields. See Appendix A – Claim Input File Layout.

The potential for reporting errors has prompted the CMS to create a section on its website identifying “Reporting Do’s and Don’ts.”

While the CMS has continued the date for the first submission of NGHP input files to January 1, 2011, it also advised that NGHP file data exchange testing will continue during 2010 as needed and will be completed by December 31, 2010.

All information and official instructions for Section 111 and its implementation including data reporting procedures can be found on the CMS website. The website includes extensive information about reporting requirements, including Section 111 Computer Based Training for RREs and their agents, as well as a User Guide, transcripts of Section 111 teleconferences and upcoming teleconferences.

Upcoming teleconferences are scheduled as follows:

NGHP Technical Support Question & Answer

March 16
March 31

NGHP Policy Question & Answer

February 25

The Grounds for an Extension on MMSEA Mandatory Reporting

The American Insurance Association, the National Association of Mutual Insurance Companies and the Self-Insurance Institute of America in early February 2010 sent HHS’ Secretary Sebelius a letter urgently requesting that HHS delay its April 1, 2010, implementation date for Section 111 mandatory reporting requirements. In that letter, the trade groups outlined significant issues with the April 2010 implementation.

[T]he agency has yet to demonstrate that the new reporting system will properly function. Yet, we are expected to begin reporting data using this system in just a matter of weeks. Even more critical, CMS has not yet provided final reporting parameters to those insurers and self-insureds subject to the new requirements. Since failure to comply with the reporting requirements . . . will expose insurers and self-insureds to substantial financial penalties, we believe that a more realistic implementation date is not only appropriate but also imperative.”

AIA News Release, “Trade Groups Ask For Delay In MSP Reporting Requirements” (2/22/2010).

The letter outlined five major concerns.

CMS has yet to provide final guidance as to which entity has reporting responsibility in situations involving risk-sharing arrangements where more than one RRE has a share in the settlement. AIA 2/22/2010 News Release.
Insurers have serious concerns with the mandatory requirement to submit private information such as a Medicare beneficiary’s social security numbers and health insurance claim numbers. “In other words, reporting entities are being directed to obtain information from individuals that CMS itself advises those individuals to provide only to their physician or other Medicare provider.” Moreover, for property and casualty insurers, this information is not readily available. AIA 2/22/2010 News Release.
“[W]e have serious concerns that CMS is not properly using the highest-level security and encryption technology to ensure the privacy of personally identifiable information that is required to be submitted. During the testing period, companies in the industry will be creating files, for the first time for CMS, containing the names and Social Security or health insurance claim numbers of thousands of individuals. As recently as last month, while in live production of a query, a reporting agent submitted one hundred files and received thousands of unrelated files in return.” AIA 2/22/2010 News Release.
“CMS has only just begun to allow entities to test the mandatory electronic reporting capabilities and interfaces with CMS systems. This short window of opportunity for system testing has put significant stress on capabilities of internal information technology groups, reporting agents, and the CMS coordination of benefits contractor to whom covered entities must report. Predictably, this has led to delays in the testing process. Given that there are more than 24,000 entities registered to report, the time contemplated for testing the system is insufficient to guarantee a successful implementation on April 1, 2010.” AIA 2/22/2010 News Release.
The letter aptly notes that the $1,000 per day, per claim penalty provision is excessive and at a minimum it should not be assessed on the first report submitted by any entity. For example, because CMS mandates that reporting occur once a quarter, “errors and glitches in a new reporting system cannot be addressed for 90 days. Hypothetically, failure to report a $2,500 automobile medical payment to a Medicare beneficiary could subject the reporting entity to a $90,000 fine.” AIA 2/22/2010 News Release.

Helpful Links and Information

Compilation of Social Security Laws

CMS Medicare Secondary Payer Mandatory Reporting

Medicare Secondary Payer Mandatory Reporting Liability Insurance (Including Self-Insurance), No-Fault Insurance, and Workers’ Compensation USER GUIDE

New information, updates and changes to the MMSEA111 web page

Liability Insurance, Self-Insurance, No-Fault Insurance and Workers' Compensation (NGHP)

DRI - Medicare Secondary Task Force

H.R. 4115 May Encourage Cookie-Cutter Complaints In Federal Court

Michael Newman — Fri, 19 Feb 2010 14:56:28 -0800

In an article appearing in today's Los Angeles and San Francisco Daily Journals (pdf), I discuss H.R. 4115, which, if passed, will overturn the Supreme Court's recent rulings in Bell Atlantic Corporation v. Twombly and Ashcroft v. Iqbal. Twombly and Iqbal held that a complaint filed in federal court could be dismissed if it does not contain sufficient factual matter to state a claim for relief that is plausible on its face.

H.R. 4115 (called "The Open Access To Courts Act of 2009"), by contrast, would prohibit a federal district judge from dismissing a complaint unless it appears

beyond doubt that plaintiff can prove no set of facts in support of their claim which would entitle plaintiff to relief.

A judge would also be prohibited from dismissing a complaint based on the determination that the factual contents of the complaint do not show their claim to be plausible or do not warrant a reasonable inference that the defendant is laible for the misconduct alleged.

The exact effect of this legislation is unclear, but, if passed, it is certain to invite the argument from plaintiff's lawyers that all they need to do to get a complaint past the pleading stage is to include as few facts as possible. Vagueness may become the order of the day, and it will certainly become more difficult to dismiss a case under Federal Rules of Civil Procedure Rule 12.

This law may mean that we will soon see complaints in federal court containing fewer and vaguer allegations. For the insurance industry, this may mean rethinking the generally accepted practice of invariably removing state court actions to federal court on diversity grounds. If a motion to dismiss is being contemplated, it may see more success as a state court demurrer.

Please feel free to contact me directly for more information.

Unfair Competition Law Cases Still Occupy Numerous Spaces on the California Supreme Court's Docket

Larry Golub — Thu, 04 Feb 2010 11:02:04 -0800

In November 2004, the voters of California passed Proposition 64, which was intended to rein in certain abuses in and bring some clarity to the Unfair Competition Law, California Business & Professions Code sections 17200 et. seq. (“the UCL”). Five years later, and after a number of decisions issued by the California Supreme Court construing the changes made by Prop 64, that clarity is still elusive.

Take, for example, the Court’s May 18, 2009 decision In re Tobacco II Cases, 46 Cal. 4th 298 (2009), which concluded that the new standing requirements for a UCL claim created by Prop 64 only require the named plaintiff/class representative to establish standing and not absent class members. In the months since the issuance of Tobacco II, a number of decisions have considered whether the Court’s conclusion as to “standing” applies to a trial court’s determination when it comes to considering the issue of “commonality” (i.e., whether common issues predominate over individual issues) for purposes of a class certification motion. Our firm’s blogs have reported on two intermediate appellate cases that found “Tobacco II to be irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.’” See Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009); Kaldenbach v. Mutual of Omaha Life Insurance Co., 178 Cal. App. 4th 830 (2009).

Cohen is now the subject of a Petition for Review pending before the Supreme Court, along with several requests for depublication of the intermediate court’s opinion. The court is expected to decide whether the case is to be accepted for review or depublished by March 1, 2010.

But Cohen is just one case on the Supreme Court’s plate. The following are cases now actual pending before the Supreme Court that address issues relating to the UCL, along with the date the Court accepted review and the issue(s) presented on the Court’s website:

Loeffler v. Target Corporation, Case No. S173972 (June 19, 2009)

Does article XIII, section 32 of the California Constitution or Revenue and Taxation Code section 6932 bar a consumer from filing a lawsuit against a retailer under the Unfair Competition Law (Bus. & Prof. Code sections 17200 et seq.) or the Consumers Legal Remedies Act (Civ. Code, section 1750 et seq.) alleging that the retailer charged sales tax on transactions that were not taxable? [The Court also issued a “grant and hold” on November 19, 2009 in Yabsley v. Cingular Wireless, Case No. S173972, pending consideration and disposition of a related issue in Loeffler v. Target Corp.]

Clark v. Superior Court (National Western Life Insurance Co.), Case No. S174229 (September 9, 2009)

Is Civil Code section 3345, which permits an enhanced award of up to three times the amount of a fine, civil penalty, or “any other remedy the purpose or effect of which is to punish or deter” in actions brought by or on behalf of senior citizens or disabled persons seeking to “redress unfair or deceptive acts or practices or unfair methods of competition,” applicable in an action brought by senior citizens seeking restitution under the Unfair Competition Law?

Kwikset Corp. v. Superior Court, Case No. S171845 (June 10, 2009)

Does a plaintiff's allegation that he purchased a product in reliance on the product label's misrepresentation about a characteristic of the product satisfy the requirement for standing under the Unfair Competition Law that the plaintiff allege a loss of money or property, or is such a plaintiff unable to allege the required loss of money or property because he obtained the benefit of his bargain by receiving the product in exchange for the payment?

Pineda v. Bank of America, Case No. S170758 (April 22, 2009)

Can penalties under Labor Code section 203 (late payment of final wages) be recovered as restitution in an Unfair Competition Law action?

Sullivan v. Oracle Corp., Case No. S170577 (April 22, 2009)

Request that the Supreme Court deicide questions of California law presented in a matter pending in the United States Court of Appeals for the Ninth Circuit. (Sullivan v. Oracle Corp., 547 F.3d 1177 (9th Cir. 2008) (now withdrawn)) The questions presented are: (1) Does the California Labor Code apply to overtime work performed in California for a California-based employer by out-of-state plaintiffs in the circumstances of this case, such that overtime pay is required for work in excess of eight hours per day or in excess of forty hours per week? (2) Does the UCL apply to the overtime work described in question one? (3) Does the UCL apply to overtime work performed outside of California for a California-based employer by out-of-state plaintiffs in the circumstances of this case if the employer failed to comply with the overtime provisions of the federal Fair Labor Standards Act (29 U.S.C. section 207 et seq.)?

Clayworth v. Pfizer, Inc., Case No. S166435 (November 19, 2008)

This case presents the following issues: (1) When plaintiffs pay overcharges on goods or services as a result of the anticompetitive conduct of defendant sellers but recover the overcharges through increased prices at which the goods or services are sold to end users, may defendants assert a “pass-on” defense and argue that plaintiffs were not injured because they did not suffer financial loss as a result of the anticompetitive conduct? (2) Is restitution available under the Unfair Competition Law to plaintiffs who recovered from third persons the overcharges paid to defendants? (3) When plaintiffs recover from third persons the overcharges paid to defendants, have they suffered actual injury and lost money or property for purposes of establishing standing under the Unfair Competition Law, as amended by Proposition 64?

Court of Appeal Reaffirms Need for Insurers to Notify Insureds of Contractual Limitation Periods and to Re-Check the Insured's Application Statements

James Castle — Tue, 26 Jan 2010 11:32:39 -0800

California Insurance Code of Regulations, specifically 10 CCR § 2695.4, requires that an insurer notify its insureds of any contractual time limitation after the insured or beneficiary submits his or her claim. In the California Court of Appeal’s January 21, 2010 decision in Superior Dispatch v. Insurance Corporation of New York, the court found the failure to provide the notice required by § 2695.4 results in the insurer’s inability to rely on the contractual limitation provision in precluding litigation.

In legal parlance, the appellate court found that the insurer was “equitably estopped” from benefiting from the contractual limitation provision. Being “estopped” from doing something is the same as being barred or blocked from doing something. When someone or an entity is equitably estopped from doing something, they are being barred or blocked from doing something based upon traditional notions of fairness or justice.

Based on prior precedents, the court held that enforcing compliance with § 2695.4 in a way to negate the contractual limitation provision (despite how conspicuous the term was in the policy) was needed to “remedy the trap for the unwary.” This is especially troubling for insurers who are not intending to “trap” anyone, but expect that the policy will be enforced as a contract between the insurer and the insured (i.e., an insurer who expects the terms of policies that were agreed to by both parties to be enforced). Thus a warning to insurers is necessary: Just because the insured agrees to a term by purchasing the policy and has the opportunity to read the entire policy, the insurer cannot expect that all the terms will be enforced by California courts. In this case, the insurer must go beyond what is required in the policy and provide specific notice of the provision in the policy, despite the insured’s ability to read it for himself. The court went further in holding that the insurer needs to still provide notice of the contractual limitation even when the insurer knows that the insured is represented by counsel.

In short, the court – in apparent antipathy for contractual limitation periods – sought to ensure that the insured is well-aware that he may be precluded from litigation if he sits on his right to bring suit. And, as such, the insurer needs to be especially diligent in providing notice to the insured if the insurer wants to benefit from the contractual limitation period later.

While the opinion reads as a surefire loss for the insurer, the Superior Dispatch appellate court ultimately found in favor of the insurer on a ground that was not even discussed in the trial court’s opinion. Apparently, the insured (a trucking company) noted in its application for insurance that it would only be carrying textiles, food and drink, and paper products. The court, rightfully, found that the insured had made a material misrepresentation in its application when the accident for which coverage was sought resulted from the trucking company carrying automobiles on its trucks. The court deemed this error as material because the insurer submitted uncontradicted evidence that a trucking company carrying automobiles should have been charged a higher premium than a food delivery trucking company. As such, the court concluded that the misrepresentation in the application rendered the policy invalid – and therefore no cause of action for breach of contract or bad faith could be maintained.

The Superior Dispatch case is instructive on two issues. First, no matter how sure an insurer is that a contractual limitation period is going to be read by the insured in the policy (by way of numbered heading, bold-face type, or flashing lights), an insurer must always advise the insured of the time in which to bring suit in the initial denial letter – as the insured still might sit on (or forget about) his or her right to sue. And second, even when all is thought lost, an insurer needs to re-examine the insured’s application for falsities – as California courts will routinely rescind policies when misrepresentations were made, typically providing complete absolution for the insurer.

California Court of Appeal Upholds Insurer's Rescission of Health Insurance Policy

Larry Golub — Mon, 25 Jan 2010 17:41:05 -0800

In Nieto v. Blue Shield of California Life & Health Insurance Company (issued January 19, 2010), the California Court of Appeal found that an insurer properly rescinded an insured’s individual health insurance policy based on medical history misrepresentations contained in the application submitted to the insurer. The court also concluded that the insurer had no statutory duty to physically attach the application to the policy or to conduct further inquiries beyond the application during the underwriting process to ascertain the truthfulness of the insured’s representations before it issued the policy. The Nieto decision is addressed in Barger & Wolen’s Life, Health and Disability Insurance Law blog.

Federal Court Denies Class Certification Motion Involving Deferred Annuities

Larry Golub — Mon, 11 Jan 2010 21:32:14 -0800

The United States District Court for the Southern District of California denied certification to a purported class of purchasers of deferred annuities. In a decision issued earlier today by United States District Judge Janis Sammartino in In re National Western Life Insurance Deferred Annuities Litigation, Case No. 05-CV-1018-JLS (JSP), the court denied certification as to a nationwide class alleging RICO violations and a California state class alleging multiple statutory violations, including claims under the Unfair Competition Law (California Business & Professions Code sections 17200 et seq.).

Plaintiffs claimed that National Western “orchestrated a nationwide scheme to target senior citizens and lure them into purchasing its high cost and illiquid deferred annuities,” basing their claim on three alleged misrepresentations and/or omissions – the failure to disclose the high commissions paid to agents, the presence of an illusory bonus on premiums paid, and the use of an increasing asset fee, each of which impacted the interest credited on the annuities. Focusing solely on the commonality and typicality requirements to establish a viable class, the court found that such requirements were lacking. For example, the court emphasized that none of the class representatives possessed an annuity with an asset fee that was increased. Moreover, the court found plaintiffs had not met their burden in demonstrating that all of National Western’s more than twenty annuity products contained the alleged same misrepresentations and omitted the same information. While the court did observe that National Western used standardized forms, they were not identical, and the evidence presented by plaintiffs failed to support their contention that those materials contained the same alleged misrepresentations and omissions.

The court denied the motion for class certification without prejudice and also explained that its ruling did not address any of the numerous other arguments advanced by the parties.

Larry Golub and Kent Keller of Barger & Wolen were co-counsel for National Western Life Insurance Company.

California Supreme Court Ruling Reaffirms Sacredness of Attorney-Client Communications in Refusing to Allow Disclosure of Opinion Letter

Lee Cirsch — Thu, 10 Dec 2009 10:12:54 -0800

In Costco Wholesale Corporation v. Superior Court, Costco had retained a law firm to provide it with legal advice regarding whether certain Costco warehouse managers in California were exempt from California’s wage and overtime laws. As part of the analysis, Costco’s attorney interviewed two warehouse managers. Afterward, the attorney generated an opinion letter.

Several years later, plaintiffs filed an action claiming that Costco had misclassified some of its managers as exempt employees, and thus did not pay them overtime to which they were otherwise entitled. In the course of discovery, plaintiffs sought to obtain a copy of the attorney’s opinion letter. Costco resisted producing the letter on the basis that it was a privileged attorney-client communication. The plaintiffs disagreed, contending that the letter was not privileged because it contained non-privileged factual information regarding the managers’ job duties that had been obtained during the course of the attorney’s interview of the managers.

The trial court ordered a discovery referee to review the opinion letter in camera to determine whether the attorney-client privilege and/or attorney work product doctrine should prevent its disclosure.

The discovery referee ultimately ordered the production of a heavily redacted version of the opinion letter. The referee indicated that the un-redacted portions of the letter contained factual information about the employees’ job responsibilities which were not protected under the attorney-client privilege or attorney work product doctrine.

Costco petitioned the Court of Appeal for a writ of mandate which was denied. Costco then petitioned the California Supreme Court which granted relief. In so doing, the Court observed that Costco had presented the attorney with a question requiring legal analysis and requested that the attorney investigate the facts necessary to generate a legal opinion in response to the question. As such, the Court held that where there is a confidential communication between attorney and client, the entire communication, including the recitation or summary of factual material therein, is privileged from disclosure.

The Court also overturned the trial court’s order on the separate ground that, under Evidence Code section 915, the trial court had improperly disclosed to the discovery referee, over Costco’s objection, a copy of the opinion letter for the purpose of determining whether the privilege should apply. The Court held that section 915 does not permit a court to conduct an in camera review of a document alleged to be protected by the attorney-client privilege in order to rule on whether the document is or is not privileged.

While the referee was free to rely on other information in determining whether the privilege should bar disclosure of the opinion letter, she could not review the opinion letter itself that Costco was seeking to shield from disclosure. Only the holder of the privilege, Costco, could have requested an in camera review of the opinion letter so as not to violate section 915 to the extent it desired such a review to assist it in persuading the court that the letter was protected by the attorney-client privilege.

California Supreme Court Adopts 1:1 Ratio for Punitive Damages

Gregory Eisenreich — Tue, 08 Dec 2009 10:24:45 -0800

On November 30, 2009, the California Supreme Court held in Roby v. McKesson Corporation, et al. that a punitive damage to compensatory damage ratio of one-to-one is the U.S. Constitutional maximum permissible under the Due Process Clause where the compensatory damage award is substantial.

Plaintiff Charlene Roby brought wrongful discharge and harassment claims against her former employer, McKesson Corporation ("McKesson"). The jury awarded her $3,511,000 in compensatory damages and $15 million in punitive damages. After finding that the appropriate compensatory award was approximately $1,900,000, the Supreme Court turned to whether the punitive damage award which had already been reduced to $2 million by the Court of Appeal was excessive.

The Court first analyzed the reprehensibility of McKesson's conduct through the following factors:

whether [1] the harm caused was physical as opposed to economic; [2] the tortious conduct evinced an indifference to or a reckless disregard of the health or safety of others; [3] the target of the conduct had financial vulnerability; [4] the conduct involved repeated actions or was an isolated incident; and [5] the harm was the result of intentional malice, trickery, or deceit, or mere accident."

The Court found that the first three factors were present.

In addressing the fourth factor, whether the conduct involved repeated actions or was an isolated incident, the Court found that the repeated harassment by a supervisor did not constitute repeated conduct by the corporate defendant. Likewise, the Court reasoned that the employer's adoption of a strict attendance policy that did not provide reasonable accommodations to employees who had disabilities constituted a single corporate act. Therefore, the fourth factor was not present.

Similarly, the Court found that the fifth factor was lacking as there was no evidence that McKesson adopted the attendance policy with a purpose or motive to discriminate as opposed to failing to prevent foreseeable discriminatory consequences.

From the foregoing, the Court concluded that the reprehensibility was at the low end of the range of wrongdoing that can support an award for punitive damages.

After discussing the degree of reprehensibility of the employer's conduct, the Court turned to the question of the ratio between the compensatory award and the punitive award noting that the United States Supreme Court had

suggested that a ratio of one to one might be the federal constitutional maximum in a case involving, as here, relatively low reprehensibility and a substantial award of noneconomic damages . . ."

The Court also considered that civil penalties authorized in comparable administrative proceedings were tiny, $150,000, compared to the jury's punitive damage award.

Ultimately, the Supreme Court concluded that a one-to-one ratio between compensatory and punitive damages was the federal constitutional maximum allowed in a case such as this one where there was relatively low reprehensibility and a substantial compensatory damages award. The Supreme Court's opinion reversed the Court of Appeal's decision which would have allowed a punitive award that was only slightly over the one-to-one ratio.

2009 California Legislative Update

Barger & Wolen LLP — Fri, 04 Dec 2009 11:24:41 -0800

The California legislature passed a number of new insurance-related bills that Governor Schwarzenegger signed into law. These include new laws regulating the rescission of health insurance coverage (AB 108), life settlement transactions (SB 98) and electronic transactions (AB 328).

Several of the laws are summarized briefly below. Our summary is intended to give you a broad overview only and does not include all new provisions enacted by the legislation. These summaries should not be relied upon as a substitute for legal advice.

If you would like additional information on any of the laws discussed herein, please contact Stuart Soldate at (213) 614-7306 or ssoldate@bargerwolen.com, Michael Rosenfield at (213) 614-7321 or mrosenfield@bargerwolen.com, Chris Burusco at (213) 614-7332 or cburusco@bargerwolen.com, or your regular Barger & Wolen attorney.

LIFE, HEALTH AND DISABILITY INSURANCE

1. AB 23: Cal-COBRA Premium Assistance

Establishes notice requirements that must be provided to eligible qualified beneficiaries regarding the availability of premium assistance under the American Recovery and Reinvestment Act of 2009 (ARRA).
Qualified beneficiaries eligible for federal assistance may elect coverage under Cal-COBRA, and those enrolled in Cal-COBRA as of February 17, 2009 may request the federal premium assistance.

2. AB 76: Life and Annuity Consumer Protection Fund

Extends the provision creating the Life and Annuity Consumer Protection Fund to January 1, 2015.
Requires the California Insurance Commissioner (“Commissioner”) to publish an annual report on its Web site detailing certain protections for consumers of insurance products.

3. AB 108: Individual Health Care Coverage

Prohibits, except as specified, rescission, canceling, limiting the provisions, or raising premiums of a contract or policy due to omission, misrepresentation, or inaccuracy in the application after 24 months following issuance of the same.

4. AB 119: Pricing of Health Care Coverage

Prohibits premium, price or charge differentials based on the gender of specified individuals, commencing January 1, 2011.

5. AB 381: Unemployment Compensation Disability Benefits

Permits a community college district to elect to become an employer, subject to specified requirements pertaining to disability compensation.

6. AB 389: Long-Term Care Insurance

For long-term care insurance policies issued before new premium rate schedules are approved and for which rate revisions are filed on or after January 1, 2010, changes the calculation for determining what benefits are deemed “reasonable” in relation to premiums.
Permits the Commissioner to approve a rate revision based on less than a certain loss ratio in order to protect the financial condition of the insurer.
Revises the required qualifications of actuaries used by the Commissioner to review rate applications relative to long-term care insurance.

7. AB 1541: Health Care Coverage (Late Enrollment)

An individual, or dependent, who has lost or will lose Healthy Families Program coverage, Access for Infants and Mothers Program coverage, or Medi-Cal program coverage can requests enrollment within 60 days (changed from 30 days) after termination of that coverage without being considered a “late enrollee.”

8. AB 1543: Medicare Supplement Coverage [1]

Adopts changes and provisions as required by the federal Medicare Improvements for Patients and Providers Act and Genetic Information Nondiscrimination Act.
Adopts other amendments relating to open enrollment and guaranteed-issue.

LIFE SETTLEMENTS

SB 98 defines when certain trusts and special interest entities do not have an insurance interest in a life insurance policy. It also establishes a number of new provisions to regulate viatical and life settlements. It adds two new license classifications for “Life Settlement Provider” and “Life Settlement Broker.”

PROPERTY AND CASUALTY INSURANCE

1. AB 63: Service Contract, Retailers

Requires retailers of service contracts to maintain certain information about a contract that is in effect and provide such information or a copy of the contract to the contract purchaser or beneficiary upon request.
Does not apply to vehicle service contracts.

2. AB 601: Motor Vehicle Insurance, Special Assessments

Extends until January 1, 2015, the special assessment imposed on insurers, which is charged per motor vehicle insured.

3. AB 1179: Motor Vehicle Insurance, Damage Assessments

Requires that additional information regarding right to independent estimate be included in the Auto Body Repair Consumer Bill of Rights.

4. AB 1200: Motor Vehicle Insurance, Direct Repair Programs

Provides that insurers may (notwithstanding prohibition against requiring use of specific auto repair shop) provide truthful and nondeceptive information regarding the services and benefits available to the claimant.

5. SB 291: Mortgage Guaranty Insurance Reserves

Amends definition of “face amount of an insured mortgage” for purposes of determining surplus requirements.
Requires notice to Commissioner before insurer falls below surplus threshold and creates ability to seek waiver of requirement.

MISCELLANEOUS

1. AB 299: Insurance Omnibus

Among other things, the bill:

Requires the California Department of Insurance to remove from, or clarify on, its Web site any pleading, order or document relating to an enforcement action that has been withdrawn.
Requires the Commissioner to consider additional criteria when examining the business and affairs of the insurer.
Allows the Commissioner to disclose market analysis data to any state or country insurance department, law enforcement officials, federal agency or NAIC.
All analyses pursuant to authorized examinations are at the expense of the insurer.
Requires insurer annual audits to be conducted in conformity with “standards adopted by the [NAIC],” and allows the Commissioner to grant multiple 30-day extensions to the audit due date.
Permits domestic insurers to invest in credit unions.
Prohibits excess fund investments in a loan or any other obligation to any one borrower or obligor as specified.
Requires insurers to provide to the Commissioner advance notice of the intent to enter into a tax sharing agreement.
Requires auto liability policy to provide for replacement of a child seat, as defined, that was damaged in a covered accident.

2. AB 328: Electronic Transactions

Deletes the exclusion of certain insurance statutes from applicability of Civil Code provisions permitting parties to conduct transactions by electronic means.
With respect to certain automobile insurance transactions, prohibits electronic delivery of certain documents unless the transaction commenced electronically.
Permits required notices related to certain types of insurance to be made electronically with consent of the parties, and imposes certain system and records requirements on the insurer related to the same.
Permits an insurer to pay claims with electronic fund transfer, with the consent of the insured.

3. AB 409: California Insurance Guarantee Association

Provides that the initial premium charge shall be adjusted by applying the same rate of premium charge as initially used to each insurer’s written premium as shown on the annual statement for the 2nd year following the year on which the initial premium charge “was based” (change from “is made”).

4. AB 470: Insurance Information Confidentiality

Authorizes the disclosure of information from an accident report, supplemental report, or investigative report to an insured’s lawyer if the insured is otherwise entitled to obtain the report.

5. AB 800: Insurance Producer Omnibus

Makes a number of changes with respect to producer licensing, including that it:

Deletes pre-licensing education requirement for resident applicants with current nonresident licenses.
For persons licensed in 2010 or after, eliminates certain exemptions from education requirement.
Permits licensed California nonresident business entity producers to use licensed California resident individual producers to transact insurance.

[1] AB 1543 was enacted as an urgency statute. As such, it became effective when it was chaptered on July 2, 2009.

Second District Court of Appeal Confirms That Plaintiff Must Prove Reliance When Bringing Misrepresentation Claim Under UCL, FAL and CLRA

Lee Cirsch — Mon, 23 Nov 2009 12:18:10 -0800

In the recently issued decision Princess Cruise Lines, LTD v. Superior Court, plaintiffs sued Princess Cruise Lines, Ltd. (“Princess”) over charges added to the price of shore excursions taken during a cruise. They alleged causes of action for violation of California’s Unfair Competition Law (UCL), False Advertising Law (FAL), Consumers Legal Remedies Act (CLRA) and common law fraud and negligent misrepresentation.

Princess moved for summary judgment and summary adjudication. The trial court granted summary adjudication on the fraud and negligent misrepresentation claims because plaintiffs could not show they relied on Princess’ alleged misrepresentations. It denied summary judgment because it concluded that on the UCL, FAL and CLRA causes of action, plaintiffs did not have to show that they relied on Princess’ alleged misrepresentations.

Princess took a writ of mandate to the Court of Appeal. Citing to the recent California Supreme Court decision in In Re Tobacco II Cases, the Court of Appeal confirmed that

a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions.

Relying further on language from Tobacco II, the Court of Appeal specified that reliance must be proven only in situations where a UCL action is based on a fraud theory involving false advertising and misrepresentations to consumers. It further held that the Tobacco II’s analysis of the phrase “as a result” in the UCL was equally applicable to identical language in the CLRA statute.

Class Certification Can Properly be Denied When Individual Showings of Damages Predominate

Lee Cirsch — Mon, 23 Nov 2009 11:01:36 -0800

A common perception in class action litigation is that, where damages are individualized, this will not usually mean that a class action cannot be certified. However, in certain cases, where individualized questions of damages exist – and indeed predominate over one or more common issues – a trial court may deny class certification and that denial should be upheld on appeal. The recent decision in Evans v. Lasco Bathware, Inc. presents such a case.

In Evans, the plaintiff brought suit against Lasco claiming that the shower pans that had been installed in thousands of residential showers were defectively designed, resulting in water leakage and consequential damages to adjacent components of the homes’ shower system. The plaintiff sought to certify a class alleging claims for strict products liability and negligence, and asserted that its expert had concluded that the shower pan design was defective (a common issue) and that damage could be resolved by calculating some formula to estimate the average cost to replace the shower pan with a new generation of shower pan and thereby avoid the need for class members to submit the individualized damage estimates.

The trial court denied class certification, holding that the need for individualized proof of the amount of damages for removing and replacing the shower pans predominated over the common questions. The Court of Appeal affirmed, explaining that while

a trial court has discretion to permit a class action to proceed where the damages recoverable by the class must necessarily be based on estimations, the trial court equally has discretion to deny certification when it concludes the fact and extent of each member’s injury requires individualized inquiries that defeat predominance.

On this basis, it asserted that the trial court did not abuse its discretion in declining to certify the class as to common issues of liability and causation since those issues required individualized proof from each class member.

Commissioner Poizner Diligent in Rejecting Any Requested Increase in the Workers' Compensation Claims Cost Benchmark

James Castle — Fri, 13 Nov 2009 16:47:40 -0800

Insurance Commissioner Steve Poizner today once again rejected a rate application from the Workers’ Compensation Insurance Rating Bureau (WCIRB) to raise the Workers’ Compensation Claims Cost Benchmark. After rejecting a slightly larger increase request in July of this year, the Commissioner this time rejected a proposed hike of 22.8% in the cost benchmark. This was yet another blow to the hopes of workers’ compensation insurers for an increased cost benchmark anytime soon.

The Commissioner explained:

One in eight Californians is unemployed. Countless others are also suffering and have either given up looking because they cannot find work or have taken part-time jobs while they seek full-time work. Any increase in costs for employers will only make our already dire economic situation worse.

Given these harsh economic realities, I refuse to rubber stamp double-digit increases to the Workers Compensation Claims Cost Benchmark, especially when I see clear evidence that the cost control reforms from 2003-2004 have yet to be fully implemented,”

…

These increases requested by the WCIRB give insurers an excuse to raise rates in concert without fully utilizing all of their cost containment tools or increasing efficiency. I will not consider an increase in the Claims Cost Benchmark until I see substantial efforts being made by insurers to use all available tools to constrain costs and improve efficiency.

With regard to the controlling of costs, in the Commissioner’s prior July denial of a request by the WCIRB to raise the Workers’ Compensation Claims Cost Benchmark, the Commissioner issued a 27 point outline of means in which costs can be trimmed by workers’ compensation insurers. Commissioner Poizner’s remarks seemed to indicate that he was disappointed by insurers’ efforts to curb costs. More specifically, the Commissioner stated, “I will not consider an increase in the Claims Cost Benchmark until I see substantial efforts being made by insurers to use all available tools to constrain costs and improve efficiency.”

This denial of the cost benchmark is the latest in a long string of decisions by the Commissioner that have been stringent in their treatment of the cost benchmark, despite the WCIRB’s repeated requests for significant increases. We expect Commissioner Poizner to continue to reject any attempt to raise the cost benchmark until there is significant improvement in California’s unemployment rate (as of last check unemployment in California is a stifling 12.2%, 4th highest among states in the country).

November 9, 2009 WC Benchmark Decision and Order

November 9, 2009 Department Press Release

California Appellate Court Clarifies Issues Raised in Tobacco II

Larry Golub — Tue, 03 Nov 2009 11:51:10 -0800

A California Court of Appeal decision published on October 28, 2009, analyzes whether UCL “standing” rules announced by the California Supreme Court in In re Tobacco II Cases, 46 Cal. 4th 298 (2009), carry over when a trial court considers the requisite elements to certify a class action. The answer, at least from the Eighth Appellate District, is that they do not.

In Cohen v. DIRECTV, Inc., the plaintiff sued the satellite television company under both the Unfair Competition Law or “UCL” (Business & Professions Code sections 17200 et seq.) and the Consumers Legal Remedies Act or “CLRA” (Civil Code sections 1750 et seq.), claiming that the company falsely advertised the quality of the High Definition (“HD”) resolution that it was transmitting to its customers. Cohen sought to certify a nationwide class. In opposition to a motion for class certification, DIRECTV presented a number of declarations from its customers that explained that their individual decisions to purchase the HD upgraded system were not based on seeing any advertising or promotional materials from the company, but rather on word of mouth, lower prices, or just because they bought an HDTV. On those facts, the trial court denied certification, finding that common legal and factual issues did not predominate.

On appeal, the court first found that no common legal issues predominated, agreeing with the trial court that the subscribers’ legal rights would vary from state to state and that subscribers outside of California may not be protected by the UCL or the CLRA. It also rejected the plaintiff’s attempt to redefine the class to include only California residents, reasoning that, even with a California-only class, plaintiff still could not show that common factual issues would predominate over individual factual issues.

As for whether common issues predominated, the court concluded that there were myriad reasons why subscribers had purchased the HD upgrade that were far removed from the alleged misleading advertisements as to resolution of the HD transmission. More particularly, the court found commonality lacking since actual reliance would need to be shown for an award of damages under the CLRA and for restitution/injunctive relief under the UCL. As for the decision in Tobacco II, the court explained that the Supreme Court in that case had been concerned with the issue of standing under the UCL and that, in the context of standing, only the class representative needed to satisfy the requirement and that there was no need for the class members to show actual reliance.

However, at the time of considering class certification, the Cohen court found “Tobacco II to be irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.’” Rather, at the time of considering class certification, the trial court was concerned that the UCL and CLRA claims alleged by plaintiff and the other class members “would involve factual questions associated with their reliance on DIRECTV’s alleged false representation,” which was a proper criterion to consider for commonality – “even after Tobacco II.”

Cohen is the second case published last week that affirmed the denial of class certification of a UCL claim and addressed the impact, or, more correctly, the lack of impact, of the decision in Tobacco II. The other decision is Kaldenbach v. Mutual of Omaha et al., published October 26, 2009, a decision in which Barger & Wolen represented the defendant, and is discussed in the Life, Health and Disability Insurance Law blog.

California Insurance Commissioner Announces New "Pay-As-You-Drive" Rating Option

Marina Karvelas — Mon, 02 Nov 2009 15:11:27 -0800

Effective immediately, insurers may offer a verified actual mileage option instead of, or in addition to, the estimated mileage program that traditionally has been used in determining automobile insurance premiums in California.

Specifically, for purposes of determining the number of miles driven annually by the insured, as required under the Second Mandatory Rating Factor, insurers can either: (a) switch to the new program; (b) offer both the verified actual mileage program and the traditional estimated mileage program; or (c) stick with the traditional program. Insurers that offer both programs must make participation in the verified actual mileage program voluntary.

The underlying impetus behind the new regulations is the Commissioner's environmental push to reduce CO² emissions and gasoline consumption by incentivizing drivers to drive less. "The Commissioner finds that basing the Second Mandatory Rating Factor on verified actual miles driven, rather than on estimated miles driven, may enable policyholders to reduce their premiums by driving less and create incentives for innovation in insurance rating in California with numerous attendant benefits." 10 CCR, § 2632.5(c)(2)(F); ("Commissioner Poizner Announces Final Approval of Pay-As-You Drive Regulations.")

Under the new option, an insurer may require an insured who chooses the verified actual mileage option for one vehicle to choose that option for all vehicles insured under the same policy.

The new option allows for a variety of different verification methods. An insurer may select one or more of the following:

odometer readings which are read by the insurer or its agent or insurer's third-party vendor;
odometer readings read by auto repair dealer in servicing the vehicle or by a vendor retained by the insurer;
odometer readings obtained by government licensed smog check stations or any other government agency that maintains public records of odometer readings;
odometer readings reported to the insurer by the insured or the insured's agent;
by a technological device provided by the insurer or otherwise made available to the insured that accurately collects vehicle mileage information. Such a device can only be used by the insurer to collect information for determining actual miles driven and not to collect or store information about the location of the insured vehicle, with the following caveat: "nothing in this section shall prevent a motor club or insurer from using a technological device to collect information about the location of the insured vehicle as part of an emergency road service, theft service, map service or travel service."
any other method approved by the Commissioner.

The verification methods selected by the insurer must be made available to all insureds equally. For example, if the insurer permits its insureds to self-report odometer readings, it must uniformly offer that verification method to the public.

In addition, by utilizing the new program, insurers are permitted to do the following:

retroactively or prospectively adjust premiums based on actual miles driven provided the insurer gives notice to the policyholder prior to the effective date of the policy;
where both a mileage estimation program and a verified actual mileage program are offered, the insurer may provide a discount to a policyholder who participates in the verified actual mileage program. Such a discount, however, must be actuarially supported. Specifically, in order to use the discount, the insurer must demonstrate "cost savings or actuarial accuracy associated with obtaining and using actual miles driven rather than estimated mileage." In addition, the discount must be applied to all policyholders in the verified actual mileage program, regardless of the method of verification used.
offer the option to purchase coverage for a specified price per mile – "Price Per Mile Option." The regulation, however, offers no guidance in setting that "price per mile," other than making it subject to compliance "with all applicable laws." (This provision of the new regulation will likely require further clarification by the Commissioner or the courts).
combine Percent Use, Academic Standing, Gender, Marital Status, and Driver Training with the Second Mandatory Rating Factor. If so, the insurer must demonstrate in its class plan that the rating factors used in combination, when considered individually, comply with the weight ordering requirements of 10 CCR § 2632.8.

Lastly, where an insurer utilizes both programs, they must be included in one class plan.

Court of Appeal Hands UCL Win to Plaintiffs, Shrinks Impact of Moradi-Shalal

Royal Oakes — Sun, 01 Nov 2009 14:39:23 -0800

A recent ruling by the California Court of Appeal in a UCL action will likely lead to a showdown in the California Supreme Court over the reach of Moradi-Shalal v. Fireman’s Fund Ins. Cos., 46 Cal. 3d 287 (1988), the ruling that barred private actions seeking to enforce California’s Unfair Insurance Practices Act, namely, Insurance Code Section 790.03, et seq. (“Section 790.03”).

For years plaintiffs’ lawyers and insurers have grappled over the question of whether causes of action for violation of California’s “Unfair Competition Law” (Business and Professions Code Section 17200, et seq., or “UCL”) may allege conduct that violates Section 790.03. Insurers have generally prevailed in demonstrating that to allow a UCL suit to include thinly-disguised Section 790.03 violations would be an impermissible circumvention or end run around Moradi-Shalal. The California Court of Appeal supported the insurers’ position on this issue in Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061 (2004).

Now, the Fourth Appellate District, in Zhang v. Superior Court (October 29, 2009), has rejected Textron, and held that because the UCL allows a plaintiff to allege unfair, unlawful, and misleading conduct against businesses generally (including insurers), the fact a plaintiff asserts what appear to be violations of Section 790.03 is not necessarily an end run around Moradi-Shalal.

In Zhang the plaintiff sued California Capital Insurance Company for breach of contract and bad faith, alleging the insurer improperly handled a claim for repair of property after a fire at his business. Zhang included a UCL count, which incorporated all the allegations that the insurer engaged in conduct that was barred by Section 790.03, but also alleged the insurer had acted unfairly by engaging in false and deceptive advertising, suggesting it would provide coverage in the event of a loss, when it had no intent to do so.

The insurer demurred, arguing that per Moradi-Shalal, there is no private cause of action for a Section 790.03 violation, and that using the UCL to in effect assert a Section 790.03 violation is a circumvention of Moradi-Shalal, as confirmed by Textron.

The trial court granted the insurer’s demurrer, but the court of appeal reversed, holding Moradi-Shalal did not bar the UCL claim. Acknowledging the contrary holding of the other court of appeal decision in Textron, the Zhang court nonetheless pointed to the California Supreme Court’s ruling in Manufacturers Life Ins. Co. v. Superior Court, 10 Cal. 4th 257 (1995), in which the high court rejected the idea that Section 790.03 was intended to “displace existing rights and remedies for unlawful business practices” in the insurance industry, among them the UCL. The court of appeal said it took from Manufacturers Life that there is no reason to treat insurers differently from other businesses when it comes to actions under the UCL, except as required by Moradi-Shalal.

Thus, the court of appeal concluded, if a plaintiff sues for conduct that is prohibited by Section 790.03, but not otherwise prohibited, then a plaintiff may not advance that claim under the UCL. Where, however, as in Zhang, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

In response to those who make the “end run” argument, the Zhang court observed in a footnote that, as established in State Farm v. Superior Court, 45 Cal. App. 4th 1093 (1994), a UCL plaintiff is not entitled to seek compensatory and punitive damages, only restitution and injunction.

Given its conflict with Textron, the Zhang case will likely be the subject of an active effort to convince the California Supreme Court to grant a petition for review in Zhang (or request to depublish) – perhaps with the support of numerous amici.

New Decision on Arbitrators' Authority

Barger & Wolen LLP — Fri, 23 Oct 2009 12:26:09 -0800

Recent Barger & Wolen Victory Answers Who Decides What to Do After Hall Street

by Evan L. Smoak and Alison J. Shilling

In March 2008, the United States Supreme Court held that parties may not contractually expand the scope of judicial review to include “errors of law.” Hall Street Assocs., LLC v. Mattel, Inc., 128 S. Ct. 1396 (2008). Therefore, the Supreme Court declined to enforce an arbitration clause provision that allowed judicial review of an arbitrator’s errors of law.

In the wake of Hall Street, parties have disputed whether an “error of law” provision in an arbitration clause invalidates the entire arbitration agreement, and whether such a dispute should be decided by the courts or by arbitrators.

A Barger & Wolen victory this month in a New York appellate court has answered who should decide the issue. See Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s, __, N.Y.S.2d. __, No. 602934/08, 2009 WL 3255942 (1st Dep’t Oct. 13, 2009). That question is for the arbitrators where the arbitration clause incorporates AAA or similar rules.

In Life Receivables, the arbitration clause contained an “errors of law” provision. The appellants asked the court to enjoin pending arbitrations, arguing that Hall Street invalidated the arbitration clause. The motion court refused to enjoin the arbitrations, and the appellate court affirmed. The arbitration clause at issue provided for arbitration of all disputes and incorporated the AAA rules by reference. Noting that the AAA rules authorize arbitrators to determine the “existence, scope or validity” of an arbitration agreement, the appellate court held that the arbitrators would determine what to do in light of Hall Street, even though that question is usually for the court:

Although the question of arbitrability is generally an issue for judicial determination, when the parties’ agreement specifically incorporates by reference the AAA rules, which provide that the tribunal shall have the power to rule on its own jurisdiction, including objections with respect to the existence, scope or validity of the arbitration agreement, and employs language referring all disputes to arbitration, courts will leave the question of arbitrability to the arbitrators. Id. (internal citations omitted).

As a result, the appellate court ordered that the disputes return to arbitration, as Barger & Wolen’s client had argued.

For additional information about this decision, or the Hall Street arguments considered by the court, please contact Steven Anderson (sanderson@bargerwolen.com) or Evan Smoak (esmoak@bargerwolen.com) in Barger & Wolen’s New York office (212-557-2800).

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

Larry Golub — Sun, 18 Oct 2009 17:38:08 -0800

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

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

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

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

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

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

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

Iranian Data Call ... What Next?

Barger & Wolen LLP — Thu, 08 Oct 2009 13:16:16 -0800

By Robert W. Hogeboom

On July 9, 2009, the California Department of Insurance (CDI) issued a Data Call to all insurers admitted in California seeking information on their investments in or related to Iran. The information was due on September 30, 2009.

The purpose for the Data Call is to determine if insurer investments are “sound” and comply with applicable law. The Data Call is controversial as it is broadly drafted to include not only direct investments by insurers in the government of Iran, including organizations owned or controlled directly or indirectly by the Iranian government, but also indirect investments. Indirect investments would include, for example, an investment in a company that, in turn, does business with any of the five sectors set forth in the Data Call, including defense, nuclear, petroleum, natural gas or banking.

As recently explained by Adam Cole, General Counsel for the CDI, the Data Call was specifically introduced by Commissioner Poizner as a measure to enforce U.S. governmental sanctions against Iran, including restrictions with respect to doing business with companies that do business in Iran.

The Commissioner’s staff will evaluate the information over the next several weeks and will likely issue a statement of the Commissioner’s intentions. The CDI may provide the information in the Data Call directly to the Treasury Department, take further action to disallow statement credit for any direct or indirect Iranian investments as being unsound investments, or request insurers to divest themselves of such investments.

For more information, contact Robert W. Hogeboom at (213) 614-7304 or rhogeboom@bargerwolen.com.