Insurance Litigation & Regulatory Law Blog

Judicial Notice Doctrine Bolstered by Court of Appeal Decision

Travis Wall — Tue, 21 May 2013 11:40:34 -0800

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

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

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

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

The Scott decision provides some needed clarity.

The plaintiff in that case sued to challenge a foreclosure on property. The original lender went bankrupt, and JPMorgan purchased the loan from the FDIC. In support of a motion for judgment on the pleadings, JPMorgan asked the trial court to take judicial notice of the purchase and assumption agreement between JPMorgan and the FDIC. The agreement specified that JPMorgan had acquired the failed bank’s assets but none of its liabilities. JPMorgan contended that this fact precluded all claims for legal or equitable relief related to the origination of the loan and thus provided a complete legal defense to all causes of action.

The court of appeal held that trial court properly took judicial notice of the purchase agreement. Because the agreement was a legally operative document and no one challenged its authenticity or completeness, the court could take judicial notice not only of the agreement’s existence but also of facts derived from its legal effect. The Scott decision went even farther, holding that trial courts may take judicial notice of the truth of statements within a legally operative document provided the fact is not reasonably subject to dispute. The court based its ruling on Evidence Code section 452, subdivision (h), which permits judicial notice of “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.” Thus, the court’s holding is not limited to agreements involving government agencies but could apply to any contract.

The doctrine has limits. Judicial notice of facts derived from a document might not be proper if the parties dispute its authenticity. Judicial notice also might not be appropriate if the operative terms are ambiguous or if the document’s enforceability turns on disputed factual issues. These restrictions are in line with federal practice.

A plaintiff alleging a breach of an insurance contract is not required to describe the contract’s terms in detail or attach the policy to the pleadings. To state a claim, a plaintiff may simply describe in general terms the key policy provisions and their legal effect. Under these liberal pleading standards, a plaintiff could attempt to sidestep legal challenges by omitting key terms or other important facts that can be derived from the policy’s contents.

The Scott decision makes it harder for a plaintiff to avoid legal challenges through artful pleading. Under Scott, an insurer may put the entire policy in front of the trial court and ask the court to take judicial notice not only of all operative terms, but also of the truth of statements that are not reasonably subject to dispute. If an application or other disclosure is part of the policy, an insurer could ask the court to take judicial notice of those documents as well, along with facts that can be derived from their contents. The decision provides insurers and other defendants a valuable procedural tool in asserting legal defenses at the earliest point in litigation.

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

Samuel Sorich — Fri, 10 May 2013 10:28:18 -0800

By Samuel Sorich and Larry Golub

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

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

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

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

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

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

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

Recent Regulatory Rulings May Provide Leverage for Insurers

Suhhee Choi — Thu, 09 May 2013 08:10:53 -0800

As recently reported in this blog post, Los Angeles Superior Court Judge Gregory Alarcon invalidated the California Department of Insurance's regulation on estimating replacement costs for homeowners insurance (10 CCR 2695.183) in Association of California Insurance Companies (ACIC) and Personal Insurance Federation of California v. Jones. This represents the second judicial determination that the Department has overstepped its regulatory authority under the Unfair Practices Act in less than a year.

In the earlier ruling (the “Torchmark” case), issued in August of 2012, Administrative Law Judge Stephen Smith found that the Department's Fair Claims Settlement Practices Regulations (FCPR) may not be used by the Department to make Unfair Practices allegations under Insurance Code section 790.03(h). A discussion of the Torchmark administrative case, which was argued by Barger & Wolen's senior insurance regulatory attorney, Robert Hogeboom, is available here.

In both cases, it was determined that the Department:

unlawfully expanded the intended scope of section 790.03 and
failed to follow the statutory procedures mandated by Insurance Code section 790.06 for taking action against insurers based on unfair practices not listed in section 790.03.

The insurance industry raised the ruling by Judge Smith, as persuasive authority, in the ACIC case as well as in another pending administrative action. While it remains to be seen what affect the Torchmark ruling will have in these other cases, the decision may be helping insurers gain some much-needed leverage when dealing with the Department and its sometimes strong-arm enforcement actions.

The Department, for its part, has sought to downplay the significance of the Torchmark decision, noting that it is not precedential. At least one senior attorney for the Department has urged that Torchmark is not a "final" decision - a claim that we discount.

The trend in the courts, nonetheless, appears to be moving towards holding the Department to the intended limits of the Unfair Practices Act. We will continue to monitor future activities in this area.

Liability Insurers May Have Duty to Defend Against Federal Prosecutions, California Court of Appeal Holds

Barger & Wolen LLP — Mon, 06 May 2013 11:47:30 -0800

By James Hazlehurst

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

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

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

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

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

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

Court of Appeal Applies Howell Rule to Future Medical Expenses and Noneconomic Damages

Samuel Sorich — Fri, 03 May 2013 10:08:23 -0800

In Howell v. Hamilton Meats & Provisions, Inc., the California Supreme Court ruled that where a plaintiff’s medical care provider, pursuant to a prior agreement with the plaintiff’s health care provider, accepted less than the billed amount as full payment, evidence of the full amount billed is not relevant on the issue of past medical expenses. The Howell ruling is discussed in this post.

In its Howell ruling, the Supreme Court expressly declined to decide whether evidence of the full amount billed is relevant or admissible on the issues of future medical expenses and noneconomic damages.

The California Court of Appeal (Second Appellate District) addressed those issues in its April 30, 2013, decision in Corenbaum v. Lampkin. Guided by the reasoning in Howell, the Court of Appeal made these three key holdings:

The full amount billed for past medical services is not relevant to the amount of future medical expenses and is inadmissible for that purpose.
Evidence of the full amount billed for past medical services cannot support an expert opinion on the reasonable value of future medical services.
Evidence of the full amount billed for past medical services is not admissible to determine the amount of noneconomic damages.

The Corenbaum decision is the latest appellate court case to apply the Howell ruling.

Last month, the Court of Appeal held in Luttrell v. Island Pacific Supermarkets Inc. that the Howell rule should be applied where the plaintiff’s health care was paid by Medicare. The court also explained how the Howell rule should be applied when the plaintiff’s recovery is reduced because of his failure to mitigate damages. The Luttrell case is discussed in this post.

And, in March 2012, the Court of Appeal applied Howell’s holding to the analogous situation in which the insured employee’s medical expenses are paid through workers’ compensation. That decision, Sanchez v. Brooke, was the subject of this post.

Barger & Wolen Insurance Regulatory Attorneys Guide Insurer Through Demutualization, Acquisition

Barger & Wolen LLP — Fri, 19 Apr 2013 14:22:39 -0800

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

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

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

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

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

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

California Legislative Committees Considering Insurance Bills

Samuel Sorich — Fri, 19 Apr 2013 09:57:02 -0800

Numerous insurance-related bills have been introduced in the California Legislature this year. Legislative committees are now conducting hearings on the various measures. This year’s regular legislative session will end on September 13.

Here are summaries of a dozen noteworthy insurance-related bills.

AB 32 would increase the annual aggregate amount of qualified investments eligible for the Community Development Financial Institution tax credit from $10 million to $50 million. Insurers are able to obtain a credit against the insurance gross premium tax for qualifying investments. AB 32 is pending before the Assembly Revenue and Taxation Committee.

AB 231 would impose strict civil liability on a person who owns a firearm for each incidence of property damage, bodily injury, or death resulting from the use of his or her firearm; the owner would be able to avoid liability if he or she reports the firearm to local law enforcement as stolen prior to the damage, injury, or death. AB 231 is pending before the Assembly Appropriations Committee.

AB 584 would enact the NAIC Own Risk Solvency Assessment Model Law. AB 584 is pending before the Assembly Appropriations Committee.

AB 710 would require the governing board of the California Health Benefit Exchange to facilitate the purchase of qualified health plans through the Exchange by multi-employer plans. AB 710 is pending before the Assembly Health Committee.

AB 724 would extend the provisional drivers licensing program to licensees who are 18 or 19 years old. AB 724 is pending before the Assembly Transportation Committee.

AB 862 would authorize an insurer to offer a separately rated, non-offset underinsured motorist policy for which the insurer’s maximum liability would be the insured’s underinsured motorist coverage limit without subtracting the amount paid to the insured by or for any person or organization that may be held legally liable for the injury. AB 862 is pending before the Assembly Insurance Committee.

AB 1236 would authorize a licensed contractor organized as a limited liability company to obtain limited liability insurance from an eligible surplus line insurer. AB 1236 is pending before the Assembly Insurance Committee.

AB 1309 would exclude specified professional athletes from California’s workers’ compensation laws. AB 1309 is pending before the Assembly Insurance Committee.

ABX 12 would require an insurer to offer, market and sell all of the insurer’s health benefit plans that are sold in the individual market to all individuals and dependents in each service area in which the insurer provides or arranges for the provision of health care services. The bill also would prohibit the use of preexisting condition exclusions in the individual insurance market. ABX 12 was passed by the Assembly and is waiting for a vote on the Senate floor.

SB 146 would enact a provision stating that a copy of a prescription for workers’ compensation pharmaceutical services is not necessary unless a copy is required under a written contract between an employer, insurer, or third-party administrator and a pharmacy. SB 146 was passed by the Senate and is waiting for an assignment to an Assembly committee.

SB 251 would allow an insurer to offer to its policyholders the option of receiving notices, offers, renewals, and disclosures electronically. SB 251 is pending before the Senate Insurance Committee.

SB 626 would revise provisions relating to workers’ compensation independent medical reviews which were enacted as part of last year’s SB 863. SB 626 also would delete the provision that sets a limit on a chiropractor’s authority to serve as a treating physician. SB 626 is pending before the Senate Labor and Industrial Relations Committee.

California Court of Appeal Again Finds No Stacking of Liability Policy Limits

Larry Golub — Sun, 14 Apr 2013 20:57:14 -0800

Nearly two years ago, the California Court of Appeal for the Second Appellate District issued a decision that upheld the concept of horizontal exhaustion of primary liability policy limits before triggering the obligation of an excess insurer, but also concluded that, in the context of that case, there was no stacking of liability insurance policies. The case was Kaiser Cement and Gypsum Corp. v. Insurance Company of the State of Pennsylvania, and we reported on it in this blog.

The California Supreme Court accepted review of Kaiser Cement, but then returned the case to the Court of Appeal after the Supreme Court issued its decision in State of California v. Continental Insurance Co., 55 Cal. 4th 186 (2012), a decision we also reported on in a prior blog.

In Continental, the Supreme Court adopted the “all-sums-with-stacking” approach to addressing indemnification for continuous injury cases. With respect to the stacking issue, the Court found that allowing the insured to “stack” its policies and recover up to the policy limits of all the triggered policies was not only the correct rule based on the policy language but also the equitable result and one that can be achieved “with a comparatively uncomplicated calculation.” The Court, however, advised that insurers may be able to enforce “anti-stacking” provisions in their policies to avoid such a result.

In the unanimous opinion of the Court of Appeal panel in Kaiser Cement, the primary policy considered in that case contained such language that precluding stacking of policy limits. Other than its addition of a brief section on the Continental decision (and some other minor revisions), the second opinion in Kaiser Cement, issued April 8, 2013, is virtually identical to the prior opinion issued June 3, 2011.

The underlying dispute involved coverage obligations for thousands of asbestos bodily injury claims brought against Kaiser, and in an even earlier decision, the appellate court held that asbestos bodily injury claims should be treated as multiple occurrences under the primary policies issued to Kaiser by Truck Insurance Exchange, rather than one single occurrence for multiple claimants. The primary policies all had non-aggregating per-occurrence limits, meaning the policies potentially could be on the hook for the total per-occurrence limit for each occurrence.

The present appeal addressed the situation as to whether, when an asbestos bodily injury claim exceeded the primary coverage issued by Truck in a particular year, the excess coverage issued by Insurance Company of the State of Pennsylvania (“ICSOP”) was triggered to provide indemnification to Kaiser. Because the case involved asbestos bodily injury, which continues to cause injury over time, even with a single claimant, a claim could trigger coverage in multiple policy years, and ICSOP argued that the insured had to exhaust all underlying primary policies for all years in which coverage was triggered. Kaiser and Truck both argued that the ICSOP excess policy was triggered upon exhaustion of the single $500,000 per occurrence limit.

The 2013 Kaiser Cement decision, just like the one in 2011, issued three holdings:

First, it held that the excess insurer ICSOP was entitled to horizontally exhaust all underlying primary insurance that was collectible and valid, and not just those policies directly underneath its excess policy.

The second holding, however, concluded that ICSOP was not able to “stack” the individual limits of the Truck primary policies. The court did not base this holding on judicially imposed anti-stacking principles, but rather concluded that under the particular language of the Truck policies, Truck could only be liable as a company for one per-occurrence limit for each occurrence. Specifically, the court cited the language in the insuring agreement stating that,

the Company’s liability as respects any occurrence . . . shall not exceed the per occurrence limit designated in the Declarations. (Italics added by court.)

Thus, the court permitted horizontal exhaustion in principle but held that there was no valid and collectible insurance to horizontally exhaust in this case since Kaiser was only entitled to one per-occurrence limit for Truck as a whole for claims that exceeded the $500,000 per occurrence limit in the implicated Truck policy.

It was in this part of the Court’s analysis that it considered and analyzed the Continental decision, explaining that its “conclusion that Kaiser may not ‘stack’ Truck’s annual liability limits is consistent with the Supreme Court’s analysis in Continental” because Truck’s policy language was the type of provision envisioned by the Continental decision that precluded the stacking of policy limits for any one occurrence.

Finally, as with the prior decision in Kaiser Cement, the Court of Appeal found that the summary judgment that had been issued by the trial court in favor of Kaiser had to be reversed because, on the present record, the appellate court could not determine if there was primary coverage issued to Kaiser by other insurers (outside of Truck) whose primary policies still needed to be exhausted under the court’s horizontal exhaustion ruling.

As of the moment, the Kaiser Cement decision remains citable law, though its status could change if review is sought from the Supreme Court and such review is accepted.

Barring such action, the case is helpful to excess insures as it affirms the obligation that horizontal exhaustion of all primary insurance is still the rule in the continuous occurrence context.

For primary insurers, the case affords the opportunity to avoid stacking of policy limits in those situations in which specific policy language precludes triggering more than one policy limit per occurrence. As we noted in our prior blog on the Kaiser Cement case, a careful review of the specific policy language found in each primary and excess policy at issue is required.

Howell Rule Applies When Medical Services Were Paid by Medicare, Court of Appeal Concludes

Samuel Sorich — Thu, 11 Apr 2013 13:09:28 -0800

In Howell v. Hamilton Meats & Provisions, Inc. the California Supreme Court ruled that a plaintiff’s recovery of medical damages is limited to the amount paid by the plaintiff’s health insurer and accepted by the health care provider as full payment. The Supreme Court’s ruling was discussed by Larry Golub in Collateral Source Rule Inapplicable When Injured Person's Medical Expenses are Discounted by Health Insurer.

In its April 8, 2013, decision in Luttrell v. Island Pacific Supermarkets, Inc., the California Court of Appeal, First Appellate District held that the Howell rule applied to a case where the plaintiff’s health care was paid by Medicare.

The Court of Appeal’s decision also explains how the Howell rule should be applied when the plaintiff’s recovery is reduced because of his failure to mitigate damages.

James Luttrell suffered a fractured hip when he was struck by an automated door at Island Pacific Supermarket. He underwent hip surgery. Three months after the surgery, he was admitted to the hospital for treatment of an ulcer that had developed on his buttocks.

Luttrell sued Island Pacific for failing to maintain the automated door. At trial, Luttrell submitted an exhibit which itemized the bills from his health care providers totaling $179,443.72 for the fractured hip and $511,105.21 for the ulcer.

Luttrell’s medical treatment was paid by Medicare.

Based on the Howell rule, the trial court limited Luttrell’s recovery for medical damages to $138,082.25 ($50,348.49 for the hip and $87,733.76 for the ulcer), which was the amount that Medicare paid to his health care providers as full payment for their services pursuant to their contracts with Medicare.

The trial court then reduced Luttrell’s recovery for treatment of his ulcer by 50 percent because it concluded that Luttrell’s failure to reasonably care for himself contributed to his developing a much more severe ulcer. The trial court’s ruling was appealed.

The published portion of the Court of Appeal’s decision, which may be cited as precedent, addressed two issues:

Is the Howell rule limited to cases where medical treatment is paid by private health insurance?
Should the court first apply the 50 percent mitigation reduction to the amount billed, and then impose the Howell amount-paid cap, or should the court first impose the Howell amount-paid cap, with the 50 percent mitigation reduction then applied to that amount?

On the first issue, Luttrell argued that Howell was inapplicable to his case because Howell involved private insurance. The court responded that Luttrell failed to articulate any reason why Howell should not apply when Medicare makes payments and concluded that Luttrell’s argument

does not account for the fact that, whatever the source of the payments—private insurer or Medicare—the end result is the same: Luttrell has no liability for past medical services in excess of those payments, so he is not entitled to recover anything more than the payment amount.”

On the second issue, the court held that the trial court was correct in applying the 50 percent mitigation reduction to Howell’s amount-paid cap.

The court explained that if the trial court had taken the 50 percent reduction

first from the amounts billed (reducing the $511,105.21 award to $255,552.60), and then the court applied the Howell cap equal to the amounts paid ($87,733.76), Luttrell would have recovered the entire amount paid ($87,733.76), and his failure to mitigate would have had no consequence whatsoever.”

According to the court, that would have provided Luttrell with a “windfall.”

The Court of Appeal concluded, “In our view, it is clear that the Howell cap must be applied first, since the amount actually paid on the plaintiff’s behalf represents the maximum amount a plaintiff could recover.”

Barger & Wolen Completes First California Demutualization Since 1997

Barger & Wolen LLP — Thu, 04 Apr 2013 13:10:11 -0800

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

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

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

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

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

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

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

United Heritage Press Release

Judge Invalidates California Regulation on Estimating Replacement Costs for Homeowners Insurance

Samuel Sorich — Wed, 03 Apr 2013 13:42:27 -0800

By Samuel Sorich and Larry Golub

On March 25, 2013, Los Angeles Superior Court Judge Gregory Alarcon issued a decision which found the California Department of Insurance’s regulation on estimating replacement costs for homeowners insurance to be invalid. The decision is Association of California Insurance Companies and Personal Insurance Federation of California v. Jones.

California Code of Regulation section 2695.183 was adopted by the insurance commissioner in 2010; the regulation went into effect on June 27, 2011. Section 2695.183 requires insurers to use a detailed method for estimating replacement costs for homeowners insurance. The regulation specifies that an insurer that communicates an estimate which does not comport with the regulation’s method makes a misleading statement in violation of Insurance Code section 790.03.

Two insurer trade associations, the Association of California Insurance Companies and Personal Insurance Federation of California, challenged the validity of section 2695.183. The associations petitioned the Los Angeles Superior Court for a judgment declaring section 2695.183 to be invalid because its adoption is beyond the insurance commissioner’s authority. Judge Alarcon granted the associations’ petition.

Insurance Code section 790.03 defines unfair and deceptive acts or practices in the business of insurance. Subdivision (b) of section 790.03 states that the definition of unfair or deceptive acts includes making a statement “which is known, or which by the exercise of reasonable care should be known, to be untrue, deceptive, or misleading.” The insurance commissioner relied on section 790.03(b) as authority to adopt section 2695.183, contending that the regulation simply interpreted section 790.03 by identifying one type of misleading statement.

Judge Alarcon rejected the commissioner’s reliance on section 790.03(b). The judge’s decision explains,

By characterizing all estimates of replacement costs as misleading (save the one provided by 10 CCR § 2695.183), Defendant, in exercising its authority under § 790.10, expands the meaning of something ‘known’ or which ‘should be known’ to be misleading beyond the parameters of § 790.03(b).”

Judge Alarcon’s decision notes that “[t]he limits of the authority granted by § 790.03 are underscored by Cal Ins Code § 790.06 which provides a special process which the commissioner can determine how acts not listed in § 790.03 can be defined as unfair or deceptive.”

The need to interpret the authority granted to the insurance commissioner by Insurance Code section 790.03 in light of Insurance Code section 790.06 was also central to the recent decision of California Administrative Law Judge Stephen J. Smith, who found that the Fair Claims Settlement Practices Regulations may not be used by the insurance commissioner to constitute unfair claims acts under section 790.03, which was discussed in this blog post.

Supreme Court Directs Trial Courts To Look At The Merits In Determining Whether To Certify A Class

Michael Newman — Mon, 01 Apr 2013 13:34:42 -0800

Comcast v Behrend is the latest in a series of United States Supreme Court cases in recent years that have restricted the ability of plaintiffs to certify federal class actions. In so doing, it has expanded the scope of the Court's landmark 2011 decision, Walmart v. Dukes (click here for our analysis of that decision).

In Comcast, plaintiffs were subscribers to Comcast's cable-television services. Plaintiffs alleged that Comcast engaged in a practice called "clustering," a strategy of concentrating operations within a particular region, and that this practice violated antitrust law. In particular, plaintiffs alleged that the clustering scheme harmed subscribers in the Philadelphia area by eliminating competition and elevating prices.

Plaintiffs sought to certify the class under Federal Rules of Civil Procedure, Rule 23(b)(3), which permits certification only if:

the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members."

The district court held that to meet this predominance requirement, plaintiffs needed show:

that the existence of individual injury "was capable of proof at trial through evidence that [was] common to the class rather than individual members" and
that the damages resulting from the injury were measurable "on a class-wide basis" through the use of a "common methodology."

Plaintiffs proposed four theories of antitrust impact. Of these four theories, the district court concluded that only one was capable of class-wide proof, and rejected the rest.

In establishing that damages could be calculated on a class-wide basis, plaintiffs introduced the testimony of an expert, who introduced a model that calculated damages of over $875 million for the entire class. However, despite the fact that the district court had rejected three, and allowed only one, theory of antitrust impact, the model introduced by the expert did not isolate damages resulting from any one theory of antitrust impact.

The District Court approved the certification of the class, and Third Circuit Court of Appeal affirmed. The Supreme Court, in a 5-4 decision authored by Justice Antonin Scalia, overturned these rulings, holding that the class action was improperly certified.

As Justice Scalia explained,

a model purporting to serve as evidence of damages in this class action must measure only those damages attributable to that theory. If the model does not even attempt to do that, it cannot possibly establish that damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3)."

The Court rejected the reasoning of the Third Circuit that such inquiry would involve consideration into the "merits," which, the Third Circuit believed, has "no place in the class certification inquiry." To the contrary, Justice Scalia explained, "our cases requir[e] a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim."

Comcast is part of a recent trend in Supreme Court jurisprudence allowing, and indeed even requiring, district courts to examine the merits of the claim in determining the suitability of class certification.

This principle was announced in Walmart v. Dukes, and it is no accident that the Court begins the analysis section of Comcast with an invocation from that 2011 ruling. Moreover, Comcast extends the ruling of Walmart v. Dukes, which considered only Rule 23(a) (the requirement that plaintiffs establish commonality), to the predominance requirement of Rule 23(b)(3).

David McMahon to Present at ACI 2013 Bad Faith Conference`

Barger & Wolen LLP — Mon, 01 Apr 2013 09:00:00 -0800

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

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

For more information on the conference, click here.

Denial Of Class Certification As To Alleged Wage And Hour Violations Affirmed by Court of Appeal

Michael Newman — Mon, 25 Mar 2013 15:56:12 -0800

In Daily v. Sears, the Fourth Appellate District, Division One, affirmed the trial court's granting of the defendant's motion to preclude class certification.

Plaintiff Dailey was a former employee of Sears, who asserted wage and hour claims individually and on behalf of a proposed class of similarly situated managers and assistant managers.

Dailey argued that Sears uniformly categorized Managers and Assistant Managers as exempt from overtime and meal/rest break requirements, but nonetheless implemented policies that had the effect of requiring the proposed class members to work at least 50 hours per week, spending the majority of their time on nonexempt activities. Sears argued that determining how the class members actually spend their time requires individualized evidence and cannot be proven on a classwide basis. The trial court granted Sears' motion.

The Court of Appeal affirmed, ruling that the trial court had not abused its discretion in denying class certification. As the Court of Appeal explained, class certification requires, among other things, "a well-defined community of interest." The "community of interest requirement," in turn, embodies three factors:

predominant common questions of law or fact;

class representatives with claims or defenses typical of the class; and

class representatives who can adequately represent the class.

For class certification purposes, the court went on to explain, Dailey was required to present substantial evidence that proving both the existence of Sears' uniform policies and practices and the alleged illegal effects of Sears' conduct could be accomplished efficiently and manageably within a class setting. Dailey presented such evidence, and Sears presented contrary evidence, which showed that whether it misclassified Managers and Assistant Managers as exempt required individual inquiries.

The trial court, weighing evidence for both sides, found the evidence Sears presented more compelling, and thus ruled that Dailey had not satisfied his burden for establishing commonality. Dailey argued on appeal that the trial court had improperly focused on the merits. The Court of Appeal disagreed:

Dailey is correct that the validity of the complaint's allegations generally is not at issue on class certification. . . . By the same token, however, the focus of the class certification inquiry is on 'the nature of the legal and factual disputes likely to be presented' [citation omitted] as those disputes are framed not only by the complaint but also by defendant's answer and affirmative defenses. . . . Critically, if the parties' evidence is conflicting on the issue of whether common or individual questions predominate (as it often is and as it was here), the trial court is permitted to credit one party's evidence over the other's in determining whether the requirements for class certification have been met—and doing so is not, contrary to Dailey's apparent view, an improper evaluation of the merits of the case.

Thus, the Court of Appeal affirmed, substantial evidence supported the trial court's finding that common questions did not predominate.

In addition, among its other rulings, the Court of Appeal rejected Dailey's argument that a random sampling methodology he proposed could have been used to managing the individual questions requiring adjudication. In particular, Dailey sought to use such a methodology to establish both liability and damages.

As the Court of Appeal explained, sampling methodologies, while sometimes appropriate to establish damages, have never been accepted to establish liability on a class wide basis. Such a method may not "be used to manufacture predominate common issues where the factual record indicates none exist."

Indeed, the Court noted, "[i]f the commonality requirement could be satisfied merely on the basis of a sampling methodology proposal such as the one before us, it is hard to imagine that any proposed class action would not be certified." (Emphasis in original).

This opinion affirms that a trial court may indeed credit one side's evidence over another's in the class certification context. This points to high importance, for both sides, of marshalling the best evidence at the class certification stage, since it can operate as a miniature bench trial.

Please call or e-mail the author to further discuss the issues in this article.

Originally posted to Barger & Wolen's Employment Law Observer blog.

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

Brendan Mullan — Thu, 21 Mar 2013 14:22:51 -0800

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

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

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

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

The Riddell and NFL cases filed in California were deemed related and stayed on forum non conveniens grounds after the insurers argued that New York was a more appropriate forum.

The NFL has appealed that ruling and the insurers’ briefs were just filed March 6, 2013. Ironically, the Alterra action was stayed based on a motion brought by the NFL that argued the California action was more comprehensive, and hence, a better forum. That motion was heard on March 15, 2013, but no ruling has been issued yet. Meanwhile, a separate motion to dismiss in the Travelers case has been briefed and is awaiting decision.

Once the procedural aspects of these cases are ironed out, the courts and the parties will face complex coverage issues due to the number of insurers potentially on the risk and the nature of the alleged brain injury related claims.

Indeed, one of the main issues is likely to be the fact that the alleged injuries took years to develop and manifest. In this regard, the concussion litigation may be similar to tobacco or asbestos litigation.

For example, football players voluntarily chose to play a violent sport and put themselves in danger of physical harm, though adverse health effects may only manifest themselves several years after the player retires and which now are claimed to be traceable to football injuries based on advancements in modern medicine.

Thus, the age old question of how to define an occurrence will be especially difficult in this situation and will be a vital component to this litigation. For example, should each game in which the player participated be an occurrence? Perhaps each season? If so, policy limits on several policies could be triggered and complex allocation issues lay ahead.

While we wait for the coverage decisions in these cases, other entities that operate sports leagues and their insurers should do their due diligence.

With annual revenues of about $9 billion, the NFL is uniquely positioned to defend itself in the concussion litigation regardless of the outcome of the coverage cases. However, the impact of the coverage decisions will be far reaching. Lawsuits against other professional leagues, colleges, high schools and even pee-wee leagues are not far off.

These institutions/leagues and their insurers would be well advised to revisit their liability policies and consider possible exposure not just for liability but also the costs associated with defending these claims.

Supreme Court Closes CAFA Loophole

Larry Golub — Wed, 20 Mar 2013 09:34:24 -0800

A unanimous decision by the United States Supreme Court has restored the integrity of the Class Action Fairness Act, or CAFA. At issue in Standard Fire Insurance Co. v. Knowles was the transparent attempt by a named plaintiff to ouster federal court jurisdiction by “stipulating” that the damages sought through a class action complaint would not exceed the $5,000,000 minimum jurisdictional limit of CAFA.

In a brief and direct decision, Justice Stephen Breyer disallowed the use of such a pre-certification stipulation, concluding that prior to the issuance of any certification order, a named plaintiff does not have the ability to bind absent class members and to concede the value of those class members’ claims.

Knowles was the named plaintiff in an action filed in Arkansas state court against Standard Fire concerning an alleged practice of failing to include general contractor fees in homeowner’s insurance loss payments. The complaint filed by Knowles, as well as an attachment to the complaint, contained a stipulation that Knowles and the Class would not seek to recover damages “in excess of $5,000,000 in the aggregate.”

Accordingly, after Standard Fire removed the action to federal court under CAFA jurisdiction, Knowles moved to remand the action back to state court based on the stipulation that Knowles claimed made the “amount in controversy” fall beneath the $5,000,000 CAFA threshold and therefore defeated jurisdiction under CAFA. While the federal district court agreed with Knowles, other cases reached the opposite view, and thus the issue ended up at the Supreme Court.

In Knowles, the district court had found that the amount at issue would have exceeded the $5,000,000 minimum limit, but for the stipulation. As such, the Supreme Court had little difficulty concluding that the stipulation was ineffective to bind absent class members because, at the precertification stage, the proposed class members are not yet – and potentially never will be – parties to the action, and thus the named plaintiff cannot bind those non-parties. At the pre-certification stage, the named plaintiff cannot bind “anyone but himself.”

In enacting CAFA, Congress sought to relax the jurisdictional threshold of class actions and ensure “Federal court consideration of interstate cases of national importance.” The unilateral “stipulation” attempted in Knowles and in other cases not only frustrated the intent of Congress but also prejudiced the claims of absent class members. The Supreme Court correctly restored the balance in CAFA.

An Employee's Umbrella Insurance Policy Must Be Exhausted Before Seeking Contribution From Policies Covering The Employer

Jenny Wang — Mon, 04 Mar 2013 11:02:04 -0800

When an employer is vicariously liable to a third party for its employee’s negligence, and both the employer and employee have primary and umbrella policies covering liability to the third party, the employee’s primary and umbrella policies must first be exhausted before the employer’s policies are implicated.

The California Court of Appeal, Fourth Appellate District in GuideOne Mutual Insurance Company v. Utica National Insurance Group recently held that priority of liability among primary and umbrella insurers of an employer and employee “is based upon principles of vicarious liability, not more general rules government primary and excess policies.”

GuideOne was an equitable contribution action involving the following scenario: Gary West was a pastor who worked for Crosswinds Community Church (“Crosswinds”) and Christian Evangelical Assemblies (“CEA”). During the course of his work, West was driving and struck a motorcyclist, Robert Jester, who sustained severe injuries. Jester filed suit against West, Crosswinds and CEA for personal injuries, and the case settled for $4.5 million. The liability of Crosswinds and CEA was entirely vicarious to the liability of West.

GuideOne issued primary and umbrella policies to Crosswinds which covered negligent acts by an employee. Utica issued primary and umbrella policies to CEA that covered only the employer. After the underlying case settled, GuideOne filed an equitable contribution action against Utica seeking a pro rata share of the settlement amount

The Court of Appeals ruled that the trial court erred in awarding equitable contribution to GuideOne on a pro rata basis. In support of its decision, the Court held that an employer is only vicariously liable for the actions of the tortfeasor employee, and therefore all of the insurance policies covering the employee, primary and excess, must be exhausted before the umbrella policy of an insurer that covered only the employer must make a contribution.

When a Cruise Goes Off Course

Barger & Wolen LLP — Fri, 01 Mar 2013 13:32:40 -0800

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

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

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

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

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

Recovery From Dissolved Corporation's Liability Insurer Barred By Foreign Survival Statute

Barger & Wolen LLP — Tue, 26 Feb 2013 13:12:39 -0800

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

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

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

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

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

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

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

FINRA Panel Rules on Charles Schwab's Challenge to FINRA Rules Prohibiting Class Action Waiver Clauses

Gregory Eisenreich — Fri, 22 Feb 2013 09:46:53 -0800

In October 2011, Charles Schwab ("Schwab") began inserting into its customer Account Agreements a class action waiver clause.

Schwab's Account Agreements require arbitration of any dispute arising out of a customer's use of Schwab's services. The waiver language that Schwab began inserting states that:

You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court."

Schwab's insertion of this waiver language followed the United States Supreme Court's decision in AT&T Mobility v. Concepcion in which the Supreme Court held that the Federal Arbitration Act preempted state laws that might otherwise limit the ability of companies to include a class action waiver clause in an arbitration agreement.

The AT&T Mobility decision invalidated a California Supreme Court decision, Discover Bank, which had placed some limits on the ability to enforce class action waiver clauses in arbitration agreements. The United States Supreme Court reasoned that the Federal Arbitration Action preempted such state laws.

The Financial Industry Regulatory Authority, Inc. ("FINRA") instituted a disciplinary proceeding against Schwab taking the position that the Schwab class action waiver clause violated FINRA's rules.

It is FINRA's position that it:

has enacted, and the SEC has approved, two applicable rules: first, that class actions cannot be arbitrated in the FINRA forum; and second, that member firms may not limit the rights of public investors to go to court for claims that cannot be arbitrated."

On February 21, 2013, a FINRA arbitration panel ruled on FINRA's and Schwab's cross-motions for summary judgment (Department of Enforcement v. Charles Schwab & Company). The panel found that:

Enforcement [of the FINRA rules preserving judicial class actions] is foreclosed by the Federal Arbitration Act, as construed by the Supreme Court in Concepcion and other decisions. Those decisions hold that adjudicators must enforce agreements to go to arbitration to resolve disputes and must reject any public policy exception that disfavors arbitration, unless Congress itself has indicated an exception to the Act."

However, the panel also ruled that Schwab's arbitration language violated FINRA Rule 2268(d)(1). Rule 2268(d)(1) specifies the circumstances in which arbitrators may arbitrate consolidated claims. The panel noted that since FINRA rules prohibit arbitration on a class action basis,

it is clear that consolidation [under Rule 2268(d)(1)] is a non-representative type of procedure, distinguished from class actions."

The panel reasoned that the Federal Arbitration Act does not bar enforcement of Rule 2268(d)(1) because the Act does not dictate how an arbitration forum should be governed and operated or prohibit the consolidation of individual claims. Therefore, Schwab was, inter alia, ordered to "cease using the portion of the Waiver purporting to delimit the authority of the arbitrators" to consolidate individual (non-representative) claims and notify customers that such a limitation is not effective. In addition, the panel fined Schwab $500,000.

While the dispute involved the arbitration provision in Schwab's customer agreements, the panel's decision potentially opens the door for the insertion of similar class action waiver clauses in employment agreements for those working in the financial services industry.

The panel's decision is subject to appeal to, and/or review by, FINRA's National Adjudicatory Council within 45 days.