There is a commonly held belief that every disability insurance policy sold to the public has been actually reviewed and approved by the California Department of Insurance. Indeed, California Insurance Code section 10291.5 requires the Insurance Commissioner to reject a proposed new disability insurance policy form if it does not meet certain requirements set forth in the Insurance Code. However, prior to the recent ruling of Ellena v. Department of Insurance, 2014 Cal. App. LEXIS 883 (1st Dist. Oct. 1, 2014), the California Department of Insurance was not following this code provision, and in fact maintained that it did not have a duty to review each new disability insurance policy form. There is now no question that the Department of Insurance has a mandatory duty to review all new disability insurance policy forms that insurers wish to sell in California.
General liability insurers and their agents often lure commercial clients with grandiose promises of coverage for business operations, but upon receiving a notice of a claim, interpret their policy exclusions liberally to limit what they consider covered business operations so as to deny coverage. A recent case from the California Court of Appeal, Baek v. Continental, 2014 Cal App. LEXIS 893 (2d Dist. Oct. 6, 2014) (“Baek”), expanded on an insurer’s broad duty to defend wherever there is a potential for coverage but in this case denied a duty to defend.
Baek involved a Heaven Massage Wellness Center (“HMWC”) client, “Jaime W.,” who brought suit against HMWC and her massage therapist (“Jaime W. action”), Luiz Baek (“Baek”), for sexual assault during a massage, alleging Baek handled the “Plaintiff’s breasts, buttocks, inner thighs and genitals.” HMWC had a general liability insurance policy with Continental Casualty Co. (“Continental”) which covered employees or partners “only for acts within the scope of their employment” or committed “while performing duties related to the conduct of [HMWC’s] business.” Continental asserted there was no coverage, and HMWC sued for breach of contract and bad faith. The trial court granted summary judgment for Continental. Subsequently, Baek filed suit against Continental, alleging it had a duty to defend and indemnify him in the Jaime W. action as a covered employee of HMWC. Continental demurred on the ground that Baek was acting beyond his scope of employment. Baek then amended his complaint to include a breach of contract, breach of the implied covenant of good faith and fair dealing and fraud against Continental. Once again, Continental demurred and trial court again sustained the demurrer, finding there was no coverage, and no potential for coverage, because Baek’s actions did not fall within his scope of his employment. Baek filed a timely appeal.
The California Court of Appeal first addressed whether Baek qualified as an “employee” of HMWC eligible for coverage. Baek argued Continental owed him a duty of defense because the complaint in the Jaime W. action alleged that Baek was either a partner or employee of HMWC and the alleged sexual assault occurred within the scope of his employment, or while performing his duties related to HMWC’s business. Conversely, Continental argued that Baek did not qualify for coverage because his complaint alleged he was an independent contractor, and thus he did not qualify as an employee or partner of HMWC. As an initial matter, the court explained an insurer’s duty to defend was triggered when the insured becomes aware of, or a third party suit pleads, facts sufficient to give rise to the potential for coverage under the policy. This duty to defend is broader than the duty to indemnify, and an insurer may have a duty to defend if there is a potential of coverage, even if no damages are awarded and any doubts concerning the potential for coverage and a duty to defend were resolved in favor of the insured. Continental knew the plaintiff in the Jaime W. action would attempt to prove Baek was HMWC’s employee or partner under the HMWC policy. However, Continental argued Baek’s complaint alleged he signed an independent contractor agreement, and thus did not qualify as an employee or partner of HMWC. The court disagreed, noting that although Baek signed an independent contractor agreement with HMWC, he did not allege he was an independent contractor so as to preclude coverage. The court clarified that an insurer’s duty to defend arises if allegations by the third party, rather than the potential insured, taken as true, reveal a potential for coverage. Here, the complaint in the Jaime W. action alleged that Baek was, at all relevant times, an employee, owner or partner of HMWC. The court explained that in its coverage determination, Continental was bound to accept these allegations as true unless extrinsic facts established otherwise. Therefore, for coverage purposes, Continental had to assume Baek’s status as an employee under HMWC’s policy to determine whether there was a duty to defend.
Next, the court addressed whether Baek’s alleged sexual assault fell within the scope of his employment so as to trigger coverage by reviewing two cases involving similar issues. First, the court reviewed Lisa M. v. Henry Mayo Newhall Memorial Hospital, 12 Cal. 4th 291 (1995) which involved an ultrasound technician who sexually molested a patient during an ultrasound exam by inserting the ultrasound wand and his fingers into her vagina. There, the court held the technician’s employment did not motivate or engender the sexual molestation; rather, the technician took advantage of his work environment and consciously committed an assault for reasons unrelated to his work. In addition, the court clarified that although the technician’s job involved examining or physical contact with a patient’s otherwise private areas, his assault on the ultrasound patient was not a foreseeable consequence of that contact. Accordingly, the sexual assault was an independent decision unrelated to his duties. Next, the Court of Appeal examined Farmers Ins. Group v. County of Santa Clara, 11 Cal. 4th 992 (1995) where a deputy sheriff’s lewd propositioning and offensive touching of others at a county jail were found to fall outside the scope of employment, despite the proximity to the workplace. The ruling court noted that where an employee’s tort was “‘personal in nature, mere presence at the place of employment and attendance to occupational duties prior or subsequent to the offense’” did not “bring the tort within the scope of employment.” The Court of Appeal explained that like the ultrasound technician in Lisa M., Baek’s employment as a massage therapist gave him the opportunity to be alone with Jaime W., but nothing in the facts suggested the alleged assault was “‘engendered by’ or an ‘outgrowth’ of his employment,” and his motivation for committing the sexual assault was unrelated to his work. Hence, his action did not occur within the scope of his employment contemplated under the Continental policy.
The Court of Appeal determined Baek’s alleged touching of Plaintiff’s breasts, buttocks, inner thighs and genitals “indisputably were not ‘duties related to the conduct of [HMWC’s] business’” or the acts he was hired to perform, but constituted a “stepping away” from HMWC’s business, as the acts were performed for Baek’s own benefit, rather than HMWC’s. Accordingly, the court concluded Baek’s acts were not related to, and did not occur, with respect to the conduct of HMWC’s business so as to trigger coverage.
Finally, the Court of Appeal rejected Baek’s arguments that even if Continental had no duty to defend the sexual assault allegations, it had a duty to defend Jaime W.’s claims of negligence and false imprisonment. Briefly, the court explained the duty to defend depended on whether the alleged facts reveal a possibility of coverage, not the labels given to the causes of action. The complaint in the Jaime W. action alleged the massage was negligent, each defendant was negligent in hiring, training and supervising Baek and Baek deprived Plaintiff of her freedom of movement by use of deceit in setting up the massage room. First, the court explained that sexual fondling is an intentional act such that Baek could not be found to liable for negligence or failing to use due care in performing the massage or supervising his own actions. Second, the court stated the false imprisonment allegations were “inextricably intertwined” with the alleged assault, for which there was no coverage. Accordingly, Continental had no duty to defend these allegations.
The good holding in Baek for insureds is that persons who work under an independent contractor agreement may be eligible for coverage under the employer’s general liability policy because a third party complaint alleges he or she was a covered “employee.” Although the court ultimately held there was no coverage, this decision is significant for policyholders as it explains that even though the insured executed an independent contractor agreement, the acts by its so-called independent contractor may be within the scope of coverage under such a policy.
Sometimes an administrator so unashamedly abuses its discretion in handling an insurance claim that its actions constitute a textbook example of “what not to do” for other administrators and the ensuing decision provides a clear illustration of how courts apply an abuse of discretion standard of review under the Employee Retirement Income Security Act (“ERISA”). Indeed, a recent case clarified that plan administrators and third-party claims administrators alike are held to comparable standards when issuing claims decisions. In Pacific Shores Hospital v. United Behavioral Health, 2014 WL 4086784; 2014 U.S. App. LEXIS 16062 (9th Cir. Cal. Aug. 20, 2014) (“Pacific Shores”) the Ninth Circuit Court of Appeal reversed the district court, finding the third-party administrator acted improperly by denying the insured’s claim based on clear factual errors. Pacific Shores provides a clear example of how courts review a decision for an abuse of discretion, and shows that even third-party administrators, who purportedly have no conflict of interest with the insured, are still held to have the same duties in handling claims and must follow appropriate procedures.
The September 11, 2014 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Case highlights importance of agent-broker distinction.” In it, Mr. McKennon discusses a new case, Douglas v. Fidelity National Insurance Co., 2014 DJDAR 12127 (Aug. 29, 2014), which highlights the critical importance in insurance coverage cases, especially disability insurance and life insurance cases, of the legal distinction between agents and brokers. Mr. McKennon explains why this distinction can alter the outcome of a case or insurance claim. The article is posted below with the permission of the Daily Journal.
Case highlights importance of agent-broker distinction
Insurance agent or insurance broker? In everyday parlance these two terms are often used interchangeably to mean a salesperson who obtains and sells insurance policies to consumers. However, the distinction between an agent and a broker can have serious implications regarding whether the insured or the insurer bears responsibility for any misrepresentations made by an individual or company acting as go-between in the process of applying for an insurance policy. This point was clearly illustrated by the California Court of Appeal in Douglas v. Fidelity National Insurance Co., 2014 DJDAR 12127 (Aug. 29, 2014).
In Douglas, the court reversed a verdict in favor of the insured, finding that the trial court improperly failed to provide the jury with instructions allowing it to find that the insurance “agent” was actually a “broker,” and that misrepresentations made in the insurance application process should be imputed to the insured, not the insurer.
The case involved plaintiffs who went to an insurance services company, InsZone, and met with their employee who assisted the plaintiffs in obtaining a homeowner’s insurance policy issued by Fidelity National Insurance Company. InsZone submitted applications to Fidelity through an online process. A few months after the policy was issued, the plaintiffs’ house was damaged in a fire and the plaintiffs filed a claim with Fidelity. After investigating the claim, Fidelity alleged that, contrary to representations made in their applications, the plaintiffs did not actually live in the house; rather, they used it as a residential care facility. Fidelity rescinded the policy based on several alleged material representations in the insurance applications concerning how the house was being used, claiming that it would not have issued the policy had it known about the misrepresentations.
The plaintiffs sued both Fidelity and InsZone, claiming that Fidelity wrongfully denied their benefits. They argued that they did not make any misrepresentations, and any false information was provided by InsZone acting as Fidelity’s agent. The jury ultimately sided with the plaintiffs.
On appeal, Fidelity argued that the trial court erred in refusing to provide jury instructions and verdict forms that would allow the jury to decide whether InsZone was the plaintiffs’ broker, thus rendering plaintiffs responsible for the misrepresentations. The Court of Appeal agreed, finding that there was undisputed evidence that an employee of InsZone had provided false information in the plaintiffs’ insurance policy applications. As such, the court explained, the issue of whether InsZone was the plaintiffs’ broker was significant because, if the jury found that InsZone was the plaintiffs’ broker, it “would have allowed the jury to hold plaintiffs responsible for any misrepresentations in the insurance applications, whether attributable to them directly or indirectly through [Inszone's] conduct.”
The court specifically distinguished an “insurance broker” from an “insurance agent,” in that a broker acts as a middleman between the insured and the insurer and is not employed by any insurance company, whereas an agent represents and is employed by the insurer. The court explained that although both brokers and agents must be licensed by the California Department of Insurance, “a person may not act as an insurance agent without a notice of the agent’s appointment by the insurer to transact business on its behalf filed with the DOI.” In other words, the person must be appointed by the insurer as an agent.
Because it was unclear whether InsZone was appointed by Fidelity, and because the producer agreement specifically stated that InsZone was “‘never’ to be deemed Fidelity’s agent, except as ‘required by law,’” the court found that there was substantial evidence supporting a jury finding that InsZone was acting as a broker and not an agent. Interestingly, the court explained that the language in the independent producer agreement and the compensation schedule between InsZone and Fidelity did not automatically confer “agent” status. The agreement stated: “Producer has no authority to bind Company or Insurance Company on any insurance policy except as otherwise stated in the underwriting guidelines for the territories and lines of business set forth on Compensation Schedule.” The schedule provided that InsZone was authorized “to bind policies for the lines of business listed below and the Company shall pay Producer a commission based on the following table.” Thus, the court concluded, the jury should have been given the opportunity to determine whether InsZone was acting as the plaintiffs’ broker.
The court found that the trial court erred in refusing to allow the jury to consider the import of any unintentional material misrepresentations in the insurance applications because an insurer can rescind a policy based on unintentional material representations. Additionally, the court found that the trial court erroneously refused to include jury instructions that would have allowed the jury to consider whether InsZone provided false information in the insurance applications since the jury could find that InsZone was the plaintiffs’ broker whose misrepresentations can be imputed to the plaintiffs for purposes of determining whether a basis for rescission exists. Finally, the court held that the jury instructions improperly limited the jury to consideration of misrepresentations made in only one of the insurance applications submitted.
Douglas provides several highly significant takeaways for an insured faced with a rescission issue. First, insurers may rescind an insurance policy based on a material misrepresentation provided in an insurance application, even if the false information was provided by his broker, and even if the insured was not at fault. Second, an insurer may rescind a policy even if the misrepresentation was unintentional. In this regard, it is important for the insured to determine if a notice of agent appointment is on file with the insurance commissioner as required by law. If one exists, the insurance producer will be deemed an agent of the insurer as a matter of law.
Had a notice of appointment existed inDouglas, the outcome would have been different. That’s because the agent’s actions would have been imputed to the insurer, who would have been estopped from seeking rescission of the policy. However, as Douglas instructs, an insurer’s failure to file a notice of appointment with the Department of Insurance does not necessarily preclude a finding that an insurance producer was the insurer’s agent. See also Chicago Title Ins. Co. v. AMZ Ins. Services Inc., 188 Cal. App. 4th 401, 425-26 (2010). An insured would then be well advised to scrutinize applications and agreements to search for any language supporting an argument that the producer is an agent who has the ability to bind the insurer.
Douglas again illustrates that it is often crucial to the outcome of a rescission case to correctly distinguish between an insurance producer’s status as either an agent or a broker, as that distinction may well mean the difference between a claim being fully covered and the insured legally having no effective policy.
A virtually insurmountable concrete wall was once an apt analogy for the effect of discretionary clauses in ERISA Plans on claimants attempting to challenge a plan administrator’s unreasonable interpretation of policy terms. A valid discretionary clause gave insurance companies power to construe the terms of ERISA- governed group insurance policies based on their own interpretation, which could only be overturned by courts if it were “illogical, implausible or without support in inferences drawn from the facts in the record.” Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666 (2011). In order to counteract the discretion these clauses provided to plan administrators/insurers, California enacted Insurance Code section 10110.6, which placed a ban on such discretionary clauses. After the enactment of this new statute, questions regarding how courts would interpret and enforce it lingered. However, recent decisions in California strongly suggests that courts will give full force to the California statute and apply de novo review of claim denials rather than the abuse of discretion standard to claims denied on or after January 1, 2012.
McKennon Law Group PC founding partner Robert J. McKennon will speak on an MCLE panel for the Orange County Bar Association Insurance Law Section on August 27, 2014 discussing “Recent Developments and Interesting Issues in Life Insurance Law.” Mr. McKennon, an attorney who currently represents insurance claimants after over two decades representing insurers, and Laura K. Kim, an attorney who currently represents insurance companies, agents and brokers in insurance litigation will provide information to help litigators assess the issues associated with life insurance litigation to ensure that counsel for both parties are able to properly represent their clients. The MCLE event is scheduled to take place at the OCBA headquarters from 12:00 PM – 1:30 PM and registered attendees will receive 1.0 hour of MCLE credits
In a victory for insurance consumers and mental health advocates, a recent change to the California Insurance Code mandates that short-term disability insurance policies provide coverage for “severe mental illnesses” as that term is defined in the Insurance Code.
Passed in 2013, and signed in to law by Governor Jerry Brown on October 4, 2013, Assembly Bill No. 402 (“AB 402”) added Section 10144.55 to the Insurance Code, effective July 1, 2014. Section 10144.55 requires that every disability insurance policy with “a short-term limited duration of two years or less,” provide coverage for disabilities caused by severe mental illnesses. Section 10144.55(b) defines “severe mental illnesses” as schizophrenia, schizoaffective disorder, bipolar disorder (manic-depressive illness), major depressive disorders (including postpartum depression), panic disorder, obsessive-compulsive disorder (OCD), pervasive developmental disorder (autism), anorexia nervosa or bulimia nervosa. Continue Reading
A disturbing trend that has developed across the country in recent years is that, while the number of workers/employees suffering from long-term illnesses or injuries has increased, the number of employers who provide long-term disability insurance has dropped dramatically. As of May 2014, the total number of Social Security disability beneficiaries in the United States hit an all-time high of about 11 million beneficiaries. However, fewer employees are covered with long term disability coverage. The number of U.S. workers with long-term disability coverage decreased 6% from 2009-2013. Below are just a few of the worrying statistics. From 2009-2013 nationwide:
- The number of employers offering long-term disability coverage decreased from 220,000 to 213,000;
- The number of employees who have long-term disability coverage decreased from 34 million to 32.1 million (6% decline); but,
- The number of employees in the U.S. workforce has increased by 6.6 million.
More and more employers are opting to drop their standard disability insurance plans for optional employee-paid plans. Additionally, more companies are implementing “defined benefit plans,” which allocate a certain amount of funds for each worker to use for all insurance coverage. This often has the effect of forcing workers to forgo some types of coverage, such as long-term disability insurance, because the funds provided are not sufficient to cover all types of insurance. Continue Reading
In a very good ruling for policyholders, the California Court of Appeal ruled that an insurance company cannot escape insurance bad faith liability by forcing a claimant to arbitrate his claim without first fairly investigating, evaluating and attempting to resolve the claim. In Maslo v Ameriprise Auto & Home Insurance, 2014 Cal. App. LEXIS 564, 2014 WL 2918866 (June 27, 2014), the court explained that “[t]here can be no serious dispute that an insurer is required to thoroughly and fairly investigate, process, and evaluate its insured’s claim,” and the failure to do so exposes the insurer to bad faith liability. Continue Reading
The Employee Retirement Income Security Act of 1974 (“ERISA”) seeks to protect participants in employer-sponsored plans, but lack of adequate communication and transparency is an often an unfortunate byproduct of the insurance industry. The California district court shed light on this issue in Echague v. Metro. Life Ins. Co., 2014 U.S. Dist. LEXIS 68642 (N.D. Cal. May 19, 2014) by holding an insurer breaches its fiduciary duty when providing insufficient responses and the insured may be entitled to equitable surcharge. Echague is highly beneficial to insureds and beneficiaries, as it warns plan fiduciaries (such as insurers and plan administrators/employers) to think twice before ignoring requests for information, giving incorrect information, or neglecting to provide updates regarding the policies they administer, as their inactions or providing of incorrect information about the plan may open them up to equitable remedies such as equitable surcharge which would allow plan participants to recover the full value of the plan benefits in dispute. Continue Reading