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
An insurer has a duty to defend even if the causes of action in a lawsuit are not expressly covered by a liability policy if the factual allegations may support a potentially covered claim. This was expansive interpretation of the duty to defend adopted by the United States District Court Southern District of California in Millennium Laboratories, Inc. v. Darwin Select Insurance Company, __ F. Supp. 2d ___ (S.D. Cal. May 13, 2014). This highly significant decision further buttresses the now well-established position of courts in California that all of the facts and allegations in a lawsuit, not just the stated causes of action and facts stated in the complaint, must be considered in determining whether there exists a potentially covered claim triggering an insured’s duty to defend. Continue Reading
The Employee Retirement Income Security Act of 1974 (“ERISA”) provides an exclusive remedial scheme for insureds who have been denied benefits. 29 USC section 1001 et seq. Under ERISA, a plan participant may sue “to recover benefits due to him under the terms of their plan, to enforce their rights under the terms of the plan, or to clarify their rights to future benefits under the terms of the plan.” 29 U.S.C. § 1132(a)(1)(B). However, before plan participants can pursue a lawsuit against the plan/plan administrator for benefits, attorneys’ fees and costs, they must first pursue their ERISA appeal rights under the doctrine of exhaustion of administrative remedies. 29 USC section 1133. If they do not do so, they may lose all of their rights to pursue an appeal or litigation of a disability, life or health insurance claim denial. Continue Reading