California Insurance Litigation Blog

A unanimous United Supreme Court ruled today that a corporation's principal place of business is where the company's executives work and direct the company’s business activities, not where the company's products are sold.  This is yet another reversal of an important Ninth Circuit Court of Appeals ruling.

In a victory for business entities, the ruling will make it harder to sue out-of-state corporations in state courts, which are considered friendlier to class-action lawsuits than are federal courts.

The circuit courts have been divided into a deep four-way split regarding the tests to be applied in locating a corporation’s principal (most important, consequential or influential) place of business for purposes of diversity jurisdiction in federal court. These tests ranged from the Seventh Circuit’s "nerve center test," which focused on locating the corporation’s "brain," and ignores all other business operations as irrelevant, to the Ninth Circuit’s "place of operations test," which focused on the locations of the corporation’s business operations, while generally ignoring its nerve center.  Unlike either of these tests, the Third Circuit’s "center of corporate activities test" focused on finding the center of day-to-day corporate-wide activity and management, with the locations of other business activities being relevant, but less important, factors. Finally, the Fifth, Sixth, Eighth, Tenth and Eleventh Circuits’ "totality of the circumstances test" hinged on no particular facet of corporate activities, but rather on the company as a whole, including its character, business purpose, nerve center, management center and locations of operations.  The Court today adopted the "nerve center" test. 

In Hertz v. Friend, __ U.S. __ (2010), plaintiffs brought a class action suit against Hertz in a California state court seeking unpaid overtime and vacation wages. Hertz moved to remove the case to a California federal district court based on diversity jurisdiction. The plaintiffs argued that there was no diversity jurisdiction as Hertz's principal place of business was California and not Florida. The federal district court agreed and remanded the case to the state court.  On appeal, the Ninth Circuit affirmed the federal district court. It held that the district court correctly applied the "place of operations test" to determine Hertz's principal place of business. Therefore, there was no diversity jurisdiction and the district court had no authority over the case.

The Supreme Court overturned that decision, sending the case back to federal court:

"We conclude that the phrase 'principal place of business' refers to the place where the corporation's high level officers direct, control and coordinate the corporation's activities," Justice Stephen Breyer wrote. "Lower federal courts have often metaphorically called that place the corporation's 'nerve center.' We believe that the 'nerve center' will typically be found at a corporation's headquarters."

Given an important recent pro-plaintiff ruling on class certification in a California UCL case and some recent unfavorable rulings in the California courts, the federal courts may not be so bad for class action plaintiffs after all.

Late last year the Fourth Appellate District of the California Court of Appeal issued its decision in Zhang v. Superior Court, 178 Cal. App. 4th 1081 (2009).  In that case, the court identified the issue presented “as whether fraudulent conduct by an insurer, which is connected with conduct that would violate Insurance Code § 790.03 et seq., sometimes referred to as the ‘Unfair Insurance Practices Act’—can also give rise to a private civil cause of action under the Unfair Competition Law (UCL), Business and Professions Code § 17200 et seq.”  The court held that it did.  This case will thus address whether insurance companies enjoy any special exemption from UCL liability.  The statement of issues on review reads:

(1) Can an insured bring a cause of action against its insurer under the unfair competition law (Bus. & Prof. Code, § 17200) based on allegations that the insurer misrepresents and falsely advertises that it will promptly and properly pay covered claims when it has no intention of doing so? (2) Does Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287 bar such an action?

This was a departure from Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061 (2004), which was previously interpreted to bar UCL “unlawful” prong claims against insurers based on conduct prohibited by § 790.03.  The court held that “if a plaintiff relies on conduct that violates the Unfair Insurance Practices Act but is not otherwise prohibited, Moradi-Shalal requires that a civil action under the UCL be considered barred.”  The court explained that that where, however, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

On February 10, 2010, the California Supreme Court granted the Petition for Review of this case.  It is therefore no longer citable. 

On the same day the California Supreme Court denied a Petition for Review and Depublication in Cohen v. DIRECTV, Inc. (October 28, 2009).  Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009).

In a press release from the California Department of Insurance (“CDI”) issued last week, Commissioner Steve Poizner announced that the CDI has recovered $112.1 million for consumers through consumer complaint investigations and market conduct examinations of insurance companies.  Here is what it said:

The $112 million is believed to be the most money recovered in California Department of Insurance (CDI) history. In comparison, the Department recovered $62 million in 2008, $63 million in 2007, $78 million in 2006 and $53 million in 2005.

"Our goal at the Department of Insurance is to be the best consumer protection agency in the nation," Commissioner Poizner said. "I’m proud to announce that our hard work has led to us recovering more than $100 million for consumers – the most ever under any insurance commissioner. Through our consumer complaint services and our market conduct exams, we will continue to be responsive to the needs of consumers and proactive in looking for any and all activities that hurt policyholders."

The CDI’s Consumer Services and Market Conduct Branch has two divisions – one focused on helping consumers directly and the other focused on examinations of insurance company’s actions through an examination/audit process. The consumer services division operates the Consumer Communications Bureau, which handles the (800) 927-HELP consumer hotline; the Claims Services and Rating and Underwriting Services bureaus, which investigates and resolves complaints filed with the Department by consumers and others. The consumer hotline annually receives approximately 250,000 calls. The Consumer Services Division recovered $89.1 million in 2009. Approximately 20 percent of that came from closing cases started in 2007 and 2008 after the devastating wildfires. Due to the complexity of the issues that must be investigated, it may take a year or more to resolve complaints resulting from wildfire disasters.

The Market Conduct Division consists of the Field Claims Bureau and a Field Rating and Underwriting Bureau. These bureaus are tasked with performing examinations of insurance company claims, underwriting, rating and marketing practices to ensure they are complying with the law and regulations.

Through the diligence of the Market Conduct Division, $23 million was recovered and 208 exams were adopted by Commissioner Poizner.

You can access the CDI's Communications Office Web page by clicking here.

When a liability insurer wishes to avoid all coverage obligations with respect to a claim against its insured, it will sometimes file a declaratory relief action requesting a ruling that it has no duty to defend or indemnify the insured.  If the insurer files for such declaratory relief while the underlying litigation is still pending, California insureds will frequently move to stay the coverage action, pursuant to Montrose Chemical Corp. v. Superior Court, 6 Cal. 4th 287 (1993).  The purpose of such a Montrose stay is to avoid the risk of prejudice to the insured in the underlying action, if it is simultaneously forced to litigate an insurance coverage dispute.

In these situations, the insured faces a dilemma: should it immediately move to stay the coverage litigation, or wait until it has filed an answer and cross-complaint? A recent California Court of Appeal decision, Great American Insurance Company v. Superior Court, 178 Cal. App. 4th 221 (2009), suggests that the better practice may be to answer and cross-complain before moving to stay.

Erica Villanueva of Farella Braun & Martel LLP wrote a good article on this topic which I commend for your reading.

Last year the House passed legislation which would repeal the limited exemption the insurance industry received when Congress passed the McCarran-Ferguson Act of 1945. The law shields insurance companies from federal antitrust laws as long as they are subject to state regulations.

Among those opposed to a repeal of the exemption is Nebraska Senator Ben Nelson, a Democrat who provided the 60th vote that cleared the way for the Senate’s Dec. 24 passage of its health bill. Nelson, a former insurance company executive and state insurance regulator, says a repeal would hurt small insurers.

House Rules Committee Chairman Louise Slaughter told reporters that Senate Judiciary Committee Chairman Patrick Leahy is negotiating with Nelson on the exemption to try to get his support.

“There is no earthly reason for the insurance companies to be exempt from the antitrust laws,” she said.

President Obama has now voiced his support for the repeal of the exemption.  We’ll see who wins this healthcare battle very soon.