California Insurance Litigation Blog

The collateral source rule is familiar to every attorney in California.  Every attorney recalls spending time studying the rule in law school.  The collateral source rule is critical to people injured by the wrongful conduct of tortfeasors, whether they be an individual involved in an auto accident or multinational corporations committing mass torts. The collateral source rule says is that if an injured plaintiff had the prudence to obtain insurance (whether it is life, health or disability insurance), the defendant who injures the plaintiff cannot get the benefit of that prudence by obtaining an offset from the plaintiff's damages.

The California Supreme Court has long held this doctrine sacred. Helfend v. Southern California Rapid Transit District, 2 Cal. 3d. 1 (1970). In the 1980s, the California Legislature authorized and encouraged doctors, hospitals and health plans to negotiate and enter into contracts for their mutual benefit.  Thus was born managed care which encouraged health providers to lower costs in exchange for a ready source of patients covered by insurance.  Thus, if a patient is a health plan member, and chooses doctors and hospitals that have a contract with their health plan, despite the fact that the patient incurs a certain regular, non-discounted charge to their medical providers, those providers will receive a lesser negotiated by their insurance companies.  This model has worked somewhat successfully in holding down health care costs.

Very often, plaintiffs will incur detriment in the form of personal financial liability when they execute written agreements in which they agree to be financially responsible for all charges for the medical services provided to them. For example, written contracts with healthcare providers state that they agree that, in consideration for all services received, they are obligated to pay the provider's “usual and customary charges for such services.” These written contracts often provide that it is “[plaintiff’s] responsibility to pay any balance not paid for by [plaintiff’s] insurance.”

When multiple insurers share the same defense obligation, the defense costs are typically allocated equally.  When an insurance company refuses to defend, those insurers which do contribute to the defense may seek contribution from the insurer(s) that do not.   Scottsdale Insurance Co. v. Century Surety Co., __ Cal. App. 4^th ___ (March 10, 2010) addresses such a situation.

In this case, Scottsdale Insurance Company (“Scottsdale”) brought suit against Century Surety Company (Century) seeking equitable contribution based on Century's failure to participate in the defense of 17 common insureds in hundreds of actions in which Scottsdale, along with at least one other insurer, shared the costs of the defense of those insured parties.  Scottsdale also sought equitable contribution with respect to indemnity of the common insureds in those underlying actions in which Scottsdale (and at least one other insurer) had paid amounts to settle the actions.

Three principal defenses were raised.  In the unpublished portion of the opinion, the court discusses two of them and concludes that the trial court correctly decided both.  Century argued that it was not required to defend or indemnify three of the common insureds because Century's insurance policies did not provide coverage of the insureds for the actions alleged against them.  Specifically, Century relied on a policy exclusion intended to exclude from coverage any action arising out of work which had been completed by the insured prior to the effective date of the policy (the prior work exclusion).  The trial court concluded that Century's prior work exclusion was not conspicuous, plain, and clear, and refused to enforce it.  Century was therefore required to share equitably in the costs of the defense and indemnification of the common insureds, despite the presence of this exclusion.

In an article appearing in the February 10, 2010 editions of the Los Angeles and San Francisco Daily Journals, I discuss the impact of the Ninth Circuit's Montour v. Hartford Life & Accident, 588 F.3d 623 (9th Cir. 2009). Here it is:

The Employee Retirement Income Security Act of 1974 (ERISA) is certainly one of the most significant pieces of federal legislation ever enacted by Congress as it impacts the employee benefit plans and retirement funds of millions of Americans.  Recently, the 9th U.S. Circuit Court of Appeals issued one of its most significant ERISA decisions in Montour v. Hartford Life & Accident, 588 F.3d 623 (9th Cir. 2009).

Under ERISA, when a plan participant challenges the administrator’s decision to terminate or deny benefits, that decision is evaluated under either an abuse of discretion or de novo standard of review.  ERISA litigation lawyers know well that when they are involved in litigating ERISA cases, the applicable standard of review can be outcome determinative.  That is why Montour should be at the top of every ERISA lawyer’s reading list. 

In Montour, the 9th Circuit clarified the application of the abuse of discretion standard of review when an insurer has a structural conflict of interest.  A structural conflict of interest arises when the entity making the decision whether or not to approve benefits is also the same entity that is ultimately responsible for paying those benefits.  In the realm of an insured employee benefit plan, this is a common occurrence as insurers typically act as claims administrators and the funding source of ERISA benefits.  Because vast numbers of ERISA plans include a provision granting the plan or claims administrator discretionary authority to interpret the plan’s terms and to decide the payment of benefits under the plan, determining when and under what circumstances a conflict of interest will be so significant as to affect the outcome of the case is of course critically important.  

Prior to Montour, but after the 9th Circuit’s en banc decision in Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955 (9th Cir. 2006), under an abuse of discretion standard of review, a district court would generally uphold the administrator’s decision provided it was grounded on any reasonable basis and made in good faith, weighing any conflict of interest of the administrator as factor in determining whether abuse of discretion existed.  See Sznewajs v. U.S. Bancorp Amended & Restated Supplemental Benefits Plan, 572 F.3d 727, 734-735 (9th Cir.2009).