At the district court level, all parties agreed that the plaintiffs were strictly limited “to obtain other appropriate equitable relief” under ERISA.  On appeal, the Ninth Circuit explained that “the Amara Court stated that, under appropriate circumstances, § 502(a)(3) may authorize three possible equitable remedies: estoppel, reformation, and surcharge.”  The retirees only sought reformation and surcharge.  The Ninth Circuit rejected the reformation claim because there was no evidence that the plan documents “fail[ed] to reflect that drafter's true intent” or “that Northrop Plan B contains terms that were induced by fraud, duress, or undue influence.”  Similarly, the Ninth Circuit ruled that the ERISA claimants were not entitled to a surcharge remedy because it found that “by failing to enforce the terms of the 2003 SPD instead of the terms of the plan master document” there was “no evidence that the committee gained a benefit by failing to ensure that participants received an accurate SPD” did not constitute a breach of fiduciary duty.

While the Ninth Circuit ruled against the retirees, it noted that they did not make an estoppel argument because “they presented no evidence of reliance on the inaccurate SPD.”  Thus, while the Ninth Circuit found that, in this particular instance, the language of the plan documents would be enforced over the language in the SPD, the Court acknowledged that if a claimant could demonstrate reliance on the SPD, the language in the SPD might well control. 

Such a ruling is consistent with the recent ruling in the District Court of Puerto Rico where the court reject the defendant’s argument that Amara found that equitable estoppel is not an appropriate avenue for relief under ERISA.  Indeed, the court noted that “equitable estoppel forms a very essential element in . . . fair dealing, and rebuke of all fraudulent misrepresentation, which it is the boast of courts of equity constantly to promote.”  See Guerra-Delgado v. Popular, Inc., 2012 U.S. Dist. LEXIS 44432 (D. P.R. March 29, 2012) (internal quotations removed).

On May 13, 2011, the Court ruled that MetLife abused its discretion and improperly denied plaintiff’s claim for long-term disability (“LTD”) benefits made under an ERISA-governed employee welfare benefit plan.  With the ruling, the Court ordered that MetLife pay all benefits due under the policy’s “own occupation” definition of disability, and remanded the claim back to MetLife for a determination under the “any occupation” definition.

While MetLife argued that 29 C.F.R. § 2560.503-1 did not apply to its actions because the disability claim was remanded to MetLife following litigation, the District Court noted that MetLife failed to provide any authority to support that position.  The Court ultimately rejected MetLife’s argument, explaining that the plain language of the regulation, which “sets forth minimum requirements for employee benefit plan procedures pertaining to claims for benefits by participants and beneficiaries," applies to the remand of the LTD claim.

In denying MetLife’s motion, the District Court explained that:

Pursuant to 29 C.F.R. § 2560.503-1(f)(3), Defendants had until June 27, 2011, to either make a determination on Plaintiff's claim, or make a determination that more time was needed to resolve Plaintiff's claim and notify Plaintiff. Defendants did neither. After hearing nothing from Defendants, Plaintiff, on her own initiative, sent over her medical records to Defendants. The first time Defendants indicated that they needed more information was in October 2011, five months after the Court remanded the claim for consideration.

Given MetLife’s failure to act within the time limits set by 29 C.F.R. § 2560.503-1, the District Court held that “it is too late for [MetLife] to further delay by seeking an IME.”  Finally, the District Court ruled that “[p]ursuant to 29 C.F.R. § 2560.503-1(l), Plaintiff's claim for long term disability benefits under the ‘any occupation’ standard is deemed exhausted,” and the plaintiff could therefore initiate further litigation regarding MetLife’s failure to pay benefits under the “any occupation” definition.

This case highlights a claimant’s remedies when a claims administrator/insurer does not follow the applicable ERISA deadlines.  It is nice to see the courts protecting claimants when insurers such as MetLife blatantly violate the applicable ERISA and Department of Labor deadlines.

The Rahm family filed a lawsuit against Kaiser Foundation Health Plan and two Kaiser health care providers.  The Rahms claimed that Kaiser improperly delayed before ordering an MRI for their daughter Anna, resulting in the eventual loss of Anna’s right leg and portions of her pelvis and spine.  Specifically, despite numerous requests by Anna’s parents that Kaiser authorize an MRI for Anna, Kaiser refused.  As a result, there was a considerable delay in discovering that Anna was suffering from a “high grade” osteosarcoma, one of the fastest growing types of osteosarcoma.  The delay significantly contributed to Anna’s poor prognosis and the need for the amputations.

The Court of Appeals indicated that “the text of the statute is unclear as to whether section 425.13 is intended to apply only to claims against health care providers, or whether it is intended to apply to claims against any type of defendant—including claims against health care service plans,” and thus turned to the legislative history.  After reviewing the legislative history, as well as Central Pathology Service Medical Clinic, Inc. v. Superior Court, 3 Cal. 4th 181 (1992) in which the California Supreme Court considered the scope of claims subject to section 425.13, the Court held that section 425.13 does not apply to claims against health care service plans.  Specifically, the Court noted that:

Defendants' argument that section 425.13 may be applied to claims against health care service plans, rather than health care providers, is also in conflict with other sections of California code. Civil Code section 3428, subdivision (c) states that “[h]ealth care service plans … are not health care providers under any provision of law, including, but not limited to … Section[] … 425.13 … of the Code of Civil Procedure.” Likewise, Health and Safety Code section 1367.01, subdivision (m) clarifies that a health care service plan's role in determining the medical necessity of a requested procedure “shall [not] cause a health care service plan to be defined as a health care provider for purposes of any provision of law, including … Section[] … 425.13 … of the Code of Civil Procedure.” The language of these statutes demonstrates a clear intent to exclude health care service plans from the procedures required under section 425.13.

Defendants have not cited a single decision that has applied section 425.13 to claims pleaded against a health care service plan or any other type of entity that was not a medical care provider.

In conclusion, the Court ruled that:

The legislative history of section 425.13 and various provisions in California code demonstrate that the procedural requirements described in the statute do not apply to claims against health care service plans. Because defendants admit that Kaiser Health Plan is a health care service plan, rather than a health care provider, the trial court did not err in refusing to strike the punitive damages allegations asserted against the Health Plan.

Based on this ruling, plaintiffs can assert punitive damage claims against health care service plan without first obtaining court approval and will therefore have an easier time holding entities such as Kaiser Foundation Health Plan or Anthem/Blue Cross liable for their actions.

Western Heritage filed a petition for writ of mandate and the court of appeals granted the requested writ relief and held that Western Heritage had “the right to assert, on its own behalf, all defenses that otherwise would be available to the insured parties whether as to liability or damages.”  The appellate court explained its reasoning for allowing an insurer to fully defend its own interests:

Indeed, there would be no purpose in allowing an insurer to intervene in order to protect its own interests but then limit the scope of the insurer’s defense to those issues to which its insured, because of the default, is limited to pursuing…. The entire purpose of the intervention is to permit the insurer to pursue its own interests, which necessarily include the litigation of defenses its insured is procedurally barred from pursuing.  

Thus, an insurer has the right to intervene in a case when an insured elects to abandon his own defense of claims asserted against the insured, and may assert the same defenses to liability and damages as the insured.  With this holding, the court seems to indicate that an insurer retains the right to defend its own interests equal to its insured’s interests when defending its insured.  This may serve as a cautionary tale when an insured seeks to assert defenses that are not aligned with the interests of the insurer.

The California legislature enacted the Parity Act in 1999 after finding that “[m]ost private health insurance policies provide coverage for mental illness at levels far below coverage for other physical illnesses.”  1999 Cal. Legis. Serv. ch. 534 (A.B.88), § 1 (West).  The legislature further found that coverage limitations resulted in inadequate treatment of mental illnesses, causing “relapse and untold suffering” for people with treatable mental illnesses, as well as increases in homelessness, increases in crime and significant demands on the state budget.  Id.  Accordingly, plans that come within the scope of the Act – including the ERISA-governed plan established by Harlick’s employer – must cover all “medically necessary” treatment for nine listed mental illnesses (including anorexia nervosa), but can apply the same financial limits – such as yearly deductibles and lifetime benefits – that are applied to coverage for physical illnesses.

Harlick sued Blue Shield, but after the parties stipulated that Blue Shield’s decision would be reviewed under the abuse of discretion standard of review, the district court granted Blue Shield’s motion for summary judgment.

In reviewing Harlick’s case, the Ninth Circuit evaluated whether Blue Shield abused its discretion in denying Harlick’s request for coverage for her treatment at Castlewood.  In ERISA cases, if there is a conflict of interest (i.e., same entity pays benefits and makes the coverage decision), than the administrator’s review and claim decision is “tempered by skepticism,” even if it is reviewed under the abuse of discretion standard.  Here, while the Court did not find that Blue Shield abused its discretion in denying Harlick’s claim, it did find that Blue Shield was responsible for Harlick’s residential care, based upon the Parity Act.  The Ninth Circuit stated:

Harlick’s Plan does not itself require that Blue Shield pay for residential care at Castlewood for her anorexia nervosa.  However, California’s Mental Health Parity Act provides that Blue Shield “shall provide coverage for the diagnosis and medically necessary treatment” of “severe mental illness” including anorexia nervosa.  Blue Shield is foreclosed from asserting that Harlick’s residential care at Castlewood was not medically necessary.  We therefore conclude that Blue Shield is obligated under the Parity Act to pay for Harlick’s residential care at Castlewood, subject to the same financial terms and conditions it imposes on coverage for physical illness.

The Court then turned to the question of whether Harlick’s treatment was medically necessary.  Blue Shield did not dispute that treatment at Castlewood was medically necessary until supplemental briefing filed after oral argument.  Blue Shield argued that it should be allowed to reopen its administrative process in order to determine whether Harlick's residential care was medically necessary.  The Court explained an ERISA administrator’s obligations:

ERISA and its implementing regulations are undermined 'where plan administrators have available sufficient information to assert a basis for denial of benefits, but choose to hold that basis in reserve rather than communicate it to the beneficiary.'  Mitchell v. CB Richard Ellis Long Term Disability Plan, 611 F.3d 1192, 1199 n.2 (9th Cir. 2010) (quoting Glista v. Unum Life Ins. Co. of Am., 378 F.3d 113, 129 (1st Cir. 2004)). Claimants should not be 'sandbagged by a rationale the plan administrator adduces only after the suit has commenced.'  Mitchell, 611 F.3d at 1199 n.2 (quoting Jebian v. Hewlett-Packard Co. Employee Benefits Org. Income Prot. Plan, 349 F.3d 1098, 1104 (9th Cir. 2003)) (some internal quotation marks omitted).  Just as claimants should present all of their arguments for granting the claim to the insurer during the administrative process, an insurer should tell the claimant all of its reasons for denying the claim.  Cf Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995).

During the administrative process, Blue Shield never said that it was denying the claim because treatment at Castlewood was not medically necessary.

The Court therefore concluded that by not including as a reason for denial of the claim that the treatment was not medically necessary, Blue Shield waived this reason to deny the claim:

Blue Shield has discretion to determine whether treatment is medically necessary during the administrative review process.  But Blue Shield had to tell Harlick the "specific reasons for the denial" - not just one reason, if there was more than one - and provide a "full and fair review" of the denial. 29 U.S.C. § 1133 (emphasis added). Blue Shield told both Harlick and her mother, as well as the DMHC, that medical necessity was not the reason for its denial of Harlick's claim. It cannot now bring out a reason that it has "held in reserve" and commence a new round of review.  See Mitchell, 611 F.3d at 1199 n.2.

Thus, even if it is expressly excluded from a plan, a California insurer is now obligated to ensure that coverage for certain medically necessary treatment for mental illness is on par with the coverage provided for necessary treatment for physical illnesses.  This ruling will thus have significant application to coverage for mental illnesses, especially autism.

For 12 years, there was no communication between Reliance Standard and Withrow, other than Withrow’s monthly receipt of her disability check.  Then, in 2002, Withrow contacted a benefits manager at Bache Halsey (which by then had changed its name to Prudential Securities) to discuss her concerns that she was being underpaid.  After a series of communications with Prudential Securities and Reliance Standard, including a formal denial of Withrow’s claim and her subsequent appeal, in January 2004, Reliance Standard left a message for Withrow’s attorney indicating that Reliance Standard was upholding its decision that $3,950 was the proper monthly benefit amount. 

In 2006, Withrow initiated a lawsuit against the Plan, however the District Court granted the Plan’s   motion to dismiss based upon a statute of limitations defense.  The Ninth Circuit began its analysis by indicating that there were two issues presented by the appeal:

There are two parts to the determination of whether a claimant’s ERISA action is timely filed: we must determine first whether the action is barred by the applicable statute of limitations, and second whether the action is contractually barred by the limitations provision in the policy.  See Wetzel v. Lou Ehlers Cadillac Group Long Term Disability Ins. Program, 222 F.3d 643 (9th Cir. 2000) (en banc).

First, citing to Wetzel, the Ninth Circuit explained that “district court must apply the state statute of limitations that is most analogous to an ERISA benefits recovery program,” and that in this ERISA case “California’s four-year statute of limitations for contract disputes applies.”  Next, the Ninth Circuit explained that federal law governs when an ERISA cause of action accrues and triggers the start of the four-year clock.  Under Wetzel, an ERISA cause of action accrues “either at the time benefits are actually denied, or when the insured has reason to know the claim as been denied.”  Citing Wise v. Verizon Communications, Inc., 600 F.3d 1180, 1188 (9th Cir. 2010), the Ninth Circuit explained that the phrase “reason to know” means when the plan communicates a “clear and continuing repudiation of a claimant’s rights under a plan such that the claimant could not have reasonably believe but that his or her benefits had been finally denied.”

After finding that Withrow’s claim was “actually denied” in 2004 when her attorney was informed that Reliance Standard was standing by its original determination, the Court turned to when Withrow had a “reason to know” her claim was denied.  While Reliance Standard argued, and the District Court agreed, that Withrow had a reason to know that her claim was denied in 1990, the Ninth Circuit disagreed.  Specifically, the Ninth Circuit found that the events of 1990 were unclear, and Reliance Standard’s records failed to provide clear evidence of who made the call in 1990, what exactly was said and whether Withrow was provided with guidance as to how to submit her claim for review.  Thus, there was insufficient evidence to support Reliance Standard’s position that it communicated a “clear and continuing repudiation” of Withrow’s claim.  Accordingly, Withrow’s claim did not accrue in 1990, and her lawsuit was timely filed.

Finally, the Court turned to the issue of whether Withrow’s claim was time-barred by the plan’s internal statute of limitations period.  The plan required that legal actions must be initiated with three years of “the time written proof of loss is required.”  After holding that “contract limitation provisions in benefit policies still have force independent of ERISA in long-term disability cases,” the Ninth Circuit held that such provisions are “meaningless as applied to disputes over the proper calculation of the amount of monthly benefits, as opposed to disputes over whether the applicant is entitled to benefits at all.”

With this opinion, the Ninth Circuit is again informing ERISA administrators that, when informing a claimant that a claim for benefits is being denied, that message must be presented in such a manner that there can be no question that the decision is final and binding.  If the administrator fails to meet this standard, it will be barred from relying on the applicable statute of limitations as a defense to any lawsuit.

In 2006 the Villa Los Alamos Homeowners Association (HOA) contracted to have spray-applied acoustical (“popcorn”) ceiling texture in common area ceilings and stairways scraped and removed.  During the removal, asbestos fibers were released into the air, common areas, individual units and public areas outside the building.  The Bay Area Air Quality Management District (District) cited the contractor and ordered the HOA to clean up the asbestos fibers.  The HOA submitted a first party claim to State Farm, its insurance carrier, for approximately $650,000 in cleanup costs.  The HOA also sued the contractor.  The contractor then cross-complained against the HOA and its management company.  The HOA tendered its defense to State Farm.

A pollution exclusion in the first party coverage section of the policy excluded coverage for any loss caused by the “presence, release, discharge or dispersal of pollutants,” while the exclusion pertinent to third party claims removes coverage for injuries arising out of “discharge, seepage, migration, dispersal, spill, release or escape of pollutants.”  State Farm denied coverage for both the first party and third party claims, citing the pollution exclusion and faulty workmanship exclusions in the policy. 

The HOA sued State Farm for breach of contract, bad faith and declaratory relief.  The trial court granted summary adjudication in favor of State Farm on the first party claims based on the pollution exclusion.  The HOA dismissed its third party claims, and appealed.

Discussion

In MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (2003), the California Supreme Court found that the standard pollution exclusion clause in a comprehensive general liability policy was intended to exclude coverage for injuries resulting from events commonly regarded as “environmental pollution.”  The Court rejected a broader, literal interpretation of the clause that would foreclose coverage for any and all injuries arising from harmful substances.  So, the Court held that it was unlikely that a reasonable policyholder would think that the activity in question there—namely, the ordinary but negligent spraying of pesticides around an apartment building in order to kill yellow jackets—was an act of pollution.  

The HOA argued that MacKinnon applied here, and that the pollution exclusion in the State Farm policy did not cover a single, negligent, localized asbestos release.  After reviewing MacKinnon and its progeny, the Villa Los Alamos court agreed that the general principles announced in MacKinnon concerning the pollution exclusion also pertain in the context of a coverage dispute over first party property insurance claims based on analogous pollution exclusion—despite the well-recognized analytical differences between first party property and third party liability policies.  But the Villa Los Alamos court otherwise rejected the HOA’s application of MacKinnon to the facts at hand. 

Reading the State Farm pollution exclusion in accord with MacKinnon as pertaining to environmental pollution, the Villa Los Alamos court asked this question:  Did the accidental release and airborne dissemination of asbestos fibers in this case amount to what is commonly regarded as “environmental” pollution?  The court concluded that asbestos is a pollutant as a matter of law, and that it was “released” into the air and areas around the popcorn ceiling texture during the contractor’s scraping and removal.  Emphasizing factual differences between a homeowner being able to buy and apply pesticides in a residential setting, and the removal of asbestos containing building materials being highly regulated by a myriad county, state and federal laws, the court rejected the HOA’s analogy of the asbestos removal to a single, ordinary act of negligence.  In short, the Villa Los Alamos court concluded that the ordinary layperson would understand the release of asbestos fibers under these circumstances to be “environmental pollution.”  Citing American Casualty Co. of Reading, PA. v. Miller, 159 Cal. App. 4th 501, 515-516 (2008), the court explained that

the key point under a MacKinnon analysis is whether the act in question is commonly thought of as environmental pollution. Thus, even if the accident consisted of a one-time negligent release of methylene chloride [as in Miller], the pollution exclusion would preclude coverage because permitting the chemical to be released into a public sewer was an act of environmental pollution. (Ibid.) Miller is persuasive. To establish bright-line rules as to what constitutes “environmental pollution” makes no sense: A one-time event can be a polluting event if it creates “‘impurity, something objectionable and unwanted.’” (MacKinnon, supra, 31 Cal. 4th at p. 654.) To reiterate: The release of asbestos from a product into the air people breathe constitutes a health hazard for which no level of exposure is safe. The work here apparently occurred over several days and resulted in the sufficient release of asbestos fibers into the air to contaminate the building complex and the adjacent outside areas, constituting environmental pollution.

Lesson Learned

There is no “bright-line” rule for when an ordinary layperson will consider a “release” of harmful substances in or around a residential structure to be “environmental pollution” rather than an “ordinary act of negligence.”  One can imagine the Villa Los Alamos court just as easily analogizing the release of asbestos fibers from asbestos-containing building materials in a residential building to be an “ordinary act of negligence” on par with pesticide contamination a la MacKinnon rather than “environmental pollution” a la Miller.  The clever insurance coverage attorney will start framing and controlling the analogy early on.

Some of our previous decisions have indicated that only a benefit plan itself or the plan administrator of a benefit plan covered under ERISA is a proper defendant in a lawsuit under [29 U.S.C. § 1132(a)(1)(B)].  We conclude that the statute does not support that limitation, however, and that an entity other than the plan itself or the plan administrator may be sued under that statute in appropriate circumstances.

Reliance Standard appealed the decision, and the Ninth Circuit heard the case en banc.  In considering only the issue of whether an insurer/claim administrator is a proper defendant in an action to recover benefits under the terms of the plan, the Ninth Circuit noted that “[b]y its terms,  § 1132(a)(1)(B) does not appear to limit which parties may be proper defendants in a civil action.  Nor has the Secretary of Labor promulgated a regulation setting out such limits.”  The Ninth Circuit analyzed the United States Supreme Court’s decision in Harris Trust & Saving Bank v. Salomon Smith Barney, Inc., 530 U.S. 238 (2008) which examined a similar issue with respect to § 1132(a)(3) and noted that the section “makes no mention at all of which parties may be proper defendants—the focus, instead, is on redressing the ‘act or practice which violates any provision of [ERISA Title I]’”  Given the Supreme Court’s analysis of § 1132(a)(3), the Ninth Circuit could “see no reason to read a limitation into § 1132(a)(1)(B).”

The Ninth Circuit explained that, in this litigation, Reliance Standard was a proper defendant because:

Reliance denied Cyr’s request for increased benefits even though, as the plan insurer, it was responsible for paying legitimate benefit claims.  Reliance is, therefore, a logical defendant for an action by Cyr to recover benefits due to her under the terms of the plan and to enforce her rights under the terms of the plan, which is precisely the civil action authorized by § 1132(a)(1)(B).

With this ruling, the Ninth Circuit specifically overruled its previous rulings to the contrary, including Everhart, Ford v. MCI Communications Corp. Health & Welfare Plan, 399 F.3d 1076, 1081 (9th Cir. 2005), Spain v. Aetna Life Insurance Co., 13 F.3d 310, 312 (9th Cir. 1993) and Gelardi v. Pertec Computer Corp., 761 F.2d 1323 (9th Cir. 1985).

While, on its face, this case seems to impose liability on insurance companies they did not previously face, in reality, this is not the case.  In most ERISA cases for life insurance benefits, health insurance benefits or disability insurance benefits for which the insurance company was financially responsible, the insurance company typically controlled the defense of these lawsuits and paid any amounts due after a settlement or judgment, regardless of whether it was named as a defendant.  This decision realized the practical reality that insurance companies should be allowed defendants in ERISA cases involving life insurance benefits, health insurance benefits or disability insurance benefits for which insurance companies are financially responsible.  This decision simply put into law what was already happening in actual practice.

Guy Carpenter & Co. (“Carpenter”) is a reinsurance intermediary providing insurance companies with reinsurance coverage.  Carpenter placed reinsurance for Workmen’s Auto Insurance Co. (“the company”) with PMA Capital Insurance Company of Philadelphia, Pennsylvania (“PMA”).  The company sued Carpenter, alleging causes of action for negligence, breach of fiduciary duty and breach of contract.  Regarding the breach of fiduciary duty claim, the company asserted that Carpenter breached its duty by failing to secure timely payments from PMA, failing to secure the best available terms of reinsurance, and acting with the intent to injure the company by incurring inflated commissions.   

The court first addressed an insurance broker’s potential liability for failure to exercise reasonable care as follows:

[A]n insurance [broker] will be liable to his client in tort where his intentional acts or failure to exercise reasonable care with regard to the obtaining or maintenance of insurance results in damage to the client. [Citation.]‖ (Saunders v. Cariss (1990) 224 Cal.App.3d 905, 909.) For example, a ―broker‘s failure to obtain the type of insurance requested by an insured may constitute actionable negligence.‖ (Nowlon v. Koram Ins. Center, Inc. (1991) 1 Cal.App.4th 1437, 1447; Desai v. Farmers Ins. Exchange (1996) 47 Cal.App.4th 1110, 1120.) But as a general proposition, a broker does not have a duty of care to advise a client on insurance matters unless ―(a) the agent misrepresents the nature, extent or scope of the coverage being offered or provided . . . , (b) there is a request or inquiry by the insured for a particular type or extent of coverage . . . , or (c) the agent assumes an additional duty by either express agreement or by ‗holding himself out‘ as having expertise in a given field of insurance being sought by the insured.‖ (Fitzpatrick v. Hayes (1997) 57 Cal.App.4th 916, 927; Jones v. Grewe (1987) 189 Cal.App.3d 950, 954 (Jones) [an insurance agent does not have a duty of care ―to advise the insured on specific insurance matters‖ absent an express agreement or holding out as an expert]; Free v. Republic Ins. Co. (1992) 8 Cal.App.4th 1726, 1730 [no general duty of care to advise regarding the sufficiency of insurance].)

The court explained that in a typical agency relationship, there is the principal, and the agent looking out for the interests of the principal.  The relationship between the agent and the principal, outside of the insurance industry, has been a fiduciary relationship, wherein the agent owes the principal a fiduciary duty.  The company argued that insurance case law should not be applied to the reinsurance intermediary-broker relationship due to the “far more complex and comprehensive relationships with their clients.”  Therefore it argued, Carpenter did not just owe a duty to exercise reasonable and due care, but owed a higher level duty, those duties owed by a fiduciary. 

The Court of Appeals looked at “whether Carpenter was the company’s agent and, if so, whether that agency imposed a fiduciary duty on Carpenter as a matter of law such that Carpenter can be held civilly liable for breaching those duties.”  A reinsurance-intermediary broker, as defined in the Insurance Code Section 1781.2(g) is

any person, other than an officer or employee of the ceding insurer, firm association, or corporation that solicits, negotiates, or places reinsurance cessions or retrocessions on behalf of a ceding insurer without the authority or power to find reinsurance on behalf of that insurer.

Under the statute, the reinsurance intermediary-broker can be characterized as a dual agent.  Such a broker acts on the behalf of the interests of two parties, not a single party.  The Court held that Carpenter, as a reinsurance intermediary-broker was an agent of the company.  However, the Court was hard-pressed to find a fiduciary duty anywhere in insurance law.  The Court stated: “we are unaware of even a single California precedent permitting a client to sue an insurance broker for breach of fiduciary duty.”  Therefore, the Court did not want to open this door as a matter of public policy.  The Court held that “decades of cases have drawn a policy line between what brokers must do and need not do.  Because that line has been drawn, we decline to revisit the issue.”

The court went on to review a number of California cases discussing the duties of an insurance broker, including Kotlar v. Hartford Fire Ins. Co (2000), 83 Cal. App. 4th 1116, 1123.  In Kotlar, the court held that “a broker only needs to use reasonable care to represent his or her client”, and “a broker’s duties are defined by negligence law, not fiduciary law.”  The court then further explained its holding that a broker owes no fiduciary duties under insurance law:

Given the foregoing, and given that a broker is an agent, there is an inherent conflict between insurance law and agency law.  Agency law establishes that ―[t]he relations of principal and agent, like those of beneficiary and trustee, are fiduciary in character. . .. [¶] . An agent must disclose to his principal every fact known to him bearing upon the [subject matter of the agency], the concealment of which would lead to the injury of the principal [citation].‖ (Kinert v. Wright (1947) 81 Cal.App.2d 919, 925 (Kinert); Chodur v. Edmonds (1985) 174 Cal.App.3d 565, 571 (Chodur) [―[a]n agent is a fiduciary‖].) Further, an agent has an obligation of ―diligent and faithful service the same as that of a trustee. [Citations.]‖ (Ibid.) As explained by Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29 (Wolf), a fiduciary is bound to act with utmost good faith for the benefit of the other party.  If applied in the insurance context, Kinert, Chodur and Wolf would require brokers to disclose all material knowledge and advise client‘s on specific insurance matters even if the broker is not required to do so by the duty of care. Indeed, ―the duty of undivided loyalty the fiduciary owes to its beneficiary . . . [is] far more stringent‖ than the duty of care. (Wolf, supra, at p. 30.) ―‗Many forms of conduct permissible in a workaday world for those acting at arm‘s length, are forbidden to those bound by fiduciary ties.  A [fiduciary] is held to something stricter than the morals of the market place.  Not honesty alone, but the punctilio of an honor the most sensitive is then the standard of behavior.‘ [Citation.]‖ (Ibid.) Thus, it is impossible for us to reconcile insurance law and agency law.

So, unless there are other courts of appeal that disagree or if the California Supreme Court addresses the issue, it appears the level of care an insurance broker owes to its client is measured, not by a fiduciary duty, but by a reasonable standard of care. 

In Private Equity Management Group, the SEC, after the appointment of a permanent receiver, obtained an August 2009 preliminary injunction preventing any suit against PEM without leave from the court.  In September 2010, Principal Life Insurance Company (“Principal Life”) sought leave to file an action against the receiver of PEM in order to challenge “the validity of an insurance policy issued on the life of Barbara Doricott … which was among PEM’s investment life insurance policies.”  Principal Life sought to void the policy on the grounds of fraud and “a lack of insurable interest.” 

In determining whether or not to lift the stay, the court applied a three-factor test from SEC v. Wencke, 622 F.2d 1363 (9th Cir. 1980):  “(1) Whether refusing to lift the stay genuinely preserves the status quo or whether the moving party will suffer substantial injury if not permitted to proceed; (2) the time in the course of the receivership at which the motion for relief from the stay is made; and (3) the merit of the moving party’s underlying claim.”

In applying the last of the Wencke factors, the court found that Principal Life had a “colorable claim” justifying a lifting of the stay.  The court placed credence in Principal Life’s contention that the life insurance policy was void because it lacked an insurable interest:

Likewise, although it is unclear whether the Policy would ultimately be deemed void for lack of an insurable interest, the Court finds that Principal Life has alleged a colorable claim to that effect.  In opposing Principal Life's motion, the Receiver relies on Lincoln Nat. Life Ins. Co. v. Gordon R.A. Fishman Irrevocable Life Trust, in which the court held that life insurance policies were not void for having been procured by STOLI practices where the trust, its settlor, and its beneficiaries had insurable interests in settlor's life at time of inception.  638 F. Supp. 2d 1170, 1177 (C. D. Cal., 2009) ("an interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.").

* * *

Ms. Dorricott’s daughter allegedly sold 1% of the interest in the policy less than three weeks after the policy was issued.  Thus, while further factual development is necessary to establish whether the Policy is actually void for lack of insurable interest, based on the forgoing, the Court finds that Principal Life’s claim has sufficient potential merit to satisfy the third Wencke factor.

In Davis, supra, the defendant, an attorney, allegedly obtained two life insurance policies (“the Policies”) for two insureds (Smith and Griffin) with each life insurance policy providing a death benefit of $1,000,000.00.  Davis also set up two irrevocable life insurance trusts (collectively, “the Trusts”).  The owners were the Trusts, Davis was the trustee, and the insureds’ wives were the beneficiaries.  Ohio National filed a Motion for Preliminary Injunction, seeking an order to enjoin any policy changes.  The Court, in ruling on the preliminary injunction, had to consider the “likelihood of success on the merits.” 

In evaluating whether Ohio National met this test, the court first noted that under California law (specifically California Insurance Code section 280), “no life insurance contract is valid unless the insured has an ‘insurable interest.’”  The court explained that the critical question was whether the Trusts had an insurable interest in the insureds because it was the Trusts that obtained the life insurance policies.  The court determined that the Trusts used to apply for the Policies presumably had insurable interests in the lives of the Insureds because the beneficiaries of the Trusts were the insureds’ wives.  See Cal. Ins. Code § 10110.1(a).  However, the court aptly explained that under California Insurance Code section 10110.1(e) “[a]ny device, scheme, or artifice designed to give the appearance of any insurable interest where there is no legitimate insurable interest violates the insurable interest laws.”  Specifically, any arrangement by which a life insurance policy is initiated for the benefit of a "third party investor" who has no insurable interest in the insured's life at the time the policy is issued is deemed a STOLI, which is a prohibited "fraudulent life settlement act."  See Cal. Ins. Code §§ 10113.1(w), 10113.2, 10113.3(s). The Court further explained:

Ohio National presents allegations that strongly support inferences that the Policies were indeed STOLIs.

To begin, Ohio National alleges that Davis solicited and induced Griffin and Smith to apply for life insurance policies promising no premium payment obligations yet receiving payments for their participation.  In the process, Griffin and Smith were convinced to sign irrevocable trusts naming Davis as the trustee and the Trusts as owners of the Policies.  Morady seemingly rubber stamped the life insurance applications without ever seeing the proposed Insureds or examining their financial records.  In addition, Davis, as trustee, was given unfettered discretion to purchase life insurance policies and to borrow money for the same.  Further, Davis was given the power to assign the Policies and the proceeds of the Policies to any lender.  Accordingly, it seems highly likely that Ohio National would succeed in establishing that the procurement of the Policies were STOLI transactions.  Specifically, Ohio National has demonstrated that Davis and Morady did not have insurable interests in the lives of the Insureds yet the Policies were initiated for their benefit.  Therefore, based on the unopposed papers and other submissions, Ohio National has established a likelihood of success on the merits.

The court therefore granted Ohio National’s motion for a preliminary injunction. 

The State of California’s requirement that a life insurance policy is invalid without an insurable interest at the time of the policy issuance is a very basic and fundamental requirement that is not to be overlooked or underestimated when dealing with STOLI or STOLI-like transactions.

In Minich Allstate issues a homeowner’s insurance policy to Kelly and Debbie Minich.  A fire destroys the Minichs’ home.  The policy requires Allstate to pay the Minichs the "actual cash value" of their home up to the $129,840 policy limit.  An extended policy limits endorsement requires Allstate to pay up to 150% of the policy limit in excess of the actual cash value if the Minichs actually repair or replace the home. 

Allstate pays the $129,840 policy limit, less the $250 deductible, within 2 weeks of the fire.  Allstate refuses to pay the $64,920 extended limit until the Minichs demonstrate to Allstate 15 months after the fire that they in fact are rebuilding the home.

Allstate files a motion for summary judgment and argues that it timely paid the Minichs the full "policy limit" under §2051(b)(1), and that the additional $64,920 represents an amount above the policy limit.  Allstate maintains that it is not required to pay the additional $64,920 unless and until the Minichs rebuild their home.  

The Minichs oppose Allstate's motion and argue that §2051 and §2051.5 require that an insurer pay the "policy limit or the fair market value of the structure, whichever is less" (§2051(b)(1)), without regard to whether the insured repairs the structure. The Minichs maintain that the "policy limit" of their policy includes the $64,920 provided for in the extended limits endorsement. 

The trial court grants Allstate's motion, and enters judgment in its favor. The Minichs appeal.

The appellate court concludes that the Minichs’ interpretation of the policy is flawed, and that neither the statutes nor the policy require Allstate to pay the extended limits under the endorsement without regard to repair or replacement.  The appellate court interprets the endorsement to refer to an amount in excess of the policy limit, and not to extend or increase the policy limit.

The appellate court also notes that public policy supports its interpretation; otherwise the homeowner would be “bettered” by receiving replacement cost benefits above the actual cash value of the home without ever having to actually replace the home—a benefit not bargained for in the insurance contract.  And a benefit that the California legislature could easily have mandated in the statutes, if it had so intended.

Since the appellate court determined that Allstate timely paid the Minichs all benefits owed under the policy, it also affirmed summary judgment and dismissal of the Minichs’ bad faith claims.  The Minich decision reaffirms that a homeowner must actually start repairs of its damaged home in order to collect policy benefits under an extended repair or replacement cost limits endorsement over and above the actual cash value of the loss.

The Facts

Gaylord owns and operates a livestock operation, raising his own cattle and raising cattle for others.  In June 2008 some of the cattle die suddenly.  By September and October 2008 cattle begin dying at an alarming rate.  Gaylord suspects feed poisoning.  Autopsies and feed testing confirm that the cattle are dying from liver failure caused by toxic plants in the alfalfa feed.  There is no known cure, so Gaylord gets permission from the Department of Agriculture to sell the cattle off for early slaughter—but at a financial loss for Gaylord and the other cattle owners. 

Nationwide issued a farm-owners insurance policy to Gaylord in March 2008.  One part insures against physical loss to covered property (first-party); one part insures against third-party liability claims.  Gaylord says he moved his farm-owners insurance from Fireman’s Fund to Nationwide because his long-trusted insurance agent told him that Nationwide had better coverage, including coverage for cattle loss from poisoned feed.  But Gaylord’s agent says he told Gaylord that a “custom feeding of livestock” endorsement was necessary to cover cattle loss from poisoned feed, and that Gaylord declined it because it was too expensive.

A third-party sues Gaylord in September 2009 for the loss of its cattle in Gaylord’s care.  Gaylord tenders his defense to Nationwide in October 2009.  Nationwide seeks the advice of coverage counsel, and denies the tender in January 2010.  Gaylord sues Nationwide in March 2010 for breach of contract, bad faith and declaratory relief on both his first-party and third-party claims.  Nationwide moves for summary judgment.

FRCP 56(c) Summary Judgment Standards

All too often attorneys moving for summary judgment cut and paste points and authorities from older cases, parroting the standards for summary judgment under FRCP 56(c) in archaic and stilted prose.  Judge  Ishii articulates the standards in clean, non-legalese prose.  Cut and paste this.  Not that.

Insurance Contract Interpretation

Ditto.  Cut and paste this.  Not that

The One-Year Contractual Limitations Clause Bars Gaylord’s First-Party Claim

The policy has a one-year limitations clause giving the insured one year to file suit for the denial of a first-party claim.  The period commences when damage becomes sufficiently “appreciable” to put the insured on notice to make a claim.  The district court concludes that Gaylord knew by October 2, 2008, when Gaylord first reported the cattle deaths to Nationwide, that his loss was “appreciable,” and that Nationwide’s October 3, 2009, denial is “unequivocal.” 

The district court also finds that Nationwide’s (standard) offer in its denial letter to consider any new or different information that the insured might furnish does not render the denial equivocal, and does not continue the tolling.  Accordingly, the limitations period was tolled for one day, and Garylord had until October 3, 2009, to timely file suit on his first-party claim.  The district court grants summary judgment on Gaylord’s first-party claim because Gaylord waited until March 2010 to file suit.

The Conflicting Agent and Insured Declarations Create a Genuine Dispute over Third-Party Coverage

The district court assumes for purposes of the motion that a contractual liability exclusion and a custom feeding exclusion in the policy encompass the third-party liability claims against Gaylord. But livestock operations endorsement (LOE) modifying the liability coverage provides that “In consideration of the premium charged for this endorsement, the liability coverage of this policy applies to your livestock.”  Gaylord and Nationwide each offer conflicting interpretations of the LOE, each of which the district court finds to be reasonable—hence ambiguous.  Standard rules of insurance contract interpretation would resolve the ambiguity in favor of Gaylord.  But… 

Gaylord says the agent told him that poisoned cattle were covered.  The agent says he told Gaylord that a more expensive endorsement was necessary, and Gaylord declined to pay for it.  The district court concludes that the trier of fact will have to resolve this conflicting extrinsic evidence in order for the district court to interpret the policy.  If Gaylord is believed, he wins.  If the agent is believed, Gaylord loses. So, the district court denies Nationwide’s motion for summary judgment on Gaylord’s third-party liability claim.

A “Genuine Dispute” over Coverage Defeats Bad Faith

When an insurer’s denial of a claim is unreasonable or without proper cause, the insured may be able to recover tort damages.  The district court point out, however, that "bad faith" implies conscious unfair dealing, and mere negligence or mistaken judgment is insufficient. Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 181 Cal.App.4th 60, 86 (2010); Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., 90 Cal.App.4th 335, 345(2001). When there is a "genuine issue" or "genuine dispute" as to the "insurer's liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute." McCoy v. Progressive W. Ins. Co., 171 Cal.App.4th 785, 793 (2009).

The Ninth Circuit apples the genuine dispute doctrine to duty to defend disputes. See Lunsford v. American Guar. & Liab. Ins. Co., 18 F.3d 653, 654, 656 (9th Cir. 1994).  In Lunsford the insurer refused to defend a counterclaim against the insured for abuse of process. The Ninth Circuit found the insurance policy ambiguous and resolved the ambiguity in favor of the insureds, thus mandating that the insurer cover the defense costs. Despite finding a breach of the duty to defend, the Ninth Circuit held, "Because [the insurer] investigated the insureds' claim and based its refusal to defend on that information and a reasonable construction of the policy, [the insurer] did not act in bad faith, and we conclude that [the insurer] was entitled to summary judgment on the implied covenant of good faith and fair dealing claim." Id. at 656. 

After reciting California insurance bad faith standards in a way that presages the insured is going to come up short, the district court quickly dispatches Gaylord’s first-party bad faith claim based on the contractual limitations period.   The district court then concludes that there is no material dispute that Nationwide conducted a reasonable investigation into the third-party claim, sought the advice of outside coverage counsel, and that its interpretation of the contractual liability and custom feeding exclusions under the facts and circumstances is not unreasonable.  So, the district court also grants summary judgment on Gaylord’s third-party bad faith claim, including the punitive damages claim.

The take-away—beside some great cut-and-paste points and authorities—is that policyholder attorneys need to be mindful when analyzing limitations periods that the insured may need to file suit early to protect a first-party claim, even when the third-party claim may not be ripe.

Noting a paucity of recent California Supreme Court precedent on whether strict or merely substantial compliance with an insurance warranty is required to invoke coverage, the Ninth Circuit Court of Appeals recently held that California law requires strict compliance with a pilot warranty in an aviation insurance policy as a condition precedent to coverage.  Trishan Air, Inc. v. Federal Insurance Company, __ F.3d __ 2011 WL 540532 (9th Cir. 2011).  The Ninth Circuit affirmed the Central District of California’s summary judgment dismissal of the insured’s breach of contract and bad faith claims.

Trishan Air, Inc. (Trishan) owned a fleet of corporate jets.  It purchased an aviation insurance policy from Federal Insurance Company (Federal). The policy included a pilot warranty endorsement that required a two-pilot crew for each aircraft and that

such pilot(s) must have successfully completed a ground and flight recurrent/initial training course for the make and model operated within the past 18 months. Any such course must incorporate the use of a motion-based simulator specifically designed for the insured make and model/make and model series.

In June 2007 Trishan’s 13-passenger Dassault Falcon 900 ran off the main runway at the Santa Barbara Municipal Airport in an aborted high-speed takeoff.  The impact snapped the front landing gear, and the Falcon 900 skidded to rest in the dirt 600 feet away.  Thankfully, no fatalities.  At the time of the accident the co-pilot had never attended any formal training course or flight simulator course for the particular jet involved.  

Trishan submitted a claim for the loss to Federal.  Federal denied coverage based on a breach of the pilot warranty.  Trishan filed suit for breach of contract, breach of the duty of good faith and fair dealing, reformation and declaratory judgment.  Federal moved for summary judgment.  Trishan introduced fact and expert evidence that the co-pilot substantially complied with the pilot warranty, and that substantial compliance satisfied the warranty.  Causation was not an issue because Trishan and Federal stipulated that Federal was not required to demonstrate a causal connection between the accident and any breach of the pilot warranty.

The district court granted Federal’s motion for summary judgment on the grounds that California law requires strict compliance with the pilot warranty.  Trishan appealed.

Citing turn-of-the-century California Supreme Court precedent, and more recent appellate precedent, the Ninth Circuit rejected Trishan’s arguments.  It concluded that the pilot warranty was in the nature of a condition precedent to coverage, requiring strict compliance, rather than a mere condition of coverage as to which substantial compliance might suffice.

Trishan's argument is premised on the warranty being a mere condition of the insurance policy, thus requiring only substantial compliance. This argument ignores the dichotomy between conditions relating to basic coverage, such as notice provisions, and conditions, like the pilot warranty, that are ‘an element of the fundamental risk insured.’ [citation]. ‘There are well-established differences between insuring clauses, exclusions, and conditions that should not be amalgamated into one binary question: coverage yes or no under an ‘if ... then’ analysis. [citation].

Contrary to such variations in insurance provisions, Trishan seeks universal application of the substantial compliance doctrine untethered from the type of warranty at issue. However, strict compliance with pilot warranties serves as a necessary corollary of aviation insurance policies. ‘Federal courts uniformly enforce [pilot warranties] ... and for good reason. Pilot qualifications and experience are obviously factors bearing directly on the risk the insurer is underwriting.’ [citation].

The pilot warranty is like a condition precedent because it expressly establishes the events or conditions that must occur before coverage can take effect.  The Ninth Circuit noted that the practical effect of adopting Trishan’s substantial compliance standard would be to substitute the underwriter’s clear underwriting parameters with the insured’s subjective assessment.  It would introduce too much uncertainty into ascertaining the risk that the underwriter agreed to assume, and would essentially re-write the insurance policy—which California courts are prohibited from doing.

The Ninth Circuit went further.  It noted that even if substantial compliance would suffice, the co-pilot’s lack of formal coursework and simulator training for the Falcon 900 did not even substantially comply with the pilot warranty. 

Trishan elides the fact that it did not comply with the pilot warranty's training requirements for co-pilots in any fashion. Instead, Trishan asserts that the pilot's alternative training served as a substitute for the simulator training. However, a complete failure to comply is not analogous to minor deficiencies. [citation]. Thus, Trishan's complete failure to comply with the pilot warranty precludes coverage even under the substantial compliance doctrine. [citation]. 

Finally, noting the long established rule in California that there is no bad faith where there is no coverage, the Ninth Circuit also affirmed the district court’s dismissal of Trishan’s bad faith claim.  The Ninth Circuit added that since Federal’s denial of coverage based on Trishan’s failure to strictly comply with the pilot warranty was reasonable, the “genuine dispute” doctrine also insulated Federal from any bad faith liability. 

The take-away for insureds:  review your insurance program carefully for warranty endorsements in your policies.  Strict compliance may be required.

In Century, Jesus Garcia, Sr.’s home was damaged when his adult son intentionally started a fire in his bedroom.  Garcia Sr. subsequently submitted a claim under his homeowner’s insurance policy issued by Century National Insurance Company (“Century”).  Although Garcia was the named insured, his wife and son also qualified as an insured under the policy.  Century denied the claim on the grounds that the damage was caused by an intentional wrongful act by an insured.  Garcia challenged the denial arguing that the Insurance Code does not bar “innocent insureds” from recovering despite a co-insured’s wrongful acts.  At trial, the state court granted Century’s demurrer and Garcia appealed.  

Writing for a unanimous court, Justice Baxter agreed with Garcia and held that the policy provision which precluded coverage was invalid.  To reconcile this result with section 533, the Court relied on Insurance Code section 2070 which states: “All fire polices . . .  shall be on the standard form, and, except as provided by this article shall not contain additions thereto. No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy . . . provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.”  In other words, fire insurance policies in California must provide coverage that is at least as good as the coverage outlined by section 2071’s standard form provisions.  Now here is where it gets a little tricky.

While certainly a victory for innocent co-insured policyholders, the long-term impact of this opinion is unclear.  On one hand, the Court’s holding raises serious doubts about the use of policy provisions that deny coverage for the intentional acts of “any” insured.  On the other hand, the Court relied heavily on Insurance Code sections 2071 which applies solely to fire insurance coverage.  In addition, the Justice Baxter himself remarked in a footnote that the holding in Century “should not be read as necessarily affecting the validity of clauses” in other contexts.  Nevertheless, we can count of the fact that more cases will be coming in the future that test the boundaries of Insurance Code section 533. 

In 1992, as a result of a shooting, Fier became permanently quadriplegic (i.e. the loss of both arms and legs).  In 1993, Fier returned to work in a new job specifically tailored to his physical limitations where he earned the same salary as he had prior to the accident.  In 1997, Fier’s salary was reduced by $20,000 when he was assigned to a new position at Boyd.  In early 1997, Fier submitted a claim for benefits under the LTD policy, and received benefit payments from UNUM.  Between 1997 and late 2004, UNUM paid Fier $152,069.02. 

In late 2004, UNUM informed Fier that regarding his 1997 LTD claim, it should have ceased payments in 1998 because Fier left Boyd to take another job.  At the new job, Fier was earning approximately the same salary he had earned before the accident.  The rationale for UNUM’s decision was based upon the LTD policy which stated:

Disability benefits will cease on the earliest of:

The date the insured is no longer disabled;

The date the insured dies;

The end of the maximum benefit period;

The date the insured’s current earnings exceed 80% of his pre-disability earnings.

On appeal with the United States Court of Appeals for the Ninth Circuit the lower court correctly determined Fier’s ineligibility for benefits from 1993 to 1997 and from 1998 forward under the LTD policy.  The policy was not ambiguous as to when benefits would terminate.  In addition, the Ninth Circuit court also held the district court correctly determined that Fier’s LTD benefits terminated in 1998 when Fier left his employment with the Boyd. 

With respect to the AD&D policy, Fier appealed the district court’s determination that to be eligible for any AD&D benefits; he had to have suffered dismemberment by “severance.”  The Ninth Circuit, not having had to construe this term before, relied upon Cunninghame v. Equitable Life Insurance Society of the Untied States, 652 F.2d 306  (2d Cir. 1981).  In Cunninghame, the Second Circuit held the policy’s definition of ‘loss’ was not ambiguous, and interpreted the terms ‘dismemberment by severance’ by stating:

The word ‘dismemberment’ itself implies actual separation; the noun derives from the transitive verb ‘dismember’, defined as meaning ‘to cut or tear off into pieces; take apart roughly or divide (a whole) into sections or separate units’ or, obsoletely, to ‘lop’ or ‘sever’.  “Dismemberment” as a noun, therefore, refers to “the act of dismembering or the state of being dismembered: division into separate parts or units.”

Therefore, the Ninth Circuit concluded that Fier was not owed any benefits under the AD&D policy because he “did not suffer the physical detachment of his limbs.” 

The Court applied long-standing law in the Ninth Circuit that if there is no ambiguity to the interpretation of a policy provision, courts will not create one, and will “interpret terms in ERISA insurance policies in an ordinary and popular sense as would a [person] of average intelligence and experience.” Evans v. Safeco Life Ins. Co., 916 F.2d 1437 (9th Cir. 1990).

 In Ameron the U.S. Department of the Interior discovered defects in concrete siphons manufactured by Ameron for use in one of Arizona’s aqueducts.  The Interior Department sought $40 million in damages against Ameron in a proceeding before the Department of Interior Board of Contract Appeals (IBCA).  The proceeding took place before an administrative law judge over the course of 22 days.  Ameron’s CGL insurer, Insurance Company of the State of Pennsylvania (ICSP), refused to pay for the cost of defending or indemnifying Ameron. 

Ameron drew a distinction between the environmental cleanup orders discussed in Foster-Gardner and the IBCA proceeding.  In a unanimous decision the Court ruled that the IBCA proceeding was a “quasi-judicial” action.  Since the proceeding took place in front of an administrative law judge, the Court reasoned, it was significantly different from the environmental cleanup orders discussed in Foster-Gardner. The proceedings before the IBCA involved witnesses under oath, cross examination, and the admission of evidence subject to generally accepted federal rules of admissibility.  Since Congress enacted the IBCA as an alternative means to resolve contractual disputes, Ameron had a choice of forums for appealing the liability decision, which arguably included litigation in federal court.  Accordingly, the Court found a duty to defend the IBCA proceeding.

Ameron effectively limits the applicability of the Foster-Gardner rule, and gives CGL policyholders a leg up on securing a defense in adjudicative-type administrative proceedings.  

The case of Levine v. Blue Shield of California involved Michael Levine, who was an unmarried attorney with two dependants at the time he applied for health insurance.  Blue Shield issued a health plan that covered Levine and one of his dependants and a separate policy was issued to cover his other dependent.  After Levine married, he sought to add his wife on to his policy as an additional dependant.  Blue Shield complied with this request and Levine continued to pay premiums. 

At some point, Levine learned that the structure of his health insurance coverage was not ideal.  Essentially, Levine claimed that he could have achieved the exact same coverage at a much lower rate if the polices were restructured as a family plan with his wife as a primary insured.  Frustrated and understandably upset, Levine instituted a class action lawsuit against Blue Shield for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and unfair competition.  In response, Blue Shield filed a demurrer to all causes of action arguing, among other things, that it did not owe a duty to disclose information about the lowest premium charge it would accept to bind coverage.  The existence of this duty was the key issue addressed on appeal. 

Levine argued that Insurance Code Section 332 establishes a duty to disclose material facts.  Blue Shield responded that this statute is not applicable to it as a health plan.  However, the court assumed for purposes of argument that even if Section 332 applied, the Court found that it does not require the parties to an insurance contract to make available all information that may be material to the other party; rather, the Court said, it requires only that each party make available information that is “material to the contract [itself].” As a result, the court held that Blue Shield did not have a duty to disclose to Levine its best pricing.

This conclusion appears wrong.  The distinction between that which is material to the other party vs. that which is material to the contract was a distinction here without a difference.  Moreover, the court’s attempt to distinguish Pastoria v. Nationwide Insurance, 112 Cal. App. 4th 1490, 1492-1493 (2003) was not persuasive.  Policyholders will want to emphasize that this decision is very limited and should apply only to a calculations of premiums issue.  They will want to focus on the holding that confirms insurers have a duty to disclose material facts regarding coverage offered.  Anticipate Levine filing a motion for a rehearing, and, failing that, the filing of a petition for review to the California Supreme Court. 

At trial, the parties agreed that the standard of review was de novo since the Plan did not grant discretion to the claims administrator.  Accordingly, the district court placed the initial burden upon Muniz as the claimant to show that he was entitled to benefits under the terms of the plan.  Muniz submitted evidence to the court from his primary physician, Dr. Towner, who concluded that Muniz was totally disabled from performing any occupation.  This, argued Muniz, was sufficient to shift the burden of proof to the Plan to demonstrate that its claim decision was justified.  However, the Ninth Circuit disagreed.  Drawing from decisions in the Eleventh and Eighth Circuits, the Appellate Court concluded that the claimant retained the burden of proving that he was entitled to benefit even in light of the proffered evidence. 

As concluded by other circuit courts which have addressed the question, when the court reviews a plan administrator’s decision under the de novo standard of review, the burden of proof is placed on the claimant.  See, e.g., Horton v. Reliance Standard Life Ins. Co., 141 F.3d 1038, 1040 (11th SCir. 1998) (“A plaintiff suing under [29 U.S.C. § 1132(a) (1)(B)] bears the burden of proving his entitlement to contractual benefits.”); Farley v. Benefit Trust Life Ins. Co., 979 F.2d 653, 658 (8th Cir. 1992) (“[W]e agree that it was [the claimant’s] burden to show that he was entitled to the ‘benefits . . . under the terms of his plan.’ ”) (omission in original) (quoting 29 U.S.C. § 1332(a)(1)(B)).”

In addition, the Ninth Circuit recognized that Muniz could cite to no precedent where a court conducting a de novo review shifted the burden of proof to the claim administrator.  The case law cited by Muniz in support of his argument all dealt with cases where the standard of review was abuse of discretion.  In those situations, the court focused on whether the Plan abused its discretion in denying benefits.  However, under a de novo review, that analysis is irrelevant to the issue of whether the claimant was entitled to benefits.  Similarly, case law that supports burden shifting under an abuse of discretion framework would be irrelevant where the standard of review is de novo.  Since Muniz could not provide any precedent in support, he retained the burden of proof.  The court did note that if the standard of review was abuse of discretion, the burden would shift to the insurer to prove that its actions were not tainted by the structural conflict of interest that results when it review and decides entitlement to benefits and also is the funding source. 

Further, the court addressed Muniz’s argument that once a claimant proves he or she is totally disabled, the burden shifts to the insurer to show an change in condition:

Muniz argues that the district court committed clear error in its analysis because his medical records did not show a change in his condition over the years he was covered by the CGLIC plan. As noted above, the fact that the claimant was initially found disabled under the terms of the plan may be considered evidence of the claimant's disability, but as the Eighth Circuit stated in McOsker v. Paul Revere Life Insurance Co., “[w]e are not suggesting that paying benefits operates forever as an estoppel so that an insurer can never change its mind.” 279 F.3d 586, 589 (8th Cir.2002). Muniz did not provide sufficient evidence to demonstrate that the district court committed clear error in its analysis of the record

After all of the evidence for and against Muniz’s position was balanced against each other, the end result as determined by the district court was that Muniz failed to prove that he was entitled to benefits.  Ultimately, it is not clear whether Muniz would have won his case even if he did not have the burden of proof.  However, this holding creates an additional obstacle for all future claimants and confirms that in the Ninth Circuit, claimants retains the burden of proof for establishing entitlement to benefits under a de novo standard of review.