California Insurance Litigation Blog

Under certain circumstances, an insurer has the right to intervene in a case against its insured to protect its own rights and to avoid harm to the insurer.  These circumstances usually involve cases where an insured is either prevented from appearing and defending, or simply chooses not to and a default is taken against the insured.  The recent case Western Heritage Insurance Company v. Superior Court, __ Cal. App. 4^th __ (Oct. 11, 2011), addresses the second set of circumstances, and provides an examination of California intervention law and holds that an insurer has the right to intervene in a case and take over in litigation if an insured is not defending the action, and may contest both liability and damages while doing so.  

Recently, the Ninth Circuit Court of Appeals ruled that an ERISA administrator must make a “clear and continuing repudiation” of a claim, in compliance with its duties of proper notification under ERISA, in order for a claim to “accrue” and thus start the statute of limitations clock on filing a lawsuit.  In Withrow v. Basch Halsey Stuart Shield, Inc. Salary Protection Plan, __ F.3d. __ (9th Cir. 2011), the United States Court of Appeals for the Ninth Circuit  held that a telephone call and resulting voicemail message made by the administrator, which was otherwise undocumented, did not constitute proper notice to a claimant that a benefits decision constituted an irrevocable and final determination.  The court explained that such a notification was deficient, and therefore cannot serve as the basis for an argument that a complaint was untimely filed.

The Ninth Circuit has reversed itself and ruled that insurance companies that make claim decisions or are responsible for paying benefits can serve as defendants in ERISA actions for benefits or to enforce the terms of the plan.  In Cyr v. Reliance Standard Life Insurance Company, __ F.3d __ (9th Cir. 2011), the Ninth Circuit overruled some of its earlier precedents, including Everhart v. Allmerica Financial Life Insurance Company, 275 F.3d 751 (9th Cir. 2001), and ruled that potential liability under 29 U.S.C. section 1132(a)(1)(B) of ERISA is not limited to the benefit plan or the Plan Administrator.  In explaining this shift, which allows insurance companies that make the claim decision or are responsible for paying benefits to be named as a defendant, the Ninth Circuit stated:

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.

Stranger Originated Life Insurance, also known as a “STOLI,” is a life insurance policy financed or held by a person who has no relationship to the person insured under the policy.  In the typical STOLI transaction, an investor encourages an elderly person to purchase a life insurance policy and name the investor, who pays the premiums, as the policy beneficiary.  Normally, the elderly insured is also paid a sum of money to entice them to enter into the transaction.

Every now and then a court decision comes along that is a virtual one-stop shop for basic insurance coverage and bad faith principles—a primer for newbie insurance attorneys and a refresher for seasoned litigators.  Chief Judge Anthony Ishii’s recent decision granting in part and denying in part an insurer’s motion for summary judgment on a farm-owners insurance policy is one. Ted Gaylord, et al. v. Nationwide Mutual Insurance Company, et al., 2011 U.S. Dist. LEXIS 21736 (Eastern District of California, March 4, 2011).  The Gaylord decision also sounds a cautionary note to policyholder attorneys to be mindful that first-party and third-party claims in a single action may be subject to different limitations periods.

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.

California Insurance Code section 533 provides that an insurer is not liable for a loss caused by the willful act of an insured.  This is consistent with California’s public policy of denying coverage for intentional acts of wrongdoing.  However, when there is more than one insured, this policy can lead to inequitable results.  Case in point is the situation presented in Century National Insurance Company v. Garcia, 2011 Cal. LEXIS 1392 (decided February 17, 2011). 

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.

The Thursday January 13, 2011 edition of the Los Angeles Daily Journal featured my article entitled “Fourth Amendment Protections Extend to Stored Email,” in the Government column. It discusses the recent the United State Sixth Circuit Court of Appeals& decision in the matter of United States v. Warshak, et al.  The article is posted below with permission of Daily Journal Corp. (2011).

In a closely watched case the California Supreme Court recently expanded the scope of a comprehensive general liability insurer’s (CGL) duty to defend “suits” to an adjudicative proceeding before the former United States Department of Interior Board of Contract Appeals (now the Civilian Board of Contract Appeals).  Ameron International Corp. v. Insurance Company of Pennsylvania, et al., 2010 Cal. LEXIS 11679 (November 18, 2010).  Many insurance industry analysts and counsel had expected the Court to continue to limit the duty to defend to court proceedings, as it had done in Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857, 887, 77 Cal.Rptr.2d 107, 959 P.2d 265 (1998)(Foster-Gardner).  In Foster-Gardner the Court held that the term “suit” in a CGL policy means “a court proceeding initiated by the filing of a complaint,” and declined to extend the duty to defend to an environmental agency’s pollution remediation order against a CGL policyholder.  The Foster-Gardner rule has since been applied to bar a CGL insurer’s duty to defend other administrative proceedings.

 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. 

The question of who has the burden of proof can often decide the outcome of litigation.  Given its importance, it is common to see litigants attempt to shift that burden to the opposing side in order to secure a tactical advantage.  Recently, in Muniz v. Amec Construction Management Inc., __ F.3d __, 2010 WL 4227877 (Decided October 27, 2010), the Ninth Circuit Court of Appeals addressed the question of whether the burden of proof can be shifted in an ERISA disability case.  In Muniz, a claimant diagnosed with HIV applied for benefits through his employer’s long-term disability plan (the “Plan”).  Benefits were approved and paid for the first 24 months.  However, as is common with many benefit plans, after 24 months the definition of disability changed.  In order to qualify under the Plan, the claimant must be unable to perform all the essential duties of any occupation.  As a result, the Plan terminated his benefits. 

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. 

In a new case from Division Three of the Fourth Appellate District, Chicago Title Insurance Company v. AMZ Insurance Services; Pacific Specialty Insurance Company, __ Cal. App. 4^th __ (September 9, 2010), the California Court of Appeal has given policyholders a good holding on the issues of when a policy binder becomes effective, when an agent acts on behalf of an insurer and what actions constitute bad faith. 

Last month, the U.S. Supreme Court handed ERISA plan participants a big victory when they decided the important ERISA disability case of Hardt v. Reliance Standard Life Insurance, __ U.S. __ (Decided May 24, 2010)(see our blog discussion here) holding that an ERISA plan participant may be able to collect attorneys’ fees from a plan or claim administrator without obtaining a judgment in the action.  It did not take long for the Ninth Circuit Court of Appeals to apply Hardt.  In Simonia v. Glendale Nissan/Infiniti Disability Plan, __ F.3d __ (9th Cir. June 24, 2010), the court rejected a plan participant’s claim for attorney’s fees.

In Simonia, Aleck Simonia became physically disabled due to a herniated disc.  He had disability insurance under his employer's group insurance plan, which was ultimately insured by the Hartford Insurance Co.  Hartford concluded that Simonia was no longer physically disabled but had a mental disorder subject to his ERISA plan's twelve-month payment limit.  Hartford also learned that Simonia had been awarded $1,551 per month in Social Security Disability Insurance (“SSDI”) benefits retroactively, which should have been offset against his payments from Hartford.  Thus, Hartford informed Simonia he would be receiving payments subject to the plan's twelve-month mental disorder limit and that he owed Hartford $22,310.

Simonia sued Hartford for improperly reclassifying his disability as a mental disorder.  Hartford filed a  counterclaim to recover its overpayment.  Simonia informed Hartford that the Social Security Administration had retroactively reduced his SSDI award, and he requested that Hartford recalculate the alleged overpayment.  The parties later settled the counterclaim and stipulated to its dismissal. Simonia did not prevail in his claims against Hartford for continuing benefits.  Simonia thereafter filed a motion seeking $63,745 in attorney’s fees because he “was successful as a counter-defendant in that the defendant dismissed its counterclaim.”

As predicted in my April blog post, the U.S. Supreme Court today handed ERISA plan participants a big victory when they decided the important ERISA disability case of Hardt v. Reliance Standard Life Insurance, __ U.S. __ (Decided May 24, 2010) holding that an ERISA plan participant may be able to collect attorneys’ fees from a plan or claim administrator without obtaining a judgment in the action. 

In that case, Bridget Hardt filed suit against the plan’s disability insurer, arguing that Reliance Standard Life Insurance Co. wrongly denied her claim for long-term disability benefits.  The district court found that Reliance’s original decision denying benefits disregarded pertinent medical evidence in violation of ERISA and found that the decision was otherwise unsupported by substantial evidence. Based on those findings, the district court remanded the matter to Reliance for reconsideration, ordering it to make a new benefits determination, after which it finally granted the benefits due. The district court then awarded Hardt $39,149 in attorney fees.

The U.S. Supreme Court heard oral arguments yesterday in the important ERISA disability case of Hardt v. Reliance Standard Life Insurance (09-448).  In that case, Bridget Hardt filed suit, arguing that Reliance Standard Life Insurance Co. wrongly denied her claim for long-term disability benefits.  The district court found that Reliance’s original decision denying benefits disregarded pertinent medical evidence in violation of ERISA and found that the decision was otherwise unsupported by substantial evidence. Based on those findings, the district court remanded the matter to Reliance for reconsideration, ordering it to make a new benefits determination, after which it finally granted the benefits due. The district court then awarded Hardt $39,149 in attorney fees.

In a case of first impression, the Ninth Circuit Court of Appeals held, for the first time under California law, that patent infringement can be covered as a "misappropriation of advertising ideas" under the advertising injury coverage of a general liability policy, where the patent is on a method of web based advertising.

In Hyundai Motor America v. National Union etc. et al., No. 08056527(April 5, 2010) Hyundai Motor America was sued for patent infringement after placing certain “build your own vehicle” features on its website. As a result, Hyundai sought a defense from its liability insurers under a comprehensive general liability policies (“CGL”) issued by National Union Fire Insurance Co. of Pittsburgh and American Home Assurance Co. Hyundai (“Defendants”)  claimed that the alleged patent infringement concerned an advertising method and thus, the lawsuit alleged an "advertising injury" as defined in the insurance policy. The insurers disagreed and declined to defend Hyundai. Consequently, Hyundai represented itself in the underlying patent infringement action.

In a case of first impression, the Fourth District Court of Appeal opened the door to new lawsuits against private Medicare plans that had previously been held to be preempted by the federal Medicare Act. In Cotton v. Starcare Medical Group Inc., __ Cal.Rptr.3d __, 2010 (Cal. App. 4 Dist.), the court found patients who are denied or suffer poor medical care by a private HMOs as part of a government-funded Medicare Advantage plan can bring state tort law claims against insurers who provide those plans and deny coverage under them. The case involved a Medicare Advantage plan where the federal government pays a fixed rate per month to a private insurer to manage the care of an elderly enrollee.

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.”

Regardless of whether the insured is represented by counsel, an insurer has a duty to provide notice of a contractual statute of limitations period.  The Insurance Corporation of New York discovered this holding the hard way when the California Court of Appeal published Superior Dispatch, Inc. v. Insurance Corp. of New York, 181 Cal. App. 4th 175 (2010), modified on Denial of Rehearing, __ Cal. App. 4th __, 2010 WL 601459 (February 22, 2010).

Superior Dispatch (“Superior”) was a trucking company who obtained a Cargo Coverage insurance policy from the Insurance Corporation of New York (“Inscorp”).  The policy issued to Superior contained a contractual statute of limitations period stating, “No suit or action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless the same be commenced within twelve (12) months next after discovery by the Insured of the occurrence which gives rise to the claim."

In July of 2003, Superior was hired to transport a dump truck on the back of a flat rack trailer.  En route to its destination, the cab of the dump truck struck an overpass and was severally damaged.  On July 17, 2003, Superior submitted a claim to Inscorp for the damaged dump truck.  Inscorp denied the claim in a letter dated November 5, 2003.  The denial letter did not notify Superior of the policy’s one-year contractual limitations period.  In January 2004, Superior retained legal counsel who challenged the denial in a several letters to Inscorp.  However, Inscorp affirmed the company’s decision to deny the claim arguing that there was no coverage under the policy.  Once again, Inscorp’s letter did not notify Superior of the one-year contractual limitations period.  When counsel for Superior finally filed a complaint on May 20, 2005, Inscorp filed a motion for summary judgment arguing that the contractual limitations period barred the complaint.  The trial court agreed and entered a judgment in favor of Inscorp.

There has been considerable attention given lately to health insurers’ attempts to rescind health insurance policies and the California Department of Insurance has recently issued regulations concerning rescission of the these policies.  The Second Appellate District has now added some heat to the controversy about these types of rescissions with its decision in Nieto v. Blue Shield of California Life & Health Insurance Company, __ Cal. App. 4^th ___ No. B214669 (January 19, 2010).

Blue Shield offers several health insurance plans to individuals.  As part of the determination whether to issue coverage, Blue Shield provides an application to an individual seeking coverage that requests detailed information of past and current health problems, treating physicians, prescribed medications and recommended treatment.  Using proprietary written guidelines, Blue Shield engages in the underwriting process by evaluated the responses provided by each applicant to determine eligibility for health insurance and, if so, at what premium rate.  Julie Nieto applied for one of these policies but failed to disclose information about her back and hip condition and treatment on a health insurance application she submitted to Blue Shield.  Blue Shield issued her a policy based upon her representations.

After issuing the policy, Blue Shield’s underwriting investigation unit opened a file on Nieto after it received a referral from the medical management department indicating that she had received a diagnosis of necrosis of the hip and was scheduled for hip replacement surgery.  As part of the investigation Blue Shield sought and obtained her medical and pharmacy records.  At that point, Blue Shield learned that immediately preceding her application appellant had received extensive treatment for back and hip pain and had been prescribed multiple medications.  Blue Shield proffered evidence that if it had been aware of the undisclosed information it either would have declined to issue the policy or, at a minimum, would not have issued the policy until receiving additional information from appellant.

The U.S. Ninth Circuit Court of Appeals has upheld an arbitration award requiring U.S. Life Insurance Co. to pay reinsurance of more than $500 million to Superior National Insurance Companies, workers' compensation insurer in liquidation, the California Department of Insurance reported.

In a press release, California Insurance Commissioner Steve Poizner said that "upholding this award means that that hundreds of millions of dollars will be available to pay the claims of workers injured on the job through the California Insurance Guarantee Association (CIGA) and other guarantee associations.”  "This is huge and welcome news," Poizner said.

U.S. Life is a subsidiary of American International Group (AIG) and was a reinsurer for five California workers' compensation insurance companies that were liquidated in 2000. U.S. Life argued that Superior National and its affiliates failed to disclose to U.S. Life all pertinent information regarding the adequacy of its outstanding reserves for payment of claims, and exposing U.S. Life to substantial losses, CDI said.

On June 25, 2007 the U.S. District Central District in Los Angeles entered an original judgment against U.S. Life for $443.5 million. U.S. Life subsequently appealed to the Ninth Circuit. Fourteen months after arguments were heard and the case submitted, the original judgment was unanimously upheld by a three-judge panel. U.S. District Court Judge Edward F. Shea wrote the opinion confirming the original judgment against U.S. Life.

Posner explained that including post-judgment interest, the judgment is now more than $517 million. Interest will continue to accrue until payment is received from U.S. Life.

Although the court upheld the judgment, U.S. Life still may seek to file a motion to reconsider or request a hearing en banc, which may be filed within 14 days, or within 90 days of the judgment being affirmed it may seek review by the United States Supreme Court. Given that this appeal relates to the affirmation of an arbitration award, it is not expected the Court will grant further review.

The press release stated “[a]t no time were people in the workers' compensation system at risk of not being paid. CIGA The California Insurance Guarantee Association has been paying the claims of injured workers whose policies were reinsured by U.S. Life. Once the money is collected from U.S. Life or from the $600 million bond AIG posted as security, it will be distributed to CIGA and other guaranty associations. CIGA will receive about 90 percent of the final amount.”

Recently, in Montour v. Harford Life & Accident, 582 F.3d 933 (9th Cir. 2009), the Ninth Circuit Court of Appeals, in one of its most important cases, adopted a new standard of reviewing ERISA abuse of discretion cases where the insurer has a conflict of interest.  The court held that a “modicum of evidence in the record supporting the administrator’s decision will not alone suffice in the face of such a conflict, since this more traditional application of the abuse of discretion standard allowed no room for weighing the extent to which the administrator’s decision may have been motivated by improper considerations.”  Further, the court in Montour explained that a reviewing court must also take into account the administrator’s conflict of interest as a factor in the abuse of discretion analysis.  This was significant because the appeals court gave a comprehensive description of the “signs of bias” it found were exhibited by Hartford throughout the decision-making process. These included overstatement of and excessive reliance upon Montour’s activities in the surveillance videos; Hartford’s decision to conduct a paper review rather than an “in-person medical evaluation;” Hartford’s insistence that Montour produce objective proof of his pain level; and Hartford’s failure to deal with and distinguish the Social Security Administration’s contrary disability decision. The appeals court also noted Hartford’s “failure to present extrinsic evidence of any effort on its part to ‘assure accurate claims assessment.’”

Sacks v. Standard Ins. Co., __ F. Supp. 2d __, 2009 WL 4307558 (C.D. Cal. 2009) is one of the first cases to address the abuse of discretion standard of review since the Ninth Circuit’s important decision in Montour.  In Sacks, the claimant was a mortgage underwriter for Countrywide Home Loans.  Standard Insurance Company (“Standard”) was the claims administrator and insurer for the Countrywide Home Loans Long Term Disability Plan (the “Plan”).  After her claim for long-term disability benefits was denied, the claimant sued Standard Insurance in federal courts for benefits under the ERISA.

The court recognized that the Plan granted Standard with discretionary authority.   However, since Standard provided the funds and made the decision concerning benefits, it operated under a structural conflict of interest.  At issue was how to apply the standard of review in light of the conflict of interest and the recent Ninth Circuit opinion in Montour.  Here, the court recognized that the “abuse of discretion” standard of review does not change just because there is a conflict of interest.  Instead, the factual circumstances surrounding the conflict of interest is a factor providing weight in the overall analysis of whether an abuse of discretion occurred.  As a result, the court in Sacks gave greater weight to the conflict of interest for a variety of reasons including because Standard used an erroneous occupation criteria to evaluate Plaintiff’s claim, failed to consider the effects of the claimant’s medication on her ability to perform her own occupation, and failed to adequately investigate the claim.  In addition, the court highlighted the fact that Standard failed to conduct follow-up testing as recommended by the IME physician and instead merely accepted the part of the physician’s conclusion that supported its claims decision.  These actions, the court found, warranted greater skepticism of Standard’s claims decision.  Accordingly, the court found that Standard had abused its discretion and reversed the claim decision by awarding the plaintiff benefits.

Expect to see more district courts to focus their analysis on these and other self-interest factors as they assess how much weight to give to an insurer’s conflict of interest.   Also expect to see more district courts applying the Montour analysis to find that administrators have acted in a manner that evidences their self-interest and to award more ERISA participants their benefits under insured benefit plans.

2009 was an important year for insurance legislation in California.  An excellent review of this legislation was posted on December 4, 2009 by the Barger & Wolen LLP legal blog (quoted verbatim from the blog) as follows: “LIFE, HEALTH AND DISABILITY INSURANCE"

1. AB 23: Cal-COBRA Premium Assistance

• Establishes notice requirements that must be provided to eligible qualified beneficiaries regarding the availability of premium assistance under the American Recovery and Reinvestment Act of 2009 (ARRA).
• Qualified beneficiaries eligible for federal assistance may elect coverage under Cal-COBRA, and those enrolled in Cal-COBRA as of February 17, 2009 may request the federal premium assistance.

2. AB 76: Life and Annuity Consumer Protection Fund

• Extends the provision creating the Life and Annuity Consumer Protection Fund to January 1, 2015.
• Requires the California Insurance Commissioner (“Commissioner”) to publish an annual report on its Web site detailing certain protections for consumers of insurance products.

3. AB 108: Individual Health Care Coverage

• Prohibits, except as specified, rescission, canceling, limiting the provisions, or raising premiums of a contract or policy due to omission, misrepresentation, or inaccuracy in the application after 24 months following issuance of the same.

4. AB 119: Pricing of Health Care Coverage

• Prohibits premium, price or charge differentials based on the gender of specified individuals, commencing January 1, 2011.

5. AB 381: Unemployment Compensation Disability Benefits

• Permits a community college district to elect to become an employer, subject to specified requirements pertaining to disability compensation.

6. AB 389: Long-Term Care Insurance

• For long-term care insurance policies issued before new premium rate schedules are approved and for which rate revisions are filed on or after January 1, 2010, changes the calculation for determining what benefits are deemed “reasonable” in relation to premiums.
• Permits the Commissioner to approve a rate revision based on less than a certain loss ratio in order to protect the financial condition of the insurer.
• Revises the required qualifications of actuaries used by the Commissioner to review rate applications relative to long-term care insurance.

7.  AB 1541: Health Care Coverage (Late Enrollment)

• An individual, or dependent, who has lost or will lose Healthy Families Program coverage, Access for Infants and Mothers Program coverage, or Medi-Cal program coverage can requests enrollment within 60 days (changed from 30 days) after termination of that coverage without being considered a “late enrollee.”

8. AB 1543: Medicare Supplement Coverage[1]

• Adopts changes and provisions as required by the federal Medicare Improvements for Patients and Providers Act and Genetic Information Nondiscrimination Act.
• Adopts other amendments relating to open enrollment and guaranteed-issue.

LIFE SETTLEMENTS

• SB 98 defines when certain trusts and special interest entities do not have an insurance interest in a life insurance policy. It also establishes a number of new provisions to regulate viatical and life settlements. It adds two new license classifications for “Life Settlement Provider” and “Life Settlement Broker.”

PROPERTY AND CASUALTY INSURANCE 1. AB 63: Service Contract, Retailers

• Requires retailers of service contracts to maintain certain information about a contract that is in effect and provide such information or a copy of the contract to the contract purchaser or beneficiary upon request.
• Does not apply to vehicle service contracts.

2. AB 601: Motor Vehicle Insurance, Special Assessments

• Extends until January 1, 2015, the special assessment imposed on insurers, which is charged per motor vehicle insured.

3. AB 1179: Motor Vehicle Insurance, Damage Assessments

• Requires that additional information regarding right to independent estimate be included in the Auto Body Repair Consumer Bill of Rights.

4. AB 1200: Motor Vehicle Insurance, Direct Repair Programs

• Provides that insurers may (notwithstanding prohibition against requiring use of specific auto repair shop) provide truthful and nondeceptive information regarding the services and benefits available to the claimant.

5. SB 291: Mortgage Guaranty Insurance Reserves

• Amends definition of “face amount of an insured mortgage” for purposes of determining surplus requirements. 
• Requires notice to Commissioner before insurer falls below surplus threshold and creates ability to seek waiver of requirement.

MISCELLANEOUS 1. AB 299: Insurance Omnibus     Among other things, the bill:

• Requires the California Department of Insurance to remove from, or clarify on, its Web site any pleading, order or document relating to an enforcement action that has been withdrawn.
• Requires the Commissioner to consider additional criteria when examining the business and affairs of the insurer.
• Allows the Commissioner to disclose market analysis data to any state or country insurance department, law enforcement officials, federal agency or NAIC.
• All analyses pursuant to authorized examinations are at the expense of the insurer.
• Requires insurer annual audits to be conducted in conformity with “standards adopted by the [NAIC],” and allows the Commissioner to grant multiple 30-day extensions to the audit due date.
• Permits domestic insurers to invest in credit unions.
• Prohibits excess fund investments in a loan or any other obligation to any one borrower or obligor as specified.
• Requires insurers to provide to the Commissioner advance notice of the intent to enter into a tax sharing agreement.
• Requires auto liability policy to provide for replacement of a child seat, as defined, that was damaged in a covered accident.

2. AB 328: Electronic Transactions

• Deletes the exclusion of certain insurance statutes from applicability of Civil Code provisions permitting parties to conduct transactions by electronic means.
• With respect to certain automobile insurance transactions, prohibits electronic delivery of certain documents unless the transaction commenced electronically.
• Permits required notices related to certain types of insurance to be made electronically with consent of the parties, and imposes certain system and records requirements on the insurer related to the same.
• Permits an insurer to pay claims with electronic fund transfer, with the consent of the insured.

3. AB 409: California Insurance Guarantee Association

• Provides that the initial premium charge shall be adjusted by applying the same rate of premium charge as initially used to each insurer’s written premium as shown on the annual statement for the 2nd year following the year on which the initial premium charge “was based” (change from “is made”).

4. AB 470: Insurance Information Confidentiality

• Authorizes the disclosure of information from an accident report, supplemental report, or investigative report to an insured’s lawyer if the insured is otherwise entitled to obtain the report.

5. AB 800: Insurance Producer Omnibus     Makes a number of changes with respect to producer licensing, including that it:

• Deletes pre-licensing education requirement for resident applicants with current nonresident licenses.
• For persons licensed in 2010 or after, eliminates certain exemptions from education requirement.
• Permits licensed California nonresident business entity producers to use licensed California resident individual producers to transact insurance.”

[1] AB 1543 was enacted as an urgency statute. As such, it became effective when it was chaptered on July 2, 2009.

Following the passage of Proposition 64 on November 2, 2004, in order to bring a representative claim under the unfair competition law (“UCL”), a plaintiff must meet the following standing requirements: (1) establish that he or she “has suffered injury in fact and has lost money or property as a result of such unfair competition” and (2) comply with the class action requirements as set forth in California Code of Civil Procedure Section 382. Bus. & Prof. Code §§ 17203, 17204 and 17535. After the passage of Prop 64, litigants continued to debate whether only the named plaintiff or all class members had to meet the more stringent standing requirements of injury in fact and loss of money or property as a result of the alleged conduct. 

In In Re Tobacco II Cases, 46 Cal. 4th 298 (2009), the California Supreme Court resolved that debate. Specifically, the Court addressed two questions: “First, who in a UCL class action must comply with Proposition 64’s standing requirements, the class representative or all unnamed class members, in order for the class action to proceed?” and “Second, what is the causation requirement for purposes of establishing standing under the UCL and in particular what is the meaning of the phrase ‘as a result of’ in section 17204?” In response to the first question, the Court concluded that the new standing requirements of Prop 64 applied only to the named plaintiff/class representative and not to absent class members. In reaching this conclusion, the Court reasoned that “the references in section 17203 to one who wishes to pursue UCL claims on behalf of others are in the singular; that is, the ‘person’ and the ‘claimant’ who pursues such claims must meet the standing requirements of section 17204 and comply with Code of Civil Procedure section 382.” The Court concluded that these singular references must be interpreted to relate only to the individual representative plaintiff.  The Court further reasoned that there was nothing in Prop 64 that indicated it was to have any affect on absent class members and the way in which class actions operate in the context of the UCL, or on the remedies available under the UCL, which did not always require actual injury to absent class members.

In response to the second question, the Court concluded that the named plaintiff/class representative must demonstrate actual reliance on the alleged deceptive or misleading representations, consistent with the element of reliance required in common law fraud actions. The Court, however, indicated that while the representative plaintiff must show that the alleged misrepresentation was “an immediate cause of the injury-producing conduct, the plaintiff need not demonstrate it was the only cause.” In other words, it is enough that the plaintiff’s reliance “played a substantial part” and was “a substantial factor, in influencing his decision.”

Finally, while the Court made clear that the new standing requirements of Prop 64 applied only to the named plaintiff/representative, the Court also noted that Prop 64 “explicitly mandates that a representative UCL action comply with Code of Civil Procedure section 382,” which requires that class representative’s claims be typical of the unnamed class members and that common questions of law and fact predominate. See Basurco v. 21^st Century Ins. Co., 108 Cal. App. 4th 110, 117 (2003).

Justice Moreno authored the opinion for a divided Court, and Justice Baxter wrote a concurring and dissenting opinion.

California Insurance Commissioner Steve Poizner unveiled his proposed regulations to, according to an LA Times article dated June 3, 2009, “combat the health insurance industry practice of dropping members with costly illnesses.” According to the article, Poizner's draft regulations would require insurers to write applications for coverage in “plain English and allow applicants a ‘not sure’ answer to questions about their preexisting medical conditions.”

According to Mr. Poizner’s news release, the new regulations will (in his words) do the following:

• Set clear and rigorous standards that insurers must meet before they issue a health insurance policy. Insurers must do their underwriting job before they issue the policy.
• Put insurers on notice that they must prove that they have met ALL of the underwriting standards before they can consider rescission.
• Put an end to lightweight sloppy underwriting if insurers want to keep the right to rescind.
• Put insurers on notice that they must be 100% sure that an individual knew the answer to a health history question and failed to provide it before considering rescinding that person.
• Require insurers to make sure that health insurance applications are accurate and complete.
• Require insurers to ask clear and unambiguous health history questions and avoid confusing applicants.
• Require agents who assist applicants with their questions to attest to the insurer regarding their assistance, at every stage of the application process.
• Encourage insurers to use Personal Health Records instead of potentially confusing health history questionnaires to underwrite applicants.
• Provide fair due process protections for consumers who are being investigated for possible rescission including early notice, opportunity to provide input to the insurers, and the chance to clarify their application. No hidden rescission investigations are allowed under the new rules and this encourages insurers to work with their insureds to resolve questions about the accuracy of their responses.
• Require insurers to share documentation used during rescission investigations with the insured under investigation.

The notice of the regulations will be officially published by the Office of Administrative Law on Friday, June 5.  According to the news release, implementation of the regulations is expected by the end of 2009, following a public hearing, public comment and regulation finalization period.

The regulations would apply to individual health coverage sold by companies licensed by the Department of Insurance.  A second state regulator, the Department of Managed Health Care, said more than two years ago that it would pursue rescission regulations, but has not done so.  The proposed regulations can be viewed here.

On a related note, the California State Assembly is expected to vote soon on a bill that would set a high bar on rescissions for people who purchase individual insurance of all types, regardless of who regulates it.

Bosetti v. The United States Life Ins. Co., 175 Cal. App. 4th 1208 (2009) is an important California Court of Appeal decision that addressed whether a two-year benefits limitation on disabilities due to “mental, nervous or emotional disorder[s]” could serve to limit benefits payable to an insured disabled from depression and anxiety who also complained of interrelated physical impairments.

Bosetti was employed by the Palos Verdes Peninsula Unified School District. As part of her employment benefits, she was covered under a group long-term disability insurance policy issued by The United States Life Insurance Company in the City of New York (“U.S. Life”).

Bosetti‘s job was eliminated for economic reasons. Shortly after she learned that her employment would be terminated, she saw a doctor for depression and was placed on temporary disability. Her disability extend beyond two years, and had a physical component as well as an emotional one.  Under the policy, Bosetti could obtain disability benefits for two years if she was disabled from her own occupation. After that time, she could only obtain disability benefits if she was disabled from “any occupation.”  U.S. Life concluded that Bosetti was not disabled from any occupation and terminated her disability benefits at the end of two years. That determination was based primarily upon the two-year benefits limitation for mental or nervous disorders, the results of a functional capacity examination, and an independent physician consultation.

After the U.S. Life moved for and was granted summary judgment, Bosetti appealed.  The court of appeal held that the limitation was ambiguous and was not applicable if the claimant’s physical problems contributed to her disabling depression or were a cause or symptom of that depression. The Bosetti court further concluded that the insurer’s denial of benefits based upon that two-year limitation was not in bad faith under the genuine dispute doctrine.

The Bosetti court explained that the insured’s disability had both mental and physical elements, noting that one of her doctors had suggested that her physical disability arose out of her emotional disability and another that her emotional disability or depression arose out of her physical problems and chronic pain. The court held that the two-year mental limitation was ambiguous because it “does not clearly explain whether the limitation applies when the total disability is due in part to a mental, nervous …disorder” and because an insured’s reasonable expectations are that disabling depression arising from a physical condition like fibromyalgia and, correspondingly, disabling physical symptoms arising from depression, would not fall within the mental/nervous limitation.  

As part of its analysis, the court rejected the rationale of Equitable Life Assurance Society v. Berry, 212 Cal. App. 3d 832, 835, 840 (1989), a California opinion concerned with an insured who was diagnosed with manic-depressive illness, a condition which has a chemical (physical) etiology, rather than a purely mental one. The Berry court concluded, as a matter of law, that there was no coverage due to a disability policy‘s exclusion for “[m]ental or nervous disorders” and a health policy‘s limitation on benefits for treatment for a neurosis, psycho-neurosis, psychopathy, psychosis, or mental or nervous disease or disorder of any kind, on the basis that these exclusions were unambiguous and referred solely to symptoms, rather than causes.  Id. at 840.  The court disagreed with Berry for two reasons: it disagreed with its analysis and its holding was abrogated by statute.

The court found that the holding of Berry did not survive Insurance Code section 10123.15, which provides that “every group policy of disability insurance which covers hospital, medical, and surgical expenses on a group basis, and which offers coverage for disorders of the brain shall also offer coverage in the same manner for the treatment of the following biologically based severe mental disorders: schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder. Coverage for these mental disorders shall be subject to the same terms and conditions applied to the treatment of other disorders of the brain.”  It appears that based on the court’s ruling, the two-year mental or nervous disorders limitation can never be applied in California to the biologically based severe mental disorders of “schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder.”

The court adopted the Ninth Circuit’s approach in Patterson v. Hughes Aircraft Co., 11 F.3d 949, 950 (9th Cir. 1993) where the court concluded that a limitation on benefits resulting from “mental, nervous or emotional disorders of any type” was ambiguous as to whether mental disorders referred to causes or symptoms, and whether a disability is mental when it results from a combination of physical and mental factors.  The court resolved the ambiguity in favor of the insured, holding that the limitation on coverage did not apply if the insured‘s disability was caused, in any part, by his physical symptoms.

Can a plan participant sue for breach of fiduciary duty when his individual account is diminished by a failure of the administrator to follow his investment instructions? The U.S. Supreme Court answered this important question in the affirmative in James LaRue  v. DeWolff, Boberg & Associates Inc., 128 S. Ct. 1020 (2008).  LaRue filed an action under ERISA alleging that his employer (also the plan administrator) breached its fiduciary duty with regards to an ERISA-regulated 401(k) retirement savings plan by failing to follow his investment instructions.  Relying on the Supreme Court’s ruling in Massachusetts Mutual Life Insurance Co. v. Russell that a participant could not bring a suit to recover consequential damages resulting from the processing of a claim under a plan that paid a fixed level of benefits, the Fourth Circuit Court of Appeals affirmed the district court’s grant of summary judgment in favor of the plan on the grounds that section 502(a)(2) did not provide a remedy for LaRue’s “individual injury.”  The Supreme Court disagreed. 

In an opinion written by Justice Stevens, the Court held that “although § 502(a)(2)  does not provide a remedy for individual injuries distinct from plan injuries, that provision does authorize recovery for fiduciary breaches that impair the value of the plan assets in a participant’s individual account.”  The Court reasoned that in the context of defined contribution plans, the misconduct did not need to threaten the solvency of the entire plan in order for section 409 (which provides remedies for breach of fiduciary duty) to apply.  Rather, the legislative history and plain language of the statute authorizes a participant to enforce fiduciary obligations under ERISA, and the administrator’s failure to follow the LaRue’sinvestment instructions could qualify as a breach of those duties.

After the United States Supreme Court decided MetLife Ins. Co. v. Glenn in which the Court held that a reviewing court must consider the conflict of interest arising from the dual role of an insurer acting as a plan administrator and payor of plan benefits as a factor in determining whether the insurer abused its discretion in denying benefits, several courts have struggled with this standard.  The Ninth Circuit Court of Appeals clarified how courts within the Ninth Circuit will apply this standard in Montour v. Hartford Life & Accident, 582 F.3d 933 (9th Cir. 2009).  In Montour, the court adopted a new standard of reviewing ERISA abuse of discretion cases where the insurer has a conflict of interest. The court held that a “modicum of evidence in the record supporting the administrator’s decision will not alone suffice in the face of such a conflict, since this more traditional application of the abuse of discretion standard allowed no room for weighing the extent to which the administrator’s decision may have been motivated by improper considerations.”

Robert Montour was a telecommunications manager for Conexant Systems, Inc. His employer provided him with a group long-term disability plan governed by ERISA. Hartford was both the insurer and claims administrator of the plan. The plan granted Hartford discretionary authority to interpret plan terms and to determine eligibility for benefits.

Montour applied for and received disability benefits, initially for an acute stress disorder, in 2003. In 2004, Montour consulted an orthopedic surgeon, Dr. Kenneth Kengla, about knee and back pain and subsequently underwent surgery. Dr. Kengla diagnosed Montour with degenerative changes in both areas and notified Hartford that Montour was suffering from physical disability which prevented him from returning to the labor force. Dr. Kengla listed numerous restrictions on Montour’s physical activities.

In November and December 2005 Hartford conducted surveillance on Montour over the course of four days. Video footage from this surveillance depicted Montour driving his car along with other activities. Shortly thereafter, a Hartford investigator conducted a personal interview with Montour at his home, during which Montour listed a “bad back, [an] arthritic right knee, and sleep apnea” as the “disabling medical condition(s)” preventing him from returning to work. He also described an inability to concentrate, which he attributed to the medication he must take to treat his “constant pain.” Montour acknowledged that the surveillance video footage accurately depicted his level of functionality.

In May 2006 a Hartford nurse case manager submitted a letter to Dr. Kengla indicating that Montour was capable of performing “sedentary to light” work and soliciting their agreement. Dr. Kengla indicated that he disagreed with Hartford’s conclusions, citing Montour’s persistent orthopedic symptoms and physical restrictions.

In July 2006 Hartford hired a consulting physician, Dr. Gale Brown, to conduct a file review. Dr. Brown concluded that medical evidence supported the existence of a lower back condition but that Dr. Kengla’s offered restrictions were excessive. He acknowledged that the medical evidence supported Montour’s chronic pain but found that Montour was nevertheless capable of working full-time with modest restrictions, such as changing positions every thirty to forty-five minutes.

After Hartford enlisted a vocational rehabilitation expert to compile an Employability Analysis Report which concluded that Montour was capable of working in a high-level managerial capacity in five different fields, in August 2006 Hartford denied his claim. Montour appealed this decision and included a vocational appraisal report which concluded that Montour was “not employable in any setting” and that Hartford’s decision was based on numerous mistakes, including a disregard for the fact that the Social Security Administration (SSA) considered Montour to be “totally disabled.”

In response, Hartford hired a physician to conduct a second file review. The physician reviewed Montour’s records for evidence of a physical condition that would preclude sedentary work and, like Dr. Brown, found none. He noted in particular a lack of objective, clinical data demonstrating the extent to which Montour’s pain impacted his functionality. He also noted that Montour’s activities depicted on the surveillance videos exceeded the activity requirements of a “sedentary” job.

In light of concerns raised in the vocational appraisal report, Hartford requested a vocational specialist to conduct an Employability Analysis Report addendum, which reached the same conclusion as the initial Employability Analysis Report regarding the sedentary nature and thus the feasibility of the five proposed managerial positions. In February 2007, a Hartford appeal specialist affirmed the company’s previous decision to terminate Montour’s benefits. In a bench trial, the district court rendered its decision in favor of Hartford, upholding its denial.

In reversing the district court, the Ninth Circuit first explained that when an ERISA plan grants the administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan, the court reviews the decision for abuse of discretion. The court agreed with the district court that the abuse of discretion standard applied and that Hartford had a conflict of interest. However, the appeals court criticized the district court’s application of the “clear error” test, explaining that a reviewing court must also take into account the administrator’s conflict of interest as a factor in the abuse of discretion analysis. The appeals court concluded that the district court’s decision did not adequately balance the conflict factors. Accordingly, the appeals court proceeded to do so.

The appeals court gave a comprehensive description of the “signs of bias” it found were exhibited by Hartford throughout the decision-making process. These included overstatement of and excessive reliance upon Montour’s activities in the surveillance videos Hartford’s decision to conduct a paper review rather than an “in-person medical evaluation;” Hartford’s insistence that Montour produce objective proof of his pain level; and Hartford’s failure to deal with and distinguish the Social Security Administration’s contrary disability decision. The appeals court also noted Hartford’s “failure to present extrinsic evidence of any effort on its part to ‘assure accurate claims assessment.’”

The appeals court concluded that Hartford’s bias had infiltrated the entire administrative decision-making process, leading the court to accord significant weight to the conflict of interest. Weighing all of the factors together, the court concluded that Hartford’s conflict of interest improperly motivated its decision to terminate Montour’s benefits. The court reversed and remanded the matter for entry of judgment in favor of Montour and for reinstatement of long-term disability benefits.

In Amer. States Ins. v. Progressive Casualty Ins., 180 Cal. App. 4th 18 (2009), the California Court of Appeal addressed the “peculiar risk” doctrine in the context of an insurer’s duty to defend. 

Victor Meza was a self-employed truck driver who was hired by Western Trucking LLC (“Western”) as an independent contractor.  While driving a tractor trailer owned by Western and insured by Wilshire Insurance Company (“Wilshire”), Meza collided with a pedestrian, Yevdokia Bristman, seriously injuring him.  Bristman later sued the grading contractor who hired Western, Vinci Pacific Corporation and the general contractor, Garden Communities (collectively “Vinci Pacific”). 

Meza’s liability insurance carrier was Progressive Casualty Insurance Company (“Progressive”) and American States Insurance Co (“American”) provided the commercial auto liability policy covering Western and Vinci Pacific.  American tendered its defense of the Bristman suit to Progressive who disclaimed coverage.  American then sued Progressive, seeking a declaration that Progressive had a duty to defend. The trial court held that the “peculiar risk” doctrine did not apply and that Progressive did not have a duty to defend.

American appealed and the appellate court reversed the trial court’s decision, holding that the Progressive had a duty to defend American against Bristman’s lawsuit based on the “peculiar risk” doctrine.  The “peculiar risk” doctrine is a form of vicariously liability where an owner or contractor can be held directly liable for damages that an independent contractor causes by negligently performing his work.  Progressive argued that this was a simple automobile accident that did not implicate any special or inherent danger in connection with the subcontractor’s operation of the truck.  The Court of Appeal disagreed.  Instead, the court noted that the Vinci Pacific allowed its subcontractors to use an entrance that required drivers to execute a U-turn, jump a curb, cross two pedestrian crosswalks and drive on the sidewalk, all without the assistance of flagmen.  This, the court reasoned, represented a level of control by the general contractor over the contractor’s work that involved a special, recognizable and inherent danger.  As a result, Vinci Pacific was potentially liable for Bristman’s injuries under the vicarious liability theory of the “peculiar risk” doctrine. 

Having established that potential liability existed, the court then held that Progressive had a duty to defend stating, “It is enough that a single claim is potentially covered by the policy; the insurer owes a duty to defend even if all other claims against the insured are clearly not covered […] [T]he insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot; the insurer, in other words, must present undisputed facts that eliminate any possibility of coverage.”

In holding that Progressive owed a duty to defend Vinci pursuant to the “peculiar risk” doctrine, the court noted two caveats.  First, that “where more than one insurer owes a duty to defend, a defense by one constitutes no excuse of the failure of any other insurer to perform.”  Second, that Progressive “may have a right to be reimbursed for defense costs allocable solely to claims for which there was no potential vicarious coverage under their policies.” 

Having concluded that a duty to defend existed based on potential liability under the peculiar risk doctrine, the Court of Appeal reversed and remanded the case for further proceedings.