In an unpublished opinion, the Court of Appeal considered the trial court’s ruling on both of the post-verdict motions.  First, after reviewing the available record, the Court determined that the verdict in Bosetti’s favor was supported by substantial evidence, including specifically that her depression caused the disabling physical symptom of an increase in her fibromyalgia pain.  Based on these facts, the Court reversed the trial court’s ruling on the motion for judgment notwithstanding the verdict.  In reaching this conclusion, the Court of Appeal affirmed its earlier ruling that a limitation on coverage for “mental, nervous or emotional disorders of any type” does not apply if the insured‘s disability was caused, in any part, by her physical symptoms.

However, with respect to U.S. Life’s motion for a new trial, the Court of Appeal explained that the trial judge is afforded great deference and “an order granting a new trial `must be sustained on appeal unless the opposing party demonstrates that no reasonable finder of fact could have found for the movant on [the trial court's] theory,’” Applying this standard, the appellate court affirmed the order granting a new trial after finding that there was also substantial evidence that would have supported a verdict in U.S. Life’s favor. 

While the case was remanded to the trial court for a second trial, the Court of Appeal did not overturn its 2009 ruling, and thus Bosetti I and its position regarding mental disabilities with physical symptoms should still be considered good law.

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.

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 first party cases, where payment is sought for the insured’s direct losses, an insurer may raise a reasonable dispute over coverage without being guilty of bad faith.  But it has never been held that an insurer in a third party case may rely on a genuine dispute over coverage to refuse settlement.  Instead, it is a long-standing rule that “the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.

Id. (internal citations omitted). Essentially, American’s dispute over coverage could not justify its failure to refuse settlement and should not affect its evaluation of whether a settlement offer is a reasonable one.  American had a duty to the insured to evaluate and participate in the settlement negations despite the potential coverage issues.  In addition, the court noted that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds.  Here, the court found that American distorted Howard’s deposition testimony by equating his memory of specific acts of molestation into an admission that no molestation occurred during the policy period.  This, the court decided, was unreasonable and evidence of bad faith. 

The key takeaway in this case is the narrowing of the genuine dispute doctrine.  The court’s opinion essentially limits the doctrine’s use as a defense in bad faith failure-to-settle cases and reinforces the principle that the mere hint of potential coverage invokes the duty to defend.