Declarations and Exclusions

"Long-Winded" but Enforceable: Statute Mandates Coverage for Life Insurance Applicant Killed While His Application Is Being Processed

The Third District Court of Appeal in Sacramento addresses a persistent problem in life insurance law: When an applicant for life insurance dies between the submission of the application and the issuance of the policy, must the insurer pay?  Here, the issue is complicated by the fact that the insurer had already taken steps to withdraw temporary coverage during the application process.  The appellate court majority finds that a somewhat obscure statute -- Insurance Code §10115 -- requires the insurer to pay the death benefit in the circumstances of the case.

Michael Hodgson applied for $500,000 of life insurance coverage through Banner Life Insurance Company.  He submitted a check for payment of the first premium with his application.  At the time of the application, the insurance agent provided Michael with a "conditional receipt" or binder, granting coverage during the time that the application was being processed.  When the application and check were received by Banner Life, it immediately notified the agent that the company's procedures did not allow a grant of temporary coverage when the applicant sought coverage greater than $250,000.  Through the agent, Banner Life returned Michael's check and gave written notice that there would be no temporary coverage provided, although it would continue to process the application.  At the conclusion of the underwriting process, Banner Life approved the application for coverage of $500,000.  Five days earlier, however, Michael had been involved in an automobile accident and sustained injuries the ultimately proved fatal.  His wife and children sought payment under the life insurance policy, but Banner Life refused, on the ground that it had extended no temporary coverage and that the actual policy had not yet been issued at the time of Michael's accident.  In subsequent litigation, the trial court granted summary judgment in the insurer's favor; the Court of Appeal reverses that decision.

In its opinion, the appellate court discusses at length the California cases that hold that an otherwise insurable life insurance applicant who has submitted payment of premium along with the application has a "reasonable expectation" of coverage while the application is processed, based on the insurer's retention of the premium.  The Court agrees with Banner Life's position that its actions in returning the initial premium check and in notifying Michael explicitly that it would not be extending temporary coverage operated to defeat any such "expectation."  Based on the case law, Banner Life would be permitted to deny the claim.  However, the case law is not the last word on the subject:

Insurance Code §10115 provides in part that when payment of premium is made with an application and either a receipt is given or the payment is received at the insurer's home office, and the application is thereafter approved, then the policy is effectively deemed to have been issued on the date of the original application.  Banner Life argued that the statute is inapplicable because it is "long-winded" and because the state Supreme Court had implicitly ignored it in the line of cases under which Banner had been held to have defeated any "expectation" of temporary coverage.  The appellate court disagrees: Nothing in the Supreme Court cases suggests that the court intended to invalidate the statute and "[l]ong-winded or not, we must apply section 10115 according to its terms."

Unlike the issue of temporary coverage raised when an applicant for life insurance dies before the application has been approved, . . . section 10115 addresses the issue of coverage when the application has been approved but has not been issued and delivered at the time of the insured’s death. Under the [case law], the retention of a premium payment, in light of the conditional receipt issued by the insurance company, may create a reasonable expectation of coverage in the mind of the applicant.  Section 10115, on the other hand, imposes a coverage obligation whenever the conditions for issuance of a policy of insurance have been satisfied but the formalities of issuance and deliverance have not occurred. This obligation is imposed by law and does not rest on the reasonable expectation of the parties based on the language of a conditional receipt and the acceptance of an initial premium payment.

The conditions of the statute having literally been met -- the later-returned check had been "received" at the insurer's home office and the application was ultimately approved -- the Court of Appeal concludes that the insurer is obligated to pay under the policy.

The decision in Hodgson v. Banner Life Ins. Co. (December 15, 2004), Case No. C041384 can be accessed at these links in PDF and Word formats.
[Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

The Man Who Knew Too Much: Insurer's Former Attorney/Consultant Disqualified from Testifying Against Company as Expert Witness

A well known insurance attorney, insurance fraud expert and claims practices consultant has been disqualified from testifying as an expert witness against an insurance company he represented and advised twelve years earlier.

From 1988 to 1991, attorney Barry Zalma defended 21st Century Insurance Company in claims litigation and rendered coverage opinions to the company.  He later formed an education and consulting firm, ClaimSchool, Inc., which also advised 21st Century and provided multi-week training sessions to its claims staff.  In 2001, Helen Brand filed suit against 21st Century, her insurer, claiming breach of the insurance contract and "bad faith" (breach of the insurer's obligations of good faith and fair dealing) in the investigation and adjustment of a mold-related loss to her home.  As trial approached, Brand retained and designated Zalma as an expert witness, to testify concerning the propriety of 21st Century's claims handling practices.  21st Century moved to disqualify Zalma on the ground that he had acquired confidential information during his former representation of the company.  The trial court twice declined to order the disqualification, finding in part that the passage of time (12 years) between Zalma's former engagement by 21st Century and his current engagement as its opponent's expert witness indicated there was no "substantial relationship" between the two matters.  21st Century filed an appeal from the trial court's order, and the Court of Appeal has ordered Zalma's disqualification.

The rule on attorney disqualifications in California is ostensibly a simple one:

An attorney engaged in employment adverse to a former client is subject to disqualification where a 'substantial relationship' exists between the lawyer's current employment and the lawyer's representation of the former client.

Despite the passage of time, the Court of Appeal found that the two engagements had an inescapable connection, giving rise to a presumption that Zalma was in possession of confidential information that he would not be permitted to utilize to the detriment of his former client.

[T]he undisputed evidence before the court in this case establishes the requisite substantial relationship between Zalma’s current and prior engagements to mandate his disqualification as an expert witness against his former client in this litigation. Not only did Zalma personally represent 21st Century as its attorney and supervise associates representing the company between 1988 and 1991, but Zalma’s representation of 21st Century also concerned matters substantially related to the issues in the instant case in which he has been retained to testify against 21st Century.

The two engagements arose in the same context and share numerous factual and legal elements. While an attorney for 21st Century, Zalma rendered “numerous coverage opinions on behalf of 21st Century on a variety of claims issues, including moisture intrusion, rot, and fungal infestation.” Zalma also defended 21st Century in actions by policyholders seeking coverage and/or alleging bad faith in claims handling. . . .

Moreover, using knowledge gained from consultations with 21st Century concerning its claims handling policies and procedures, Zalma taught the company’s claims adjusters how to evaluate claims for coverage under 21st Century’s homeowner’s policy and made suggestions to the company for improving its claims handling procedures. It is thus readily apparent that by virtue of the nature of Zalma’s representation of 21st Century, confidential information material to the current dispute would normally have been imparted to Zalma. As such, Zalma’s knowledge of confidential information must be presumed.

At least as the court describes it, the close ties between the past and current representations are sufficiently clear that one can only ask of Zalma's decision to accept retention as an expert in this case:  "What was he thinking?" (This is the latest in a continuing series of attorneys seemingly believing that their former representations of an insurer pose no obstacle to switching sides.  Click through for two previous  examples of disqualifications of insurers' former attorneys.)

The decision in Brand v. 20th Century Insurance Company (Sept. 1, 2004; ordered published December 1, 2004), Case No. B169913, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Not an "Honest Broker" -- Insurer May Sue Broker Responsible for Falsehoods on Policy Application

As discussed below, an insurance "broker" usually represents -- and owes his or her primary duties to -- the insurance buyer, not the insurance company from which the coverage is obtained.  Can a broker be held liable to the insurance company for fraud or negligence in presenting an application supported by false statements and forged documents?  The Court of Appeal concludes the answer is "yes."

Crosby Insurance was a broker acting for Baroco, a building contractor, and obtained a policy for Baroco from Century Surety.  Baroco was sued for construction defects as the general contractor on a single-family home and demanded that Century defend and pay the claim.  After first accepting the defense, Century discovered that the application for insurance had significantly misrepresented Baroco's past loss history (using a letter forged on the prior insurer's letterhead) and misrepresented the nature of Baroco's business (specifically denying that Baroco ever acted as other than a drywall subcontractor).  The misrepresentations were allegedly traceable to the Crosby Insurance employee who prepared the applications. 

Century withdrew from Baroco's defense; Baroco sued Century; Century counter-sued and also filed suit against Crosby based on theories for fraud and negligence in the presentation of the falsified insurance application.  Crosby obtained a dismissal on the grounds that it could not be held to owe any legal duty to the insurer, since it acted only as the representative of the insured, Baroco.  On appeal, that dismissal has been reversed.

After analyzing current California law, the Court of Appeal ruled that there is no reason why insurance brokers should be "exempt . . . from the consequences of their own fraud."  The Court observed that "it would be an unreasonable, if not perverse, result if the law allowed an insurer no remedy against a broker who has, as is alleged in the cross-complaint, actively forged documents to support an insurance application."

On the issue of negligence, Crosby argued that any duties of care that it owed were owed only to its client, Baroco, and not to the insurer.  The Court disagreed.  Analogizing the case to others in which a professional may owe duties to third parties as well as to the professional's client, and applying the five-step analysis typically used to determine when a duty of care may be owed, the Court concluded that it is reasonable that an insurance broker should owe a duty to prospective insurers not to present knowingly inaccurate information in an insurance application:

First, the transaction of applying for an insurance policy is intended to benefit the insurer as well as the insured and is designed to influence the insurer’s conduct in issuing an insurance policy.  Second, harm from misrepresentations in an insurance application, such as the precise harm alleged to have occurred in this case, is easily foreseeable.  Third, injury is certain in that the insurer incurred costs in defending an insurance claim on a policy that would not have issued but for the misrepresentations in the application.  Fourth the misrepresentations in the application were material to the insurer’s decision to issue the policy and thus were closely connected to the ensuing injury.  Fifth, under the circumstances alleged, the factor of moral blame supports a finding of duty. Finally, imposing liability on insurance brokers for misrepresentations in insurance applications would act as a deterrent in preventing future harm.

The decision in Century Surety Co. v. Crosby Insurance (Nov. 17, 2004), Case No. E033550, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

A Debatable Preposition: Court Opines Upon "Upon"

When is a person "upon" an automobile?  Must there be some physical contact with the vehicle?  If not, how far from the vehicle can a person be and still be deemed "upon" it?  The California Court of Appeal for the Sixth District has produced an opinion elaborately parsing the meaning of "upon" as used in determining who is the insured for purposes of "underinsured motorist" coverage, concluding in the case before it that an injured person was "upon" a vehicle when standing a foot or so away from it but not "upon" his own vehicle parked 200 feet away.

Roberto Ruiz was driving a pickup truck owned by his employer, Fast UnderCar, and insured by American States Insurance Company.  Another motorist, Tavares, struck the pickup as well as a van owned by Group Manufacturing and insured by Atlantic Mutual Insurance Company.  Everyone pulled over and Ruiz, then uninjured, exited his pickup and walked approximately 200 feet to check on the condition of the driver of the van.  While conversing with the van driver and preparing to open the passenger door to allow the van's passenger to exit, Ruiz was struck and injured by another motorist, Alma Ogana.  Ogana was insured, but the limits of her coverage were significantly less than the $1 million limits available under both the American States and Atlantic Mutual policies for "underinsured motorist" coverage.  The issue before the court was whether Ruiz qualified as an insured under either or both of the policies.  The trial court concluded, and the Court of Appeal agreed, that Ruiz is insured under the policy on the van [Atlantic Mutual] but not under the policy on his employer's pickup truck [American States].

Both policies had identical language defining who is insured for purposes of the "underinsured motorist" coverage.  In each policy, the persons insured include anyone "occupying" the covered vehicle.  "Occupying,"' in turn, is defined to mean "in, upon, getting in, on, out or off."

Atlantic Mutual argued that Ruiz was not "upon" the van because he was standing outside of it when he was injured.  The courts, however, concluded after analyzing dictionary definitions and a series of earlier decisions that "upon" is reasonably open to being defined as being in close proximity, and that the term must be construed favorably to Ruiz.

In this case, Ruiz was positioned immediately adjacent to Group Manufacturing's van for reasons essentially related to the insured vehicle and its use on the highway. When struck by the underinsured vehicle, Ruiz was attempting to speak to the van's driver regarding the multi-vehicle accident that had just occurred and had just helped an injured passenger exit. In light of the principle that ambiguities in a policy are generally construed against the insurer [citation] and the underlying public purpose of the uninsured motorist statute, we conclude that under the stipulated facts Ruiz, who was standing only about a foot from Group Manufacturing's van, was 'upon' the van and qualified as an 'insured' within the meaning of Atlantic Mutual's UM coverage provisions.

As for the coverage on the pickup truck that Ruiz had been driving prior to the accident, the courts concluded that the walk he took from that vehicle to the van covered a sufficient distance that Ruiz simply cannot be said any longer to have been "upon" the vehicle he had been operating.

At some distance, an individual who exits a vehicle is no longer "upon" the vehicle in even a physical sense. Ruiz was approximately 200 feet, about two-thirds of a football field, away from the truck at the time he was struck by the underinsured motorist. Such a distance in no way qualifies as close proximity to the Fast UnderCar truck and a contrary conclusion would strain the meaning of the word "upon." "Words used in an insurance policy are to be interpreted according to the plain meaning which a layman would ordinarily attach to them. Courts will not adopt a strained or absurd interpretation in order to create an ambiguity where none exists. [Citations.]"

The decision in Atlantic Mutual Ins. Co. v. Ruiz (Nov. 5, 2004), Case No. H025852, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

The Indemnitor of My Indemnitee is My Indemnitee

When putting together construction projects, most general contractors will require (1) that any subcontractor indemnify or "hold harmless" the general contractor for any liabilities other than those caused entirely by the general contractor's own negligence and (2) that the subcontractor provide liability insurance coverage in which the general contractor is named as an additional insured. In such an arrangement, the Court of Appeal has ruled that the subcontractor's "hold harmless" agreement also operates to bar the subcontractor's insurer from pursuing a reimbursement claim against the general contractor's insurer. "To hold otherwise," the court remarks, "would negate the indemnity provision in the construction contract."

PCS, a general contractor, entered into an agreement of this sort with a subcontractor, Valley Metal. When a Valley Metal employee was injured on the job, he brought suit againt PCS. [He could not bring a claim against his own employer, against which his sole remedy is workers' compensation.] Valley Metal's insurer, Hartford, defended PCS -- which was named as an additional insured under its policy -- and settled the claim. Hartford then turned to PCS' own insurer, Mt. Hawley, and sought to obtain reimbursement of half of the amounts it had spent on PCS' defense and the settlement. The trial court found that Hartford was entitled to be reimbursed, based on principles of "equitable contribution." The Court of Appeal reversed:

[I]n this case, the indemnity provision in the subcontract stated that PCS would not be liable for any claims or damages unless caused by its sole negligence or willful misconduct. In its complaint, Hartford alleged that PCS was solely negligent in causing the accident. The complaint did not allege nor does Hartford contend on appeal that PCS engaged in willful misconduct. In moving for summary judgment,
Mt. Hawley established as an undisputed fact that PCS was not solely negligent.... Valley Metal included PCS as an additional insured under the Hartford policy as part of the consideration for the construction job. And it appears both insurers knew that they might have to satisfy a full judgment. In short, the indemnity provision precludes any recovery by Valley Metal against PCS.

* * *

Just as Valley Metal has no right of recovery against PCS, so Valley Metal’s insurer, Hartford, has no right to recover from PCS’s insurer, Mt. Hawley. It would be unjust to 'impose liability on [Mt. Hawley] when [PCS] bargained with [Valley Metal] to avoid that very result as part of the consideration for the construction agreement.' [Citation] Hartford does not point to any language in the subcontract or the insurance policies suggesting otherwise.

Given that their respective insureds clearly intended, by the indemnity agreement, that PCS would pay nothing to Valley Metal in the circumstances of the case, the court concludes that there is no basis on which PCS' insurer should be held to pay what PCS does not owe.

The decision in Hartford Casualty Ins. Co. v. Mt. Hawley Ins. Co. (Oct. 21, 2004), Case No. B172449, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Court to Insurer: They Ain't Brokers, So Fix It

The Court of Appeal has ruled that the broker-agent structure implemented by Mercury Insurance Group, a major provider of personal automobile insurance in California, constitutes an “unfair business practice” under California’s Unfair Competition Law (Business & Professions Code section 17200), and has affirmed a trial court’s order prohibiting Mercury from utilizing ongoing relationships with brokers who have not been formally appointed as agents, and prohibiting those brokers from collecting brokerage commissions in selling Mercury policies to consumers.  Central to the decision is the semi-historical distinction between “insurance agents” and “insurance brokers” under California law. 

In simplest terms, an insurance “agent” works for and represents an insurer, and has the authority to act on behalf of and to bind the insurance company.  To be an “agent,” it is necessary to (1) be licensed by the Department of Insurance, and (2) have a formal “appointment” filed with the Department by the insurer for which the agent is a representative.  An insurance “broker” does not act on behalf of the insurance company; instead, a broker acts on behalf of the prospective insurance buyer and is hired to seek out and obtain the coverage the buyer needs or wants.  A “broker” is licensed by the Department, but does not have an appointment from any particular insurer.  While an agent will generally be paid for his/her services by the insurer he/she represents, a broker is compensated by the insurance buyer, through fees or commissions.  In some limited cases -- the physical delivery of policies to the insured, and the acceptance of premium payments for transmission to the insurer -- California’s Insurance Code provides that a broker may also act as an agent.

Mercury has a large number of insurance sellers who have more or less permanent and ongoing ties to the company.  Prior to 1989, all of them were formally appointed as agents.  In 1989, however, Mercury terminated the appointments of 700 out of 800 agents, declaring them instead to be “brokers.” 

In general, the change in title did not alter the ability or authority to bind Mercury, but it did allow the former agents to charge brokerage fees. Policies sold by brokers or appointed agents used the same application forms, rating guidelines, and underwriting guidelines, all of which were provided by Mercury. Both brokers and appointed agents advertise that they “represent” Mercury. Mercury subjects agents and brokers to the same amount of training and supervision. Mercury does not object to brokers charging brokerage fees (in addition to policy premiums), but it will discipline appointed agents who attempt to charge such fees. In its comparative rate advertising, Mercury does not advise that brokerage fees may be added to the advertised cost of insurance. This practice may provide a competitive advantage to Mercury, which “is aware of, and concerned about, misleading the public with its comparative rate print advertisements,” but it “has not established any system to discover or monitor . . . and has no way of knowing” whether brokerage fees are being assessed. Mercury submits its insurance rates and premiums—but not the brokerage fees—to the California Department of Insurance for approval.

 

The Court of Appeal, after a lengthy analysis of the relevant statutory and regulatory scheme, affirms the trial court’s decision to issue an injunction prohibiting Mercury from using brokers not appointed as the company’s agents and prohibiting those broker-agents from charging brokerage fees, even though there was no evidence to show that any portion of the brokers’ fees is passed along to Mercury.  While the Court acknowledges that certain regulations of the Department of Insurance arguably justify Mercury’s practices, it emphasizes that only a statute, not an administrative regulation, will create a “safe harbor” from liability under the Unfair Competition Law.  The Court also affirmed the trial court’s award of attorneys’ fees to the plaintiff of nearly $1.2 million.

In addition to the “safe harbor” issue, this is another case illustrating one of the criticisms most frequently leveled at California’s “Unfair Competition Law,” Business & Professions Code section 17200.  As the court describes it:

Mercury makes a point of opening its brief with comments that plaintiff never purchased a policy from Mercury and is therefore utterly “disinterested” in the controversy he began. It is well established, however, that a personal stake is not required for standing to prosecute an unfair competition law suit on behalf of others….

 

This and other aspects of the case may draw comment from the weblog that specializes in section 17200 issues, The UCL Practitioner. [UPDATE:  As predicted, interested readers will find that discussion here.]

The decision in Krumme v. Mercury Insurance Company (Oct. 29, 2004), Case No. A103046, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

[Personal note: Coincidentally, I was present when this case was argued before the Court of Appeal in San Francisco.  (I represented the appellant in an unrelated matter that was also on the court’s calendar that morning.  The court has not yet ruled in my case, which may or may not result in a published opinion.)  Mercury’s counsel did a sterling job, in my view, of presenting his client’s case, and the issue determined here is clearly of significant importance to that company.  I would not be at all surprised if Mercury petitions the California Supreme Court to take up the issue.  I will report further if the case moves on from this point.]

Going Fishing: Broad Discovery of Unrelated Claim Files Permitted to Establish Discriminatory Claims Handling

The Fourth District Court of Appeal has authorized extraordinarily wide-ranging discovery into an insurer's claim files by a plaintiff claiming that she was subjected to racial discrimination in the handling of her own claim for a theft loss. The Court has, however, conditioned the production of any other claim files on the plaintiff first obtaining the express authorization of the insured involved in each claim.

Maria Luisa Hernandez was insured under an auto policy issued by Permanent General Insurance Corporation. She submitted a claim for the theft of her insured vehicle. When a dispute arose concerning that claim, she brought suit alleging breach of the insurer's obligations of good faith and fair dealing, alleging that the insurer had delayed, underpaid or refused to pay benefits that were owing to her for racially discriminatory reasons. Her attorneys served a discovery request requiring the insurer to produce "all claims files for all of defendant’s insureds who had submitted a claim for vehicle theft since January 1, 1998."

The insurer objected and refused to produce the files, relying principally on the prohibitions of the Insurance Information Privacy Act [Cal. Insurance Code 791, et seq.], which prohibits insurers' disclosure of personal and private information concerning its insureds. The insurer also argued that the materials were irrelevant in their entirety. Ms. Hernandez and her attorneys urged that the content of the files might disclose an ongoing pattern of discriminatory claims handling.

The trial court ordered production of the records, rejecting all of the insurer's objections. However, the court ""failed to condition the order on plaintiff obtaining authorizations from the nonparty insureds in general, and it impliedly ruled that plaintiff need not obtain authorizations specifically for files as to which her attorney had already obtained authorizations in prior litigation involving a different client." The insurer petitioned the Court of Appeal for a writ/order to prevent the disclosure.

The Court of Appeal held that the claim files are all, at least theoretically, potentially relevant and required to be disclosed. However, disclosure of the files is conditioned upon the plaintiff first obtaining express authorization from the insured(s) in each case, including new authorizations as to each file obtained by her counsel in the earlier litigation. (The Court declines to address the insurer's objection that plaintiff's counsel is using the information improperly to solicit new clients. That, the Court notes, "is a matter to be resolved through proper channels within the State Bar.")

Most of the appellate court's decision is concerned with whether the files are discoverable at all. The Court is unswayed by three of the four arguments offered by plaintiff in support of the request to obtain the records, and emphasizes that the existence of a "pattern and practice" of discrimination is largely irrelevant to any claim that the plaintiff may be able to present. However, the Court ultimately concludes that the existence of discriminatory claims handling in other cases may support plaintiff's claim that there was a discriminatory animus at work in her case:

In large part, plaintiff’s bad faith cause of action is predicated on an unpleaded theory that defendant has a pattern and practice of a discriminatory claims handling practice, under which the auto theft claims filed by Hispanic, African-American, and/or low income insureds are singled out for bad faith denial or extraordinary contest. Plaintiff contends production of the claims files is the only avenue by which she may discover evidence supporting her discrimination theory, and thus her bad faith cause of action. We agree that an insurer making decisions about auto theft claims on such bases may well be engaging in bad faith conduct, and that evidence of repeated or habitual discriminatory denial or handling of claims could be used to support plaintiff’s theory that, as an Hispanic, she was subjected to the same bad faith practice. [Citation.] We are not sure plaintiff can expect to find information about ethnicity, race, or income level set forth in the claims files. Nonetheless, plaintiff’s counsel will no doubt have direct contact with those claimants who authorize release of their files, and such contacts may disclose the existence of a common thread of discrimination in defendant’s claims, and thus support plaintiff’s theory that she herself was the victim of discrimination.

The decision in Permanent General Insurance Corp. v. Superior Court (Hernandez) (Oct. 12, 2004), Case No. G033269, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Dogged Determination

Part of the fun of practicing insurance coverage law is the opportunity to read appellate decisions that start like this:

“The cat will mew, and dog will have his day.” (Shakespeare, Hamlet, act 5, scene 1.) Here, Dwayne Vandagriff’s dog elected to have his day by biting Robert Grisham’s leg after escaping from Vandagriff’s parked pickup truck.

What is the coverage issue here? It is this: Does a dog bite occurring 20 to 25 feet away from the dog owner’s pickup truck, in which the dog has been left for between 30 and 120 minutes, “arise out of the use of” that truck, so as to be covered under the dog owner’s automobile insurance policy?

A surprisingly large number of California decisions have wrestled with similar questions. At its most basic, the question boils down to whether there is some identifiable causal connection between the way in which a vehicle has been used and the plaintiff’s injury. For instance, automobile coverage has been held to exist when a gun goes off inside a car as a result of a combination of its hair-trigger and the bouncing inherent in driving off-road. On the other hand, merely driving in a car to get to the scene of an otherwise unrelated criminal or tortious act has been held not to be covered. As for dogs: bites that occur inside the vehicle, when humans and dogs are sharing the space, or injuries that occur when humans and dogs both try to exit the vehicle simultaneously, may be covered by the auto policy. The Court of Appeal in this latest case, however, found that the dog bite was too far removed from the pickup truck in both time and space, and that the auto coverage does not apply. You cannot say the victim’s attorney didn’t try hard in a losing cause:

Finally, Grisham argues that Vandagriff was using his truck as a temporary pet storage, and this was a substantial rather than a trivial factor in causing Grisham’s injury. Grisham points to the water dish that Vandagriff left for the dogs in the pickup cab. One problem with this argument is that Grisham was not bit when the dogs were being stored in the vehicle. Of course, Grisham would say that’s the point --Vandagriff was negligently storing the dogs in the truck. Nevertheless, the temporary storage of the dogs in the truck is not much different from their transport in the truck. As we have seen, the transport of the dogs here is akin to the situation of transporting a tortfeasor who departs the vehicle and commits a tort; the tort is not considered to have resulted from the use of the vehicle. [Citations omitted.] . . . The fact remains, at the time of the biting, neither Grisham nor the dog had anything to do with Vandagriff’s truck; they were 20 to 25 yards away from it. The issue is not whether Grisham’s injury resulted from Vandagriff’s negligence, but whether that injury resulted from the use of Vandagriff’s truck.

We conclude that Grisham’s injury did not result from the use of Vandagriff’s truck.

The decision in State Farm Mut. Auto. Ins. Co. v. Grisham (Sept. 20, 2004), Case No. C045912, can be accessed at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

It’s Not That Bad: Tort Damages Unavailable for “Bad Faith” in Overcharging Insurance Premium

Every contract carries with it an implied obligation of good faith and fair dealing: the irreducible promise that neither party will act to unfairly or unreasonably deny the other the benefits of the agreement. Generally, a breach of that obligation of good faith is dealt with as a breach of contract, and the injured party is entitled to damages equivalent to the benefit of the bargain that party would have received if the contract had been performed. In the context of insurance coverage, however, an insurer’s breach of the obligation of good faith and fair dealing -- a denial of policy benefits that is not merely “wrong” but also “unreasonable” -- is compensated as more than a simple breach of contract. It is viewed as a tort, for which the insurer may potentially be liable for general damages (such as damages for the insured’s emotional distress) and for punitive damages. This is the sort of claim generally referred to as “insurance bad faith.”

One of the ongoing questions in California law has been whether tort damages can be recovered for breaches of the covenant of good faith beyond the context of insurance coverage. As a general matter, the rule has been that such damages are not recoverable, even in important contractual relationships such as that between an employee and employer. The California Supreme Court has now held that not every breach of the covenant of good faith by an insurer is compensable as a tort. In particular, when an insurer breaches its duties of good faith by unreasonably overcharging a premium, that act of “bad faith” is to be compensated under ordinary contract measures of damage.

The facts of the case are more complex than can conveniently be summarized here, but they can be reduced to this: the Jones family trucking business was significantly and unreasonably overcharged for insurance, by approximately $50,000. The Joneses brought an action for breach of contract, fraud and “bad faith.” The trial court found that the covenant of good faith and fair dealing had been breached and awarded compensatory damages of more than $2 Million and punitive damages of more than $4 Million. On appeal, the Court of Appeal held that a breach of the covenant of good faith involving premium (as opposed to a breach involving payment of insurance benefits) would not support tort damages, so that the damages would have to be reduced to the amount by which they were overcharged, without additional damages for emotional distress, without an award of attorney’s fees, and without punitive damages. On further review, the California Supreme Court agreed. The Court summarizes its conclusions (citations of authority are omitted) as follows:

[T]here are several critical factors that counsel against the availability of tort remedies for breach of the covenant of good faith and fair dealing in the present case. First, the billing dispute does not, by itself, deny the insured the benefits of the insurance policy -- the security against losses and third party liability. Second, the dispute does not require the insured to prosecute the insurer in order to enforce its rights, as in the case of bad faith claims and settlement practices.

Third, traditional tort remedies may be available to the insured who is wrongfully billed a retroactive premium. If the premium charge is wholly unjustified, the insured may, after successfully defending the action, sue for malicious prosecution. If the debt is reported to third parties, to the debtor’s detriment, a defamation action may lie. The untruthful, bad faith creditor may also be liable for intentional interference with prospective economic advantage.

(The Court also held that the premium dispute should be heard in the first instance by the Department of Insurance, prior to recourse to the courts, because this particular case arose under California’s “Assigned Risk” program.)

The decision in Jonathan Neil & Associates, Inc. v. Jones (August 5, 2004), Case No. S107855, can be found at these links in PDF and Word formats. [Note: The links will expire in approximately 120 days; the opinion should still be accessible thereafter by substituting "archive" for "documents" in the URL.]

Get Out Your Calculators: Attorney’s Fees Awarded to Insured’s Attorneys in “Bad Faith” Case May Exceed Policy Benefits Recovered for the Insured

In 1985, in the case of Brandt v. Superior Court, the California Supreme Court held that an insured who successfully sues his or her insurer for damages for “bad faith” may recover, as an element of damages, at least a portion of the attorneys’ fees the insured incurred in the case. Specifically, the Brandt decision holds:

When an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney’s fees are an economic loss -- damages -- proximately caused by the tort. These fees must be distinguished from recovery of attorney’s fees qua attorney’s fees, such as those attributable to the bringing of the bad faith action itself. What we consider here is attorney’s fees that are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action.

Only the fees relating to recovery of the unpaid benefits can be recovered as damages; additional fees relating to the “bad faith” claim itself, or to pursuing punitive damages, are not to be awarded.

Now, a closely divided (4-3) California Supreme Court has held that an insured who recovered unpaid insurance benefits of approximately $40,000 may be entitled to recover attorney’s fees of $400,000 or more as an element of damages in a related “bad faith” case.

The Cassim family suffered a loss by fire that compelled them to move out of their house. Their insurer, Allstate, initially paid living expenses, but stopped doing so early on when the company began to suspect that the Cassims may have been responsible themselves for the fire. This and other suspicions that the claim was being unduly inflated caused Allstate to delay payment under the policy, and eventually to reject the claim altogether. The Cassims ultimately lost their house to foreclosure. They retained counsel and brought suit to recover the unpaid benefits under their policy and to recover damages for the insurer’s breach of its obligations of good faith and fair dealing.

At trial, the jury found in the Cassims favor, awarding compensatory damages of $3,594.600 and punitive damages of $5 Million. The amount that the insurer should have paid (which was included in the compensatory damages) was found to be $40,856.40. The Cassims’ attorney had handled the case under a contingent fee agreement entitling him to 40% of the total recovery. Allstate argued that the recoverable attorney fee damages under Brandt should thus be $16,342.56: 40% of the policy benefits portion of the overall damages. The trial court disagreed, and awarded Brandt fees of $1,193,533.

The Supreme Court suggests that the amount awarded for fees may be too high, but that the proper amount will likely be much more than the “40% of recovered benefits” urged by Allstate. The court approves a method for determining an appropriate Brandt award:

To determine the percentage of the legal fees attributable to the contract recovery, the trial court should determine the total number of hours an attorney spent on the case and then determine how many hours were spent working exclusively on the contract recovery. Hours spent working on issues jointly related to both the tort and contract should be apportioned, with some hours assigned to the contract and some to the tort. This latter figure, added to the hours spent on the contract alone, when divided by the total number of hours worked, should provide the appropriate percentage.

An example of this calculation, with numbers similar to the instant case, illustrates the point. Suppose the compensatory damages are $3,594,000. Suppose further that the attorney and the client have a 40 percent contingent fee agreement. The total legal fee for the compensatory award is thus 40 percent of $3,594,000, or $1,437,600. Now suppose counsel spent 1,500 hours on the case, and can prove this breakdown: 200 hours on issues related solely to the contract, 500 hours on issues relevant to both the contract and the tort, and 800 hours on issues related solely to the tort. The trial court could reasonably conclude that half the hours spent on the joint contract/tort issues are fairly attributable to the contract (i.e., half of 500 hours, or 250 hours), and thus 30 percent of the hours worked (200 hours plus 250 hours, divided by 1,500 total hours) is attributable to the contract recovery. Thirty percent of the total legal fee (30 percent times $1,437,600) is $431,280. This is the amount a trial court should award as Brandt fees in this hypothetical situation.

The three dissenting justices are not persuaded that the majority’s approach makes either legal or practical sense. Summarizing the dissenters’ doubts, Justice Baxter writes:

Brandt entitles the plaintiff insured to full recovery of policy benefits, undiminished by the attorney’s fees incurred to recover those benefits. In this case, where the attorney was retained under a contingent fee agreement of 40 percent, the correct award is 40 percent of the recovery under the policy. The method proposed by the majority is not only inconsistent with Brandt but will also burden the system with bitterly contested litigation over which contract issues are intertwined with the tort claims and how legal work on such issues should be apportioned. Because this method is predictably unwise and unworkable, I respectfully dissent.

The opinions in Cassim v. Allstate Insurance Company (July 29, 2004), Case No. S109711, can be read at these links in PDF and Word formats.