Declarations and Exclusions

A Brilliant Deduction? -- Senate Bill Proposes Eliminating Deductability of Punitive Damage Payments

Business Insurance magazine reports here on the Jumpstart Our Business Strength ["JOBS," get it?] Act, Senate Bill 1637, which in addition to a variety of changes to bring U.S. law into compliance with World Trade Organization requirements includes a provision to eliminate the federal income tax deduction for payment of punitive damages.

Under current law, a business that is obliged to pay punitive damages can deduct those payments as an ordinary business expense -- assuming, of course, that the business pays the punitive award itself, rather than shifting it to an insurer (which it can do in some states, but not all). The bill would eliminate that deduction, so that businesses would receive no tax benefit from satisfying punitive judgments. Naturally, various business groups and their representatives are opposed to the change:

Mark A. Behrens, an attorney in the Public Policy Group of Shook, Hardy & Bacon L.L.P. in Washington, however, said he is confident that the provision will be excluded from any final version of the bill.

'One of the reasons why I don’t expect it will be in a bill that will finally pass is it does have very serious consequences for employers,' he said. 'I think when the employer community becomes more aware that it’s in there, they’re going to be calling their congressmen to say: "This could have very adverse consequences for us. We’re trying to create jobs and economic growth, and this is going to impede that and this should not be in any final version that passes."'

This is not exactly the most compelling policy argument we have seen recently. As a general rule, one would expect (or hope) that the sorts of malicious or fraudulent conduct that must be proven in support of a punitive damage claim will have little legitimate relationship to "creating jobs and economic growth."

Under California law, insurance companies are prohibited from paying punitive damage awards rendered against their insureds, so that the "sting" of those damages will be felt directly by the wrongdoer. Eliminating the deductibility of punitive damage payments is consistent with the public policies embodied in California's approach. Is it unduly cynical to suggest that, rather than trying to preserve the incidental tax benefits, perhaps the better policy for the "employer community" might be to avoid the varieties of conduct that give rise to the punitive damage award in the first place?

Laboring Under a Misconception -- Court Declines to Create "Union Member-Union Representative Privilege"

In the context of a wrongful termination dispute against his former employer, American Airlines, Jawad Alamad asserted that he had been the victim of racial discrimination relating to his Middle Eastern background. Alamad's union representative Richard DiMarco testified in deposition that the testimony of other American mechanics favorable to the employer had been "coerced," but he refused to provide any details of the coercion, claiming that the information had come to him in his capacity as a union representative and was therefore privileged. American sought to compel the testimony, but the trial court concluded that DiMarco was entitled to assert a "union member-union representative privilege" and to decline to disclose the information. American sought the assistance of the Court of Appeal, which concluded that no such privilege currently exists under California law.

The Court of Appeal emphasizes that evidentiary privileges are fundamentally established by statute. No statute explicitly recognizes the privilege DiMarco asserted, nor did the Court find that such a privilege could be implied by the terms of related statutes governing labor relations issues. Absent a statutory privilege, Cal. Evidence Code section 911 declares that "[n]o person has a privilege to refuse to disclose any matter or to refuse to produce any writing, object, or other thing." The Court also noted that the recognition of such a privilege "could severely compromise the ability of employers to conduct investigations pertaining to claims of harassment, discrimination, unlawful conduct, or other employer rules violations, all to the detriment of union members." While the Legislature is certainly empowered to create the privilege in question, it has not done so and the Court declines to recognize such a privilege.

To summarize, this case presents a backdrop of competing social policies: a union member’s right to organize and collectively bargain, a union’s obligations to its members, an employer’s duty to ferret out discriminatory practices and its right to defend itself in litigation, and a search for truth in the adversarial process. To this backdrop, we add the overlay of Supreme Court and legislative mandate that courts are not free to create new evidentiary privileges. The Legislature is particularly well suited as the forum to give appropriate weight to these contending policies, and, accordingly, we decline real parties’ invitation to create judicially a new privilege.

The decision in American Airlines Inc. v. Superior Court (December 29, 2003), Case No. B162513, can be found at these links in PDF and Word formats.

The Snows of Kilimanjaro -- Climbing Death Results from Covered “Accident” Under Life Insurance Policy

The 9th Circuit U.S. Court of Appeals sets the scene:

In response to a query about why he wanted to climb the world’s tallest mountain, British explorer George Mallory responded, ‘Because it is there.’ As Mallory and others have learned, the lure and mystique of mountain climbing are not without risk of injury, including death. The controversy in this case is whether a climbing death on Mt. Kilimanjaro falls within the meaning of the terms “accidental injury” and “disease” as used in a life insurance policy. Although this inquiry is seemingly straightforward, it turns out that, in the context of insurance law, unraveling the meaning of these simple words is no easy task.

Bernard Chale died in December, 2000, from high altitude cerebral and pulmonary edema -- conditions of exposure to high altitudes resulting in congestion of the lungs and swelling of the brain -- after reaching the top of Kilimanjaro. Prior to making the ascent, he had procured a $100,000 policy of life insurance, which promised to pay policy benefits if he died “solely from accidental injury” and not as a result of “disease or infirmity of the body.” None of these terms was specifically defined in the policy.

Following his death, Bernard’s wife Luanne Chale sought payment from the insurer. The insurance company denied the claim, maintaining that the death was the result of a disease, not of an accident. The U.S. District Court (applying Oregon law) agreed and granted judgment in favor of the insurer. On appeal, the 9th Circuit reversed.

The District Court accepted the insurer’s argument that a death caused by a known risk associated with an activity cannot be deemed the result of an “accident”. The 9th Circuit concluded that the term “accident,” if not otherwise specifically defined, must be found to be ambiguous, and therefore must be construed as favorably to the insured as ordinary English meaning will allow.

Chale contracted an unusual and extremely serious medical condition while engaging in the activity of mountain climbing. Even if he was or should have been aware of the risk . . . , his chances of falling victim to these conditions were slim. Because Chale was struck by altitude-induced edema much in the way someone might be struck by lightning, his death falls within the definition of ‘accidental injury’ contemplated by any reasonable purchaser of Allstate’s life insurance policy.

The court also rejected the insurer’s argument that the death was the result of a “disease.” Oregon law construes “disease” to mean only disorders “of a somewhat established or settled character” to which the insured was prone. The high-altitude syndromes to which Bernard Chale succumbed undisputedly were not present before he began his ascent. They struck suddenly and unexpectedly, and therefore did not fall within the meaning of a “disease” as Oregon law construes that term.

The decision in Chale v. Allstate Life Ins. Co. (December 23, 2003), Case No. 02-35665, can be found at this link in PDF format.

The 411 on 911: Public Entity Not Liable for Dispatcher's Negligence in Handling Emergency Calls

The California Supreme Court, disapproving earlier case law, has ruled unanimously that public entities operating "911" emergency telephone services generally cannot be held liable for errors, delays or failures by 911 dispatchers handling those emergency calls. The Court summarizes its conclusions in the opening paragraph of its opinion:

In California, public agencies each year receive millions of 911 dispatch calls seeking emergency, medical, and fire services. [Citations.] In this case, we must decide whether public entities employing emergency dispatchers are subject to direct or vicarious tort liability for injury attributable in part to a dispatcher’s failure or delay in responding to a 911 call. We conclude that, based on applicable statutory provisions and the legislative policies underlying them, no statute imposes direct liability on public entities in such situations [citation], and vicarious liability [citation] is limited to cases involving gross negligence or bad faith [citation]. Plaintiffs have failed to plead facts disclosing any acts of gross negligence or bad faith on the part of defendants or their employees, and they presently assert no additional facts that might justify an amended complaint. Accordingly, we will affirm the judgment of the Court of Appeal, which had affirmed a judgment of dismissal in favor of defendants.

The Supreme Court disapproves the contrary holding of the Court of Appeal in Ma v. City and County of San Francisco (2002) 95 Cal.App.4th 488.

The decision in Eastburn v. Regional Fire Protection Authority (December 18, 2003), Case No. S107792 can be found at these links in PDF and Word formats.

Let’s Get Metaphysical -- Loss of Data Resulting From Operator Error is Not a Covered “Direct Physical Loss”

When a computer “crash” caused serious data loss, Ward General Insurance Services sought compensation from its insurer for the costs of restoring the lost data and for business income lost due to the unavailability of its computer system. The insurer denied most of the claim and litigation ensued. After the trial court ruled in favor of the insurer, Ward appealed; the court of appeal has affirmed the judgment, finding there is no coverage for the loss.

All of the relevant insurance agreements extended coverage only for “direct physical loss” to covered property. There was no evidence that the physical storage media or the computers themselves has sustained any harm, as the appellate court emphasized in a footnote:

From all the evidence submitted, and because plaintiff failed to provide evidence of any mechanical or electrical failure, we proceed on the assumption this ‘crash’ did not involve a mechanical or electrical failure. Plaintiff imprecisely described the ‘crash’ [in written briefs] to have resulted from ‘human error.’ At oral argument, plaintiff further advised that an operator inadvertently pressed the ‘delete’ key on the keyboard. Thus, it appears the ‘crash’ involved in this case resulted either fromm operator error or from a software program not sufficiently robust to recover form anticipated operator error.

Given those facts, the court concluded that what plaintiff had sustained was not a “direct physical loss”:

We fail to see how information, qua information, can be said to have a material existence, be formed out of tangible matter, or be perceptible to the sense of touch. To be sure, information is stored in a physical medium, such as a magnetic disd or tape, or evan as papers inn three-ring binders or a file cabinet, but the information itself remains intangible. Here, the loss suffered by plaintiff was a loss of information, i.e., the sequence of ones and zeros stored by aligning small domains of magnetic material on the computer’s hard drive in a machhine readable manner. Plaintiff did not lose the tangible material of the storage medium. Rather, plaintiff lost the stored information. The sequence of ones and zeros can be altered, rearranged, or erased, without losing or damaging the tangible material of the storage medium.

The decision in Ward General Insurance Services, Inc. v. The Employers Fire Ins. Co. (December 17, 2003) Case No. G031624, can be found at these links in PDF and Word formats.

Litigants on the Grass Alas¹

The case itself is not all that exciting -- except perhaps as an example of a court showing exemplary patience with some litigants dragging out the process -- but it has proven impossible to resist quoting this opening paragraph, in which the Court of Appeal invokes Gertrude Stein:

Attorney fees are permitted when authorized by contract, statute or law. A city ordinance allows the city to collect attorney fees incurred in foreclosing a lien on real property. Just as ‘. . . a rose is a rose . . . .’ so is an ordinance a statute when it permits recovery of attorney fees.

What would Alice B. Toklas say?

The decision in City of Santa Paula v. Narula (December 17, 2003), Case No. Crim B160389, can be found at these links in PDF and Word formats.

¹ Homage to Gertrude Stein’s Four Saints in Three Acts.

A Day Late and $3.00 Short -- Lack of Sufficient Filing Fee Bars Last Minute Medical Malpractice Claim

When little things go wrong, large and unpleasant consequences may follow. A cautionary tale:

An attorney in San Diego representing the potential plaintiff in a medical malpractice case to be venued in San Francisco submitted the complaint for filing two days before the statute of limitations was set to expire. Unfortunately, the filing fee check the attorney submitted with the complaint was in an amount $3.00 less than required by local court rules. The court clerk rejected the filing. Counsel did not learn of the rejection until after the statutory time to file had expired. The complaint was accepted with a new fee check, but the defendants were ultimately able to obtain a dismissal on the basis of the statute of limitations. Confronted with these facts, the Court of Appeal is sympathetic to the plaintiff's plight, but ultimately unable to come to her aid:

Benjamin Franklin described the snowballing consequences of inattention to a small detail—'For want of a nail, the shoe was lost; for want of a shoe the horse was lost; and for want of a horse the rider was lost.' (Oxford Dict. of Quotations (2d ed. 1955) p. 211.) In this case the missing nail is a check that was $3 short of the amount required to file a complaint for medical malpractice that allegedly caused the death of the plaintiffs’ infant child. The harsh but unavoidable result is that we affirm the trial court’s dismissal of the complaint because it was not filed before the statute of limitations ran.

Noting that "[a]n unbroken line of decisions by our Supreme Court holds that it is mandatory for court clerks to demand and receive the fee required by statute before documents or pleadings are filed", the court reluctantly rejected plaintiff's argument that the $3.00 shortfall was a trivial defect that should not preclude the complaint from being deemed to have been filed when it arrived in the courthouse.

Three practical safety tips for attorneys can be drawn here:

♣ Try to avoid filing complaints at the last moment before the expiration of a statute of limitations. [There is much less room for error when the time to correct a mistake or to respond to a surprise development is so short.]

♣ Be extra cautious when filing in a court at a distance from your own local practice. [Again, reaction times slow when the problem is developing hundreds of miles away. If the case were being filed in San Diego rather than San Francisco, the San Diego attorney would probably still have had time to submit the extra fee.]

♣ Always double-check the procedural details of the local rules of the court in which you are filing. [The precise reason the fee check came up short here is not stated, but one possible cause is an assumption that the fee in San Francisco was the same as in San Diego. As 'twas said of old: "When you assume, you make an ass of you and me." (Ass u me - get it?)]

The sad story can be read in the decision in Duran v. St. Luke's Hospital (December 16, 2003), Case No. A102182, at these links in PDF and Word formats.

Holding the Line: Two Appellate Courts Decline to Expand Duties of Hospital and School District

Two new California appellate decisions continue the courts’ ongoing exploration of the scope of duties of care. In one case, the court finds that a hospital could not be held liable for the emotional distress that a patient’s adult daughter suffered upon discovering that she had not been notified of her mother’s death and cremation. In the second case, the court found that a school district owed no duty to prevent a six year old student from being struck and injured by an automobile while crossing a street adjacent to her school after being dismissed for the day.

In the hospital case, Spates v. Dameron Hospital Assn. (Dec. 11, 2003), Case No. C043762, the plaintiff had visited her aging mother in defendant hospital most recently some 9 months prior to her mother’s death. Although the daughter had left information concerning her current address on that visit, the information was not contained in the hospital’s main file relating to her mother. When the mother died, the hospital tried the number it had in its main file and contacted the convalescent facility at which the mother had been living; none of those efforts led to the daughter’s current location. Not having found the next of kin, the hospital turned the remains over to the county coroner, who eventually disposed of them by cremation. The Court of Appeal concluded that the hospital’s efforts to locate plaintiff had been reasonable, that its actions in then turning the remains over to the coroner were authorized by law, and that there existed no “direct relationship” between the hospital and plaintiff that would allow plaintiff to recover emotional distress damages arising from the hospital’s alleged negligence. The decision can be found at these links in PDF and Word formats.

In the school case, 6-year old Norma Guerrero had been dismissed with the rest of her class at the usual time of 2:00 in the afternoon. Her older brother Miguel’s 4th grade class was dismissed on schedule at 2:25. While he and Norma were waiting to be picked up, Miguel crossed the street to see a toy being played with by another student. Norma followed, then returned across the street toward the school. On that return crossing, Norma was struck and injured by an automobile. The court concluded that the school’s duty of care ended when Norma had been released in due course in the company of her older sibling.

In order for this court to construct a duty of care under the circumstances, we would have to conclude that the responsibility to ‘exercise reasonable care in permitting students to leave school premises’ . . . continues until the children have been safely picked up or perhaps safely returned home in the case of those who may walk home. No case has created such a sweeping responsibility for our public schools and we decline to be the first to do so.

Rejecting the position of the dissenting judge that the school district had been negligent while Norma was still on the school’s premises, the majority added:

There is no evidence of any act, or failure to act, by school personnel while Norma was on school grounds that could be described as negligent. Indeed, the record shows that Norma was kept on school grounds until her older siblings were released from school. At that point Norma was routinely released with her siblings to leave the school and await pick up by her parent at the designated place. There is no evidence the District undertook any duty to supervise Norma until she was safely united with her parent and nothing to show that it erred in the manner in which Norma was released from school on the date of the accident.

While a broad duty to ensure that each child either arrives home safely or is picked up by a parent might well advance the interests of child safety, the majority could find no basis for such a broad duty in the controlling statutes, and declined to adopt so broadly expansive a rule on its own.

The opinion in Guererro v. South Bay Union School District (Dec. 12, 2003), Case No. D040351 can be found at these links in PDF and Word formats.

The Captive Candidate? -- Howard Dean Criticized for Ties to Insurance Industry

Here's an unexpected pairing: Democratic presidential contender Howard Dean and the insurance industry. The New Republic Online Primary is taking the former Vermont governor to task for his active promotion and expansion of Vermont's status as a center for "captive" insurance companies:

Deanophiles love to spin their candidate's weaknesses into strengths--arrogance is a sign of conviction, tactlessness is straight-talk, and so forth. So I'm curious to see how they'll spin the latest Dean misstep: hypocrisy.

Turns out that while old Howard has been bashing the coziness of the Bush administration with corporate America, Vermont has quietly become the leading state for a dubious tax-break scheme known as 'captive insurance' -- under Dean's direction.

[Decs & Excs does not endorse that characterization of captive insurance as a "dubious tax break scheme." While there are potential tax benefits accompanying a captive arrangement, it can be (and primarily should be) used as a legitimate tool for risk management.]

The New Republic piece is inspired by a detailed article on Dr. Dean and the Vermont captive industry published in today's Boston Globe. An excerpt:

Dean spokesman Jay Carson said there is no contradiction between Dean's complaints about President Bush's corporate tax breaks and the former governor's own efforts to help the captive insurance industry. 'This is a legitimate industry, perfectly legal. It helped the economy here, and Governor Dean is going to make no apologies for that,' Carson said.

As governor, Dean saw his competitor for this business as Bermuda, which hosts nearly three times as many captives as Vermont. 'We consider our competition to be Bermuda or the Cayman Islands,' Dean said in a 2001 article published by the A.M. Best Co. 'We feel pretty good about what we are doing, but it is competitive. Our goal is to overtake Bermuda as the world's largest captive domicile." Carson, the Dean spokesman, said yesterday the governor was referring at the time to his desire to "bring jobs and revenue back to the United States.'

While the captive insurance industry began arriving in Vermont before Dean began his 11-year term as governor, Dean heavily promoted the industry and it grew dramatically under his administration into a key revenue source.

'In terms of benefits to the state, this is one of the crown jewels in the state's tiara,' said Lisa Ventriss, who until last year ran the Vermont Captive Insurance Association and is now president of the Vermont Business Roundtable. 'There is maple syrup and skiing and cheddar cheese and captive insurance. What more could you want from life?'

While the article offers a reasonably clear explanation of how captive insurance works, its focus is more on the perceived disjunction between Dr. Dean's image as a progressive and the corporate clientele most likely to benefit from setting up captive insurance companies. In particular (and duly noted by the New Republic item), the Globe engages in a bit of "guilt by association" between the former governor and a particularly notorious corporate enterprise:

As a presidential candidate, Dean has attacked Bush for giving tax breaks to "Ken Lay and the boys who ran Enron." But Enron apparently was attracted to Vermont because of the benefits offered under Dean's administration. Dean, who became governor in 1991, cut taxes in 1993 by up to 60 percent on the premiums paid by the parent companies to the captives at the same time he was raising the state sales tax and cutting spending. Dean's tax cuts on captives set off Vermont's boom in that industry.

In December 1994, Enron set up a captive insurance company called Gulf Company Ltd., which is managed by USA Risk Group, a company in Montpelier that specializes in managing captive insurance companies. Indicating the closeness of a captive to its parent corporation, Enron's former chief financial officer, Andrew Fastow, was on the Gulf board and made one appearance at USA Risk's Montpelier office, a company official said. (Fastow is no longer on the Gulf board, and Enron has filed for bankruptcy.)

Whether this story will actually make any difference -- a questionable proposition given how easily the public is put to sleep by the mechanics of risk and insurance -- remains to be seen, but Decs & Excs will be watching it unfold with (tax free) interest.

Unconscionability on the March: Court Invalidates Another Arbitration Provision

Following on the heels of the case summarized below, the California Court of Appeal has invalidated another contractual arbitration provision, declaring it to be "unconscionable."

Ryan Gutierrez responded to a televised infomercial by defendant Autowest offering affordable leasing of a Dodge Durango. After telephoning ahead to confirm that he qualified for the advertised price, Gutierrez went to Autowest's dealership to close the deal. There, he was informed that he could lease the vehicle at the advertised rate if he made a more substantial downpayment than the infomercial suggested. Ultimately, he made a lower downpayment, but was obliged to make monthly payments several hundred dollars more than had been advertised.

Having entered into the written lease, Gutierrez thought through his situation and concluded he had been victimized by an illegal "bait and switch." He filed suit, in response to which Autowest asserted a provision -- which was printed in eight point Arial Narrow type on the rear of the lease document (the appellate court reproduces it in that format) and which Gutierrez contends was never called to his attention -- requiring any disputes to be submitted to binding arbitration through the American Arbitration Association [AAA] under the federal Arbitration Act [9 U.S. Code, §1, et seq.]. Autowest petitioned the trial court to order the matter into arbitration under the terms of the lease. The trial court, finding that the cost of AAA arbitration would be prohibitive -- Gutierrez would have to pay fees of some $8,000 simply to commence the arbitration, which he demonstrated was beyond his ability to pay -- and that the contract provided no means for Gutierrez to seek relief from those costs, declared the provision unconscionable and unenforceable. On appeal by Autowest, the Court of Appeal agrees:

We conclude that where a consumer enters into an adhesive contract that mandates arbitration, it is unconscionable to condition that process on the consumer posting fees he or she cannot pay. It is self-evident that such a provision is unduly harsh and one-sided, defeats the expectations of the nondrafting party, and shocks the conscience. While arbitration may be within the reasonable expectations of consumers, a process that builds prohibitively expensive fees into the arbitration process is not. [Citation omitted.] To state it simply: it is substantively unconscionable to require a consumer to give up the right to utilize the judicial system, while imposing arbitral forum fees that are prohibitively high. Whatever preference for arbitration might exist, it is not served by an adhesive agreement that effectively blocks every forum for the redress of disputes, including arbitration itself.

(Emphasis added.) The court's decision in Gutierrez v. Autowest, Inc. (Dec. 9, 2003), Case No. A098704, may be found at the following links in PDF and Word formats.