Declarations and Exclusions

It All Comes Out in the Wash.

Insurance Journal reports (drawing largely on this press release) that a group of Washington state physicians has launched a campaign to qualify a medical malpractice reform initiative. If the required signatures are obtained, and if the Washington legislature then fails to act on the proposal, it will be presented to the state's voters for adoption in the Fall of 2005.

The text of the initiative can be read here.

On initial review, there are numerous parallels between this proposal and the approaches adopted by California in its 1975 "MICRA" reforms. An oft-cited RAND Study earlier this year concluded that MICRA has reduced malpractice defendants’ payments by approximately 30%, with the injured claimants’ recoveries diminished by 15% and their attorneys’ fee recoveries by 60%. The most prominent provisions in the Washington proposal:

♦ Establishes an upper limit on noneconomic damages (pain and suffering, emotional distress, loss of enjoyment, etc.) of $350,000. [California’s parallel limitation has stood at $250,000 since 1975.] The $350,000 limit replaces or modifies an existing limitation under which noneconomic damages may not exceed “an amount determined by multiplying 0.43 by the average annual wage [in the state of Washington] and by the life expectancy” of the injured claimant. Economic damages -- actual costs of medical care, lost wages and similar “objectively verifiable” losses -- are not limited.

♦ Restrict the amounts that attorneys may collect as contingent fees in medical malpractice cases to 40% of the first $50,000; 33-1/3 of the next $50,000; 25% of the next $500,000 and 15% of anything about that. [This parallels California’s contingent fee limitations.]

♦ No medical malpractice suit may be filed without the defendant(s) first being given 90 days advanced notice of the intent to sue. Once the notice is given, it triggers mandatory mediation of the claim. The state supreme court is directed to adopt appropriate rules for the management of such mediations. [Regular readers will recall that mandatory mediation is also favored by Senators Kerry and Edwards.]

♦ Where the injured claimant has been compensated by his/her own insurance, such as by a personal health insurance policy, the defendant(s) may present evidence of the amounts that the claimant has received. Those other insurers are not entitled to claim recovery through the malpractice case by way of subrogation or reimbursement.

♦ Medical professionals are authorized to include mandatory arbitration clauses in their contracts to render professional services, provided that mandatory disclosure language is included.

♦ Vicarious liability is limited: reversing an existing Washington appellate decision, the initiative would not hold a hospital responsible for a doctor’s negligence merely because the hospital granted that doctor hospital privileges. Instead, as a prerequisite to the hospital’s liability, it would have to be proven that the doctor was in fact that agent or employee of the hospital.

Regulating Regulators in the Name of De-Regulation [w/ multiple updates]

The prospect of further Federal involvement in insurance regulation is becoming a surprisingly hot topic of late. I have noted in prior posts Senator John Edwards’ interest in repealing the McCarran-Ferguson Act’s exemptions of insurers from federal regulation, at least in connection with claimed “price fixing” in relation to medical malpractice liability premiums. David Giacalone has been actively engaged on this subject, and I recommend reading his comments, attached to posts here and here.

I agree with the consensus behind David’s position that there is no particular cause to believe that federal antitrust enforcers would target information sharing activities among insurers that bear upon the accurate assessment of risk, with or without the McCarran-Ferguson exemption. I quoted the relevant bill in my original post, and acknowledged that its focus was explicitly on “price fixing, bid rigging, or market allocations” -- activities that, if proven, certainly ought to be halted or penalized.

The questions I think remain unanswered are:

(1) Is there any evidence at all that such activities are actually going on in the insurance industry generally or with regard to medical malpractice coverage in particular?

(2) Is there any evidence that the states would be ineffectual in stopping that activity if it actually did take place (i.e., is federal antitrust enforcement per se superior to state-level enforcement)? And

(3) If eliminating the McCarran-Ferguson is such a good idea, why is the proposed legislation focused on medical malpractice coverages and not on the entire insurance industry?

My personal views in favor of maintaining the McCarran-Ferguson exemption stem not from any wish that insurers should be free from all regulation or should be permitted to engage in anticompetitive activities, but from a belief that the state level is the right level at which to carry out that regulation. The insurance “ecosystem,” if you will, has evolved under a McCarran-Ferguson regime in which the states have handled the bulk of the regulation of insurance qua insurance. The re-Federalization of that regulation does not appear to offer advantages concomitant with the havoc it would likely cause. In the abstract, McCarran-Ferguson may not have been necessary when it was originally enacted, but after the entire structure of the industry has for so many decades been built around its effects I have yet to see a compelling argument that its repeal is any more necessary or that it would result in any measurable improvement or public benefit.

Having expressed a distaste for Federal involvement generally, consistency compels me to look askance initially at the latest Republican proposals for federal legislation to mandate or prohibit state insurance regulators from engaging in specified regulatory activities, such as rate regulation. I have not dug deeply enough into this to express any informed opinion yet, but Professor Martin Grace is following the issue closely on his weblog, a tort et a travers. I can’t seem to get his permalinks to work properly (nor do my trackback pings appear to stick properly on his site), but his first report on this subject is on August 23, with updates on succeeding days. The most thorough summary of the Republican proposal, linked by Professor Grace today, is this report from A.M. Best. No doubt, there will be more to say as the legislation and election roll forward.

UPDATE [8/27/04]: Following the wry advice often given to the government during the Vietnam War, David Giacalone has declared victory and gone home, promising to return his attention to the crafting of elegant haiku. His parting ode to online debate and camaraderie reminds me of an old "Far Side" cartoon, in which one of a pair of medieval torturers says to the other at the end of a long day: "I'm tired, but it's a good tired."

Rest up; there's more battles ahead to be sure.

FURTHER UPDATE [still later on 8/27/04]: Tired of technical difficulties, Professor Grace has made a discrete migration to TypePad. I have made post facto updates of my various links to his posts of the past few days. I particularly direct you to this one, that one, and this other one, too.

FINAL FURTHER UPDATE [also 8/27/04]: A good summary of where we all stand at this stage of the discussion is available, for those who are not weary of the whole thing, in this latest post from Professor Grace. I can't complain: he has given what strikes me as an accurate rundown of the positions I've taken so far, and I definitely endorse his characterization of some of the proposals from both sides of the aisle -- including the Republican-backed "SMART Act" (when, pray, are we going to oblige our legislators to grow up and overcome their fondness for cute acronyms?) that triggered this particular post -- as "'funny' federalism." That seems as good a note as any on which to leave off on the subject, at least for the weekend. . . .

Democratic Candidates: Errin' on McCarran?

For those following the medical malpractice/tort reform aspects of the 2004 presidential campaign, Martin Grace offers more [link updated 8/27] comment on the Kerry-Edwards plan to target the insurance industry's federal antitrust exemption under the McCarran-Ferguson Act. He notes in particular the reasons why tightening restrictions on information sharing is likely to make lower-priced medical malpractice insurance less available than it already is.

Decs&Excs remarked on this facet of the Democratic proposals here.

On This We Can Agree: John Edwards Questions His Own Reform Proposal

The Washington Times -- admittedly not the most reliably objective source in American journalism -- adds to the long list of profiles of John Edwards' pre-Senate career as a highly successful attorney for plaintiffs in medical malpractice cases. Nothing much new here, except the discovery that during his time in practice Senator Edwards himself questioned the value of one of the central provisions of what is now the Kerry-Edwards plan for medical malpractice reform.

The Democratic team's proposal would require that a qualified medical specialist certify the probable merit of a malpractice case prior to filing. In my initial report on the plan (here), I suggested that this is not a requirement that would make much of a difference:

Under current law a medical malpractice case is generally not viable without at least one expert witness who will opine that the defendant doctor fell beneath accepted practice standards. Pre-screening may simply require the plaintiff's attorney to find that expert sooner rather than later.

The Washington Times' story suggests that Senator Edwards agrees with my assessment:

Part of the platform that Mr. Edwards is running on includes medical-malpractice reform. The Democrats' plan would go after insurance companies that increase doctors' premiums and ban lawyers and plaintiffs for 10 years if they file three frivolous lawsuits.

One tenet of their plan would 'require that individuals making medical-malpractice claims first go before a qualified medical specialist to make sure a reasonable grievance exists.'

However, Mr. Edwards said in a 1995 interview that such pre-screening is unnecessary.

'Pre-screening as a concept is very good, but it's already done by every experienced malpractice lawyer,' he told North Carolina Lawyers Weekly.

[Note: As this has become a regular topic on this weblog, I have added a new category to the Archives to collect those posts looking particularly at insurance issues in the Presidential campaign. "Politics of Insurance - Campaign 2004" is accessible through the links at the end of relevant posts, and through the Archives links in the right column.]

Doctors Take John Edwards' Medical [Malpractice] History to Heart

More press reports roll in on the Kerry-Edwards approach to medical malpractice issues, including discussions of the likely motive for giving those proposals a high profile: overcoming doctors' hostility to John Edwards.

Senator Kerry's hometown paper, the Boston Globe reports on the campaign's larger effort to re-define Sentaor Edwards as a Friend of Doctors, rather than as their longtime nemesis:

Since first running for the US Senate in 1998, John Edwards has been the politician many doctors dislike most -- a trial lawyer who amassed an eight-figure fortune from personal injury lawsuits and became a symbol of the soaring medical malpractice insurance premiums physicians must pay.

But there is another John Edwards that the Kerry-Edwards campaign is taking pains to introduce: a man whose past legal advocacy for patients stemmed from a passion for quality health care, for allowing doctors to make medical decisions instead of insurance companies, and for unfettered medical research.

* * *

Behind the campaign's effort to recast Edwards lies a fear that doctors' anger over his trial-lawyer image could deprive the Democratic ticket of support from a medical constituency that is very much in play in this election. Polling data from recent elections show that doctors, who traditionally vote Republican, are moving toward Democrats because of concerns over health-care issues, including a patient bill of rights.

The medical profession makes up a sizable constituency: the article quotes an AMA figure putting the number of U.S. medical doctors about 853,000.

In the battleground state of Pennsylvania, medical malpractice claims and premiums are very much on the minds of health care providers, according to this story in the Bucks County Courier Times, and John Edwards professional history of pursuing medical malpractice claims represents a sizable obstacle to earning those doctors' votes in November:

The hot topic this election season for many Pennsylvania doctors is skyrocketing liability insurance costs. Because of the incumbent president's position on the issue, many local doctors said he gets their vote.

'It's the main reason I am backing [President Bush],' said Dr. John Petolillo Jr., an orthopedic surgeon based in Middletown. Insurance carriers consider his field extremely high risk.

'It's important enough to back him solely on that issue,' Petolillo said.

First lady Laura Bush addressed about 300 white-coated doctors and other healthcare practitioners Monday at the Sheraton Bucks County hotel in Falls. Dressed in a gray suit and blue scarf, her honey-colored hair tidily coifed, Bush talked about her husband's position on medical liability insurance, healthcare reform, the economy and foreign policy. She also accepted the endorsement of the Pennsylvania Medical Society.

* * *

Others at Monday's medical society event said the Democratic candidate for president, John Kerry, has alienated many doctors by choosing medical malpractice trial lawyer John Edwards as his running mate.

'Normally, we don't get involved with presidential issues,' said Dr. George Green, a board member of the Pennsylvania Medical Society. 'The choice of Edwards forced us.'

Cross-Reference

The decision is somewhat off topic for this weblog, so I have posted initial impressions of the California Supreme Court's opinion today in the San Francisco gay marriage case at the more wide-ranging A Fool in the Forest.

Welcome Professor Bainbridge Readers

Many thanks to Professor Bainbridge for his kind triple quadruple-link to this weblog. As a UCLA Law alumnus myself (albeit from a long-ago time before Professors Bainbridge or Volokh appeared on the faculty), this is a benefit I particularly relish.

If you came here via some other route, and you don't already include him as a regular stop on your weblog rounds, I firmly commend the good professor to your attention.

Kerry On, Wayward Son: Democratic Med Mal Updates

Coverage of the Kerry-Edwards proposals for medical malpractice reform continues to accumulate. Some of the latest additions:

♣ Walter Olson of Overlawyered probes the campaign's recurrent theme that Senators Kerry and Edwards "can achieve medical malpractice reform in the same way that Republican Richard Nixon could achieve rapprochement with China, presumably because their ticket would have the sort of credibility with the litigation lobby that the late GOP president had with dedicated anti-communists." Thus far, he is unconvinced.

♣ Readers are encouraged to revisit my own prior post on Kerry-Edwards and the McCarran-Ferguson Act for the sake of reading the detailed and articulate comment left by David Giacalone. David had hands-on, in-depth experience with the Act during his tenure at the FTC circa 1978, and suggests that I may be playing the role of Chicken Little here. If you are at all interested in this aspect of the debate -- which strikes me as being a trifle too policy-wonkish to achieve a measurable public profile in mainstream media coverage of the campaign -- David's countervailing analysis is a contribution worth your attention. (I will probably have more to say on the subject, but I want to undertake some additional investigation first.)

♣ If you look into the pages of the campaign's official statement, Our Plan for America (downloadable as a PDF from this page at the official campaign site), you'll find no additional details on the Democratic candidates' proposals beyond what has already been reported here. Senator Edwards, however, disclosed another wrinkle in an interview published today in the Rocky Mountain News: expanded tax breaks for doctors.

Q: Republicans often say rising malpractice insurance costs are forcing doctors out of rural areas, and that only tort reform can bring down health care costs. What do you think of that?

A: First of all, I think that we have the best legal system in the world. It's not perfect. And I think that there are a lot of things that we can do as a nation to help our doctors and our medical care providers with this problem (of rising malpractice insurance rates).

What John and I would do is we'd give some tax relief to doctors whose premiums have gone up significantly, so that they could have some help with that. And then on the other end, we would require - we'd put the burden on the lawyers.

We would require the lawyers who were considering filing a malpractice case to get the case reviewed by independent experts to determine that it's serious and meritorious for the cases filed, to certify that. If they fail to do it - this is the key, frivolous cases, cases that don't belong in the system now - if they fail to do it, then we hold the lawyer accountable, financially accountable.

And I'd also have a three-strikes- and-you're-out rule. In other words, if some lawyer violates that rule three times, they lose their right to file a case for 10 years or so - a substantial period of time.

(Emphasis added.)

Perhaps someone with more knowledge of existing tax law can enlighten me on this: aren't malpractice insurance premiums already deductible as a necessary business expense? (This sounds like another subject for more research . . . .)

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.]

Bronco Bustin', or, The California Supreme Court Takes a Napa

The California Supreme Court has upheld state laws that require that wine sold under a brand name that includes the word "Napa," or any other designation of a designated viticultural area, must be made principally with grapes that were actually grown in the area referred to. The court has disallowed the practice of Fred Franzia's Bronco Wine Co. of bottling wines under brand names such as "Napa Ridge," "Napa Creek" and "Rutherford Vintners" when the grapes from which they were produced came from less respected areas, often hundreds of miles from the Napa Valley.

Bronco Wine Co. is an enormous enterprise, producing wines under some 30 different brands. In many cases, those brand names once belonged to other wineries, but were acquired by Bronco. Perhaps the best known of the Bronco labels is Charles Shaw -- aka "Two-Buck Chuck" -- of which I have written previously here and here, not to mention here. In the case before the California Supreme Court, the brands involved were acquired by Bronco at various points in the past ten years or so. From the Court's introductory summary of the facts we learn (with emphasis added):

Bronco asserts that it specializes in 'premium wines at affordable prices.' Some of Bronco’s wine is bottled at its facilities in Ceres (near Modesto, in Stanislaus County) and in Sonoma County; other Bronco wines are bottled by petitioner Barrel Ten Quarter Circle, Inc., at a recently completed facility in the City of Napa, in Napa County. The latter plant is capable of producing approximately 18 million 12-bottle cases per year -- output that would be more than double the current annual production of Napa-grown wines.

* * *

Bronco acquired these three brand names, and the right to use these labels, from predecessor owners of wineries located in Napa County. The Napa Ridge brand, which Bronco acquired in January 2000 from Beringer Wine Estates for more than $40 million, had been in use since the early 1980s. The Napa Creek Winery brand, introduced in 1981, was acquired by Bronco in 1993. The Rutherford Vintners brand originated in the early 1970s, and was acquired by Bronco in 1994.

The prior owner of the Napa Ridge brand had used that name and label for wines made from grapes grown in California’s Central Coast, North Coast, and Lodi appellation areas, as well as from Napa County. All of the wines previously marketed by the prior owner under the Napa Creek Winery brand and most wines previously marketed by the prior owner under the Rutherford Vintners brand had been made from Napa County grapes. Under Bronco’s ownership, all three of these brands have been used exclusively to sell wines made from grapes grown outside Napa County.

Bronco's labeling practices are entirely legal under the relevant federal regulations: while new brands with geographical designations in them are required to be made at least 75% from grapes grown in the indicated area, older preexisting brands such as the ones Bronco acquired were "grandfathered" in and are permitted to use grapes from most anywhere so long as their labels also indicate those grapes' place of origin. For instance, the Napa Ridge and Napa Creek labels in issue specified that their grapes came from Lodi, and the Rutherford Vintners label indicated grapes from Stanislaus County in California's Central Valley.

In the year 2000, the California legislature at the urging of various Napa Valley-based vintners passed a statute imposing a stricter rule: any California wine with a viticultural region name in its brand must be made at least 75% from that area's grapes, or it cannot be sold or distributed in California.

The Supreme Court's opinion is unusually lengthy -- 67 pages -- but it turns on a single issue: the Court finds through an excruciatingly detailed review of the relevant legislative and regulatory history that there is no reason that California cannot adopt a stricter labeling standard for the state's wines than is required by the federal regulations. Here is the court's conclusion (again with emphasis added):

Bronco has failed to carry its burden of demonstrating federal preemption of a long established and legitimate exercise of state police power with respect to the subject regulated by section 25241. As we have seen, there is no express preemption in the present context, and Bronco’s assertions of implied preemption are contradicted by the long history we have described of concurrent state and federal regulation of wine labels including, historically, the representations appearing on labels suggesting the place of origin of the grapes used to make wine. Nor has Bronco succeeded in providing any persuasive indication that this longstanding concurrent regulatory scheme no longer is compatible with Congress’s overall purposes -- which have been to support the states’ efforts to protect consumers from misleading labeling, not to permit the type of labeling at issue here. Finally, Bronco has not established that, by purchasing a brand name that had been used prior to 1986, it acquired a federally recognized right or license exempting it from stricter state regulation.

California is recognized as a preeminent producer of wine, and the geographic source of its wines -- reflecting the attributes of distinctive locales, particularly the Napa Valley -- forms a very significant basis upon which consumers worldwide evaluate expected quality when making a purchase. We do not find it surprising that Congress, in its effort to provide minimum standards for wine labels, would not foreclose a state with particular expertise and interest from providing stricter protection for consumers in order to ensure the integrity of its wine industry.

The "federal vs. state" nature of the decisive issue suggests that Bronco Wine Co. may well petition the U.S. Supreme Court to review the case: details will be posted here if and when that occurs.

The opinion in Bronco Wine Co. v. Jolly (August 5, 2004), Case No. S113136, 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.]

[Cross-posted to A Fool in the Forest.]