In Health Net, Inc. v. RLI Insurance Company, et al., Cal. Ct. App. Case N. B224884 c/w B240833, the California Court of Appeal clarified that contract benefits owed by an insured are not covered by a liability insurer because the obligation to pay contractual amounts is not a loss due to a “wrongful act.”
The appellate court reversed summary judgments granted by the trial court based upon the application of a “dishonesty” exclusion, finding instead that most (and potentially all) of the underlying ERISA class action claims brought against the insured did not fall within the scope of the insuring agreements. The insured, Health Net, had been sued in two class actions for underpaying out-of-network claims, and had settled those claims for $215 million, inclusive of plaintiff’s attorney’s fees and various business practice changes. The insured sued four of its insurers seeking payment of its defense expenses and the settlement of the class actions. The appellate court concluded that “there is no coverage for the vast bulk of the claims asserted in these actions. Specifically, there is no coverage for the actions to the extent they sought: (1) unpaid [contractual] benefits; (2) injunctive relief; (3) civil penalties; (4) damages arising out of claims subject to the willful act and other policy exclusions; and (5) attorney’s fees arising out of any of the above.”
The appellate court held that even absent a breach of contract exclusion, the Insuring Agreement of the applicable policies did not provide coverage for the insured’s contractual obligations – whether the insured committed a wrongful act in its failure to pay such benefits. Quoting August Entertainment, Inc. v. Philadelphia Indemnity Ins. Co., 146 Cal.App.4th 565, the court explained “[P]erformance of a contractual obligation – - – is a debt the [insured] voluntarily accepted. It is not a loss resulting from a wrongful act within the meaning of the policy.” Id. at pp. 581-582.
The court rejected the insured’s argument that the underlying settlement consisted of amounts paid to resolve disputed claims, and therefore “does not establish such amounts were owed under contract.” In footnote 24, the court stated: “[W]e determine coverage by the allegations of the underlying actions. To the extent the underlying actions sought coverage for unpaid benefits, the underlying actions were not covered by the policy – thus no amounts paid to settle those claims were covered by the policy. An insured cannot transform an uncovered contract claim into a potentially covered one simply by settling it prior to any decision being made on its merits.” The court explained that even where breach of contract claims involve alleged negligence or breach of fiduciary duties, it is required to “consider the nature of the damage and the risk involved, not the name of the causes action pleaded” in determining insurability. Citing Vandenberg v. Superior Court, 21 Cal.4th 815, 838-839 (1999). Thus, whether or not Health Net’s conduct was negligent or violated ERISA, the the nature of the claims asserted involved the failure to pay contract benefits, and those unpaid benefits were not the responsibility of the insurers.
The court also rejected the insured’s argument that the plaintiffs’ fee award, which comprised $70 million of the underlying settlement, constituted an independent claim for damages, apart from the unpaid benefits or other settlement amounts. The court ruled that “if the entire action alleges no covered wrongful act under the policy, coverage cannot be bootstrapped based solely on a claim for attorney’s fees.” The court stated that if “a complaint alleges some covered wrongful acts and some acts which are not covered, the claim for attorney’s fees is covered only to the extent it arises out of the covered wrongful acts.”
The appellate court concluded that the “dishonest acts” exclusion relied upon by the trial court excluded some but not all of the underlying claims, some of which might potentially allege a covered loss, and remanded the case to the trial court “to determine whether and to what extent there is any merit to the claim of coverage.”