Thanksgiving is one day when the whole family gets together and sets aside petty differences to give thanks to the Almighty for the bounty we enjoy.
California’s insurance coverage family is often a dysfunctional one. To listen to us – the plaintiffs’ bar, insurance carriers, the brokerage community, and the defense bar – one might think that we agree on hardly anything. The clan gathers at the big house on the hill many more times than once a year and argues over how to allocate the abundance flowing from the cornucopia – the amalgam of insurance policy proceeds, corporate assets, and public largesse – and who among us is the most deserving.
Our disputations play out under a complex set of rules, more pliable than Hoyle’s, called “coverage,” as if eight letters were enough to encompass the breadth of written contracts, statutorily implied provisions, terms of art, commercial standards, and that most elastic yardstick of all: public policy. We are guided in our fractious interactions by twelve good citizens, sworn and true, and by a three-tiered priesthood clad in black. As our creative arguments rise up the hierarchy from trial court, to appeals court, to Supreme Court, we intently watch for portents that will guide us in our next encounter.
There has been, as they say, “something for everybody” in 2013, so let us give thanks.
Zhang: Let the UCL Suits Begin!
The plaintiffs’ bar should be thankful for Zhang v. Superior Court, 57 Cal.4th 364(2013), a partial and long-anticipated answer to the question of whether California’s pernicious (to businesses) Unfair Competition Law (UCL) applies to insurers in lawsuits brought by their insureds. That answer: Yes, sort of. A policyholder may sue its own insurer for false advertising, one of the prohibited acts in the UCL, even though the same conduct would not be actionable under the state’s Unfair Insurance Practices Act, Cal. Ins. Code sections 790.03 et seq.
Although damages cannot be awarded in UCL cases, they can be highly intrusive and expensive to defend against, and a prevailing plaintiff may be awarded attorneys’ fees as well as disgorgement and other equitable remedies.
Later cases will try to stretch Zhang to other circumstances, but for now it is limited to actions by first-party claimants (the carrier’s own policyholders). Read narrowly, the decision only allows the UCL cause of action to be pleaded; proof still remains a major hurdle.
Reservations of Rights and Independent Counsel
Insurers came out ahead in two California appellate opinions that dealt with reservations of rights.
- Federal Ins. Co. v. MBL, Inc., 219 Cal.App.4th 29 (2013). Halford’s Cleaners was targeted by the U.S. government in an environmental cleanup case brought under CERCLA. Halford’s sued its product suppliers for indemnity, including MBL, Inc. MBL, in turn, tendered its defense to six of its insurers, who agreed to provide a defense under reservations of rights to MBL, to be conducted by insurer-appointed counsel. MBL objected, claiming that it was entitled to independent counsel under California Civil Code section 2860 (sometimes called the Cumis statute) because the reservations of rights, which were primarily based on the carriers’ absolute pollution exclusions, allegedly created a conflict of interest on the part of appointed counsel, and because some of the same carriers had also appointed different counsel to defend some of the other parties in Halford’s underlying suit against its suppliers. The insurers filed suit for declaratory relief as to whether MBL had a right to independent counsel under the circumstances. MBL cross-complained for breach of contract and bad faith.
The trial court held that the absolute pollution exclusion did not, in and of itself, create a conflict of interest on the part of appointed counsel, since the exclusion’s applicability would not be adjudicated in Halford’s case against MBL and the other suppliers. Similarly, the carriers’ defense of other insureds in that action presented at most a “theoretical” conflict, without a significant, actual conflict having been demonstrated by MBL. The Court of Appeal also rejected an argument by MBL that the timing and number of “occurrences” under the various policies created a potential conflict, since that issue would likewise not be decided in the Halford’s v. MBL case.
- Does a reservation of rights last forever? In Swanson v. State Farm General Ins. Co., 219 Cal.App.4th 1153 (2013), the court held that a carrier may withdraw its reservation of rights and thus cut off its obligation to pay for fees charged by the insured’s independent counsel. State Farm had reserved its rights to deny coverage in a lawsuit brought by one homeowner against the neighboring owner whose retaining wall collapsed during a heavy rainstorm. State Farm questioned whether the damages in the case constituted “bodily injury or property damage” as those terms were defined under the policy it issued, and also whether the incident was an “occurrence” as defined. State Farm later withdrew these reservations, appointed new counsel to associate in the case as defense counsel for its insured, and stopped paying the insured’s independent counsel. The insured sued State Farm for breach of contract and bad faith.
The trial court in the coverage action granted summary judgment to State Farm, holding that once the reservation of rights that created a conflict was withdrawn, the insured’s right to independent counsel ended and that State Farm could have no bad faith liability because it did not breach the contract. If the decision stopped there it would be an unequivocal rule to be followed by California trial courts, but the Court of Appeal inserted an ominous footnote:
“Of course, an insurer’s decisions to withdraw the reservation of rights that gives rise to the need for Cumis counsel, to take control of the litigation, and to cease paying Cumis counsel, as well as the timing of those decisions, are, like all of the insurer’s decisions, subject to the insurer’s duty of good faith and fair dealing to its insured.”
This dictum in Swanson leaves the door open for the case to be distinguished by trial courts in California. Insurers would be well advised to carefully consider the practical effects of the timing of withdrawing a reservation of rights on the insured’s defense. The court’s implication seems to be that earlier is better.
There’s No Demand. Is There a Duty to Settle?
In a very recent case, the Court of Appeal limited an insurer’s duty to settle third-party claims within its policy limit to circumstances where the claimant has actually made a demand within the limit. In Reid v. Mercury Insurance Company (Cal. Court of Appeal, Second District, No. B241154, filed 10/7/13), an auto liability carrier’s insured failed to stop at a red light, rear-ending the claimant’s car, which then crashed into another car, causing injuries to occupants of both cars. The insured’s liability was immediately clear, as is often the case in red-light-running rear-end collisions. Although the named plaintiff, Reid, asked the carrier what its policy limit was, and his lawyer later did the same, neither of them expressly demanded that the policy limit be offered in settlement, or stated that plaintiff would accept the limit if it were offered.
State Farm sought claimant’s medical records and later offered its policy limit to settle, but claimant rejected the offer and proceeded to trial against the insured driver, resulting in a verdict in excess of $5.9 million. The insured filed for bankruptcy, and the bankruptcy trustee assigned the insured’s rights against State Farm to Reid, who then brought a bad faith suit based on the assignment.
The trial court, affirmed by the Court of Appeal, found no basis on which to hold State Farm liable for the excess-of-limit judgment because it had never received a demand within the policy limit. As the court stated, “We will not construe a bare request to know the policy limit as an opportunity to settle.”
It merits mention that the Court of Appeal’s decision recites in detail the history of communications between State Farm and claimant’s counsel. Reid, while a favorable decision for insurers, may be limited to its facts in later cases in which the communications more clearly establish that the claimant expresses a willingness to settle for an amount at or below the policy limit where liability is clear.
Does an Exclusion Mean What It Says?
Cases construing exclusions are perennial favorites of coverage connoisseurs. Several cases of note were produced in 2013. Here are two examples in which the insurers came out ahead.
- Does a failure to prevent assault and battery fall within an assault and battery exclusion? The court in Mount Vernon Fire Ins. Corp. v. Oxnard Hospitality Enterprise, Inc., 219 Cal.App.4th 876 (2013), held the exclusion applied to a case in which a nightclub owner allegedly failed to prevent a patron from throwing a glass of flammable liquid on an employee then lighting her on fire. The employee and her minor children filed suit, alleging that the nightclub did not provide adequate security to prevent such incidents.
The Mount Vernon liability insurance policy excluded assault and battery, “battery” being defined as “negligent or intentional wrongful physical contact with another without consent that results in physical or emotional injury.” The trial court in Mt. Vernon’s declaratory relief action had no difficulty finding the incident met that definition, though the nightclub’s liability was premised on negligence for failing to prevent the battery, rather than committing the battery. Moreover, the minor children’s claims were also held to be excluded – though they did not experience the “wrongful physical contact” – because they “arise from” an assault or battery. The Court of Appeal affirmed.
- Does a “statutory violation” exclusion extend to class actions alleging privacy violations? The U.S. District Court held that an exclusion for liability “arising out of the violation of a person’s right of privacy created by any state or federal act” does preclude coverage for claimed invasions of privacy even when those invasions are not pleaded as violations of such statutes, where the right to privacy only exists because of those statutes. (Big 5 Sporting Goods Corp. v. Zurich American Ins. Co., Case No. CV 012-03699 DMG (C.D. Cal., July 10, 2013).) The court found that claimants’ privacy rights were ultimately dependent on California’s Song-Beverly Act of 1991, Cal. Civ. Code § 1747.08(a)-(b), regardless of the legal theory pleaded.
And for the Insurance Brokers …
Insurance brokers also have a reason to be thankful this year. In San Diego Assemblers, Inc. v. Work Comp for Less Ins. Services, Inc., 220 Cal. App. 4th 1363 (2013), the Court of Appeal upheld a trial court’s grant of summary judgment to a brokerage firm that had allegedly failed to procure a liability insurance policy for its customer, a building remodeling contractor, that would cover its exposure for its faulty work at a restaurant that caught fire after the work was completed. The contractor had only instructed the broker to obtain “the least expensive policy.”
The restaurant’s property insurer paid for the fire loss, then sued the contractor, obtaining a default judgment, and sued the contractor’s liability insurer in the contractor’s name. In affirming the grant of summary judgment to the contractor’s insurer, the Court of Appeal reiterated the long-standing California rule regarding an insurance broker’s limited duties:
“As we recently explained, under well-settled law, ‘[i]nsurance brokers owe a limited duty to their clients, which is only to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.’ [Citations.] Accordingly, an insurance broker does not breach its duty to clients to procure the requested insurance policy unless (a) the [broker] misrepresents the nature, extent or scope of the coverage being offered or provided … , (b) there is a request or inquiry by the insured for a particular type or extent of coverage … , or (c) the [broker] assumes an additional duty by either express agreement or by ‘holding himself out’ as having expertise in a given field of insurance being sought by the insured. (Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Ins. Services West, Inc. (2012) 203 Cal.App.4th 1278, 1283 [138 Cal. Rptr. 3d 294] (Pacific Rim).)”
The court also ruled in the professional liability insurer’s favor under the “superior equities doctrine,” an equitable rule that limits a party who has paid a loss when seeking indemnity for its payment. The property insurer does not have “superior equities” as compared with a party that did not cause the fire loss (the broker’s E&O insurer). For brokers, the niceties of courts’ equitable remedies are probably of less interest than the reaffirmation of California law that limits brokers’ duties, as stated above.
Over the course of a year the federal and state courts in California publish many noteworthy opinions. Those summarized above seemed to this author to be the most interesting. They also illustrate that the California judiciary is not, uniformly or even primarily, pro-policyholder when it comes to insurance cases, a reputation that it may have earned in bygone years.
Litigants seek redress in court, or defend themselves in court, with an expectation of a fair, neutral system of justice that follows established precedents, or at least departs from those precedents on a fair and neutral basis. To the extent that courts in California met those expectations throughout 2013, we all have something for which we can be very thankful this Thursday.