McKennon Law Group, Author at McKennon Law Group

Letters denying an insured’s claim often end by listing what steps an insured can take to challenge an unfavorable determination. Assuming all administrative appeals have been exhausted, this generally involves filing a lawsuit. Depending on the language in the underlying insurance policy, the denial letter may state that if an insured wishes to bring suit, they must bring suit in a specific court in a particular state that could be on the other side of the country. Clauses in contracts, such as insurance policies, that require filing suit in a particular jurisdiction are called “forum selection clauses.”

Courts often enforce forum selection clauses. When determining whether to enforce a forum selection clause, a court will ask if the forum selection clause is “fundamentally unfair.” Many people would question the fairness of forcing a Californian to bring suit in Vermont or Connecticut in order to vindicate their rights under an insurance policy bought in California. Unfortunately for insureds, courts make the question of fundamental fairness rather complicated. To make the determination, courts consider three factors: “(1) whether the forum selection clause was motivated by bad faith; (2) whether accession to the forum selection clause was obtained by fraud or overreaching; and (3) whether a plaintiff was ‘given notice of the forum provision and, therefore, presumably retained the option of rejecting the contract with impunity.’” Laasko v. Xerox Corp., 566 F.Supp.2d 1018, 1024 (C.D. Cal. 2008) (quoting in part Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 595 (1991)). The Supreme Court stated that “forum-selection clauses should control except in unusual cases.” Atlantic Marine Construction Co. v. U.S. District Court for Western District of Texas, 571 U.S. 49, 64 (2013).

A further complication arises when the Employee Retirement Income Security Act of 1974 (“ERISA”) governs a policy or plan with a forum selection clause. ERISA provides a systematic framework for the determination of an insured’s rights under many insurance policies. ERISA governs numerous life, accidental death and dismemberment, health and disability insurance policies. When drafting ERISA, Congress attempted to protect the rights of insureds so that venue of an ERISA lawsuit is in a location that is typically close in proximity to the insured. ERISA provides that:

Where an action under this subchapter is brought in a district court of the United States, it may be brought in the district where the plan is administered, where the breach took place, or where a defendant resides or may be found, and process may be served in any other district where a defendant resides or may be found.

29 U.S.C. § 1132.

ERISA provides for a wide variety of locations where an insured may file a lawsuit to vindicate their rights. If a policy governed by ERISA includes a forum selection clause, can an insurer require that a matter be venued in a particular court thousands of miles away from the insured? Most appellate courts have yet to rule on this issue. However, all appellate courts to have addressed the issue agree that courts should enforce forum selection clauses in policies governed by ERISA if the clauses are not “fundamentally unfair.” In the ERISA context, courts look to the same factors previously listed.

To date, only two appellate courts have addressed this issue. The Sixth Circuit Court of Appeals addressed the issue in Smith v. Aegon Companies Pension Plan, 769 F.3d 922 (6th Cir. 2014). The Seventh Circuit Court of Appeals addressed the issue in In re Mathias, 867 F.3d 727 (7th Cir. 2017). Both courts upheld the enforcement of the forum selection clauses in their respective cases. Both courts reasoned that 29 U.S.C. section 1132 speaks in terms of permission. See, e.g., Smith, 769 F.3d at 932 (“ERISA’s venue provision is permissive: suit ‘may be brought’ in one of several districts.”). The courts noted that no language in 29 U.S.C. section 1132 contains a command. The courts further emphasized that because courts have a strong tendency to honor forum selection clauses in contracts, and here the statute does not clearly prohibit forum selection clauses, ERISA does not deny an insurer the right to have a forum selection clause in a plan.

In each appellate opinion, one of the three judges dissented. The dissenting judges presented largely identical arguments. The dissenters focused on how ERISA was meant to guarantee that insureds had ready access to a convenient court where the insured could bring suit. The dissenters reasoned that Congress intended for insureds to have the chance to conveniently vindicate their rights in court. Furthermore, unlike other forum selection clauses, insurance companies and employers negotiate the contents of ERISA policies. The insured/plan participant almost never takes part in those negotiations and thus has no chance to advocate for a plan that does not have a forum selection clause. A forum selection clause, so the dissenting judges reasoned, denies insureds some of the very rights Congress intended to establish and protect.

The Secretary of Labor also addressed the applicability of ERISA to forum selection clauses. The Secretary argued as amicus curiae in several cases, including Mathias and Smith. The Secretary consistently argues that ERISA supersedes forum selection clauses. For example, in Mathias, the Secretary argued “that the statute ought to be read to protect . . . the interests of participants in employee benefit plans . . . by providing for appropriate remedies, sanctions, and ready access to the Federal courts[.]” Mathias, 867 F.3d at 735 (internal quotations omitted). The Secretary concludes that such a reading of ERISA results in the invalidation of forum selection clauses. To date, the Secretary has had little success in persuading courts not to honor the clauses.

A majority of appellate courts have yet to address this issue. Possibly, other circuits will rule contrary to their already decided sister courts. To date, only a handful of district courts have struck down forum selection clauses in insurance plans governed by ERISA. McKennon Law Group PC will soon be briefing this issue in an ERISA pension case advocating for a district court in Orange County, California to reject the application of a forum selection clause in an ERISA plan.

Few Americans can retire on their savings alone. Many workers participate in an employee benefits plans, which serve to provide financial security in case of disability or retirement. In the case of insurers that decide who qualifies for life, health and disability insurance benefits, there exists a major concern about the significant conflict of interest that exists when these insurers make these decisions and also pay for these benefits. Will these insurers exalt their own interests of bottom line profitability over the interests of ERISA plan participants and beneficiaries who file claims for life, health and disability benefits? It is not a leap of logic that this conflict of interest results in insurance companies wrongfully denying ERISA benefit claims.

In Nichols v. Reliance Standard Life Insurance Co., 2018 WL 3213618 (S.D. Miss. June 29, 2018), the court considered the actions of Reliance Standard Insurance Company (“Reliance”), one of the country’s largest disability insurers. The court addressed whether Reliance’s denial of disability benefits to the claimant Juanita Nichols (“Ms. Nichols”) was an abuse of discretion. In its ruling, the court discovered a decades-long pattern of arbitrary claim denials and other misdeeds, a pattern the court considered when assessing Reliance’s actions.

Ms. Nichols was a 62-year-old employee of Peco Foods’ (“Peco”) chicken processing factory in Sebastopol, Mississippi. Ms. Nichols’ duties included spending a minimum of twenty percent of her work day in processing areas, where temperatures at the factory were kept at eight degrees above freezing. After being diagnosed with circulatory system disorders that were exacerbated in cold environments, her doctors concluded that exposure to the cold could give her serious circulatory problems, including gangrene. As a result, Ms. Nichols stopped working at Peco, as she spent much of her day in near-freezing conditions.

Ms. Nichols applied for long-term disability benefits through the group insurance plan administered by Reliance. Reliance admitted that Ms. Nichols’ medical conditions prevented her from working in cold temperatures yet determined that Ms. Nichols’ occupation as it was performed in the national economy was “sanitarian,” an occupation with duties that do not require exposure to cold temperatures. Based on this determination, Reliance denied Ms. Nichols’ application for disability benefits. After a subsequent appeal of the claim denial that Reliance upheld, Ms. Nichols filed a lawsuit against Reliance to challenge her denial under ERISA. ERISA’s purpose is, in part, to protect workers by establishing standards of conduct for those who manage their benefit plans. ERISA allows employees to recover benefits due under a covered plan, like Pecos’ plan with Reliance.

The Nichols court considered whether Reliance based its denial of Ms. Nichols’ claim on substantial evidence. The court responded in the negative, finding that it was unreasonable for a vocational expert to define occupational duties by relying exclusively on a single Dictionary of Occupational Titles description that does not refer to important job duties.

The court also considered whether Reliance had a conflict of interest. As Reliance admitted, it “potentially benefits from every denied claim,” and therefore was operating under a conflict of interest. Id. at *5. The Supreme Court has held that, when an insurer is “operating under a conflict of interest,” that conflict “must be weighed as a factor in determining whether there is an abuse of discretion.” Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 117 (2008) (emphasis added). Such circumstances include when there is evidence that an insurer has a “history of biased claims administration.” Id. The question turned, however, to how much weight the court should give to Reliance’s conflict of interest. Glenn held that this evidence “can take many forms,” and “may be shown by a pattern or practice of unreasonably denying meritorious claims.” Id. at 123.

The court considered an approach delineated by the United States District Court for the District of Massachusetts in Radford Trust v. First Unum Life Ins. Co. of Am., 321 F.Supp.2d 226, 247 (D. Mass. 2004), which revealed a disturbing pattern of erroneous and arbitrary benefits denials, bad faith contract misinterpretations, and other unscrupulous tactics.

In its review addressing Reliance’s behavior in disability cases, the court found over 100 opinions in the last 21 years criticizing Reliance’s disability decisions, including over 60 opinions reversing a decision as an abuse of discretion or as arbitrary and capricious. The court found that judges describe the behavior underlying Reliance’s claims administration as “arbitrary,” “blind,” “conclusory,” “extreme,” “flawed,” “fraught,” “illogical,” “inadequate,” “inappropriate,” “incomplete,” “indifferent,” “lax,” “misguided,” “opportunisti[c],” “precursory,” “questionable,” “remarkable,” “selective,” “self-serving,” “skewed,” “tainted,” “troubling,” “unfair,” “unreasonable,” and “unreliable.” Nichols, 2018 WL 3213618 at *7.

The court noted these opinions revealed that Reliance takes a range of extraordinary steps to deny claims for disability benefits. Reliance makes “unreasonable” interpretations of benefit plan language, going so far as to “misconstru[e] the concept of occupational disability.” Reliance “selectively interpret[s]” evidence so it can “opportunistically deny [a] claim” for “selfserving reasons,” creating a “skewed administrative record discounting all of the substantial evidence of … disability.” Reliance’s denials are “overwhelmingly outweighed by evidence to the contrary,” “fraught with procedural irregularities,” and “blind or indifferent.” Those denials “rel[y] upon mere assumptions” and “demonstrate a pattern of arbitrary and capricious decision making.” Reliance uses “obfuscation and delay tactics,” “fail[s] to engage in ongoing communications with [claimants] to keep [them] informed of the process,” makes “misstatement[s]” to claimants, “miscalculate[s] the amount owed,” and generally exhibits behavior that “reeks of bad faith.” Reliance “regularly retain[s]” experts with “an incentive to [make] outcomes in [their] favor,” and uses expert reports that “betray a palpable bias in favor of rejecting the claim.” Despite being “[put] on notice of this bias issue” by “prior judicial criticism,” Reliance still tells courts that “it does not choose … third-party contractor[s] based on the outcomes.” Courts often conclude that Reliance’s denials are “greatly impacted” by “self-interest,” making it “clear that Reliance put[s] its own financial interest above its fiduciary duty.” Id.

The court went on to criticize the way Reliance used the Department of Labor’s Dictionary of Occupational Titles to ignore the actual duties of a claimant’s job. Further, the court criticized the vocational expert involved in Ms. Nichols’ appeal for her cursory methodology and paper reviews of claimant files. Ultimately, the court held that Reliance’s long past of biased and wrongful claims denials supported the court’s finding that the decision to deny Ms. Nichols’ claim was an abuse of discretion. Further, in deciding to award attorney’s fees to Ms. Nichols, the court found that Reliance had a severe degree of culpability and hoped that such an award would have some deterrent effect on Reliance and other insurers.

Conclusion

Opinions like Nichols give hope to victims of wrongful claim denials that the courts will seek justice in viewing the actions of insurance companies. Nichols highlights the inherent conflict of interest between insurance companies and insureds, as insurance companies decide when claimants receive benefits, and at the same time, benefit financially when benefit claims are denied. While Reliance was singled out by the court’s opinion, denials like these by insurance companies are a logical result of situations where “foxes guard the henhouse.” Hopefully this opinion evidences a trend of scrutiny toward insurance companies that also act as plan administrators.

Determining whether an insurance company wrongfully denied a benefit claim is a difficult task for most insureds. A claim denial can be an especially traumatic experience when an insured expects a life and disability insurance company like Reliance to provide benefits in a time of need. McKennon Law Group PC has extensive experience determining whether an insurer improperly denied a life, health or disability insurance claim. If you believe your insurer improperly denied your life, health or disability insurance claim, call us for a free consultation.

In July 2018, The Orange County Bar Association published an article written by Robert J. McKennon and Stephanie L. Talavera of the McKennon Law Group PC in the Orange County Lawyer. The article addresses the liability implications of the relationship between insurers and various types of intermediaries. As the article explains, depending on the nature of the relationship between the insurer and others involved in the process, the insurer may be held liable for the actions of those who act as its intermediaries. The article gives tips on how to make an insurer vicariously liable for the acts of those functioning as intermediaries in the insurance process.

Insurers’ Intermediaries: The Implications of Actions Taken by Agents, Employers and Third-Party Administrators[1]

By Robert J. McKennon & Stephanie L. Talavera[2]

Those engaged in the business of insurance often act through intermediaries: agents, brokers, third-party administrators (“TPAs”) and employers. For example, an appointed insurance agent may sell an insurance policy and a TPA might handle the policyholder’s claim for benefits. In the context of employer-sponsored, group insurance plans, an employer may act on behalf of an insurer in collecting premiums via payroll deductions or investigating eligibility, temporarily transmuting the employer-employee relationship. Occasionally, the employer may, itself, act as the insurer, providing benefits through a self-funded plan (typically with the help of a TPA). It goes without saying that how an intermediary relates to each party imports different contours of liability. In this article, we explore some of those theories as they relate to insurance agents, brokers, TPAs and employers, as a good insurance litigator must be able to use all available theories of liability.

Agents of the Insurer

In assessing an insurer’s liability, or an employer stepping into the role of an insurer, it is critical to first identify the various parties involved in the insurance procurement and claims process. Once identified, you must determine when each party acts on behalf of the insurer, so as to render the insurer vicariously liable for the actions of its agents. The most important parties to the insurance procurement and claims process are discussed below, and at least include insurance agents, insurance brokers, TPAs and employers.

Insurance Agents vs. Brokers

Courts sometimes use “agent” and “broker” interchangeably. This inconsistent usage confuses terminology that already relies on an unpredictable, independent factual examination of the relationship on a case-by-case basis. But, the primary distinction between an insurance agent and broker is who each represents.

An “insurance agent” is “a person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life insurance.” Cal. Ins. Code § 31. A life agent is a person authorized by and on behalf of a life, disability, or life and disability insurance company to transact life and disability insurance. Cal. Ins. Code §§ 32, 1622. An appointed life insurance agent is always at least the agent of the insurer. See Loehr v. Great Republic Ins. Co., 226 Cal.App.3d 727 (1995). “The most definitive characteristic of an insurance agent is his ability to bind his principal, the insurer.” Marsh & McLennan v. City of Los Angeles, 62 Cal.App.3d 108, 117 (1976). An agent may bind the insurer by “acts, agreements, or representations within the ordinary scope and limits of the insurance business entrusted to him … even if the agent’s actions violate private restrictions on his or her authority.” Troost v. Estate of DeBoer, 155 Cal.App.3d 289, 298 (1984).

In contrast, “‘[i]nsurance broker’ means a person who, for compensation and on behalf of another person, transacts insurance other than life, disability, or health with, but not on behalf of, an insurer.” Cal. Ins. Code § 33; Krumme v. Mercury Ins. Co., 123 Cal.App.4th 924, 929 (2004). Brokers represent potential insureds or policyholders in purchasing insurance and typically act independently, working with several insurance companies. Id. at 929. Thus, a broker acts only on behalf of the client, the potential insured or policyholder, and not the insurer. Carlton v. St. Paul Mercury Ins. Co., 30 Cal.App.4th 1450, 1457 (1994).

Employers

Much of the insurance in force in the United States is placed through employers in the form of employee benefits, such as long-term disability insurance, short-term disability insurance, life insurance and health insurance. Employers play a vital role as plan sponsors and plan administrators of these group insurance policies, and are often responsible for enrolling new members, collecting premium contributions via payroll deductions and submitting claims for policy benefits on behalf of the insurer.

Although the Employee Retirement Income Security Act of 1974 (“ERISA”) governs many of these employer-sponsored plans, occasionally, employers “self-fund” such plans and qualify for an exemption from ERISA on that basis. When a plan is self-funded, the employer steps into the role of the insurer. Because the employer is not routinely engaged in the business of insurance, it may hire a TPA to handle the group policy’s administration. Under this arrangement, an employer begins to look even more like an insurer, using a TPA’s insurance expertise while retaining the benefits of having a self-funded plan.

TPAs

Sometimes referred to as the “downstream” intermediaries, TPAs play an important, but different, role in the insurance process. TPAs handle the rote tasks that keep the insurance industry moving, such as recordkeeping, policy administration, underwriting, investigating and claims handling. TPAs are not typically involved with individual policies, but increasingly play a key role in employer-sponsored group policies, where they assist employers in all aspects of plan administration.

Insurers’ Vicarious Liability Based on Actions of Insurance Agents, Employers and TPAs

The most complicated of the third-party relationships is the agent vs. broker distinction, which becomes particularly important concerning which actions will be imputed to the insurer. Generally, an agent’s actions are imputed to the insurer, but a broker’s do not, and only the former renders the insurer vicariously liable. See LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co., 156 Cal.App.4th 1259 (2007). This distinction is often important in insurer rescission matters, based on an alleged misrepresentation in an application for the insurance policy. Frequently, a potential insured will make accurate disclosures to the agent or broker as part of the application process, but the agent or broker will tell the potential insured that such disclosure on the application is unnecessary. Depending on whether the agent is treated as an agent of the insurer or an agent of the insured (a broker), knowledge of the misrepresentation, and consequent liability, will be imputed differently. If an agent is responsible for the alleged material misrepresentation, the insured may argue that the insurer is responsible for the misrepresentation and thus cannot rescind the policy regardless of whether the disclosure was actually communicated to the insurer. See e.g., O’Riordan v. Federal Kemper Life Assur., 36 Cal.4th 281 (2005) (imputing agent’s knowledge despite agent’s failure to actually communicate insured’s history of smoking).

Like insurance agents, traditional theories of agency and contractual privity immunize TPAs from independent liability for their claims handling misconduct.[3] TPAs act as the principal’s disclosed agents and lack contractual relationships with the insureds. So, a TPA is not typically liable for its bad faith claims handling conduct, even if its sole responsibility is to handle claims. See Gruenberg v. Aetna Ins. Co., 9 Cal.3d 566, 576 (1973).

When it comes to group policies, California law treats employers as agents of the insurer. The rationale behind this application of liability is that when an employer administers an insurance policy on behalf of the insurer, it acts as its TPA and thus its agent. Accordingly, an employer’s conduct is attributable to the insurer. See McCormick v. Sentinel Life Ins. Co., 153 Cal.App.3d 1030 (1984); Elfstrom v. New York Life Ins. Co., 67 Cal.2d 503 (1967). But, as noted above, ERISA governs many group policies offered through employer-sponsored plans and consequently, preempts state laws that would otherwise determine the agent relationship and vicarious liability. See UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358 (1999). For some time, the question remained as to whether employers also acted as agents of the insurer when administering a group policy governed by ERISA. Recently, in Salyers v. Metro. Life Ins. Co., 871 F.3d 934 (9th Cir. 2017), the Ninth Circuit squarely addressed this issue, ultimately applying California’s rule on employers as agents. As a result, when employers collect premiums, enroll individual plan members and otherwise administer claims, they act as agents of the insurer. Accordingly, the knowledge and conduct of the employer may be imputed to the insurer, even if it was not communicated to the insurer directly.

Employers Treated as Insurers

In some situations, there may not be an insurance company involved in the traditional sense. Instead, an employer or some other entity not typically engaged in the business of insurance may act as the functional equivalent of an insurer. This may arise when an employer self-funds or self-insures a group policy covering its employees that qualifies for an exemption under ERISA. Whether the entity is acting as an “insurer” is important because the special relationship involved in an insurance contract may give rise to a cause of action for insurance bad faith–allowing the individual to pursue extra-contractual recovery against the employer, such as emotional distress damages, attorney’s fees and punitive damages.

Although ERISA traditionally preempts state law causes of action for breach of contract and insurance bad faith, when the group policy is exempt from ERISA, traditional preemption principles will not apply. Accordingly, the question then becomes whether an employer, when it self-funds a plan exempt from ERISA, may be liable for extra-contractual remedies where it has tortuously breached the implied covenant of good faith and fair dealing.

The Ninth Circuit Court of Appeals effectively addressed whether an employer acts as an “insurer” when administering a plan that may be exempt from ERISA in Williby v. Aetna Life Ins. Co., 867 F.3d 1129 (9th Cir. 2017). The Court found that the employer’s self-funded disability plan met both elements of the broad definition of “insurance” under California Insurance Code section 22 because: (1) it shifted one party’s risk of loss to another and (2) distributed that risk among similarly situated persons. Id. at 1134. Although the underlying plan in Williby was actually governed by ERISA, thus preempting the state bad faith claim, it could have qualified under the pay practices exemption to ERISA. As the Court noted, the plan could have met the requirements for the pay practices exemption (and, therefore, California law would have applied), but the argument was rejected because it was raised for the first time on appeal. See Id. at 1136–37. If the plaintiff had argued for the exemption earlier in the case, it is likely that the employer, having issued disability “insurance” to its employees, could have been successfully sued for insurance bad faith. This situation gives employees a powerful procedural tool to fight their employer’s insurance claims denials.

Conclusion

The ultimate success of an insurance litigation matter may turn on whether an insurer is vicariously liable for the actions of a third-party intermediary. How an intermediary relates to the insurer and the insured has important legal implications. Understanding how these relationships operate in various circumstances could have an important impact on the outcome of your next insurance litigation matter.

[1] This article was first published as Insurers’ Intermediaries: The Implications of Actions Taken by Agents, Employers and Third-Party Administrators, Robert J. McKennon and Stephanie L. Talavera, Orange County Lawyer, July 2018 (Vol. 60 No. 7), p. 42.

[2] The views expressed herein are those of the Authors. They do not necessarily represent the views of the Orange County Lawyer magazine, the Orange County Bar Association, The Orange County Bar Association Charitable Fund, or their staffs, contributors, or advertisers. All legal and other issues must be independently researched.

[3] Jeffrey W. Stempel, The “Other” Intermediaries: The Increasingly Anachronistic Immunity of Managing General Agents and Independent Claims Adjusters, 15 Conn. Ins. L. J. 599 (2009).

All too often, we see insurance companies deny insurance claims by attempting to opportunistically rescind insurance policies. This practice has become more prevalent in recent years as insurers look for ways to deny insurance claims.

Anyone who has purchased a disability, life or health insurance policy is likely familiar with the significant paperwork involved in the insurance application process. The paperwork includes policy notices, policy applications, supplemental policy applications, personal history questionnaires, policy warnings, medical examination documents, etc. These will include numerous and detailed questions relevant (and often not so relevant) to the risk being insured. An insurance agent or broker will ask questions on the policy application and often additional questions not on the application. Only after the applicant has answered countless questions, will the insurance company decide whether to issue the policy. Many applicants do not appreciate why insurance companies go to such great lengths before issuing a policy. The answer: they want to evaluate the risk that the applicant poses to them. If there exists too much risk of a payout under the policy, they will not underwrite that risk by issuing a policy. Throughout the application process, like the claims process, insurers often have a duty to investigate the information contained on the application. The failure to engage in such an investigation may result in the insurer being precluded under the law from later rescinding a policy that it decided to issue.

When insureds file claims under their policies, insurers often first look to determine if they can rescind the policy, asserting that the policy should be considered null and void as if it was never issued in the first place. As we explained in a previous blog article, rescission legally renders the contract as if it never existed and releases both parties from their obligations under the contract. An insurance company is often allowed to rescind a contract when there is a material misrepresentation on the insurance application. Many times, the omission was an honest mistake or it was excused by the broker or agent as immaterial. Regardless of the purposefulness of the omission, the insurance company may still have the right to rescind the contract.

There are exceptions however. One involves the insurer’s duty to investigate the information on the application at the time the application is submitted and its duty to investigate the possible basis for rescission when handling the claim. If there is an implication that the application was not completely accurate, and the insurer fails to investigate, then the insurer may have waived the right to rescind the policy. For example, the applicant fails to state that she had seen a doctor in the last five years, yet the application reveals she is on several prescription medications. Or, the evidence may arise from an outside source. For example, the insured may submit a claim for a treatment which strongly implies that the applicant had a non-disclosed pre-existing condition at the time the application was submitted. Insurance companies have a duty to explore such information or they may lose the right to rescind the policy. As one court stated, an insurance company “may not blindly ignore evidence of misrepresentation, collect premiums, and then opportunistically rescind once a claim is filed.” Star Insurance Co. v. Sunwest Metals, Inc., 691 F.App’x 358, 360 (9th Cir. 2017). The issue is not just whether the insurer had actual knowledge of the material misrepresentation, but also whether the insurer could have or would have obtained the information if it had exercised reasonable diligence in investigating the claim.

In DuBeck v. California Physicians’ Service, 234 Cal.App.4th 1254 (2015), the California Court of Appeal addressed an insurance company’s failure to diligently investigate an application. Bonnie DuBeck submitted an application for health insurance to California Physicians’ Service, doing business as Blue Shield of California. In her application, she failed to disclose that she had recently visited a doctor to have a lump in her breast examined. DuBeck’s application was approved. Five days after Blue Shield issued the policy, DuBeck underwent breast cancer surgery. She submitted bills for her treatments to Blue Cross. Blue Cross became suspicious that, given the timing of the billings, the condition had arisen before DuBeck’s enrollment. “Yet by its own admission Blue Shield neither commenced an investigation nor obtained records confirming the date of appellant’s first breast cancer-related procedure for another year.” Id. at 1268. By the time Blue Cross had started its investigation, DuBeck had been diagnosed with leukemia. During that time, DuBeck submitted various bills to Blue Cross, some of which Blue Cross refused to pay. Ultimately, Blue Cross cancelled the policy. Of note is that Blue Cross did not rescind the policy – it only cancelled the policy. Two years after Blue Cross canceled the policy, DuBeck sued Blue Cross to force payment of the unpaid medical bills.

In the trial court, Blue Cross moved for summary judgment. It argued that it had the right to rescind the insurance contract because DuBeck had lied on the application. The trial court granted Blue Cross’s motion. DuBeck appealed.

The court of appeals reversed the trial court on several different grounds. One of those grounds was that Blue Cross failed to properly and promptly investigate the information in the application once it received information putting it on notice that DuBeck had omitted information from her application, thus waiving its right to rescind the policy. As the court of appeals explained:

By ignoring information that would have resolved the truthfulness of the representations in appellant’s application at an early stage and determining at that time whether to continue as her insurer, Blue Shield allowed appellant to incur substantial medical expenses and dissuaded her from investigating the availability of government assistance. Blue Shield’s lack of diligence in the early months of the policy and the apparent prejudice to appellant provide a second and independent basis for rejecting its claimed right to rescind. Id.

Insurance companies have an affirmative duty to investigate the applications submitted to them. If they have failed to do so, then they may lose the right to rescind a contract that was less than complete. Insurers will still often attempt to rescind a policy, sometimes years after they had evidence that something was amiss. Determining whether an insurance company can properly rescind a policy is a difficult task for most insureds. McKennon Law Group PC has extensive experience determining whether an insurer can deny your life, health or disability insurance claim by rescinding your policy. Some of the issues we examine: was there actually a misrepresentation? Was the misrepresentation innocent or intentional? Was it material and how can the insurer prove it was material? What did the agent/broker know or say in the application process? Was there some information in the claim file that should have led the insurer to suspect a material misrepresentation? We expertly determine and often are able to successfully challenge an insurer’s attempted rescission. If you have a denied life, health or disability insurance claim that is the subject of an attempted rescission, call us for a free consultation.

In the July 2018 edition of the Orange County Lawyer, The Orange County Bar Association published an article written by Robert J. McKennon and Stephanie L. Talavera of the McKennon Law Group PC. The article examines the liability implications of the relationship between insurers and various types of intermediaries, such as insurance agents and brokers, employers and third-party beneficiaries. As the article explains, depending on the nature of the relationship between the insurer and others involved in the process, the insurer may be held liable for the actions of others who act as intermediaries in the insurance process. The article gives tips in rendering insurers vicariously liable for the acts of the intermediaries in the insurance process.

Since the writing of the article, Stephanie L. Talavera has left the McKennon Law Group PC.

Generally, an insured will not receive coverage under a liability policy when they intentionally cause the loss or injury for which they are seeking coverage. As expected, insurers regularly deny claims when they are able to characterize an insured’s conduct as intentional, even when the damage or injury caused was accidental or not intended by the insured. In recent years, insurers in California have been able to successfully defend their denial of insurance claims involving an intentional act before California courts. The success experienced by these insurers has largely been the result of a California Supreme Court decision in 2009 holding that “an injury-producing event is not an ‘accident’ within the policy’s coverage language when all of the acts, the manner in which they were done, and the objective accomplished occurred as intended by the actor.” Delgado v. Interinsurance Exchange of the Automobile Club of Southern California, 47 Cal.4th 302 (2009). Prior to the Delgado decision, California courts followed a more expansive interpretation of liability policies requiring insurance companies to defend policyholders against lawsuits even where the underlying claim alleged only intentional conduct. See Gray v. Zurich ins. C.o., 65 Cal.2d 263 (1966).

Recently, the California Supreme Court provided clarity that once again expanded the interpretation of liability policy provisions to provide coverage even when an event involves an intentional act. In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., 418 P.3d 400 (2018), Ledesma & Meyer (“L&M”) contracted with a school district to manage a construction project. The assistant superintendent that L&M hired sexually abused a 13 year-old student, and L&M was sued for negligently hiring, retaining and supervising the assistant superintendent. L&M tendered the defense of the case to Liberty, its insurer. L&M’s insurance policy provided coverage for bodily injury caused by an “occurrence,” which was defined in the policy as an accident. Liberty sought declaratory relief from the federal district court contending it had no obligation to defend or indemnify L&M since the injury to the student was not caused by an “occurrence” or accident, since the alleged negligent hiring and supervision of the assistant superintendent was too attenuated from the injury-causing conduct, and the alleged negligent hiring and supervision of the assistant superintendent was not an accident despite the fact L&M did not intend for the injury to occur. Liberty also argued that because the sexual abuse was an intentional act by the superintendent hired by L&M, it could not be an “occurrence” triggering coverage.

The district court granted summary judgment to Liberty on the cause of action for negligent hiring, retention, and supervision. L&M appealed the decision arguing the district court misapplied California law, and the Court of Appeals sought the opinion of the California Supreme Court. The California Supreme Court noted that the applicable definition of “accident” in California means an unexpected, unforeseen, or undersigned happening or consequence from either a known or unknown cause. The Court further explained that the word “accident” in the coverage clause of a liability policy refers to the conduct of the insured for which liability is sought to be imposed (which here would be the conduct of L&M rather than the conduct of the assistant superintendent). The Court determined that the sexual abuse of the student may be deemed an accident or an unexpected consequence of L&M’s independent act of negligently hiring, retaining and supervising the assistant superintendent.

The Court noted that the insured’s “allegedly negligent hiring, retention and supervision were independently tortious acts, which form the basis of its claim against [the insurer] for defense and indemnity.” It then pointed out that the employee’s molestation “was the act directly responsible for the injury, while [the insured’s] negligence in hiring, retaining, and supervising him was an indirect cause.” It reasoned that the insured’s acts:

must be considered the starting point of the series of events leading to the molestation. [The insured] does not rely on any event preceding its own negligence to establish potential coverage. As alleged by [the plaintiff], the ‘occurrence resulting in injury’ began with [the insured’s] negligence and ended with [the employee’s] act of molestation.

The Court further explained that Liberty’s arguments, if accepted, would leave employers without coverage for claims of negligent hiring, retention, or supervision whenever an employee’s conduct is deliberate, and such a result would be inconsistent with California law. The Court concluded that absent an applicable exclusion, employers should expect to provide coverage for such claims under comprehensive general liability insurance policies, just as they do for other claims of negligence.

This decision should cause concern for insurance providers who have developed a practice of regularly denying general liability claims based upon the premise that there was an intentional act involved. Given that in California, a duty to defend exists if the insurer becomes aware of, or if a third party lawsuit pleads facts giving rise to the potential for coverage, this ruling will apply in a variety of contexts where an intentional act is at issue in a claim involving negligence.

The Latest Frontier for Forum Selection Clauses: ERISA Policies

Get the Answers and Assistance You Need