McKennon Law Group, Author at McKennon Law Group

One hundred days is not a reasonable amount of time to give a plan participant to file a lawsuit under the Employee Retirement Income Security Act of 1974 (“ERISA”). This was the conclusion reached by the United States District Court Southern District of California in its recent decision in Nelson v. Standard Insurance Company, 2014 U.S. Dist. LEXIS 119179 (S.D. Cal. Aug. 26, 2014), which held that a contractual limitation contained in an ERISA-governed group long-term disability policy’s limitation period is unreasonable and unenforceable because the time period may have ran prior to the end of the administrative review process and because it provided the plan participant only one hundred days to file an action in federal court. The holding in Nelson was one of the first in the Ninth Circuit to determine, in the wake of the Supreme Court’s decision in Heimeshoff v. Hartford Life & Accident Insurance Co., 134 S. Ct. 604 (2013), that a plan’s contractual limitation on filing a lawsuit is unreasonably short. While numerous questions still remain as to what constitutes an unreasonable plan limitations period, the Nelson decision makes it clear that, at the very least, providing a plan participant only one hundred days within which to file a complaint in federal court is not reasonable.

Last year, in its highly anticipated decision in Heimeshoff, the Supreme Court unanimously held that an ERISA governed plan’s limitation period, requiring a claimant to bring an action within three years of when proof of claim was due, was enforceable. The Court found that this contractual time limitation on filing a claim in federal court was valid despite the fact that it was shorter than the applicable statute of limitations. Although the Court held that a plan’s contractual limitation periods should ordinarily be enforced, it also stated that such provisions may not be enforced where the period provided is “unreasonably short.” The Heimeshoff Court explained that a limitations provision is unreasonably short if it “leav[es] [a] claimant[] with little chance of bringing a claim not barred.” The Heimeshoff decision left open the issue of just how short a plan’s contractual limitation must be in order to be considered unreasonable. The Southern District’s decision in Nelson now provides some guidance on this question.

In Nelson, the Plaintiff, a plan participant, brought an ERISA action against her Group Long-Term Disability Plan (“Defendant”) and the plan administrator, Standard Insurance Company (“Standard”). After initially accepting and paying the Plaintiff’s disability benefits in July 2008, Standard terminated her benefits in January 2010 based on a finding that she was no longer disabled. In June 2010, Plaintiff appealed the decision and a final denial was issued in October 2011. In January 2013, Plaintiff filed her action against Standard and Defendant in the Southern District. The plan contained a provision entitled, “Time Limits on Legal Actions”, which states that a plan participant must bring a legal action within three years after the earlier of either (1) the date the administrator received proof of loss or (2) the time within which Proof of Loss was due to the administrator. On the basis of this contractual limitations provision, Defendant filed a motion for judgment on the pleadings under the Federal Rules of Civil Procedure 12(c), arguing that because the Plaintiff provided her Proof of Loss in May 2008 and the contractual time limit had already expired in May 2011, she was barred from suit.

The court in Nelson first stated that it could not determine the date upon which the contractual limitations period began to run because the term, “proof of loss” was never used in Plaintiff’s first amended complaint and she had submitted documentation supporting her disability status on several different dates. Plaintiff argued that her cause of action did not accrue as of the May 30, 2011 date that Defendant contended the limitation period expired. However, Defendant asserted that Plaintiff’s cause of action accrued on February 16, 2011, one hundred days before the contractual time limit expired. The court held that, even accepting Defendant’s argument that the limitation period concluded on May 30, 2011 and that the Plaintiff’s cause of action accrued one hundred days earlier on February 16, Defendant cited to no legal authority finding that a period of one hundred days is a reasonable period for a Plaintiff to file a lawsuit. The court found that this time limitation was especially unreasonable in the Plaintiff’s situation because a final decision had not even been reached on the claim prior to the expiration of the contractual limitation period. Indeed, the court concluded that a contractual limitation period may be rendered unreasonable as a result of undue delay in reviewing a claim. Based on these findings, the court denied Defendant’s motion for judgment on the pleadings because the contractual limitations period in the plan was unreasonably short.

The decision in Nelson demonstrates that, even after Heimeshoff, a plan’s contractual limitation period that may run prior to the completion of administrative review process is a good candidate to be found to be unreasonable and unenforceable. Moreover, at least in the situation presented in Nelson, providing a plan participant with only one hundred days to file an action is patently unreasonable. It is important to note that the Nelson court also specifically stated that, even where a limitation period is found to be reasonable, the doctrine of equitable estoppel may still prevent enforcement of the contractual limitations provision. The decision in Nelson should remind plan participants to be mindful of both statutory and contractual time limitations on their ability to file a lawsuit to protect their benefits.

There is a commonly held belief that every disability insurance policy sold to the public has been actually reviewed and approved by the California Department of Insurance. Indeed, California Insurance Code section 10291.5 requires the Insurance Commissioner to reject a proposed new disability insurance policy form if it does not meet certain requirements set forth in the Insurance Code. However, prior to the recent ruling of Ellena v. Department of Insurance, 2014 Cal. App. LEXIS 883 (1st Dist. Oct. 1, 2014), the California Department of Insurance was not following this code provision, and in fact maintained that it did not have a duty to review each new disability insurance policy form. There is now no question that the Department of Insurance has a mandatory duty to review all new disability insurance policy forms that insurers wish to sell in California.

Cassaundra Ellena was an employee of the County of Sonoma who was insured under a group disability insurance policy sold and administered by Standard Insurance Company (“Standard”). Unfortunately, Ellena was diagnosed with lupus and was unable to continue working. Ellena filed a claim for long-term disability benefits with Standard, but Standard denied her claim, forcing Ellena to file a lawsuit to collect her disability benefits. Along with naming Standard as a defendant for various causes of action including breach of contract and bad faith (also known as the breach of the covenant of good faith and fair dealing), Ellena also named the California Department of Insurance as a defendant.

Ellena asserted a cause of action for mandamus against the Department of Insurance, alleging that the Department had a mandatory duty to review the policy to make sure it complied with California law before approving the policy. Ellena alleged that the policy was in violation of California law because it improperly allowed Standard to define “own occupation” as other than the one Ellena performed for the City of Sonoma, and also that the policy’s definitions of “disability” and “any occupation” were also improper.

The trial court granted the Department of Insurance’s demurrer, ruling that “Ellena had not sufficiently alleged a violation of a specific mandatory duty and that a writ of mandate could not be based on general enforcement provisions or statutes involving the DOI’s exercise of discretion.” The Department of Insurance was dismissed from the lawsuit, and Ellena timely appealed.

On appeal, a large focus of the Court of Appeals’ ruling turned on what exactly Ellena was seeking through her lawsuit. The Court of Appeals noted that “[w]hile a party may not invoke mandamus to force a public entity to exercise discretionary powers in any particular manner, if the entity refuses to act, mandate is available to compel the exercise of those discretionary powers in some way.” Ellena acknowledged that the Department of Insurance “has the discretion to decide whether to approve a policy, but maintains that the [Department of Insurance] must exercise that discretion by reviewing the policy to determine whether it does or does not comply with California law.” The Department of Insurance argued that the Insurance Code only requires that an insurance company submit its draft policy for review, but that it had no actual duty to review and approve the policy before it is sold to the public.

After reviewing the Insurance Code and characterizing the oversight function of the Department of Insurance as “a matter of great public interest,” the Court of Appeal ruled:

The clear language of this statute is that “[t]he commissioner shall not approve any disability policy for insurance or delivery …” unless it meets a number of requirements. (§ 10291.5, subd. (b), italics added.) “The commissioner shall require from every insurer a full compliance with all the provisions of this code” (§ 12926, italics added) and the commissioner has an obligation to fulfill the duties imposed by the Insurance Code under section 12921.5.

…

The plain meaning of these provisions is that the commissioner has a mandatory duty to review the policy prior to approving it and the commissioner must review the disability policy to ensure it meets the requirements set forth in section 10291.5, subdivision (b). The Insurance Code imposes on the commissioner the duty to review the policy to ensure it complies with the law.

The Court noted that if the Department of Insurance did not actually review each policy that was submitted for review, “how could the commissioner responsibly disapprove any disability policy containing provisions that are ‘unintelligible, uncertain, ambiguous, or abstruse, or likely to mislead a person to whom the policy is offered, delivered or issued,’ as required by subdivision (b) of [section 10291.5]?” The Court further noted the “legislative history to [the 1949 amendment to section 10291.5] supports the conclusion that the statute requires the commissioner to review the disability policy form prior to approving it.” Accordingly, the Court of Appeal concluded that “the Insurance Code requires that the commissioner review a disability policy form prior to approving the policy.”

This is a victory for consumers and policyholders as the Department of Insurance will now be required to review every potential disability policy before it is sold to the public. The Insurance Commissioner and Department of Insurance should now ensure that policies, such as the one sold to Ellena, are in compliance with California law. This decision is also of practical procedural significance to attorneys who engage in insurance litigation against insurers as naming the Department of Insurance will destroy diversity of citizenship jurisdiction thus precluding insurers from removing such cases to federal court.

General liability insurers and their agents often lure commercial clients with grandiose promises of coverage for business operations, but upon receiving a notice of a claim, interpret their policy exclusions liberally to limit what they consider covered business operations so as to deny coverage. A recent case from the California Court of Appeal, Baek v. Continental, 2014 Cal App. LEXIS 893 (2d Dist. Oct. 6, 2014) (“Baek”), expanded on an insurer’s broad duty to defend wherever there is a potential for coverage but in this case denied a duty to defend.

Baek involved a Heaven Massage Wellness Center (“HMWC”) client, “Jaime W.,” who brought suit against HMWC and her massage therapist (“Jaime W. action”), Luiz Baek (“Baek”), for sexual assault during a massage, alleging Baek handled the “Plaintiff’s breasts, buttocks, inner thighs and genitals.” HMWC had a general liability insurance policy with Continental Casualty Co. (“Continental”) which covered employees or partners “only for acts within the scope of their employment” or committed “while performing duties related to the conduct of [HMWC’s] business.” Continental asserted there was no coverage, and HMWC sued for breach of contract and bad faith. The trial court granted summary judgment for Continental. Subsequently, Baek filed suit against Continental, alleging it had a duty to defend and indemnify him in the Jaime W. action as a covered employee of HMWC. Continental demurred on the ground that Baek was acting beyond his scope of employment. Baek then amended his complaint to include a breach of contract, breach of the implied covenant of good faith and fair dealing and fraud against Continental. Once again, Continental demurred and trial court again sustained the demurrer, finding there was no coverage, and no potential for coverage, because Baek’s actions did not fall within his scope of his employment. Baek filed a timely appeal.

The California Court of Appeal first addressed whether Baek qualified as an “employee” of HMWC eligible for coverage. Baek argued Continental owed him a duty of defense because the complaint in the Jaime W. action alleged that Baek was either a partner or employee of HMWC and the alleged sexual assault occurred within the scope of his employment, or while performing his duties related to HMWC’s business. Conversely, Continental argued that Baek did not qualify for coverage because his complaint alleged he was an independent contractor, and thus he did not qualify as an employee or partner of HMWC. As an initial matter, the court explained an insurer’s duty to defend was triggered when the insured becomes aware of, or a third party suit pleads, facts sufficient to give rise to the potential for coverage under the policy. This duty to defend is broader than the duty to indemnify, and an insurer may have a duty to defend if there is a potential of coverage, even if no damages are awarded and any doubts concerning the potential for coverage and a duty to defend were resolved in favor of the insured. Continental knew the plaintiff in the Jaime W. action would attempt to prove Baek was HMWC’s employee or partner under the HMWC policy. However, Continental argued Baek’s complaint alleged he signed an independent contractor agreement, and thus did not qualify as an employee or partner of HMWC. The court disagreed, noting that although Baek signed an independent contractor agreement with HMWC, he did not allege he was an independent contractor so as to preclude coverage. The court clarified that an insurer’s duty to defend arises if allegations by the third party, rather than the potential insured, taken as true, reveal a potential for coverage. Here, the complaint in the Jaime W. action alleged that Baek was, at all relevant times, an employee, owner or partner of HMWC. The court explained that in its coverage determination, Continental was bound to accept these allegations as true unless extrinsic facts established otherwise. Therefore, for coverage purposes, Continental had to assume Baek’s status as an employee under HMWC’s policy to determine whether there was a duty to defend.

Next, the court addressed whether Baek’s alleged sexual assault fell within the scope of his employment so as to trigger coverage by reviewing two cases involving similar issues. First, the court reviewed Lisa M. v. Henry Mayo Newhall Memorial Hospital, 12 Cal. 4th 291 (1995) which involved an ultrasound technician who sexually molested a patient during an ultrasound exam by inserting the ultrasound wand and his fingers into her vagina. There, the court held the technician’s employment did not motivate or engender the sexual molestation; rather, the technician took advantage of his work environment and consciously committed an assault for reasons unrelated to his work. In addition, the court clarified that although the technician’s job involved examining or physical contact with a patient’s otherwise private areas, his assault on the ultrasound patient was not a foreseeable consequence of that contact. Accordingly, the sexual assault was an independent decision unrelated to his duties. Next, the Court of Appeal examined Farmers Ins. Group v. County of Santa Clara, 11 Cal. 4th 992 (1995) where a deputy sheriff’s lewd propositioning and offensive touching of others at a county jail were found to fall outside the scope of employment, despite the proximity to the workplace. The ruling court noted that where an employee’s tort was “‘personal in nature, mere presence at the place of employment and attendance to occupational duties prior or subsequent to the offense’” did not “bring the tort within the scope of employment.” The Court of Appeal explained that like the ultrasound technician in Lisa M., Baek’s employment as a massage therapist gave him the opportunity to be alone with Jaime W., but nothing in the facts suggested the alleged assault was “‘engendered by’ or an ‘outgrowth’ of his employment,” and his motivation for committing the sexual assault was unrelated to his work. Hence, his action did not occur within the scope of his employment contemplated under the Continental policy.

The Court of Appeal determined Baek’s alleged touching of Plaintiff’s breasts, buttocks, inner thighs and genitals “indisputably were not ‘duties related to the conduct of [HMWC’s] business’” or the acts he was hired to perform, but constituted a “stepping away” from HMWC’s business, as the acts were performed for Baek’s own benefit, rather than HMWC’s. Accordingly, the court concluded Baek’s acts were not related to, and did not occur, with respect to the conduct of HMWC’s business so as to trigger coverage.

Finally, the Court of Appeal rejected Baek’s arguments that even if Continental had no duty to defend the sexual assault allegations, it had a duty to defend Jaime W.’s claims of negligence and false imprisonment. Briefly, the court explained the duty to defend depended on whether the alleged facts reveal a possibility of coverage, not the labels given to the causes of action. The complaint in the Jaime W. action alleged the massage was negligent, each defendant was negligent in hiring, training and supervising Baek and Baek deprived Plaintiff of her freedom of movement by use of deceit in setting up the massage room. First, the court explained that sexual fondling is an intentional act such that Baek could not be found to liable for negligence or failing to use due care in performing the massage or supervising his own actions. Second, the court stated the false imprisonment allegations were “inextricably intertwined” with the alleged assault, for which there was no coverage. Accordingly, Continental had no duty to defend these allegations.

The good holding in Baek for insureds is that persons who work under an independent contractor agreement may be eligible for coverage under the employer’s general liability policy because a third party complaint alleges he or she was a covered “employee.” Although the court ultimately held there was no coverage, this decision is significant for policyholders as it explains that even though the insured executed an independent contractor agreement, the acts by its so-called independent contractor may be within the scope of coverage under such a policy.

Sometimes an administrator so unashamedly abuses its discretion in handling an insurance claim that its actions constitute a textbook example of “what not to do” for other administrators and the ensuing decision provides a clear illustration of how courts apply an abuse of discretion standard of review under the Employee Retirement Income Security Act (“ERISA”). Indeed, a recent case clarified that plan administrators and third-party claims administrators alike are held to comparable standards when issuing claims decisions. In Pacific Shores Hospital v. United Behavioral Health, 2014 WL 4086784; 2014 U.S. App. LEXIS 16062 (9th Cir. Cal. Aug. 20, 2014) (“Pacific Shores”) the Ninth Circuit Court of Appeal reversed the district court, finding the third-party administrator acted improperly by denying the insured’s claim based on clear factual errors. Pacific Shores provides a clear example of how courts review a decision for an abuse of discretion, and shows that even third-party administrators, who purportedly have no conflict of interest with the insured, are still held to have the same duties in handling claims and must follow appropriate procedures.

Pacific Shores involved a Wells Fargo & Company (“Wells Fargo”) employee, dubbed “Jane Jones” by the court, covered under the employer’s health plan (“Plan”), governed by ERISA and administered by United Behavioral Health (“UBH”), a third-party claims administrator. Jones was admitted to the Pacific Shores Hospital (“PSH”) for inpatient treatment for severe anorexia nervosa and major depression with suicide attempts. During her inpatient stay, Jones submitted a claim to UBH for the costs of treatment, but UBH refused to pay for more than three weeks of treatment. PSH continued to treat Jones following UBH’s refusal, and subsequently Jones assigned her rights to payment under the Plan to PSH. PSH sued UBH and the Plan seeking payment for the additional days of inpatient treatment. The district court ruled in favor of UBH, finding that Jones’ administrative record provided a reasonable basis for UBH’s denial decision.

On appeal, PSH conceded the Plan granted discretion to the administrator, but advanced three arguments for the court to adopt a less deferential review of UBH’s decision. First PSH argued UBH’s claims administration contained procedural irregularities such that the denial should be reviewed de novo. Based on its review of the case, the court agreed, stating it was “painfully apparent” that UBH did not follow appropriate procedures in reaching its denial. For instance, although UBH maintained Jones’ case required medical evaluation due to its “‘medical and psychiatric complexity,’” UBH’s decision was based almost entirely on telephone conversations and voicemail messages. Indeed, Jones’ claim file was remarkably devoid of any hospital records or independent examination results. Moreover, UBH’s physician evaluations contained “obvious factual errors could easily have been corrected” if UHB consulted the PSH records or its own administrative record.

Second, PSH argued the court should consider materials outside Jones’ administrative record to review UBH’s denial decision. The district court declined to consider documents beyond the administrative record, as is typical in cases where a court is reviewing for abuse of discretion. However, the Court of Appeal explained when the administrator’s decision contains procedural irregularities, courts may consider extrinsic evidence to review the impacts of the irregularity. In the instant case, the administrator issued its decision based solely on telephone conversations and conflicting information despite the “medical and psychiatric complexity” involved in Jones’ case. The court determined that a review of the medical files would be helpful in establishing the accuracy of medical facts and Jones’ condition, and therefore it was appropriate to consider extrinsic evidence.

Next, PSH argued that even though UBH was third-party administrator, it was operating under a conflict of interest based on a desire for a continued relationship with Wells Fargo, and the court should consider these factors deciding whether UBH abused its discretion. The court declined to rule on this matter, stating that based on the record UBH reviewed before issuing its decision, UBH improperly denied Jones’ benefits. Indeed, even absent this analysis, the court found that there was sufficient information to conclude UBH acted improperly.

The court then explained the abuse of discretion standard entails a review of all the surrounding circumstances for “‘any reasonable basis’” to support an administrator’s decision. An administrator abuses its discretion if the administrator rendered its decision without any explanation, construed plan provisions in a way that conflicts with the plain language of the plan, fails to develop necessary facts for its determination or relies on clearly erroneous facts. In Jones’ case, the Plan documents represented an insured was eligible for coverage if any one of six state criteria was met, including having a “serious medical condition” requiring “24-hour management.” UBH authorized coverage for three weeks of inpatient treatment for Jones after finding this criteria applied. The Plan further also explains a plan member is eligible for continued coverage based on ten listed criteria involving a continuing condition and active participation in treatment. UBH, based on its physician evaluations, determined that Jones failed three of the ten criteria, as she did not meet the required level of care, she was not in danger of deterioration if transitioned into a lower level of care, and she was effectively recovering, as determined by UBH’s physician evaluations. The court first noted that in cases where residential care was required, the requirement necessarily satisfied the ten criteria regarding level of care and participation in treatment. The physician evaluations contained critical factual errors which downplayed Jones’ condition. Ultimately, the court held UBH breached its fiduciary duty to discharge its duties with “‘care, skill, prudence, and diligence” and solely in the interest of the Jones by employing and relying on three physician evaluators who made critical factual errors supporting UBH’s denial decision, and its denial was improper under the plan.

Pacific Shores clearly shows third-party administrators are held to the same fiduciary duties as first party plan administrators to act in the insured’s interests when administering claims. The case also provides support for allowing extrinsic documents in ERISA cases where the administrative record is inadequate. Although Pacific Shores leaves open the question of whether a third-party administrator may be acting under a conflict of interest with the insureds, for now, third party-administrators are not spared from federal ERISA laws applicable to plan administrators.

The September 11, 2014 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Case highlights importance of agent-broker distinction.” In it, Mr. McKennon discusses a new case, Douglas v. Fidelity National Insurance Co., 2014 DJDAR 12127 (Aug. 29, 2014), which highlights the critical importance in insurance coverage cases, especially disability insurance and life insurance cases, of the legal distinction between agents and brokers. Mr. McKennon explains why this distinction can alter the outcome of a case or insurance claim. The article is posted below with the permission of the Daily Journal.

Case highlights importance of agent-broker distinction

Insurance agent or insurance broker? In everyday parlance these two terms are often used interchangeably to mean a salesperson who obtains and sells insurance policies to consumers. However, the distinction between an agent and a broker can have serious implications regarding whether the insured or the insurer bears responsibility for any misrepresentations made by an individual or company acting as go-between in the process of applying for an insurance policy. This point was clearly illustrated by the California Court of Appeal inDouglas v. Fidelity National Insurance Co., 2014 DJDAR 12127 (Aug. 29, 2014).

InDouglas, the court reversed a verdict in favor of the insured, finding that the trial court improperly failed to provide the jury with instructions allowing it to find that the insurance “agent” was actually a “broker,” and that misrepresentations made in the insurance application process should be imputed to the insured, not the insurer.

The case involved plaintiffs who went to an insurance services company, InsZone, and met with their employee who assisted the plaintiffs in obtaining a homeowner’s insurance policy issued by Fidelity National Insurance Company. InsZone submitted applications to Fidelity through an online process. A few months after the policy was issued, the plaintiffs’ house was damaged in a fire and the plaintiffs filed a claim with Fidelity. After investigating the claim, Fidelity alleged that, contrary to representations made in their applications, the plaintiffs did not actually live in the house; rather, they used it as a residential care facility. Fidelity rescinded the policy based on several alleged material representations in the insurance applications concerning how the house was being used, claiming that it would not have issued the policy had it known about the misrepresentations.

The plaintiffs sued both Fidelity and InsZone, claiming that Fidelity wrongfully denied their benefits. They argued that they did not make any misrepresentations, and any false information was provided by InsZone acting as Fidelity’s agent. The jury ultimately sided with the plaintiffs.

On appeal, Fidelity argued that the trial court erred in refusing to provide jury instructions and verdict forms that would allow the jury to decide whether InsZone was the plaintiffs’ broker, thus rendering plaintiffs responsible for the misrepresentations. The Court of Appeal agreed, finding that there was undisputed evidence that an employee of InsZone had provided false information in the plaintiffs’ insurance policy applications. As such, the court explained, the issue of whether InsZone was the plaintiffs’ broker was significant because, if the jury found that InsZone was the plaintiffs’ broker, it “would have allowed the jury to hold plaintiffs responsible for any misrepresentations in the insurance applications, whether attributable to them directly or indirectly through [Inszone’s] conduct.”

The court specifically distinguished an “insurance broker” from an “insurance agent,” in that a broker acts as a middleman between the insured and the insurer and is not employed by any insurance company, whereas an agent represents and is employed by the insurer. The court explained that although both brokers and agents must be licensed by the California Department of Insurance, “a person may not act as an insurance agent without a notice of the agent’s appointment by the insurer to transact business on its behalf filed with the DOI.” In other words, the person must be appointed by the insurer as an agent.

Because it was unclear whether InsZone was appointed by Fidelity, and because the producer agreement specifically stated that InsZone was “‘never’ to be deemed Fidelity’s agent, except as ‘required by law,’” the court found that there was substantial evidence supporting a jury finding that InsZone was acting as a broker and not an agent. Interestingly, the court explained that the language in the independent producer agreement and the compensation schedule between InsZone and Fidelity did not automatically confer “agent” status. The agreement stated: “Producer has no authority to bind Company or Insurance Company on any insurance policy except as otherwise stated in the underwriting guidelines for the territories and lines of business set forth on Compensation Schedule.” The schedule provided that InsZone was authorized “to bind policies for the lines of business listed below and the Company shall pay Producer a commission based on the following table.” Thus, the court concluded, the jury should have been given the opportunity to determine whether InsZone was acting as the plaintiffs’ broker.

The court found that the trial court erred in refusing to allow the jury to consider the import of any unintentional material misrepresentations in the insurance applications because an insurer can rescind a policy based on unintentional material representations. Additionally, the court found that the trial court erroneously refused to include jury instructions that would have allowed the jury to consider whether InsZone provided false information in the insurance applications since the jury could find that InsZone was the plaintiffs’ broker whose misrepresentations can be imputed to the plaintiffs for purposes of determining whether a basis for rescission exists. Finally, the court held that the jury instructions improperly limited the jury to consideration of misrepresentations made in only one of the insurance applications submitted.

Douglasprovides several highly significant takeaways for an insured faced with a rescission issue. First, insurers may rescind an insurance policy based on a material misrepresentation provided in an insurance application, even if the false information was provided by his broker, and even if the insured was not at fault. Second, an insurer may rescind a policy even if the misrepresentation was unintentional. In this regard, it is important for the insured to determine if a notice of agent appointment is on file with the insurance commissioner as required by law. If one exists, the insurance producer will be deemed an agent of the insurer as a matter of law.

Had a notice of appointment existed inDouglas, the outcome would have been different. That’s because the agent’s actions would have been imputed to the insurer, who would have been estopped from seeking rescission of the policy. However, asDouglasinstructs, an insurer’s failure to file a notice of appointment with the Department of Insurance does not necessarily preclude a finding that an insurance producer was the insurer’s agent. See alsoChicago Title Ins. Co. v. AMZ Ins. Services Inc., 188 Cal. App. 4th 401, 425-26 (2010). An insured would then be well advised to scrutinize applications and agreements to search for any language supporting an argument that the producer is an agent who has the ability to bind the insurer.

Douglasagain illustrates that it is often crucial to the outcome of a rescission case to correctly distinguish between an insurance producer’s status as either an agent or a broker, as that distinction may well mean the difference between a claim being fully covered and the insured legally having no effective policy.

A virtually insurmountable concrete wall was once an apt analogy for the effect of discretionary clauses in ERISA Plans on claimants attempting to challenge a plan administrator’s unreasonable interpretation of policy terms. A valid discretionary clause gave insurance companies power to construe the terms of ERISA- governed group insurance policies based on their own interpretation, which could only be overturned by courts if it were “illogical, implausible or without support in inferences drawn from the facts in the record.” Salomaa v. Honda Long Term Disability Plan, 642 F.3d 666 (2011). In order to counteract the discretion these clauses provided to plan administrators/insurers, California enacted Insurance Code section 10110.6, which placed a ban on such discretionary clauses. After the enactment of this new statute, questions regarding how courts would interpret and enforce it lingered. However, recent decisions in California strongly suggests that courts will give full force to the California statute and apply de novo review of claim denials rather than the abuse of discretion standard to claims denied on or after January 1, 2012.

California Insurance Code section 10110.6 provides in pertinent part:

(a) If a policy, contract, certificate, or agreement offered, issued, delivered, or renewed, whether or not in California, that provides or funds life insurance or disability insurance coverage for any California resident contains a provision that reserves discretionary authority to the insurer, or an agent of the insurer, to determine eligibility for benefits or coverage, to interpret the terms of the policy, contract, certificate, or agreement, or to provide standards of interpretation or review that are inconsistent with the laws of this state, that provision is void and unenforceable.

(b) For purposes of this section, “renewed” means continued in force on or after the policy’s anniversary date.

The statute applies to life and disability insurance policies issued, delivered or renewed on or after January 1, 2012 in California. One of the key questions that remained after the enactment of the statute was whether, and under what circumstances, it applies to policies that were in effect prior to the enactment of the statute. This question appears to have been answered in two recent Northern District of California decisions finding that the statute applies even to policies that were issued or had an effective date prior to January 1, 2012 where it is renewed annually and the relevant claim is denied after January 1, 2012.

In Polnicky v. Liberty Life Assurance Company of Boston, 2013 U.S. Dist. LEXIS 163915 (N.D. Cal. Nov. 18, 2013) the court interpreted section 10110.6 and concluded that the policy which controlled in that case was the one in effect at the time the claim was denied, after the enactment of section 10110.6, even though the policy had an effective date of January 1, 2010 (before the statute became effective). In Polnicky, the relevant policy was renewed annually on January 1. In March 2010, the plaintiff submitted a claim for short-term disability benefits under his ERISA-governed disability policy, which was denied in June 1, 2012. The plaintiff’s subsequent appeal was then denied in February 2013. The insurer argued that the abuse of discretion standard should be applied given the express grant of discretion authority in the policy. On the other hand, the plaintiff argued that any grant of discretion was void and unenforceable under section 10110.6. The court ultimately held that, because the policy was renewed and continued after its January 1, 2012 anniversary date, any provision in the policy attempting to confer discretionary authority was rendered void and unenforceable.

Recently, in Gonda v. Permanente Med. Group, Inc., 2014 U.S. Dist. LEXIS 5981, 2014 WL 186354 (N.D. Cal. Jan. 16, 2014), the court reaffirmed its prior holding in Polnicky and held that section 10110.6 made void any grant of discretionary authority in ERISA plans even if the plan was issued prior to when the statute came into effect because the policy in question renewed annually and became effective January 1, 2013, prior the final denial of the plaintiff’s claim in May 2013.

As Polnicky and Gonda demonstrate, courts will likely find discretionary clauses invalid and void where the policy is renewed after January 1, 2010, even if it became effective prior to the enact of section 10110.6.

Too Little Time – Court Finds ERISA Plan’s Contractual Limitation Period Unreasonably Short and Unenforceable

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