McKennon Law Group, Author at McKennon Law Group

In 1987 Robert Fier started working for the Boyd Group (“Boyd”) as a casino slot repairman. After a promotion to management, Fier subsequently enrolled into Boyd’s two benefits programs: a Long Term Disability (“LTD”) Policy and an Accidental Death and Dismemberment Insurance (“AD&D”) Policy. Both policies are maintained pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq.

In 1992, as a result of a shooting, Fier became permanently quadriplegic (i.e. the loss of both arms and legs). In 1993, Fier returned to work in a new job specifically tailored to his physical limitations where he earned the same salary as he had prior to the accident. In 1997, Fier’s salary was reduced by $20,000 when he was assigned to a new position at Boyd. In early 1997, Fier submitted a claim for benefits under the LTD policy, and received benefit payments from UNUM. Between 1997 and late 2004, UNUM paid Fier $152,069.02.

In late 2004, UNUM informed Fier that regarding his 1997 LTD claim, it should have ceased payments in 1998 because Fier left Boyd to take another job. At the new job, Fier was earning approximately the same salary he had earned before the accident. The rationale for UNUM’s decision was based upon the LTD policy which stated:

Disability benefits will cease on the earliest of:

The date the insured is no longer disabled;

The date the insured dies;

The end of the maximum benefit period;

The date the insured’s current earnings exceed 80% of his pre-disability earnings.

Fier filed suit against UNUM in the District Court of Nevada for both a declaratory judgment entitling him to continued payment of benefits, and for four years of benefits from 1993 until 1997. The Nevada district court found Fier was not eligible for benefits between 1993 and 1997 because he was working at his full salary and that he was not entitled to benefits after 1998 when he began his new job with a salary at the pre-disability level. The district court also held Fier was no longer covered under the LTD policy because he no longer was employed by Boyd. Lastly, the district court rejected Fier’s claim for benefits under the AD&D policy because his feet and hands had not been severed from his body.

On appeal with the United States Court of Appeals for the Ninth Circuit the lower court correctly determined Fier’s ineligibility for benefits from 1993 to 1997 and from 1998 forward under the LTD policy. The policy was not ambiguous as to when benefits would terminate. In addition, the Ninth Circuit court also held the district court correctly determined that Fier’s LTD benefits terminated in 1998 when Fier left his employment with the Boyd.

With respect to the AD&D policy, Fier appealed the district court’s determination that to be eligible for any AD&D benefits; he had to have suffered dismemberment by “severance.” The Ninth Circuit, not having had to construe this term before, relied upon Cunninghame v. Equitable Life Insurance Society of the Untied States, 652 F.2d 306 (2d Cir. 1981). In Cunninghame, the Second Circuit held the policy’s definition of ‘loss’ was not ambiguous, and interpreted the terms ‘dismemberment by severance’ by stating:

The word ‘dismemberment’ itself implies actual separation; the noun derives from the transitive verb ‘dismember’, defined as meaning ‘to cut or tear off into pieces; take apart roughly or divide (a whole) into sections or separate units’ or, obsoletely, to ‘lop’ or ‘sever’. “Dismemberment” as a noun, therefore, refers to “the act of dismembering or the state of being dismembered: division into separate parts or units.”

Therefore, the Ninth Circuit concluded that Fier was not owed any benefits under the AD&D policy because he “did not suffer the physical detachment of his limbs.”

The Court applied long-standing law in the Ninth Circuit that if there is no ambiguity to the interpretation of a policy provision, courts will not create one, and will “interpret terms in ERISA insurance policies in an ordinary and popular sense as would a [person] of average intelligence and experience.” Evans v. Safeco Life Ins. Co., 916 F.2d 1437 (9th Cir. 1990).

Because of fairly recent California wild fires and California’s history of rising property values (at least this was the case a few years ago), many California homeowners have found themselves underinsured for fire losses. The California Department of Insurance has been considering new regulations governing standards and training for estimating replacement value on homeowners’ insurance for some time. California Insurance Commissioner Steve Poizner had previously called for regulations that would provide more comprehensive and reliable estimates of what it might cost to completely rebuild a destroyed home. Such estimates were previously unregulated and led homeowners to believe they needed less coverage than they truly did in the event of a disaster.

Poizner announced last week that his new regulations designed to combat underinsurance were approved by the Office of Administrative Law on December 29, 2010. The regulations will take effect June 27, 2011.

The Regulations:

Require all California resident fire and casualty broker-agents and personal lines broker-agents, who have not already done so, to satisfactorily complete one three-hour training course on homeowners’ insurance valuation prior to estimating the replacement value of structures in connection with, or explaining the various levels of coverage under, a homeowners’ insurance policy;
Require insurers, agents and brokers that provide replacement cost estimates to applicants and insureds to document who created the estimate and the sources or methods used to create the replacement cost estimate; and
Require that all replacement cost estimates communicated to applicants or insureds be complete, based upon specifically enumerated standards set forth in the regulations.

The Regulations represent the final phase of Poizner’s plan to reduce underinsurance.

Co-written with Associate Joshua Malter

In Advanced Network, Inc. v. Peerless Ins. Co., 2010 Cal. App. LEXIS 2078 (Dec. 10, 2010) the California Fourth Appellate District concluded that the theft of $2 million in cash from an insured’s client did not trigger a commercial general liability (CGL) insurer’s duty to defend or indemnify the insured against the client’s lawsuit to recover damages caused by the theft. The Court relied on a long line of cases dating back to Collin v. American Empire Ins. Co., 21 Cal.App.4th 787 (1994) (Collin).

The facts are straightforward. An employee of Advanced Network, Inc. (ANI) stole $2 million in cash from an ANI client. The employee got caught. ANI’s client apparently did not recover the stolen cash. The client’s fidelity bond holder paid the loss, and sued ANI for equitable subrogation, breach of contract and negligence. ANI tendered its defense to Peerless Insurance Company (Peerless), its commercial general liability (CGL) insurer. Peerless denied coverage. ANI settled the lawsuit without Peerless’ assistance, and then sued Peerless for breach of the CGL policy and bad faith. The trial court concluded that Peerless breached its duty to defend and indemnify ANI, and entered judgment in favor of ANI after a jury trial for compensatory damages, punitive damages, Brandt attorney’s fees, and costs. Peerless appealed.

The Fourth Appellate District reversed. The Court explained that the theft of cash was not “loss of use” of property within the meaning of the CGL policy form:

‘Loss of use’ of property is different from ‘loss’ of property. To take a simple example, assume that an automobile is stolen from its owner. The value of the ‘loss of use’ of the car is the rental value of a substitute vehicle; the value of the ‘loss’ of the car is its replacement cost.”

Id. at *11 (quoting Collin). The insured’s client sued to replace the stolen cash—not to recover the loss of use of the cash. So, the Court concluded that Peerless had no duty to defend or indemnify the insured against its client’s lawsuit. Along the way, the Court provides a helpful explanation of basic principles of California CGL insurance law.

In today’s Los Angeles Times Business Section, Duke Helfand writes about an 18-month investigation by the California Department of Managed Health Care into the payment practices of Aetna Inc., Anthem Blue Cross of California, Blue Shield of California, Cigna Corp., Health Net Inc., Kaiser Foundation Health Plan and United Healthcare/PacifiCare.

Here is his article:

California’s largest health plans are fined nearly $5 million

The seven companies failed to properly pay medical claims submitted by thousands of doctors and hospitals over the last three years, state insurance regulators say.

California’s seven largest health plans were fined nearly $5 million in total Monday for failing to properly pay medical claims submitted by thousands of doctors and hospitals over the last three years.

Insurance regulators said the companies also would pay “tens of millions of dollars” in restitution to medical providers whose claims were underpaid or incorrectly rejected.

The fines cap an 18-month investigation by the California Department of Managed Health Care into the payment practices of Aetna Inc., Anthem Blue Cross of California, Blue Shield of California, Cigna Corp., Health Net Inc., Kaiser Foundation Health Plan and UnitedHealthcare/PacifiCare.

“California’s hospitals and physicians must be paid fairly and on time,” Cindy Ehnes, the state department’s director, told a Los Angeles news conference. “The incorrect payment of provider claims by plans unfortunately is a persistent issue.”

Hospitals said Monday’s action would send a loud message across California’s multibillion-dollar insurance industry.

“In levying these fines, [the state] is addressing an ongoing, systemic issue that harms the ability of providers to care for their patients,” said Jan Emerson-Shea, a spokeswoman for the California Hospital Assn.

But doctors blasted the fines, saying they were a “slap on the wrist.” James Hinsdale, president of the California Medical Assn., called the penalties “chump change … for highly profitable health plans that systematically deny legitimate claims and routinely block, delay or limit physician reimbursements as one tactic to boost their bottom lines.”

The state agency reviewed samples of claims after providers who serve members of health maintenance organizations complained about problems. Auditors said none of the plans met a state legal requirement to pay 95% of their claims correctly. More than 21 million Californians have HMO coverage.

The reviews also found that most of the health plans lacked adequate procedures for settling disputes with providers. In some cases, health plan workers responsible for processing claims also oversaw appeals.

The trade group for health plans said the companies would work with state regulators to improve their performance. But the California Assn. of Health Plans also seized on a piece of positive news from regulators: The fined firms generally met state requirements for paying claims on time.

“We have long recognized that the administrative side of healthcare coverage can take valuable time away from patient care, which is why plans have been working to streamline processes both at the health plan level and in doctors’ offices,” said Patrick Johnston, the association’s president.

Only two health plans commented on the state’s action.

Kaiser spokesman Won Ha said the plan, which is based in Oakland, had taken steps to improve its processing of claims in a “timely and accurate manner,” although he did not provide details.

“We continue to build on our progress to meet the high standards of the Department of Managed Health Care and other regulators,” Ha said. “We are committed to achieving or exceeding all regulatory and customer requirements.”

Connecticut-based Aetna acknowledged problems with its payment procedures and said it took immediate action once regulators informed the company of its findings. Aetna pointed out that its penalty — $300,000 — was the lowest of those imposed on the seven health plans.

“Aetna takes our responsibilities to our members and providers very seriously, but we do sometimes make mistakes,” spokeswoman Anjanette Coplin said.

Anthem Blue Cross, a unit of Indianapolis-based WellPoint Inc., and Blue Shield of California received the largest fines — $900,000 each. UnitedHealthcare/PacifiCare was penalized $800,000. Health Net and Kaiser were fined $750,000 each, and Cigna was assessed $450,000.

State regulators said the size of the fines was determined by the volume of each plan’s business in California and the severity of its violations.

The health plans also must compensate providers for money they are owed, including penalties and interest, within six months. The plans must reopen their records dating back two to three years to their last financial review by the state.

Hospitals are likely to receive the largest share of the money because they submit bigger bills than doctors.

The restitution is the latest good news for some hospitals. Last month, regulators from the managed care department said that seven facilities would divvy up $1.62 million from Anthem Blue Cross to resolve unrelated allegations that the health plan improperly reimbursed the providers for patient costs that exceeded daily hospital rates. Anthem admitted no wrongdoing in the case.

By: Duke Helfand (November 30, 2010)
Copyright © 2010, Los Angeles Times

In a closely watched case the California Supreme Court recently expanded the scope of a comprehensive general liability insurer’s (CGL) duty to defend “suits” to an adjudicative proceeding before the former United States Department of Interior Board of Contract Appeals (now the Civilian Board of Contract Appeals). Ameron International Corp. v. Insurance Company of Pennsylvania, et al., 2010 Cal. LEXIS 11679 (November 18, 2010). Many insurance industry analysts and counsel had expected the Court to continue to limit the duty to defend to court proceedings, as it had done in Foster-Gardner, Inc. v. National Union Fire Ins. Co., 18 Cal.4th 857, 887, 77 Cal.Rptr.2d 107, 959 P.2d 265 (1998)(Foster-Gardner). In Foster-Gardner the Court held that the term “suit” in a CGL policy means “a court proceeding initiated by the filing of a complaint,” and declined to extend the duty to defend to an environmental agency’s pollution remediation order against a CGL policyholder. The Foster-Gardner rule has since been applied to bar a CGL insurer’s duty to defend other administrative proceedings.

In Ameron the U.S. Department of the Interior discovered defects in concrete siphons manufactured by Ameron for use in one of Arizona’s aqueducts. The Interior Department sought $40 million in damages against Ameron in a proceeding before the Department of Interior Board of Contract Appeals (IBCA). The proceeding took place before an administrative law judge over the course of 22 days. Ameron’s CGL insurer, Insurance Company of the State of Pennsylvania (ICSP), refused to pay for the cost of defending or indemnifying Ameron.

The question on appeal was whether a federal administrative proceeding before an administrative law judge would be considered a “suit” for purposes of the duty to defend. ICSP, relying on the Foster-Gardner rule, argued that since no complaint was filed, the proceeding before the IBCA was not a “suit.” Although initially upheld on appeal, Ameron sought review before the California Supreme Court.

Ameron drew a distinction between the environmental cleanup orders discussed in Foster-Gardner and the IBCA proceeding. In a unanimous decision the Court ruled that the IBCA proceeding was a “quasi-judicial” action. Since the proceeding took place in front of an administrative law judge, the Court reasoned, it was significantly different from the environmental cleanup orders discussed in Foster-Gardner. The proceedings before the IBCA involved witnesses under oath, cross examination, and the admission of evidence subject to generally accepted federal rules of admissibility. Since Congress enacted the IBCA as an alternative means to resolve contractual disputes, Ameron had a choice of forums for appealing the liability decision, which arguably included litigation in federal court. Accordingly, the Court found a duty to defend the IBCA proceeding.

Ameron effectively limits the applicability of the Foster-Gardner rule, and gives CGL policyholders a leg up on securing a defense in adjudicative-type administrative proceedings.

Last week, Commissioner Poizner released the results of his second Preferred Provider Organization (“PPO”) quality of care report card. The results are not good news for consumers, and show that California’s PPOs have much work to do in meeting customer needs. According to Poizner:

“California PPOs rank in the middle of the pack compared with the national average, and show some of the lowest overall scores that California has ever seen. HMOs began reporting on quality in 2001, and I got PPOs to join the effort beginning last year. I am grateful for their cooperation, but this report card shows they will have to do better. This should be their wake-up call,” said Commissioner Poizner. “These results show that insurers have a lot of room for improvement, particularly in the area of customer satisfaction. As I promised when I came into office, consumers now have much more information to make choices that are best for them, and to pressure insurers to do better. We all need to use this data to make that happen.”

None of the six PPOs on the report card received the highest four-star rating, but Aetna, CIGNA HealthCare of California and United Healthcare (California) each received three stars overall for delivering quality clinical care. Anthem Blue Cross, Blue Shield of California and Health Net each received two stars overall in that category. Rating criteria included asthma care, checking for cancer, diabetes care and treatment of children. The ratings are based on a set of standard measures developed by the National Committee on Quality Assurance.

In addition to grades based on clinical best practices, the report also includes grades, for the first time, on customer satisfaction. While all PPOs got the mid-range 2-3 stars for getting care easily, all insurers except Aetna received the lowest, single-star rating for plan service. This is clearly the area of greatest concern for California consumers and where there is the greatest room for improvement. The Plan Service category includes customer ratings on things like helpful customer service, getting information about your costs and paying claims.

The PPO report card is available at http://www.insurance.ca.gov. The companion report card on HMOs will be released separately early next year.