California Court of Appeal Upholds Insurance Coverage for Health Net Finding The “Dishonest Acts” Exclusion Did Not Preclude Coverage

In Health Net, Inc. v. RLI Insurance Company, et al., the California Court of Appeal, Second District, reversed a trial court’s entry of judgment on a Motion for Summary Judgment finding some coverage for Health Net, Inc. (“Health Net”) in connection with numerous lawsuits filed against it arising under the Employee Retirement Income Security Act of 1974 (“ERISA”).  Health Net brought suit against four of its insurers (one primary and three excess carriers) seeking a declaratory judgment that the insurers had a duty to defend and indemnify Health Net in over 20 underlying actions involving Health Net’s insurance plans provided by employers, which plans were subject to the requirements of the ERISA. The parties, however, directed their attention to two specific underlying actions, as the amount of indemnity sought in those actions would far exceed the combined policy limits of the defendant insurers.  Relying on a policy exclusion for “dishonest acts,” the trial court granted summary adjudication to the insurers with respect to Health Net’s claim for reimbursement of its defense costs and the costs of settling the specified underlying actions. The parties subsequently settled their dispute regarding the remaining underlying actions, and summary judgment was granted in favor of the insurers.  Health Net appealed the ruling.

On appeal, the Court of Appeals first addressed whether the two underlying actions at issue sought damages covered by Health Net’s insurance policies. The court concluded that the great bulk of the claims asserted in the underlying actions were not covered, but there was a potential for coverage for some of them.  The court held that in the “Insuring Agreement” of the applicable policies, including a “HMO/PPO/Managed Health Care Professional Liability” policy, did not provide coverage for the insured’s contractual obligations, even if the insured committed a wrongful act in its failure to pay such benefits.

Second, the court addressed the “dishonest acts” exclusion, and considered whether it barred, as a matter of law, coverage for all of the otherwise covered claims in the underlying actions. The court concluded that, while the “dishonest acts” exclusion was triggered with respect to the underlying actions, the exclusion barred coverage only for those claims alleging dishonest acts, not the entirety of the underlying actions.  As some claims for indemnity and defense costs relating to the two underlying actions at issue remained, the court reversed the summary judgment.

Because the court concluded that the “dishonest acts” exclusion relied upon by the trial court excluded some, but not all, of the underlying claims, some of which might potentially allege a covered loss, it remanded the case to the trial court “to determine whether and to what extent there is any merit to the claim of coverage.”

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