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The collateral source rule is familiar to every attorney in California. Every attorney recalls spending time studying the rule in law school. The collateral source rule is critical to people injured by the wrongful conduct of tortfeasors, whether they be an individual involved in an auto accident or multinational corporations committing mass torts. The collateral source rule says is that if an injured plaintiff had the prudence to obtain insurance (whether it is life, health or disability insurance), the defendant who injures the plaintiff cannot get the benefit of that prudence by obtaining an offset from the plaintiff’s damages.

The California Supreme Court has long held this doctrine sacred. Helfend v. Southern California Rapid Transit District, 2 Cal. 3d. 1 (1970). In the 1980s, the California Legislature authorized and encouraged doctors, hospitals and health plans to negotiate and enter into contracts for their mutual benefit. Thus was born managed care which encouraged health providers to lower costs in exchange for a ready source of patients covered by insurance. Thus, if a patient is a health plan member, and chooses doctors and hospitals that have a contract with their health plan, despite the fact that the patient incurs a certain regular, non-discounted charge to their medical providers, those providers will receive a lesser negotiated by their insurance companies. This model has worked somewhat successfully in holding down health care costs.

Very often, plaintiffs will incur detriment in the form of personal financial liability when they execute written agreements in which they agree to be financially responsible for all charges for the medical services provided to them. For example, written contracts with healthcare providers state that they agree that, in consideration for all services received, they are obligated to pay the provider’s “usual and customary charges for such services.” These written contracts often provide that it is “[plaintiff’s] responsibility to pay any balance not paid for by [plaintiff’s] insurance.”

The collateral source issue arises when a tort defendant, despite Insurance Code Section 10133(b) that expressly says those negotiated rates are benefits to health plan members, want reduce a plaintiff’s damages by discounting their liability.

Recently, the California court of appeals handed down Howell v. Hamilton Meats & Provisions, Inc., 179 Cal. App. 4th 686 (2009), the first case to analyze these negotiated rate differentials under California’s collateral source rule. The Court held that the amount of damages to which a plaintiff is entitled is the non-discounted value of the health provider’s services, not merely the discounted amount the insurer actually paid. The court explained it reasoning as follows:

We conclude that the extinguishment of a portion of Howell’s debt to Scripps and CORE in the amount of the negotiated rate differential ($130,286.90) was a benefit to Howell because she was no longer personally liable for that portion of the debt she personally incurred in obtaining medical treatment for her injuries. We also conclude that this benefit to Howell was a collateral source benefit within the meaning of the collateral source rule because it was conferred upon her as a direct result of her own thrift and foresight in procuring private health care insurance through PacifiCare, a source wholly independent of Hamilton as the defendant in this case. Under California’s collateral source rule (paraphrasing Helfend, supra, 2 Cal.3d at pp. 9-10, 84 Cal.Rptr. 173, 465 P.2d 61), Howell, as a person who has invested insurance premiums to assure her medical care, should receive the benefits of her thrift; and Hamilton, as the party liable for Howell’s injuries, should not garner the benefits of Howell’s providence. The law allows Howell to keep this collateral source benefit for herself because (paraphrasing the Restatement Second of Torts) she was responsible for the benefit by maintaining her own insurance. (Rest.2d Torts, § 920A, com. (b).)

The California Supreme Court granted review in Howell on March 11. Given the Supreme Court’s decision in Parnell v. Adventist Health System/West, 35 Cal. 4th 595 (2005) (Hospital could not assert lien under Hospital Lien Act against any judgment or settlement accruing to patient in underlying action to recover the difference between provider’s discounted payment and the hospital’s “usual and customary” charges; under the agreement with provider hospital that agreed to accept discounted amount as “payment in full”) and its decisions in City and County of San Francisco v. Sweet, 12 Cal. 4th 105, 117 (1995), and Mercy Hospital and Medical Center v. Farmers Insurance Group of Companies, 15 Cal. 4th 213 (1997)(where the Supreme Court confirmed that a medical provider and patient have a creditor-debtor relationship for the provider’s usual rates), the Supreme Court will have ample related precedent to affirm.

Stranger-Owned Annuities allow investors to purchase an interest in the life of an elderly or terminally ill person, inducing the insured to purchase the policy largely for the benefit of unrelated and sometimes unknown beneficiaries. The NAIC will examine whether greater regulation of the Stranger-Owned Annuity market is warranted and whether consumers are adequately protected.

In recent history, as discussed in the firm’s California Insurance Litigation Blog, the insurance industry has focused on Stranger-Originated Life Insurance Policies and many states, including California, have now regulated them. Numerous states such as California have outlawed them.

Stranger-Owned Annuities are less well known, but equally concerning to the industry. The investors have no insurable interest in the owner of the annuity, and generally purchase the annuity to receive an enhanced death benefit or some other advantage. Other than scattered lawsuits challenging the validity of Stranger-Owned Annuities, the market is largely unregulated. Many states have strict laws regarding insurance interests in life insurance policies, but have little or no regulation regarding annuities.

For a copy of the NAIC’s press release, click here: http://www.naic.org/Releases/2010_docs/stranger_owned_annuities.htm

When multiple insurers share the same defense obligation, the defense costs are typically allocated equally. When an insurance company refuses to defend, those insurers which do contribute to the defense may seek contribution from the insurer(s) that do not. Scottsdale Insurance Co. v. Century Surety Co., __ Cal. App. 4^th ___ (March 10, 2010) addresses such a situation.

In this case, Scottsdale Insurance Company (“Scottsdale”) brought suit against Century Surety Company (Century) seeking equitable contribution based on Century’s failure to participate in the defense of 17 common insureds in hundreds of actions in which Scottsdale, along with at least one other insurer, shared the costs of the defense of those insured parties. Scottsdale also sought equitable contribution with respect to indemnity of the common insureds in those underlying actions in which Scottsdale (and at least one other insurer) had paid amounts to settle the actions.

Three principal defenses were raised. In the unpublished portion of the opinion, the court discusses two of them and concludes that the trial court correctly decided both. Century argued that it was not required to defend or indemnify three of the common insureds because Century’s insurance policies did not provide coverage of the insureds for the actions alleged against them. Specifically, Century relied on a policy exclusion intended to exclude from coverage any action arising out of work which had been completed by the insured prior to the effective date of the policy (the prior work exclusion). The trial court concluded that Century’s prior work exclusion was not conspicuous, plain, and clear, and refused to enforce it. Century was therefore required to share equitably in the costs of the defense and indemnification of the common insureds, despite the presence of this exclusion.

In the published portion of the opinion, the Court also discussed the important issues of damages and burden of proof in an action for equitable contribution by one insurer against another. The trial court concluded that Scottsdale was entitled to equitable contribution from Century with respect to approximately 80 of the underlying actions. The amount of money that Scottsdale had contributed toward the defense and indemnity of the underlying insureds in those actions was not subject to dispute. With respect to many of the underlying actions, the parties also did not dispute: (1) the total number of insurers who participated in the defense of the common insureds; and (2) that the defense costs were allocated among the participating insurers by means of an equal shares formula. Century argued, in order to calculate the amount which it owed Scottsdale for defense costs, the trial court should recalculate, under the equal shares method, the amount each insurer would have paid for defense costs had Century participated with the other insurers in the defense of the insured.

Thus, Century argued it should be ordered to pay Scottsdale the difference between the equal share Scottsdale paid without Century’s participation, and the equal share it would have paid had Century participated. The trial court rejected Century’s proposed method of calculation, and instead awarded Scottsdale half of all defense and indemnity payments it made with respect to the claims for which it was entitled to recover equitable contribution. This result, however, was in conflict with the general rule, applied in non‑insurance cases, that in order to be entitled to equitable contribution a party must have first paid more than its share of the loss and it bears the burden of proving such circumstance.

The court applied those principles and concluded that they should have equal application in insurance cases. As a result, the court held that not only must Scottsdale prove that it had paid more than its “fair share” of the defense and indemnity costs for the common insureds but it also bears the burden of producing the evidence necessary to calculate such “fair share.” Moreover, the court held that one insurer cannot recover equitable contribution from another insurer any amount that would result in the first insurer paying less than its “fair share” even if that means that the otherwise liable second insurer will have paid nothing. Because the trial court applied an incorrect standard, the court reversed and remanded for a redetermination of Scottsdale’s equitable contribution damages.

Regardless of whether the insured is represented by counsel, an insurer has a duty to provide notice of a contractual statute of limitations period. The Insurance Corporation of New York discovered this holding the hard way when the California Court of Appeal published Superior Dispatch, Inc. v. Insurance Corp. of New York, 181 Cal. App. 4th 175 (2010), modified on Denial of Rehearing, __ Cal. App. 4th __, 2010 WL 601459 (February 22, 2010).

Superior Dispatch (“Superior”) was a trucking company who obtained a Cargo Coverage insurance policy from the Insurance Corporation of New York (“Inscorp”). The policy issued to Superior contained a contractual statute of limitations period stating, “No suit or action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless the same be commenced within twelve (12) months next after discovery by the Insured of the occurrence which gives rise to the claim.”

In July of 2003, Superior was hired to transport a dump truck on the back of a flat rack trailer. En route to its destination, the cab of the dump truck struck an overpass and was severally damaged. On July 17, 2003, Superior submitted a claim to Inscorp for the damaged dump truck. Inscorp denied the claim in a letter dated November 5, 2003. The denial letter did not notify Superior of the policy’s one-year contractual limitations period. In January 2004, Superior retained legal counsel who challenged the denial in a several letters to Inscorp. However, Inscorp affirmed the company’s decision to deny the claim arguing that there was no coverage under the policy. Once again, Inscorp’s letter did not notify Superior of the one-year contractual limitations period. When counsel for Superior finally filed a complaint on May 20, 2005, Inscorp filed a motion for summary judgment arguing that the contractual limitations period barred the complaint. The trial court agreed and entered a judgment in favor of Inscorp.

The California Court of Appeal reversed the lower court’s judgment holding that Inscorp was not entitled to summary judgment based on the contractual limitations provision. Here, the court noted that the fact that Superior retained counsel before the end of the limitations period did not establish as a matter of law that Superior’s reliance on the nondisclosure was unreasonable. Instead, the court held that the reasonableness of Superior’s reliance on Inscorp’s nondisclosure was a question of fact. While other cases preclude estoppel based on counsel’s knowledge of the law, in this case, the limitation period was contractual rather than statutory. Accordingly, a triable issue of fact remained as to the existence of an equitable estoppels claim. As a result, the Court of Appeal ruled that Inscorp was not entitled to summary judgment.

Although the trial court’s summary judgment was overturned, all was not lost for Inscorp. The appellate court ultimately held that Superior made a material misrepresentation on its insurance application by failing to disclose that Superior transported motor vehicles. This misrepresentation, the court held, rendered the policy invalid and established a complete defense to the breach of contract and implied covenant claims.

This case should serve as an additional reminder that an insurer has a duty to notify the insured of a contractual limitations provision, regardless of whether or not the insured has retained legal counsel. Whenever a policy contains a contractual limitation provision, the insurer should provide notice of the provision in nearly all communications with the insured.

In an article appearing inthe February 10, 2010 editions of theLos Angeles and San FranciscoDaily Journals, I discuss the impact of the Ninth Circuit’s Montour v. Hartford Life & Accident, 588 F.3d 623 (9th Cir. 2009). Here it is:

The Employee Retirement Income Security Act of 1974 (ERISA) is certainly one of the most significant pieces of federal legislation ever enacted by Congress as it impacts the employee benefit plans and retirement funds of millions of Americans. Recently, the 9th U.S. Circuit Court of Appeals issued one of its most significant ERISA decisions in Montour v. Hartford Life & Accident, 588 F.3d 623 (9th Cir. 2009).

Under ERISA, when a plan participant challenges the administrator’s decision to terminate or deny benefits, that decision is evaluated under either an abuse of discretion or de novo standard of review. ERISA litigation lawyers know well that when they are involved in litigating ERISA cases, the applicable standard of review can be outcome determinative. That is why Montour should be at the top of every ERISA lawyer’s reading list.

In Montour, the 9th Circuit clarified the application of the abuse of discretion standard of review when an insurer has a structural conflict of interest. A structural conflict of interest arises when the entity making the decision whether or not to approve benefits is also the same entity that is ultimately responsible for paying those benefits. In the realm of an insured employee benefit plan, this is a common occurrence as insurers typically act as claims administrators and the funding source of ERISA benefits. Because vast numbers of ERISA plans include a provision granting the plan or claims administrator discretionary authority to interpret the plan’s terms and to decide the payment of benefits under the plan, determining when and under what circumstances a conflict of interest will be so significant as to affect the outcome of the case is of course critically important.

Prior to Montour, but after the 9th Circuit’s en banc decision in Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955 (9th Cir. 2006), under an abuse of discretion standard of review, a district court would generally uphold the administrator’s decision provided it was grounded on any reasonable basis and made in good faith, weighing any conflict of interest of the administrator as factor in determining whether abuse of discretion existed. See Sznewajs v. U.S. Bancorp Amended & Restated Supplemental Benefits Plan, 572 F.3d 727, 734-735 (9th Cir.2009).

In Abatie, the widow of an ERISA plan participant challenged the administrator’s decision to deny benefits. There, Alta Health & Life Insurance Co. was the claims administrator and also the funding source of the ERISA plan, thereby creating a conflict of interest. After addressing what language was necessary to confer discretionary review on an administrator, the court turned to the issue of how to apply that standard of review when an administrator operates under a conflict of interest. In deciding this issue, the 9th Circuit in Abatie overruled its prior decision in Atwood v. Newmont Gold Co., 45 F.3d 1317 (9th Cir.1995). Under the Atwood standard, a plan participant was required to present “material, probative evidence, beyond the mere fact of the apparent conflict, tending to show that the fiduciary’s self-interest caused a breach of the administrator’s fiduciary obligations to the beneficiary.” merIf the participant did so, the burden then shifted to the administrator to prove that the conflict of interest did not affect its decision to deny benefits. If the plan could not carry that burden, a court would give no deference to the administrator’s decision to deny benefits, but would instead review the decision de novo. Under Abatie, the court considered any potential conflict of interest as a factor in its analysis. As a factor, the court would weigh the conflict of interest in light of all the factual circumstances. For instance, the conflict of interest might receive little weight if the record was void of any evidence of malice, self-dealing, or parsimonious claims-granting history. Likewise, if the administer provided inconsistent reasons for the denial or failed to adequately investigate the claim, then the court could weigh the conflict more heavily. Moreover, the court held that the district could look beyond the administrative record to determine whether a conflict of interest existed that affected the appropriate level of judicial scrutiny. The reasoning expressed by the 9th Circuit in Abatie was confirmed in the U.S. Supreme Court case of Glenn v. MetLife, 2008 DJDAR 5285, holding that the conflict of interest was merely a factor in the analysis.

Three years after Abatie, the 9th Circuit returned to the conflict of interest issue in Montour. In Montour, the claimant was a telecommunications manager for Conexant Systems, Inc., which provided Montour with a group long-term disability plan governed by ERISA. Hartford was both the insurer and claims administrator and the plan granted Hartford discretionary authority to interpret plan terms and to determine eligibility for benefits.

In reversing the district court, the 9th Circuit first explained that when an ERISA plan grants the administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan, the court reviews the decision for abuse of discretion. The court agreed with the district court that the abuse of discretion standard applied and that Hartford had a conflict of interest. However, the appeals court criticized the district court’s application of the “clear error” test, explaining that a reviewing court must also take into account the administrator’s conflict of interest as a factor in the abuse of discretion analysis. The appeals court concluded that the district court’s decision did not adequately balance the conflict factors. Accordingly, the appeals court proceeded to do so.

The 9th Circuit gave a comprehensive description of the “signs of bias” it found Hartford exhibited throughout the decision-making process. These included overstatement of and excessive reliance upon Montour’s activities in the surveillance videos; Hartford’s decision to conduct a paper review rather than an “in-person medical evaluation;” Hartford’s insistence that Montour produce objective proof of his pain level; and Hartford’s failure to deal with and distinguish the Social Security Administration’s contrary disability decision. The appeals court also noted Hartford’s “failure to present extrinsic evidence of any effort on its part to ‘assure accurate claims assessment.’” Continuing beyond the facts in Montour, the court described what it believed to be common factors that frequently arise in the ERISA context including, “whether the plan administrator subjected the claimant to an in-person medical evaluation or relied instead on a paper review of the claimant’s existing medical records, whether the administrator provided its independent experts “with all of the relevant evidence[,]” and whether the administrator considered a contrary SSA disability determination, if any.” Ultimately, the appeals court concluded that Hartford’s bias had infiltrated the entire administrative decision-making process, leading the court to accord significant weight to the conflict of interest. Weighing all of the factors together, the court concluded that Hartford’s conflict of interest improperly motivated its decision to terminate Montour’s benefits. The court reversed and remanded the matter for entry of judgment in favor of Montour and for reinstatement of long-term disability benefits.

Montour makes it clear that when there is a structural conflict of interest, the district court must give the conflict adequate consideration in its analysis of whether the administrator abused its discretion. This consideration includes weighing the relevant factors in light of the factual circumstances, including the following potential “signs of bias:”

Did the insurer overstate the surveillance findings in its communications to third party medical doctors?

Did the insurer exaggerate the extent to which the claimant’s activities while under surveillance where inconsistent with his claimed level of disability?

Did the insurer fail to account for a contrary decision by the Social Security Administrator that the claimant was disabled?

Did the insurer fail to adequately inform the claimant of what further evidence should be submitted to help establish his claim for benefits?

Did the insurer conduct a “pure paper” review as opposed to an independent medical examination?

Expect to see district courtsfocus their analysis on these and other self-interest factors as they assess how much weight to give to an insurer’s conflict of interest. Also expect to see district courts applying the Montour analysis to find that administrators have acted in a manner that evidences their self-interest and to award more ERISA participants their benefits under insured benefit plans.

Robert J. McKennon is a founding partner of McKennon│Schindler. He represents clients in sophisticated business and insurance litigation matters, with a particular emphasis on life, health and disability insurance, insurance bad faith and unfair business practices litigation. He can be reached at (949) 436-7529 or rm@mslawllp.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.

Just when you thought the bad news for Anthem Blue Cross (“Anthem”) could not get any worse, it does. According to an article by Duke Helfand appearing in today’s Los Angeles Times, California Insurance Commissioner Steve Poizner reported that Anthem, California’s largest for-profit health insurer, violated California law more than 700 times over a three-year period by failing to pay medical claims on time and misrepresenting policy provisions to customers.

Anthem could face fines of up to $7 million stemming from the alleged violations from 2006 to 2009. Poizner said that Anthem repeatedly failed to respond to state regulators in a “reasonable time” as they investigated complaints over the last year.

“We believe there is evidence to suggest there are serious issues with how Anthem Blue Cross pays claims,” Poizner said at a Sacramento news conference. “Most disturbing to us is that they don’t even respond” to the Department of Insurance “in a timely way.”

Anthem’s parent company, WellPoint Inc., said that it had not seen the enforcement action but would cooperate fully with Poizner to resolve the matter “in the best interests” of its policyholders.

“We take the issues raised by Commissioner Poizner very seriously,” Anthem said in a statement. “As the largest insurer in California, our responsibility is to pay the many millions of claims on behalf of our members each year fairly, fully and promptly.”

As reported in this blog, WellPoint and Anthem have faced intense criticism from consumers, regulators, members of Congress and the Obama administration over rate hike proposals of as much as 39% for customers with individual policies in California. Lawmakers in Sacramento and Washington are holding hearings this week on the increases, which have been postponed until May 1 amid the outcry.

The rate hikes would affect many of the 800,000 individual policyholders in California.

According to Poizner, nearly 40% of the violations in the Anthem case, 277, stem from allegations that the company failed to pay patient claims within 30 days as required by state law, officials said.

Poizner’s office filed the enforcement action against Anthem on Monday with the Office of Administrative Hearings. An administrative law judge will hear the matter. Each violation carries a maximum penalty of $10,000.

California Supreme Court Accepts Review of Howell: Will the Collateral Source Rule Be Extended to Cover Non-Discounted Medical Expenses?

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