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Bosetti v. The United States Life Ins. Co., 175 Cal. App. 4th 1208 (2009) is an important California Court of Appeal decision that addressed whether a two-year benefits limitation on disabilities due to “mental, nervous or emotional disorder[s]” could serve to limit benefits payable to an insured disabled from depression and anxiety who also complained of interrelated physical impairments.

Bosetti was employed by the Palos Verdes Peninsula Unified School District. As part of her employment benefits, she was covered under a group long-term disability insurance policy issued by The United States Life Insurance Company in the City of New York (“U.S. Life”).

Bosetti‘s job was eliminated for economic reasons. Shortly after she learned that her employment would be terminated, she saw a doctor for depression and was placed on temporary disability. Her disability extend beyond two years, and had a physical component as well as an emotional one. Under the policy, Bosetti could obtain disability benefits for two years if she was disabled from her own occupation. After that time, she could only obtain disability benefits if she was disabled from “any occupation.” U.S. Life concluded that Bosetti was not disabled from any occupation and terminated her disability benefits at the end of two years. That determination was based primarily upon the two-year benefits limitation for mental or nervous disorders, the results of a functional capacity examination, and an independent physician consultation.

After the U.S. Life moved for and was granted summary judgment, Bosetti appealed. The court of appeal held that the limitation was ambiguous and was not applicable if the claimant’s physical problems contributed to her disabling depression or were a cause or symptom of that depression. The Bosetti court further concluded that the insurer’s denial of benefits based upon that two-year limitation was not in bad faith under the genuine dispute doctrine.

The Bosetti court explained that the insured’s disability had both mental and physical elements, noting that one of her doctors had suggested that her physical disability arose out of her emotional disability and another that her emotional disability or depression arose out of her physical problems and chronic pain. The court held that the two-year mental limitation was ambiguous because it “does not clearly explain whether the limitation applies when the total disability is due in part to a mental, nervous …disorder” and because an insured’s reasonable expectations are that disabling depression arising from a physical condition like fibromyalgia and, correspondingly, disabling physical symptoms arising from depression, would not fall within the mental/nervous limitation.

As part of its analysis, the court rejected the rationale of Equitable Life Assurance Society v. Berry, 212 Cal. App. 3d 832, 835, 840 (1989), a California opinion concerned with an insured who was diagnosed with manic-depressive illness, a condition which has a chemical (physical) etiology, rather than a purely mental one. The Berry court concluded, as a matter of law, that there was no coverage due to a disability policy‘s exclusion for “[m]ental or nervous disorders” and a health policy‘s limitation on benefits for treatment for a neurosis, psycho-neurosis, psychopathy, psychosis, or mental or nervous disease or disorder of any kind, on the basis that these exclusions were unambiguous and referred solely to symptoms, rather than causes. Id. at 840. The court disagreed with Berry for two reasons: it disagreed with its analysis and its holding was abrogated by statute.

The court found that the holding of Berry did not survive Insurance Code section 10123.15, which provides that “every group policy of disability insurance which covers hospital, medical, and surgical expenses on a group basis, and which offers coverage for disorders of the brain shall also offer coverage in the same manner for the treatment of the following biologically based severe mental disorders: schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder. Coverage for these mental disorders shall be subject to the same terms and conditions applied to the treatment of other disorders of the brain.” It appears that based on the court’s ruling, the two-year mental or nervous disorders limitation can never be applied in California to the biologically based severe mental disorders of “schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder.”

The court adopted the Ninth Circuit’s approach in Patterson v. Hughes Aircraft Co., 11 F.3d 949, 950 (9th Cir. 1993) where the court concluded that a limitation on benefits resulting from “mental, nervous or emotional disorders of any type” was ambiguous as to whether mental disorders referred to causes or symptoms, and whether a disability is mental when it results from a combination of physical and mental factors. The court resolved the ambiguity in favor of the insured, holding that the limitation on coverage did not apply if the insured‘s disability was caused, in any part, by his physical symptoms.

In a pair of cases, the California Supreme Court restricted the use of California Business & Professions Code Section 17200 et seq. One case affirmed what many expected, that Proposition 64, a 2004 voter initiative, requires plaintiffs to follow strict class-action procedures when seeking to recover under California’s unfair competition law (Bus. & Prof. Code § 17200 et seq.) which prohibits “any unlawful, unfair or fraudulent business act or practice . . . .”

Before 2004, any person could assert representative claims under the unfair competition law to obtain restitution or injunctive relief against unfair or unlawful business practices. Such claims were not required to be brought as a class action, and a plaintiff had standing to sue even without having personally suffered an injury. (See Former §§ 17203, 17204; Stop Youth Addiction, Inc. v. Lucky Stores, Inc., 17 Cal. 4th 553, 561 (1998)).

In 2004, however, the California electorate passed Proposition 64, amending the unfair competition law to provide that a private plaintiff may bring a representative action under this law only if the plaintiff has “suffered injury in fact and has lost money or property as a result of such unfair competition” and “complies with Section 382 of the Code of Civil Procedure . . . .” This statute provides that “when the question is one of a common or general interest, of many persons, or when the parties are numerous, and it is impracticable to bring them all before the court, one or more may sue or defend for the benefit of all.” The Court has previously interpreted Code of Civil Procedure section 382 as authorizing class actions. See Richmond v. Dart Industries, Inc., 29 Cal. 3d 462, 470 (1981).

In Arias v. Superior Court of San Joaquin (Angelo Dairy), 46 Cal. 4th 969 (2009), the Court held that employees can pursue penalties for wage-and-hour violations under the Private Attorneys General Act, or (“PAGA”), without having to qualify their lawsuit as a class action.

Justice Joyce L. Kennard, writing for the majority, also analyzed the effect of Proposition 64. Plaintiff contended that because Proposition 64’s amendment of the unfair competition law required compliance only with “[s]ection 382 of the Code of Civil Procedure” and because that statute makes no mention of the words “class action,” his representative lawsuit brought under the unfair competition law need not comply with the requirements governing a class action. The Court rejected this assertion, explaining:

In light of this strong evidence of voter intent, we construe the statement in section 17203, as amended by Proposition 64, that a private party may pursue a representative action under the unfair competition law only if the party “complies with Section 382 of the Code of Civil Procedure” to mean that such an action must meet the requirements for a class action. (See Fireside Bank v. Superior Court, supra, 40 Cal.4th at p. 1092, fn. 9.)

In a concurring opinion by Justice Werdegar, she disagreed with the majority’s “nonliteral interpretation of Proposition 64 (Gen. Elec. (Nov. 2, 2004)), which forecloses a variety of representative actions the measure clearly permits. Unlike the majority, I do not believe we would frustrate the voters’ intent by enforcing the measure according to its plain language.”

Similarly, in Amalgamated Transit Union, Local 1756, AFL-CIO v. Superior Court (First Transit, Inc.), 46 Cal. 4th 993 (2009), the Court ruled that the requirement that a plaintiff be one “who has suffered injury in fact,” combined with the PAGA requirement that a labor action be initiated by an “aggrieved employee,” prevents a union from bringing a UCL action based on associational standing.

California Insurance Commissioner Steve Poizner unveiled his proposed regulations to, according to an LA Times article dated June 3, 2009, “combat the health insurance industry practice of dropping members with costly illnesses.” According to the article, Poizner’s draft regulations would require insurers to write applications for coverage in “plain English and allow applicants a ‘not sure’ answer to questions about their preexisting medical conditions.”

According to Mr. Poizner’s news release, the new regulations will (in his words) do the following:

Set clear and rigorous standards that insurers must meet before they issue a health insurance policy. Insurers must do their underwriting job before they issue the policy.
Put insurers on notice that they must prove that they have met ALL of the underwriting standards before they can consider rescission.
Put an end to lightweight sloppy underwriting if insurers want to keep the right to rescind.
Put insurers on notice that they must be 100% sure that an individual knew the answer to a health history question and failed to provide it before considering rescinding that person.
Require insurers to make sure that health insurance applications are accurate and complete.
Require insurers to ask clear and unambiguous health history questions and avoid confusing applicants.
Require agents who assist applicants with their questions to attest to the insurer regarding their assistance, at every stage of the application process.
Encourage insurers to use Personal Health Records instead of potentially confusing health history questionnaires to underwrite applicants.
Provide fair due process protections for consumers who are being investigated for possible rescission including early notice, opportunity to provide input to the insurers, and the chance to clarify their application. No hidden rescission investigations are allowed under the new rules and this encourages insurers to work with their insureds to resolve questions about the accuracy of their responses.
Require insurers to share documentation used during rescission investigations with the insured under investigation.

The notice of the regulations will be officially published by the Office of Administrative Law on Friday, June 5. According to the news release, implementation of the regulations is expected by the end of 2009, following a public hearing, public comment and regulation finalization period.

The regulations would apply to individual health coverage sold by companies licensed by the Department of Insurance. A second state regulator, the Department of Managed Health Care, said more than two years ago that it would pursue rescission regulations, but has not done so. The proposed regulations can be viewed here.

On a related note, the California State Assembly is expected to vote soon on a bill that would set a high bar on rescissions for people who purchase individual insurance of all types, regardless of who regulates it.

Several insurers who act as broker-dealers in connection with the sale of “securities” find themselves litigating in Financial Industry Regulatory Authority (“FINRA”) (formerly NASD) arbitrations when disputes arise. Sometimes, they prefer not to litigate in a FINRA forum under its rules. A very recent California Court of Appeals case discussed the types of disputes that are not subject to FINRA arbitration.

In Valentine Capital Asset Management, Inc. v. Agahi, 174 Cal. App. 4th 606 (2009), the court held that a dispute between securities’ brokers was not subject to arbitration pursuant to FINRA rules because the dispute did not relate to the brokers’ activities as members of FINRA-associated firms.

Valentine was the founder and president of Valentine Capital Asset Management, Inc. (“VCAM”) and Valentine Wealth Management, Inc. (“VWM”), neither of which was a member of FINRA.

Agahi, Luippold and Ortale worked for VCAM and VWM. When they left, Agahi formed a competing firm. Luippold and Ortale joined him at that firm and they allegedly took with them the VCAM and VWM client databases. Valentine sued Agahi, Luippold and Ortale (“defendants”) for misappropriation of trade secrets and other causes of action. Defendants moved to compel arbitration, arguing that because they were all members of FINRA, their dispute was subject to mandatory arbitration under FINRA’s arbitration clause. Valentine opposed the defendants’ motion, contending essentially that the defendants had waived their right to arbitrate and that the disputes in the litigation were not subject to FINRA arbitration.

The trial court denied the motion to compel arbitration, finding that FINRA was inapplicable because the parties’ dispute did not arise out of their business activities as FINRA members. The Court of Appeal affirmed.

The Court first explained that written arbitration provisions in interstate commercial transactions are enforceable under the FAA and that the FAA therefore applied to determine the scope of arbitration provisions in contracts with FINRA-member firms. Before engaging in activities as a registered representative for a FINRA-member firm, all registered representatives of broker-dealers, investment advisors, and securities issuers must sign a “Uniform Application for Securities Industry Registration or Transfer,” commonly referred to as Form U-4. See McManus v. CIBC World Markets Corp., 109 Cal. App. 4th 76, 88, fn. 3 (2003). Form U-4 contains an arbitration provision. By signing this form, Valentine and the defendants agreed to arbitrate every dispute required to be arbitrated under FINRA rules.

Noting that arbitration of a dispute between associated persons is required under FINRA Rule 13200 only “if the dispute arises out of the business activities of a member or an associated person . . .,” the court stated:

[T]he phrase ‘business activities of … an associated person’ must have some limitation and cannot include the activities of every possible business enterprise in which an individual, who happens to be an ‘associated person,’ might be engaged. The mandate to arbitrate disputes arising out of ‘business activities of … an associated person,’ reasonably read, must require arbitration of disputes only if they arise out of the business activities of an individual as an associated person of a FINRA member.

The court held that there was no allegation that any of the parties were acting for any FINRA-member firm or as an associated person and no relation was alleged between any FINRA-member firm and the work performed for Valentine. Further, the Court determined that none of the purported wrongdoing was alleged to have occurred in the course of the parties’ duties as associated persons with a FINRA-member firm. Instead, it allegedly occurred in connection with investment advisory firms which were not members of FINRA. The disputes thus related to Valentine and defendants, but not to their business activities as associated persons of a FINRA member.

Following the passage of Proposition 64 on November 2, 2004, in order to bring a representative claim under the unfair competition law (“UCL”), a plaintiff must meet the following standing requirements: (1) establish that he or she “has suffered injury in fact and has lost money or property as a result of such unfair competition” and (2) comply with the class action requirements as set forth in California Code of Civil Procedure Section 382. Bus. & Prof. Code §§ 17203, 17204 and 17535. After the passage of Prop 64, litigants continued to debate whether only the named plaintiff or all class members had to meet the more stringent standing requirements of injury in fact and loss of money or property as a result of the alleged conduct.

In In Re Tobacco II Cases, 46 Cal. 4th 298 (2009), the California Supreme Court resolved that debate. Specifically, the Court addressed two questions: “First, who in a UCL class action must comply with Proposition 64’s standing requirements, the class representative or all unnamed class members, in order for the class action to proceed?” and “Second, what is the causation requirement for purposes of establishing standing under the UCL and in particular what is the meaning of the phrase ‘as a result of’ in section 17204?” In response to the first question, the Court concluded that the new standing requirements of Prop 64 applied only to the named plaintiff/class representative and not to absent class members. In reaching this conclusion, the Court reasoned that “the references in section 17203 to one who wishes to pursue UCL claims on behalf of others are in the singular; that is, the ‘person’ and the ‘claimant’ who pursues such claims must meet the standing requirements of section 17204 and comply with Code of Civil Procedure section 382.” The Court concluded that these singular references must be interpreted to relate only to the individual representative plaintiff. The Court further reasoned that there was nothing in Prop 64 that indicated it was to have any affect on absent class members and the way in which class actions operate in the context of the UCL, or on the remedies available under the UCL, which did not always require actual injury to absent class members.

In response to the second question, the Court concluded that the named plaintiff/class representative must demonstrate actual reliance on the alleged deceptive or misleading representations, consistent with the element of reliance required in common law fraud actions. The Court, however, indicated that while the representative plaintiff must show that the alleged misrepresentation was “an immediate cause of the injury-producing conduct, the plaintiff need not demonstrate it was the only cause.” In other words, it is enough that the plaintiff’s reliance “played a substantial part” and was “a substantial factor, in influencing his decision.”

Finally, while the Court made clear that the new standing requirements of Prop 64 applied only to the named plaintiff/representative, the Court also noted that Prop 64 “explicitly mandates that a representative UCL action comply with Code of Civil Procedure section 382,” which requires that class representative’s claims be typical of the unnamed class members and that common questions of law and fact predominate. See Basurco v. 21^st Century Ins. Co., 108 Cal. App. 4th 110, 117 (2003).

Justice Moreno authored the opinion for a divided Court, and Justice Baxter wrote a concurring and dissenting opinion.

According to National Underwriter, Guardian Life Insurance Company of America is making it easier for employers with 2 to 9 employees to offer disability insurance benefits. It says it now will let employers in that size range provide disability insurance on a guaranteed issue basis. The guaranteed issue provision lets employers provide employees with some disability protection without them having to complete a medical exam or undergo medical underwriting.

Court of Appeal Complicates the Analysis of Mental and Nervous Disability Claims

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