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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.

Arthur Fries, an independent disability consultant and an expert I have known for many years, has written an article entitled “Calling In a Disability Expert” which appeared on November 16, 2009 in the National Underwriter. Insurance consumers and consumer attorneys should review this article. He posits that insurance consumers should hire consultants and/or attorneys with expertise in the disability insurance field. He explains that this is because disability claims are increasingly complex and insurance consumers cannot go it alone in the “David vs. Goliath” scenarios that typically play out between insureds and insurers. Here are some snippets:

[T]here are issues related to how your clients conduct themselves in communicating their disability to their physician, how to handle a field claims representative and how to conduct themselves should the insurer request an I.M.E. (independent medical evaluation) or F.C.E. (functional capacity evaluation).
Your client may think he has a residual (partial) claim from an emotional standpoint but in reality has a total disability claim from a contractual standpoint. There are issues related to objective symptoms vs. subjective symptoms. As an example, the claimant told the physician he felt nauseous. That’s subjective. If he then “threw up” in front of the physician that would be objective! Some claims may lean very strongly toward subjective symptoms yet be quite disabling in terms of doing the material duties of the job.
How would your client handle a request by the insurance company that he see a rehabilitation specialist when the contract provides a “your occupation” definition?
In past years, disability claim forms asked limited questions and insurance companies paid claims in a rather routine fashion. Because of mounting losses, many insurance carriers have made major adjustments in their claim departments. In addition, they utilize the services of C.P.A.s, psychiatrists, physicians with specific backgrounds, field investigators, video surveillance and other investigative agencies to analyze the claim to a finite degree.
Today, many claims are being denied because “going it alone” leaves the policyholder (claimant) at a serious disadvantage. Although you may think you, as a producer, know a lot about disability insurance, you may not be equipped to provide advice in terms of the knowledge and effort required on your part.
If your client has his claim terminated and it appears the claim is justified…what are his options? Should he remain in the corner with his thumb in his mouth in the fetal position or should he have available the services of a disability claim consultant? Should he seek the services of an attorney? Why or why not? Since we are often talking about a potential payout in the millions of dollars, shouldn’t your client have available a person to protect that money well? Do you want your client to collect on a fraudulent claim? Obviously, the answer is no. Insurers have every right to investigate a claim. But do they have the right to intimidate your client? Do they have the right to continuously ask for more information to the point where your client feels like a dog running around in circles chasing its “tail?”
The days of your client completing one or two pieces of paper are long gone. A half dozen or more forms may be required and an inadvertent or improper response by your client, his attending physician or employer can prejudice your client’s rights with a denial being the result.
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Although “Goliath” might outweigh you or your client, a smart approach and strategy can bring “Goliath” to his knees. There is a war out there as it relates to a disability claim. If you believe the saying “I’m from the IRS and I’m here to help you,” you’ll believe the disability carrier has your client’s best interest at heart!

2009 was an important year for insurance legislation in California. An excellent review of this legislation was posted on December 4, 2009 by the Barger & Wolen LLP legal blog (quoted verbatim from the blog) as follows: “LIFE, HEALTH AND DISABILITY INSURANCE”

1. AB 23: Cal-COBRA Premium Assistance

Establishes notice requirements that must be provided to eligible qualified beneficiaries regarding the availability of premium assistance under the American Recovery and Reinvestment Act of 2009 (ARRA).
Qualified beneficiaries eligible for federal assistance may elect coverage under Cal-COBRA, and those enrolled in Cal-COBRA as of February 17, 2009 may request the federal premium assistance.

2. AB 76: Life and Annuity Consumer Protection Fund

Extends the provision creating the Life and Annuity Consumer Protection Fund to January 1, 2015.
Requires the California Insurance Commissioner (“Commissioner”) to publish an annual report on its Web site detailing certain protections for consumers of insurance products.

3. AB 108: Individual Health Care Coverage

Prohibits, except as specified, rescission, canceling, limiting the provisions, or raising premiums of a contract or policy due to omission, misrepresentation, or inaccuracy in the application after 24 months following issuance of the same.

4. AB 119: Pricing of Health Care Coverage

Prohibits premium, price or charge differentials based on the gender of specified individuals, commencing January 1, 2011.

5. AB 381: Unemployment Compensation Disability Benefits

Permits a community college district to elect to become an employer, subject to specified requirements pertaining to disability compensation.

6. AB 389: Long-Term Care Insurance

For long-term care insurance policies issued before new premium rate schedules are approved and for which rate revisions are filed on or after January 1, 2010, changes the calculation for determining what benefits are deemed “reasonable” in relation to premiums.
Permits the Commissioner to approve a rate revision based on less than a certain loss ratio in order to protect the financial condition of the insurer.
Revises the required qualifications of actuaries used by the Commissioner to review rate applications relative to long-term care insurance.

7. AB 1541: Health Care Coverage (Late Enrollment)

An individual, or dependent, who has lost or will lose Healthy Families Program coverage, Access for Infants and Mothers Program coverage, or Medi-Cal program coverage can requests enrollment within 60 days (changed from 30 days) after termination of that coverage without being considered a “late enrollee.”

8. AB 1543: Medicare Supplement Coverage[1]

Adopts changes and provisions as required by the federal Medicare Improvements for Patients and Providers Act and Genetic Information Nondiscrimination Act.
Adopts other amendments relating to open enrollment and guaranteed-issue.

LIFE SETTLEMENTS

SB 98 defines when certain trusts and special interest entities do not have an insurance interest in a life insurance policy. It also establishes a number of new provisions to regulate viatical and life settlements. It adds two new license classifications for “Life Settlement Provider” and “Life Settlement Broker.”

PROPERTY AND CASUALTY INSURANCE 1. AB 63: Service Contract, Retailers

Requires retailers of service contracts to maintain certain information about a contract that is in effect and provide such information or a copy of the contract to the contract purchaser or beneficiary upon request.
Does not apply to vehicle service contracts.

2. AB 601: Motor Vehicle Insurance, Special Assessments

Extends until January 1, 2015, the special assessment imposed on insurers, which is charged per motor vehicle insured.

3. AB 1179: Motor Vehicle Insurance, Damage Assessments

Requires that additional information regarding right to independent estimate be included in the Auto Body Repair Consumer Bill of Rights.

4. AB 1200: Motor Vehicle Insurance, Direct Repair Programs

Provides that insurers may (notwithstanding prohibition against requiring use of specific auto repair shop) provide truthful and nondeceptive information regarding the services and benefits available to the claimant.

5. SB 291: Mortgage Guaranty Insurance Reserves

Amends definition of “face amount of an insured mortgage” for purposes of determining surplus requirements.
Requires notice to Commissioner before insurer falls below surplus threshold and creates ability to seek waiver of requirement.

MISCELLANEOUS 1. AB 299: Insurance Omnibus Among other things, the bill:

Requires the California Department of Insurance to remove from, or clarify on, its Web site any pleading, order or document relating to an enforcement action that has been withdrawn.
Requires the Commissioner to consider additional criteria when examining the business and affairs of the insurer.
Allows the Commissioner to disclose market analysis data to any state or country insurance department, law enforcement officials, federal agency or NAIC.
All analyses pursuant to authorized examinations are at the expense of the insurer.
Requires insurer annual audits to be conducted in conformity with “standards adopted by the [NAIC],” and allows the Commissioner to grant multiple 30-day extensions to the audit due date.
Permits domestic insurers to invest in credit unions.
Prohibits excess fund investments in a loan or any other obligation to any one borrower or obligor as specified.
Requires insurers to provide to the Commissioner advance notice of the intent to enter into a tax sharing agreement.
Requires auto liability policy to provide for replacement of a child seat, as defined, that was damaged in a covered accident.

2. AB 328: Electronic Transactions

Deletes the exclusion of certain insurance statutes from applicability of Civil Code provisions permitting parties to conduct transactions by electronic means.
With respect to certain automobile insurance transactions, prohibits electronic delivery of certain documents unless the transaction commenced electronically.
Permits required notices related to certain types of insurance to be made electronically with consent of the parties, and imposes certain system and records requirements on the insurer related to the same.
Permits an insurer to pay claims with electronic fund transfer, with the consent of the insured.

3. AB 409: California Insurance Guarantee Association

Provides that the initial premium charge shall be adjusted by applying the same rate of premium charge as initially used to each insurer’s written premium as shown on the annual statement for the 2nd year following the year on which the initial premium charge “was based” (change from “is made”).

4. AB 470: Insurance Information Confidentiality

Authorizes the disclosure of information from an accident report, supplemental report, or investigative report to an insured’s lawyer if the insured is otherwise entitled to obtain the report.

5. AB 800: Insurance Producer Omnibus Makes a number of changes with respect to producer licensing, including that it:

Deletes pre-licensing education requirement for resident applicants with current nonresident licenses.
For persons licensed in 2010 or after, eliminates certain exemptions from education requirement.
Permits licensed California nonresident business entity producers to use licensed California resident individual producers to transact insurance.”

[1] AB 1543 was enacted as an urgency statute. As such, it became effective when it was chaptered on July 2, 2009.

The California Supreme Court has embraced the principle suggested by the U.S. Supreme Court that a ratio of punitive damages to compensatory damages of one-to-one is the federal constitutional maximum where there is relatively low reprehensibility and the compensatory damages award is substantial.

In Roby v. McKesson Corporation, plaintiff Charlene Roby filed alleged a wrongful termination and harassment action against McKesson and her supervisor Schoener claiming she was fired because of a medical condition and a related disability. The jury found in favor of Roby on all causes of action and awarded compensatory damages of $3,511,000 against McKesson and $500,000 against the supervisor, Schoener. The jury also awarded punitive damages: $15,000,000 against McKesson and $3,000 against Schoener. The trial court reduced the compensatory damages against McKesson to $2,805,000 because some of the damage awards overlapped.

The California Court of Appeal reduced the compensatory damages award to $1.4 million, finding there was insufficient evidence for a harassment verdict against McKesson and that the $15 million punitive damages award was excessive under the federal due process clause. The Court of Appeal determined that the maximum permissible punitive damages award, based on the facts of the case and size of the compensatory damages award, was $2 million, or 1.4 times the amount of the compensatory damages award.

The California Supreme Court decided two important issues: whether personnel actions undertaken by a supervisor can be used as evidence of harassment and whether the punitive damages award against McKesson was excessive. As to the first issue, the Supreme Court reversed the Court of Appeal holding that there was insufficient evidence of Roby’s harassment claim. Rather, the Supreme Court held that biased personnel actions can be used as evidence of harassment because they can contribute to harassment by communicating hostility and evidence the discriminatory animus of the person taking the personnel action. These actions included demeaning comments about her body odor, arm sores, and the demeaning manner in which her supervisor acted towards her, including refusing to respond to greetings, failing to give gifts and other less favorable treatment. The Court found that none of these events was fairly characterized as official employment actions or personnel actions, and thus, could not be conduct that fell within the supervisor’s business and management duties. Thus, it reinstated the jury’s verdict finding for Roby on the discrimination claim. The Court also found there was sufficient evidence for the jury to infer the supervisor discriminated against Roby based on her medical condition, and that the constant hostility was also based on medical conditions, constituting harassment and in violation of applicable laws.

As to the punitive damage award, the Supreme Court found that McKesson’s implementation of its attendance policy was not an act with intentional but “managerial malfeasance.” Thus, although punitive damages were appropriate in that Roby was financially vulnerable, the conduct affected her physical and mental well being and McKesson’s conduct showed a reckless disregard for the health and safety of others, it reduced the punitive damage award to the amount of the compensatory damages, $1,905,000.

The California Supreme Court reversed, holding that there was sufficient evidence to support the harassment verdict and affirming $1.9 million in compensatory damages. However, although the Supreme Court agreed that the award of $15 million in punitive damages was excessive, it relied on U.S. Supreme Court precedent to determine that the ratio of punitive damages to compensatory damages could not exceed one-to-one. In reaching its decision, the California Supreme Court based its determination on an analysis of the five “reprehensibility factors” articulated by the U.S. Supreme Court in State Farm Mut. Auto Ins. Co. v. Campbell, 538 US 408 (2003): (1) the harm caused was physical as opposed to economic, (2) the defendant’s indifference to or reckless disregard of the health or safety of others, (3) the plaintiff’s financial vulnerability, (4) the defendant’s conduct involved repeated actions or an isolated incident, and (5) the harm was the result of intentional malice, trickery or deceit. The Court found that only the first three factors were present, and that the defendant’s conduct “was at the low end of the range of wrongdoing.”

With respect to the first of these reprehensibility factors, the Court explained that the harm to Roby was “physical” in the sense that it affected her emotional and mental health, rather than being a purely economic harm. With respect to the second reprehensibility factor, the Court determined that it was objectively reasonable to assume that employer McKesson‟s acts of discrimination and harassment toward Roby would affect her emotional well being, and therefore McKesson‟s “conduct evinced an indifference to or a reckless disregard of the health or safety of others.” The third reprehensibility factor was likewise present: Roby was a relatively low-level employee who quickly depleted her savings and lost her medical insurance as a result of her termination, and therefore it appears that she “had financial vulnerability.”

With respect to the fourth reprehensibility factor of the State Farm test, however, the Court found it was not present. Schoener‟s wrongful conduct was repeated, as she subjected Roby to a series of discriminatory disciplinary actions and harassed Roby on an almost daily basis, but there was no indication of repeated wrongdoing by McKesson, as discussed below.

Concerning the discrimination claim, McKesson’s wrongdoing was limited to its one-time decision to adopt a strict attendance policy that, in requiring 24-hour advance notice before an absence, did not reasonably accommodate employees who had disabilities or medical conditions that might require several unexpected absences in close succession. The Court stated that McKesson’s act of discharging Roby (including the perfunctory investigation that accompanied it) was simply an application of this attendance policy. Although te jury found that McKesson’s adoption of this flawed attendance policy constituted “oppression” or “malice,” justifying an award of punitive damages under Civil Code section 3294(a), nevertheless, McKesson’s adoption of this attendance policy was a single corporate decision.

The significance of this opinion lies partly in the fact that the California Supreme Court has issued so few opinions on punitive damages in recent years. But the primary significance seems to be that the court has put the final nail in the coffin of the argument that the portion of State Farm calling for a one-to-one ratio limit is mere dicta that should does not apply in California. However, where the reprehensibility factor is considerably more egregious than was present in this case, it would appear that single digit punitive damages well above the one-to-one ratio could be mandated.

Recently, in Montour v. Harford Life & Accident, 582 F.3d 933 (9th Cir. 2009), the Ninth Circuit Court of Appeals, in one of its most important cases, adopted a new standard of reviewing ERISA abuse of discretion cases where the insurer has a conflict of interest. The court held that a “modicum of evidence in the record supporting the administrator’s decision will not alone suffice in the face of such a conflict, since this more traditional application of the abuse of discretion standard allowed no room for weighing the extent to which the administrator’s decision may have been motivated by improper considerations.” Further, the court in Montour explained that a reviewing court must also take into account the administrator’s conflict of interest as a factor in the abuse of discretion analysis. This was significant because the appeals court gave a comprehensive description of the “signs of bias” it found were exhibited by Hartford 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.’”

Sacks v. Standard Ins. Co., __ F. Supp. 2d __, 2009 WL 4307558 (C.D. Cal. 2009) is one of the first cases to address the abuse of discretion standard of review since the Ninth Circuit’s important decision in Montour. In Sacks, the claimant was a mortgage underwriter for Countrywide Home Loans. Standard Insurance Company (“Standard”) was the claims administrator and insurer for the Countrywide Home Loans Long Term Disability Plan (the “Plan”). After her claim for long-term disability benefits was denied, the claimant sued Standard Insurance in federal courts for benefits under the ERISA.

The court recognized that the Plan granted Standard with discretionary authority. However, since Standard provided the funds and made the decision concerning benefits, it operated under a structural conflict of interest. At issue was how to apply the standard of review in light of the conflict of interest and the recent Ninth Circuit opinion in Montour. Here, the court recognized that the “abuse of discretion” standard of review does not change just because there is a conflict of interest. Instead, the factual circumstances surrounding the conflict of interest is a factor providing weight in the overall analysis of whether an abuse of discretion occurred. As a result, the court in Sacks gave greater weight to the conflict of interest for a variety of reasons including because Standard used an erroneous occupation criteria to evaluate Plaintiff’s claim, failed to consider the effects of the claimant’s medication on her ability to perform her own occupation, and failed to adequately investigate the claim. In addition, the court highlighted the fact that Standard failed to conduct follow-up testing as recommended by the IME physician and instead merely accepted the part of the physician’s conclusion that supported its claims decision. These actions, the court found, warranted greater skepticism of Standard’s claims decision. Accordingly, the court found that Standard had abused its discretion and reversed the claim decision by awarding the plaintiff benefits.

Expect to see more district courts to focus 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 more 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.

California Supreme Court Holds that Only the Class Representative Needs to Meet the Standing Requirements of Proposition 64 to Pursue a Representative Action

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