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In an important decision, the Ninth Circuit Court of Appeals ruled that California’s Mental Health Parity Act (“Parity Act” ) requires that health insurers cover certain medically necessary treatment for certain mental illnesses, even if the insurance policy explicitly excludes such coverage. In Harlick v. Blue Shield of Calif., __ F.3d __ (9th Cir. August 26, 2011), the Ninth Circuit reversed the district court’s granting of Blue Shield of California’s motion of summary judgment, and held that under the Parity Act, Blue Shield was required to provide medically necessary health insurance benefits for mental illnesses on par with the treatment for physical illness covered under Harlick’s ERISA-governed health insurance plan.

The California legislature enacted the Parity Act in 1999 after finding that “[m]ost private health insurance policies provide coverage for mental illness at levels far below coverage for other physical illnesses.” 1999 Cal. Legis. Serv. ch. 534 (A.B.88), § 1 (West). The legislature further found that coverage limitations resulted in inadequate treatment of mental illnesses, causing “relapse and untold suffering” for people with treatable mental illnesses, as well as increases in homelessness, increases in crime and significant demands on the state budget. Id. Accordingly, plans that come within the scope of the Act – including the ERISA-governed plan established by Harlick’s employer – must cover all “medically necessary” treatment for nine listed mental illnesses (including anorexia nervosa), but can apply the same financial limits – such as yearly deductibles and lifetime benefits – that are applied to coverage for physical illnesses.

In March 2006, Jeanene Harlick (“Harlick”) was advised by her doctors to seek treatment for her anorexia nervosa at a residential treatment facility. After Harlick and her doctors concluded that none of the in-network treatment facilities suggested by Blue Shield could provide effective treatment, Harlick registered at Castlewood Treatment Center, a facility outside of the state and outside of Blue Shield’s treatment network. Harlick was at Castlewood, a residential treatment facility, for more than 8 months. However, Blue Shield refused to pay for Harlick’s care, because the plan specifically stated that “residential care” was not covered.

Harlick sued Blue Shield, but after the parties stipulated that Blue Shield’s decision would be reviewed under the abuse of discretion standard of review, the district court granted Blue Shield’s motion for summary judgment.

In reviewing Harlick’s case, the Ninth Circuit evaluated whether Blue Shield abused its discretion in denying Harlick’s request for coverage for her treatment at Castlewood. In ERISA cases, if there is a conflict of interest (i.e., same entity pays benefits and makes the coverage decision), than the administrator’s review and claim decision is “tempered by skepticism,” even if it is reviewed under the abuse of discretion standard. Here, while the Court did not find that Blue Shield abused its discretion in denying Harlick’s claim, it did find that Blue Shield was responsible for Harlick’s residential care, based upon the Parity Act. The Ninth Circuit stated:

Harlick’s Plan does not itself require that Blue Shield pay for residential care at Castlewood for her anorexia nervosa. However, California’s Mental Health Parity Act provides that Blue Shield “shall provide coverage for the diagnosis and medically necessary treatment” of “severe mental illness” including anorexia nervosa. Blue Shield is foreclosed from asserting that Harlick’s residential care at Castlewood was not medically necessary. We therefore conclude that Blue Shield is obligated under the Parity Act to pay for Harlick’s residential care at Castlewood, subject to the same financial terms and conditions it imposes on coverage for physical illness.

The Court then turned to the question of whether Harlick’s treatment was medically necessary. Blue Shield did not dispute that treatment at Castlewood was medically necessary until supplemental briefing filed after oral argument. Blue Shield argued that it should be allowed to reopen its administrative process in order to determine whether Harlick’s residential care was medically necessary. The Court explained an ERISA administrator’s obligations:

ERISA and its implementing regulations are undermined ‘where plan administrators have available sufficient information to assert a basis for denial of benefits, but choose to hold that basis in reserve rather than communicate it to the beneficiary.’ Mitchell v. CB Richard Ellis Long Term Disability Plan, 611 F.3d 1192, 1199 n.2 (9th Cir. 2010) (quoting Glista v. Unum Life Ins. Co. of Am., 378 F.3d 113, 129 (1st Cir. 2004)). Claimants should not be ‘sandbagged by a rationale the plan administrator adduces only after the suit has commenced.’ Mitchell, 611 F.3d at 1199 n.2 (quoting Jebian v. Hewlett-Packard Co. Employee Benefits Org. Income Prot. Plan, 349 F.3d 1098, 1104 (9th Cir. 2003)) (some internal quotation marks omitted). Just as claimants should present all of their arguments for granting the claim to the insurer during the administrative process, an insurer should tell the claimant all of its reasons for denying the claim. Cf Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995).

During the administrative process, Blue Shield never said that it was denying the claim because treatment at Castlewood was not medically necessary.

The Court therefore concluded that by not including as a reason for denial of the claim that the treatment was not medically necessary, Blue Shield waived this reason to deny the claim:

Blue Shield has discretion to determine whether treatment is medically necessary during the administrative review process. But Blue Shield had to tell Harlick the “specific reasons for the denial” – not just one reason, if there was more than one – and provide a “full and fair review” of the denial. 29 U.S.C. § 1133 (emphasis added). Blue Shield told both Harlick and her mother, as well as the DMHC, that medical necessity was not the reason for its denial of Harlick’s claim. It cannot now bring out a reason that it has “held in reserve” and commence a new round of review. See Mitchell, 611 F.3d at 1199 n.2.

Thus, even if it is expressly excluded from a plan, a California insurer is now obligated to ensure that coverage for certain medically necessary treatment for mental illness is on par with the coverage provided for necessary treatment for physical illnesses. This ruling will thus have significant application to coverage for mental illnesses, especially autism.

Recently, the Ninth Circuit Court of Appeals ruled that an ERISA administrator must make a “clear and continuing repudiation” of a claim, in compliance with its duties of proper notification under ERISA, in order for a claim to “accrue” and thus start the statute of limitations clock on filing a lawsuit. In Withrow v. Basch Halsey Stuart Shield, Inc. Salary Protection Plan, __ F.3d. __ (9th Cir. 2011), the United States Court of Appeals for the Ninth Circuit held that a telephone call and resulting voicemail message made by the administrator, which was otherwise undocumented, did not constitute proper notice to a claimant that a benefits decision constituted an irrevocable and final determination. The court explained that such a notification was deficient, and therefore cannot serve as the basis for an argument that a complaint was untimely filed.

As presented by the Ninth Circuit, the facts of Valerie Withrow’s lawsuit are fairly straightforward. In 1979, Withrow began working at Bache Halsey. In December 1996, after periodically missing work due to a variety of disabling conditions, Withrow became permanently disabled and began receiving benefits from Reliance Standard Life Insurance Company (“Reliance Standard”), the claims administrator for the Bache Halsey disability insurance plan offered to employees. In 1987, Withrow (who continues, to this day, to receive disability benefits) contacted Reliance Standard and asserted that she should be receiving $5,000 per month, the maximum allowed under the plan, rather than the $3,950 she was receiving. At that time, Reliance Standard attempted to explain to Withrow how her benefits were calculated and why $3,950 was the proper monthly benefit amount. In 1990, Withrow again contacted Reliance Standard to discuss her monthly benefit amount, but was again advised, via a message left on her answering machine, that the determination of her monthly benefit amount was correct.

For 12 years, there was no communication between Reliance Standard and Withrow, other than Withrow’s monthly receipt of her disability check. Then, in 2002, Withrow contacted a benefits manager at Bache Halsey (which by then had changed its name to Prudential Securities) to discuss her concerns that she was being underpaid. After a series of communications with Prudential Securities and Reliance Standard, including a formal denial of Withrow’s claim and her subsequent appeal, in January 2004, Reliance Standard left a message for Withrow’s attorney indicating that Reliance Standard was upholding its decision that $3,950 was the proper monthly benefit amount.

In 2006, Withrow initiated a lawsuit against the Plan, however the District Court granted the Plan’s motion to dismiss based upon a statute of limitations defense. The Ninth Circuit began its analysis by indicating that there were two issues presented by the appeal:

There are two parts to the determination of whether a claimant’s ERISA action is timely filed: we must determine first whether the action is barred by the applicable statute of limitations, and second whether the action is contractually barred by the limitations provision in the policy. See Wetzel v. Lou Ehlers Cadillac Group Long Term Disability Ins. Program, 222 F.3d 643 (9th Cir. 2000) (en banc).

First, citing to Wetzel, the Ninth Circuit explained that “district court must apply the state statute of limitations that is most analogous to an ERISA benefits recovery program,” and that in this ERISA case “California’s four-year statute of limitations for contract disputes applies.” Next, the Ninth Circuit explained that federal law governs when an ERISA cause of action accrues and triggers the start of the four-year clock. Under Wetzel, an ERISA cause of action accrues “either at the time benefits are actually denied, or when the insured has reason to know the claim as been denied.” Citing Wise v. Verizon Communications, Inc., 600 F.3d 1180, 1188 (9th Cir. 2010), the Ninth Circuit explained that the phrase “reason to know” means when the plan communicates a “clear and continuing repudiation of a claimant’s rights under a plan such that the claimant could not have reasonably believe but that his or her benefits had been finally denied.”

After finding that Withrow’s claim was “actually denied” in 2004 when her attorney was informed that Reliance Standard was standing by its original determination, the Court turned to when Withrow had a “reason to know” her claim was denied. While Reliance Standard argued, and the District Court agreed, that Withrow had a reason to know that her claim was denied in 1990, the Ninth Circuit disagreed. Specifically, the Ninth Circuit found that the events of 1990 were unclear, and Reliance Standard’s records failed to provide clear evidence of who made the call in 1990, what exactly was said and whether Withrow was provided with guidance as to how to submit her claim for review. Thus, there was insufficient evidence to support Reliance Standard’s position that it communicated a “clear and continuing repudiation” of Withrow’s claim. Accordingly, Withrow’s claim did not accrue in 1990, and her lawsuit was timely filed.

Finally, the Court turned to the issue of whether Withrow’s claim was time-barred by the plan’s internal statute of limitations period. The plan required that legal actions must be initiated with three years of “the time written proof of loss is required.” After holding that “contract limitation provisions in benefit policies still have force independent of ERISA in long-term disability cases,” the Ninth Circuit held that such provisions are “meaningless as applied to disputes over the proper calculation of the amount of monthly benefits, as opposed to disputes over whether the applicant is entitled to benefits at all.”

With this opinion, the Ninth Circuit is again informing ERISA administrators that, when informing a claimant that a claim for benefits is being denied, that message must be presented in such a manner that there can be no question that the decision is final and binding. If the administrator fails to meet this standard, it will be barred from relying on the applicable statute of limitations as a defense to any lawsuit.

In a somewhat surprising recent decision, the California Court of Appeal upheld a punitive damages award that carried a ratio of more than 16 to 1 based on the compensatory damages awarded by the jury. The ruling was surprising considering the United States Supreme Courts’ recent holding that “grossly excessive” punitive damages awards offend due process under the Fourteenth Amendment, and stating that “in practice, few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003). California courts have once again sent a clear message of willingness to uphold just punitive damages awards under appropriate circumstances, applying a balancing test as opposed to a bright line ratio approach.

The court in Bullock v. Philip Morris USA, Inc., 2011 Cal. App. LEXIS 1081 (Cal. App. 2d Dist., 2011), affirmed an award of $13.8 million in punitive damages and $850,000 in compensatory damages against cigarette manufacturer Philip Morris. The court discussed the impact of the due process limitation on punitive damages, and analyzed the award in the context of the three guideposts for determining whether a punitive damages award is excessive under State Farm: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.” Bullock v. Philip Morris USA, 2011 Cal. App. Lexis 1081, *22-23 (quoting State Farm, supra, 538 U.S. at 418.) The court also took into consideration the defendant’s financial condition, which has previously been recognized by California courts as a permissible consideration under the due process clause as necessary to further the state’s legitimate interests in punishment and deterrence. Id. at 22 (citing Simon v. San Paolo U.S. Holding Co., Inc., 35 Cal.4th 1159, 1185–1186 (2005).) After balancing the competing interests as to each factor, the court concluded that the award was justified, but cautioned slightly against use of this holding to establish a presumption of appropriateness for other cases:

We believe that the extreme reprehensibility of Philip Morris’s misconduct, including the vast scale and profitability of its course of misconduct, and its financial condition justify the $13.8 million punitive damages award against Philip Morris. Our conclusion is the same regardless of whether the ratio of 16 to one can be said to significantly exceed a single-digit ratio, so we need not decide that question. We do not mean to suggest that 16 to one would be an appropriate ratio in another case involving extreme reprehensibility or to establish any kind of presumption, but merely conclude, based on the facts in this case, that the $13.8 million punitive damages award is reasonable, not arbitrary, and does not offend due process. Id. at 58.

However, in a footnote, the court noted that “‘[T]he presumption of unconstitutionality applies only to awards exceeding the single-digit level ‘to a significant degree.’ (State Farm, supra, 538 U.S. at p. 425.)’” (Simon, supra, 35 Cal.4th at p. 1182, fn. 7.) Thus, the court sent a clear message that it did not believe that a 16 to 1 ratio exceeded the single-digit level to a significant degree, and left the door open for other California courts to allow punitive damages awards above the single-digit ratio.

Insurers often wrongfully deny policy benefits to their insureds in situations where there may be some uncertainty as to coverage. Despite an overarching duty to act reasonably and find in favor of coverage in such situations, insurers often will deny coverage and rely on their in-house medical experts’ (i.e., nurses, doctors) analysis and opinions as a basis for denial. In such situations, the insurer denies coverage at its peril.

California courts have consistently held that where there is a “genuine dispute” as to coverage, an insurer cannot be held liable for bad faith – this is known as the “genuine dispute doctrine.” However, an insurer’s reliance on the genuine dispute doctrine is often misplaced and misguided, and regularly results in substantial damages awards for plaintiffs for bad faith denial of coverage. California courts have routinely held that an insurer cannot “create” a genuine dispute to absolve itself from bad faith liability by relying on in-house experts. Instead, the courts have created an affirmative duty in such a situation to employ independent medical experts before making a coverage decision.

The recent decision of the District Court, Southern District of California in Barbour v. UNUM Life Ins. Co., 2011 U.S. Dist. LEXIS 91060 (S.D. Cal. 2011), is a primary example of how an insurer’s misuse of in-house experts and its reliance on the “genuine dispute doctrine” can result in potential bad faith liability, as well as punitive damages.

Barbour involved a disability policy issued by UNUM through a school district and covering the Principal of a school in the district. The Group Salary Protection Insurance Policy (“Policy”) at issue provided Accident and Sickness Disability Benefits for one year in the event of total disability, and after one year, the Policy provided monthly long term disability income benefits for as long as the claimant remains totally disabled or otherwise qualifies for benefits, up to age 65. The Policy defined “Total Disability” during the first two years as the inability “to perform the material duties of your own occupation.” After two years, the Policy defined “Total Disability” as the inability “to engage in any gainful occupation for which you are reasonably qualified by training, education or experience.” In February 2003, the insured submitted a claim for disability benefits based on abdominal pain that restricted her from driving, walking/standing and sitting for extended period, and UNUM began paying benefits. Over the course of several years, the insured suffered multiple further injuries relating to her initial injury, which required multiple surgeries, and which rendered her totally disabled. The insured submitted regular medical reports and updates, and UNUM continued to pay disability benefits.

In December 2007, UNUM hired an investigator to conduct surveillance on the insured to confirm the claimed disabilities. The investigator observed a “female subject believed to be the insured” who was moving without the physical limitations represented to UNUM by the insured and her doctors. The investigator’s report and video raised suspicion within UNUM regarding the insured’s disability, and resulted in UNUM conducting further surveillance. UNUM investigators made a field visit in October 2008, and again conducted surveillance in January 2009. In February 2009, UNUM’s in-house doctor/consultant reviewed the file and prepared a report which concluded that the insured’s claimed disability was inconsistent with her findings. Then, in March 2009, UNUM’s “Designated Medical Officer” reviewed the file and determined that there were three occupations that the insured was capable of performing, notwithstanding her disability. UNUM thereafter revoked the insured’s disability benefits effective March 31, 2009, and advised her that she had the right to file a civil action under the section 502(a) ERISA statute. Unsurprisingly, the insured hired an attorney.

The insured’s attorney sent a letter to UNUM advising that UNUM’s determination that the claim was governed by ERISA was erroneous. The attorney also provided a letter from the insured’s doctor stating that the person observed during surveillance in December 2007 was not the insured. UNUM was also provided a functional capacity evaluation by the insured’s physical therapist that concluded that the insured’s “physical limitations presented a barrier to work.” This information was reviewed by UNUM’s in-house medical experts. On October 6, 2009, UNUM sent a letter agreeing with the insured’s position as to ERISA, but stating that the new medical information did not change UNUM’s decision to deny benefits.

UNUM filed a motion for summary judgment to dismiss the insured’s claims for breach of the implied covenant of good faith and fair dealing (bad faith), intentional infliction of emotional distress and punitive damages. To defeat the bad faith claim, UNUM relied on the “genuine dispute doctrine.” In rendering its ruling, the court noted that the overarching issue in a bad faith claim is whether the insurer’s claims-handling conduct was reasonable. Amadeo v. Principal Mut. Life Ins. Co., 290 F.3d 1152, 1161 (9th Cir. 2002). The court then explained the applicability of the genuine dispute doctrine:

“The genuine issue rule in the context of bad faith claims allows a district court to grant summary judgment when it is undisputed or indisputable that the basis for the insurer’s denial of benefits was reasonable–for example, where even under the plaintiff’s version of the facts there is a genuine issue as to the insurer’s liability under California law. In such a case, because a bad faith claim can succeed only if the insurer’s conduct was unreasonable, the insurer is entitled to judgment as a matter of law.” Amadeo, 290 F.3d at 1161-62 (citation omitted). “On the other hand, an insurer is not entitled to judgment as a matter of law where, viewing the facts in the light most favorable to the plaintiff, a jury could conclude that the insurer acted unreasonably.” Id. at 1162 (citation omitted)(emphasis added).

The court held that a reasonable jury could conclude that UNUM acted unreasonably when it was informed that the evidence UNUM relied upon to deny the insured’s claim was wrong (i.e., the surveillance was of someone other than the insured). The court further determined that there was no evidence that UNUM’s experts evaluated the evidence with an eye towards favoring the insured and in a manner which would indicate that she was indeed disabled as she and her doctors asserted. The court relied upon the facts as viewed “in the light most favorable to Plaintiff” to determine that a jury could conclude that UNUM acted unreasonably, and thus in bad faith when it denied the insured’s claim. The court therefore denied UNUM’s motion for summary judgment.

The court also discussed UNUM’s initial erroneous determination that the claim was governed by ERISA, and held that it created evidence of insurer bias, which could also indicate and support a claim for bad faith. Hangarter v. Provident Life & Acc. Ins. Co., 373 F.3d 998, 1010 (9th Cir. 2004) (citing Chateau Chamberay Homeowners Ass’n v. Associated Int’l Ins. Co., 90 Cal. App. 4th 335, 348 (2001)).

The court placed a premium on UNUM’s apparent failure to reasonably and thoroughly investigate the insured’s claim. In particular, the court found that UNUM’s failure to seek an independent medical examination of the insured supported her claim that UNUM acted unreasonably. In so finding, the court discussed a line of cases which suggest that an insurer’s sole reliance on its own in-house experts, and its failure to obtain an independent medical examination, is clear evidence that an insurer has acted unreasonably.

Based on these findings, the court held that the insured’s claims for intentional infliction of emotional distress and for punitive damages were equally as viable based on UNUM’s potentially unreasonable conduct in evaluating the insured’s claim.

With this decision, the court made it very clear that an insurer cannot escape liability for bad faith by relying on its own in-house experts and ignoring evidence presented by an insured which, when viewed in favor of the insured, would indicate coverage should be afforded. An insurer cannot create a “genuine dispute” as to coverage on which it can deny an insured’s claim simply by relying on its own in-house experts. An insurer who does so, does so at its own peril, and opens itself up to claims for bad faith and punitive damages.

According to a recent California appellate court decision, a contractor’s negligent release of asbestos fibers during the removal of asbestos-containing acoustical spray in a condominium complex is excluded by the pollution exclusion in a homeowner association’s property and liability policy, despite a 2003 California Supreme Court ruling that a contractor’s negligent spraying of pesticide in an apartment complex is not excluded by a similar pollution exclusion in an apartment owner’s policy. The Villa Los Alamos Homeowners Association v. State Farm General Insurance Company, __ Cal. App. 4th __, 2011 WL 3586475 (August 17, 2011). How can that be?

Facts

In 2006 the Villa Los Alamos Homeowners Association (HOA) contracted to have spray-applied acoustical (“popcorn”) ceiling texture in common area ceilings and stairways scraped and removed. During the removal, asbestos fibers were released into the air, common areas, individual units and public areas outside the building. The Bay Area Air Quality Management District (District) cited the contractor and ordered the HOA to clean up the asbestos fibers. The HOA submitted a first party claim to State Farm, its insurance carrier, for approximately $650,000 in cleanup costs. The HOA also sued the contractor. The contractor then cross-complained against the HOA and its management company. The HOA tendered its defense to State Farm.

A pollution exclusion in the first party coverage section of the policy excluded coverage for any loss caused by the “presence, release, discharge or dispersal of pollutants,” while the exclusion pertinent to third party claims removes coverage for injuries arising out of “discharge, seepage, migration, dispersal, spill, release or escape of pollutants.” State Farm denied coverage for both the first party and third party claims, citing the pollution exclusion and faulty workmanship exclusions in the policy.

The HOA sued State Farm for breach of contract, bad faith and declaratory relief. The trial court granted summary adjudication in favor of State Farm on the first party claims based on the pollution exclusion. The HOA dismissed its third party claims, and appealed.

Discussion

In MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635 (2003), the California Supreme Court found that the standard pollution exclusion clause in a comprehensive general liability policy was intended to exclude coverage for injuries resulting from events commonly regarded as “environmental pollution.” The Court rejected a broader, literal interpretation of the clause that would foreclose coverage for any and all injuries arising from harmful substances. So, the Court held that it was unlikely that a reasonable policyholder would think that the activity in question there—namely, the ordinary but negligent spraying of pesticides around an apartment building in order to kill yellow jackets—was an act of pollution.

The HOA argued that MacKinnon applied here, and that the pollution exclusion in the State Farm policy did not cover a single, negligent, localized asbestos release. After reviewing MacKinnon and its progeny, the Villa Los Alamos court agreed that the general principles announced in MacKinnon concerning the pollution exclusion also pertain in the context of a coverage dispute over first party property insurance claims based on analogous pollution exclusion—despite the well-recognized analytical differences between first party property and third party liability policies. But the Villa Los Alamos court otherwise rejected the HOA’s application of MacKinnon to the facts at hand.

Reading the State Farm pollution exclusion in accord with MacKinnon as pertaining to environmental pollution, the Villa Los Alamos court asked this question: Did the accidental release and airborne dissemination of asbestos fibers in this case amount to what is commonly regarded as “environmental” pollution? The court concluded that asbestos is a pollutant as a matter of law, and that it was “released” into the air and areas around the popcorn ceiling texture during the contractor’s scraping and removal. Emphasizing factual differences between a homeowner being able to buy and apply pesticides in a residential setting, and the removal of asbestos containing building materials being highly regulated by a myriad county, state and federal laws, the court rejected the HOA’s analogy of the asbestos removal to a single, ordinary act of negligence. In short, the Villa Los Alamos court concluded that the ordinary layperson would understand the release of asbestos fibers under these circumstances to be “environmental pollution.” Citing American Casualty Co. of Reading, PA. v. Miller, 159 Cal. App. 4th 501, 515-516 (2008), the court explained that

the key point under a MacKinnon analysis is whether the act in question is commonly thought of as environmental pollution. Thus, even if the accident consisted of a one-time negligent release of methylene chloride [as in Miller], the pollution exclusion would preclude coverage because permitting the chemical to be released into a public sewer was an act of environmental pollution. (Ibid.) Miller is persuasive. To establish bright-line rules as to what constitutes “environmental pollution” makes no sense: A one-time event can be a polluting event if it creates “‘impurity, something objectionable and unwanted.’” (MacKinnon, supra, 31 Cal. 4th at p. 654.) To reiterate: The release of asbestos from a product into the air people breathe constitutes a health hazard for which no level of exposure is safe. The work here apparently occurred over several days and resulted in the sufficient release of asbestos fibers into the air to contaminate the building complex and the adjacent outside areas, constituting environmental pollution.

Lesson Learned

There is no “bright-line” rule for when an ordinary layperson will consider a “release” of harmful substances in or around a residential structure to be “environmental pollution” rather than an “ordinary act of negligence.” One can imagine the Villa Los Alamos court just as easily analogizing the release of asbestos fibers from asbestos-containing building materials in a residential building to be an “ordinary act of negligence” on par with pesticide contamination a la MacKinnon rather than “environmental pollution” a la Miller. The clever insurance coverage attorney will start framing and controlling the analogy early on.

California Insurance Commissioner Dave Jones recently announced that the California Department of Insurance is investigating whether Blue Shield of California Life and Health Insurance Company (“Blue Shield”) failed to comply with the California Mental Health Parity Act. Specifically, Blue Shield is required to respond to an Order to Show Cause regarding its handling of claims for treatment of autism.

During a recent hearing before the California Senate Select Committee on Autism, Department of Insurance representatives testified that Applied Behavior Analysis (“ABA”) therapy must be covered by California health insurers. While ABA therapy is proven to improve the lives of children with autism, the Department of Insurance charges that Blue Shield violated the California Mental Health Parity Act by:

Denying coverage on the ground that ABA isn’t “medically necessary”
Denying coverage on the ground that ABA is “experimental”
Denying coverage on the ground it is available only for services performed by a licensed provider and ABA providers are not licensed
Denying coverage on the ground that ABA is not a “health care service,” but instead is a service for “learning disabilities or behavioral problems or social skills training/therapy”
Not including ABA providers in its network
Refusing to provide insureds with definitive denials of coverage within 30 days of receiving a claim, thereby preventing insureds from invoking IMR [independent medical reviews]

The Department of Insurance’s investigation of Blue Shield began after the parents of two autistic children sought the Department’s assistance after Blue Shield denied coverage for ABA therapy, despite a finding following an independent medical review that the therapy was medically necessary. The Department of Insurance explained that its Order to Blue Shield was necessary to “ensure that insurance companies are in full compliance with California’s mental health parity law.”

Ninth Circuit Rules that California’s Mental Parity Act Requires Health Insurers to Pay for Certain “Medically Necessary” Treatment for Mental Illnesses

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