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ERISA requires that an administrator provide a claimant with a “full and fair” review of a denial decision. In a recent ruling entitled Salomaa v. Honda Long Term Disability Plan, __ F.3d __, 2011 U.S. App. LEXIS 4386 (9th Cir. Cal. Mar. 7, 2011) the Ninth Circuit Court of Appeals imposed a new requirement that an insurer must meet in order to conduct a full and fair review. Specifically, an administrator must provide a claimant with copies of the internal medical reports it generated and relied upon when making the decision when it denies a claim. The Ninth Circuit held that the failure to provide the claimant with copies of the medical reports, and also to sufficiently explain what additional information might be needed to support the claimant’s claim for benefits, constituted a violation of ERISA’s full and fair review requirement.

Samuel Salomaa was an employee of the American Honda Motor Company, Inc. for more than twenty years. His supervisor described him as “the best employee to have worked for me” and Salomaa never called in sick, never left work early and never came in late. Unfortunately, in October 2003 Salomaa developed what he thought was the stomach flu. However, this “flu” was followed by grossly excessive fatigue, headaches, insomnia and excessive sensitivity to stimuli.

Before his illness, Salomaa used to jog the two miles to and from work. However, because getting up and getting dressed for work often left Salomaa too exhausted to even drive to work, he began to stay home. When he did make it to work, his severe fatigue rendered him only able to “do paperwork for a few minutes.” Salomaa underwent a battery of tests and examinations at Kaiser Permanente and was eventually diagnosed with Chronic Fatigue Syndrome (“CFS”).

Because he was no longer able to perform his job duties, Salomaa filed a claim for disability benefits with Life Insurance Company of North America, which is a wholly owned subsidiary of CIGNA. Salomaa made his claim though the ERISA-governed disability insurance plan offered by his employer. However, his claim for benefits was denied after CIGNA concluded that because his “thyroid, calcium, albumin, serum electrolytes, and CBC results were normal,” his medical records contained “no positive objective physical findings” supporting disability.

With their decision, CIGNA ignored the explanation by Salomaa’s physicians that for those suffering from CFS “laboratory tests are always normal and there is no test that is available at the present time for chronic fatigue syndrome.” CIGNA’s decision to ignore this explanation was especially egregious given that both the Center for Disease Control and CIGNA’s own health care guidelines explain that there are no specific diagnostic studies specific to the diagnosis of CFS and that chronic fatigue syndrome is diagnosed by excluding other underlying diseases.

After CIGNA denied his claim for disability benefits, Salomaa filed a lawsuit. In reviewing CIGNA’s decision, the Ninth Circuit noted that because CIGNA both administers the insurance plan and pays benefits out of its own pocket it is operating under a conflict of interest and “has a financial incentive to cheat” Salomaa and other claimants.

While the district court upheld the CIGNA’s claim decision, the Ninth Circuit ruled that CIGNA’s decision was “illogical, implausible and without support.” In holding that CIGNA abused its discretion, the Ninth Circuit noted that every doctor who personally examined Salomaa determined that he was disabled and that CIGNA unreasonably demanded objective tests to prove the existence of a condition for which there are no objective tests.

The Ninth Circuit also determined that CIGNA failed to provide Salomaa with a full and fair review of his claim. Specifically, while CIGNA’s internal physicians concluded (without examining Salomaa) that he was not disabled, CIGNA did not “give Salomaa and his attorney and physician access to the two medical reports of its own physician upon which it relied.” The Court also criticized CIGNA for telling Salomaa that he should provide “x-rays, CT, MRI reports, etc. that support your physician’s assessment,” but failing to tell him exactly what tests it wanted. Indeed, the Ninth Circuit classified this request as “absurd” since CIGNA was well aware that x-rays, computerized tomography and magnetic resonance imaging are not used to diagnose CFS. The court explained:

The plan evidently based its denial in large part on review of Salomaa’s file by two physicians, one for the first denial, another for the final denial. They both wrote their appraisals for the plan administrator. Yet the plan failed to furnish their letters to Salomaa or his lawyer. The regulation, quoted above, requires an ERISA plan to furnish “all documents, records, and other information relevant for benefits to the claimant.” A physician’s evaluation provided to the plan administrator falls squarely within this disclosure requirement. The disclosure requirement serves the purpose of facilitating what the regulation also requires, providing claimants “the opportunity to submit written comments, documents, records, and other information relating to the claim for benefits.” Had the plan met its duty of providing copies of its physicians’ evaluations, then Salomaa’s treating physicians could have provided such comments and performed such additional examinations and tests as might be appropriate. By denying Salomaa the disclosure and fair opportunity for comment, the plan denied him the statutory obligation of a fair review procedure.

As stated by the Salomaa court, in order to “conform to the claim procedure required by statute and regulation,” a plan administrator is required to “explain, upon denial, any additional ‘information needed’” to support a claim for benefits. The Salomaa court concluded:

The administrator’s procedural violations are similar to those in Saffon v. Wells Fargo & Company Long Term Disability Plan and Boonton v. Lockheed Medical Benefit Plan. There, as here, the administrator did not provide material sufficient to meet the requirement of “meaningful dialogue.” We held in those cases, where the denials were based on absence of some sort of medical evidence or explanation, that the administrator was obligated to say in plain language what additional evidence it needed and what questions it needed answered in time so that the additional material could be provided. An administrator does not do its duty under the statute and regulations by saying merely “we are not persuaded” or “your evidence is insufficient.” Nor does it do its duty by elaborating upon its negative answer with meaningless medical mumbo jumbo. In this case, the skeptical look required by us in a case of a conflicted administrator requires us to conclude that the administrator acted arbitrarily and capriciously, both procedurally and substantively, thereby abusing its discretion in the denial of Salomaa’s claim.

Finally, the Ninth Circuit criticized CIGNA for failing to consider Salomaa’s Social Security disability award and for shifting the reason for its denial decision after Salomaa and his physician’s refuted CIGNA’s initial denial decision.

After concluding that CIGNA abused its discretion, the Ninth Circuit remanded the case to the district court with instructions that Salomaa be awarded the disability benefits he initially sought.

Plan participants will certainly want to use this decision as a key component of their arguments that plan administrators/insurers did not give them a full and fair review.

Every now and then a court decision comes along that is a virtual one-stop shop for basic insurance coverage and bad faith principles—a primer for newbie insurance attorneys and a refresher for seasoned litigators. Chief Judge Anthony Ishii’s recent decision granting in part and denying in part an insurer’s motion for summary judgment on a farm-owners insurance policy is one. Ted Gaylord, et al. v. Nationwide Mutual Insurance Company, et al., 2011 U.S. Dist. LEXIS 21736 (Eastern District of California, March 4, 2011). The Gaylord decision also sounds a cautionary note to policyholder attorneys to be mindful that first-party and third-party claims in a single action may be subject to different limitations periods.

The Facts

Gaylord owns and operates a livestock operation, raising his own cattle and raising cattle for others. In June 2008 some of the cattle die suddenly. By September and October 2008 cattle begin dying at an alarming rate. Gaylord suspects feed poisoning. Autopsies and feed testing confirm that the cattle are dying from liver failure caused by toxic plants in the alfalfa feed. There is no known cure, so Gaylord gets permission from the Department of Agriculture to sell the cattle off for early slaughter—but at a financial loss for Gaylord and the other cattle owners.

Nationwide issued a farm-owners insurance policy to Gaylord in March 2008. One part insures against physical loss to covered property (first-party); one part insures against third-party liability claims. Gaylord says he moved his farm-owners insurance from Fireman’s Fund to Nationwide because his long-trusted insurance agent told him that Nationwide had better coverage, including coverage for cattle loss from poisoned feed. But Gaylord’s agent says he told Gaylord that a “custom feeding of livestock” endorsement was necessary to cover cattle loss from poisoned feed, and that Gaylord declined it because it was too expensive.

Gaylord makes a first-party claim with Nationwide for the cattle loss on October 2, 2008. Nationwide denies the first-party claim on October 3, 2008, and advises Gaylord that he has until May 21, 2009, to file a legal action under the one-year contractual limitations clause. It isn’t clear how Nationwide comes up with the May 2009 deadline. Nationwide continues to investigate the third-party claim, and denies it in April 2009.

A third-party sues Gaylord in September 2009 for the loss of its cattle in Gaylord’s care. Gaylord tenders his defense to Nationwide in October 2009. Nationwide seeks the advice of coverage counsel, and denies the tender in January 2010. Gaylord sues Nationwide in March 2010 for breach of contract, bad faith and declaratory relief on both his first-party and third-party claims. Nationwide moves for summary judgment.

FRCP 56(c) Summary Judgment Standards

All too often attorneys moving for summary judgment cut and paste points and authorities from older cases, parroting the standards for summary judgment under FRCP 56(c) in archaic and stilted prose. Judge Ishii articulates the standards in clean, non-legalese prose. Cut and paste this. Not that.

Insurance Contract Interpretation

Ditto. Cut and paste this. Not that

The One-Year Contractual Limitations Clause Bars Gaylord’s First-Party Claim

The policy has a one-year limitations clause giving the insured one year to file suit for the denial of a first-party claim. The period commences when damage becomes sufficiently “appreciable” to put the insured on notice to make a claim. The district court concludes that Gaylord knew by October 2, 2008, when Gaylord first reported the cattle deaths to Nationwide, that his loss was “appreciable,” and that Nationwide’s October 3, 2009, denial is “unequivocal.”

The district court also finds that Nationwide’s (standard) offer in its denial letter to consider any new or different information that the insured might furnish does not render the denial equivocal, and does not continue the tolling. Accordingly, the limitations period was tolled for one day, and Garylord had until October 3, 2009, to timely file suit on his first-party claim. The district court grants summary judgment on Gaylord’s first-party claim because Gaylord waited until March 2010 to file suit.

The Conflicting Agent and Insured Declarations Create a Genuine Dispute over Third-Party Coverage

The district court assumes for purposes of the motion that a contractual liability exclusion and a custom feeding exclusion in the policy encompass the third-party liability claims against Gaylord. But livestock operations endorsement (LOE) modifying the liability coverage provides that “In consideration of the premium charged for this endorsement, the liability coverage of this policy applies to your livestock.” Gaylord and Nationwide each offer conflicting interpretations of the LOE, each of which the district court finds to be reasonable—hence ambiguous. Standard rules of insurance contract interpretation would resolve the ambiguity in favor of Gaylord. But…

Gaylord says the agent told him that poisoned cattle were covered. The agent says he told Gaylord that a more expensive endorsement was necessary, and Gaylord declined to pay for it. The district court concludes that the trier of fact will have to resolve this conflicting extrinsic evidence in order for the district court to interpret the policy. If Gaylord is believed, he wins. If the agent is believed, Gaylord loses. So, the district court denies Nationwide’s motion for summary judgment on Gaylord’s third-party liability claim.

A “Genuine Dispute” over Coverage Defeats Bad Faith

When an insurer’s denial of a claim is unreasonable or without proper cause, the insured may be able to recover tort damages. The district court point out, however, that “bad faith” implies conscious unfair dealing, and mere negligence or mistaken judgment is insufficient. Nieto v. Blue Shield of Cal. Life & Health Ins. Co., 181 Cal.App.4th 60, 86 (2010); Chateau Chamberay Homeowners Assn. v. Associated Internat. Ins. Co., 90 Cal.App.4th 335, 345(2001). When there is a “genuine issue” or “genuine dispute” as to the “insurer’s liability under the policy for the claim asserted by the insured, there can be no bad faith liability imposed on the insurer for advancing its side of that dispute.” McCoy v. Progressive W. Ins. Co., 171 Cal.App.4th 785, 793 (2009).

The Ninth Circuit apples the genuine dispute doctrine to duty to defend disputes. See Lunsford v. American Guar. & Liab. Ins. Co., 18 F.3d 653, 654, 656 (9th Cir. 1994). In Lunsford the insurer refused to defend a counterclaim against the insured for abuse of process. The Ninth Circuit found the insurance policy ambiguous and resolved the ambiguity in favor of the insureds, thus mandating that the insurer cover the defense costs. Despite finding a breach of the duty to defend, the Ninth Circuit held, “Because [the insurer] investigated the insureds’ claim and based its refusal to defend on that information and a reasonable construction of the policy, [the insurer] did not act in bad faith, and we conclude that [the insurer] was entitled to summary judgment on the implied covenant of good faith and fair dealing claim.” Id. at 656.

After reciting California insurance bad faith standards in a way that presages the insured is going to come up short, the district court quickly dispatches Gaylord’s first-party bad faith claim based on the contractual limitations period. The district court then concludes that there is no material dispute that Nationwide conducted a reasonable investigation into the third-party claim, sought the advice of outside coverage counsel, and that its interpretation of the contractual liability and custom feeding exclusions under the facts and circumstances is not unreasonable. So, the district court also grants summary judgment on Gaylord’s third-party bad faith claim, including the punitive damages claim.

The take-away—beside some great cut-and-paste points and authorities—is that policyholder attorneys need to be mindful when analyzing limitations periods that the insured may need to file suit early to protect a first-party claim, even when the third-party claim may not be ripe.

In recent years there have been many cases of insurance agents selling unsuitable annuities to members of the public, especially seniors. These annuities typically involve large premiums and very large cash surrender charges. The large cash surrender charges are often in place for at least the first five years of the annuity and usually exist because of the very large commissions that are paid to the insurance agents selling them. Also, the rates of return in the annuities are often misrepresented. Insurers and their agents also often sell unsuitable annuities as part of 412(i) plans (named by the IRS Code section which applies to them), and sometimes the IRS disallows deductions, classifying them as abusive tax shelters. In order for these annuities to be financially viable for persons or businesses buying them, the purchasers must keep them in force for many years. Because many individuals and some businesses are not in a position to keep them in force for many years, and because they do not provide flexibility, they are often grossly unsuitable for the individuals or businesses purchasing them.

On March 7, 2011, Insurance Commissioner Dave Jones announced new regulations aimed at protecting seniors from financial abuse by those selling seniors an unsuitable annuity. Here is the press release:

“Seniors and their family members need to know that not all annuities are a good fit for their individual circumstance,” Commissioner Jones said. “While a new annuity may seem like a good idea, all too often, unsuitable annuities have cost some seniors their life savings.”

An annuity is an insurance contract that is created when an individual gives a life insurance company money which may grow on a tax-deferred basis and then can be distributed back to the owner, either immediately or over a period of time. These new regulations are an important step towards ensuring that seniors are not deceived into tying up their money in long term annuities when they cannot pay their living expenses, and are fully aware of the products they are purchasing.

The purpose of the new regulations is to require insurers to establish a system to supervise recommendations and to set forth standards and procedures for recommendations to consumers aged 65 and older that result in the sales of annuities so that the insurance needs and financial objectives of consumers at the time of the transaction are appropriately addressed. The proposed regulations are based on the National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulations of March 2010. The regulations require insurers to establish a system to supervise the recommendations made by the insurer or by the insurers’ agent to a consumer that result in the purchase of an annuity. The regulations exempt certain transactions — direct response solicitations where there is no recommendation made based on information collected from the consumer, for instance, as well as annuities used to fund certain other investments, such as ERISA plans.

The regulations set forth duties of insurers and insurance producers that in recommending to a consumer the purchase of an annuity, or the exchange of an annuity, the producer or insurer must have reasonable grounds for believing that the recommendation is suitable for the consumer based on information given by the consumer about her finances and investments. The regulations make it clear that insurers and insurance agents shall not sell an annuity unless there is a reasonable basis to believe that the annuity is suitable based on the consumer’s financial needs and objectives. The regulations require insurers to establish a supervision system designed to achieve the insurers’ and the producers’ compliance with suitability standards and allow insurers to contract out the supervision function. The regulations require that all insurance producers be adequately trained pursuant to California law prior to soliciting the sale of an annuity. The regulations give the Commissioner the authority, among other things, to order an insurer to take corrective action when he determines that a violation of the regulations has occurred. The regulations also specify record-keeping requirements for producers transacting annuities. The new regulations have been filed by Commissioner Jones with the Office of Administrative Law, where they are available for public comment and review before becoming law.

Purchasing insurance and other financial products such as annuities that meet an individual’s specific needs can be challenging. Since an individual’s financial situation may change over time, it is important to review and understand any insurance policy or contract to decide if it is still appropriate. Insurance Commissioner Jones offers the following tips to seniors who are considering purchasing a new or replacement annuity policy:

•    Obtain all proposals in writing.
•    Don’t be pressured into buying any insurance product. Take enough time to review the information before making any decisions.
•    Do not sign anything you do not understand.
•    Consider having a trusted family member, friend or advisor participate in discussions concerning the purchase of any insurance product.
•    Make sure the agent, broker and insurance company are properly licensed to sell the product you are considering purchasing.
•    Make sure you receive a full disclosure of all information relating to the benefits and possible negative consequences regarding the replacement of an existing annuity.
•    Obtain a full disclosure of all surrender charges and related time frames in connection with an annuity prior to purchase.

This information provided is not all inclusive and does not negate or preempt existing California law. If a senior or anyone has questions or wishes to discuss any insurance matter, the officers at the CDI Consumer Hotline are available to help. Please call 1-800-927-HELP (4357) or visit www.insurance.ca.gov. “

For additional information about annuities, visit http://www.insurance.ca.gov/0100-consumers/0060-information-guides/0020-life/life-insurance.cfm

Myrna Kawakita was set to undergo gastric bypass surgery, and her health insurer, Blue Shield of California, initially authorized the procedure. However, rather than paying for the procedure, Blue Shield rescinded Kawakita’s health insurance policy, asserting that her application contained misrepresentations about her height and weight.

Kawakita purchased her health insurance policy through Blue Shield’s alleged agent, Steven Stendal, and claimed that Stendal was responsible for any misstatements on her application. Blue Shield rescinded Kawakita’s policy in August 2006, and she filed her lawsuit in July 2009, asserting causes of action for breach of contract, tortious breach on the implied covenant of good faith and fair dealing and declaratory relief.

Blue Shield filed a motion for summary adjudication, arguing that the bad faith claim was barred by the two-year statute of limitations imposed by California Code of Civil Procedure Section 339 and Love v. Fire Insurance Exchange, 221 Cal. App. 3d 1136, 1144 n.4 (1990). The trial court rejected Blue Shield’s motion, and with Blue Shield of California Life & Health Insurance Company v. Superior Court (Kawakita), No. B225632, Blue Shield sought a peremptory writ of mandate directing the trial court to reverse its order. While the California Court of Appeal did not agree with the trial court’s reasoning, it did agree with the result and allowed Kawakita to proceed with her bad faith cause of action.

With its motion, Blue Shield anticipated that Kawakita might rely on California Insurance Code Section 10350.11 to contend that the statute of limitations for a bad faith claim was actually three years. Relying primarily on federal court decisions, Blue Shield asserted that Section 10350.11 relates to contractual limitations tied to filing written proofs of loss and is unrelated to Code of Civil Procedure Section 339. The Court of Appeal explained that even if it accepted Blue Shield’s interpretation of Insurance Code Section 10350.11, the argument was irrelevant because, as permitted by Insurance Code Section 10350, Blue Shield’s policy actually contained language extending Kawakita’s deadline to initiate a lawsuit until three years after the claim for benefits was first denied. Specifically, under the headline, “Commencement of Legal Action,” the policy issued to Kawakita provided that “Any suit or action to recover benefits under this Plan … or any other matter arising out of this Plan … must be commenced no later than three years after the date the coverage for benefits in question was first denied.”

Based on this provision, with its broad application to “any other matter arising out of the Plan,” the Court of Appeal ruled that Kawakita’s bad faith claim needed to be filed no later than three years after the coverage was first denied; which it was. With this ruling, Kawakita’s attempt to impose bad faith liability of Blue Shield’s decision to rescind her coverage case can proceed.

Noting a paucity of recent California Supreme Court precedent on whether strict or merely substantial compliance with an insurance warranty is required to invoke coverage, the Ninth Circuit Court of Appeals recently held that California law requires strict compliance with a pilot warranty in an aviation insurance policy as a condition precedent to coverage. Trishan Air, Inc. v. Federal Insurance Company, __ F.3d __ 2011 WL 540532 (9th Cir. 2011). The Ninth Circuit affirmed the Central District of California’s summary judgment dismissal of the insured’s breach of contract and bad faith claims.

Trishan Air, Inc. (Trishan) owned a fleet of corporate jets. It purchased an aviation insurance policy from Federal Insurance Company (Federal). The policy included a pilot warranty endorsement that required a two-pilot crew for each aircraft and that

such pilot(s) must have successfully completed a ground and flight recurrent/initial training course for the make and model operated within the past 18 months. Any such course must incorporate the use of a motion-based simulator specifically designed for the insured make and model/make and model series.

In June 2007 Trishan’s 13-passenger Dassault Falcon 900 ran off the main runway at the Santa Barbara Municipal Airport in an aborted high-speed takeoff. The impact snapped the front landing gear, and the Falcon 900 skidded to rest in the dirt 600 feet away. Thankfully, no fatalities. At the time of the accident the co-pilot had never attended any formal training course or flight simulator course for the particular jet involved.

Trishan submitted a claim for the loss to Federal. Federal denied coverage based on a breach of the pilot warranty. Trishan filed suit for breach of contract, breach of the duty of good faith and fair dealing, reformation and declaratory judgment. Federal moved for summary judgment. Trishan introduced fact and expert evidence that the co-pilot substantially complied with the pilot warranty, and that substantial compliance satisfied the warranty. Causation was not an issue because Trishan and Federal stipulated that Federal was not required to demonstrate a causal connection between the accident and any breach of the pilot warranty.

The district court granted Federal’s motion for summary judgment on the grounds that California law requires strict compliance with the pilot warranty. Trishan appealed.

Citing turn-of-the-century California Supreme Court precedent, and more recent appellate precedent, the Ninth Circuit rejected Trishan’s arguments. It concluded that the pilot warranty was in the nature of a condition precedent to coverage, requiring strict compliance, rather than a mere condition of coverage as to which substantial compliance might suffice.

Trishan’s argument is premised on the warranty being a mere condition of the insurance policy, thus requiring only substantial compliance. This argument ignores the dichotomy between conditions relating to basic coverage, such as notice provisions, and conditions, like the pilot warranty, that are ‘an element of the fundamental risk insured.’ [citation]. ‘There are well-established differences between insuring clauses, exclusions, and conditions that should not be amalgamated into one binary question: coverage yes or no under an ‘if … then’ analysis. [citation].

Contrary to such variations in insurance provisions, Trishan seeks universal application of the substantial compliance doctrine untethered from the type of warranty at issue. However, strict compliance with pilot warranties serves as a necessary corollary of aviation insurance policies. ‘Federal courts uniformly enforce [pilot warranties] … and for good reason. Pilot qualifications and experience are obviously factors bearing directly on the risk the insurer is underwriting.’ [citation].

The pilot warranty is like a condition precedent because it expressly establishes the events or conditions that must occur before coverage can take effect. The Ninth Circuit noted that the practical effect of adopting Trishan’s substantial compliance standard would be to substitute the underwriter’s clear underwriting parameters with the insured’s subjective assessment. It would introduce too much uncertainty into ascertaining the risk that the underwriter agreed to assume, and would essentially re-write the insurance policy—which California courts are prohibited from doing.

The Ninth Circuit went further. It noted that even if substantial compliance would suffice, the co-pilot’s lack of formal coursework and simulator training for the Falcon 900 did not even substantially comply with the pilot warranty.

Trishan elides the fact that it did not comply with the pilot warranty’s training requirements for co-pilots in any fashion. Instead, Trishan asserts that the pilot’s alternative training served as a substitute for the simulator training. However, a complete failure to comply is not analogous to minor deficiencies. [citation]. Thus, Trishan’s complete failure to comply with the pilot warranty precludes coverage even under the substantial compliance doctrine. [citation].

Finally, noting the long established rule in California that there is no bad faith where there is no coverage, the Ninth Circuit also affirmed the district court’s dismissal of Trishan’s bad faith claim. The Ninth Circuit added that since Federal’s denial of coverage based on Trishan’s failure to strictly comply with the pilot warranty was reasonable, the “genuine dispute” doctrine also insulated Federal from any bad faith liability.

The take-away for insureds: review your insurance program carefully for warranty endorsements in your policies. Strict compliance may be required.

California Insurance Code section 533 provides that an insurer is not liable for a loss caused by the willful act of an insured. This is consistent with California’s public policy of denying coverage for intentional acts of wrongdoing. However, when there is more than one insured, this policy can lead to inequitable results. Case in point is the situation presented in Century National Insurance Company v. Garcia, 2011 Cal. LEXIS 1392 (decided February 17, 2011).

In Century, Jesus Garcia, Sr.’s home was damaged when his adult son intentionally started a fire in his bedroom. Garcia Sr. subsequently submitted a claim under his homeowner’s insurance policy issued by Century National Insurance Company (“Century”). Although Garcia was the named insured, his wife and son also qualified as an insured under the policy. Century denied the claim on the grounds that the damage was caused by an intentional wrongful act by an insured. Garcia challenged the denial arguing that the Insurance Code does not bar “innocent insureds” from recovering despite a co-insured’s wrongful acts. At trial, the state court granted Century’s demurrer and Garcia appealed.

Writing for a unanimous court, Justice Baxter agreed with Garcia and held that the policy provision which precluded coverage was invalid. To reconcile this result with section 533, the Court relied on Insurance Code section 2070 which states: “All fire polices . . . shall be on the standard form, and, except as provided by this article shall not contain additions thereto. No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy . . . provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.” In other words, fire insurance policies in California must provide coverage that is at least as good as the coverage outlined by section 2071’s standard form provisions. Now here is where it gets a little tricky.

The Century policy provision that excluded coverage for intentional wrongdoing used the term “any insured” and “an insured.” Century used this definition of “insured” to include both Garcia Sr. and his son. However, section 533 and section 2071 prefix the term “insured” with the word “the.” This distinction, the court wrote, bears directly on the issue of coverage because “unlike policy exclusions that refer to `an’ insured or ‘any’ insured, exclusions based on acts of ‘the’ insured are construed as not barring coverage for innocent coinsureds.” Once the Court established that section 533 was intended to exclude coverage for acts of “the insured” vs. “any insured,” the minimum coverage aspect of section 2071 comes into play. Since section 2071 provides a baseline level of coverage that fire insurance policies in California must meet or exceed and the minimal coverage only excludes willful acts of “the insured”, then any policy that excludes willful acts of “any insured” would violate the minimal coverage levels outlined in section 2071. Because the policy at issue in Century excluded the wrongful acts of “any insured,” it failed to provide the minimal level of coverage.

While certainly a victory for innocent co-insured policyholders, the long-term impact of this opinion is unclear. On one hand, the Court’s holding raises serious doubts about the use of policy provisions that deny coverage for the intentional acts of “any” insured. On the other hand, the Court relied heavily on Insurance Code sections 2071 which applies solely to fire insurance coverage. In addition, the Justice Baxter himself remarked in a footnote that the holding in Century “should not be read as necessarily affecting the validity of clauses” in other contexts. Nevertheless, we can count of the fact that more cases will be coming in the future that test the boundaries of Insurance Code section 533.

Ninth Circuit Clarifies ERISA’s Full and Fair Review Standard by Imposing New Requirements on Plan Administrators in Salomaa Case