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Understanding modern day insurance contracts is no easy task, even for experienced attorneys. The wording is dense and the language is often archaic and hard to comprehend. As a result, consumers often rely on their insurance company to help them navigate the multitude of different policy types, structures, pricing and provisions. Recently, the California Court of Appeal held that Blue Shield did not have a duty to disclose information on the lowest premium cost it would accept for a given coverage.

The case of Levine v. Blue Shield of California involved Michael Levine, who was an unmarried attorney with two dependants at the time he applied for health insurance. Blue Shield issued a health plan that covered Levine and one of his dependants and a separate policy was issued to cover his other dependent. After Levine married, he sought to add his wife on to his policy as an additional dependant. Blue Shield complied with this request and Levine continued to pay premiums.

At some point, Levine learned that the structure of his health insurance coverage was not ideal. Essentially, Levine claimed that he could have achieved the exact same coverage at a much lower rate if the polices were restructured as a family plan with his wife as a primary insured. Frustrated and understandably upset, Levine instituted a class action lawsuit against Blue Shield for fraudulent concealment, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and unfair competition. In response, Blue Shield filed a demurrer to all causes of action arguing, among other things, that it did not owe a duty to disclose information about the lowest premium charge it would accept to bind coverage. The existence of this duty was the key issue addressed on appeal.

Unfortunately for Mr. Levine, the California Court of Appeal for the Fourth Appellate District agreed with Blue Shield. It reasoned that “a person’s initial decision to obtain insurance and the insurer’s decision to offer coverage generally should be governed by traditional standards of freedom to contract.” Further, the court noted that “an insurer’s negotiation of an insurance contract is not the type of transaction that would give rise to heightened duties of disclosure concerning price.” In reaching this conclusion, the court acknowledged California Service Station etc. Assn. v. American Home Assurance Co., 62 Cal.App.4th 1166 (1998), which recognized that an insurer does have a duty to disclose information regarding the coverage created by an insurance policy. And yet, the court declined to extend California Service Station any further. Instead, the court reasoned that there is no duty of ordinary care to disclose pricing information during arm’s-length contract negotiations. The court acknowledged that the California Service Station court recognized that an insurer owes its insureds a duty concerning “representations about the coverage created by an insurance policy,” but went on to explain that this duty “should be distinguished from a duty to disclose information about the calculation of premiums.” (Id. at p. 1174, italics added.) Levine sought to distinguish California Service Station by highlighting the preexisting relationship with Blue Shield as an insured. This, Levine argued, imposed special obligations upon Blue Shield to adequately disclose information regarding the calculation of premiums. However, the court did not find this persuasive and instead noted that amount of money that an insurer is willing to accept in exchange for coverage is not information that implicates a special relationship.

Levine argued that Insurance Code Section 332 establishes a duty to disclose material facts. Blue Shield responded that this statute is not applicable to it as a health plan. However, the court assumed for purposes of argument that even if Section 332 applied, the Court found that it does not require the parties to an insurance contract to make available all information that may be material to the other party; rather, the Court said, it requires only that each party make available information that is “material to the contract [itself].” As a result, the court held that Blue Shield did not have a duty to disclose to Levine its best pricing.

This conclusion appears wrong. The distinction between that which is material to the other party vs. that which is material to the contract was a distinction here without a difference. Moreover, the court’s attempt to distinguish Pastoria v. Nationwide Insurance, 112 Cal. App. 4th 1490, 1492-1493 (2003) was not persuasive. Policyholders will want to emphasize that this decision is very limited and should apply only to a calculations of premiums issue. They will want to focus on the holding that confirms insurers have a duty to disclose material facts regarding coverage offered. Anticipate Levine filing a motion for a rehearing, and, failing that, the filing of a petition for review to the California Supreme Court.

In an important decision favoring policyholders, the Ninth Circuit recently discussed the breadth of an insurer’s duty to defend its insured under California law, even where no potentially covered causes of action are alleged in the underlying complaint. The Ninth Circuit just issued this decision in Hudson Insurance v Colony Insurance, addressing coverage in trademark (and counterfeit sales) cases. Commercial general liability policies (“CGL”) generally have “advertising injury” endorsements that exclude coverage for claims “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.” But these exclusions typically have this exemption: “this exclusion does not apply to infringement, in your advertisement, of copyright, trade dress or slogan.” Carriers always try to read this exemption from the exclusion narrowly.

However, in this case the Ninth Circuit disagreed and reasoned:

“Here, in contrast, the facts alleged in the NFL complaint state that All Authentic sold a “Steel Curtain Limited Edition Steelers Jersey” on its website, which “reads ‘Steel Curtain’ across the back and bears the numbers of four Pittsburgh Steelers players.” As the district court noted, “A fair reading of the [NFL complaint] reveals that ‘Steel Curtain’ is used to promote fan loyalty to the Steelers (an NFL Member Club) in general, and a subset of Steeler players in particular.” The district court concluded that this potentially stated a claim for slogan infringement because a “slogan” is a “brief attention-getting phrase used in advertising or promotion.”

In addition, because the complaint “potentially” stated a cause of action for infringement, the insurance carrier still had a duty to defend. The Ninth Circuit gave easily rejected Colony’s argument that the attorneys for NFL Properties consciously chose not to include a slogan infringement claim and therefore no duty to defend existed. The Ninth Circuit concluded that there was no basis under California law for such an argument.

Ultimately, this opinion offers an additional avenue for asserting coverage under a CGL policy and emphasizes an insurer’s broad duty to defend their insureds.

The question of who has the burden of proof can often decide the outcome of litigation. Given its importance, it is common to see litigants attempt to shift that burden to the opposing side in order to secure a tactical advantage. Recently, in Muniz v. Amec Construction Management Inc., __ F.3d __, 2010 WL 4227877 (Decided October 27, 2010), the Ninth Circuit Court of Appeals addressed the question of whether the burden of proof can be shifted in an ERISA disability case. In Muniz, a claimant diagnosed with HIV applied for benefits through his employer’s long-term disability plan (the “Plan”). Benefits were approved and paid for the first 24 months. However, as is common with many benefit plans, after 24 months the definition of disability changed. In order to qualify under the Plan, the claimant must be unable to perform all the essential duties of any occupation. As a result, the Plan terminated his benefits.

At trial, the parties agreed that the standard of review was de novo since the Plan did not grant discretion to the claims administrator. Accordingly, the district court placed the initial burden upon Muniz as the claimant to show that he was entitled to benefits under the terms of the plan. Muniz submitted evidence to the court from his primary physician, Dr. Towner, who concluded that Muniz was totally disabled from performing any occupation. This, argued Muniz, was sufficient to shift the burden of proof to the Plan to demonstrate that its claim decision was justified. However, the Ninth Circuit disagreed. Drawing from decisions in the Eleventh and Eighth Circuits, the Appellate Court concluded that the claimant retained the burden of proving that he was entitled to benefit even in light of the proffered evidence.

As concluded by other circuit courts which have addressed the question, when the court reviews a plan administrator’s decision under the de novo standard of review, the burden of proof is placed on the claimant. See, e.g., Horton v. Reliance Standard Life Ins. Co., 141 F.3d 1038, 1040 (11th SCir. 1998) (“A plaintiff suing under [29 U.S.C. § 1132(a) (1)(B)] bears the burden of proving his entitlement to contractual benefits.”); Farley v. Benefit Trust Life Ins. Co., 979 F.2d 653, 658 (8th Cir. 1992) (“[W]e agree that it was [the claimant’s] burden to show that he was entitled to the ‘benefits . . . under the terms of his plan.’ ”) (omission in original) (quoting 29 U.S.C. § 1332(a)(1)(B)).”

In addition, the Ninth Circuit recognized that Muniz could cite to no precedent where a court conducting a de novo review shifted the burden of proof to the claim administrator. The case law cited by Muniz in support of his argument all dealt with cases where the standard of review was abuse of discretion. In those situations, the court focused on whether the Plan abused its discretion in denying benefits. However, under a de novo review, that analysis is irrelevant to the issue of whether the claimant was entitled to benefits. Similarly, case law that supports burden shifting under an abuse of discretion framework would be irrelevant where the standard of review is de novo. Since Muniz could not provide any precedent in support, he retained the burden of proof. The court did note that if the standard of review was abuse of discretion, the burden would shift to the insurer to prove that its actions were not tainted by the structural conflict of interest that results when it review and decides entitlement to benefits and also is the funding source.

Further, the court addressed Muniz’s argument that once a claimant proves he or she is totally disabled, the burden shifts to the insurer to show an change in condition:

Muniz argues that the district court committed clear error in its analysis because his medical records did not show a change in his condition over the years he was covered by the CGLIC plan. As noted above, the fact that the claimant was initially found disabled under the terms of the plan may be considered evidence of the claimant’s disability, but as the Eighth Circuit stated in McOsker v. Paul Revere Life Insurance Co., “[w]e are not suggesting that paying benefits operates forever as an estoppel so that an insurer can never change its mind.” 279 F.3d 586, 589 (8th Cir.2002). Muniz did not provide sufficient evidence to demonstrate that the district court committed clear error in its analysis of the record

After all of the evidence for and against Muniz’s position was balanced against each other, the end result as determined by the district court was that Muniz failed to prove that he was entitled to benefits. Ultimately, it is not clear whether Muniz would have won his case even if he did not have the burden of proof. However, this holding creates an additional obstacle for all future claimants and confirms that in the Ninth Circuit, claimants retains the burden of proof for establishing entitlement to benefits under a de novo standard of review.

Litigation pursuant to the Employee Retirement Income Security Act (“ERISA”) is rather unique. Unlike most cases, ERISA disputes are based on a limited scope of permissible evidence. The range of that scope is ultimately dependent on which standard of review is employed by the courts. Typically, when the standard of review is abuse of discretion, the scope of admissible evidence is limited to what was before the claims administrator when the claims decision was made, i.e. the “administrative record.” The reason for this limited subset of evidence is based on the sole question before the court, namely “Did the claim administrative abuse its discretion in rendering its decision?” Obviously, evidence discovered or submitted after the claims decision was made would be irrelevant to that question, hence the narrow scope. However, when the standard of review is de novo, the question before the court changes to whether or not the claimant is entitled to benefits. In other words, it is simply whether or not the claimant is disabled. Consequently, this change in question also alters the realm of admissible evidence.

Recently, the court in Ermovick vs. Mitchell, Silberberg & Knump LLP Long Term Disability Plan, 2010 WL 3956819 (Decided October 8, 2010), addressed the question of whether evidence of procedural deficiencies should be considered in the context of a de novo review. The facts are relatively straight forward. James Ermovick worked as a word processor at the law firm of Mitchell, Silberberg & Knump. His claim for disability benefits was based on depression, anxiety and pain radiating in his back and neck due to myeloradiculopathy. Ermovick claimed to be totally disabled from any occupation while Prudential, the claims administrator, believed his disability to be temporary and therefore denied his benefits claim.

Eventually, the case found its way the U.S. District Court for the Central District of California. There, the court held that the proper standard of review was de novo and sought to address the case on the merits. Ermovick sought to offer evidence of certain procedural deficiencies. Specifically, Ermovick alleged that Prudential failed to conduct any meaningful review of the evidence and arbitrarily denied his claim without a proper review. He further argued that Prudential denied his claim based on a lack of information while at the same time failing to tell him what information was missing. Normally, this type of evidence is highly relevant because it can, if true, show that the claim administrator violated its duty to make a proper and informed claims decision. More importantly, it undermines the arguments and credibility of the claims administrator.

The problem the court faced was that the evidence, although relevant to the issue of Prudential’s credibility, was ultimately irrelevant on the narrow issue of whether Ermovick was disabled. Not to be deterred, Ermovick cited to the 10th Circuit case of Niles v. American Airlines, Inc., 269 Fed. Appx. 827, 833 (10th Cir.2008), which held that “[a] showing that the administrator failed to follow ERISA procedures therefore provides a basis for reversal separate from that provided by de novo review of the merits of the claim.” There, the court in Niles concluded that such procedural deficiencies effectively created an independent basis for reversal of a claims administrator’s decision. However, not every circuit believed this to be the case. For example, the Sixth Circuit took a more hard-line view. In Wilkins v. Baptist Healthcare System, Inc., 150 F.3d 609, 613 (6th Cir.1998), the court found that analysis of procedural deficiencies were not necessary under a de novo review provided that the denial of benefits was correct. If the decision made by the claims administrator was ultimately the right one, then the convoluted manner in which it reached that conclusion was irrelevant.

Since existing case law in the Ninth Circuit did not provide clear guidance, the court in Ermovick came to the conclusion that it should follow the Sixth Circuit rational based on Abatie v. Alta Health & Life Ins. Co., 458 F. 3d 955 (9th Cir. 2006). In Abatie, the Ninth Circuit held that “even in instances of wholesale and flagrant violations of the procedural requirements of ERISA, the Court’s remedy is to accord no deference to the Plan and review the record de novo.” By according no deference, the Ninth Circuit left no room for an independent basis for reversal. The Ermovick court interpreted this holding to mean that to give “no deference” also equates to providing to no weight to procedural deficiencies. There was, of course, one exception to this rule. Where the procedural deficiencies caused the record itself to be incomplete, then the court may supplement the administrative record with additional evidence.

In Ermovick, since neither party asked to supplement the record, the court reasoned that the administrative record was complete. As a result, the court held that evidence of procedural deficiencies was not necessary when the standard of review was de novo. On that basis, the court proceeded to conduct its own independent review of the record which revealed that despite the errors in handling the case, Prudential’s decision to terminate benefits was correct.

Assuming the Ninth Circuit doesn’t reverse this decision on appeal, it seems clear that when the standard of review is de novo, the court will not consider procedural deficiencies in ERISA cases.

In what appears to be the first FINRA arbitration award of its kind in the pending Medical Capital cases, McKennon│Schindler LLP client Eric Anderson was awarded $543,612.62 in damages (the full amount of his investment losses) for his massive losses caused by his financial advisor firm’s negligence and breach of fiduciary duties owed to Mr. Anderson.

Mr. Anderson looked forward to relaxing with his family and enjoying a well deserved retirement. After years of hard work and saving, Mr. Anderson had accumulated a sizable retirement fund which he intended to live off of for the rest of his life. These funds were entrusted with Cullum & Burks Securities, who managed both his finances and 401(k) retirement accounts. A Cullum & Burks’ agent and representative, Robert Clark took advantage of Mr. Anderson’s ignorance and pressured him into moving the entirety of his retirement funds into an extremely risky investment fund by Medical Capital Holdings. Clark ignored Mr. Anderson’s fragile financial situation and made this recommendation despite being told that this money was the sole means of support for him and his wife.

It turned out that Medical Capital Holdings, which provided financing to healthcare providers by purchasing the providers’ accounts receivables and making loans to those providers, was almost certainly a fraudulent ponzi scheme. The accounts receivables allegedly were packaged into notes and sold through private placements to investors. Approximately 20,000 investors purchased $2.2 billion in Medical Capital notes. Approximately $1 billion of the notes are in default, leaving investors like Mr. Anderson with massive investment losses. According to the SEC’s investigation, Medical Capital and its officers used the accounts as their personal piggy banks, improperly requesting and obtaining investor funds to pay themselves massive “administrative fees” of nearly $325 million which they used to purchase lavish personal perquisites, Medical Capital and its affiliates also invested in an array of non-medical projects that were placed under the personal supervision of Lampariello, including mobile phone and movie ventures, and commingled investor funds. Despite controlling hundreds of millions of dollars, the SEC and an appointed Receiver found that the Medical Capital entities operated without financial or accounting controls, failed to prepare financial statements in accordance with GAAP, failed to use audited financial statements, failed to perform annual appraisals of assets, and repeatedly obtained the Trustees’ permission to pay themselves fees based on a formula.

Ultimately, Mr. Anderson lost his entire life savings. What was initially touted by Clark as a “safe” investment was wiped out in a little over a year. The loss was so complete that Mr. Anderson, at age 68, was forced to study for and obtain his insurance license in order to start working again so that he could support his family. His dream of a leisurely retirement had been shattered.

MCKENNON LAW GROUP PC LLP filed an action on behalf of Mr. Anderson with the Financial Industry Regulation Authority (“FINRA”) against Cullum & Burks Securities and Robert J. Clark his financial advisors. MCKENNON LAW GROUP PC LLP, on behalf of Mr. Anderson, asserted claims for breach of fiduciary duty, unsuitability, failure to supervise, professional negligence, unjust enrichment, negligent and intentional misrepresentation, elder abuse, and violation of California Corporate Code section 25401. After a hearing and arbitration, the FINRA panel awarded Mr. Anderson the full amount of compensatory damages plus interest requested in the amount of $543,612.62. According to Robert McKennon, the lead attorney on the case, “this is the first of what is expected to be several other FINRA awards against financial advisors who sold Medical Capital investments to unsuspecting and vulnerable clients.”

The “reasonable expectations of the insured” doctrine continues to weave its way into all types of insurance coverage cases. This time, it thrust itself into a title insurance case. In Karen Lee v. Fidelity National Title Insurance Company,__Cal. App. 4th__ (September 16, 2010), the First Appellate District of the California Court of Appeal found coverage under this doctrine.

Karen and Terry Lee (“Lees”) purchased property in Solano County in 1990. The purchased property was covered by a policy issued by Fidelity National Title Insurance Co. (“Fidelity”). Fidelity’s preliminary report of the purchased property identified two parcel numbers, APN 09 and APN 22. Although Fidelity’s policy did not incorporate parcel APN 09 and APN 22, it did have attached to it a map indicating parcels APN 09 and APN 22. It was not until 2006 when the Lees were selling their property did they discover they only in fact owned one parcel and not the two parcels as they originally thought they had purchased.

The Lees made a claim under the Fidelity policy, but Fidelity denied coverage based upon the description within the policy. Lee sued Fidelity for breach of contract, bad faith, and declatory relief but the trial court granted a summary judgment in favor of Fidelity because the causes of action were time barred. On appeal the Court reversed. The Court found the “legal description was ambiguous. Further ambiguity was created by the attachment of the assessor’s parcel map that, on one hand, was said to be excluded from the policy, but on the other hand had an arrow pointing at APN 22 as a parcel in the policy.” The court of appeal then discussed the reasonable expectation of the insured doctrine as follows:

That reasonable expectation informs interpretation of the policy’s coverage. As our Supreme Court stated in White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 881 (White), “ ’In determining what benefits or duties an insurer owes his insured pursuant to a contract of title insurance, the court may not look to the words of the policy alone, but must also consider the reasonable expectations of the public and the insured as to the type of service which the insurance entity holds itself out as ready to offer. [Citation.] Stated in another fashion, the provisions of the policy must be construed so as to give the insured the protection which he reasonably had a right to expect…. [Italics in original.] [Citation.]’ The White court rejected the insurer’s argument that the plaintiffs in that case could not be deemed to have relied upon the title policies in question when they purchased their lands because the policies “were issued only when the sale was consummated.”

* * *

While an “ordinary reading” of the legal description of the land insured in Havstad precluded any reasonable expectation of coverage in that case, the same cannot be said here. “[T]he words in an insurance policy are to be interpreted according to the plain meaning which a layman, not an attorney or insurance expert, would ordinarily attach to the words’ ”[Citation omitted] and laypersons like plaintiffs would have no way of knowing from the surveyor’s metes and bounds description of the land in their title policy whether APN 22 was covered. In the context of the coverage issue in this case, the legal description was ambiguous. (See Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, [¶] 4:300, p. 4-43 [“an ambiguity may arise where a policy uses terms beyond the working vocabulary of a person of ordinary intelligence”].) Further ambiguity was created by the attachment of the assessor’s parcel map that, on the one hand, was said to be excluded from the policy, but on the other hand had an arrow pointing to APN 22 as a parcel in the policy.

The court found that the Lees had an objectively reasonable expectation of coverage because they purchased both parcels of land in 1990 given the circumstances surrounding the issuance of the title insurance policy. Therefore, the court concluded that Fidelity’s denial of coverage was erroneous.