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In 1996, Plaintiff Laura Kieffer developed carpal tunnel syndrome and severe cervical pain which forced her to stop working as a dental hygienist. Thereafter, Kieffer started receiving disability payments under an individual disability insurance policy she purchased from Paul Revere Life Insurance Company and its parent company the Unum Group Corporation. Even though she had been receiving disability payments for nearly ten years, Unum terminated her benefits in March of 2008. As a result, Laura sued in Los Angeles Superior Court alleging that Unum had unreasonably terminated her benefits. She sued for breach of contract, insurance bad faith and for punitive damages. This week, a jury awarded her $4.2 million in compensatory and punitive damages. Unum intends to appeal the verdict.
The Reasonable Expectations Doctrine Finds a New Ground in the Realm of Title Insurance
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.
Court Affirms Bad Faith Verdict in Homeowner’s Insurance Case
In a new case from Division Three of the Fourth Appellate District, Chicago Title Insurance Company v. AMZ Insurance Services; Pacific Specialty Insurance Company, __ Cal. App. 4th __ (September 9, 2010), the California Court of Appeal has given policyholders a good holding on the issues of when a policy binder becomes effective, when an agent acts on behalf of an insurer and what actions constitute bad faith.
Thomas and Cheryl Mustains (“Mustains”) successfully refinanced their home mortgage with an escrow closing date of October 12, 2005. One of the conditions by the lender was a new homeowner’s insurance policy was to be received and the premium paid for in escrow by Chicago Title. The Mustains’ loan officer contacted AMZ Insurance Services Inc. (“AMZ”) and McGraw Insurance Services (“McGraw”) to obtain the homeowner insurance policy. AMZ selected Pacific Specialty Insurance Company (“PSIC”) as the insurer. AMZ prepared an Evidence of Property Insurance (“EOI”), a computer generated form naming PSIC as the Insurer and the Mustains as the insureds for homeowner’s insurance, which was sent to Chicago Title. Unfortunately, an application from the Mustains was never completed, and the premium was not paid by Chicago Title. On November 11, 2005, the Mustains’ home burned down. Chicago Title reimbursed the Mustains for their loss, and in turn obtained an assignment of rights from the Mustains.
Chicago Title sued both PSIC and McGraw, the parent company of PSIC, for breach of insurance contract, bad faith, and declaratory relief . In a special verdict, the jury found:
1) The EOI was not legally cancelled before the Mustain’s fire loss on 11/11/2005
2) AMZ had actual or ostensible authority to prepare and issue the EOI on behalf of PSIC and McGraw
3) PSIC and McGraw breached their obligation of good faith and fair dealing by failing to pay insurance proceeds to the Mustain’s under the EOI
4) PSIC and McGraw breached their obligation of good faith and fair dealing by failing to properly investigate the Mustain’s fire loss; and
5) PSIC and McGraw’s wrongful actions caused Chicago Title to bring the lawsuit against AMZ.
On appeal the Appellate Court affirmed, ruling in favor of Chicago Title. The central issue in this case was whether EOI issued by AMZ was an enforceable binder of homeowner’s insurance extending coverage from PSIC for a fire loss incurred by the Mustains. The EOI was an effective binder for which the loss of the house came within coverage. The court explained:
The trial court correctly instructed the jury. The existence and content of the EOI were undisputed. “Whether undisputed facts establish the existence of a binder is a question of law.” (Adams, supra, 107 Cal.App.4th at p. 451.)
The EOI on its face constituted a binder as a matter of law. It included all of the required elements for a binder under Insurance Code section 382.5, subdivision (a): The EOI identified the insurer (PSIC), the insureds (the Mustains), the (purported) agent executing the EOI (AMZ), the effective date of coverage, the binder number, and the address of the insured property. The EOI states, “[t]his is evidence that insurance as identified below has been issued, is in force, and conveys all the rights and privileges afforded under the policy.” Under “Coverage,” the EOI states, “See Supplemental Information Page(s),” which lists the coverages provided with the amounts of insurance and the deductible for each. The EOI recites the total annual premium as $776, and included with the EOI was an invoice to Chicago Title in that amount.
But the Appellate Court also found that despite the lack of notice of appointment with the Department of Insurance, AMZ’s acted as PSIC’s agent based on actual and ostensible agent theories. The issuance of the EOI by AMZ was not out the ordinary course of business between AMZ and PSIC, and PSIC had never complained about AMZ issuing the EOI prior to the receipt of the insurance premiums. The court explained its ruling that the lack of a notice of appointment was not controlling:
While the lack of a notice of appointment might subject AMZ to fines or a disciplinary proceeding, AMZ’s actions in issuing the EOI as a binder could bind PSIC if the facts otherwise support an agency relationship. “[Insurance Code section 1704, subdivision (a)] may simply impose further requirements on the conduct of an insurance agent, rather than establishing additional criteria for the creation of an agency relationship. In other words, it may be unlawful for an entity to act as an agent of the insurer without complying with section 1704[, subdivision ](a), but that entity would still constitute an insurance agent for the present purposes.” (Oakland-Alameda County Coliseum, Inc. v. National Union Fire Ins. Co. (N.D.Cal. 2007) 480 F.Supp.2d 1182, 1196.) We agree with this reasoning.
The Appellate Court also found that PSIC and McGraw acted in bad faith because they did no investigation into the Mustains’ claim, as there was evidence that an employee with PSIC concluded “the EOI issued to the Mustain’s escrow was legally inconsequential and not even worth forwarding to the PSIC claims department.” The court found that PSIC did not investigate whether its policy of authorizing AMZ to cancel a binder by stamping “void” on the EOI was lawful. The court also stated that “[t]he evidence supported the inference too that PSIC’s policies and practices for issuing EOI’s were created in bad faith to allow PSIC to try to evade liability precisely in the circumstances presented by this case.”
Court of Appeals Limits the Application of the Genuine Dispute Doctrine in Third Party Insurance Coverage Cases
The genuine dispute doctrine received another blow as the California Court of Appeals held that the doctrine may not be used to refuse settlement in third party coverage cases. The recently decided case of Howard v. American National Fire Ins. Co., __Cal. App. 4th __, 2010 WL 3156851 (decided August 11, 2010), involved allegations of priest molestation by an employee of the Roman Catholic Bishop of Stockton (“Bishop”). American National Fire Insurance Co. (“American”) provided liability insurance to Bishop that covered bodily injury caused by an employee’s battery. When Howard filed suit for negligent retention of the molesting priest, Bishop asked American to defend and indemnify against the suit. American refused on the grounds that the alleged molestation occurred after the policy had expired in November of 1979. In support, American relied on deposition testimony by Howard in which he stated that his first memory of being molested was when he was five or six years old, the earliest of which would have been seven months after the policy had expired. The case continued to trial and Bishop was found liable for negligent retention and directed to pay $5.5 million in compensatory and punitive damages. While the case was still on appeal, the parties settled and Howard agreed to join Bishop in a suit against American to recover on the judgment and for bad faith failure to defend, settle, and indemnify against the molestation case.
A number of issues and defenses were raised in the subsequent suit against American. Relevant for this discussion was American’s assertion of the genuine dispute doctrine as a defense against Howard’s allegations of bad faith. Under the genuine dispute doctrine, if the insurer can show that a genuine dispute existed as to coverage, then it is entitled to summary judgment on the insured’s bad-faith cause of action. Here, American argued, there was a genuine dispute as to whether the molestation occurred during the policy period. Although Howard alleged in his complaint that the molestation occurred sometime between 1977 and 1991, American argued that the only evidence presented at trial showed that the molestation occurred after the policy expiration. The weakness of this argument was that the underlying trial did not focus on when the molestation occurred, but rather whether it occurred. Therefore, the subsequent suit against American was not limited to the evidence offered at the previous trial. Further, the court held, the genuine dispute rule does not apply in all bad faith insurance contexts.
In first party cases, where payment is sought for the insured’s direct losses, an insurer may raise a reasonable dispute over coverage without being guilty of bad faith. But it has never been held that an insurer in a third party case may rely on a genuine dispute over coverage to refuse settlement. Instead, it is a long-standing rule that “the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.
Id. (internal citations omitted). Essentially, American’s dispute over coverage could not justify its failure to refuse settlement and should not affect its evaluation of whether a settlement offer is a reasonable one. American had a duty to the insured to evaluate and participate in the settlement negations despite the potential coverage issues. In addition, the court noted that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. Here, the court found that American distorted Howard’s deposition testimony by equating his memory of specific acts of molestation into an admission that no molestation occurred during the policy period. This, the court decided, was unreasonable and evidence of bad faith.
The key takeaway in this case is the narrowing of the genuine dispute doctrine. The court’s opinion essentially limits the doctrine’s use as a defense in bad faith failure-to-settle cases and reinforces the principle that the mere hint of potential coverage invokes the duty to defend.
Insurance Commissioner Poizner Publicly Denounces Lawsuit Over Rescission Regulations
On July 19, 2010, Insurance Commissioner Poizner promulgated regulations designed to limit the practice of rescissions in the health insurance industry. See our blog article, New Regulations Take Aim at Policy Rescissions, on this. Last Monday, an insurance industry trade group filed a lawsuit in San Francisco to block the regulations, which would have been effective August 18, 2010. Poizner commented on the lawsuit stating: “I find it unconscionable that insurers would sue to keep the Department from stopping the horrific practice of illegal rescissions[.] Sometimes I think representatives in this industry have their heads permanently stuck in the sand. Illegal rescissions are a repugnant industry practice. In this current environment, this lawsuit is simply short-sighted and morally wrong.” The Association of California Life and Health Insurance Companies says the new rules would impose new costs and inconveniences on consumers and are unnecessary.
Right to Jury Trial Trumps Binding Arbitration When Insurer Unreasonably Delays Paying Independent Defense Counsel
In an article appearing in the April 12, 2010 editions of the Los Angeles and San Francisco Daily Journals, I discuss the impact of the California Fourth Appellate District’s Intergulf Development, LLC. v. Superior Court (Interstate Fire & Casualty Company). Here it is:
In an important vindication of a California policyholder’s right to a jury trial to enforce an insurer’s duty to defend, the California Fourth Appellate District recently held that a liability insurer that fails to promptly acknowledge its insured’s right to independent counsel and begin funding that defense forfeits its rights to binding arbitration under Civil Code section 2860. Intergulf Development, LLC. v. Superior Court (Interstate Fire & Casualty Company), __ Cal.App.4th __, 2010 WL 1052745 (March 24, 2010). In Intergrulf, the court ruled that the insured may proceed first to a jury trial, and, if successful, recover contract and tort damages against the insurer.
The Duty to Defend Under California Law
Under California law, a liability insurer must defend its insured if the underlying complaint alleges the insured’s liability for damages potentially covered under the policy or if the complaint might be amended to give rise to a liability that would be covered under the policy.” Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 299 (1993). The duty to defend arises at the time the insured tenders defense of the third party lawsuit to the insurer. Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf. Montrose Chem. Corp., supra, 6 Cal. 4th at 295; Buss v. Superior Court (Transamerica Ins. Co.), 16 Cal. 4th 35, 49 (1997) (“To defend meaningfully, the insurer must defend immediately”); 10 Cal. Code Regs., section 2695.7(b). On occasion, an insurer will delay its decision to defend outright, defend under a reservation of rights, or deny coverage altogether while it “investigates” coverage, leaving the insured to its own devices.
An unreasonable delay in paying policy benefits or paying less than the amount due is an actionable withholding of benefits which may constitute a breach of contract, as well as bad faith, giving rise to tort damages. Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 720, 723 (2007); Major v. Western Home Ins. Co., 169 Cal. App. 4th 1197, 1209 (2009). The general measure of damages for breach of the duty to defend consists of the insured’s cost of defense in the underlying action, including attorney fees. Major v. Western Home Ins. Co., 130 Cal. App. 4th 1078, 1088-1089 (2005). Breach of the duty to defend also results in the insurer’s forfeiture of the right to control the defense of the action or settlement, including the ability to take advantage of the protections and limitations set forth in Civil Code section 2860. Fuller-Austin Insulation Co. v. Highlands Ins. Co. 135 Cal. App. 4th 958, 984 (2006); Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 426 F.Supp. 2d 1039, 1047 (N.D. Cal. 2005).
An Insurer’s Right to Invoke Civil Code Section 2860 Fee Arbitration
Under Civil Code section 2860, when a liability insurer reserves its rights to contest coverage for a third party’s suit against its insured, and defense counsel could manipulate the suit in a way that could impair the insured’s coverage, section 2860 requires the insurer to pay for independent counsel to defend the suit. For example, defense counsel may be in a position to hire expert witnesses with particular perspectives, and guide their testimony on issues such as when damage occurred or whether particular damage was expected or intended—steering claims in or out of coverage. Notably, section 2860(c) limits the hourly rates that the insurer must pay independent counsel, and requires the insured to submit any fee dispute to binding arbitration.
An Insurer’s Unreasonable Delay Forfeits its Right to Invoke Civil Code Section 2860
In Intergulf, Intergulf developed a condominium project in San Diego, California. Intergulf was an additional insured on policies issued to one of its subcontractors by Interstate Fire & Casualty Company, a division of Fireman’s Fund Insurance Company. The policies provided that Interstate had the right and duty to defend any lawsuit seeking damages because of property damage. While Interstate’s policies were in effect, the homeowners association sued Intergulf for alleged construction defects.
Intergulf promptly tendered its defense to Interstate. Two weeks later, Interstate responded, not with an acknowledgment of its defense obligation, but by requesting information and reserving all of its rights. Interstate wrote that, if it determined it had a duty to participate in Intergulf’s defense, it would impose “litigation handling guidelines,” and it would typically not pay hourly rates of more than $ 150 for partners, $135 for associates, and $ 75 for paralegals. Intergulf defended with its own counsel—Luce, Forward, Hamilton & Scripps, LLP—billing at a blended rate of $250 per hour.
Seven months later, Interstate finally informed Intergulf that Interstate recognized a “potential” for a defense obligation, but did not actually acknowledge either a duty to defend or coverage. Interstate offered to “participate” in the defense of Intergulf through the firm of Wood, Smith Henning & Berman. Intergulf objected that Interstate’s reservation of rights created a conflict of interest for the Wood Smith firm, and demanded the appointment of its own independent counsel under section 2860.
Intergulf then asked Interstate to reimburse its out-of-pocket defense fees and costs. No response. About a month later, Intergulf asked again. No response. Approximately one year after it had tendered its defense, Intergulf had neither a commitment to defend with conflict-free counsel nor any reimbursement for outstanding defense fees and costs from Interstate. Intergulf then sued Interstate for breach of the duty to defend, bad faith, and declaratory relief. Two months after Intergulf filed suit, Interstate made a first payment of approximately $ 140,000; nine months later, Interstate made a second payment of approximately $ 98,000.
Five weeks before the scheduled trial, Interstate filed a petition to compel arbitration of what it characterized as a section 2860 fee dispute. Intergulf responded that the case was about the contract and tort damages that Interstate owed for breaching its duty to defend—not about a fee dispute. It argued that because the questions of Interstate’s duty to defend, conflict of interest, and bad faith had not been resolved, Interstate did not satisfy the prerequisites for arbitration under section 2860(c). The trial court, however, granted Interstate’s petition to compel arbitration and continued the trial, pending completion of arbitration.
Intergulf challenged the trial court’s ruling by filing a petition for writ of mandate. The appellate court summarily denied the petition. The Supreme Court granted Intergulf’s petition for review and transferred the matter back to the appellate court with directions to vacate the order denying mandate and issue an order to show cause why the relief sought should not be granted.
The appellate court agreed with Intergulf that the gravamen of the complaint was bad faith and breach of contract, not a dispute over the amount Interstate should pay independent counsel under section 2860(c). By filing the action for breach of contract, bad faith, and declaratory relief, Intergulf gave Interstate notice that it was treating Interstate’s failure to acknowledge Intergulf’s right to independent counsel and delay in paying policy benefits as a total breach of the duty to defend. Intergulf at *2-3, citing Coughlin v. Blair, 41 Cal. 2d 587, 599 (1953) (filing suit gave defendant notice that plaintiff viewed its failure to perform as a total breach of contract); and Sackett v. Spindler, 248 Cal. App. 2d 220, 229-230 (1967)(seller could treat persistent delay in payment for stock as total breach of the purchase agreement).
Intergulf’s entitlement to damages for breach of contract and bad faith turned on (i) whether Interstate owed Intergulf a duty to defend in the first instance; and (ii) whether Interstate breached that duty by failing to defend Intergulf “immediately” and “entirely” on tender of the defense. Intergulf at *3, citing Buss v. Superior Court, supra, 16 Cal. 4th at 49; and Montrose Chemical Corp., supra, 6 Cal. 4th at 295. Neither of these questions had been resolved at the time the court granted Interstate’s petition to compel binding arbitration of the purported fee dispute pursuant to section 2860(c).
As the appellate court noted, ordering fee arbitration under section 2860 under these circumstances puts the cart before the horse. If Intergulf proves that Interstate breached the duty to defend or committed bad faith by failing to acknowledge Intergulf’s right to independent counsel or failing to immediately and fully fund its defense, Interstate forfeits its right to limit defense fees and costs under section 2860(c) fee arbitration. Instead, a jury could award contract and tort damages in the trial court. Intergulf at *4. The appellate court issued a peremptory writ of mandate directing the trial court to vacate its order granting Interstate’s petition to compel arbitration under section 2860(c), and to enter an order denying the petition to compel arbitration.
Sound Public Policy
The appellate court’s decision is based on sound public policy. If an insurer could delay a full and immediate defense for its insured, and then run for cover under section 2860’s rate limits and binding arbitration, it would have an incentive to fabricate a Cumis conflict, comforted by the knowledge that the attorney fee element of its insured’s damages would be limited by Cumis rates, claim management protocols, and binding arbitration, instead of being tried to a jury. The insured’s right to have a jury determine breach and damages is fundamental to enforcing the insurer’s duty to provide a full and immediate defense.
