Disability Insurance Archives - Page 30 of 44

“Slimy Conduct That Gives Insurance Companies a Bad Name:” Some Quotes from Judge Alex Kozinski

We do not normally focus on dissents in our blogging but we made an exception here with a published Per Curiam opinion from the Ninth Circuit Court of Appeals, Guam Industrial Services, Inc. v. Zurich American Insurance Co., 2015 DJDAR 5948 (9th Cir. June 1, 2015). This insurance coverage case arose out of the sinking of a dry dock, loaded with barrels of oil, during a typhoon on Guam. The issues pertain to whether either of two insurance policies covered costs of damage to the dock and the associated cleanup which was accomplished before any of the oil leaked out of the containers into the Pacific Ocean. Guam Industrial Services, Inc. (“Guam Industrial”) owned the dry dock. At the time of the sinking, one of its insurance policies, an Ocean Marine Policy, covered liability for property damage caused by pollutants, issued by Zurich American Insurance Company (“Zurich”). After the dock sank, Guam Industrial filed a claim under each policy. Zurich denied the claim, and Guam Industrial brought suit. The district court granted summary judgment for the insurers, finding that the first policy was voidable because Guam Industrial had failed to maintain the warranty on the dock, and that the coverage under the second policy was never triggered because no pollutants were released. Guam Industrial appealed the decision and the Ninth Circuit affirmed.

The court found no ambiguity in the terms of the policy, and under the ordinary meaning of the relevant endorsement, Zurich would have to provide coverage of Guam Industrial’s damages if either oil or pollutants were discharged into the water. However, the court determined that although the barrels or containers were discharged, the oil was not. The parties agreed that the oil remained sealed inside its containers at all relevant times. Thus, the majority found that under the ordinary meaning of applicable endorsement, Zurich’s coverage was not triggered by a “discharge, dispersal, release, or escape” of oil. Furthermore, it ruled that sealed containers did not qualify as “pollutants” under the plain meaning of the Policy, which limited the term “pollutants’ to chemicals and other hazardous substances.

Judge Alex Kozinski dissented. His incendiary comments on Zurich’s actions are particularly notable:

If you slap a silk suit on a monkey, you still won’t want to take it to the prom. And if you pour crude oil into a barrel, you still won’t want it in your hot tub.

Zurich’s Ocean Marine Policy covers claims “arising out of the discharge, dispersal, release, or escape of . . . oil . . . or pollutants into . . . any watercourse or body of water.” Guam Industrial paid for this coverage and Zurich happily accepted the premiums. (Insurance companies seldom have trouble with this part of the bargain.) What risk was Zurich paid to assume? The risk that something nasty would get into the water and Guam Industrial would be under a legal obligation to clean it up. That’s just what happened here: Some very nasty stuff—barrels containing over 100,000 gallons of industrial oil—plunged into the harbor when the dry dock sank. To no one’s surprise, the Coast Guard immediately issued Guam Industrial a clean-up notice. This wasn’t an invitation to the prom; it was a clean-up-or-else-we’ll-do-it-ourselves-and-make-you-pay-through-the-nose notice . . . .

Like the majority, I start with the dictionary definitions of “discharge,” “dispersal,” “release” and “escape” to ascertain their ordinary meaning. A “discharge” is a “release from confinement, custody, or care.” Merriam-Webster’s Collegiate Dictionary 356 (11th ed. 2003). A “dispersal” is the act of “spread[ing] or distribut[ing] from a fixed or constant source.” Id. at 361. A “release” is the act of “set[ting] free from restraint [or] confinement,” id. at 1051, and an “escape” is “flight from confinement,” id. at 425. The majority concludes that “barrels or containers were discharged, dispersed, and released” from the dry dock. Op. at 11. It then follows that the contents of those barrels were likewise “discharged, dispersed, and released” from the dry dock.

Let’s say you place your cell phone in your backpack while hiking, and the backpack falls into a crevice and can’t be recovered. You’d certainly be right in claiming that you lost your cell phone, even though the phone is still inside your backpack. What matters is that the backpack and its contents are no longer in your control. If the phone was insured against loss, no insurance company (except maybe Zurich) would claim that the phone isn’t lost because it’s still inside your backpack.

* * *

No rational dry dock owner would buy a policy that covers government-ordered pollution clean-up if containment vessels filled with toxic waste break apart upon sinking but not if they remain intact. It’s absurd. Zurich’s denial of coverage is the type of slimy conduct that gives insurance companies a bad name. This opinion should serve as fair warning to those who would throw away good money doing business with Zurich.

Judge Kozinski will not be taking Zurich to the prom any time soon.

Robert J. McKennon Named Corporate LiveWire’s Global Awards 2015 Insurance & Risk Management Lawyer of The Year for Orange County, California

McKennon Law Group PC is proud and honored to announce that Robert J. McKennon, founding shareholder of McKennon Law Group PC, has been named as Corporate LiveWire’s Global Awards 2015 Orange County, California Insurance & Risk Management Lawyer of the Year. The annual Global Awards Lawyer of the Year recognition honors the achievements of those individuals that have consistently shown best practice and demonstrated general excellence in every endeavor on a global and national level. Mr. McKennon specializes in all types of insurance litigation but especially focuses his efforts in long-term disability insurance, life insurance, long-term care insurance, health insurance and insurance bad faith litigation.

The Corporate LiveWire Global Awards 2014 Lawyer of the Year winner’s guide is available here.

Insurers Do Not Have Discretionary Authority, Absent Clear Language in Official Plan Documents

In actions brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), two roads diverge in federal court—and the court’s choice regarding the applicable standard of review can make all the difference in the scope of permissible evidence. If the court applies the abuse of discretion standard of review, the court more typically (but not always) only considers evidence received by the insurer in time for its decision and limits its review to the “administrative record” to determine whether the insurer’s denial was an abuse of discretion. Alternatively, the court may review a case “de novo,” and may consider documents not previously provided to the insurer to determine whether the insured is entitled to benefits.

Prior case law holds a district court must review a plan administrator’s decision de novo, “unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits.” Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). The Ninth Circuit Court of Appeals expanded upon this holding, by defining what constitutes the “benefit plan.” The Ninth Circuit clarified that where a Summary Plan Description (“SPD”) which was not defined as an official plan document unambiguously granted discretionary authority to a plan administrator to decide claims, but an insurance certificate, an official plan document, did not grant discretionary authority, the official plan document governed. Because the governing plan document, the insurance certificate, did not grant the insurer discretionary authority, the district court was required to review the case de novo. Prichard v. Metropolitan Life Ins. Co., 2015 U.S. App. LEXIS 6553 (9th Cir. Apr. 21, 2015). Prichard is significant as the de novo standard is arguably more favorable to insureds, because it not only provides a less deferential standard of review, but insureds may be able to conduct discovery and supplement the administrative record to offer evidence that administrators acted with bias or to bring in additional medical evidence to support a disability.

Prichard involved a fairly standard ERISA claim by Matthew Prichard, an insured, against Metropolitan Life Insurance Company (“MetLife”) for his long-term disability insurance benefits. Prichard’s policy contained a 24-month benefits period for mental limitations. Prichard filed for, and received, benefits for his psychiatric disability for a period just shy of 24 months. Subsequently, MetLife requested additional information demonstrating Prichard was disabled due to non-limited conditions, received his updated medical records and decided there was insufficient medical evidence to support his claim. Prichard appealed unsuccessfully, then brought suit for a continuation of his ERISA benefits under 29 U.S.C. section 1132(a)(1)(B).

The district court addressed whether the applicable standard of review was de novo or abuse of discretion. MetLife pointed to unambiguous language in its SPD granting the plan fiduciary “discretionary authority to interpret the terms of the Plan,” and argued for the abuse of discretion standard of review. Prichard argued the Supreme Court holding in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) stating the terms of plan summaries may not be enforced as the plan itself precluded MetLife from asserting that the SPD language was the Plan language. Prichard further argued that no other plan documents conferred discretionary authority on MetLife, and therefore the district court should review the case de novo. The district court found the SPD was a governing plan document which unambiguously granted MetLife discretionary authority to determine claims and benefit eligibility. Applying an abuse of discretion standard of review, the district court held that MetLife did not abuse its discretion in denying Prichard disability benefits. Prichard timely appealed.

The Ninth Circuit Court of Appeals reversed, explaining that a district court must review a plan administrator’s denial of benefits de novo, unless the benefit plan gave the administrator discretionary duty to determine eligibility for benefits. The Court noted that Amara involved a dispute in which there was an SPD and a written plan instrument, and the plan administrator sought to enforce the SPD’s terms over those of the plan instrument. MetLife sought to enforce the SPD as the one and only formal plan document. It argued that previous federal court decisions have accepted the SPD as the formal plan document where the terms of the SPD did not add to, or contradict, the terms of existing Plan documents. In light of these decisions, the Court explained that the SPD terms do not govern if they conflict with governing plan documents, and similarly, the SPD cannot create terms beyond those in the governing plan documents. However, the Court rejected MetLife’s argument that the SPD and the plan “are one and the same.” The Court determined that the SPD clearly stated the only plan documents are 1) a Group Policy (including the certificate), 2) IBM’s application and 3) any amendments or endorsements to the Group Policy. The Court noted that while the insurance certificate was plainly listed as a plan document, “[c]onspicuously absent from this exclusive list was the SPD.” Further, MetLife carried the burden of providing other official plan documents, such as a document containing the discretionary language, but failed to do so. As such, the SPD was the only plan document provided to the Court, and it did not grant discretionary authority to MetLife. The court also noted that “the SPD itself declares ‘official plan documents. . . remain the final authority’ and ‘shall govern’” if the SPD terms conflict with official plan documents. Finally, the Court of Appeal stated:

Because the official insurance certificate contains no discretion-granting terms, we will not, consistent with Amara, hold that the SPD’s grant of discretion constitutes an additional term of the Plan.

Accordingly, the Court held the district court erred in reviewing MetLife’s denial under the abuse of discretion standard of review, and remanded for a de novo review.

While Prichard turned on a technical distinction—what constitutes an official plan document, it affirms the idea that an insurer does not have discretionary authority absent clear language in official plan documents. Therefore, unless an insurer establishes it has discretionary authority under such documents, a court must apply a de novo standard of review. This de novo standard can be outcome determinative.

Ninth Circuit Affirms MLG’s Six-Figure Judgment in a Disability Suit Filed Against Sun Life

On April 22, 2015, the United States Court of Appeals for the Ninth Circuit issued a decision affirming the district court’s decision to award McKennon Law Group PC’s client, an attorney (“insured”), his past-due ERISA plan benefits, as well as attorneys’ fees, costs and interest against Sun Life & Health Insurance Company in connection with his short-term and long-term disability insurance claim.

In reaching this unpublished decision, the Ninth Circuit ruled that the district court correctly found that Sun Life “abused its discretion” in denying the insured’s claim for long-term disability benefits, because the record established he became disabled prior to the termination of his employment, and although his symptoms improved, it was not by enough for him to be able to return to work. The brief holding also noted that Sun Life acted with bias, as evidenced by its failure to correct an error caused when another patient’s record was mixed with the insured’s, its reliance on a purely paper review, its failure to reconcile its findings with those of the insured’s physicians and its own psychiatrist’s earlier contrary determination and its demand for objective evidence despite the psychiatric nature of the disability. Finally, while, post-trial, Sun Life attempted to introduce evidence not contained in the Administrative Record to support its decision, the Ninth Circuit stated that the district court did not abuse its discretion by not expanding the record.

For the McKennon Law Group PC’s client, the Ninth Court’s holding signals the end of every insured’s worst nightmare. For the insured, this nightmare began over seven years ago, when he became disabled following a nervous breakdown in December 2007. While Sun Life paid his claim for short-term disability benefits, Sun Life subsequently denied the insured’s claim for long-term disability benefits in December 2008 and upheld that decision in March 2010. The McKennon Law Group argued, and both the district court and Ninth Circuit agreed, that Sun Life’s denial decision was flawed for many reasons, including that it was based in part on a defective report by a physician reviewer who never spoke with the insured and considered medical records for another, younger female patient mistakenly provided to the reviewer. Further, Sun Life improperly imposed an impossible requirement that the insured provide “objective” evidence of his psychiatric conditions, even though such a requirement was not included in the Plan. Sun Life also failed to explain to the insured what medical evidence was needed to establish his disability, as is required under ERISA.

After Sun Life denied the insured’s claim, the McKennon Law Group filed suit against Sun Life in September 2011. The parties scheduled a mediation in October 2012, but negotiations were fruitless, as Sun Life only offered the insured a trivial amount to end the litigation. After discovery and extensive trial briefing, the district court conducted a bench trial in November 2012 and in its Memorandum of Decision, District Judge Cormac J. Carney explained:

[Sun Life’s] decisions that Mr. Evans was not disabled until December 13, 2007 and that Mr. Evans was not disabled throughout the elimination period were illogical, implausible, and without support in inferences that could reasonably be drawn from facts in the record because: (1) every doctor who personally examined Mr. Evans concluded that he was disabled and unable to return to his regular work; (2) Sun Life did not subject Mr. Evans to an in-person medical evaluation; (3) Sun Life relied almost exclusively on the deeply flawed assessment by Dr. Himber; (4) and Sun Life failed to engage in a “meaningful dialogue” with Mr. Evans. (Emphasis added.)

Moreover, Judge Carney also identified flaws in Sun Life’s review and commented that they “raise[] serious questions about the quality of the process Sun Life used in making its determination.” Accordingly, in April 2013, the court ruled in favor of the insured and awarded him $480,682.52 – $217,068.00 in past due benefits plus $20,882.69 in pre-judgment interest, $212,400.00 in attorneys’ fees and $2,355.69 in costs. The Ninth Circuit affirmed this Judgment, and the McKennon Law Group expects to be awarded attorneys’ fees and costs associated with the appeal.

The Ninth Circuit’s decision serves as both a cautionary tale and a beacon of hope for insureds – insurers may fight tooth and nail to avoid paying claims, but tenacious insureds with strong, aggressive legal representation can prevail – and may even receive their full benefits and attorneys’ fees and costs paid by the insurer causing this hardship.

Robert McKennon and Joe McMillen Publish Article: “When Insurers Rescind, They Must Act Fast”

The April 1, 2015 edition of the Los Angeles Daily Journal features an article written by Robert McKennon and Joseph McMillen of the McKennon Law Group entitled: “When Insurers Rescind, They Must Act Fast.” In the article, Mr. McKennon and Mr. McMillen discuss the California Court of Appeal’s decision in DuBeck v. California Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), which held that Blue Shield of California (“Blue Shield”), waived its right to rescind her health insurance policy and, therefore, her claim was covered. While Ms. DuBeck had allegedly willfully misrepresented material facts about her medical condition on her application, the appellate court found that even if she had done so, Blue Shield waived its right to rescind.

The article is posted below with the permission of the Los Angeles Daily Journal.

When insurers rescind, they must act fast
By Robert J. McKennon and Joe McMillen

Did you disclose your material medical history on your health insurance application?
What about your application for disability or life insurance? Be careful that you do or
you may find yourself without insurance when you need it most like Bonnie DuBeck
did when she learned she had breast cancer that her insurer would not cover because she allegedly misrepresented her medical condition.

Fortunately for DuBeck, the California Court of Appeal in DuBeck v. California
Physicians’ Service, 2015 DJDAR 2629 (Cal. App. 2d Dist. Mar. 5, 2015), held her
insurer, California Physicians’ Service, doing business as Blue Shield of California,
waived its right to rescind her health insurance policy and, therefore, her claim was
covered. While DuBeck had allegedly willfully misrepresented material facts about her
medical condition on her application, the appellate court found that even if she had
done so, Blue Shield waived its right to rescind. Looking at the facts, one wonders how the trial court did not easily reach the same conclusion.

On Feb. 16, 2005, DuBeck submitted a signed application for health insurance to
Blue Shield. Five days earlier, she had visited the Revlon UCLA Breast Center where a nurse performed a “fine needle aspiration” on a lump in her left breast that had
developed after she ran into a cabinet. On the nurse’s advice, DuBeck scheduled a
mammogram and consultation with a breast surgeon for Feb. 17, the day after she
submitted the insurance application.

DuBeck was asked on the application whether she ever had treatment or symptoms
related to potential breast problems or had been advised to have a physician conduct
an exam or further testing which had not yet been performed. DuBeck answered “no”
to each question, omitting material information about her recent and upcoming breast
procedures. On April 1, 2005, Blue Shield issued a health insurance policy to DuBeck
without knowing about her breast exam, procedures and potential health problems.
The lump turned out to be malignant. In the months that followed, DuBeck had breast
surgery and other related medical procedures. In April and May 2005, DuBeck started
submitting claims to Blue Shield under the policy for the medical services. Blue Shield
did not pay for the claims, but suspended processing them. It explained the services
might not be covered under the policy’s preexisting condition exclusion and that it
needed to investigate further.

Blue Shield continued to collect DuBeck’s premiums, $19,600, for the next seventeen
months. It paid for her other claims unrelated to her breast cancer. It did not rescind
the policy during that period.

Seventeen months after Blue Shield issued the policy, on Sept. 8, 2006, it sent
DuBeck a letter explaining it had determined she had not provided complete and
accurate information on her insurance application. Namely, she failed to disclose the
fine needle aspiration procedure, a mammogram and a breast surgeon exam. With full
knowledge that DuBeck had undergone breast cancer surgery and had submitted a
claim to Blue Shield to cover the costs of these procedures, Blue Shield decided to
terminate the policy prospectively rather than rescind it. The letter stated, “Blue shield
has determined that, rather than rescind the coverage completely, your coverage was
terminated prospectively and ended effective today, September 8, 2006.” Blue Shield
also promised to cover and pay for any covered services prior to the termination date.

On the same date Blue Shield sent DuBeck the letter, it sent her a “Certificate of
Creditable Coverage” confirming that her coverage began April 1, 2005, and ended
September 8, 2006. The certificate stated that it was “evidence of your coverage under this plan.”

Two years later, because it had still refused to pay for her breast cancer surgery and
related services, DuBeck sued Blue Shield for breach of the insurance contract and bad faith, among other claims. Blue Shield asserted an affirmative defense that the policy was subject to rescission because DuBeck had willfully misrepresented material facts in her application, rendering the policy void ab initio. It moved for summary judgment on that defense, which the trial court granted.

DuBeck appealed and argued Blue Shield waived any right to rescind the policy. The
Court of Appeal agreed, reversed the trial court, and found waiver as a matter of law.

The court noted rescission extinguishes a contract, rendering it void ab initio, as if it
never existed. Rescission is, of course retroactive, rendering a contract or insurance
policy unenforceable from the outset. Cancellation, however, is prospective. To rescind under California law, the insurer must return to the insured all the premiums paid, unlike cancellation.

It is established California law that an insurer has the right to rescind a policy when
the insured misrepresented or concealed material information in seeking to obtain
insurance. Nieto v. Blue Shield of California Life & Health Ins. Co., 181 Cal. App. 4th
60, 75 (2010). However, that right, like any other, can be waived: “An insurance
company will be deemed to waive any ground which would otherwise entitle it to
rescind a policy … when, despite knowledge of the facts giving it the option, it impliedly recognizes the continuing effect of the policy.” Pierson v. John Hancock Mut. Life Ins. Co., 262 Cal. App. 2d 86, 91 (1968); see also Silva v. National American Life Ins. Co., 58 Cal. App. 3d 609, 61516 (1976).

In general, to constitute a waiver, there must be an existing right, a knowledge of its
existence, an actual intention to relinquish it, or conduct so inconsistent with the intent
to enforce the right as to induce a reasonable belief that it has been relinquished.
Pacific Business Connections, Inc. v. St. Paul Surplus Lines Ins. Co., 150 Cal. App. 4th 517, 525 (2007), quoting Klotz v. Old Line Life Ins. Co. of America, 955 F. Supp. 1183, 1186 (N.D. Cal. 1996).

Under this authority, the Court of Appeal held that Blue Shield waived its right to
rescind the policy as a matter of law, finding the insurer’s conduct was “so inconsistent with the intent to enforce the right [to rescind] as to induce a reasonable belief that it has been relinquished.” The court reasoned Blue Shield told its insured it was terminating the policy prospectively rather than rescinding it, that all her claims prior to the cancellation date would be covered, and retained her premiums.

Additionally, the court explained that in 2009, the Legislature enacted Health and
Safety Code Section 1389.21, which prohibits an insurer governed by the KnoxKeene
Health Care Service Plan Act from rescinding or canceling a health care service plan
contract for any reason more than 24 months following its issuance. Although the
effective date of the statute was January 2010, the court stated: “we find support for
our decision in the Legislature’s judgment that two years is ample time for an insurer to uncover any misrepresentations made in an application and determine whether to
rescind or continue coverage.”

The court determined that Blue Shield first asserted its right to rescind DuBeck’s
policy (during litigation) over three and a half years after issuing it, and more than two
years after admittedly learning the truth about appellant’s medical condition. The court
concluded these facts established Blue Shield had engaged in conduct so plainly
inconsistent with an intent to enforce the right to rescind the policy that it had waived
that right. That Blue Shield first attempted to rescind the policy in litigation after it
represented that it would cancel the policy, but not rescind it, made this outcome
predictable.

This case teaches that insurers must promptly rescind the policy and return all
premiums upon learning of material misrepresentations in the application. They
cannot engage in conduct inconsistent with a right to rescind that would lead an
insured to reasonably believe the policy is still in effect. California courts will not
hesitate to find waiver as a matter of law in that scenario.

California Court of Appeal Emphasizes Just How Broad the Duty to Defend Is, which Includes Suits Alleging Even Rape

A liability insurer’s duty to defend its insured against lawsuits is extremely broad, much broader than its duty to indemnify its insured for a judgment entered against it. That has been the law in California for decades. But just how broad is the duty to defend? Does it extend to civil lawsuits alleging the insured raped and sexually assaulted the plaintiff? Does it extend to lawsuits alleging intentional acts by the insured? You bet it does if the policy contains the right language.

The California Court of Appeal recently addressed these issues in Gonzalez v. Fire Insurance Exchange, __ Cal. App. 4th __ (Feb. 5, 2015). There, plaintiff Jessica Gonzalez alleged she was sexually assaulted and raped by Stephen Rebagliati and nine other members of the De Anza College baseball team. Ms. Gonzalez, who was seventeen years old at the time, alleged she was invited to a party by Mr. Rebagliati and the other team members, given shots of hard liquor in quick succession, and then later that night sexually assaulted by unknown members of the baseball team as she lay unconscious in a room. Ms. Gonzalez alleged that Mr. Rebagliati and the other defendants prevented three innocent bystanders from taking her out of the room during the assault. She alleged that although Mr. Rebagliati was in the room, he did not rescue her. Also, that the men took photos, videos and cheered during the assault.

Ms. Gonzalez filed a lawsuit against Mr. Rebagliati and the other team members alleging fifteen causes of action, including rape, sexual battery, unlawful intercourse, false imprisonment, invasion of privacy, slander per se, negligence and other claims. While she pleaded claims labeled “negligence” against Mr. Rebagliati for inviting her to the party, serving her alcohol and failing to rescue her, those claims failed to allege accidental acts, only deliberate, intentional acts. All of the causes of action were pleaded against Mr. Rebagliati “and/or” the other defendants, except the negligence claims were pleaded solely against Mr. Rebagliati. Thus, the complaint allegations left open the possibility that just the other team members sexually assaulted and raped Ms. Gonzalez, not Mr. Rebagliati.

Mr. Rebagliati was insured through his parents’ homeowner’s policy issued by Fire Insurance Exchange (“Fire”) and an umbrella policy issued by Truck Insurance Exchange (“Truck”). He tendered the sexual assault lawsuit to both insurers and asked that they defend him. They denied the claim on the grounds that the sexual assault lawsuit did not allege an “accident” and their policies covered accidents, not willful misconduct; coverage was precluded under various intentional acts exclusions since all of the claims alleged intentional misconduct; and the sexual molestation exclusion precluded coverage for all of the lawsuit’s claims because each claim was inextricably intertwined with the uncovered sexual assault claim.

Mr. Rebagliati settled the sexual assault lawsuit with Ms. Gonzalez. As part of the settlement, he assigned her all of his rights against Fire and Truck under the insurance policies. He also agreed to entry of judgment against him in Ms. Gonzalez’ favor.

Ms. Gonzalez sued Fire and Truck alleging they breached their duty to defend their insured, Mr. Rebagliati, and for bad faith. Both insurers successfully moved for summary judgment. The trial court found the insurers did not have a duty to defend Mr. Rebagliati in the sexual assault lawsuit.

Ms. Gonzalez appealed. The appellate court reversed the summary judgment made in favor of Truck (the umbrella insurer) and held it had a duty to defend. The court, however, upheld the judgment in Fire’s favor. It reasoned the homeowner’s policy insured against just damages caused by “accidents” and the sexual assault lawsuit did not allege accidental acts, only intentional acts.

The court found Truck’s umbrella policy had broader language, a duty to defend its insured against accidents and intentional misconduct. Unlike the primary liability policy issued by Fire, the coverage grant in the umbrella policy was not limited to accidental acts. It covered injury caused by “personal injury” offenses enumerated in the policy including: wrongful detention or imprisonment; invasion of privacy; and slander. While the primary policy required similar “personal injury” offenses to result from an “accident” for coverage to exist, the umbrella policy did not. The Court of Appeal therefore found Truck had a duty to defend the underlying lawsuit, despite that it alleged solely intentional and not accidental acts. The suit alleged damages resulting from the “personal injury” offenses covered by the policy, including false imprisonment, invasion of privacy and slander:

Next, Gonzalez insists the court erred in granting summary judgment in favor of Truck because its umbrella policy provided broader coverage than the Fire homeowner’s insurance policy. Specifically, she argues the umbrella policy’s definition of “personal injury” did not require covered incidents to be “accidental” in nature. Given the wording of the policy’s definitions, we agree.

* * * *

Gonzalez points to the policy’s definition of an “occurrence”: “Occurrence means: [¶] a. with regard to bodily injury or property damage, an accident, . . . .; or [¶] b. with regard to personal injury, offenses committed during the policy period . . . .” (Italics added by the court.) . . . .

Accordingly, the Truck umbrella policy sets forth no requirement that a personal injury arise out of an “accident” in order for there to be coverage. As a result, Gonzalez’s complaint, which alleged causes of action for false imprisonment, slander per se, and invasion of privacy, raised the potential for coverage under the umbrella policy’s provision providing coverage for damages from an “occurrence” resulting in “personal injury.”

Next the court addressed three exclusions in Truck’s policy. First, it rejected Truck’s argument that it owed no duty to defend Mr. Rebagliati given the policy’s sexual molestation exclusion. That exclusion precludes coverage for damages resulting from any acts of molestation by the insured (Mr. Rebagliati) or any other person who is acting or who appears to be acting on behalf of the insured. The court reasoned the exclusion may not apply because the sexual assault complaint was pleaded using the disjunctive “and/or” for each claim and thus raised the possibility that Mr. Rebagliati might be found liable for covered conduct (such as invading Ms. Gonzalez’ privacy or wrongly imprisoning her) but not for the uncovered sexual assault claim. Because the complaint raised the possibility the other defendants committed the uncovered physical act of sexually assaulting Ms. Gonzalez, not Mr. Rebagliati and not anyone else acting on his behalf, the court found the exclusion may not ultimately apply to a judgment entered against Mr. Rebagliati and, therefore, a potential for indemnity coverage existed.

In reaching this conclusion, the court discussed the well-established rule that an insurer’s duty to defend is exceptionally broad and applies unless the insurer can prove there is no potential the underlying claims will fall within the policy’s indemnity coverage. The court also discussed the rules pertaining to exclusions, which also strongly favor policyholders, especially when deciding a duty to defend issue:

While an insured bears the initial burden to demonstrate a claim may be covered by a policy, when it comes to exclusions the burden is switched. It is up to the insurer to conclusively show an exclusion to the policy applies barring coverage. Once that possibility of coverage has been raised . . . then the insurer may defeat such claim of coverage by extrinsic evidence, but only where such evidence presents undisputed facts which conclusively eliminate a potential for liability. . . . . Moreover, exclusionary clauses are interpreted narrowly, whereas clauses identifying coverage are interpreted broadly. [Internal quotes and citations omitted; italics in original].

Since there was at least a bare possibility Mr. Rebagliati would be covered under his umbrella policy for a judgment entered against him in the sexual assault lawsuit at the time Truck denied him a defense, based on the underlying complaint’s broad allegations, the court held Truck owed him a duty to defend the entire lawsuit. It also held that the sexual molestation exclusion did not obviate Truck’s duty to defend because there remained a possibility the exclusion would not apply to him.

The court next found the umbrella policy’s exclusion for damages that are either “expected or intended from the standpoint of the insured” did not obviate Truck’s duty to defend. Nor did the statutory exclusion, read into every insurance policy under Insurance Code section 533, for a loss caused by the insured’s willful act. The court reasoned that coverage is not precluded under these exclusions by just intentional acts without more. Instead, the insured must have intentionally acted with a “preconceived design to inflict injury.” Indeed,

Courts have held that the appropriate test for expected damage is whether the insured knew or believed its conduct was substantially certain or highly likely to result in that kind of damage. . . . . Therefore, it is the insured’s subjective belief as to whether his or her conduct would cause the type of damage claimed that excludes coverage. [Internal quotes and citations omitted].

The court found under the complaint’s broad allegations, Mr. Rebagliati could have committed various intentional acts without the requisite intent to cause damage to Ms. Gonzalez and, therefore, there was at least a potential for covered liability under the policy despite its intentional acts exclusions. For example, it noted that the tort of slander per se does not necessarily require a defendant to subjectively intend to harm the plaintiff. Under the complaint allegations, the jury could possibly award damages against Mr. Rebagliati for intentionally making statements about Ms. Gonzalez, though he had no subjective intent to harm her. Thus, Truck failed to meet its burden to conclusively prove the intentional acts exclusions barred any possibility of a covered liability under its policy.

The court rejected Truck’s argument that it had no duty to defend based on the criminal acts exclusion. The court reasoned there was no evidence that conclusively proved Mr. Rebagliati sexually assaulted Ms. Gonzalez and thus committed a crime. And, based on the complaint allegations, it was possible the jury would find the other team members perpetrated the sexual assault, not Mr. Rebagliati. The court therefore held Truck had a duty to defend Mr. Rebagliati because it failed to conclusively demonstrate the exclusion applied to all of Ms. Gonzalez’ underlying claims against him.

The Court addressed one final matter, the insurer’s argument that Mr. Rebagliati’s potentially covered acts were “inseparably intertwined” with the uncovered sexual assault claim and therefore should be excluded from coverage as well. Truck relied on various sexual assault cases that had held as much. The court distinguished those cases and held:

We disagree with the insurers that these cases set forth a blanket rule that if a cause of action is related to sexual molestation it must be excluded from insurance coverage. This interpretation would gloss over the finer nuances of the law governing an insurer’s duty to defend.

The court noted that, unlike the other cases, Mr. Rebagliati was one of several defendants and Ms. Gonzalez’ complaint raised the possibility that other individuals and not Mr. Rebagliati perpetrated the sexual assault. Additionally, Mr. Rebagliati had not admitted to the assault and Truck had not conclusively proved he was involved in that aspect of the alleged wrongs prior to rejecting his tender of defense. The court thus found the insurer had not met its burden to conclusively demonstrate the policy’s criminal acts exclusion eliminated all possibility for indemnity coverage.

The lesson of Gonzalez v. Fire Insurance Exchange is that an insurer’s duty to defend is extremely broad and that duty requires an insurer to defend its insured against even a lawsuit alleging rape and sexual assault under the right circumstances (i.e., there is no requirement that personal injury arise from an accident). As California courts have held for decades, if there is any possibility for indemnity coverage under an insurance policy based on the underlying complaint’s allegations, the insurer must defend its insured against the entire lawsuit unless and until it can conclusively prove with undisputed facts the contrary.

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