Firm News Archives - Page 36 of 76

CBS’ 60 Minutes Segment “Denied” Highlights Insurers’ Wrongful Denial of Mental Health Claims

On Sunday December 14, 2014, CBS’ 60 Minutes program contained a segment entitled “Denied” which highlights that insurers routinely deny, based on lack of medical necessity, treatment for patients with mental illnesses, especially those for long-term in-patient care at mental health facilities. This segment was an indictment of health insurance companies’ actions (especially Anthem Blue Cross) to deny legitimate claims for such care, sometimes with tragic results. According to 60 Minutes, “we found that the vast majority of claims are routine but the insurance industry aggressively reviews the cost of chronic cases. Long-term care is often denied by insurance company doctors who never see the patient. As a result, some seriously ill patients are discharged from hospitals over the objections of psychiatrists who warn that someone may die.”

As we see all too often, insurers rely on their non-independent physician consultants, who are paid handsomely for their opinions, who render decisions favoring the insurers’ attempts to deny legitimate claims. These physician consultants do not see or physically examine the insureds, but rather perform a “peer review” or “paper review” based on a review of medical records and other information. These physicians typically attempt to contact the insured’s treating physicians to ask questions, but in reality use these “attempted” phone calls as a pretext to opinions against the insured’s interest (i.e., that the insured does not need additional mental health care) so that the insurer can deny these claims. This is very often done without giving the treating physician adequate time for a response. This is exactly what the 60 Minutes segment found.

This problem is so prevalent that when McKennon Law Group clients hire us to represent them to handle ERISA or non-ERISA insurance claim correspondence and appeals, we now instruct insurers that if they wish to contact our clients’ treating physicians, any communications between the insurer’s consulting physician and the treating physicians must be in writing, include only those questions that are pertinent to the claim and include a reasonable time to allow the treating physicians to adequately respond to the questions. This allows the treating physicians the time necessary to adequately respond to the questions in writing, with the benefit of allowing them to review the most recent medical records. All too often we have seen a scenario in which an insurer’s consulting physician makes a “cold call” to an insured’s treating physician without an appointment to speak to him or her in the midst of a busy practice schedule. This creates several problems. First, the treating physician may not be able to immediately take the call because he or she is treating patients. As a result, the insurer’s physician notes that the treating physician did not take his call and an implication is raised that the insured’s physician does not support the claim. Second, even if the treating physician is able to take the call, he or she may not be prepared to thoroughly discuss the claim or the restrictions and limitations without a review of his or her records. If pressed for answers regarding the date of last examination or clinical findings, the treating physician may, understandably, not be able to give complete or accurate answers. Of course, this does not stop the physician consultants and insurance companies from arguing that the treating physicians do not support the insured’s claim. Communication in writing alleviates these problems.

The real problem is that (as the CBS segment notes) doctors hired by the insurance companies are paid for each medical review they complete, and in many cases, the so-called independent physician consultants conduct hundreds of reviews per year for these insurers. They are thus economically motivated to render opinions that allow insurers to deny legitimate health insurance claims because they want repeat business.

California Insurance Commissioner Dave Jones commented on the 60 Minutes segment, stating that:

60 Minutes featured a story last night about Anthem Blue Cross’ denial of coverage for patients needing mental health treatment. “I am very pleased to see that 60 Minutes has brought national attention to our disputes with Anthem Blue Cross over their denial of coverage for mental health treatment,” said California Insurance Commissioner Dave Jones. “Medically necessary mental health treatment, including residential mental health treatment, is required to be covered under mental health parity laws.”

(Calif. Dept of Insurance, “Insurance Commissioner responds to 60 Minutes story about insurer denials of coverage for mental health treatment,” December 15, 2014)

State and federal mental health parity laws are in place to prevent health insurers from denying coverage for mental health care. California Insurance Code section 10144.5 requires health insurance policies to cover diagnosis and medically necessary treatment of severe mental illnesses for patients of all ages.

One issue not mentioned in the 60 Minutes segment is that insureds typically have a review or appeal process available to them. In order to navigate this complex area of the law, it is advisable that they seek out the advice of experienced attorneys in this area of the law when they are faced with insurance claim denials.

What’s a Policyholder to Do? California Court Permits “Conditional Judgment” Awarding Replacement Cost to Policyholders

When a covered property is damaged, the insured may face a quintessential Catch-22—the insured cannot afford to proceed with costly repairs or replacement without insurance money, but until the repairs or replacements are finished, the insured cannot recover under the replacement cost provision of the liability policy. A recent court decision held a policyholder must actually repair or replace the damage in order to claim replacement cost value, but may recover a “conditional judgment” for replacement cost benefits and satisfy the condition after trial. Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co., 2014 Cal. App. LEXIS 1073, 2014 WL 6679263 (Cal. App. 1st Dist. Nov. 24, 2014) (“Stephens”). Stephens fashions a pragmatic approach whereby insurers can condition payment on actual replacement, while policyholders preserve their rights to benefits after proving coverage.

The case involved a vacant, industrial warehouse owned by Stephens & Stephens XII, LLC (“Stephens XII”), which was covered under a commercial property insurance policy issued by Fireman’s Fund Insurance Co. (“Fireman’s Fund”). The insurance policy initially covered liability, and subsequently, Stephens XII added property damage coverage. The updated policy covered loss from property damage, including rent, and provided two different measures for reimbursement of covered damages: Stephens XII either could recover the replacement cost, or full cost of repairing the damage, so long as the repairs were actually made promptly or as soon as reasonably possible, or the actual cash value, or depreciated value of the damaged property.

Three days after the property damage coverage became effective, Stephens XII discovered large scale vandalism and theft by burglars who stripped all the electrical and conductive materials on the covered property, causing an estimated $1 million in repairs. Stephens XII filed a claim, but Fireman’s Fund delayed resolution of the claim, asserting that given the extensive scope of the vandalism, the damage must have occurred before the policy effective date. Stephens brought suit against Fireman’s Fund for breach of contract and breach of the implied covenant of good faith and fair dealing. Five years later, and one month before the trial, Fireman’s Fund denied coverage. As of the trial date, Stephens XII had yet to repair the damage. Regardless, in a special verdict, the jury awarded Stephens XII the “Replacement Cost,” plus over $2 million in lost “Business Income” for breach of contract, but denied damages for repair and lost profits and awarded $436,896 in “lost rents” as bad faith damages and awarding no damages for loss of rental value.

The trial court granted a judgment notwithstanding the verdict (“JNOV”), holding the terms of policy did not require Fireman’s Fund to pay replacement cost until the property damage was actually repaired or replaced, and such repairs had not been made. Replacement cost insurance, which typically places the insured in a better position than before the loss, creates a moral hazard that the insured will intentionally destroy property and recover under the policy. Therefore, replacement coverage typically requires as a condition to recovery that the insured actually repair or replace the damaged property before the insurer will pay the replacement cost. Generally, policies provide that the actual repair or replacement must occur as soon as possible.

The court noted that often, a policyholder with replacement cost coverage could claim an immediate payment based on the actual cash value to use as seed money to start the repairs. Here, claims discussions were in vain, with Stephens XII taking no steps to make repairs, and Fireman’s Fund never accepting coverage. Stephens XII did not ever seek the actual cost value to use as “seed money” to begin repairs and instead sought the replacement cost value with making any repairs, and sought its lost income. Because Stephens XII did not seek actual cost value and did not repair the damage, the trial court ruled that neither award was warranted. Next, the court rejected the jury award for lost business income. The policy contained a provision under which Fireman’s Fund agreed to pay for “actual loss of Business Income and Rental Value” sustained “due to the necessary suspension of operations during the period of restoration.” The court explained Stephens XII did not sustain losses because potential income lost from a failed property sale did not constitute “business income,” and Stephens XII did not suffer business losses as it did not conduct business at the property, as required by the policy.

On appeal, the Court of Appeal reversed, holding that Stephens XII was entitled to a conditional judgment awarding the replacement value, so long as the repairs were actually made. The court first confirmed that the trial court properly interpreted the contract as stating Stephens XII could claim either replacement cost, only if it actually repaired the damage, or actual cost value, which it did not claim. Further, there was no dispute that Stephens XII did not actually repair the damage, and therefore it was not entitled to replacement cost under the policy. The only issue to resolve was whether Stephens XII was excused from repairs based on Fireman’s Fund’s actions.

Stephens XII successfully argued its failure to repair was prevented by Fireman’s Fund’s failure to accept coverage. The court upheld the jury finding that there was significant evidence of Fireman’s Fund’s refusal to cover the loss which made it difficult for Stephens XII to repair the property. The court held that an insurer’s failure to pay a claim excused the procedural requirements (i.e., time restrictions), but not the insured’s underlying obligations (to repair the building) under the policy. However, the insured was entitled to a conditional judgment for replacement costs conditioned on the insured’s completion of repairs promptly after judgment. The Court of Appeal explained:

If coverage is ultimately resolved in favor of the insured, the insured should remain eligible to receive replacement cost, but only so long as the insured complies with other applicable policy terms, such as a repair requirement. In other words, a coverage dispute should not give the insured a benefit under the policy it never had in the absence of the dispute—such as the right to receive the replacement cost without actually repairing the damage.

The court rejected Stephens XII’s arguments that Fireman’s Fund waived, and was estopped from asserting, its right to demand compliance with the repair provision because it failed to communicate this demand in its correspondence. The court noted that California courts adhere to the general rule that waiver requires an insurer intentionally relinquish its right to deny coverage, and a failure to raise one basis for a denial in a denial letter may not reflect an intention to waive that reason. Here, Stephens XII did not provide sufficient evidence that Fireman’s Fund intended to waive the repair requirement.

Finally, the court upheld the jury’s verdict of $436,896 in “lost rents.”

Stephens identified a problematic issue in recovering replacement cost under a property damage policy and fashioned a rarely used judicial remedy by permitting a conditional judgment of award of replacement/repair costs. This solution seems appropriate and allows an insured to establish its right to coverage under a policy where the insurer denied coverage by requiring insurers to pay the replacement value once repairs are made.

Recent Federal Cases Applying the State and Federal Mental Health Parity Acts: What Do They All Mean?

The Federal Mental Health Parity and Addiction Equity Act (“MH Parity Act”) requires, at a minimum, that the financial requirements and treatment limitations for mental health benefits set by group health plans and health insurance carriers be no more restrictive than those provided for non-mental health medical benefits. The MH Parity Act was originally signed into law by President Bill Clinton in 1996 and amended the Employee Retirement Income Security Act (ERISA) and Public Health Service Act and Internal Revenue Code in 2008. Now, the MH Parity Act is at issue in an increasing number of cases and has been addressed several times by the federal courts in the Ninth Circuit Court of Appeals.

Daniel F. v. Blue Shield of California, U.S. Dist. LEXIS 111643 (N.D. Cal. Aug. 11, 2014) began with two parents seeking coverage for residential treatment of their minor son’s mental health condition under their Blue Shield health insurance plan, governed by ERISA. Blue Shield denied the claim, stating its policy excluded coverage of residential treatment services for severe mental health conditions. Plaintiffs brought suit alleging violation of the insurance contract and a claim for declaratory and injunctive relief, but the court granted summary judgment for Blue Shield. During the appeal of this case, the Ninth Circuit issued Harlick v. Blue Shield of California, 686 F.3d 699 (9th Cir. 2012) holding the MH Parity Act requires health plans to provide coverage for all medically necessary treatment for severe mental illness, subject to the same financial terms as imposed on coverage for physical illnesses. Plaintiffs sought to maintain a class action against Blue Shield on behalf of participants covered under Blue Shield health insurance plans, governed by ERISA, whose claims for residential treatment of mental health claims were denied. However, the court explained class certification would require individualized discovery and proof, inquiries into medical necessity and whether individual mental health conditions and treatment were covered under the California Parity Act and additional difficulties with determining damages. Ultimately, the court held Plaintiffs failed to articulate a definition of an ascertainable class, and denied the motion for class certification.

Brazil v. OPM, 2014 U.S. Dist. LEXIS 44856 (N.D. Cal. Mar. 28, 2014) involved a plaintiff who received medically necessary mental health treatment at a residential facility, but her federal health insurance plan excluded coverage for residential treatment. The Plaintiff exhausted all administrative remedies and brought suit against the Office of Personnel Management (“OPM”) in federal court. The court held the plaintiff cannot recover under the MH Parity Act because the OPM has sovereign immunity, and Congress did not consent to be sued under the MH Parity Act. Brazil demonstrates the MH Parity Act did not apply to federal insurance plans.

A.F. v. Providence Health Plan, 2014 U.S. Dist. LEXIS 109507 (D. Or. Aug. 8, 2014) involved plaintiffs who sought an order enjoining the insurer, Providence Health Plan, from excluding applied behavior analysis therapy for participants diagnosed with autism spectrum disorders. The court granted the plaintiffs’ partial motion for summary judgment holding Providence’s “Developmental Disability Exclusion,” which excluded coverage for services relating to “developmental disabilities, developmental delays or learning disabilities” but not medical or surgical conditions, constituted a violation of the MH Parity Act and the Oregon Mental Health Parity Act.

R.H. v. Premera Blue Cross, 2014 U.S. Dist. LEXIS 108503 (W.D. Wash. Aug. 6, 2014) involved a class action suit in which plaintiffs alleged Premera Blue Cross, imposed treatment limitations on applied behavior analysis and neurodevelopmental therapy when similar limitations were not applied to medical benefits in violation of Washington’s Mental Health Parity Act. Premera agreed to a settlement in which it would remove the limitations and establish a $3.5 million settlement fund to reimburse plaintiffs who were denied services under the limitation. The court approved the unopposed class settlement as fair, reasonable, and adequate.

The trend of cases reveal practical considerations some insureds may encounter in bringing suit against their health insurance company if benefits are small, and additional difficulties establishing a class action suit. However, these decisions reflect the Ninth Circuit Court’s interpretation of the MH Parity Act, its willingness to hold health insurance carriers responsible for violations and ensure that insureds who have health insurance coverage have a viable claims for violations of the MH Parity Act.

Too Little Time – Court Finds ERISA Plan’s Contractual Limitation Period Unreasonably Short and Unenforceable

One hundred days is not a reasonable amount of time to give a plan participant to file a lawsuit under the Employee Retirement Income Security Act of 1974 (“ERISA”). This was the conclusion reached by the United States District Court Southern District of California in its recent decision in Nelson v. Standard Insurance Company, 2014 U.S. Dist. LEXIS 119179 (S.D. Cal. Aug. 26, 2014), which held that a contractual limitation contained in an ERISA-governed group long-term disability policy’s limitation period is unreasonable and unenforceable because the time period may have ran prior to the end of the administrative review process and because it provided the plan participant only one hundred days to file an action in federal court. The holding in Nelson was one of the first in the Ninth Circuit to determine, in the wake of the Supreme Court’s decision in Heimeshoff v. Hartford Life & Accident Insurance Co., 134 S. Ct. 604 (2013), that a plan’s contractual limitation on filing a lawsuit is unreasonably short. While numerous questions still remain as to what constitutes an unreasonable plan limitations period, the Nelson decision makes it clear that, at the very least, providing a plan participant only one hundred days within which to file a complaint in federal court is not reasonable.

Last year, in its highly anticipated decision in Heimeshoff, the Supreme Court unanimously held that an ERISA governed plan’s limitation period, requiring a claimant to bring an action within three years of when proof of claim was due, was enforceable. The Court found that this contractual time limitation on filing a claim in federal court was valid despite the fact that it was shorter than the applicable statute of limitations. Although the Court held that a plan’s contractual limitation periods should ordinarily be enforced, it also stated that such provisions may not be enforced where the period provided is “unreasonably short.” The Heimeshoff Court explained that a limitations provision is unreasonably short if it “leav[es] [a] claimant[] with little chance of bringing a claim not barred.” The Heimeshoff decision left open the issue of just how short a plan’s contractual limitation must be in order to be considered unreasonable. The Southern District’s decision in Nelson now provides some guidance on this question.

In Nelson, the Plaintiff, a plan participant, brought an ERISA action against her Group Long-Term Disability Plan (“Defendant”) and the plan administrator, Standard Insurance Company (“Standard”). After initially accepting and paying the Plaintiff’s disability benefits in July 2008, Standard terminated her benefits in January 2010 based on a finding that she was no longer disabled. In June 2010, Plaintiff appealed the decision and a final denial was issued in October 2011. In January 2013, Plaintiff filed her action against Standard and Defendant in the Southern District. The plan contained a provision entitled, “Time Limits on Legal Actions”, which states that a plan participant must bring a legal action within three years after the earlier of either (1) the date the administrator received proof of loss or (2) the time within which Proof of Loss was due to the administrator. On the basis of this contractual limitations provision, Defendant filed a motion for judgment on the pleadings under the Federal Rules of Civil Procedure 12(c), arguing that because the Plaintiff provided her Proof of Loss in May 2008 and the contractual time limit had already expired in May 2011, she was barred from suit.

The court in Nelson first stated that it could not determine the date upon which the contractual limitations period began to run because the term, “proof of loss” was never used in Plaintiff’s first amended complaint and she had submitted documentation supporting her disability status on several different dates. Plaintiff argued that her cause of action did not accrue as of the May 30, 2011 date that Defendant contended the limitation period expired. However, Defendant asserted that Plaintiff’s cause of action accrued on February 16, 2011, one hundred days before the contractual time limit expired. The court held that, even accepting Defendant’s argument that the limitation period concluded on May 30, 2011 and that the Plaintiff’s cause of action accrued one hundred days earlier on February 16, Defendant cited to no legal authority finding that a period of one hundred days is a reasonable period for a Plaintiff to file a lawsuit. The court found that this time limitation was especially unreasonable in the Plaintiff’s situation because a final decision had not even been reached on the claim prior to the expiration of the contractual limitation period. Indeed, the court concluded that a contractual limitation period may be rendered unreasonable as a result of undue delay in reviewing a claim. Based on these findings, the court denied Defendant’s motion for judgment on the pleadings because the contractual limitations period in the plan was unreasonably short.

The decision in Nelson demonstrates that, even after Heimeshoff, a plan’s contractual limitation period that may run prior to the completion of administrative review process is a good candidate to be found to be unreasonable and unenforceable. Moreover, at least in the situation presented in Nelson, providing a plan participant with only one hundred days to file an action is patently unreasonable. It is important to note that the Nelson court also specifically stated that, even where a limitation period is found to be reasonable, the doctrine of equitable estoppel may still prevent enforcement of the contractual limitations provision. The decision in Nelson should remind plan participants to be mindful of both statutory and contractual time limitations on their ability to file a lawsuit to protect their benefits.

Court Allows Mandamus Claim Against the California Department of Insurance Regarding Disability Insurance Dispute

There is a commonly held belief that every disability insurance policy sold to the public has been actually reviewed and approved by the California Department of Insurance. Indeed, California Insurance Code section 10291.5 requires the Insurance Commissioner to reject a proposed new disability insurance policy form if it does not meet certain requirements set forth in the Insurance Code. However, prior to the recent ruling of Ellena v. Department of Insurance, 2014 Cal. App. LEXIS 883 (1st Dist. Oct. 1, 2014), the California Department of Insurance was not following this code provision, and in fact maintained that it did not have a duty to review each new disability insurance policy form. There is now no question that the Department of Insurance has a mandatory duty to review all new disability insurance policy forms that insurers wish to sell in California.

Cassaundra Ellena was an employee of the County of Sonoma who was insured under a group disability insurance policy sold and administered by Standard Insurance Company (“Standard”). Unfortunately, Ellena was diagnosed with lupus and was unable to continue working. Ellena filed a claim for long-term disability benefits with Standard, but Standard denied her claim, forcing Ellena to file a lawsuit to collect her disability benefits. Along with naming Standard as a defendant for various causes of action including breach of contract and bad faith (also known as the breach of the covenant of good faith and fair dealing), Ellena also named the California Department of Insurance as a defendant.

Ellena asserted a cause of action for mandamus against the Department of Insurance, alleging that the Department had a mandatory duty to review the policy to make sure it complied with California law before approving the policy. Ellena alleged that the policy was in violation of California law because it improperly allowed Standard to define “own occupation” as other than the one Ellena performed for the City of Sonoma, and also that the policy’s definitions of “disability” and “any occupation” were also improper.

The trial court granted the Department of Insurance’s demurrer, ruling that “Ellena had not sufficiently alleged a violation of a specific mandatory duty and that a writ of mandate could not be based on general enforcement provisions or statutes involving the DOI’s exercise of discretion.” The Department of Insurance was dismissed from the lawsuit, and Ellena timely appealed.

On appeal, a large focus of the Court of Appeals’ ruling turned on what exactly Ellena was seeking through her lawsuit. The Court of Appeals noted that “[w]hile a party may not invoke mandamus to force a public entity to exercise discretionary powers in any particular manner, if the entity refuses to act, mandate is available to compel the exercise of those discretionary powers in some way.” Ellena acknowledged that the Department of Insurance “has the discretion to decide whether to approve a policy, but maintains that the [Department of Insurance] must exercise that discretion by reviewing the policy to determine whether it does or does not comply with California law.” The Department of Insurance argued that the Insurance Code only requires that an insurance company submit its draft policy for review, but that it had no actual duty to review and approve the policy before it is sold to the public.

After reviewing the Insurance Code and characterizing the oversight function of the Department of Insurance as “a matter of great public interest,” the Court of Appeal ruled:

The clear language of this statute is that “[t]he commissioner shall not approve any disability policy for insurance or delivery …” unless it meets a number of requirements. (§ 10291.5, subd. (b), italics added.) “The commissioner shall require from every insurer a full compliance with all the provisions of this code” (§ 12926, italics added) and the commissioner has an obligation to fulfill the duties imposed by the Insurance Code under section 12921.5.

…

The plain meaning of these provisions is that the commissioner has a mandatory duty to review the policy prior to approving it and the commissioner must review the disability policy to ensure it meets the requirements set forth in section 10291.5, subdivision (b). The Insurance Code imposes on the commissioner the duty to review the policy to ensure it complies with the law.

The Court noted that if the Department of Insurance did not actually review each policy that was submitted for review, “how could the commissioner responsibly disapprove any disability policy containing provisions that are ‘unintelligible, uncertain, ambiguous, or abstruse, or likely to mislead a person to whom the policy is offered, delivered or issued,’ as required by subdivision (b) of [section 10291.5]?” The Court further noted the “legislative history to [the 1949 amendment to section 10291.5] supports the conclusion that the statute requires the commissioner to review the disability policy form prior to approving it.” Accordingly, the Court of Appeal concluded that “the Insurance Code requires that the commissioner review a disability policy form prior to approving the policy.”

This is a victory for consumers and policyholders as the Department of Insurance will now be required to review every potential disability policy before it is sold to the public. The Insurance Commissioner and Department of Insurance should now ensure that policies, such as the one sold to Ellena, are in compliance with California law. This decision is also of practical procedural significance to attorneys who engage in insurance litigation against insurers as naming the Department of Insurance will destroy diversity of citizenship jurisdiction thus precluding insurers from removing such cases to federal court.

General Liability Insurer Has No Duty to Defend Massage Therapist’s Alleged Sexual Assault

General liability insurers and their agents often lure commercial clients with grandiose promises of coverage for business operations, but upon receiving a notice of a claim, interpret their policy exclusions liberally to limit what they consider covered business operations so as to deny coverage. A recent case from the California Court of Appeal, Baek v. Continental, 2014 Cal App. LEXIS 893 (2d Dist. Oct. 6, 2014) (“Baek”), expanded on an insurer’s broad duty to defend wherever there is a potential for coverage but in this case denied a duty to defend.

Baek involved a Heaven Massage Wellness Center (“HMWC”) client, “Jaime W.,” who brought suit against HMWC and her massage therapist (“Jaime W. action”), Luiz Baek (“Baek”), for sexual assault during a massage, alleging Baek handled the “Plaintiff’s breasts, buttocks, inner thighs and genitals.” HMWC had a general liability insurance policy with Continental Casualty Co. (“Continental”) which covered employees or partners “only for acts within the scope of their employment” or committed “while performing duties related to the conduct of [HMWC’s] business.” Continental asserted there was no coverage, and HMWC sued for breach of contract and bad faith. The trial court granted summary judgment for Continental. Subsequently, Baek filed suit against Continental, alleging it had a duty to defend and indemnify him in the Jaime W. action as a covered employee of HMWC. Continental demurred on the ground that Baek was acting beyond his scope of employment. Baek then amended his complaint to include a breach of contract, breach of the implied covenant of good faith and fair dealing and fraud against Continental. Once again, Continental demurred and trial court again sustained the demurrer, finding there was no coverage, and no potential for coverage, because Baek’s actions did not fall within his scope of his employment. Baek filed a timely appeal.

The California Court of Appeal first addressed whether Baek qualified as an “employee” of HMWC eligible for coverage. Baek argued Continental owed him a duty of defense because the complaint in the Jaime W. action alleged that Baek was either a partner or employee of HMWC and the alleged sexual assault occurred within the scope of his employment, or while performing his duties related to HMWC’s business. Conversely, Continental argued that Baek did not qualify for coverage because his complaint alleged he was an independent contractor, and thus he did not qualify as an employee or partner of HMWC. As an initial matter, the court explained an insurer’s duty to defend was triggered when the insured becomes aware of, or a third party suit pleads, facts sufficient to give rise to the potential for coverage under the policy. This duty to defend is broader than the duty to indemnify, and an insurer may have a duty to defend if there is a potential of coverage, even if no damages are awarded and any doubts concerning the potential for coverage and a duty to defend were resolved in favor of the insured. Continental knew the plaintiff in the Jaime W. action would attempt to prove Baek was HMWC’s employee or partner under the HMWC policy. However, Continental argued Baek’s complaint alleged he signed an independent contractor agreement, and thus did not qualify as an employee or partner of HMWC. The court disagreed, noting that although Baek signed an independent contractor agreement with HMWC, he did not allege he was an independent contractor so as to preclude coverage. The court clarified that an insurer’s duty to defend arises if allegations by the third party, rather than the potential insured, taken as true, reveal a potential for coverage. Here, the complaint in the Jaime W. action alleged that Baek was, at all relevant times, an employee, owner or partner of HMWC. The court explained that in its coverage determination, Continental was bound to accept these allegations as true unless extrinsic facts established otherwise. Therefore, for coverage purposes, Continental had to assume Baek’s status as an employee under HMWC’s policy to determine whether there was a duty to defend.

Next, the court addressed whether Baek’s alleged sexual assault fell within the scope of his employment so as to trigger coverage by reviewing two cases involving similar issues. First, the court reviewed Lisa M. v. Henry Mayo Newhall Memorial Hospital, 12 Cal. 4th 291 (1995) which involved an ultrasound technician who sexually molested a patient during an ultrasound exam by inserting the ultrasound wand and his fingers into her vagina. There, the court held the technician’s employment did not motivate or engender the sexual molestation; rather, the technician took advantage of his work environment and consciously committed an assault for reasons unrelated to his work. In addition, the court clarified that although the technician’s job involved examining or physical contact with a patient’s otherwise private areas, his assault on the ultrasound patient was not a foreseeable consequence of that contact. Accordingly, the sexual assault was an independent decision unrelated to his duties. Next, the Court of Appeal examined Farmers Ins. Group v. County of Santa Clara, 11 Cal. 4th 992 (1995) where a deputy sheriff’s lewd propositioning and offensive touching of others at a county jail were found to fall outside the scope of employment, despite the proximity to the workplace. The ruling court noted that where an employee’s tort was “‘personal in nature, mere presence at the place of employment and attendance to occupational duties prior or subsequent to the offense’” did not “bring the tort within the scope of employment.” The Court of Appeal explained that like the ultrasound technician in Lisa M., Baek’s employment as a massage therapist gave him the opportunity to be alone with Jaime W., but nothing in the facts suggested the alleged assault was “‘engendered by’ or an ‘outgrowth’ of his employment,” and his motivation for committing the sexual assault was unrelated to his work. Hence, his action did not occur within the scope of his employment contemplated under the Continental policy.

The Court of Appeal determined Baek’s alleged touching of Plaintiff’s breasts, buttocks, inner thighs and genitals “indisputably were not ‘duties related to the conduct of [HMWC’s] business’” or the acts he was hired to perform, but constituted a “stepping away” from HMWC’s business, as the acts were performed for Baek’s own benefit, rather than HMWC’s. Accordingly, the court concluded Baek’s acts were not related to, and did not occur, with respect to the conduct of HMWC’s business so as to trigger coverage.

Finally, the Court of Appeal rejected Baek’s arguments that even if Continental had no duty to defend the sexual assault allegations, it had a duty to defend Jaime W.’s claims of negligence and false imprisonment. Briefly, the court explained the duty to defend depended on whether the alleged facts reveal a possibility of coverage, not the labels given to the causes of action. The complaint in the Jaime W. action alleged the massage was negligent, each defendant was negligent in hiring, training and supervising Baek and Baek deprived Plaintiff of her freedom of movement by use of deceit in setting up the massage room. First, the court explained that sexual fondling is an intentional act such that Baek could not be found to liable for negligence or failing to use due care in performing the massage or supervising his own actions. Second, the court stated the false imprisonment allegations were “inextricably intertwined” with the alleged assault, for which there was no coverage. Accordingly, Continental had no duty to defend these allegations.

The good holding in Baek for insureds is that persons who work under an independent contractor agreement may be eligible for coverage under the employer’s general liability policy because a third party complaint alleges he or she was a covered “employee.” Although the court ultimately held there was no coverage, this decision is significant for policyholders as it explains that even though the insured executed an independent contractor agreement, the acts by its so-called independent contractor may be within the scope of coverage under such a policy.

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