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McKennon Law Group PC wins $3.94 million arbitration award in business litigation dispute involving a patent license. Robert McKennon is lauded by Arbitrator for his “exceptional skill in cross-examining” key witnesses.
California Court of Appeal Finds That a 10:1 Ratio Between Punitive Damages and Compensatory Damages Awards Satisfies Due Process
A 10-to-1 ratio of punitive damages to compensatory damages awards in an insurance bad faith case passes Constitutional muster. So says the California Court of Appeal in its decision in Nickerson v. Stonebridge Life Insurance Company, __ Cal. App. 4th ___, 2013 Cal. App. LEXIS 583 (2013). The decision is significant in that it affirms that punitive damages are not limited to a single-digit ratio and that a ratio of punitive to compensatory damages of 10-to-1, and perhaps higher, falls within the maximum permitted under due process. Additionally, the decision clarifies what damages may be included in fixing the ratio of compensatory to punitive damages.
The Nickerson case concerns a disabled veteran, Nickerson, who was covered under a policy providing coverage for hospital confinement, intensive care unit and emergency room visits issued by Stonebridge. After suffering an injury to his leg, Nickerson was hospitalized for over 100 days. However, Stonebridge contended that only a small portion of the time Nickerson stayed in the hospital was considered “Necessary Treatment” under his policy. On this basis, Stonebridge denied benefits for the rest of the time Nickerson was hospitalized.
Following the denial of his benefits under the policy, Nickerson filed a claim against Stonebridge for breach of the insurance contract and for breach of the implied covenant of good faith and fair dealing. The trial court found that Nickerson was entitled to $31, 500 in unpaid benefits for the breach of contract cause of action. The jury returned a special verdict finding Stonebridge’s failure to pay policy benefits was unreasonable and that Nickerson suffered $35,000 in damages for emotional distress. Finally, the jury awarded Nickerson $19 million in punitive damages, which constituted 5% of Stonebridge’s net worth. Stonebridge immediately moved for a motion for new trial seeking to reduce the punitive damages award. The trial court conditionally granted a new trial unless Nickerson agreed to accept a reduction of the punitive damage award to 10 to 1 in accordance with “recent California and federal authority.” In calculating the amount of punitive damages, the trial court only included the $35,000 in compensatory damages for bad faith and did not include damages for the insurer’s breach of contract or the $12, 500 in attorney’ fees awarded to Nickerson pursuant to Brandt v. Superior Court, 37 Cal. 3d 813, 817 (1985) (when the defendant insurer’s tortious conduct forces insured to retain counsel to obtain policy benefits, the insurer is liable for attorney’s fees). Thus, the trial court offered Nickerson a reduction of punitive damages to $350,000.
Nickerson rejected the trial court’s offer and appealed, arguing that the trial court erred (1) in concluding it was constrained by law to limit punitive damages to no more than 10 times the compensatory award; and (2) in excluding certain categories of compensatory damages.
The Court of Appeal began its analysis by reciting that a punitive damages award violates the due process clause of the Fourteenth Amendment if the award is “grossly excessive.” In determining whether the trial court’s remittance of the jury’s award of punitive damages to a 10-to-1 ratio with compensatory damages was constitutional, the court followed the three guideposts set out in BMW of North America, Incorporated v. Gore, 517 U.S. 559, 575 (1996): (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. As to the first guidepost, the court found that the degree of reprehensibility factor weighs in favor of Nickerson because, although Nickerson did not suffer physical harm, Stonebridge acted with indifference toward Nickerson’s health and safety, Nickerson was a financially vulnerable individual, Stonebridge’s conduct was intentionally deceitful and was not an isolated incident. The court did not consider the third guide post relating to comparable civil penalties because Nickerson conceded that this guide post was of “limited utility.” Turning to the second and most important guidepost, the court noted that the Supreme Court has consistently refused to establish a ratio beyond which a punitive damage award could not exceed, but that awards significantly exceeding a single-digit ratio between punitive and compensatory damages generally will not satisfy due process. The court then stated that the California Supreme Court has found that ratios significantly greater than 9 or 10-to-1 are suspect and may not pass constitutional muster absent “special justification.” Based on both federal and state case law, the court concluded that the message gleaned from these cases is that due process analysis is flexible and the constitutionality of any award must be based upon the particular facts and circumstances of the case.
Based on its analysis of the three guideposts, the circumstances of this case, the high level of reprehensibility of Stonebridge’s conduct, Stonebridge’s net worth and the small economic damage award justifies an outside constitutional limit of a 10-to-1 ratio of punitive to compensatory damages. As such, the Court of Appeal upheld the trial court’s decision to remit the jury’s award to a 10-to-1 ratio.
Additionally, it is important to note that the court also addressed what categories of compensatory damages are included in calculating the ratio of punitive to compensatory damages. Nickerson argued that “uncompensated potential harm” should be included into the calculation. However, the court rejected this argument because Nickerson was fully compensated for his emotional distress injuries. The court also refused to include the $31, 500 in policy benefits awarded to Nickerson because, citing Major v. Western Home Insurance Company, 169 Cal. App. 4th 1197, 1224 (2009), punitive damages are not authorized in contract actions. The court also refused to include attorney’s fees awarded pursuant to Brandt because they were awarded after the jury awarded punitive damages. However, it should be noted that if the jury had awarded attorney’s fees, they would have been considered in determining if the ratio of punitive damages to compensatory damages is excessive because Brandt fees “are considered extra contractual tort damages that compensate a plaintiff for an insurer’s bad faith refusal to pay policy benefits.” Id (emphasis in original).
The Nickerson decision is highly significant in that the Court of Appeal made it clear that punitive damages awards are not limited to a single-digit ratio and that there is no bright line maximum ratio of punitive damages to compensatory damages required by due process. Although the court strongly suggested that a punitive damage award significantly exceeding a 9 or 10-to-1 ratio could violate due process, the court refused set the 10 to 1 ratio as a maximum cap on all punitive damages awards. Indeed, given the highly flexible due process analysis adopted by the court, instances where insurers engage in significantly reprehensible acts of bad faith, as determined under the guidepost analysis, may well justify a punitive to compensatory damages ratio which exceeds the 10-to-1 ratio applied in Nickerson.
Insurer’s General Reservation of Rights Does Not Entitle Insured to Cumis Counsel
In a recent ruling, the California Court of Appeal held that an insurer’s general reservation of rights to deny coverage of damages outside its policy does not create a conflict of interest with the insured, such that the insured in entitled to Cumis counsel. The decision in Federal Insurance Co. v. MBL, Inc. __ Cal. App. 4th __, 2013 Cal. App. LEXIS 679, 2013 WL 4506149 (August 26, 2013) follows California precedent denying insureds the right to select independent counsel at the insurer’s expense absent an actual conflict of interest.
The case arose out of United States v. Lyon, an action by the Federal government against Halford’s Cleaners, for soil and groundwater contamination. Halford’s, a dry cleaning facility, filed third party actions against the suppliers of dry-cleaning products, including defendant MBL, Inc. (“MBL”). MBL’s insurers retained counsel for MBL, but asserted a general reservation of rights to deny coverage for damages occurring beyond the policy period and in excess of the policy amount. However, the reservation of rights did not address any specific policy exclusions. MBL alleged that their insurers’ reservation of rights created a conflict of interest such that MBL was entitled to choose an independent counsel (known as Cumis counsel) at the expense of the insurer. The trial court granted summary judgment in favor of the insurers, finding there was no actual conflict of interest. On appeal, MBL contended the trial court erred in finding the insurers were entitled to declaratory relief.
The Court of Appeals affirmed, analyzing and rejecting each of MBL’s arguments that a conflict of interest existed requiring Cumis counsel. The Court explained that:
Without an express reservation of a right under the policy, there can be no conflict of interest based on the application of that exclusion or policy term during the pendency of the action. (Emphasis added.)
First, the court rejected MBL’s contention that a general reservation of rights creates a conflict of interest, stating at most, they create a theoretical, potential conflict of interest, which is not sufficient to trigger the right to Cumis counsel. Next, MBL argued the policy exclusions create a conflict because the appointed counsel would have an interest in establishing policy exclusions, such as when the damages occurred. The Court rejected this argument, holding that MBL and the insurers’ interests were aligned because it is in the interest of both parties’ interest to avoiding liability, and defense counsel could not control the issue of when such damages occurred. Furthermore, no conflict exists because insurer’s retained counsel has no control over whether exclusions apply.
Finally, that Court found that, although MBL and select third party plaintiffs in Lyons shared the same insurance company, there was no per se conflict of interest because the insurer’s interest ultimately remained in indemnifying their insureds against judgment. The court noted the insurers retained different law firms for these plaintiffs, assigned different claims adjusters and ensured the adjusters did not have access to each other’s files.
The trial court granted declaratory relief for the insurers stating that absent a conflict, insurers were not obligated to provide independent counsel. Furthermore, MBL’s refusal to accept appointed counsel relieved the insurers of their contractual obligation to defend MBL.
Ultimately, the California Court of Appeal agreed that MBL failed to establish a significant and actual conflict of interest, and their insurers’ were therefore not obligated to retain independent counsel. A general reservation of rights is not enough to create a conflict of interest; instead, the parties’ interests must be analyzed to determine whether the interests can be reconciled. The ruling therefore affirms the San Gabriel Valley Water Co., 82 Cal. App. 4th 1230 (2000) decision that insured parties are not entitled to Cumis counsel absent a showing of an actual conflict of interest with the insurer.
FAQs: What do you need to know about long-term care insurance?
The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deal with frequently asked questions in the insurance bad faith, life insurance, long term disability insurance, annuities, accidental death insurance, ERISA and other areas of the law. This article in that series focuses on long-term care insurance.
What is long-term care insurance?
Long-term care insurance refers to coverage for health care and treatment in extended care facilities (for example, convalescent homes, nursing homes, etc.), at-home health care and/or adult day care for individuals (usually above the age of 65 or with a chronic or disabling condition that needs constant supervision) rather than in an acute care unit of a hospital. See California Insurance Code § 10231.2 et seq. Long-term care insurance is designed to pay for care that is generally not covered by health insurance, Medicare or Medicaid.
Long-term medical care is typically expensive but can be an important part of financial planning for single persons and families. This insurance is designed to cover out-of-pocket expenses for long-term care, and assists those who purchase it from relying on children or other family members for support in the latter years of life.
Insurers often deny these claims interpreting facts and the law in a manner that unfairly and unreasonably favors their financial interest in denying claims.
When is an insured eligible to receive long-term care insurance benefits?
While the specific coverage offered by long-term care insurance may vary, typically, an insured is eligible for long-term care benefits if he or she is unable to perform at least two or more activities of daily living without substantial assistance. “Activities of daily living” will be a defined term in the insurance policy, but normally, activities of daily living include eating, dressing, bathing and attending to other personal hygiene, walking and toileting without assistance. Most policies provide benefits when and insured is diagnosed with a severe cognitive impairment such as Alzheimer’s or Parkinson’s disease.
What should an insured do if the insurer denies a long-term care insurance claim?
In an insurer denies a claim for long-term care insurance, then the next step would generally be to bring a civil lawsuit against the insurer, as there is typically no requirement that the insured submit an appeal. However, an insured should review the policy and denial letter to ensure that he/she has completed all the necessary steps for claiming long-term care benefits. After doing so, the insured should consult with an experienced insurance attorney regarding bringing a civil action. Most attorneys, including the McKennon Law Group PC, will take a meritorious case on a contingency fee basis (meaning the insured does not pay a fee unless there is some type of recovery from which a fee may be earned).
In the rare instance that the long-term care insurance was provided and paid for by the insured’s employer, the policy is most likely governed by ERISA. In this case, then the insured cannot immediately file a civil action to recover long-term care insurance benefits until he/she appeals the initial claim denial. ERISA requires that the insured first appeal the initial determination in accordance with procedures contained in the plan documents/policy. Under the Department of Labor Regulations, an insured has no more than 180 days to appeal a denial decision relating to long term care insurance benefits. If the insured does not timely appeal an adverse benefit decision, then he/she may lose the right to collect benefits under the Plan. When an insurer denies an insurance claim made under an ERISA-governed policy, it is required to advise the insured of the specific reasons for the denial and describe any additional material or information necessary to perfect the claim. Additionally, the insurer must inform the insured of the plan’s review procedures and inform the insured of his/her right to file a subsequent civil action. However, the insurer never tells the insured that he/she will not be allowed to use new evidence to support a subsequent civil action. Because the insured may be limited to the information contained in the Administrative Record in the lawsuit, it is crucial that the Administrative Record contains all information that supports the insured’s long-term care insurance claim.
As such, following denial of a long-term care insurance claim, the insured should immediately consult with an experienced long-term care insurance attorney and discuss whether to appeal the insurer’s initial decision or proceed to a lawsuit. As discussed above, time is of the essence and the insured does not want to risk losing long-term care insurance benefits by failing to file a timely appeal. But, if an appeal is required, the insured should not simply submit an appeal stating that he/she disagrees with the insurer’s denial decision. The insured should have an attorney prepare the appeal and ensure that the file contains all of the documents and information needed in a subsequent lawsuit. Specifically, a qualified attorney can help the insured review the insurer’s often voluminous records and identify any problems or irregularities in its initial denial. An experienced attorney can also ensure that these problems or irregularities are noted in the Administrative Record and are backed up by applicable case law citations. Moreover, when confronted with the arguments of experienced ERISA attorneys such as McKennon Law Group PC, the insurer or plan administrator will often reverse itself and approve the claim for benefits without the need to file a lawsuit.
If the matter is not governed by ERISA, then state law claims will apply, such a breach of contract and insurance bad faith. These allow for a broader array of damages, including compensatory damages caused by the insurer’s bad faith, emotional distress, and punitive damages. Furthermore, under California law, an insured may be able to bring additional claims under Bus. & Prof. Code section 17200 and California elder abuse law, that potentially allows for treble damages.
For more information about long-term care insurance, visit our full FAQ regarding this topic located here.
Supreme Court Reaches Favorable Decision for Insureds in Zhang v. Superior Court of San Bernardino; Daily Journal Publishes McKennon Law Group PC Article on Zhang
The Wednesday August 7, 2013 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “Clear win for insureds, though scope uncertain.” In it, Mr. McKennon discusses how a highly anticipated decision by the California Supreme Court in Zhang v. Superior Court of San Bernardino (California Capital Insurance), 2012 DJDAR 10174, expands the availability of claims that can be brought under Bus. & Prof. Code 17200, a.k.a. California’s Unfair Competition Law, or UCL. The article discusses how in Zhang, the Supreme Court addressed the split among courts in California regarding the scope of the court’s prior holding in Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal. 3d 287 (1988) and adopted a narrow interpretation of Moradi-Shalal. The article explains how the Supreme Court’s holding in Zhang will now allow insureds to bring claims under the UCL against insurers for unfair business practices, such as false advertising, so long as those claims do not rest exclusively on California’s Unfair Insurance Practices Act, or UIPA. This means that insureds will not just have breach of contract and bad faith claims against insurers, but may also have UCL claims too. The article is posted below with the permission of the Daily Journal.
McKennon Law Group PC Founding Partner, Robert J. McKennon, Receives 2013 “Top Attorney” Designation for Orange County, California Attorneys
McKennon Law Group PC is proud to announce that its founding partner, Robert J. McKennon, has been recognized as one of Orange County’s “Top Attorneys” and he appeared in the July 29, 2013 issue of the Orange County Register’s OC Metro Register magazine. [click here to see the issue]
Each year, OC Metro Register magazine, which is published monthly and distributed to all cities in Orange County, recognizes the top lawyers in the region in its “Top Attorneys” list. The list profiles attorneys who have a proven track record and expertise in their specific fields based on data compiled by AVVO. The OC Metro Register’s accompanying article on Mr. McKennon highlights his success in representing clients “in their fight for individual disability, life and ERISA insurance benefits.” Additionally, the article praised the California Insurance Litigation Blog, stating that “[m]any believe it to be the best insurance blog in California.”
In addition, for the 2012-2013 years, Mr. McKennon received the following awards and recognitions:
• Named in the Business Edition 2012 and 2013 Thomson Reuters/Super Lawyers annual list of the nation’s top attorneys in the insurance coverage practice areas.
• Awarded the designation of “2013 Top Rated Lawyer in Labor & Employment” by American Lawyer Media and Martindale Hubbell, leading providers of news and rating information to the legal industry.
• Awarded the designation of 2012-2013 “Southern California’s Top Rated Lawyers” by American Lawyer Media and Martindale Hubbell, leading providers of news and rating information to the legal industry.
• Awarded the designation of 2012-2013 “Top Rated Lawyer in Commercial Litigation” by American Lawyer Media and Martindale Hubbell, leading providers of news and rating information to the legal industry.
• Rated “AV Preeminent” by his peers, an achievement of Martindale Hubbell’s highest rating in legal ability and ethical standards.
• Featured in the Corporate Counsel magazine and The National Law Journal, both of which feature the Top Rated Lawyers in Insurance Law.
• Awarded AVVO’s highest rating of “Superb,” (receiving a score of “10” out of “10”) which also highlights an attorney’s competence, ethical conduct, professional ability, diligence and overall performance.
• Awarded the designation of “Super Lawyer” for Insurance Coverage in 2012 and 2013 by Southern California’s Super Lawyers magazine, as well as the Los Angeles and Orange Coast Magazines.
