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California Courts Give Effect to the Intent of the Parties to an Insurance Contract

A recent California Court of Appeals decision served as a reminder of the long-standing rule in California that the mutual intent of the parties will always control the interpretation of potentially conflicting provisions in an insurance contract. In its recent decision in Gemini Ins. Co. v. Delos Ins. Co. (Dec. 5, 2012, B239533) __ Cal.App.4th __ [2012 WL 6050774] [Second Dist., Div. Five], the Court of Appeals was faced with the task of interpreting the inter-insured exclusion (i.e., an exclusion for claims between two insureds) in a liability policy as it applied to an additional insured named in the policy when the additional insured’s property has been damaged.

The Facts: A restaurant owner, and tenant to the property, negligently caused a fire which caused damage to property of the landlord. The landlord was an additional insured under the policy at issue, which insured him from liability for acts caused by the restaurant. The policy also contained an exclusion for claims asserted between two insureds. After the fire, the landlord sought relief from the restaurant for damage to his property. On a motion for summary judgment by the landlord’s insurer, the landlord argued that he was not an insured under the policy, and therefore the inter-insured exclusion did not apply. The trial court granted the motion.

Disposition: Affirmed. On appeal, the court addressed the issue as one of contract interpretation. Citing to the long-standing rules of contract interpretation, the court stated:

The rules are well established. In interpreting an insurance policy, we follow the general rules of contract interpretation. We give effect to the mutual intention of the parties, determined, if possible, from the written provisions of the contract. The clear and explicit meaning of those provisions, interpreted in their ordinary and popular sense, controls (Topanga and Victory Partners v. Toghia (2002) 103 Cal.App.4th 775, 779-780. ‘[E]xclusionary clauses are interpreted narrowly, whereas clauses identifying coverage are interpreted broadly.’ (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 406.

The appellate court found that the inter-insured exclusion did not bar recovery by the landlord for damage to his property, but not because the landlord wasn’t an insured under the policy. The court found that the inter-insured exclusion only barred recovery when the landlord (an additional insured) was being charged with liability as a result of the tenant’s (the named insured) negligence in causing the fire at the restaurant, and the landlord sought recovery directly from the tenant. That was not the case. The landlord only sought to recover for the damage to his property; no one sought to hold the landlord liable for the fire. Since the intent of the additional insured provision was to protect the landlord from liability (not limit recovery for damage to property), he would not be considered an additional insured for purposes of his recovering for damage to his own property. The court therefore looked past the literal interpretation of the policy to give effect to the parties’ intent based on a broad reading of the provision identifying coverage.

The court of appeals further found that instances such as this, where a landlord insists on being added as an additional insured under a tenant’s liability policy, are common practice. Thus, clearly, the landlord intended to be added to limit its liability for acts of the tenant, not to limit its recovery for damage to property.

McKennon Law Group Wins Disability Insurance Lawsuit Against Sun Life And Health Insurance Company Following Trial

On November 27, 2012, following a trial before Judge Cormac J. Carney of the United States Federal District Court for the Central District of California, Robert J. McKennon and Scott E. Calvert of the McKennon Law Group secured a victory for their client in a lawsuit against Sun Life and Health Insurance Company. Representing the claimant, Mr. Evans, the McKennon Law Group convinced the District Court that Sun Life abused its discretion in denying Mr. Evans’ claim for long-term disability benefits and that Mr. Evans is entitled to receive his disability benefits that Sun Life denied him.

Mr. Evans was an attorney who unfortunately suffered a mental breakdown that left him unable to return to work. While his claim for short-term disability benefits was approved and paid by Sun Life, the company improperly denied his claim for long-term disability (“LTD”) benefits. When Sun Life refused to overturn its claim decision on appeal, Mr. Evans hired the McKennon Law Group to file a lawsuit against Sun Life, alleging that the decision to deny his claim for LTD benefits violated the Employee Retirement Income Security Act of 1974, also known as ERISA. Mr. Evans filed a Complaint in September 2011.

During the litigation, the parties could not agree as to the proper scope of discovery in an ERISA matter. After the parties presented the dispute the Court, Mr. Evans was permitted to conduct discovery regarding Sun Life’s conflict of interest through written discovery and deposition testimony.

Following the trial, Judge Carney issued a Memorandum of Decision in Mr. Evans’ favor. While explaining that the Plan’s language mandated that Sun Life’s decision should be reviewed under the more lenient “abuse of discretion” standard of review, the Court found that Mr. Evans presented:

evidence that Sun Life failed to credit Mr. Evans’ reliable evidence, failed to adequately investigate the claim, and failed to ask Mr. Evans for necessary evidence. As a result, the Court will give considerable weight to Sun Life’s conflict of interest in determining whether it abused its discretion in denying Mr. Evans’ claim.

The Court then explained that despite being presented with medical evidence supporting Mr. Evans’ claim for disability benefits, Sun Life abused its discretion in denying his claim:

In addition to the conflict of interest, the other factors, “the quality and quantity of the medical evidence, whether the plan administrator subjected the claimant to an in-person medical evaluation or relied instead on a paper review of the claimant’s existing medical records, whether the administrator provided its independent experts with all of the relevant evidence, and whether the administrator considered a contrary SSA disability determination, if any,” Montour, 588 F.3d at 630, weigh in favor of a finding that Sun Life abused its discretion. Specifically, its 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.

In conclusion, the Court ruled that the “evidence in the record overwhelming shows that Mr. Evans was totally disabled prior the date of his termination and throughout the elimination period” and ordered Sun Life “to pay long-term disability benefits to Mr. Evans in accordance with the Policy.”

Robert J. McKennon and Scott E. Calvert litigated the case on behalf of Mr. Evans.

Robert J. McKennon and Scott E. Calvert Win Judgment

On November 29, 2012, following a trial, Robert J. McKennon and Scott E. Calvert won a judgment against Sun Life and Health Insurance Company in a case involving long-term disability insurance benefits. The McKennon Law Group attorneys convinced the Court that Sun Life “abused its discretion,” and Sun Life was ordered to pay their client all benefits due to him under the Policy.

McKennon Law Group Achieves 7-figure Settlement

In November 2012, McKennon Law Group achieved a 7 figure settlement in an insurance bad faith and insurance fraud case against several defendants, including Hartford Life Insurance Company, on behalf of a business owner who was sold a 412(i) retirement plan.

Insurance Companies Must Show “Substantial Prejudice” to Deny Claims for a Failure to Comply With the Proof of Loss Requirement

Following the August 2009 Station Fire, the lawsuits of over 1,440 policyholders filed against Fire Insurance Exchange (“FIE”) and related insurers were consolidated into one case – Henderson v. Farmers Group, Inc., __ Cal.App.4th __, 2012 Cal. App. LEXIS 1108 (October 24, 2012). In this case, the California Court of Appeal, Second Appellate District, issued an interesting opinion addressing several important issues.

In the consolidated lawsuit, the policyholders alleged that FIE improperly denied their claims by asserting either that: (1) the policyholders did not submit sworn proof of loss as required by the fire insurance policies, or (2) that the policyholders submitted delayed notice of loss. The policyholders asserted causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing (bad faith) and unfair business practices under section 17200. Given the large number of policyholders, five plaintiffs were selected as representative of the other policyholders and had their claims litigated, while the lawsuits of the other policyholders were stayed.

FIE moved for summary adjudication against the five representative plaintiffs, asserting, among other things, that submission of proof of loss is a condition precedent to coverage under the policy, and the failure to submit proof of loss in a timely manner meant the policyholders did not meet their own contractual obligations. While the trial court granted summary adjudication to FIE, the California Court of Appeal reversed.

For the policyholders whose claims were denied based on a failure to meet the policies’ proof of loss deadline – usually within 60 days of a request by FIE – the Court of Appeal ruled that California’s notice-prejudice rule applied. Under the rule, an insurer cannot avoid liability for an untimely claim, unless the insurer shows it suffered “substantial prejudice” from the claimant’s failure to provide timely notice and proof loss. The Court explained:

There is ample reason to apply the “notice-prejudice” rule here. California has a strong public policy against “technical forfeitures.” (Bollinger v. National Fire Ins. Co. (1944) 25 Cal.2d 399, 405.) Since forfeitures are not favored, “‘conditions in a contract, will if possible be construed to avoid forfeiture. [Citations.] This is particularly true of insurance contracts. [Citation.] [¶] And where . . . the condition is express and cannot be avoided by construction, the court may, in a proper case, excuse compliance with it or give equitable relief against its enforcement.’” (Root v. American Equity Specialty Ins. Co. (2005) 130 Cal.App.4th 926, 942, quoting O’Morrow v. Borad (1946) 27 Cal.2d 794, 800.) FIE’s employees testified that they waited for the insured to submit a proof of loss only where FIE’s hygienist recommended cleaning, i.e., when its investigation determined the insured had sustained a specific measure of damage and cleanup costs would be greater than the deductible. A reasonable trier of fact might infer that the insureds’ failure to provide a sworn proof of loss in such cases was a technical forfeiture that FIE used to avoid paying for cleanup costs when its hygienists recommended that course of action after testing samples from the property.

The Court further explained that “the notice-prejudice rule avoids an absurd result that would follow were courts to require absolute compliance with the proof of loss condition.” Reviewing the available facts, the Court of Appeal found that FIE failed to establish “substantial prejudice,” and indeed noted that even FIE’s person most knowledgeable testified that FIE relied upon the conclusions of expert hygienists hired to determine the level of char each house suffered, not the proof of loss, in preparing the damage estimates.

For the policyholders whose claims were denied because of delayed notice, the Court determined that FIE did show that it was prejudiced by the delayed notice because the condition of the property at the time the claim was made was substantially different from its condition when the loss occurred. However, summary adjudication was still reversed because FIE failed to raise the delayed notice until the lawsuit. In the letter denying the claim of the representative plaintiff that provided delayed notice, FIE’s denial was based on the grounds that “there were insufficient levels of smoke, ash, and/or soot present in the home,” and that it was reserving any available defenses. While FIE argued that the reservation language in the letter meant that it could raise the delayed notice defense to justify its denial decision, the Court of Appeal disagreed. Specifically, the Court held that under Insurance Code section 554, a failure to “promptly and specifically object to a delay in the presentation of notice” means that further objections based on delay are waived. The Court further noted that:

“The law is established that where an insurance company denies liability under a policy which it has issued, it waives any claim that the notice provisions of the policy have not been complied with.” (Comunale v. Traders & General Ins. Co. (1953) 116 Cal.App.2d 198, 202-203.) The rationale for this rule is “that an insurer cannot deny all liability, and at the same time be permitted to stand on a provision inserted in the policy for its benefit. . . . [W]here the insurer denie[d] all liability under the policy, the insured is misled into believing it would be futile to perform any affirmative obligation under the policy. In other words, the insurer is deemed to have waived the insured’s failure to perform because the nonperformance is attributable to the insurer’s conduct. [Citation.] Thus, the cases in which a notice or proof of loss provision has been deemed waived by the insurer usually involve an insured lulled by the insurer’s silence into believing it had complied with the policy notice and/or proof of loss provisions. Consistent with this rule, section 554 operates to deem an insurer’s belated objection to an untimely notice of claim or proof of loss waived if not promptly called to the attention of the insured. . . . [S]ection 554 prevents an insurer from lulling the insured into believing that notice and proof of loss are unnecessary.” (Insua v. Scottsdale Ins. Co. (2002) 104 Cal.App.4th 737, 742–743, fns. omitted.)

Finally, the California Court of Appeal affirmed the trial court’s summary adjudication ruling in favor of the insurer regarding alter ego and other vicarious liability theories, but reversed the trial court’s summary adjudication ruling on the causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair competition under Business & Professions Code section 17200 et seq. With regard to the latter claim, the Court found that Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal. 3d 287 (1988), did not bar a UCL cause of action based on an insurer’s bad faith, even if the same conduct might also constitute a violation of the Unfair Insurance Practices Act (which can only be enforced by the California Insurance Commissioner). With this, the lawsuit will be remanded back to the trial court, although we expect that the California Supreme Court’s upcoming opinion in Zhang v. Superior Court, 178 Cal. App. 4th 1801 (2009) could result in a rehearing of the section 17200 cause of action.

Insurance Agents May Be the Key to Insurer Liability

The Thursday November 1, 2012 edition of the Los Angeles Daily Journal featured Robert McKennon and Reid Winthrop’s front-page article entitled: “Insurance Agents Key to Insurer Liability.” In it, Mr. McKennon and Mr. Winthrop discuss how agents can be the key to rendering insurers liable for policy coverage. The article discusses the difference between “brokers” and “agents,” including “dual agents,” and discusses when and how to make the case that a “broker” is really an “agent” for purposes of imputing liability to an insurance company. The article also discusses how to respond to an insurer’s argument that the policy terms control and the insured has a duty to read the policy. The article is posted below with the permission of the Daily Journal.

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