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The Wednesday July 11, 2012 edition of the Los Angeles Daily Journal featured Robert McKennon’s and Scott Calvert’s article entitled: “Equitable Relief in the Ninth Circuit Just Got Better for Consumers.” In it, Mr. McKennon and Mr. Calvert discuss two important Ninth Circuit rulings allowing certain equitable relief to ERISA plan participants that have definite pro-consumer holdings. The article is posted below with the permission of the Daily Journal.
Bad Faith Liability May Be Premised on an Insurer’s Failure to Effectuate Settlement When Insured’s Liability Was Reasonably Clear
The Ninth Circuit Court of Appeals in a recent decision held that an insurer’s duty of good faith and fair dealing, which is implied in every contract of insurance, may be violated by the insurer’s failure to attempt to effectuate a settlement within policy limits after liability of its insured has become reasonably clear. In essence, the Court found that an insurer’s unreasonable refusal to attempt to effectuate settlement after the evidence reasonably indicates that the insured’s liability will be in excess of the policy limits constitutes bad faith.
In Du v. Allstate Insurance Company et al., 2012 U.S. App. LEXIS 11755, May 11, 2012 (9th Cir. 2012), the victim was injured in an accident caused by the insurer’s insured, who then obtained a judgment against the insured. The insured assigned his bad faith claim to the victim, who argued in the District Court that the insurer breached the covenant of good faith and fair dealing when it did not attempt to effectuate settlement of the victim’s claims after it became reasonably clear that the insured’s liability to the victim was in excess of the policy limits. The victim requested a jury instruction that such a failure by the insurer could constitute bad faith. The District Court rejected the victim’s request.
On appeal, the Ninth Circuit found that the District Court legally erred in holding that, as a matter of law, bad faith liability could not be premised on an insurer’s failure to effectuate settlement in the absence of a reasonable demand. In so finding, the Court noted the long standing principal that the duty of good faith and fair dealing “requires the carrier to consider in good faith the interests of the assured equally with its own and evaluate settlement offers within policy limits as though it alone carried the entire risk of loss.” See Merritt v. Reserve Ins. Co., 34 Cal. App. 3d 858 (1973). The Court, however, affirmed the District Court’s judgment and found that the District Court did not abuse its discretion in refusing to give the requested instruction in this case because there was no evidentiary foundation for the victim’s assertion that the insurer should or could have made an earlier settlement offer to the insured. The Court found that the requested jury instruction was proper, however, the facts of this case did not warrant such an instruction.
Despite the Court’s ultimate finding in this case, this decision by the Ninth Circuit reaffirms the courts’ willingness to extend bad faith liability under a multitude of circumstances wherein an insurer acts unreasonably and places its own interests ahead of its insured.
California Court of Appeal Upholds Insurance Coverage for Health Net Finding The “Dishonest Acts” Exclusion Did Not Preclude Coverage
In Health Net, Inc. v. RLI Insurance Company, et al., the California Court of Appeal, Second District, reversed a trial court’s entry of judgment on a Motion for Summary Judgment finding some coverage for Health Net, Inc. (“Health Net”) in connection with numerous lawsuits filed against it arising under the Employee Retirement Income Security Act of 1974 (“ERISA”). Health Net brought suit against four of its insurers (one primary and three excess carriers) seeking a declaratory judgment that the insurers had a duty to defend and indemnify Health Net in over 20 underlying actions involving Health Net’s insurance plans provided by employers, which plans were subject to the requirements of the ERISA. The parties, however, directed their attention to two specific underlying actions, as the amount of indemnity sought in those actions would far exceed the combined policy limits of the defendant insurers. Relying on a policy exclusion for “dishonest acts,” the trial court granted summary adjudication to the insurers with respect to Health Net’s claim for reimbursement of its defense costs and the costs of settling the specified underlying actions. The parties subsequently settled their dispute regarding the remaining underlying actions, and summary judgment was granted in favor of the insurers. Health Net appealed the ruling.
On appeal, the Court of Appeals first addressed whether the two underlying actions at issue sought damages covered by Health Net’s insurance policies. The court concluded that the great bulk of the claims asserted in the underlying actions were not covered, but there was a potential for coverage for some of them. The court held that in the “Insuring Agreement” of the applicable policies, including a “HMO/PPO/Managed Health Care Professional Liability” policy, did not provide coverage for the insured’s contractual obligations, even if the insured committed a wrongful act in its failure to pay such benefits.
Second, the court addressed the “dishonest acts” exclusion, and considered whether it barred, as a matter of law, coverage for all of the otherwise covered claims in the underlying actions. The court concluded that, while the “dishonest acts” exclusion was triggered with respect to the underlying actions, the exclusion barred coverage only for those claims alleging dishonest acts, not the entirety of the underlying actions. As some claims for indemnity and defense costs relating to the two underlying actions at issue remained, the court reversed the summary judgment.
Because the court concluded that the “dishonest acts” exclusion relied upon by the trial court excluded some, but not all, of the underlying claims, some of which might potentially allege a covered loss, it remanded the case to the trial court “to determine whether and to what extent there is any merit to the claim of coverage.”
MetLife Pays $40 Million To Settle Allegations That It Failed To Properly Identify And Pay Life Insurance Beneficiaries
The California Department of Insurance, along with five other state insurance departments, reached a settlement with Metropolitan Life Insurance Company, Inc. (“MetLife”) over allegations that the company failed to properly utilize the Social Security Administration’s Death Master File database to identify deceased life insurance policyholders and pay their beneficiaries. In addition to promising to enact business reforms to ensure that it promptly pays life insurance benefits to the proper beneficiaries, MetLife will pay $40 million to the state insurance departments.
In announcing the settlement, California Insurance Commissioner Dave Jones called the settlement “an important victory for consumers,” explaining that:
“For many years, MetLife selectively used the Social Security Administration’s Death Master File database to cut off payments to annuity holders but did not use that database to identify deceased life insurance policyholders and pay their beneficiaries. Under today’s settlement, that practice will end. I hope other life insurers will follow MetLife’s lead and enter into similar agreements.”
As a result of this settlement, every month, MetLife is required to use the Social Security Death Master File to determine whether its life insurance policyholders, annuity owners and holders of retained asset accounts have died. If MetLife learns that a policyholder died, it must conduct a thorough search for beneficiaries, using contact information in its records and online search and locator tools. If MetLife does not find a beneficiary within a year of learning of a death, it must transfer the benefit to the appropriate state controller as unclaimed property.
The state departments of insurance alleged that, prior to this settlement, MetLife had a decades-long practice of improperly retaining life insurance benefits that should have been paid to the beneficiaries of its life insurance policies. Earlier this year, Commissioner Jones reached a similar settlement agreement with Prudential Life Insurance Company.
If you believe that a life insurance company failed to pay the benefits you are owed under a life insurance policy, please contact our office for a free consultation. Our firm is currently advising existing clients regarding these issues.
FAQs: Who May Sue or Be Sued for Insurance Bad Faith?
The McKennon Law Group PC periodically publishes articles on its California Insurance Litigation Blog that deals with frequently asked questions in the insurance bad faith and ERISA area of the law. This is another such article in that series.
Generally, in order to sue for insurance bad faith there necessarily must be an insurance policy at issue that establishes a concept known as “privity of contract” between an insured and an insurer. This means that an insured under an insurance policy typically may sue for bad faith if the insured is entitled to benefits under a policy and if those benefits are wrongfully withheld or payment was wrongfully delayed. This includes the contracting parties (persons named as insureds) as well as others entitled to benefits as “additional insureds” or as express beneficiaries under the policy. In insurance parlance, this means that the “named insured” and any “additional insureds” may sue.
Furthermore, a designated beneficiary of an insurance contract has standing to sue for both the policy benefits and extra-contractual damages if the benefits are wrongfully withheld. An express beneficiary need not be specifically named. An insured may have standing to sue if a member of a class for whose benefit the contract was made. Someone not a party to the contract has no standing to sue. Thus, in the disability insurance context, even though a spouse may have suffered emotional distress, if she is not an insured, she cannot sue the insurer for bad faith. However, if an insurer breaches an independent duty it owes to a spouse, it is possible for that spouse to sue for damages (e.g., intentional infliction of emotional distress). In the life insurance context, a beneficiary of the policy would have standing to sue for insurance bad faith.
In addition, an insurance bad faith claim can be assigned. In the context of a third party claim, it is possible to assign a bad faith claim under certain circumstances. This is most typically done in connection with a failure by an insurer to defend and indemnify an insured for third party liability. However, because purely personal tort claims are not assignable, the insured’s claims for emotional distress damages and punitive damages are not assignable. Essex Ins. Co. v. Five Star Dye House, Inc., 38 Cal. 4th 1252, 1263 (2006). An assignment allows the third-party to obtain more than the policy limits from the insurer. Without the assignment, a third-party can only sue the insurer for the amount of the judgment as third party beneficiary of those liability policies. Ins. Code § 11580(a).
The same “privity of contract” requirement applies in determining who may be sued. Generally, only the insurer(s) on the risk as the party to the contract can be sued. This includes “primary,” “excess” and “umbrella” insurers. Moreover, it is possible to sue an insurer’s alter ego or joint-venturer, typically a parent company. It is also possible under certain circumstances to sue a “managing general agent” who is appointed by the insurer to manage all or part of its insurance business. An insurance agent can be sued for professional negligence, but not for insurance bad faith. See Kurtz, Richards, Wilson & Co. v. Insurance Communicators Marketing Corp., 12 Cal. App. 4th 1249, 1257 (1992) (“At a minimum, an insurance agent has a duty to use reasonable care, diligence, and judgment in procuring the insurance requested by its client. An agent may assume additional duties by an agreement or by holding himself or herself out as having specific expertise.”); Williams v. Hilb, Rogal & Hobbs Ins. Services of Calif., Inc., 177 Cal. App. 4th 624, 635–636 (2009) (holding that a special duty will arise when an agent holds himself out as having specific expertise.)
Insurance bad faith claims can be potent weapons for insureds or beneficiaries who have been mistreated by insurance companies in the handling of their insurance claims. Knowing who can sue and be sued is therefore important to understand if you are considering an insurance bad faith lawsuit.
Ninth Circuit Confirms That Plan Language Controls In The Absence of Detrimental Reliance on SPD Language
In Skinner v. Northrop Grumman Retirement Plan B, 673 F.3d 1162 (9th Cir. 2012), the Ninth Circuit applied the Supreme Court’s ruling in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) wherein the high court ruled that ERISA “summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan for purposes of § 502(a)(1)(B).” (The holding in CIGNA Corp. v. Amara was discussed in our blog) While the Ninth Circuit adopted the Supreme Court’s logic and ruling, it left open the possibility that language contained only in the Summary Plan Description (“SPD”) could be enforced if a claimant relied on that language.
In Skinner, two retirees sued for additional retirement benefits under an ERISA-governed pension plan. The retirees alleged that their pension benefits should be calculated using the formula set forth in the SPD, rather than the plan documents. The Plan moved for, and was granted summary judgment by the trial court on the grounds that the retirees had not raised a genuine issue of material fact with respect to the proper amount of pension benefits they were entitled to receive.
At the district court level, all parties agreed that the plaintiffs were strictly limited “to obtain other appropriate equitable relief” under ERISA. On appeal, the Ninth Circuit explained that “the Amara Court stated that, under appropriate circumstances, § 502(a)(3) may authorize three possible equitable remedies: estoppel, reformation, and surcharge.” The retirees only sought reformation and surcharge. The Ninth Circuit rejected the reformation claim because there was no evidence that the plan documents “fail[ed] to reflect that drafter’s true intent” or “that Northrop Plan B contains terms that were induced by fraud, duress, or undue influence.” Similarly, the Ninth Circuit ruled that the ERISA claimants were not entitled to a surcharge remedy because it found that “by failing to enforce the terms of the 2003 SPD instead of the terms of the plan master document” there was “no evidence that the committee gained a benefit by failing to ensure that participants received an accurate SPD” did not constitute a breach of fiduciary duty.
While the Ninth Circuit ruled against the retirees, it noted that they did not make an estoppel argument because “they presented no evidence of reliance on the inaccurate SPD.” Thus, while the Ninth Circuit found that, in this particular instance, the language of the plan documents would be enforced over the language in the SPD, the Court acknowledged that if a claimant could demonstrate reliance on the SPD, the language in the SPD might well control.
Such a ruling is consistent with the recent ruling in the District Court of Puerto Rico where the court rejected the defendant’s argument that Amara found that equitable estoppel is not an appropriate avenue for relief under ERISA. Indeed, the court noted that “equitable estoppel forms a very essential element in . . . fair dealing, and rebuke of all fraudulent misrepresentation, which it is the boast of courts of equity constantly to promote.” See Guerra-Delgado v. Popular, Inc., 2012 U.S. Dist. LEXIS 44432 (D. P.R. March 29, 2012) (internal quotations removed).
