Firm News Archives - Page 61 of 76

Court of Appeals Rejects Blue Shield’s Attempt to Impose a Two-Year Statute of Limitations for Bad Faith

Myrna Kawakita was set to undergo gastric bypass surgery, and her health insurer, Blue Shield of California, initially authorized the procedure. However, rather than paying for the procedure, Blue Shield rescinded Kawakita’s health insurance policy, asserting that her application contained misrepresentations about her height and weight.

Kawakita purchased her health insurance policy through Blue Shield’s alleged agent, Steven Stendal, and claimed that Stendal was responsible for any misstatements on her application. Blue Shield rescinded Kawakita’s policy in August 2006, and she filed her lawsuit in July 2009, asserting causes of action for breach of contract, tortious breach on the implied covenant of good faith and fair dealing and declaratory relief.

Blue Shield filed a motion for summary adjudication, arguing that the bad faith claim was barred by the two-year statute of limitations imposed by California Code of Civil Procedure Section 339 and Love v. Fire Insurance Exchange, 221 Cal. App. 3d 1136, 1144 n.4 (1990). The trial court rejected Blue Shield’s motion, and with Blue Shield of California Life & Health Insurance Company v. Superior Court (Kawakita), No. B225632, Blue Shield sought a peremptory writ of mandate directing the trial court to reverse its order. While the California Court of Appeal did not agree with the trial court’s reasoning, it did agree with the result and allowed Kawakita to proceed with her bad faith cause of action.

With its motion, Blue Shield anticipated that Kawakita might rely on California Insurance Code Section 10350.11 to contend that the statute of limitations for a bad faith claim was actually three years. Relying primarily on federal court decisions, Blue Shield asserted that Section 10350.11 relates to contractual limitations tied to filing written proofs of loss and is unrelated to Code of Civil Procedure Section 339. The Court of Appeal explained that even if it accepted Blue Shield’s interpretation of Insurance Code Section 10350.11, the argument was irrelevant because, as permitted by Insurance Code Section 10350, Blue Shield’s policy actually contained language extending Kawakita’s deadline to initiate a lawsuit until three years after the claim for benefits was first denied. Specifically, under the headline, “Commencement of Legal Action,” the policy issued to Kawakita provided that “Any suit or action to recover benefits under this Plan … or any other matter arising out of this Plan … must be commenced no later than three years after the date the coverage for benefits in question was first denied.”

Based on this provision, with its broad application to “any other matter arising out of the Plan,” the Court of Appeal ruled that Kawakita’s bad faith claim needed to be filed no later than three years after the coverage was first denied; which it was. With this ruling, Kawakita’s attempt to impose bad faith liability of Blue Shield’s decision to rescind her coverage case can proceed.

New Ninth Circuit Decision Says California Law Requires Strict Compliance with Insurance Policy Warranty

Noting a paucity of recent California Supreme Court precedent on whether strict or merely substantial compliance with an insurance warranty is required to invoke coverage, the Ninth Circuit Court of Appeals recently held that California law requires strict compliance with a pilot warranty in an aviation insurance policy as a condition precedent to coverage. Trishan Air, Inc. v. Federal Insurance Company, __ F.3d __ 2011 WL 540532 (9th Cir. 2011). The Ninth Circuit affirmed the Central District of California’s summary judgment dismissal of the insured’s breach of contract and bad faith claims.

Trishan Air, Inc. (Trishan) owned a fleet of corporate jets. It purchased an aviation insurance policy from Federal Insurance Company (Federal). The policy included a pilot warranty endorsement that required a two-pilot crew for each aircraft and that

such pilot(s) must have successfully completed a ground and flight recurrent/initial training course for the make and model operated within the past 18 months. Any such course must incorporate the use of a motion-based simulator specifically designed for the insured make and model/make and model series.

In June 2007 Trishan’s 13-passenger Dassault Falcon 900 ran off the main runway at the Santa Barbara Municipal Airport in an aborted high-speed takeoff. The impact snapped the front landing gear, and the Falcon 900 skidded to rest in the dirt 600 feet away. Thankfully, no fatalities. At the time of the accident the co-pilot had never attended any formal training course or flight simulator course for the particular jet involved.

Trishan submitted a claim for the loss to Federal. Federal denied coverage based on a breach of the pilot warranty. Trishan filed suit for breach of contract, breach of the duty of good faith and fair dealing, reformation and declaratory judgment. Federal moved for summary judgment. Trishan introduced fact and expert evidence that the co-pilot substantially complied with the pilot warranty, and that substantial compliance satisfied the warranty. Causation was not an issue because Trishan and Federal stipulated that Federal was not required to demonstrate a causal connection between the accident and any breach of the pilot warranty.

The district court granted Federal’s motion for summary judgment on the grounds that California law requires strict compliance with the pilot warranty. Trishan appealed.

Citing turn-of-the-century California Supreme Court precedent, and more recent appellate precedent, the Ninth Circuit rejected Trishan’s arguments. It concluded that the pilot warranty was in the nature of a condition precedent to coverage, requiring strict compliance, rather than a mere condition of coverage as to which substantial compliance might suffice.

Trishan’s argument is premised on the warranty being a mere condition of the insurance policy, thus requiring only substantial compliance. This argument ignores the dichotomy between conditions relating to basic coverage, such as notice provisions, and conditions, like the pilot warranty, that are ‘an element of the fundamental risk insured.’ [citation]. ‘There are well-established differences between insuring clauses, exclusions, and conditions that should not be amalgamated into one binary question: coverage yes or no under an ‘if … then’ analysis. [citation].

Contrary to such variations in insurance provisions, Trishan seeks universal application of the substantial compliance doctrine untethered from the type of warranty at issue. However, strict compliance with pilot warranties serves as a necessary corollary of aviation insurance policies. ‘Federal courts uniformly enforce [pilot warranties] … and for good reason. Pilot qualifications and experience are obviously factors bearing directly on the risk the insurer is underwriting.’ [citation].

The pilot warranty is like a condition precedent because it expressly establishes the events or conditions that must occur before coverage can take effect. The Ninth Circuit noted that the practical effect of adopting Trishan’s substantial compliance standard would be to substitute the underwriter’s clear underwriting parameters with the insured’s subjective assessment. It would introduce too much uncertainty into ascertaining the risk that the underwriter agreed to assume, and would essentially re-write the insurance policy—which California courts are prohibited from doing.

The Ninth Circuit went further. It noted that even if substantial compliance would suffice, the co-pilot’s lack of formal coursework and simulator training for the Falcon 900 did not even substantially comply with the pilot warranty.

Trishan elides the fact that it did not comply with the pilot warranty’s training requirements for co-pilots in any fashion. Instead, Trishan asserts that the pilot’s alternative training served as a substitute for the simulator training. However, a complete failure to comply is not analogous to minor deficiencies. [citation]. Thus, Trishan’s complete failure to comply with the pilot warranty precludes coverage even under the substantial compliance doctrine. [citation].

Finally, noting the long established rule in California that there is no bad faith where there is no coverage, the Ninth Circuit also affirmed the district court’s dismissal of Trishan’s bad faith claim. The Ninth Circuit added that since Federal’s denial of coverage based on Trishan’s failure to strictly comply with the pilot warranty was reasonable, the “genuine dispute” doctrine also insulated Federal from any bad faith liability.

The take-away for insureds: review your insurance program carefully for warranty endorsements in your policies. Strict compliance may be required.

Provision Excluding Insurance Coverage For Wrongful Acts of a Coinsured Limited By California Supreme Court

California Insurance Code section 533 provides that an insurer is not liable for a loss caused by the willful act of an insured. This is consistent with California’s public policy of denying coverage for intentional acts of wrongdoing. However, when there is more than one insured, this policy can lead to inequitable results. Case in point is the situation presented in Century National Insurance Company v. Garcia, 2011 Cal. LEXIS 1392 (decided February 17, 2011).

In Century, Jesus Garcia, Sr.’s home was damaged when his adult son intentionally started a fire in his bedroom. Garcia Sr. subsequently submitted a claim under his homeowner’s insurance policy issued by Century National Insurance Company (“Century”). Although Garcia was the named insured, his wife and son also qualified as an insured under the policy. Century denied the claim on the grounds that the damage was caused by an intentional wrongful act by an insured. Garcia challenged the denial arguing that the Insurance Code does not bar “innocent insureds” from recovering despite a co-insured’s wrongful acts. At trial, the state court granted Century’s demurrer and Garcia appealed.

Writing for a unanimous court, Justice Baxter agreed with Garcia and held that the policy provision which precluded coverage was invalid. To reconcile this result with section 533, the Court relied on Insurance Code section 2070 which states: “All fire polices . . . shall be on the standard form, and, except as provided by this article shall not contain additions thereto. No part of the standard form shall be omitted therefrom except that any policy providing coverage against the peril of fire only, or in combination with coverage against other perils, need not comply with the provisions of the standard form of fire insurance policy . . . provided, that coverage with respect to the peril of fire, when viewed in its entirety, is substantially equivalent to or more favorable to the insured than that contained in such standard form fire insurance policy.” In other words, fire insurance policies in California must provide coverage that is at least as good as the coverage outlined by section 2071’s standard form provisions. Now here is where it gets a little tricky.

The Century policy provision that excluded coverage for intentional wrongdoing used the term “any insured” and “an insured.” Century used this definition of “insured” to include both Garcia Sr. and his son. However, section 533 and section 2071 prefix the term “insured” with the word “the.” This distinction, the court wrote, bears directly on the issue of coverage because “unlike policy exclusions that refer to `an’ insured or ‘any’ insured, exclusions based on acts of ‘the’ insured are construed as not barring coverage for innocent coinsureds.” Once the Court established that section 533 was intended to exclude coverage for acts of “the insured” vs. “any insured,” the minimum coverage aspect of section 2071 comes into play. Since section 2071 provides a baseline level of coverage that fire insurance policies in California must meet or exceed and the minimal coverage only excludes willful acts of “the insured”, then any policy that excludes willful acts of “any insured” would violate the minimal coverage levels outlined in section 2071. Because the policy at issue in Century excluded the wrongful acts of “any insured,” it failed to provide the minimal level of coverage.

While certainly a victory for innocent co-insured policyholders, the long-term impact of this opinion is unclear. On one hand, the Court’s holding raises serious doubts about the use of policy provisions that deny coverage for the intentional acts of “any” insured. On the other hand, the Court relied heavily on Insurance Code sections 2071 which applies solely to fire insurance coverage. In addition, the Justice Baxter himself remarked in a footnote that the holding in Century “should not be read as necessarily affecting the validity of clauses” in other contexts. Nevertheless, we can count of the fact that more cases will be coming in the future that test the boundaries of Insurance Code section 533.

California Supreme Court Prohibits the Collection of ZIP Codes

The collection of ZIP codes by retailers may now be prohibited following the recent California Supreme Court decision in Pineda vs. William Sonoma, __ Cal. 4th__ (February 10, 2011). Writing for a unanimous court, Justice Morena found that ZIP codes are “personal identification information” for the purposes of the Song-Beverly Credit Card Act (“Credit Card Act “). Under the Credit Card Act, personal identification information may not be recorded nor required of a customer in order to make an in-store purchase using a credit card.

Initially passed in 1990, the Credit Card Act was enacted “to address the misuse of personal identification information for, inter alia, marketing purposes.” It prohibits retailers from asking customers for their personal identification information and recording it during credit card transactions. Specifically, section 1747.08(a) provides that no firm shall “[r]equest, or require as a condition to accepting the credit card as payment in full or in part for goods or services, the cardholder to provide personal identification information, which the . . . firm . . . accepting the credit card writes, causes to be written, or otherwise records upon the credit card transaction form or otherwise.” Since its initial passage, there have been multiple class action lawsuits against retailers violating this statute. As recently as 2008, California 4th District Court of Appeals addressed this specific issue in Party City Corp. v. Superior Court, 169 Cal.App.4th 497 (2008) where it held that ZIP codes were too general to be covered by the Credit Card Act because they pertain to a group of individuals, not a specific individual.

Not to be deterred, Jessica Pineda brought a class action against Williams-Sonoma for violations of the Credit Card Act “and Business and Professions Code section 17200 et seq. Her lawsuit was based on a 2008 visit to a Williams-Sonoma Store in California. While making her purchase, the cashier asked for her zip code, but did not tell her what the information would be used for. Thinking the information was necessary to complete the transaction, Pineda provided the information. Later, using specialized computer software, Williams-Sonoma conducted a “reverse lookup” and was able to determine Pineda’s previously unknown mailing address by matching her name and zip code in a third-party database. This information was then stored in Williams-Sonoma’s own database for use in direct-mail marketing campaigns. Aware of the court’s prior holding in Party City, Pineda pursued her class action on the grounds that an essential element was missing from the prior cases. Namely, allegations that Williams=Sonoma actually use of the acquired ZIP code. Rather than rule that harm was a required element, the court instead overruled Party City altogether.

In Pineda, the Supreme Court construed the definition of “personal identification information” broadly to include any information concerning the cardholder. Personal identification information is defined in subsection (b) of the Credit Card Act as “information concerning the cardholder . . . including, but not limited to, the cardholder’s address and telephone number.” The Court reasoned that since a cardholder’s ZIP code refers to the area where a cardholder lives or works, it would qualify as information that pertains to the card holder. In addition, since a ZIP code is part of the address, the statute “should be construed as encompassing not only a complete address, but also its components.” Further, in reversing Party City, the Court rejected the argument that a ZIP code should not be protected because it does not pertain to a specific individual. An address or phone number, both of which are explicitly defined as personal identification information by section 1747.08, might also pertain to individuals other than the cardholder. Therefore, the fact that a ZIP code could pertain to multiple individuals did not render it exempt from the Credit Card Act.

The Court found further support in “the legislative history of the Credit Card Act in general, and section 1747.08 in particular, [which] demonstrates the Legislature intended to provide robust consumer protections by prohibiting retailers from soliciting and recording information about the cardholder that is unnecessary to the credit card transaction.” Here, the ZIP codes at issue were not collected for identification purposes nor were they necessary in order to complete the credit card transaction. Instead, Williams-Sonoma collected the ZIP codes specifically for marketing purposes. The difference is key. Had Williams-Sonoma collected ZIP codes for identification purposes, it would have been governed by Civil Code section 1747.08(d). This statute allows a business to require reasonable forms of identification from cardholder, such as a driver’s license, but it may not record any of the information on that license, including the cardholder’s ZIP code. It would be inconsistent with the intent of the Legislature to allow in subdivision (a) what would be explicitly forbidden in subdivision (d) – namely the requesting and recording of a ZIP code. The logical conclusion, the court held, is that the term “personal identification information” as used in section 1747.08, includes a cardholder’s ZIP code.

Within California, the effect of this ruling is significant. Retail stores routinely ask customers for their ZIP code for both marketing and regional sales forecasting. The potential effect is compounded by the fact that in 2008, this practice was considered exempt from the Credit Card Act by the court’s holding in Party City. Seemingly overnight, actions that were previously authorized could now subject retail stores to statutory penalties up to $250 for the first violation and $1,000 for each subsequent violation. At a minimum, California retailers should take a close look at their information collection practices and consider updating those policies in light of this decision.

Dental Hygienist Wins Large Jury Verdict in Disability Insurance Lawsuit

In 1996, Plaintiff Laura Kieffer developed carpal tunnel syndrome and severe cervical pain which forced her to stop working as a dental hygienist. Thereafter, Kieffer started receiving disability payments under an individual disability insurance policy she purchased from Paul Revere Life Insurance Company and its parent company the Unum Group Corporation. Even though she had been receiving disability payments for nearly ten years, Unum terminated her benefits in March of 2008. As a result, Laura sued in Los Angeles Superior Court alleging that Unum had unreasonably terminated her benefits. She sued for breach of contract, insurance bad faith and for punitive damages. This week, a jury awarded her $4.2 million in compensatory and punitive damages. Unum intends to appeal the verdict.

Nurses’ Association Study Shows That California Insurers Denied 26 Percent of All Health Insurance Claims in 2010

Despite more attention focused on the nation’s largest health insurance companies with their recent requests for large premium increases and with all of the talk about national healthcare reform, California’s largest health insurance companies continue to deny about 26 percent of all health insurance claims, according to a recently released study by the California Nurses Association(“CAN”)/National Nurses United (“NNU”).

Blue Shield, which has recently garnered attention for requesting premium rate increases of up to 59 percent for individuals in California, denied nearly two million claims last year, trailing only Anthem Blue Cross, which denied nearly six million claims. PacifiCare had the highest percentage of denials at a whopping 44 percent.

For the first three quarters of 2010, seven of California’s largest insurers rejected 13.1 million claims, 26 percent of all claims submitted, a number only slightly below the 26.8 percent rate for 2009. The data, new findings by the Institute of Health and Socio-Economic Policy, the CNA/NNU research arm, is based on data from the California Department of Managed Care.

Claims denial rates by leading California insurers, for the first three quarters of 2010, were:

PacifiCare – 43.9%
Cigna – 39.6%
Anthem Blue Cross – 27.3%
HealthNet – 24.1%
Blue Shield – 21.9%
Kaiser Permanente – 20.2%
Aetna – 5.9%

Since 2002, these seven companies, which account for more than three-fourths of all insurance enrollees in California, have rejected 67.5 million claims. Cigna, which denied 40 percent of claims, showed the biggest increase from 2009, increasing its rejection rate by 5.3 percent. Kaiser Permanente accounted for the biggest drop, a one year decline of 7.4 percent in denials. Blue Shield slightly increased its denial rate by .3 percent from 2009.

“These rejection rates demonstrate one reason medical bills are a prime source of personal bankruptcies as doctors and hospitals will push patients and their families to make up what the insurer denies,” said CNA/NNU Co-President DeAnn McEwen. The national reform law signed by President Obama last spring has, to date, had no impact on the high pace of insurance denials, she noted.

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