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Insurer Seeking Contribution From Another Insurer Must Prove it Paid More Than Its Share of Loss

When multiple insurers share the same defense obligation, the defense costs are typically allocated equally. When an insurance company refuses to defend, those insurers which do contribute to the defense may seek contribution from the insurer(s) that do not. Scottsdale Insurance Co. v. Century Surety Co., __ Cal. App. 4^th ___ (March 10, 2010) addresses such a situation.

In this case, Scottsdale Insurance Company (“Scottsdale”) brought suit against Century Surety Company (Century) seeking equitable contribution based on Century’s failure to participate in the defense of 17 common insureds in hundreds of actions in which Scottsdale, along with at least one other insurer, shared the costs of the defense of those insured parties. Scottsdale also sought equitable contribution with respect to indemnity of the common insureds in those underlying actions in which Scottsdale (and at least one other insurer) had paid amounts to settle the actions.

Three principal defenses were raised. In the unpublished portion of the opinion, the court discusses two of them and concludes that the trial court correctly decided both. Century argued that it was not required to defend or indemnify three of the common insureds because Century’s insurance policies did not provide coverage of the insureds for the actions alleged against them. Specifically, Century relied on a policy exclusion intended to exclude from coverage any action arising out of work which had been completed by the insured prior to the effective date of the policy (the prior work exclusion). The trial court concluded that Century’s prior work exclusion was not conspicuous, plain, and clear, and refused to enforce it. Century was therefore required to share equitably in the costs of the defense and indemnification of the common insureds, despite the presence of this exclusion.

In the published portion of the opinion, the Court also discussed the important issues of damages and burden of proof in an action for equitable contribution by one insurer against another. The trial court concluded that Scottsdale was entitled to equitable contribution from Century with respect to approximately 80 of the underlying actions. The amount of money that Scottsdale had contributed toward the defense and indemnity of the underlying insureds in those actions was not subject to dispute. With respect to many of the underlying actions, the parties also did not dispute: (1) the total number of insurers who participated in the defense of the common insureds; and (2) that the defense costs were allocated among the participating insurers by means of an equal shares formula. Century argued, in order to calculate the amount which it owed Scottsdale for defense costs, the trial court should recalculate, under the equal shares method, the amount each insurer would have paid for defense costs had Century participated with the other insurers in the defense of the insured.

Thus, Century argued it should be ordered to pay Scottsdale the difference between the equal share Scottsdale paid without Century’s participation, and the equal share it would have paid had Century participated. The trial court rejected Century’s proposed method of calculation, and instead awarded Scottsdale half of all defense and indemnity payments it made with respect to the claims for which it was entitled to recover equitable contribution. This result, however, was in conflict with the general rule, applied in non‑insurance cases, that in order to be entitled to equitable contribution a party must have first paid more than its share of the loss and it bears the burden of proving such circumstance.

The court applied those principles and concluded that they should have equal application in insurance cases. As a result, the court held that not only must Scottsdale prove that it had paid more than its “fair share” of the defense and indemnity costs for the common insureds but it also bears the burden of producing the evidence necessary to calculate such “fair share.” Moreover, the court held that one insurer cannot recover equitable contribution from another insurer any amount that would result in the first insurer paying less than its “fair share” even if that means that the otherwise liable second insurer will have paid nothing. Because the trial court applied an incorrect standard, the court reversed and remanded for a redetermination of Scottsdale’s equitable contribution damages.

An Insurer Has A Duty to Notify Insured of Contractual Limitations Provision Regardless of Whether the Insured is Represented By Counsel.

Regardless of whether the insured is represented by counsel, an insurer has a duty to provide notice of a contractual statute of limitations period. The Insurance Corporation of New York discovered this holding the hard way when the California Court of Appeal published Superior Dispatch, Inc. v. Insurance Corp. of New York, 181 Cal. App. 4th 175 (2010), modified on Denial of Rehearing, __ Cal. App. 4th __, 2010 WL 601459 (February 22, 2010).

Superior Dispatch (“Superior”) was a trucking company who obtained a Cargo Coverage insurance policy from the Insurance Corporation of New York (“Inscorp”). The policy issued to Superior contained a contractual statute of limitations period stating, “No suit or action or proceeding for the recovery of any claim under this policy shall be sustainable in any court of law or equity unless the same be commenced within twelve (12) months next after discovery by the Insured of the occurrence which gives rise to the claim.”

In July of 2003, Superior was hired to transport a dump truck on the back of a flat rack trailer. En route to its destination, the cab of the dump truck struck an overpass and was severally damaged. On July 17, 2003, Superior submitted a claim to Inscorp for the damaged dump truck. Inscorp denied the claim in a letter dated November 5, 2003. The denial letter did not notify Superior of the policy’s one-year contractual limitations period. In January 2004, Superior retained legal counsel who challenged the denial in a several letters to Inscorp. However, Inscorp affirmed the company’s decision to deny the claim arguing that there was no coverage under the policy. Once again, Inscorp’s letter did not notify Superior of the one-year contractual limitations period. When counsel for Superior finally filed a complaint on May 20, 2005, Inscorp filed a motion for summary judgment arguing that the contractual limitations period barred the complaint. The trial court agreed and entered a judgment in favor of Inscorp.

The California Court of Appeal reversed the lower court’s judgment holding that Inscorp was not entitled to summary judgment based on the contractual limitations provision. Here, the court noted that the fact that Superior retained counsel before the end of the limitations period did not establish as a matter of law that Superior’s reliance on the nondisclosure was unreasonable. Instead, the court held that the reasonableness of Superior’s reliance on Inscorp’s nondisclosure was a question of fact. While other cases preclude estoppel based on counsel’s knowledge of the law, in this case, the limitation period was contractual rather than statutory. Accordingly, a triable issue of fact remained as to the existence of an equitable estoppels claim. As a result, the Court of Appeal ruled that Inscorp was not entitled to summary judgment.

Although the trial court’s summary judgment was overturned, all was not lost for Inscorp. The appellate court ultimately held that Superior made a material misrepresentation on its insurance application by failing to disclose that Superior transported motor vehicles. This misrepresentation, the court held, rendered the policy invalid and established a complete defense to the breach of contract and implied covenant claims.

This case should serve as an additional reminder that an insurer has a duty to notify the insured of a contractual limitations provision, regardless of whether or not the insured has retained legal counsel. Whenever a policy contains a contractual limitation provision, the insurer should provide notice of the provision in nearly all communications with the insured.

ERISA Plan Administrators Take Heed

In an article appearing inthe February 10, 2010 editions of theLos Angeles and San FranciscoDaily Journals, I discuss the impact of the Ninth Circuit’s Montour v. Hartford Life & Accident, 588 F.3d 623 (9th Cir. 2009). Here it is:

The Employee Retirement Income Security Act of 1974 (ERISA) is certainly one of the most significant pieces of federal legislation ever enacted by Congress as it impacts the employee benefit plans and retirement funds of millions of Americans. Recently, the 9th U.S. Circuit Court of Appeals issued one of its most significant ERISA decisions in Montour v. Hartford Life & Accident, 588 F.3d 623 (9th Cir. 2009).

Under ERISA, when a plan participant challenges the administrator’s decision to terminate or deny benefits, that decision is evaluated under either an abuse of discretion or de novo standard of review. ERISA litigation lawyers know well that when they are involved in litigating ERISA cases, the applicable standard of review can be outcome determinative. That is why Montour should be at the top of every ERISA lawyer’s reading list.

In Montour, the 9th Circuit clarified the application of the abuse of discretion standard of review when an insurer has a structural conflict of interest. A structural conflict of interest arises when the entity making the decision whether or not to approve benefits is also the same entity that is ultimately responsible for paying those benefits. In the realm of an insured employee benefit plan, this is a common occurrence as insurers typically act as claims administrators and the funding source of ERISA benefits. Because vast numbers of ERISA plans include a provision granting the plan or claims administrator discretionary authority to interpret the plan’s terms and to decide the payment of benefits under the plan, determining when and under what circumstances a conflict of interest will be so significant as to affect the outcome of the case is of course critically important.

Prior to Montour, but after the 9th Circuit’s en banc decision in Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955 (9th Cir. 2006), under an abuse of discretion standard of review, a district court would generally uphold the administrator’s decision provided it was grounded on any reasonable basis and made in good faith, weighing any conflict of interest of the administrator as factor in determining whether abuse of discretion existed. See Sznewajs v. U.S. Bancorp Amended & Restated Supplemental Benefits Plan, 572 F.3d 727, 734-735 (9th Cir.2009).

In Abatie, the widow of an ERISA plan participant challenged the administrator’s decision to deny benefits. There, Alta Health & Life Insurance Co. was the claims administrator and also the funding source of the ERISA plan, thereby creating a conflict of interest. After addressing what language was necessary to confer discretionary review on an administrator, the court turned to the issue of how to apply that standard of review when an administrator operates under a conflict of interest. In deciding this issue, the 9th Circuit in Abatie overruled its prior decision in Atwood v. Newmont Gold Co., 45 F.3d 1317 (9th Cir.1995). Under the Atwood standard, a plan participant was required to present “material, probative evidence, beyond the mere fact of the apparent conflict, tending to show that the fiduciary’s self-interest caused a breach of the administrator’s fiduciary obligations to the beneficiary.” merIf the participant did so, the burden then shifted to the administrator to prove that the conflict of interest did not affect its decision to deny benefits. If the plan could not carry that burden, a court would give no deference to the administrator’s decision to deny benefits, but would instead review the decision de novo. Under Abatie, the court considered any potential conflict of interest as a factor in its analysis. As a factor, the court would weigh the conflict of interest in light of all the factual circumstances. For instance, the conflict of interest might receive little weight if the record was void of any evidence of malice, self-dealing, or parsimonious claims-granting history. Likewise, if the administer provided inconsistent reasons for the denial or failed to adequately investigate the claim, then the court could weigh the conflict more heavily. Moreover, the court held that the district could look beyond the administrative record to determine whether a conflict of interest existed that affected the appropriate level of judicial scrutiny. The reasoning expressed by the 9th Circuit in Abatie was confirmed in the U.S. Supreme Court case of Glenn v. MetLife, 2008 DJDAR 5285, holding that the conflict of interest was merely a factor in the analysis.

Three years after Abatie, the 9th Circuit returned to the conflict of interest issue in Montour. In Montour, the claimant was a telecommunications manager for Conexant Systems, Inc., which provided Montour with a group long-term disability plan governed by ERISA. Hartford was both the insurer and claims administrator and the plan granted Hartford discretionary authority to interpret plan terms and to determine eligibility for benefits.

In reversing the district court, the 9th Circuit first explained that when an ERISA plan grants the administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan, the court reviews the decision for abuse of discretion. The court agreed with the district court that the abuse of discretion standard applied and that Hartford had a conflict of interest. However, the appeals court criticized the district court’s application of the “clear error” test, explaining that a reviewing court must also take into account the administrator’s conflict of interest as a factor in the abuse of discretion analysis. The appeals court concluded that the district court’s decision did not adequately balance the conflict factors. Accordingly, the appeals court proceeded to do so.

The 9th Circuit gave a comprehensive description of the “signs of bias” it found Hartford exhibited throughout the decision-making process. These included overstatement of and excessive reliance upon Montour’s activities in the surveillance videos; Hartford’s decision to conduct a paper review rather than an “in-person medical evaluation;” Hartford’s insistence that Montour produce objective proof of his pain level; and Hartford’s failure to deal with and distinguish the Social Security Administration’s contrary disability decision. The appeals court also noted Hartford’s “failure to present extrinsic evidence of any effort on its part to ‘assure accurate claims assessment.’” Continuing beyond the facts in Montour, the court described what it believed to be common factors that frequently arise in the ERISA context including, “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.” Ultimately, the appeals court concluded that Hartford’s bias had infiltrated the entire administrative decision-making process, leading the court to accord significant weight to the conflict of interest. Weighing all of the factors together, the court concluded that Hartford’s conflict of interest improperly motivated its decision to terminate Montour’s benefits. The court reversed and remanded the matter for entry of judgment in favor of Montour and for reinstatement of long-term disability benefits.

Montour makes it clear that when there is a structural conflict of interest, the district court must give the conflict adequate consideration in its analysis of whether the administrator abused its discretion. This consideration includes weighing the relevant factors in light of the factual circumstances, including the following potential “signs of bias:”

Did the insurer overstate the surveillance findings in its communications to third party medical doctors?

Did the insurer exaggerate the extent to which the claimant’s activities while under surveillance where inconsistent with his claimed level of disability?

Did the insurer fail to account for a contrary decision by the Social Security Administrator that the claimant was disabled?

Did the insurer fail to adequately inform the claimant of what further evidence should be submitted to help establish his claim for benefits?

Did the insurer conduct a “pure paper” review as opposed to an independent medical examination?

Expect to see district courtsfocus their analysis on these and other self-interest factors as they assess how much weight to give to an insurer’s conflict of interest. Also expect to see district courts applying the Montour analysis to find that administrators have acted in a manner that evidences their self-interest and to award more ERISA participants their benefits under insured benefit plans.

Robert J. McKennon is a founding partner of McKennon│Schindler. He represents clients in sophisticated business and insurance litigation matters, with a particular emphasis on life, health and disability insurance, insurance bad faith and unfair business practices litigation. He can be reached at (949) 436-7529 or rm@mslawllp.com. His firm’s California Insurance Litigation Blog can be found at www.californiainsurancelitigation.com.

Supreme Court Says Principal Place of Business is Where a Company’s Headquarters is Located

A unanimous United Supreme Court ruled today that a corporation’s principal place of business is where the company’s executives work and direct the company’s business activities, not where the company’s products are sold. This is yet another reversal of an important Ninth Circuit Court of Appeals ruling.

In a victory for business entities, the ruling will make it harder to sue out-of-state corporations in state courts, which are considered friendlier to class-action lawsuits than are federal courts.

The circuit courts have been divided into a deep four-way split regarding the tests to be applied in locating a corporation’s principal (most important, consequential or influential) place of business for purposes of diversity jurisdiction in federal court. These tests ranged from the Seventh Circuit’s “nerve center test,” which focused on locating the corporation’s “brain,” and ignores all other business operations as irrelevant, to the Ninth Circuit’s “place of operations test,” which focused on the locations of the corporation’s business operations, while generally ignoring its nerve center. Unlike either of these tests, the Third Circuit’s “center of corporate activities test” focused on finding the center of day-to-day corporate-wide activity and management, with the locations of other business activities being relevant, but less important, factors. Finally, the Fifth, Sixth, Eighth, Tenth and Eleventh Circuits’ “totality of the circumstances test” hinged on no particular facet of corporate activities, but rather on the company as a whole, including its character, business purpose, nerve center, management center and locations of operations. The Court today adopted the “nerve center” test.

In Hertz v. Friend, __ U.S. __ (2010), plaintiffs brought a class action suit against Hertz in a California state court seeking unpaid overtime and vacation wages. Hertz moved to remove the case to a California federal district court based on diversity jurisdiction. The plaintiffs argued that there was no diversity jurisdiction as Hertz’s principal place of business was California and not Florida. The federal district court agreed and remanded the case to the state court. On appeal, the Ninth Circuit affirmed the federal district court. It held that the district court correctly applied the “place of operations test” to determine Hertz’s principal place of business. Therefore, there was no diversity jurisdiction and the district court had no authority over the case.

The Supreme Court overturned that decision, sending the case back to federal court:

“We conclude that the phrase ‘principal place of business’ refers to the place where the corporation’s high level officers direct, control and coordinate the corporation’s activities,” Justice Stephen Breyer wrote. “Lower federal courts have often metaphorically called that place the corporation’s ‘nerve center.’ We believe that the ‘nerve center’ will typically be found at a corporation’s headquarters.”

Given an important recent pro-plaintiff ruling on class certification in a California UCL case and some recent unfavorable rulings in the California courts, the federal courts may not be so bad for class action plaintiffs after all.

California Insurance Commissioner Says Anthem Blue Cross Violated California Law More Than 700 Times

Just when you thought the bad news for Anthem Blue Cross (“Anthem”) could not get any worse, it does. According to an article by Duke Helfand appearing in today’s Los Angeles Times, California Insurance Commissioner Steve Poizner reported that Anthem, California’s largest for-profit health insurer, violated California law more than 700 times over a three-year period by failing to pay medical claims on time and misrepresenting policy provisions to customers.

Anthem could face fines of up to $7 million stemming from the alleged violations from 2006 to 2009. Poizner said that Anthem repeatedly failed to respond to state regulators in a “reasonable time” as they investigated complaints over the last year.

“We believe there is evidence to suggest there are serious issues with how Anthem Blue Cross pays claims,” Poizner said at a Sacramento news conference. “Most disturbing to us is that they don’t even respond” to the Department of Insurance “in a timely way.”

Anthem’s parent company, WellPoint Inc., said that it had not seen the enforcement action but would cooperate fully with Poizner to resolve the matter “in the best interests” of its policyholders.

“We take the issues raised by Commissioner Poizner very seriously,” Anthem said in a statement. “As the largest insurer in California, our responsibility is to pay the many millions of claims on behalf of our members each year fairly, fully and promptly.”

As reported in this blog, WellPoint and Anthem have faced intense criticism from consumers, regulators, members of Congress and the Obama administration over rate hike proposals of as much as 39% for customers with individual policies in California. Lawmakers in Sacramento and Washington are holding hearings this week on the increases, which have been postponed until May 1 amid the outcry.

The rate hikes would affect many of the 800,000 individual policyholders in California.

According to Poizner, nearly 40% of the violations in the Anthem case, 277, stem from allegations that the company failed to pay patient claims within 30 days as required by state law, officials said.

Poizner’s office filed the enforcement action against Anthem on Monday with the Office of Administrative Hearings. An administrative law judge will hear the matter. Each violation carries a maximum penalty of $10,000.

Tumult in California UCL Class Action Cases: Will the Supreme Court Step in?

Late last year the Fourth Appellate District of the California Court of Appeal issued its decision in Zhang v. Superior Court, 178 Cal. App. 4th 1081 (2009). In that case, the court identified the issue presented “as whether fraudulent conduct by an insurer, which is connected with conduct that would violate Insurance Code § 790.03 et seq., sometimes referred to as the ‘Unfair Insurance Practices Act’—can also give rise to a private civil cause of action under the Unfair Competition Law (UCL), Business and Professions Code § 17200 et seq.” The court held that it did. This case will thus address whether insurance companies enjoy any special exemption from UCL liability. The statement of issues on review reads:

(1) Can an insured bring a cause of action against its insurer under the unfair competition law (Bus. & Prof. Code, § 17200) based on allegations that the insurer misrepresents and falsely advertises that it will promptly and properly pay covered claims when it has no intention of doing so? (2) Does Moradi-Shalal v. Fireman’s Fund Ins. Companies (1988) 46 Cal.3d 287 bar such an action?

This was a departure from Textron Financial Corp. v. National Union Fire Ins. Co., 118 Cal. App. 4th 1061 (2004), which was previously interpreted to bar UCL “unlawful” prong claims against insurers based on conduct prohibited by § 790.03. The court held that “if a plaintiff relies on conduct that violates the Unfair Insurance Practices Act but is not otherwise prohibited, Moradi-Shalal requires that a civil action under the UCL be considered barred.” The court explained that that where, however, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

On February 10, 2010, the California Supreme Court granted the Petition for Review of this case. It is therefore no longer citable.

On the same day the California Supreme Court denied a Petition for Review and Depublication in Cohen v. DIRECTV, Inc. (October 28, 2009). Cohen v. DIRECTV, Inc., 178 Cal. App. 4th 966 (2009).

In Cohen, the plaintiff alleged that DIRECTV violated the UCL and the Consumer Legal Remedies Act (“CLRA”) by inducing subscribers to purchase high definition television services through misrepresentations in DIRECTV’s advertising that DIRECTV’s broadcast of those channels would meet certain technical specifications. Id. at pp. 969-970. In opposing class certification, DIRECTV submitted evidence that many subscribers had never seen, or did not remember seeing, advertisements with the alleged misrepresentations about the technical specifications, and purchased the services at issue due to other factors. The trial court found that common issues of fact did not predominate because the allegedly fraudulent representations were not uniformly made to or considered by the class members.

The appellate court affirmed. In discussing the UCL claim, the appellate court noted that Tobacco II, 46 Cal. 4th 298 (2009) was irrelevant to class certification because it addressed only the issue of standing, and did not instruct the “state’s trial courts to dispatch with an examination of commonality when addressing a motion for class certification.” Id. at p. 981. The court then concluded that the trial court’s concern that the plaintiff’s UCL and CLRA claims would involve individual factual issues regarding class members’ reliance on the alleged misrepresentations “was a proper criterion for the court’s consideration when examining ‘commonality’ in the context of the subscribers’ motion for class certification, even after Tobacco II.” Id.

The Court may very well have viewed the issues as premature, given that Cohen has been heavily criticized by other decisions recently. Most recently, the modified opinion in Steroid Hormone Product Cases, __ Cal. App. 4th __ (February 8, 2010) rejected the Cohen analysis. The court stated:

“But to the extent the appellate court’s opinion might be understood to hold that plaintiffs must show class members’ reliance on the alleged misrepresentations under the UCL, we disagree. As Tobacco II made clear, Proposition 64 did not change the substantive law governing UCL claims, other than the standing requirements for the named plaintiffs, and “before Proposition 64, ‘California courts have repeatedly held that relief under the UCL is available without individualized proof of deception, reliance and injury.’ [Citation.]” (Tobacco II, supra, 46 Cal.4th at p. 326.) But in any event, the Cohen court’s discussion regarding the appropriateness of considering class members’ reliance when examining commonality is irrelevant here, where the UCL claim is based upon the unlawful prong of the UCL and thus presents no issue regarding reliance.”

Yokoyama v. Midland National Life Insurance Co., __ F.3d __ (9th Cir. February 8, 2010), also amounts to a rebuke of Cohen, although the court did not cite to Cohen and even though the court interpreted Hawaii law. It ruled that class members, relative to Hawaii’s version of California’s UCL, did not need to show reliance on misrepresentations because the Hawaii statute required an “objective” standard. Like California’s UCL, under Hawaii law, a deceptive act or practice is: (1) a representation, omission, or practice that (2) is likely to mislead consumers acting reasonably under the circumstances [where] (3) the representation, omission, or practice is material. Likewise, claims under California unfair business practices statutes are governed by the “reasonable consumer” test. Freeman v. Time, Inc., 68 F.3d 285, 289 (9th Cir.1995) (“[T]he false or misleading advertising and unfair business practices claim must be evaluated from the vantage of a reasonable consumer.” (citation omitted)); Lavie v. Procter & Gamble Co., 105 Cal. App. 4th 496, 506-07 (2003) (“[U]nless the advertisement targets a particular disadvantaged or vulnerable group, it is judged by the effect it would have on a reasonable consumer.”).

It will be interesting to when the California Supreme Court will resolve these conflicts.

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