Firm News Archives - Page 72 of 76

California to Announce New Rules for HMO Members

On Wednesday, the California Department of Managed Health Care (“CDMH”) is scheduled to roll out new regulations that limit HMO members’ wait times for an appointment with a physician or specialist, the Los Angeles Times reports. The rules stem from a 2002 state law that called for HMOs to provide faster access to medical care. Since the initial passage of the law, DMHC has been in negotiations with health plans, hospitals, physician groups and others to work out details of the regulations.

Officials say California will be the first state to limit wait times for HMO members. About 21 million state residents are enrolled in HMO plans. The regulations by the California Department of Managed Health Care, in the works for much of the last decade, will require that patients have access to a health care professional at all times. The Regulations will require that patients be treated by HMO doctors within 10 business days of requesting an appointment, and by specialists within 15. Patients seeking urgent care that does not require prior authorization must be seen within 48 hours. In addition, telephone calls to doctors’ offices will have to be returned within 30 minutes, and physicians or other health professionals will have to be available 24 hours a day.

The regulations also include wait time requirements for HMOs that offer dental, mental health, vision care and other services. Consumers enrolled in non-HMO plans will not be directly affected by the new rules. HMOs will need to submit plans for meeting the requirements within nine months and will need to comply with the new rules within one year.

After January 2011, DMHC will have the authority to penalize non-compliant HMOs. Consumers also will be able to notify the department about delays in HMO care (See Helfand, Los Angeles Times, 1/19)

Unfair Insurance Practices Act Can Give Rise To Private Cause Of Action Under UCL

The California Court of Appeal recently addressed the question of whether a violation of the Unfair Insurance Practices Act can give rise to a civil cause of action under the Unfair Competition Law (“UCL”). The court answered the question in the affirmative. In Zhang v. Superior Court, 178 Cal. App. 4th 1081 (2009), Plaintiff Zhang sued California Capital Insurance Company (“California Capital”) for breach of contract and bad faith arising out of the handling of her claim for damages to her commercial premises due to fire. In addition, Zhang alleged a cause of action under the UCL and for “unfair, deceptive, untrue, and/or misleading advertising.” California Capital demurred to Zhang’s third cause of action by arguing that the plaintiff could not state a private cause of action under the UCL due to the decision in Moradi-Shalal v. Fireman’s Fund Ins. Companies, 46 Cal.3d 287 (1988). The trial court agreed by sustaining the demurrer and Zhang appealed.

On appeal, the court explained that Moradi-Shalal did not stand for the proposition that insurers who violate the Unfair Insurance Practices Act can never be liable in tort to the injured party. Instead, the court noted that “the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud, infliction of emotional distress and (as to the insured) either breach of contract or breach of the implied covenant of good faith and fair dealing.” Moradi-Shalal, at 304-305.

This was 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 section 790.03. Instead, 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.” Where, however, as in Zhang, a plaintiff alleges unlawful, misleading and untrue conduct that is expressly within the parameters of the UCL, the suit may proceed on that claim.

In response to those who make the “end run” argument, the Zhang court observed in a footnote that, as established in State Farm v. Superior Court, 45 Cal. App. 4th 1093 (1994), a UCL plaintiff is not entitled to seek compensatory and punitive damages, only restitution and injunction. Accordingly, “if a plaintiff expressly alleges conduct that was prohibited by the UCL, then there is no reason to apply Moradi-Shalal to prohibit the cause of action.”

As a result, the Court of Appeal found that the trial court erred in sustaining the demurrer and issues an order overruling the lower court’s decision.

Court Upholds $500 Million Award Against U.S. Life Insurance Co.

The U.S. Ninth Circuit Court of Appeals has upheld an arbitration award requiring U.S. Life Insurance Co. to pay reinsurance of more than $500 million to Superior National Insurance Companies, workers’ compensation insurer in liquidation, the California Department of Insurance reported.

In a press release, California Insurance Commissioner Steve Poizner said that “upholding this award means that that hundreds of millions of dollars will be available to pay the claims of workers injured on the job through the California Insurance Guarantee Association (CIGA) and other guarantee associations.” “This is huge and welcome news,” Poizner said.

U.S. Life is a subsidiary of American International Group (AIG) and was a reinsurer for five California workers’ compensation insurance companies that were liquidated in 2000. U.S. Life argued that Superior National and its affiliates failed to disclose to U.S. Life all pertinent information regarding the adequacy of its outstanding reserves for payment of claims, and exposing U.S. Life to substantial losses, CDI said.

On June 25, 2007 the U.S. District Central District in Los Angeles entered an original judgment against U.S. Life for $443.5 million. U.S. Life subsequently appealed to the Ninth Circuit. Fourteen months after arguments were heard and the case submitted, the original judgment was unanimously upheld by a three-judge panel. U.S. District Court Judge Edward F. Shea wrote the opinion confirming the original judgment against U.S. Life.

Posner explained that including post-judgment interest, the judgment is now more than $517 million. Interest will continue to accrue until payment is received from U.S. Life.

Although the court upheld the judgment, U.S. Life still may seek to file a motion to reconsider or request a hearing en banc, which may be filed within 14 days, or within 90 days of the judgment being affirmed it may seek review by the United States Supreme Court. Given that this appeal relates to the affirmation of an arbitration award, it is not expected the Court will grant further review.

The press release stated “[a]t no time were people in the workers’ compensation system at risk of not being paid. CIGA The California Insurance Guarantee Association has been paying the claims of injured workers whose policies were reinsured by U.S. Life. Once the money is collected from U.S. Life or from the $600 million bond AIG posted as security, it will be distributed to CIGA and other guaranty associations. CIGA will receive about 90 percent of the final amount.”

Ninth Circuit Affirms Use of Genuine Dispute Doctrine in D&O Coverage Cases

The genuine dispute doctrine has received much attention recently by the California courts. Although the doctrine first arose in the Ninth Circuit Court of Appeals, there has not been much recent activity by the Ninth Circuit or the federal district courts located in California relative to this doctrine. The Ninth Circuit jumped backed in the frey with its decision in S.J. Amoroso Const. Co., Inc. v. Executive Risk Indem., Inc., 325 Fed. Appx. 548, 2009 WL 1154202 (9th Cir. 2009).

In S.J. Amoroso Const. Co., the Ninth Circuit upheld a district court decision dismissing a claim of bad faith against an insurer for denying coverage under a Directors & Officers insurance policy (“D&O policy”).

Paul Mason was an officer of S.J. Amoroso Construction Company (“Amoroso”) and a covered individual under the D&O Policy issued by Executive Risk Indemnity Inc. (“Executive Risk”). Mason entered into a construction contract with Mauna Kea Properties, who later alleged negligent or intentional misrepresentation in connection with that contract. Litigation eventually ensued between the parties and a claim was made under the D&O policy. Executive Risk argued that Amoroso was not entitled to coverage under the D&O policy because coverage was excluded for claims arising from a contract or written agreement. Executive Risk also argued coverage should be excluded because Mason acted in his individual capacity and not on behalf of the company. The district court agreed granting summary judgment in favor of Executive Risk.

On appeal, the Ninth Circuit reversed the district court’s decision holding that under California law, employees may be said to act within the scope of their employment, even when their actions are not authorized by their employer, so long as their actions are not so “unusual or startling that it would seem unfair to include the loss resulting from it among other costs of the employer’s business.” Here, the construction contract with Mauna Kea Properties was not so “unusual or startling” because it was in the same general business as Amoroso, namely construction. Moreover, the Ninth Circuit further held that “coverage clauses are interpreted broadly to afford the greatest possible protection to the insured, exclusionary clauses are construed narrowly against the insurer.” Although the facts suggested that Mason executed a written assignment agreement, there was a genuine dispute as to whether that agreement was sufficient to implicate the policy’s exclusionary clause. As a result, a triable issue of fact remained as to whether correspondence between Mason and Mauna Kea Properties created a separate contract or agreement which would be excluded by the policy.

Under the genuine dispute doctrine, if the insurer can show that a genuine dispute existed as to coverage, then it is entitled to summary judgment on the insured’s bad-faith cause of action. The same facts that saved Amoroso’s claim from summary judgment, also created a genuine dispute as to coverage. Relying on Lunsford v. Am. Guar. & Liab. Ins. Co., 18 F.3d 653, 656 (9th Cir.1994), the court held that where there is a genuine issue of liability, Executive Risk, as a matter of law, could not have acted in bad faith in denying coverage. Therefore, even though the reasonableness of Executive Risk is ordinarily a matter for a jury to decide, the genuine dispute doctrine entitled Executive Risk to summary judgment on Amoroso’s bad faith claim.

District Court Applies Abuse of Discretion Standard of Review After Montour

Recently, in Montour v. Harford Life & Accident, 582 F.3d 933 (9th Cir. 2009), the Ninth Circuit Court of Appeals, in one of its most important cases, adopted a new standard of reviewing ERISA abuse of discretion cases where the insurer has a conflict of interest. The court held that a “modicum of evidence in the record supporting the administrator’s decision will not alone suffice in the face of such a conflict, since this more traditional application of the abuse of discretion standard allowed no room for weighing the extent to which the administrator’s decision may have been motivated by improper considerations.” Further, the court in Montour explained that a reviewing court must also take into account the administrator’s conflict of interest as a factor in the abuse of discretion analysis. This was significant because the appeals court gave a comprehensive description of the “signs of bias” it found were exhibited by Hartford 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.’”

Sacks v. Standard Ins. Co., __ F. Supp. 2d __, 2009 WL 4307558 (C.D. Cal. 2009) is one of the first cases to address the abuse of discretion standard of review since the Ninth Circuit’s important decision in Montour. In Sacks, the claimant was a mortgage underwriter for Countrywide Home Loans. Standard Insurance Company (“Standard”) was the claims administrator and insurer for the Countrywide Home Loans Long Term Disability Plan (the “Plan”). After her claim for long-term disability benefits was denied, the claimant sued Standard Insurance in federal courts for benefits under the ERISA.

The court recognized that the Plan granted Standard with discretionary authority. However, since Standard provided the funds and made the decision concerning benefits, it operated under a structural conflict of interest. At issue was how to apply the standard of review in light of the conflict of interest and the recent Ninth Circuit opinion in Montour. Here, the court recognized that the “abuse of discretion” standard of review does not change just because there is a conflict of interest. Instead, the factual circumstances surrounding the conflict of interest is a factor providing weight in the overall analysis of whether an abuse of discretion occurred. As a result, the court in Sacks gave greater weight to the conflict of interest for a variety of reasons including because Standard used an erroneous occupation criteria to evaluate Plaintiff’s claim, failed to consider the effects of the claimant’s medication on her ability to perform her own occupation, and failed to adequately investigate the claim. In addition, the court highlighted the fact that Standard failed to conduct follow-up testing as recommended by the IME physician and instead merely accepted the part of the physician’s conclusion that supported its claims decision. These actions, the court found, warranted greater skepticism of Standard’s claims decision. Accordingly, the court found that Standard had abused its discretion and reversed the claim decision by awarding the plaintiff benefits.

Expect to see more district courts to focus 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 more 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.

California Supreme Court Embraces 1:1 Punitive Damages Ratio

The California Supreme Court has embraced the principle suggested by the U.S. Supreme Court that a ratio of punitive damages to compensatory damages of one-to-one is the federal constitutional maximum where there is relatively low reprehensibility and the compensatory damages award is substantial.

In Roby v. McKesson Corporation, plaintiff Charlene Roby filed alleged a wrongful termination and harassment action against McKesson and her supervisor Schoener claiming she was fired because of a medical condition and a related disability. The jury found in favor of Roby on all causes of action and awarded compensatory damages of $3,511,000 against McKesson and $500,000 against the supervisor, Schoener. The jury also awarded punitive damages: $15,000,000 against McKesson and $3,000 against Schoener. The trial court reduced the compensatory damages against McKesson to $2,805,000 because some of the damage awards overlapped.

The California Court of Appeal reduced the compensatory damages award to $1.4 million, finding there was insufficient evidence for a harassment verdict against McKesson and that the $15 million punitive damages award was excessive under the federal due process clause. The Court of Appeal determined that the maximum permissible punitive damages award, based on the facts of the case and size of the compensatory damages award, was $2 million, or 1.4 times the amount of the compensatory damages award.

The California Supreme Court decided two important issues: whether personnel actions undertaken by a supervisor can be used as evidence of harassment and whether the punitive damages award against McKesson was excessive. As to the first issue, the Supreme Court reversed the Court of Appeal holding that there was insufficient evidence of Roby’s harassment claim. Rather, the Supreme Court held that biased personnel actions can be used as evidence of harassment because they can contribute to harassment by communicating hostility and evidence the discriminatory animus of the person taking the personnel action. These actions included demeaning comments about her body odor, arm sores, and the demeaning manner in which her supervisor acted towards her, including refusing to respond to greetings, failing to give gifts and other less favorable treatment. The Court found that none of these events was fairly characterized as official employment actions or personnel actions, and thus, could not be conduct that fell within the supervisor’s business and management duties. Thus, it reinstated the jury’s verdict finding for Roby on the discrimination claim. The Court also found there was sufficient evidence for the jury to infer the supervisor discriminated against Roby based on her medical condition, and that the constant hostility was also based on medical conditions, constituting harassment and in violation of applicable laws.

As to the punitive damage award, the Supreme Court found that McKesson’s implementation of its attendance policy was not an act with intentional but “managerial malfeasance.” Thus, although punitive damages were appropriate in that Roby was financially vulnerable, the conduct affected her physical and mental well being and McKesson’s conduct showed a reckless disregard for the health and safety of others, it reduced the punitive damage award to the amount of the compensatory damages, $1,905,000.

The California Supreme Court reversed, holding that there was sufficient evidence to support the harassment verdict and affirming $1.9 million in compensatory damages. However, although the Supreme Court agreed that the award of $15 million in punitive damages was excessive, it relied on U.S. Supreme Court precedent to determine that the ratio of punitive damages to compensatory damages could not exceed one-to-one. In reaching its decision, the California Supreme Court based its determination on an analysis of the five “reprehensibility factors” articulated by the U.S. Supreme Court in State Farm Mut. Auto Ins. Co. v. Campbell, 538 US 408 (2003): (1) the harm caused was physical as opposed to economic, (2) the defendant’s indifference to or reckless disregard of the health or safety of others, (3) the plaintiff’s financial vulnerability, (4) the defendant’s conduct involved repeated actions or an isolated incident, and (5) the harm was the result of intentional malice, trickery or deceit. The Court found that only the first three factors were present, and that the defendant’s conduct “was at the low end of the range of wrongdoing.”

With respect to the first of these reprehensibility factors, the Court explained that the harm to Roby was “physical” in the sense that it affected her emotional and mental health, rather than being a purely economic harm. With respect to the second reprehensibility factor, the Court determined that it was objectively reasonable to assume that employer McKesson‟s acts of discrimination and harassment toward Roby would affect her emotional well being, and therefore McKesson‟s “conduct evinced an indifference to or a reckless disregard of the health or safety of others.” The third reprehensibility factor was likewise present: Roby was a relatively low-level employee who quickly depleted her savings and lost her medical insurance as a result of her termination, and therefore it appears that she “had financial vulnerability.”

With respect to the fourth reprehensibility factor of the State Farm test, however, the Court found it was not present. Schoener‟s wrongful conduct was repeated, as she subjected Roby to a series of discriminatory disciplinary actions and harassed Roby on an almost daily basis, but there was no indication of repeated wrongdoing by McKesson, as discussed below.

Concerning the discrimination claim, McKesson’s wrongdoing was limited to its one-time decision to adopt a strict attendance policy that, in requiring 24-hour advance notice before an absence, did not reasonably accommodate employees who had disabilities or medical conditions that might require several unexpected absences in close succession. The Court stated that McKesson’s act of discharging Roby (including the perfunctory investigation that accompanied it) was simply an application of this attendance policy. Although te jury found that McKesson’s adoption of this flawed attendance policy constituted “oppression” or “malice,” justifying an award of punitive damages under Civil Code section 3294(a), nevertheless, McKesson’s adoption of this attendance policy was a single corporate decision.

The significance of this opinion lies partly in the fact that the California Supreme Court has issued so few opinions on punitive damages in recent years. But the primary significance seems to be that the court has put the final nail in the coffin of the argument that the portion of State Farm calling for a one-to-one ratio limit is mere dicta that should does not apply in California. However, where the reprehensibility factor is considerably more egregious than was present in this case, it would appear that single digit punitive damages well above the one-to-one ratio could be mandated.

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