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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.

In Marin General Hospital v. Modesto & Empire Traction Co., 581 F.3d 941 (9th Cir. 2009), the Ninth Circuit Court of Appeals held that section 502(a)(1)(B) of ERISA did not completely preempt state-law causes of actions for breach of contract, negligent misrepresentation, quantum meruit and estoppel brought by a hospital against a patient’s employer and its claims administrator based on an alleged oral agreement between the hospital and claims administrator to pay for services provided by the hospital. Because the claims could not be pursued under section 502(a)(1)(B), the Ninth Circuit concluded that the state-law claims were not preempted, depriving the court of subject matter jurisdiction. Accordingly, removal from state court was improper and the case was remanded to the district court with instructions to remand the matter to state court.

Marin General Hospital (“Hospital”) contended that its representative spoke to a representative of Medical Benefits Administrators of M.D. Inc. (“Medical Benefits”) on April 8, 2004 to confirm that a prospective patient had health insurance through a plan provided by his employer, Modesto & Empire Traction Co., and administered by Medical Benefits. The Hospital contended that the Medical Benefits representative verbally verified the patient’s coverage, authorized treatment, and agreed to cover ninety-percent of the patient’s medical expenses. The Hospital sued Medical Benefits and Modesto & Empire in state court and the defendants successfully removed the case to the U.S. District Court for the Northern District of California, claiming that ERISA completely preempted the claims. The district court subsequently dismissed the Hospital’s complaint, concluding that the only remedy available was under ERISA § 502(a)(1)(B).

The Ninth Circuit first found the parties “have not clearly understood the difference between complete preemption under ERISA § 502(a), 29 U.S.C. § 1132(a), and conflict preemption under ERISA § 514(a), 29 U.S.C. § 1144(a).” Complete preemption under § 502(a) is a jurisdictional doctrine. A party seeking removal based on federal question jurisdiction must show either that the state-law causes of action are completely preempted by § 502(a) of ERISA, or that some other basis exists.

The court then explained that removal was only proper if the Hospital’s state law claims were completely preempted under section 502(a)(1)(B) of ERISA. It then examined whether the claims asserted by the Hospital were completely preempted by ERISA, concluding that they were not. In reaching this conclusion, the Ninth Circuit clarified a distinction between complete preemption under section 502(a) and conflict preemption under section 514(a). Citing to Franciscan Skemp Healthcare, Inc. v. Central States Joint Board Health & Welfare Trust Fund, 538 F.3d 594, 596 (7th Cir. 2008), the Ninth Circuit explained that complete preemption under section 502(a) is “really a jurisdictional rather than a preemption doctrine, [as it] confers exclusive federal jurisdiction in certain instances where Congress intended the scope of a federal law to be so broad as to entirely replace any state-law claims.” In contrast, the “rule is that a defense of federal preemption of state-law claims, even conflict preemption under section 514(a) of ERISA, is an insufficient basis for original federal question jurisdiction.”

Relying on Aetna Health Inc. v. Davila, 542 U.S. 200, 210 (2004), the Ninth Circuit explained that a state-law cause of action is completely preempted by section 502(a)(1)(B) if: (1) “an individual, at some point in time, could have brought [the] claim under ERISA section 502(a)(1)(B);” and (2) “where there is no other independent legal duty that is implicated by a defendant’s actions.” Based on this conjunctive two-prong test, the Ninth Circuit concluded that the Hospital’s state-law claims were not pre-empted.

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.

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.

On Monday October 19, 2009, Lisa Girion of the Los Angeles Times reported on the healthcare reform bills being debated in Congress and their potential impact on claim denials by insurers. Girion states that, “Despite growing frustration with the way health insurers deny medical treatments, major healthcare bills pending in Congress would give patients little new power to challenge those sometimes life-and-death decisions.” She further explains that “a patient’s ability to fight insurers’ coverage decisions could be more important than ever because Congress, in promoting cost containment and price competition, may actually add to the pressure on insurers to deny requests for treatment.”

The article discusses the wrongful death lawsuit filed by Hilda and Grigor Sarkisyan, whose daughter Nataline died in 2007 after Cigna decided not to cover a liver transplant. The lawsuit against Cigna over the transplant denial was dismissed this year by a federal judge, who ruled that the Employee Retirement Income Security Act (“ERISA”) preempts suits with state law claims for damages over such health benefit decisions. The Sarkisyans traveled to Washington this year to try to persuade members of Congress to pass legislation which would remove ERISA’s bar of certain types of damages that are now available under state law.

Rep. Adam B. Schiff (D-Burbank), who met with the Sarkisyans in Washington, said that there are not enough votes in Congress to pass such legislation. Insurers and employers strongly support ERISA’s limitations on damages. They say any increase in litigation would drive up costs and could force some employers to drop health benefits.

The healthcare reform bill pending in the House would extend the right to sue under state law for damages to anyone who buys coverage through one of the health insurance exchanges it envisions. That could include small businesses. However, the pending legislation does not remove ERISA’s barrier to such suits by employees who procure coverage in the employment-based insurance market.

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

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