Bad Faith Archives - Page 13 of 14

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.

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.

The “reasonable expectations of the insured” doctrine continues to weave its way into all types of insurance coverage cases. This time, it thrust itself into a title insurance case. In Karen Lee v. Fidelity National Title Insurance Company,__Cal. App. 4th__ (September 16, 2010), the First Appellate District of the California Court of Appeal found coverage under this doctrine.

Karen and Terry Lee (“Lees”) purchased property in Solano County in 1990. The purchased property was covered by a policy issued by Fidelity National Title Insurance Co. (“Fidelity”). Fidelity’s preliminary report of the purchased property identified two parcel numbers, APN 09 and APN 22. Although Fidelity’s policy did not incorporate parcel APN 09 and APN 22, it did have attached to it a map indicating parcels APN 09 and APN 22. It was not until 2006 when the Lees were selling their property did they discover they only in fact owned one parcel and not the two parcels as they originally thought they had purchased.

The Lees made a claim under the Fidelity policy, but Fidelity denied coverage based upon the description within the policy. Lee sued Fidelity for breach of contract, bad faith, and declatory relief but the trial court granted a summary judgment in favor of Fidelity because the causes of action were time barred. On appeal the Court reversed. The Court found the “legal description was ambiguous. Further ambiguity was created by the attachment of the assessor’s parcel map that, on one hand, was said to be excluded from the policy, but on the other hand had an arrow pointing at APN 22 as a parcel in the policy.” The court of appeal then discussed the reasonable expectation of the insured doctrine as follows:

That reasonable expectation informs interpretation of the policy’s coverage. As our Supreme Court stated in White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 881 (White), “ ’In determining what benefits or duties an insurer owes his insured pursuant to a contract of title insurance, the court may not look to the words of the policy alone, but must also consider the reasonable expectations of the public and the insured as to the type of service which the insurance entity holds itself out as ready to offer. [Citation.] Stated in another fashion, the provisions of the policy must be construed so as to give the insured the protection which he reasonably had a right to expect…. [Italics in original.] [Citation.]’ The White court rejected the insurer’s argument that the plaintiffs in that case could not be deemed to have relied upon the title policies in question when they purchased their lands because the policies “were issued only when the sale was consummated.”

* * *

While an “ordinary reading” of the legal description of the land insured in Havstad precluded any reasonable expectation of coverage in that case, the same cannot be said here. “[T]he words in an insurance policy are to be interpreted according to the plain meaning which a layman, not an attorney or insurance expert, would ordinarily attach to the words’ ”[Citation omitted] and laypersons like plaintiffs would have no way of knowing from the surveyor’s metes and bounds description of the land in their title policy whether APN 22 was covered. In the context of the coverage issue in this case, the legal description was ambiguous. (See Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, [¶] 4:300, p. 4-43 [“an ambiguity may arise where a policy uses terms beyond the working vocabulary of a person of ordinary intelligence”].) Further ambiguity was created by the attachment of the assessor’s parcel map that, on the one hand, was said to be excluded from the policy, but on the other hand had an arrow pointing to APN 22 as a parcel in the policy.

The court found that the Lees had an objectively reasonable expectation of coverage because they purchased both parcels of land in 1990 given the circumstances surrounding the issuance of the title insurance policy. Therefore, the court concluded that Fidelity’s denial of coverage was erroneous.

In a new case from Division Three of the Fourth Appellate District, Chicago Title Insurance Company v. AMZ Insurance Services; Pacific Specialty Insurance Company, __ Cal. App. 4^th __ (September 9, 2010), the California Court of Appeal has given policyholders a good holding on the issues of when a policy binder becomes effective, when an agent acts on behalf of an insurer and what actions constitute bad faith.

Thomas and Cheryl Mustains (“Mustains”) successfully refinanced their home mortgage with an escrow closing date of October 12, 2005. One of the conditions by the lender was a new homeowner’s insurance policy was to be received and the premium paid for in escrow by Chicago Title. The Mustains’ loan officer contacted AMZ Insurance Services Inc. (“AMZ”) and McGraw Insurance Services (“McGraw”) to obtain the homeowner insurance policy. AMZ selected Pacific Specialty Insurance Company (“PSIC”) as the insurer. AMZ prepared an Evidence of Property Insurance (“EOI”), a computer generated form naming PSIC as the Insurer and the Mustains as the insureds for homeowner’s insurance, which was sent to Chicago Title. Unfortunately, an application from the Mustains was never completed, and the premium was not paid by Chicago Title. On November 11, 2005, the Mustains’ home burned down. Chicago Title reimbursed the Mustains for their loss, and in turn obtained an assignment of rights from the Mustains.

Chicago Title sued both PSIC and McGraw, the parent company of PSIC, for breach of insurance contract, bad faith, and declaratory relief . In a special verdict, the jury found:

1)     The EOI was not legally cancelled before the Mustain’s fire loss on 11/11/2005

2)     AMZ had actual or ostensible authority to prepare and issue the EOI on behalf of PSIC and McGraw

3)     PSIC and McGraw breached their obligation of good faith and fair dealing by failing to pay insurance proceeds to the Mustain’s under the EOI

4)     PSIC and McGraw breached their obligation of good faith and fair dealing by failing to properly investigate the Mustain’s fire loss; and

5)     PSIC and McGraw’s wrongful actions caused Chicago Title to bring the lawsuit against AMZ.

On appeal the Appellate Court affirmed, ruling in favor of Chicago Title. The central issue in this case was whether EOI issued by AMZ was an enforceable binder of homeowner’s insurance extending coverage from PSIC for a fire loss incurred by the Mustains. The EOI was an effective binder for which the loss of the house came within coverage. The court explained:

The trial court correctly instructed the jury. The existence and content of the EOI were undisputed. “Whether undisputed facts establish the existence of a binder is a question of law.” (Adams, supra, 107 Cal.App.4th at p. 451.)

The EOI on its face constituted a binder as a matter of law. It included all of the required elements for a binder under Insurance Code section 382.5, subdivision (a): The EOI identified the insurer (PSIC), the insureds (the Mustains), the (purported) agent executing the EOI (AMZ), the effective date of coverage, the binder number, and the address of the insured property. The EOI states, “[t]his is evidence that insurance as identified below has been issued, is in force, and conveys all the rights and privileges afforded under the policy.” Under “Coverage,” the EOI states, “See Supplemental Information Page(s),” which lists the coverages provided with the amounts of insurance and the deductible for each. The EOI recites the total annual premium as $776, and included with the EOI was an invoice to Chicago Title in that amount.

But the Appellate Court also found that despite the lack of notice of appointment with the Department of Insurance, AMZ’s acted as PSIC’s agent based on actual and ostensible agent theories. The issuance of the EOI by AMZ was not out the ordinary course of business between AMZ and PSIC, and PSIC had never complained about AMZ issuing the EOI prior to the receipt of the insurance premiums. The court explained its ruling that the lack of a notice of appointment was not controlling:

While the lack of a notice of appointment might subject AMZ to fines or a disciplinary proceeding, AMZ’s actions in issuing the EOI as a binder could bind PSIC if the facts otherwise support an agency relationship. “[Insurance Code section 1704, subdivision (a)] may simply impose further requirements on the conduct of an insurance agent, rather than establishing additional criteria for the creation of an agency relationship. In other words, it may be unlawful for an entity to act as an agent of the insurer without complying with section 1704[, subdivision ](a), but that entity would still constitute an insurance agent for the present purposes.” (Oakland-Alameda County Coliseum, Inc. v. National Union Fire Ins. Co. (N.D.Cal. 2007) 480 F.Supp.2d 1182, 1196.) We agree with this reasoning.

The Appellate Court also found that PSIC and McGraw acted in bad faith because they did no investigation into the Mustains’ claim, as there was evidence that an employee with PSIC concluded “the EOI issued to the Mustain’s escrow was legally inconsequential and not even worth forwarding to the PSIC claims department.” The court found that PSIC did not investigate whether its policy of authorizing AMZ to cancel a binder by stamping “void” on the EOI was lawful. The court also stated that “[t]he evidence supported the inference too that PSIC’s policies and practices for issuing EOI’s were created in bad faith to allow PSIC to try to evade liability precisely in the circumstances presented by this case.”

The genuine dispute doctrine received another blow as the California Court of Appeals held that the doctrine may not be used to refuse settlement in third party coverage cases. The recently decided case of Howard v. American National Fire Ins. Co., __Cal. App. 4^th __, 2010 WL 3156851 (decided August 11, 2010), involved allegations of priest molestation by an employee of the Roman Catholic Bishop of Stockton (“Bishop”). American National Fire Insurance Co. (“American”) provided liability insurance to Bishop that covered bodily injury caused by an employee’s battery. When Howard filed suit for negligent retention of the molesting priest, Bishop asked American to defend and indemnify against the suit. American refused on the grounds that the alleged molestation occurred after the policy had expired in November of 1979. In support, American relied on deposition testimony by Howard in which he stated that his first memory of being molested was when he was five or six years old, the earliest of which would have been seven months after the policy had expired. The case continued to trial and Bishop was found liable for negligent retention and directed to pay $5.5 million in compensatory and punitive damages. While the case was still on appeal, the parties settled and Howard agreed to join Bishop in a suit against American to recover on the judgment and for bad faith failure to defend, settle, and indemnify against the molestation case.

A number of issues and defenses were raised in the subsequent suit against American. Relevant for this discussion was American’s assertion of the genuine dispute doctrine as a defense against Howard’s allegations of bad faith. 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. Here, American argued, there was a genuine dispute as to whether the molestation occurred during the policy period. Although Howard alleged in his complaint that the molestation occurred sometime between 1977 and 1991, American argued that the only evidence presented at trial showed that the molestation occurred after the policy expiration. The weakness of this argument was that the underlying trial did not focus on when the molestation occurred, but rather whether it occurred. Therefore, the subsequent suit against American was not limited to the evidence offered at the previous trial. Further, the court held, the genuine dispute rule does not apply in all bad faith insurance contexts.

In first party cases, where payment is sought for the insured’s direct losses, an insurer may raise a reasonable dispute over coverage without being guilty of bad faith. But it has never been held that an insurer in a third party case may rely on a genuine dispute over coverage to refuse settlement. Instead, it is a long-standing rule that “the only permissible consideration in evaluating the reasonableness of the settlement offer becomes whether, in light of the victim’s injuries and the probable liability of the insured, the ultimate judgment is likely to exceed the amount of the settlement offer.

Id. (internal citations omitted). Essentially, American’s dispute over coverage could not justify its failure to refuse settlement and should not affect its evaluation of whether a settlement offer is a reasonable one. American had a duty to the insured to evaluate and participate in the settlement negations despite the potential coverage issues. In addition, the court noted that a genuine dispute exists only where the insurer’s position is maintained in good faith and on reasonable grounds. Here, the court found that American distorted Howard’s deposition testimony by equating his memory of specific acts of molestation into an admission that no molestation occurred during the policy period. This, the court decided, was unreasonable and evidence of bad faith.

The key takeaway in this case is the narrowing of the genuine dispute doctrine. The court’s opinion essentially limits the doctrine’s use as a defense in bad faith failure-to-settle cases and reinforces the principle that the mere hint of potential coverage invokes the duty to defend.

On July 19, 2010, Insurance Commissioner Poizner promulgated regulations designed to limit the practice of rescissions in the health insurance industry. See our blog article, New Regulations Take Aim at Policy Rescissions, on this. Last Monday, an insurance industry trade group filed a lawsuit in San Francisco to block the regulations, which would have been effective August 18, 2010. Poizner commented on the lawsuit stating: “I find it unconscionable that insurers would sue to keep the Department from stopping the horrific practice of illegal rescissions[.] Sometimes I think representatives in this industry have their heads permanently stuck in the sand. Illegal rescissions are a repugnant industry practice. In this current environment, this lawsuit is simply short-sighted and morally wrong.” The Association of California Life and Health Insurance Companies says the new rules would impose new costs and inconveniences on consumers and are unnecessary.

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

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