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Right to Jury Trial Trumps Binding Arbitration When Insurer Unreasonably Delays Paying Independent Defense Counsel

In an article appearing in the April 12, 2010 editions of the Los Angeles and San Francisco Daily Journals, I discuss the impact of the California Fourth Appellate District’s Intergulf Development, LLC. v. Superior Court (Interstate Fire & Casualty Company). Here it is:

In an important vindication of a California policyholder’s right to a jury trial to enforce an insurer’s duty to defend, the California Fourth Appellate District recently held that a liability insurer that fails to promptly acknowledge its insured’s right to independent counsel and begin funding that defense forfeits its rights to binding arbitration under Civil Code section 2860.  Intergulf Development, LLC. v. Superior Court (Interstate Fire & Casualty Company), __ Cal.App.4th __, 2010 WL 1052745 (March 24, 2010).  In Intergrulf, the court ruled that the insured may proceed first to a jury trial, and, if successful, recover contract and tort damages against the insurer.

The Duty to Defend Under California Law

Under California law, a liability insurer must defend its insured if the underlying complaint alleges the insured’s liability for damages potentially covered under the policy or if the complaint might be amended to give rise to a liability that would be covered under the policy.”  Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 299 (1993).  The duty to defend arises at the time the insured tenders defense of the third party lawsuit to the insurer.  Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf. Montrose Chem. Corp., supra, 6 Cal. 4th at 295; Buss v. Superior Court (Transamerica Ins. Co.), 16 Cal. 4th 35, 49 (1997) (“To defend meaningfully, the insurer must defend immediately”); 10 Cal. Code Regs., section 2695.7(b).  On occasion, an insurer will delay its decision to defend outright, defend under a reservation of rights, or deny coverage altogether while it “investigates” coverage, leaving the insured to its own devices.

An unreasonable delay in paying policy benefits or paying less than the amount due is an actionable withholding of benefits which may constitute a breach of contract, as well as bad faith, giving rise to tort damages. Wilson v. 21st Century Ins. Co., 42 Cal. 4th 713, 720, 723 (2007);  Major v. Western Home Ins. Co., 169 Cal. App. 4th 1197, 1209 (2009).  The general measure of damages for breach of the duty to defend consists of the insured’s cost of defense in the underlying action, including attorney fees.  Major v. Western Home Ins. Co., 130 Cal. App. 4th 1078, 1088-1089 (2005).  Breach of the duty to defend also results in the insurer’s forfeiture of the right to control the defense of the action or settlement, including the ability to take advantage of the protections and limitations set forth in Civil Code section 2860.  Fuller-Austin Insulation Co. v. Highlands Ins. Co. 135 Cal. App. 4th 958, 984 (2006); Atmel Corp. v. St. Paul Fire & Marine Ins. Co., 426 F.Supp. 2d 1039, 1047 (N.D. Cal. 2005).

An Insurer’s Right to Invoke Civil Code Section 2860 Fee Arbitration

Under Civil Code section 2860, when a liability insurer reserves its rights to contest coverage for a third party’s suit against its insured, and defense counsel could manipulate the suit in a way that could impair the insured’s coverage, section 2860 requires the insurer to pay for independent counsel to defend the suit.  For example, defense counsel may be in a position to hire expert witnesses with particular perspectives, and guide their testimony on issues such as when damage occurred or whether particular damage was expected or intended—steering claims in or out of coverage.  Notably, section 2860(c) limits the hourly rates that the insurer must pay independent counsel, and requires the insured to submit any fee dispute to binding arbitration.

An Insurer’s Unreasonable Delay Forfeits its Right to Invoke Civil Code Section 2860

In Intergulf, Intergulf developed a condominium project in San Diego, California. Intergulf was an additional insured on policies issued to one of its subcontractors by Interstate Fire & Casualty Company, a division of Fireman’s Fund Insurance Company.  The policies provided that Interstate had the right and duty to defend any lawsuit seeking damages because of property damage.  While Interstate’s policies were in effect, the homeowners association sued Intergulf for alleged construction defects.

Intergulf promptly tendered its defense to Interstate.  Two weeks later, Interstate responded, not with an acknowledgment of its defense obligation, but by requesting information and reserving all of its rights.  Interstate wrote that, if it determined it had a duty to participate in Intergulf’s defense, it would impose “litigation handling guidelines,” and it would typically not pay hourly rates of more than $ 150 for partners, $135 for associates, and $ 75 for paralegals.  Intergulf defended with its own counsel—Luce, Forward, Hamilton & Scripps, LLP—billing at a blended rate of $250 per hour.

Seven months later, Interstate finally informed Intergulf that Interstate recognized a “potential” for a defense obligation, but did not actually acknowledge either a duty to defend or coverage.  Interstate offered to “participate” in the defense of Intergulf through the firm of Wood, Smith Henning & Berman.  Intergulf objected that Interstate’s reservation of rights created a conflict of interest for the Wood Smith firm, and demanded the appointment of its own independent counsel under section 2860.

Intergulf then asked Interstate to reimburse its out-of-pocket defense fees and costs.  No response.  About a month later, Intergulf asked again.  No response.  Approximately one year after it had tendered its defense, Intergulf had neither a commitment to defend with conflict-free counsel nor any reimbursement for outstanding defense fees and costs from Interstate.  Intergulf then sued Interstate for breach of the duty to defend, bad faith, and declaratory relief.  Two months after Intergulf filed suit, Interstate made a first payment of approximately $ 140,000; nine months later, Interstate made a second payment of approximately $ 98,000.

Five weeks before the scheduled trial, Interstate filed a petition to compel arbitration of what it characterized as a section 2860 fee dispute.  Intergulf responded that the case was about the contract and tort damages that Interstate owed for breaching its duty to defend—not about a fee dispute.  It argued that because the questions of Interstate’s duty to defend, conflict of interest, and bad faith had not been resolved, Interstate did not satisfy the prerequisites for arbitration under section 2860(c).  The trial court, however, granted Interstate’s petition to compel arbitration and continued the trial, pending completion of  arbitration.

Intergulf challenged the trial court’s ruling by filing a petition for writ of mandate.  The appellate court summarily denied the petition. The Supreme Court granted Intergulf’s petition for review and transferred the matter back to the appellate court with directions to vacate the order denying mandate and issue an order to show cause why the relief sought should not be granted.

The appellate court agreed with Intergulf that the gravamen of the complaint was bad faith and breach of contract, not a dispute over the amount Interstate should pay independent counsel under section 2860(c).  By filing the action for breach of contract, bad faith, and declaratory relief, Intergulf gave Interstate notice that it was treating Interstate’s failure to acknowledge Intergulf’s right to independent counsel and delay in paying policy benefits as a total breach of the duty to defend.  Intergulf  at *2-3, citing  Coughlin v. Blair, 41 Cal. 2d 587, 599 (1953) (filing suit gave defendant notice that plaintiff viewed its failure to perform as a total breach of contract); and Sackett v. Spindler, 248 Cal. App. 2d 220, 229-230 (1967)(seller could treat persistent delay in payment for stock as total breach of the purchase agreement).

Intergulf’s entitlement to damages for breach of contract and bad faith turned on (i) whether Interstate owed Intergulf a duty to defend in the first instance; and (ii) whether Interstate breached that duty by failing to defend Intergulf “immediately” and “entirely” on tender of the defense.  Intergulf  at *3, citing  Buss v. Superior Court, supra, 16 Cal. 4th at 49; and Montrose Chemical Corp., supra, 6 Cal. 4th at 295.  Neither of these questions had been resolved at the time the court granted Interstate’s petition to compel binding arbitration of the purported fee dispute pursuant to section 2860(c).

As the appellate court noted, ordering fee arbitration under section 2860 under these circumstances puts the cart before the horse. If Intergulf proves that Interstate breached the duty to defend or committed bad faith by failing to acknowledge Intergulf’s right to independent counsel or failing to immediately and fully fund its defense, Interstate forfeits its right to limit defense fees and costs under section 2860(c) fee arbitration.  Instead, a jury could award contract and tort damages in the trial court.  Intergulf at *4.  The appellate court issued a peremptory writ of mandate directing the trial court to vacate its order granting Interstate’s petition to compel arbitration under section 2860(c), and to enter an order denying the petition to compel arbitration.

Sound Public Policy

The appellate court’s decision is based on sound public policy.  If an insurer could delay a full and immediate defense for its insured, and then run for cover under section 2860’s rate limits and binding arbitration, it would have an incentive to fabricate a Cumis conflict, comforted by the knowledge that the attorney fee element of its insured’s damages would be limited by Cumis rates, claim management protocols, and binding arbitration, instead of being tried to a jury.  The insured’s right to have a jury determine breach and damages is fundamental to enforcing the insurer’s duty to provide a full and immediate defense.

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.

There has been considerable attention given lately to health insurers’ attempts to rescind health insurance policies and the California Department of Insurance has recently issued regulations concerning rescission of the these policies.  The Second Appellate District has now added some heat to the controversy about these types of rescissions with its decision in Nieto v. Blue Shield of California Life & Health Insurance Company, __ Cal. App. 4th ___ No. B214669 (January 19, 2010).

Blue Shield offers several health insurance plans to individuals.  As part of the determination whether to issue coverage, Blue Shield provides an application to an individual seeking coverage that requests detailed information of past and current health problems, treating physicians, prescribed medications and recommended treatment.  Using proprietary written guidelines, Blue Shield engages in the underwriting process by evaluated the responses provided by each applicant to determine eligibility for health insurance and, if so, at what premium rate.  Julie Nieto applied for one of these policies but failed to disclose information about her back and hip condition and treatment on a health insurance application she submitted to Blue Shield.  Blue Shield issued her a policy based upon her representations.

After issuing the policy, Blue Shield’s underwriting investigation unit opened a file on Nieto after it received a referral from the medical management department indicating that she had received a diagnosis of necrosis of the hip and was scheduled for hip replacement surgery.  As part of the investigation Blue Shield sought and obtained her medical and pharmacy records.  At that point, Blue Shield learned that immediately preceding her application appellant had received extensive treatment for back and hip pain and had been prescribed multiple medications.  Blue Shield proffered evidence that if it had been aware of the undisclosed information it either would have declined to issue the policy or, at a minimum, would not have issued the policy until receiving additional information from appellant.

The trial court ultimately granted Blue Shield’s summary judgment motion, ruling that it was entitled to rescind, as a matter of law, because of the undisputed evidence that Nieto had made material misrepresentations and omissions regarding her medical history.  Nieto appealed.

The Second Appellate District affirmed, holding that as a matter of law, Blue Shield was entitled to rescind coverage if the undisputed evidence showed that Nieto committed fraud by making material misrepresentations or omissions concerning her medical history or condition to Blue Shield before it issued the policy.  Turning to the evidence submitted in connection with the motion, the court affirmed the trial court’s finding “that the undisputed facts establish each element of fraud and deceit under California law, with respect to [Nieto’s] misrepresentations when applying for coverage with Blue Shield Life.”

The court found that undisputed evidence established that Nieto made material misrepresentations and omissions on the application regarding her medical condition and treatment finding that she responded negatively to the inquiries in the “Medical History” portion of the application, when in fact she had suffered from chronic back problems throughout 2005 and previously.  Moreover, she represented that her last doctor’s visit had occurred three years earlier, when in fact she had seen and received significant treatment her doctor, and she had seen him at least 17 times between February and May 2005, including the day she signed the application.  She further represented that she had not taken or been directed to take any prescription medications when in fact she had filled at least 10 prescriptions for four different medications and had received two steroid injections as well as an oral steroid.

The court found that the undisputed evidence further established that Nieto’s misrepresentations and omissions were material.  In support of summary judgment, Blue Shield offered a declaration that it would not have approved Nieto for coverage had it known about her medical history.  According to Blue Shield’s underwriting guidelines, the medical conditions reflected in Nieto’s medical and pharmacy records, if disclosed on her application, would have rendered her ineligible for enrollment in any Blue Shield product.

The court also rejected Nieto’s assertion that even if the undisputed evidence established that she misrepresented and omitted material information on her application, Blue Shield was precluded from rescinding the policy because it neither attached nor endorsed the application to the policy.  Nieto relied on Ticconi v. Blue Shield of California Life & Health Insurance Company, 160 Cal. App. 4th 528 (2008).

In Ticconi, the insured alleged that Blue Shield issued his policy without either attaching or endorsing a copy of his application and that therefore he was not bound by any representation made in the application.  He further alleged Blue Shield had rescinded multiple policies that did not have the applications attached to or endorsed on the policies and that such rescission violated sections 10113 and 10381.5 and was an unfair business practice.  Id. at pp. 535–536.  Determining that the insured had stated a claim suitable for class certification, the court summarized the pertinent statutes, stating that “section 10113 prohibits incorporating applications into a disability insurance policy by reference unless they are endorsed upon or attached to the policies when issued.  [Citation.]  If a copy of an application for a policy is not attached to or endorsed on the policy when the policy is issued, then the insured is not bound by statements made in that application.  [Citation.]“  Id. at p. 540.

Turning to legislative history, the court observed that section 10381.5 “was designed to ‘repeat[ ] a provision of section 10113 . . .’ [citation]” and separately established that when a copy of the application is neither attached to nor endorsed on the policy the insured is not bound by any statement made in the application.  Id. at p. 540.)  Further, citing Telford v. New York Life Ins. Co., 9 Cal. 2d 103 (1937), the court determined that “[a]nother consequence of violating sections 10113 and 10381.5 is that the insurer may not invoke the defense of misrepresentations in or omissions from the unattached and unendorsed application.”  Id. at p. 541.  Thus, it concluded that the insured’s claim that Blue Shield “fail[ed] to attach applications to or endorse them on disability policies when issued and later engage[ed] in post-claims underwriting by holding insureds to statements in those unattached and unendorsed applications as grounds for voiding or rescinding the policies” alleged unlawful conduct that could serve as a predicate unlawful business practice in violation of Business and Professions Code section 17200.

The court explained that, though not cited by the Ticconi court, Metzinger v. Manhattan Life Ins. Co., 71 Cal. 2d 423 (1969) that section 10113 does not apply to a situation where an insurer seeks to rescind a policy because of fraudulent misrepresentations made by the insured.  It further explained that in Blue Shield did not seek to incorporate any document into the policy by reference.  Rather, it sought to demonstrate that, in accordance with sections 331 and 359, it was entitled to rescind the policy.

The appellate court also agreed with the trial court that the undisputed evidence failed to establish that Blue Shield was precluded from rescinding the policy because it engaged in postclaims underwriting in violation of section 10384.  That statute prohibits an “insurer issuing or providing any policy of disability insurance covering hospital, medical, or surgical expenses” from engaging in postclaims underwriting, defined as “the rescinding, canceling, or limiting of a policy or certificate due to the insurer’s failure to complete medical underwriting and resolve all reasonable questions arising from written information submitted on or with an application before issuing the policy or certificate.”  Id. The trial court ruled:  “Blue Shield Life did not engage in postclaims underwriting for at least two reasons:  (1) the undisputed facts establish that Blue Shield Life properly completed its underwriting and resolved all reasonable questions arising from the written information submitted on or with respect to [Nieto’s] application; and (2) even if one were to assume that Blue Shield Life had some obligation to contact the providers listed in the application, [Nieto] did not even list the providers who had treated her for the conditions that led to the rescission.  Thus, the rescission was not ‘due to’ (i.e., the result of) any claimed underwriting deficiency.”

The court rejected Nieto’s reliance on Hailey v. California Physicians’ Service, 158 Cal. App. 4th 452, (2007).  Hailey involved an interpretation of Health and Safety Code section 1389.3, which applies exclusively to health care service plans licensed and regulated by the Department of Managed Health Care.  The statute is phrased similarly to section 10384, but does not apply upon a showing of willful misrepresentation.  See Health & Saf. Code § 1389.3.  In Hailey, the insured completed a Blue Shield application, mistakenly believing the application sought information only about her—not her husband and son for whom she also sought coverage; she also incorrectly underestimated her husband’s weight.  After Blue Shield extended coverage to the insured and her family, the insured’s husband was admitted to the hospital for stomach problems and later became completely disabled as the result of an automobile accident.  Following the first hospitalization, a Blue Shield investigation revealed that the insured had misrepresented and omitted material information concerning her husband’s medical condition.  Blue Shield rescinded the policy.  The trial court granted summary judgment in favor of Blue Shield on the insured’s complaint for breach of contract and breach of the implied covenant of good faith and fair dealing and on Blue Shield’s declaratory relief cross-complaint.

The Hailey court reversed, concluding that there were triable issues of fact as to whether Blue Shield engaged in postclaims underwriting and whether the insured willfully misrepresented her husband’s medical condition.  It explained that Blue Shield was operating as a health care service plan subject to the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act, Health & Saf. Code, § 1340 et seq.), which was designed “to ‘ensure the best possible health care for the public at the lowest possible cost by transferring the financial risk of health care from patients to providers.’  See § 1342, subd. (d).)”  Consistent with that goal, the Legislature enacted Health and Safety Code section 1389.3 to prevent providers from shifting the financial risk of health care back to patients.  Hailey, supra, at p. 463.  Given these particular policy considerations, the Court determined that “to effectuate section 1389.3’s purpose, and in light of the equitable nature of rescission, we interpret ‘medical underwriting’ to require a plan to make reasonable efforts to ensure a potential subscriber’s application is accurate and complete.”  Id. at p. 469.  The Court rejected Blue Shield’s argument that it could rely on the truthfulness of an applicant’s responses as part of its medical underwriting process, explaining that while such a position was consistent with section 331—permitting an insurer to rescind a policy for concealment—the Knox-Keene Act does not have a counterpart to Insurance Code section 331.”  Id. at p. 470.  The court held that “given this qualification, we construe the Hailey court’s medical underwriting requirements to be limited to health care service plans subject to the Knox-Keene Act.”

The court went on to hold that Blue Shield did not commit bad faith.

It will be interesting to see if the California Supreme Court weighs in on this issue and resolves the conflicting holdings in this case and Ticconi.

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.

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.

Bosetti v. The United States Life Ins. Co., 175 Cal. App. 4th 1208 (2009) is an important California Court of Appeal decision that addressed whether a two-year benefits limitation on disabilities due to “mental, nervous or emotional disorder[s]” could serve to limit benefits payable to an insured disabled from depression and anxiety who also complained of interrelated physical impairments.

Bosetti was employed by the Palos Verdes Peninsula Unified School District. As part of her employment benefits, she was covered under a group long-term disability insurance policy issued by The United States Life Insurance Company in the City of New York (“U.S. Life”).

Bosetti‘s job was eliminated for economic reasons. Shortly after she learned that her employment would be terminated, she saw a doctor for depression and was placed on temporary disability. Her disability extend beyond two years, and had a physical component as well as an emotional one.  Under the policy, Bosetti could obtain disability benefits for two years if she was disabled from her own occupation. After that time, she could only obtain disability benefits if she was disabled from “any occupation.”  U.S. Life concluded that Bosetti was not disabled from any occupation and terminated her disability benefits at the end of two years. That determination was based primarily upon the two-year benefits limitation for mental or nervous disorders, the results of a functional capacity examination, and an independent physician consultation.

After the U.S. Life moved for and was granted summary judgment, Bosetti appealed.  The court of appeal held that the limitation was ambiguous and was not applicable if the claimant’s physical problems contributed to her disabling depression or were a cause or symptom of that depression. The Bosetti court further concluded that the insurer’s denial of benefits based upon that two-year limitation was not in bad faith under the genuine dispute doctrine.

The Bosetti court explained that the insured’s disability had both mental and physical elements, noting that one of her doctors had suggested that her physical disability arose out of her emotional disability and another that her emotional disability or depression arose out of her physical problems and chronic pain. The court held that the two-year mental limitation was ambiguous because it “does not clearly explain whether the limitation applies when the total disability is due in part to a mental, nervous …disorder” and because an insured’s reasonable expectations are that disabling depression arising from a physical condition like fibromyalgia and, correspondingly, disabling physical symptoms arising from depression, would not fall within the mental/nervous limitation.

As part of its analysis, the court rejected the rationale of Equitable Life Assurance Society v. Berry, 212 Cal. App. 3d 832, 835, 840 (1989), a California opinion concerned with an insured who was diagnosed with manic-depressive illness, a condition which has a chemical (physical) etiology, rather than a purely mental one. The Berry court concluded, as a matter of law, that there was no coverage due to a disability policy‘s exclusion for “[m]ental or nervous disorders” and a health policy‘s limitation on benefits for treatment for a neurosis, psycho-neurosis, psychopathy, psychosis, or mental or nervous disease or disorder of any kind, on the basis that these exclusions were unambiguous and referred solely to symptoms, rather than causes.  Id. at 840.  The court disagreed with Berry for two reasons: it disagreed with its analysis and its holding was abrogated by statute.

The court found that the holding of Berry did not survive Insurance Code section 10123.15, which provides that “every group policy of disability insurance which covers hospital, medical, and surgical expenses on a group basis, and which offers coverage for disorders of the brain shall also offer coverage in the same manner for the treatment of the following biologically based severe mental disorders: schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder. Coverage for these mental disorders shall be subject to the same terms and conditions applied to the treatment of other disorders of the brain.”  It appears that based on the court’s ruling, the two-year mental or nervous disorders limitation can never be applied in California to the biologically based severe mental disorders of “schizophrenia, schizo-affective disorder, bipolar disorders and delusional depressions, and pervasive developmental disorder.”

The court adopted the Ninth Circuit’s approach in Patterson v. Hughes Aircraft Co., 11 F.3d 949, 950 (9th Cir. 1993) where the court concluded that a limitation on benefits resulting from “mental, nervous or emotional disorders of any type” was ambiguous as to whether mental disorders referred to causes or symptoms, and whether a disability is mental when it results from a combination of physical and mental factors.  The court resolved the ambiguity in favor of the insured, holding that the limitation on coverage did not apply if the insured‘s disability was caused, in any part, by his physical symptoms.

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