Case Updates Archives - Page 3 of 21

Under California law, an insurer has an obligation to, among other things, make reasonable efforts to settle a third party’s lawsuit against an insured. As a recent decision rendered by the California Court of Appeals illustrates, “reasonable efforts” entail more than timely offering the policy limit to settle a claim from a third party. The insurer’s conduct must be reasonable given the circumstances and they must do everything reasonably within their power to effect a settlement. An insurer’s responsibilities are not necessarily complete when they offer to pay their policy limits or other amounts agreed-upon by the parties.

Barickman v. Mercury Casualty Company, 2 Cal. App. 5th 508 (2016), arose from a personal injury claim where an individual insured of Mercury struck two pedestrians with her automobile while intoxicated and then fled the scene. The individual then reported the claim to Mercury the following day as an accident. The insured was subsequently arrested, sentenced to prison, and ordered to pay restitution to the injured pedestrians. Mercury offered the policy limits of $15,000 to each of the injured pedestrians to settle their claims against Mercury. The injured pedestrians accepted the settlement, but insisted upon additional language in the release agreement assuring that the $15,000 payments did not cover court-ordered restitution.

Mercury failed to respond to the injured pedestrian’s demand to include the additional language in the settlement agreement by the deadline provided to them. Mercury was later informed by criminal counsel that the language requested by the injured individuals should not be accepted because it could be interpreted as waiving the insured’s right to offset the restitution she is required to pay with the $15,000 insurance payments from Mercury. However, the injured parties’ attorney had conversations with the Mercury agent assuring them that he was simply trying to preserve his client’s basic rights to restitution, and not attempting to eliminate the insured’s right to an offset. Mercury never attempted to revise the language requested by the injured pedestrian’s attorney to clarify that the right to offset the restitution owed was preserved. After the insured assigned her rights to sue Mercury, the injured pedestrians filed suit against Mercury for breach of contract and insurance bad faith which resulted in a $3 million judgment against Mercury.

Mercury appealed claiming that it acted in good faith by offering the policy limits to the injured pedestrians and the only reason the case did not settle was because the injured pedestrians’ attorney insisted upon unacceptable additional language in the settlement agreement. The Appellate Court disagreed with Mercury’s argument, reasoning that Mercury’s position would mean that just because an insurer acted in good faith at one point in a settlement negotiation, it discharged its obligations to act in good faith and had no further responsibility to make reasonable efforts to settle a third-party lawsuit. The Appellate Court upheld the $3 million judgment, determining that Mercury’s policy limits offer was not enough to defeat the insurance bad faith claim. The Court determined that Mercury unreasonably rejected the modified settlement instead of at least attempting to amend the release to clarify the parties’ mutual intent. The Court also noted that the language requested by the injured pedestrians should not have affected the settlement, because a release in a civil case would not release a defendant from the criminal court’s restitution order and did not disturb the insured’s right to offset under California law. Therefore, Mercury did not make reasonable efforts to settle the injured parties’ claim.

Our take: This decision is important because it correctly demonstrates that insurers must make reasonable efforts to settle third-party lawsuits beyond simply offering to pay for a claim based on a settlement offer at or within policy limits, and they cannot fail to engage in reasonable negotiations related to the terms of settlement or release agreements. All of an insurer’s conduct surrounding settlement of a claim must be reasonable given the circumstances. If a conflict arises regarding the terms of a settlement or release, an insurer must pursue all reasonable avenues to resolve a dispute in order to satisfy their obligation to act in good faith.

During their Presidential election campaigns, Donald Trump and Hillary Clinton spotlighted for America flaws in our criminal justice system. They raised questions about whether the criminal probe into Ms. Clinton’s private email server was handled honestly or politically. Conservatives bitterly complained that FBI director Jim Comey’s recommendation not to prosecute Ms. Clinton was inconsistent with the FBI’s fact findings (that she carelessly mishandled classified emails) and influenced by the left-leaning Justice Department rather than justice. On the flip side, Liberals vehemently complained that on the eve of the election Director Comey made an unprecedented announcement that the FBI had reopened its criminal investigation into Ms. Clinton’s private emails, attempting to influence the election.

Whatever your political leanings are, most Americans would probably agree that politics has no business in a court of law, where a person’s freedom or livelihood is at stake. Lady Justice is supposed to be blind.

Like politics, “quack” physicians have inappropriately crept into our judicial process through the insurance industry. This has endangered blind justice for indigent policyholders. Wealthy life, health and disability insurers appear adept at getting a doctor to say just about anything for the right price. Some doctors are willing to sell the truth and abandon science for a steady stream of business from an insurance company. They have increasingly become willing to allow their high-paying insurance company clients to dictate what they can and cannot consider in reaching their professional medical opinions, often limiting them to a review of the insured’s medical records without the opportunity to examine or speak with the insured or his treating physicians. Some insurers seemingly have made this part of their business model to help them deny even legitimate claims made by their disabled or sick policyholders.

The California Court of Appeal recently criticized one such insurance company’s practice in the case of Nickerson v. Stonebridge Life Insurance Company, 5 Cal. App. 5th 1 (2016). While the bulk of the lengthy opinion focuses on the constitutionality of punitive damage awards – it held that a 10:1 ratio of punitive to compensatory damages in an insurance bad faith case passes muster – we have blogged on that topic and the Nickerson case before. See https://mslawllp.com/california-court-of-appeal-finds-that-a-101-ratio-between-punitive-damages-and-compensatory-damages/ (discussing Nickerson v. Stonebridge Life Insurance Company, 219 Cal. App. 4th 188 (2013)) and https://mslawllp.com/in-an-insurance-bad-faith-case-attorneys-fees-are-compensatory-damages-that-can-increase-a-punitive-damages-award/ (discussing Nickerson v. Stonebridge Life Insurance Company, 63 Cal. 4th 363 (2016). What is more interesting as it relates to ERISA and bad faith long-term disability insurance and health claims is that the Nickerson court berates the practice, systemic to the health and disability insurance industry, of hiring doctors to perform “pure paper reviews” of the insured’s medical records and, more accurately, of controlling the process to dictate results favorable to the insurance company.

The Nickerson case concerned a disabled veteran, Tom Nickerson, paralyzed from the chest down with no income other than a very small military pension. He bought a policy from Stonebridge providing coverage for hospital confinement. After suffering a broken leg from falling out of his wheelchair onto the asphalt, Nickerson was hospitalized for 109 days on the advice of his attending primary care physician. He submitted a claim to Stonebridge for his hospital stay. Stonebridge contended only 18 days was “Necessary Treatment” under its policy. On that basis, it denied him policy benefits for the rest of the time he was hospitalized. Nickerson sued Stonebridge for breach of the insurance contract and the implied covenant of good faith and fair dealing (i.e. “bad faith”) seeking his unpaid policy benefits, emotional distress, attorneys’ fees and punitive damages.

As health and disability insurers often to, Stonebridge had hired a medical consultant during the claim to review Nickerson’s medical records and render an opinion on whether 109 days of hospitalization was medically necessary. The insurance company’s doctor:

never spoke with the insured, Nickerson;
never spoke with Nickerson’s attending physicians; and
never examined Nickerson.

Based purely on a “paper review” of his medical records, Stonebridge’s doctor concluded that Nickerson should have been released from the hospital after eighteen days (which became the rationale for Stonebridge denying the claim).

Nickerson’s primary care physician disagreed and even wrote a three-paragraph letter to Stonebridge explaining in detail why hospitalization was required for 109 days, including that “the fracture was complicated by extensive swelling, infection, blistering, and muscle damage that required acute hospitalization, intravenous fluids and antibiotics, and full staff support including consultation with an orthopedic surgeon.” He further explained that because Nickerson was paraplegic and confined to a wheelchair, he could not have managed at home any earlier. Stonebridge never gave that information to its “paper reviewing” physician consultant and never asked him to speak with Nickerson’s treating doctor about his conflicting opinion. It withheld the obviously pertinent information and maintained its claim denial.

The court berated Stonebridge for what it found was a systemic company-wide practice: “Stonebridge’s practice was never to authorize peer reviewers to communicate with treating physicians, thus intentionally concealing material information from the claims’ functional decision-maker so as to limit the amount Stonebridge would have to pay out on its policies.” It held Stonebridge’s conduct in ignoring the opinion of the insured’s treating physician and withholding it from its peer reviewer essentially controlled the peer reviewer’s opinion and supported a finding that the insurer committed fraud warranting punitive damages, not just bad faith. The court held that the insurer’s conduct was “particularly reprehensible” warranting a higher constitutional ratio of compensatory to punitive damages. Finally, the court stated that, “Insurers may not ignore the opinion of treating physicians absent a showing the physician’s judgment is either ‘plainly unreasonable, or contrary to good medical practice.’ ”

Our take: Unfortunately, as the Nickerson case and our recent Presidential Election illustrate, Lady Justice is not always blind. It certainly isn’t for poor, out-of-work claimants fighting against billion-dollar life, health and long-term disability insurers with systemic corporate practices to the highest level of management aimed at denying even legitimate claims to line their own pockets with your hard-earned policy premiums. Justice is not blind for indigent claimants struggling against insurers’ handsomely paid “paper-reviewing” physicians complicit in the insurance industry’s often unfair claims handling practices.

If you have a long-term disability, life or health insurance claim, to equal the scales of justice, you need an experienced attorney to fight hard for you. At McKennon Law Group PC, our lawyers have decades of experience litigating these types of claims, both under ERISA and state insurance bad faith laws. Most of our lawyers previously spent years defending insurance companies against long-term disability, life and health insurance claims. That will give you a distinct advantage because our lawyers know how insurance companies operate and the arguments they are likely to raise from first-hand experience. We will review your claim free of charge. Your matter will be handled on a contingency basis, which means you pay nothing and we receive nothing unless you win a recovery by way of a settlement, claim reinstatement, verdict or award. Let us try to equal the scales of justice for you.

Were you denied benefits by your group long-term disability insurer without the insurance company’s doctor examining you in-person? Did your insurer deny your claim even though the Social Security Administration concluded you are disabled? If so, the McKennon Law Group may be able to help get your disability benefits by appealing the insurer’s decision or by filing a lawsuit against it in federal court. As experienced ERISA disability insurance lawyers who have handled hundreds of individual and group long-term disability claims, we see all too often insurance companies unjustly deny claims based purely upon a “paper review” of the employee’s medical records by a biased medical consultant and, worse yet, often by just an unqualified nurse employed by the insurer. No rational doctor would determine whether his patient is disabled from working without examining him. But that is precisely how group disability insurers deny claims on a regular basis, hiring a doctor to perform a cursory review of the claimant’s medical records without ever examining him or speaking to him. Unfortunately, it is a widespread, endemic practice in the disability insurance industry.

Fortunately for claimants, courts often criticize this “pure paper review” practice to decide claims. A federal court in Oakland, California recently did in the case of Lin v. Metropolitan Life Insurance Company, 2016 WL 4373859 (N.D. Cal. Aug. 16, 2016). In that case, Senior United States District Judge Saundra Brown Armstrong was persuaded that Metropolitan Life Insurance Company (“MetLife”) improperly terminated Steven Lin’s disability benefits based in large part on the fact that MetLife’s doctors never examined him.

Mr. Lin has a Ph.D. in chemistry and was employed by TriNet as its Director of Polymer Technologies when he had to stop working because his kidney failed. His job required him to generate ideas, focus and concentrate, and provide leadership and direction to subordinate chemists. Fortunately, years earlier he had enrolled in TriNet’s employee welfare benefit plan, including for long-term disability benefits, in case of such a dire event. The plan was funded by a group disability insurance policy issued by MetLife to TriNet for the benefit of its employees including Mr. Lin.

Mr. Lin submitted a claim to MetLife for long-term disability benefits and reported he could not perform his job because of kidney failure, headaches, chest pain, fatigue, loss of memory and sleepiness. At just 48 years old he underwent a kidney transplant obtained from a cadaver. He was positive for Hepatitis B at the time of his surgery.

MetLife initially approved Mr. Lin’s claim. Over the course of the next several years Mr. Lin was regularly examined by his personal physician, Shahrzad Zarghamee, a nephrologist, to mandate his continuing disability. After documenting Mr. Lin’s consistent fatigue and headaches in her progress notes, Dr. Zarghamee concluded that her patient, Mr. Lin, could not work because he was unable to focus or concentrate, experienced extreme exhaustion when he tried to focus on even mundane matters, and consistently suffered from debilitating headaches and chronic fatigue on a daily basis.

Despite the opinion of Dr. Zarghamee, MetLife terminated Mr. Lin’s benefits four years after it started paying them based upon the opinions of three other doctors, two of which were MetLife’s employees and another, nephrologist Michael Gross, M.D., of which MetLife hired as a consultant. MetLife’s doctors reviewed Mr. Lin’s medical records and concluded based purely on that review, without ever examining him, that his kidney function was normal and there was no objective support in his medical records for his subjective complaints of fatigue and pain. MetLife thus concluded Mr. Lin was not disabled from working based on what its doctors said.

MetLife acknowledged in its termination letter that the Social Security Administration awarded Mr. Lin Social Security disability benefits. But MetLife summarily dismissed the award by stating that a Social Security finding of disability does not guarantee the continuation of long-term disability benefits. Without analyzing why, MetLife stated that its decision may differ from the Social Security Administration because it “may not have the same information that was utilized in making our decision.”

Mr. Lin sued MetLife for recovery of disability benefits under ERISA. The Court conducted a bench trial to determine whether MetLife properly terminated Mr. Lin’s benefits. The Court found MetLife made the wrong decision, that Mr. Lin was in fact disabled. It reinstated his disability benefits and ordered MetLife to pay them plus interest and attorneys’ fees.

In the key part of its analysis, the Court criticized MetLife’s use of “paper reviews” instead of retaining a doctor to actually examine Mr. Lin:

[O]ther aspects of the administrative record also persuade the Court that MetLife erroneously terminated Plaintiff’s benefits. In particular, the Court finds it significant that MetLife terminated Plaintiff’s benefits without actually examining him.

The Ninth Circuit has recognized that an insurer’s decision to conduct “a ‘pure paper’ review. . ., that is, to hire doctors to review [the claimaint]’s files rather than to conduct an in-person medical evaluation of him” may raise “questions about the thoroughness and accuracy of the benefits determination.” Montour v. Hartford Life & Acc. Ins. Co., 588 F.3d 623, 634 (9th Cir. 2009) . . . .

Here, MetLife’s termination decision was predicated principally on the reports of its outside consultant, Dr. Gross, and its Medical Director. Both of these individuals evaluated Plaintiff’s claim for benefits without physically examining him. . . . While MetLife was not necessarily required to conduct a personal examination of Plaintiff as a prerequisite to terminating his benefits, the fact that MetLife failed to do so—in contravention to the recommendation of its own consultant—further underscores the result-driven nature of MetLife’s decision to terminate Plaintiff’s benefits.

The Court found the opinions of Mr. Lin’s treating physicians more than sufficient to establish he was disabled despite the contrary opinions from the insurance company’s “paper reviewers.” The Court also rejected MetLife’s contention that “objective” medical findings showing disability is required, not just a treating physician documenting Mr. Lin’s subjective complaints of chronic fatigue and pain in her progress notes.

Finally, the Court held that, in order to terminate Mr. Lin’s insurance policy benefits, MetLife was required to meaningfully address why its decision differed from that of the Social Security Administration who, in fact, had found Mr. Lin disabled under its rules. It held that analysis must entail comparing and contrasting the definition of disability in MetLife’s policy to that used by the Social Security Administration and also the medical evidence considered by each, not simply dismissing the Social Security award with an entirely generic, conclusory analysis like MetLife did. Because of that conduct, coupled with MetLife’s decision to rely on “paper reviews,” the Court was persuaded that MetLife improperly terminated Mr. Lin’s benefits and that he was disabled within the meaning of its policy.

The Court also explained that MetLife was not allowed to discount the Social Security Administration’s disability finding in court based upon a rationale MetLife first raised during the litigation. In other words, by failing to use the rationale during the claim administrative process, MetLife waived any right to employ it in court: “MetLife cannot attempt to downplay the significance of the SSA award on a ground that was not specified in its termination letter.”

If you are an employee covered under your employer’s group short-term disability, long-term disability, life insurance or health insurance policy and had your claim denied, do not give up. If your insurer denied your claim without examining you, or, even after you were awarded Social Security disability benefits, there is a good chance we can help. You should immediately contact the McKennon Law Group, a law firm specializing in ERISA insurance and employee benefits litigation. Let us decide whether your claim was wrongfully denied and let us see if we can assist you.

The “reasonable expectations of the insured” doctrine has been around for decades in California. The state Supreme Court started toying with rules that became its foundation after the turn of the century. See Pac. Heating & Ventilating Co. v. Williamsburgh City Fire Ins. Co., 158 Cal. 367, 370 (1910) (“any ambiguity … must be resolved in favor of the insured”).

In the early 1990s, the California Supreme Court first articulated the modern version of the rule in cases like AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 822 (1990), and Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1265 (1992). Bank of the West explained that courts must interpret ambiguous policy provisions as the insurance company reasonably believed that the insured understood them when making the contract or, stated another way, in accord with “the objectively reasonable expectations of the insured” about what the policy covered.

Federal courts borrowed this insurance policy interpretation principle, highly favorable to policyholders, from state law, and also directly from federal common law. They have applied the doctrine in cases involving group insurance policies governed by ERISA, a federal law pertaining to employee benefits. Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 539-40 (9th Cir. 1990). That is very good news to claimants seeking benefits under their group disability, life or health insurance policies offered through their employers. Crafty ERISA lawyers are skilled at uncovering ambiguities in policy language that may help them win their claim.

The Ninth Circuit recently relied on this rule to award an ERISA policy claimant all of her disability benefits in Anderson v. Sun Life Assurance of Canada, et al., No. 13-17594 (9th Cir. Apr. 6, 2016) (unpublished). The appellate court reversed the district court’s finding that the claimant, registered nurse Diana Anderson, was not entitled to long-term disability insurance benefits. The Ninth Circuit quoted the rule that “ambiguous terms in an insurance policy governed by ERISA are interpreted in the insured’s favor.” It explained that because the policy was “fairly susceptible” to more than one interpretation, it was ambiguous and, therefore, the less restrictive interpretation favoring coverage must be adopted. It found that, although the insurer’s and district court’s interpretation of the “Partial Disability,” “Material and Substantial Duties” and “Own Occupation” definitions in the policy was a reasonable one, Ms. Anderson’s less restrictive interpretation was also reasonable and thus trumped.

Ms. Anderson became unable to perform her duties as a nurse in 2008, but she did not actually lose any income until 2009. The hospital that employed her allowed her to do other, easier jobs which she could perform at her full nurse’s salary, until 2009.

The insurer argued that the policy definitions required Ms. Anderson’s loss of income to occur simultaneously with the onset of her inability to perform the duties of her own occupation as a nurse in order to qualify for partial disability benefits. The Ninth Circuit disagreed. It found the policy definitions were ambiguous noting an “equally reasonable construction of the policy terms allows an employee to make a claim for long-term partial disability benefits even if the loss of income occurs after the onset of the inability to perform,” as in Ms. Anderson’s case. It held, “Because the Policy was ‘fairly susceptible’ of this interpretation, under which Anderson was eligible for benefits, the district court erred in adopting the more restrictive interpretation.” While the lower court awarded zero benefits, the Ninth Circuit identified an ambiguity in the policy which turned the entire case. It reversed and remanded with instructions to the district court to calculate and award Ms. Anderson all of her past and future disability benefits given that the ambiguous policy terms had to be interpreted in the insured’s favor.

If you are looking for more information on this policy interpretation doctrine, we discussed it in our September 22, 2015 article appearing in the Los Angeles Daily Journal entitled, “Examine the ‘reasonable expectations of the insured.” The article is re-published on our website at https://mslawllp.com/robert-mckennon-and-joe-mcmillen-publish-article-examine-the-reasonable-expectations-of-the-insured-2/.

The Anderson case illustrates why it is critical that an employee/insured plan participant who has a short-term disability claim or a long-term disability claim retain an experienced ERISA insurance coverage lawyer before battling his or her insurance company. While the insurer may quote seemingly insurmountable exclusionary language from its policy, federal courts may have interpreted the language differently in favor of policyholders or, as in the case of Anderson, held the policy provision is ambiguous and must be interpreted against the insurer and in favor of the insured.

If you are an employee covered under your employer’s group short-term disability, long-term disability, life insurance or health insurance policy and had your claim denied, do not give up. Insurance companies count on their policyholders doing just that, even for legitimate claims. You should immediately contact the McKennon Law Group PC, a law firm specializing in ERISA insurance and employee benefits litigation. Let us decide whether your claim was wrongfully denied and let us see if we can assist you.

When and under what circumstances an insurer paying long-term disability benefits may collect retroactive benefits paid to an ERISA plan participant under the Social Security Act has been the source of conflicting opinions over the years. The most recent pronouncement: a long-term disability plan administrators must “specifically identify a particular fund” from which it will be reimbursed in order to seek to recover of alleged overpayment of disability benefits. So held the Southern District of California in its recent plaintiff-friendly decision in Wong v. Aetna Life Insurance Company, 2014 U.S. Dist. LEXIS 135661 (S.D. Cal. 2014). Through its decision in Wong, the district court reaffirmed that simply because an ERISA governed long-term disability plan’s language provides for recovery of an award of back-dated SSDI benefits does not mean that an insurance company may seek reimbursement from an insured’s general assets. Instead, the onus is on the insurer to specifically identify specific funds, separate from a plan participant’s general assets, on which it may place an attachment.

In Wong, the plan a participant was initially granted benefits under her ERISA governed long-term disability plan. However, the plan administrator, Aetna, repeatedly denied and then reinstated her benefits. After the third denial, the plan participant filed an appeal with Aetna, which was subsequently denied. However, while she was still on claim, Aetna had advised her to apply for Social Security benefits, which was eventually approved and the Social Security Administration also agreed to back-date her award for over a year. However, very soon after being approved for the award, Aetna contacted the plan participant and asserted that it was entitled to reimbursement of the retroactive SSDI benefits she received.

Following Aetna’s demand for reimbursement, the plan participant filed an ERISA action seeking benefits owed to her. Aetna in turn filed a counterclaim seeking recovery for the retroactive social security benefits received by the plan participant. First, as to the plan participant’s claim, the court concluded that it was unreasonable and an abuse of discretion for Aetna to terminate the plan participant’s benefits. Second, and more significantly, the court held that Aetna may not retroactively attach the plan participant’s social security benefits because it failed to meet the necessary criteria for seeking overpayment. In reaching its holding, the court explained that there are “at least three criteria” that a plan administrator must satisfy in order to recover the overpayment:

First, there must be a promise by the beneficiary to reimburse the fiduciary for benefits paid under the plan in the event of a recovery from a third party. Second, the reimbursement agreement must specifically identify a particular fund, distinct from the beneficiary’s general assets, from which the fiduciary will be reimbursed. Third, the funds specifically identified by the fiduciary must be within the possession and control of the [beneficiary]. (internal quotations omitted).

Here, as in most plans, the first criteria is satisfied because, as the plan participant did not dispute that she contracted to reimburse overpayment of benefits to Aetna. However, the court held that Aetna did not satisfy second criteria. The court focused on the fact that the Social Security Act provides that “none of the moneys paid or payable or rights existing under this [Social Security] subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process.” As such, although Aetna attempted to do so, the court found that Aetna could not identify the SSDI benefits as themselves a particular fund because they had already been paid. Furthermore, Aetna did not dispute that the long-term disability benefits had already been spent by the plan participant. As such, the court held that Aetna is not permitted to attach the plan participant’s SSDI benefits because it could not identify a fund distinct from her general assets that permits such an attachment.

This decision demonstrates that simply because a plan participant contracted to reimburse an insurer for an overpayment does not mean that the plan has an unfettered ability to seek recovery of overpaid benefits. Indeed, especially in the case of retroactive social security benefits, the insurance company may well be unable to meet its burden of identifying particular fund from which it can properly be reimbursed. Plan participants and beneficiaries can take some solace from this decision.

A homeowners’ insurance policy does not always mean what it says. That is, in effect, what the California Court of Appeal recently concluded in Vardanyan v. AMCO Ins. Co., 243 Cal. App. 4th 779 (2015), a case involving the well-established “efficient proximate cause” doctrine. The insurer’s policy explicitly stated it did not cover property damage caused by collapse of a building unless the collapse was caused “only by” hidden decay, hidden insect damage or a couple other listed perils. Although the collapse was caused in part by non-listed perils that were excluded by the policy, the Court of Appeal still concluded the loss should be covered if the jury on remand decides one of the listed perils is the most important cause of the loss. It looked not just to the written contract language, though the claim would have been excluded if it did that, but to public policy as well. The court held the insurer’s collapse provision “is an unenforceable attempt to contract around the efficient proximate cause doctrine.”

In Vardanyan, Artyun Vardanyan sued his homeowners’ insurer, AMCO Insurance Company, alleging it breached their insurance contract and acted in bad faith by refusing to cover damage to his house when it partially collapsed. Mr. Vardanyan submitted a claim which resulted in numerous experts investigating what caused the collapse and, ultimately, in AMCO denying the claim. At trial, “The evidence presented by both sides indicated there were multiple causes of the damage to plaintiff’s house.” Mr. Vardanyan’s experts testified dry rot, decay, termite damage and water coming from behind the walls caused a bedroom and the living room to collapse (i.e. those floors sunk and were resting on the ground). AMCO’s experts testified that various sources of moisture—roof leaks, gutters and downspouts that did not channel the water away from the house, a faucet spraying water on the exterior of the house for a significant length of time, a leaking toilet and bathtub, and humidity—contributed to the collapse, along with poor construction, termite damage and decay.

The policy’s basic insuring provision stated it covered Mr. Vardanyan’s house “for risk of direct physical loss . . . except collapse other than as provided in Other Coverage 9 . . ..” Other Coverage 9, in turn, provided coverage for losses involving collapse of a building or part of a building “caused only by one or more” of a list of specific perils, including hidden decay, hidden insect or vermin damage, or “weight of contents, equipment, animals or people.” The “general exclusions” section of the policy contained exclusions for water damage, neglect by the insured, inadequate or defective design, workmanship, construction, remodeling, or materials, and inadequate or defective maintenance. In denying the claim, AMCO reasoned the damage to the home was not covered by many of these policy exclusions. The evidence at trial showed that both covered perils listed in the Other Coverage 9 collapse provision and non-listed, excluded perils jointly caused the home to partially collapse.

At trial, AMCO’s lawyers requested a special jury instruction based upon the collapse provision’s explicit language. Namely, AMCO’s proposed jury instruction read in pertinent part, “If you find that the property or a part of the property collapsed, Mr. Vardanyan bears the burden of proving that the collapse was caused only by one or more of the following: . . . hidden decay; hidden insect or vermin damage; weight of contents, equipment, animals or people; . . . . The insurance policy’s coverage for collapse does not apply if the cause of the collapse involved any cause other than those listed above.” Mr. Vardanyan, in contrast, requested the form jury instruction that is routinely given in homeowners’ property damage claims where there are multiple causes of the loss, CACI No. 2306, that is, where the “efficient proximate cause” doctrine applies. That doctrine was developed by California courts decades ago and applies where multiple perils cause a loss, at least one of which is covered by the insurance policy and one of which is not. The doctrine is that the most important cause of the loss or, stated another way, the predominant cause of the loss, also called the “efficient proximate cause,” dictates whether the loss is covered. In other words, if two perils caused the loss but the covered peril was its predominant cause, then the loss is covered despite that the excluded peril also contributed to the loss. Mr. Vardanyan’s proposed instruction followed that doctrine and stated in pertinent part, “You have heard evidence that the claimed loss was caused by a combination of covered and excluded risks under the insurance policy. When a loss is caused by a combination of covered and excluded risks under the policy, the loss is covered only if the most important or predominant cause is a covered risk.”

The trial court refused Mr. Vardanyan’s jury instruction and concluded AMCO’s instruction should be read since it accurately reflected what the policy’s collapse provision stated. It decided the jury should be instructed “that plaintiff’s property damage loss was covered by his policy only if it was caused by perils specifically listed in the collapse coverage provision and no others.” Mr. Vardanyan conceded he could not prevail at trial under AMCO’s instruction because the evidence was clear that both covered perils listed in the policy’s collapse provision and uncovered, excluded perils not listed there jointly caused the loss. Consequently, the trial court granted AMCO’s motion for a directed verdict, and Mr. Vardanyan appealed. He contended his jury instruction should have been used because AMCO’s instruction ignored the “efficient proximate cause” doctrine.

The California Court of Appeal agreed with Mr. Vardanyan. It stated:

We conclude plaintiff’s interpretation of the Other Coverage 9 [collapse] provision is the correct interpretation, consistent with the efficient proximate cause doctrine. A policy cannot extend coverage for a specified peril, then exclude coverage for a loss caused by a combination of the covered peril and an excluded peril, without regard to whether the covered peril was the predominant or efficient proximate cause of the loss. Other Coverage 9 identifies the perils that are covered when the loss involves collapse. If any other peril contributes to the loss, whether the loss is covered or excluded depends upon which peril is the predominant cause of the loss. To the extent the term “caused only by one or more” of the listed perils can be construed to mean the contribution of any unlisted peril, in any way and to any degree, would result in the loss being excluded from coverage, the provision is an unenforceable attempt to contract around the efficient proximate cause doctrine.

The Court of Appeal also sided with the policyholder on the burden of proof. AMCO’s proposed jury instruction stated it was Mr. Vardanyan’s burden to prove his loss fell within the policy’s collapse provision instead of requiring AMCO to prove that the loss was excluded. But that instruction reverses the well-established rule that an insurer has the burden to prove an exclusion or other provision that limits coverage applies (once the policyholder first meets its initial burden of showing the loss comes within the policy’s basic insuring provision). The Court of Appeal reversed the directed verdict in favor of AMCO, remanded the case to the trial court for a new trial, and instructed it to read Mr. Vardanyan’s instruction to the jury instead of AMCO’s.

The Vardanyan case illustrates why it is critical that a homeowner retain an experienced insurance coverage lawyer before battling his insurance company. While the insurer may quote seemingly insurmountable exclusionary language from its policy, California courts may have interpreted the language differently in favor of policyholders or, as in the case of Vardanyan, held the policy provision is unenforceable because it contravenes well-established California law.

Insureds May Still Have a Claim for Insurance Bad Faith Even If Their Insurer Offered to Pay the Policy Limits

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