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The Thursday August 5, 2010 edition of the Los Angeles Daily Journal featured my article entitled “Cell Phone Users Catch a Break,” in the Perspective column. It discusses the U.S. Copyright Office’s recent announcement regarding its decision to exempt wireless telephone handsets from the anti-circumvention provision under the Digital Millennium Copyright Act. The article is posted below with permission of Daily Journal Corp. (2010).
In a Case of First Impression, California Court of Appeal Extends the Duty to Defend Under a CGL Policy
Commercial General Liability (“CGL”) policies that cover personal injury and property damage require CGL carriers to defend “suits,” typically defined to mean “a civil proceeding in which damages . . . to which this insurance applies are alleged.” A question arises as to whether the process prescribed by the Calderon Act (the Calderon Process) is a” civil proceeding” within this definition. The Calderon Act requires a common interest development association to satisfy certain dispute resolution requirements with respect to the builder, developer, or general contractor before the association may file a complaint in court for construction or design defects. (Civil Code § 1375, subd. (a)) Although the Calderon Process occurs before a complaint is filed and itself does not result in a judgment or court-ordered payment of money, the Calderon Process is an integral part of construction defect litigation initiated by a common interest development association. In a case of first impression, the Fourth Appellate District in Clarendon America Insurance Co. v. StarNet Insurance Co., __ Cal. App. 4th ___ (decided July 27, 2010) held that a CGL insurer has a duty to defend its insured in such proceedings.
Centex Homes (Centex) was the developer of a residential development in Simi Valley known as Westwood Ranch. In July 2006, the Westwood Ranch Homeowners Association, Inc., served a notice of commencement of legal proceedings pursuant to section 1375 et seq. (Calderon Notice) on Centex that set forth a list of alleged construction defects at Westwood Ranch.
WSM Transportation doing business as Sam Hill & Sons, Inc. (Sam Hill), was a subcontractor on the Westwood Ranch development. StarNet Insurance Company (StarNet) issued two successive policies of CGL insurance (the StarNet CGL policies) to Sam Hill effective from June 12, 2002 to June 12, 2004. The StarNet CGL policies’ insuring agreement provides: “[StarNet] will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The StarNet CGL policies’ defense agreement provides: “We will have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for ‘bodily injury’ or ‘property damage’ to which this insurance does not apply. We may, at our discretion, investigate any ‘occurrence’ and settle any claim or ‘suit’ that may result.”
The StarNet CGL policies define the word “suit” as follows: “‘Suit’ means a civil proceeding in which damages because of ‘bodily injury[,’] ‘property damage’ or ‘personal and advertising injury’ to which this insurance applies are alleged. ‘Suit’ includes: [¶] a. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or [¶] b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”
Centex filed a cross-complaint against Clarendon America Insurance Co. (“Clarendon”) in 2007 seeking payment for defending against the proceeding initiated by WRHA. Clarendon in turn cross-complained against StarNet Insurance Co. (“StarNet”) claiming StarNet was obligated to provide a defense for Centex. StarNet moved for a summary judgment asserting the Calderon Action was not a suit within the meaning of the defense agreement in StarNet’s commercial general liability (“CGL”) policy.
The trial court denied StarNet’s motion for summary judgment and found for Clarendon for which StarNet appealed. StarNet argued the Calderon Process is not a suit within the meaning of their insurance policy.
The Court of Appeal held “The Calderon Process is mandatory: The Calderon Act prohibits an association from filing a complaint for construction or design defects until it satisfies all of the requirements of the Calderon Process.” Further, the court explained:
“The Calderon Process is more than a prelitigation alternative dispute resolution requirement: It is part and parcel of construction or design defect litigation initiated by an association and, as such, cannot be divorced from a subsequent complaint.”
This decision reached the correct conclusion. One has to wonder why an insurer would even challenge whether a defense was owed in these circumstances.
The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com
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Ninth Circuit Applies New Hardt Decision to Deny ERISA Participant Attorney’s Fees
Last month, the U.S. Supreme Court handed ERISA plan participants a big victory when they decided the important ERISA disability case of Hardt v. Reliance Standard Life Insurance, __ U.S. __ (Decided May 24, 2010)(see our blog discussion here) holding that an ERISA plan participant may be able to collect attorneys’ fees from a plan or claim administrator without obtaining a judgment in the action. It did not take long for the Ninth Circuit Court of Appeals to apply Hardt. In Simonia v. Glendale Nissan/Infiniti Disability Plan, __ F.3d __ (9th Cir. June 24, 2010), the court rejected a plan participant’s claim for attorney’s fees. In Simonia, Aleck Simonia became physically disabled due to a herniated disc. He had disability insurance under his employer’s group insurance plan, which was ultimately insured by the Hartford Insurance Co. Hartford concluded that Simonia was no longer physically disabled but had a mental disorder subject to his ERISA plan’s twelve-month payment limit. Hartford also learned that Simonia had been awarded $1,551 per month in Social Security Disability Insurance (“SSDI”) benefits retroactively, which should have been offset against his payments from Hartford. Thus, Hartford informed Simonia he would be receiving payments subject to the plan’s twelve-month mental disorder limit and that he owed Hartford $22,310. Simonia sued Hartford for improperly reclassifying his disability as a mental disorder. Hartford filed a counterclaim to recover its overpayment. Simonia informed Hartford that the Social Security Administration had retroactively reduced his SSDI award, and he requested that Hartford recalculate the alleged overpayment. The parties later settled the counterclaim and stipulated to its dismissal. Simonia did not prevail in his claims against Hartford for continuing benefits. Simonia thereafter filed a motion seeking $63,745 in attorney’s fees because he “was successful as a counter-defendant in that the defendant dismissed its counterclaim.” The district court, applying the five factors in Hummell v. S.E. Rykoff & Co., 634 F.2d 446 (9th Cir. 1980), denied the motion for fees. Simonia appealed. The Ninth Circuit affirmed. The court initially explained that the Supreme Court in Hardt expressly declined to foreclose the possibility that, once a court has determined that a litigant has achieved some degree of success on the merits, it may then evaluate the traditional five factors under Hummell, before exercising its discretion to award attorney’s fees. Thus, once a court has found that a litigant has made the Hardt showing, it must consider, under Hummell, the opposing parties’ culpability and ability to pay fees, whether an award would deter similar conduct, whether the claimant sought to benefit all beneficiaries or resolve a significant issue, and the merits of the parties’ positions. The court held that even assuming Simonia achieved some degree of success on the merits, fees would be inappropriate according to the relevant factors. The court explained its rationale:
First, there is no “culpability” or “bad faith” evidenced by Hartford’s actions. Simonia began receiving retroactive SSDI benefits in 2006. Under Simonia’s policy, these benefits –when combined with certain forms of income–offset his award from Hartford. At the time Hartford filed its counterclaim, it had a good faith belief that Simonia had been overpaid by $22,309.51, and that the deduction of Simonia’s remaining mental disorder benefits would result in a balance due of $8,589. Hartford was then informed that Simonia’s SSDI benefits had been retroactively reduced. Hartford thereafter stipulated to a dismissal of the counterclaim. These actions evidence good faith. Second, Hartford undoubtedly has the ability to satisfy an award of fees. However, no single Hummell factor is necessarily decisive. See Carpenters S. Cal. Admin. Corp. v. Russell, 726 F.2d 1410, 1416 (9th Cir. 1984). Third, given Hartford’s good faith actions, we do not wish to deter others from acting in the same manner. Fourth, in seeking to settle the counterclaim following the Social Security Administration’s retroactive reduction in benefits, Simonia did not seek “to benefit all participants and beneficiaries of an ERISA plan or to resolve a significant legal question regarding ERISA.” Hummell, 634 F.2d at 453. Instead, as the district court found, Simonia sought to benefit only himself. Finally, the district court correctly noted that the counterclaim was meritorious when it was filed. When the Social Security Administration’s adjustment allegedly deprived the counterclaim of merit, Hartford settled and voluntarily dismissed. The district court did not exceed the permissible bounds of its discretion in determining that the Hummell factors weigh against an award of attorney’s fees. Even assuming that, as Simonia argues, Hartford mistakenly calculated the amount of overpayment and the counterclaim was of questionable merit when filed, there is no evidence in the record to indicate that Hartford acted in bad faith. On the contrary, Hartford’s subsequent voluntary dismissal is indicative of its good faith in this matter. Simonia’s claim would therefore still fail after considering all of the factors.
This was an easy decision for the Ninth Circuit as there was not a good basis for the plaintiff to argue for attorney’s fees here. However, it is also a rare case where ERISA claimants applied for and do not receive an award of attorney’s fees in an ERISA action.
Submission of the Claim File: Seal or Redact?
For most insurance litigation, the majority of the evidence used by both sides comes from the claim file, also known as the administrative record in ERISA cases. The claim file represents the insurance carrier’s written record of its handling and processing of an insurance claim. Obviously, this information is highly relevant whenever coverage or a claim is disputed. Moreover, in the case of life, health, or disability insurance cases, the claim file will also be full of personal and confidential information such as medical records and social security numbers.
The question becomes how best to utilize the information in the claim file during the course of litigation while still addressing the privacy concerns of a public court record. Generally, there are two courses of action. The first is to go through the entire record and redact any personal information, also known as “personal identifiers.” See Federal Rule of Civil Procedure 5.2(a). This can be a very time consuming and expensive process since the claim file can easily encompass several hundred or thousand pages. The second course of action is to submit the claim file under seal. This is usually the quickest, easiest and most cost effective choice when dealing with confidential medical information. The downside to this course of action is that counsel must demonstrate to the court a “compelling reason” to file records under seal. See Foltz v. State Farm Mut. Auto. Ins. Co., 331 F.3d 1122, 1135 (9th Cir. 2003). Many federal courts have their own Local Rules regarding filing documents under seal. For example, in the Central District of California, Local Rule 79-5.1 provides:
L.R. 79-5.1* Filing Under Seal – Procedures . Except when authorized by statute or federal rule, or the Judicial Conference of the United States, no case or document shall be filed under seal without prior approval by the Court. Where approval is required, a written application and a proposed order shall be presented to the judge along with the document submitted for filing under seal. The proposed order shall address both the sealing of the application and order itself, if appropriate. The original and judge’s copy of the document shall be sealed in separate envelopes with a copy of the title page attached to the front of each envelope. Conformed copies need not be placed in sealed envelopes. Where under-seal filings are authorized by statute or rule, the authority therefor shall appear on the title page of the proposed filing. Applications and Orders to Seal, along with the material to be placed under seal, shall not be electronically filed but shall be filed manually in the manner prescribed by Local Rule 79-5. A Notice of Manual Filing shall also be electronically filed identifying materials being manually filed.
If you opt to file the claim file under seal, what constitutes a compelling reason to do so? At least one court in the Ninth Circuit has held that difficulty in redacting thousands of pages of documents does not, by itself, qualify as a “compelling reason.” In Nash v. Life Insurance Company of North America, 2010 WL 2044935 (Decided May 18, 2010), both parties submitted a joint motion to file a unredacted copy of the administrative record under seal, citing difficulty in redacting 4,500 pages of documents. The parties argued that redacting social security numbers, dates of birth, the names of minor children, and financial account numbers from the administrative record is “impracticable” However, despite being unopposed, the court nonetheless declined to grant the motion, stating:
Historically, courts have recognized a ‘general right to inspect and copy public records and documents, including judicial records and documents. Except for documents that are traditionally kept secret, there is a strong presumption in favor of access to court records. A party seeking to seal a judicial record then bears the burden of overcoming this strong presumption by meeting the compelling reasons standard. That is, the party must articulate compelling reasons supported by specific factual findings, … that outweigh the general history of access and the public policies favoring disclosure, such as the public interest in understanding the judicial process.
Id. (internal citations omitted). Although Nash is unpublished and can be factually distinguishable based on the contents of the claim file at issue, its holding should serve as a warning to future litigants to be wary about filing under seal. That does not mean that filing under seal is never appropriate. Instead, the lesson is to approach the court early in the litigation and seek permission to file under seal. The last thing any attorney wants to do on the eve of a motion filing deadline is to spend countless hours redacting documents.
The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com
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Ninth Circuit Court of Appeals Applies Montour to the Conflict of Interest Analysis in ERISA Case
In the aftermath of the United States Supreme Court holding in Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105, 128 S.Ct. 2343, 2348 (2008), the courts have struggled to apply this holding. The Ninth Circuit did so in Montour v. Hartford Life & Accid. Ins. Co., 582 F.3d 933 (9th Cir. 2009). In turn, the District Courts have applied Montour in several decisions.
One of the latest is the unpublished opinion in Sterio v. HM Life, 2010 U.S. App. LEXIS 4615 (E.D. Cal., Mar. 4, 2010) which represents the first case out of the Ninth Circuit Court of Appeals to substantively discuss the application of the conflict of interest analysis set forth in Montour. This case provides valuable insight into how may courts will apply the factors set forth in Montour.
In Sterio, the plaintiff Barabara Sterio, sought long term disability benefits under an ERISA benefits plan sponsored by her former employer, Diabetes Well. Sterio suffered post-operative complications following total hip replacement surgery which she claims left her permanently disabled. HD Life, the insurer and administrator of the ERISA plan , eventually concluded that the medical evidence did not support Sterio’s claim. HD Life denied benefits and Sterio sued in federal court. At issue on appeal was the proper standard of review and the weight to give the conflict of interest.
As with many insurance cases, the ultimate benefits decision was made by HD Life, who was also the insurer of the plan. This situation creates a structural conflict of interest. In Glenn, supra, the Court held that the presence of a conflict of interest does not change the standard of review, but instead becomes a factor in determining whether an administrator abused its discretion. Here in Sterio, the court discussed five factors which it held, demonstrated that HD Life abused its discretion. The first was HD Life’s failure to address what the court believed was reliable medical evidence. This conflicted with HD Life’s claim that there was no objective medical evidence supporting her disability. Second, HD Life failed to address or even acknowledge the Social Security Administration’s determination that Sterio was permanently disabled. Although the SSA’s determination would not be binding on HD Life, their failure to even address the issue was suspect. The third factor was the failure to conduct an in-person medical evaluation. Independent medical exams are not required but in this case, HD Life engaged six different independent reviewing physicians, each of whom conducted only a paper review of the evidence. The fourth factor addressed by the court is the failure of the administrator to communicate to the claimant the specific evidence necessary to establish the claim. Here, HD Life discounted Sterio’s Functional Capacity Evaluation because there was no bone density study performed. However, HD Life failed to communicate to Sterio that information which prevented her from taking steps to prove her claim by undergoing a bone density study. The final factor discussed by the court was HD Life’s violation of ERISA procedures by “tacking on a new reason for denying benefits in its final decision, thereby precluding Sterio from responding to that rational for denial at the administrative level.” (internal citations omitted). This action, the court reasoned, was evidence of the conflict of interest and demonstrated that the decision may not have been entirely based on the medical evidence.
Based on the abovementioned factors, the court held that HD Life abused its discretion when it denied Sterio’s LTD benefits. For the purposes of future litigation, this case highlights the application of the conflict of interest analysis and is useful to both plaintiffs and defendants, by discussing in detail the Ninth Circuit’s desired application of Montour.
The California Insurance and Life, Health, Disability Blog at californiainsurancelitigation.com and at mslawllp.com
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Documents Reviewed by Independent Medical Examiner Sufficient to Satisfy Plan Obligation to Consider All Relevant Documents
The United States Court of Appeals for the Ninth Circuit, in an unpublished decision, addressed the question of whether documents reviewed by an independent medical examiner, but not by the plan administrator, was sufficient to satisfy the Plan’s obligation to consider all relevant documents. Sun Sun Lin v. Mellon Long Term Disability Plan, 2010 WL 1917305 (Decided May 13, 2010).
In Sun Sun Lin, the Mellon Long Term Disability Plan was administered by a Corporate Benefits Committee (“CBC”). The plaintiff, Sun Sun Lin (“Lin”), challenged the district court’s grant of summary judgment by arguing that CBC failed to give her a full and fair review of the denial of her claim for long term disability benefits. In making this argument, she relied on a statement from the Plan’s attorney “that the CBC did not directly consider those documents in making its determination to deny [Lin’s] claim,” but did “‘indirectly’ consider[ ] these documents to the extent they were reviewed and considered by” an independent medical examiner retained by the CBC in its review of Lin’s appeal. The question before the court was whether the review by the independent examiner was sufficient.
On appeal, the Ninth Circuit focused on the language of the Plan which did not contain any “direct consideration” requirement. Instead, the terms of the Plan required CBC to “take into account all comments, documents, records, and other information submitted by the participant relating to the Claim.” This language did not impose a requirement upon CBC to directly review each and every document. Instead, it was sufficient that the documents were reviewed and considered by the independent medical expert. The Court explained:
In light of the plain language of the Plan, which provides that the CBC need only “take into account,” not “directly consider,” all documentation, and which actually requires that the CBC consult an independent expert on questions of medical judgment, the CBC did not abuse its discretion in “indirectly consider[ing]” certain medical documents relating to an earlier benefits determination under a different disability standard.
As a result, the Court affirmed the district court’s grant of summary judgment. This result is not surprising given the plan language and the fact that the plan did consider an opinion by an independent medical expert.
