Is California Bringing Back Statutory Bad Faith Claims? California Supreme Court Revisits Moradi-Shalal


By John Armstrong

California experimented with allowing third-party claimants to sue insurers for insurance bad faith in the landmark case of Royal Globe. The decision was decried by the Insurance Bar and commentators throughout the United States. They found that, among other problems, it created uncertainty when an insurer would be liable for such “third party” bad faith, i.e., before the insured was determined liable to the claimant? 

Royal Globe authorized a private right action to recover damages for an insurer’s violation of the California Department of Insurance’s insurance regulations, codified in the California Code of Regulations. The portion of these regulations dealing with good faith claims handling were based on California Insurance Code, § 790 et seq., styled the “Unfair Insurances Practices Act” or “UIPA.” Based on these statutes, the California Insurance Commissioner adopted a series of regulations styled “good faith claims practices,” which the California Insurance Commissioner may still enforce against insurers issuing policies to California insureds.

Years after Royal Globe, the California Supreme Court expressly overruled Royal Globe in Moradi–Shalal v. Fireman’s Fund Insurance Companies (1988) 46 Cal.3d 287, at 292, by holding that that there was no private right of action to recover damages for violations of the California Department of Insurance’s regulations.

Subsequent California appellate court decisions thereafter repeatedly held that there was no private right action for violations of the California Department of Insurance’s insurance regulations. Appellate courts expansively applied this bar to even first party claims though factually Royal Globe and Moradi-Shalal involved third party claims. And, though not considered in Moradi-Shalal, appellate courts have barred claims under California’s broad Unfair Competition Law (“UCL”), codified at Business & Professions Code, § 1700, et seq., when a private right of action was based on Insurance Commissioner regulations.

In the last few years, however, courts have carefully examined the holding in Moradi-Shalal and determined that it did not outright bar claims against insurers based on regulatory violations. Similarly, the Ninth Circuit has also limited the holding of Moradi-Shalal as barring only private damage claims against insurer for regulatory violations.

To summarize the problem, though appellate courts have applied Moradi-Shalal to first party cases, the California Supreme Court never has decided this. Also, Moradi-Shalal did not decide or discuss whether a plaintiff has a private right of action for restitution or injunctive relief under California’s Unfair Competition Law (“UCL”) [Business and Professions Code, § 17200 et seq.]. In the last few years, the Supreme Court has applied § 17200 broadly because the remedies are more limited, that is the return or money or property that defendant obtained from the plaintiff and injunctive relief versus compensation from the harm sustained from an alleged regulatory violation. Finally, Moradi-Shalal never discussed whether a private right of action under California’s UCL exists for insurance regulatory violations other than claims handling or for express statutory violations of the California Insurance Code.

Presently, two cases are pending before the California Supreme Court addressing these issues raised above; namely, Zhang v. Superior Court (2009) and Hughes vs. Progressive (2011). Both opinions are presently unpublished and not citable as authority until the California Supreme Court decides these cases. 

In Hughes, the appellate court found that the plaintiff stated a private cause of action under the UCL for alleged statutory violations of Insurance Code, § 758.5, which prohibits insureds from being required to use a specific auto repair facility designated by the insurer and from suggesting the use of a specified auto repair facility without telling the insured in writing that the insured may select another repair facility. Though § 758.5 was not part of the UIPA, it authorizes the Insurance Commissions to enforce its provisions along with the UIPA.

In Zhang, the appellate court allowed allowed a UCL false advertising claim against an insurer for allegedly falsely representing that the insurer would properly and promptly pay claims though it allegedly had no intention of doing so.

The above cases are important to insurers doing business in California in that these companion decisions are likely to change the landscape for what insurers may be sued for in California. There is a good chance for a modest expansion of Moradi-Shalal—especially since the California Legislature narrowed the standing requirements for UCL claimants to only those persons directly affected, and because of the limited remedies a UCL plaintiff may recover.

Restitution would ordinarily be a return of the insured’s premium for successful fraudulent advertising plaintiff under Zhang. A Hughes plaintiff, may be entitled to recover whatever the insured pay to the company designated/recommended repair facility and possibly the return of the insured’s insurance premiums. These remedies are far less drastic than the Royal Globe remedy allowing claims for money damages, including all detriment and losses the insured suffered, plus emotional distress, and other damages. On the other hand, Supreme Court would be within its rights to take an expansive of Moradi-Shalal and eliminate claims based on statutory or regulatory violations, other than common law claims for insurance bad faith.

The lesson? It’s a safer and better practice to do what the California Insurance Code requires and to follow the the California Insurance Commissioner’s regulations. It’s also a good idea to have insurer-related advertising run by experienced lawyers familiar with insurance bad faith to avoid potential problems. Regardless whether a “separate” cause of action exists, experienced insurance bad faith counsel will use the Insurance Code and Insurance Regulations to establish the floor of good faith insurer conduct in insurance bad faith actions, making an ounce of prevention worth a pound of cure in this evolving area of law.

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Hotel Liability For Not Supplying Bath Mats—Lack of Similarity of Past Accidents Supports Summary Judgment


 

By John Armstrong

A recent case out of California’s Fourth District Court of Appeal involving Omni Hotels shows that a good investigation helps support summary judgment—even in California where such summary disposition  of cases are hard to come by.

For adjustors involved in hotel claims, however, it is the last two pages of the opinion that are of interest. The trial court granted summary judgment for defendants that a hotel was not liable for premises liability or under any of the products liability theories advanced for failing to supply bath mats. The trial court however granted plaintiff a motion for new trial on whether the hotel was negligent in either not investigating further or not communicating more widely within the hotel chain the reports of bathtub accidents at Omni hotels. 

The appellate court affirmed the summary judgments, but reversed the trial court’s grant of a new trial to plaintiff based on plaintiff’s evidence of past accidents. The appellate court looked at the hotel incident reports and determined that these did not show the required “substantially similar accidents” and lacked detail about the conditions of or in the bathtubs, and lacked details about the medical conditions of the guests who were reported to have fallen in the hotel’s bathtubs. The court found the reports only provided “speculative or conjectural evidence” that Omni knew or had reason to know of a dangerous condition surrounding its hotel bathtubs.

The court also rejected the argument that hotel’s past reports of bathtub accidents necessarily put on the hotel on a “heightened duty of inquiry” to find out from the bathtub manufacturer, Kohler, if Kohler was aware of similar incidents with its bathtubs. Though the plaintiff alleged he could bring “ample” evidence that Omni had both actual and constructive knowledge that tubs in its hotels were dangerously slippery, he failed to support these claims with anything but his anecdotal witness testimony and opinions. The appellate court found this evidence insufficient to create triable issues of fact.

The lesson? Courts are looking at the foundation of expert declarations mare carefully to see if the evidence relied on is legally sufficient to support having a trial. The appellate court recognized that bathtubs are inherently slippery, meaning that for a plaintiff to impose liability against the hotel, he’d have to prove that either the hotel made dangerously more slippery or was on notice that its tubs were more slippery than other tubs—a very difficult burden. Usually, if there is a clash of expert declarations, most courts will hold a trial and let the jury decide, which is probably why the trial court granted the motion for new trial. The appellate court reversed however because it carefully examined plaintiff’s evidence and found that it was not legally or logically compelling to prove the claim that Omni knew its Kohler tubs were more slippery than other tubs—“even if” the hotel had other reported tub accidents. Implicit in the court’s decision was that it would be likely for any large hotel chain to have tub accidents since they are slippery and since the general public, including persons with a variety of medical conditions, could cause or contribute to causing tub accidents.

The moral? You can get summary judgment granted in California when the plaintiff’s expert’s opinions are based on anecdotal evidence, educated guesses, or are otherwise lacking foundation.  

Handling Claims Professionally Is Handling Claims In Good Faith—Unprofessional Claims Conduct May Land You With Bad Faith Litigation


By John Armstrong

Claims adjusters today are more competent and better trained than ever. I have had the privilege of lecturing and meeting claims adjusters throughout the U.S., Canada, and Great Britain. Contrary to the opinions of the plaintiff bar, most of them are caring, hard working individuals who want to be fair and do the right thing. So why do we hear so much about insurance “bad faith”? Well…. the professionalism is a mixed bag. Those who have more knowledge, skill, and training, are expected to act like of person of more knowledge, skill, and training. This is especially true if you have “alphabet soup” letters following your name or title regarding all the insurance certifications you’ve obtained.

Let me give you an example to show what I’m talking about. Let’s say you get in a claim. You (especially having read one of my earlier posts) see what coverages the insured has. You determine that the claim is probably not covered under the liability policy but probably is covered under a property policy the insured bought at the same time from your company.

You could deny the claim, but that’s a bad idea for reasons I’ll discuss shortly. Or, you could let the insured know your company is still “reviewing” coverage, and send the claim the company’s property adjuster for review, indicating that you’re inclined to deny under the general liability policy. Why? Because from the insured’s, the court’s, the jury’s, and the rest of the world’s point of you, the tender is to the entire insurance company. This is especially true for insurers insuring insureds in California (say that 3 times fast), since the legal standard is that the insurer is to engage in searching inquiry to find coverage. Put simply, you represent your entire company, not just the kinds of policies the company assigned you to adjust. But don’t panic. You don’t need to be an expert in lines your not certified in. You just need to communicate to the insured that the company is still reviewing coverage until the appropriate lines of coverage that might be affected have all had a chance to review and assess the claim.

Why not deny? Well, besides getting hit with a suit for bad faith—which is going to be difficult to defend if the company did insure the claim but just not under the policy you were examining, the insured may be able to recover pre-tender costs and fees that otherwise would not be recoverable.

California cases hold that an insurer who wrongfully denies a claim that the insurer covered buys the entire loss—even if the insurer decides to later cover the claim. Why? Because the California courts adopt the reasoning that if the insured had tendered immediately, the claim would have been denied then anyway. Thus, you not only avoid a bad faith claim, you also minimize the company’s risk by not outright denying the claim.

And, think about it from the insured’s perspective. If you “find” coverage for the insured, insureds don’t care which policy covers the claim with your company only that the claim is covered. They have a great experience and say good things about your company to others, and business grows. If, for whatever reason, the company were sued for bad faith, don’t you think the judge and jury would be impressed at your zeal to help the insured get coverage? Being professional pays good faith dividends.

Changes to Federal Diversity Law for Liability Insurance Companies Raises Federal Jurisdictional Problems for the Insurance Bar


By John Armstrong

Congress made significant changes to the laws allowing the removal of actions filed in local state courts to be removed to federal court. Two kinds of cases have historically been allowed to proceed in federal court—even if filed and served in state courts, namely, “subject matter jurisdiction” where a federal law or policy is the gravamen of the claim and “diversity jurisdiction” where the dispute involves more than $75,000 and all of the plaintiffs and all of the defendants are residents of different states.

Congress changed what are known as the “removal statutes,” namely Title 28 U.S.C. § 1332 and § 1441. Section 1332 makes every corporate insurer, as a matter of law, a “citizen” of the state in which the insured resides, as well as the state of the insurer’s corporate incorporation, and where the insurer’s principal place of business. This is important because insurers can no longer bring declaratory relief actions against their insurers in federal court, and because insurers can no longer remove insurance bad faith actions to federal courts

Some states, like Louisiana,  allow a tort victim to sue the defendant’s liability insurer directly. In response to a large number of federal suits filed in the federal courts in Louisiana, Congress expanded the definition of “citizenship” for insurance companies. Liability Insurance companies are now a resident of the state in which they are incorporated, where their principal place of business [the corporation’s “nerve center” where its chief executive operations take place], and are deemed a resident of the same state that their insureds reside in if:

1) There is a “direct action” against a liability insurer; and

2) The insured is not joined as a party-defendant.

See the problem? “Direct action” is not defined. If the insured sues the insurance company directly for declaratory relief or for insurance bad faith, does this mean that the insurer can no longer remove to federal court? If the insurer cross-complains against the insured, is the insured now “joined” as a party-defendant? If an insurer sues in federal court first, can the insured move to dismiss for lack of diversity? The answer? Only time will tell. The answer will depend on how each court faced with these issues decides it.

A purely literal interpretation seems to preclude an insurer from removing the insured’s declaratory relief or insurance bad faith action since the insured is not a “party-defendant” at the time of the attempted removal, and the action would be a direct against an insurance company. Though the Congressional history shows that Congress intended to limit victims from suing insurers in federal court, the plain language in the Act does not contain such a limitation.

Oddly, if the insurer sues the insured first, the insured may not be able to dismiss for lack of diversity jurisdiction, since a literal interpretation of the Act only makes a liability insurer a citizen of the same state as its insured when the insured is “not joined as a party-defendant.”

If the changes to the Act are read in view of the Congressional history, a court should interpret the Act as defeating diversity jurisdiction only in actions where state law allows a victim to sue the wrongdoer’s insurer directly, which interpretation is consistent with the text’s reference to applying where insureds are not joined as party-defendants.

It’s worth noting that changes don’t apply to property insurers, i.e., “non-liability” insurers. Or do they? What if a property policy provides a defense or indemnity for a certain kind of liability claim? Would the court look to the type of policy issued or to the insuring provision? Again, only time will tell. Now, the insurance bar is free to argue either way until we get some judicial interpretation of these new changes.

Changes to Federal Diversity Law for Liability Insurance Companies Raises Federal Jurisdictional Problems for the Insurance Bar


By John Armstrong

Congress made significant changes to the laws allowing the removal of actions filed in local state courts to be removed to federal court. Two kinds of cases have historically been allowed to proceed in federal court—even if filed and served in state courts, namely, “subject matter jurisdiction” where a federal law or policy is the gravamen of the claim and “diversity jurisdiction” where the dispute involves more than $75,000 and all of the plaintiffs and all of the defendants are residents of different states.

Congress changed what are known as the “removal statutes,” namely Title 28 U.S.C. § 1332 and § 1441. Section 1332 makes every corporate insurer, as a matter of law, a “citizen” of the state in which the insured resides, as well as the state of the insurer’s corporate incorporation, and where the insurer’s principal place of business. This is important because insurers can no longer bring declaratory relief actions against their insurers in federal court, and because insurers can no longer remove insurance bad faith actions to federal courts

Some states, like Louisiana,  allow a tort victim to sue the defendant’s liability insurer directly. In response to a large number of federal suits filed in the federal courts in Louisiana, Congress expanded the definition of “citizenship” for insurance companies. Liability Insurance companies are now a resident of the state in which they are incorporated, where their principal place of business [the corporation’s “nerve center” where its chief executive operations take place], and are deemed a resident of the same state that their insureds reside in if:

1) There is a “direct action” against a liability insurer; and

2) The insured is not joined as a party-defendant.

See the problem? “Direct action” is not defined. If the insured sues the insurance company directly for declaratory relief or for insurance bad faith, does this mean that the insurer can no longer remove to federal court? If the insurer cross-complains against the insured, is the insured now “joined” as a party-defendant? If an insurer sues in federal court first, can the insured move to dismiss for lack of diversity? The answer? Only time will tell. The answer will depend on how each court faced with these issues decides it.

A purely literal interpretation seems to preclude an insurer from removing the insured’s declaratory relief or insurance bad faith action since the insured is not a “party-defendant” at the time of the attempted removal, and the action would be a direct against an insurance company. Though the Congressional history shows that Congress intended to limit victims from suing insurers in federal court, the plain language in the Act does not contain such a limitation.

Oddly, if the insurer sues the insured first, the insured may not be able to dismiss for lack of diversity jurisdiction, since a literal interpretation of the Act only makes a liability insurer a citizen of the same state as its insured when the insured is “not joined as a party-defendant.”

If the changes to the Act are read in view of the Congressional history, a court should interpret the Act as defeating diversity jurisdiction only in actions where state law allows a victim to sue the wrongdoer’s insurer directly, which interpretation is consistent with the text’s reference to applying where insureds are not joined as party-defendants.

It’s worth noting that changes don’t apply to property insurers, i.e., “non-liability” insurers. Or do they? What if a property policy provides a defense or indemnity for a certain kind of liability claim? Would the court look to the type of policy issued or to the insuring provision? Again, only time will tell. Now, the insurance bar is free to argue either way until we get some judicial interpretation of these new changes.

Dealing With Difficult People-Kill ‘Em With Kindness Is The Best Policy—No Matter How Much It Hurts You


By John Armstrong

Being in business means dealing with people. Being involved in insurance claims means dealing with difficult people. Normal, good, decent people tend to be difficult or impossible when under stress. You and your company may be wrongly accused of all kinds of things. You may be threatened with lawsuits or worse. What to do? Turn the other cheek! Don’t given into the temptation to write about how you really feel to the claimant, in your claimants, or to anyone. If you really feel the need to do, write what you want to say on waste paper, and then shred your personal thoughts. While valid, they have no place in the insured’s claim file. 

Why? Well… I began my career defending insurance bad faith property cases arising out of the 1994 Northridge Earthquake. The most difficult cases to defend where ones in which the claims adjuster wrote “less than nice things” about the insured.The lawyers armed with the claims correspondence all obtained recoveries and better ones, than where there wasn’t this added “bad fact” in defending the claim. (Of course only this information was only produced after valiant efforts were made to protect the claims file.) The sad part was that if you carefully reviewed the entire file, you understood where the adjuster was coming from. But all that anyone on a jury would be focused on would be the “bad”  comments by the adjuster.

From a juror’s perspective, the claims adjuster, as the insurer’s agent, has all the cards in his or her favor. The claimant has suffered a loss, and may be out thousands of dollars or more and may even have sustained permanent bodily injury from the event giving rise to the claim. In contrast, the claims adjuster’s stress “only” has to deal with fairly adjusting the loss. No doubt the adjuster must deal with the verbal and written threats by the insured and insured’s attorney. No doubt it its unpleasant. But adjusters are held to a higher level. They are expected to be professional at all time because, after all, claims is their profession. 

To illustrate what I’m writing about, I once had to defend a claimant who was also an attorney. I had to copy all of correspondence to the handling and senior claims adjuster and coverage counsel since there was such a high chance of the insured suing for bad faith. But not matter how nasty the multiple tomes of single-spaced emails I received every day, I always responded with kindness and professionalism. The result? We got the claim resolved, and when it was all over, the insured sent me a very nice and unexpected thank you. That is a much happier result than trying to defend your words once your company is sued for bad faith. The moral? Kill ‘em with kindness. It’ll save you and your employer countless headaches and plenty of $$$ in the long run.

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An Ounce of Prevention—Sometimes the Best Claims Handling Is Resolving Problems Before They Rise to the Level of Claim


By John Armstrong

Whether you’re an insurance adjuster or a self-insured business, or have a high insurance deductible, your likely to have a claim involving your business. This blog covers a sub-category. Namely, the “pre-claim” claim. It’s hard to define a “pre-claim.” Some malpractice policies describe it as the point when the professional has notice of a situation where a claim is likely to develop in the future. Real life examples I’ve seen are claims against a publicly traded corporation regarding financial errors/mismanagement that should have been caught by the publicly traded firm’s accountants. The SEC or class action may be against the corporation’s Board of Directors at first, but it may be just a matter of time before others are sued. Another situation is where a business is subpoenaed to provide information in a lawsuit regarding work or services the business provided one of the parties in the dispute.

In both of these situations, there generally is no insurance coverage because, thus far, there is no “claim” as that term is ordinary defined in standard liability insurance policies. But here’s the dilemma; do nothing, and by the time a real “claim” is made against the insured business, there may be little hope of fighting liability or damages—especially if depositions have been taken. Some insurers will agree to treat such situations as a “modified” claim where the insured pays a modest deductible because a defense for the deposition and subpoena and others will just agree to hire pay hire the insured’s attorney at panel counsel rates to protect the insured. Certainly, in the above scenarios the insurer is not legally obligated to start funding a defense. However, the big picture is too avoid being penny wise and dollar foolish; that is, the few thousand dollars spent today may prevent a “claim” from ever being made against the insured, and if there is one, the valuable of the claim is likely to be much less.

Another thing businesses and insurers can benefit from is having the insurance company offer seminars to insured businesses on good risk prevention practices. Some insurers may even offer discounts on premiums to insureds who participate in such programs. Many insureds are unaware that these programs exist. For insurers offering Employment Practices Liability (a.k.a. “EPL” policies), such programs are invaluable to claim prevention.

Even if an insurance company doesn’t offer a risk prevention program, often the law firms they use will, or even a business’s existing lawyers, if asked. Law firms will generally treat this kind of a seminar as a marketing event instead of billable event. Of course, it always a good idea to let the law firm know as much information about the business so that a well tailored risk prevention seminar can be given.

In sum, early claim detection and prevention saves insurers and business thousands if not ten thousands of dollars. If you’re a business and you think that a claim might be pursued against your business, that’s a great time to start a dialogue with your insurer and with your attorneys. Even before then, taking advantage of educational opportunities will let you know what to do and how to do it to prevent potential claims, or to at least mitigate the costs when a claim is made.