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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It’s a Wrap! Insurance Brokers Have No Duty to Warn Contractors When Their Wrap Policy Insurers Go Insolvent After Placing Policy


By John Armstrong

A “wrap” policy or Owner Controlled Insurance Program (OCIP) is a relatively new and popular form of insurance for construction projects. To simplify, imagine an insurer selling a monster insurance policy covering all liability risks that the developer, general contractor, and subcontractor might have for a construction project. The idea is strength in numbers, as all parties may contribute to the purchase of such insurance policy or program and also waive subrogation/indemnity rights against each other. Think economies of scale, like the power of all the States of the United States or the economic power of the Economic Union versus any one individual state or country.

A constant problem in construction related claims is what happens when a liability insurer goes insolvent. Often, there is a complex claims process akin to a bankruptcy. California’s Insurance Guarantee Association may provide some help when the insurer goes insolvent but CIGA’s liability is capped regardless of policy limits and usually cannot be recovered against if there is any other insurance available for a loss. (This can have the added event of barring liability claims against a negligent subcontractor if the subcontractor’s only available policy for a loss is a loss covered by CIGA. Recovery must be had against CIGA or not at all.)

Recently, California’s Fourth District Court of Appeal in San Diego held that an insurance broker, Aon, who placed an OCIP covering a construction project had no legal duty to warn a subcontractor covered under the OCIP issued by Legion, which insurer became insolvent—even though the insurance broker learned that Legion was insolvent before the subcontractor work was completed. The sub argued that had the broker warned the sub that Legion (the OCIP insurer) was insolvent, the sub could have obtained other liability insurance for the eventual third party claim against the sub.

First, the court recognize that insurance brokers do have a legal duty to place insurance initially but do not have, in the absence of a contract, a continuing obligation to report on the insurance placed by the broker.

Second, the court rejected public policy arguments imposing an expanded legal duty on insurance brokers to warn their clients regarding changes in an insurer’s financial condition—especially since the Legislature and California’s Department of Insurance heavily regulated insurers brokers already and because most E&O policies covering brokers would exclude coverage for such claims (in California, courts look at whether insurance is available before expanding one’s common law liability).

Third, the court found that imposing such a legal duty to monitor insurance companies placed by brokers after issuance of a policy created practical difficulty for brokers.

The moral? If you’re insurance broker or if you adjust insurance broker D&O claims, this is a great case for your defense. If you’re a contractor or developer, self-monitor the wrap liability insurer so you can decide if you need additional insurance. Or see if your insurance broker will contractually agree to monitor for you and place other coverage if the wrap insurer goes belly up before construction is completed. 

 

 

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.  

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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Alternative Fee Agreements-As Good Or As Bad As You Make Them


By John Armstrong

We are in an ever changing business environment. The practice of law and the handling of claims today moves literally light years faster than before with the use of email, mobile phones, ipads, and netbooks. We’re plugged in everywhere we go, and can virtually be at the office while vacationing in Hawaii.

The Billable Hour

The billable hour is still the main style of fee agreement, largely because both claims adjustors and law firms understand this basic formula: The law firm charges an agreed upon hourly rate for partners, associates, and paralegals, the time is billed in one-tenth of an hour increments (the “0.1” or every six minutes), each timekeeper must record what activity was done, and frequently is also required to “code” the work with both a task an activity.

But there are alternatives to the “billable hour” described above. It can be mutually beneficial or a train wreck. The difference? How much is discussed up front so that each side, insurer and law firm, understand what’s expected. This post discusses the main alternative fee arrangements this writer has seen and been a part of, and I will discuss the pros and cons of each.

The “Flat Fee”

In complex cases, such as construction defect cases, usually the insurer insuring a large number of subcontractors will request a “flat fee” per file. That is, the insurer will send a large number of files but will only be charged a single attorney’s fee for each file (the insurer ordinarily covers hard costs, like court reporter fees and filing fees too). This arrangement can work well but two problems usually arise. First, the insurer may not send enough files to warrant the volume discount. This can be hard to do unless the claims adjuster consistently has a steady flow of a known number of files. Too few files, and the idea of volume pricing is out the window. Second, there has to be a mechanism to get a file out of the “flat fee” arrangement if a flat fee suddenly requires more work, such as a large number of depositions or extensive law and motion. Often, this happens when a flat fee subcontractor file becomes the target defendant whose work primarily caused the plaintiff’s damages. At that point, both the plaintiffs’ counsel and the general contractor’s counsel team up on the culpable subcontractor who is now facing a two-front war—not really a good candidate for flat fee work. On the other hand, if you represent the electric door knob polisher, odds are the insurer and law firm are safe in keeping this subcontractor in the flat fee arrangement.

Another variety of the “flat” fee is where a the law firm get a flat fee per month during the life of the file. This may make financial sense where the insurer and defense counsel believe that there is going to be a lot of litigation and where it is unlikely that the case will settle until closer to trial. This requires some sophistication on both the law firm’s and on the adjuster’s part in that the flat fee per month should be enough to cap what would be expected overages in certain months while generating enough income for the firm that the file gets appropriately staffed. The law firm benefits by being able to plan that it will get X amount of fees each month, and the adjuster knows that the fees will never exceed X per month.

The Contingency Case

This usually occurs in the subrogation cases. However, if you have a file where the insured has attorney’s fees clause in its favor, and it appears objectively likely to both the insurer and defense counsel that the insured is likely to prevail and there is another insurer or a solvent plaintiff who could pay attorney’s fees, then such a defense file may be ripe for a contingency or “blended” fee, that is a guaranteed lower hourly rate plus the right to recover fees if the defense counsel are successful. These type arrangements work only when there is a candid, upfront discussion regarding how fees will be split, what costs the insurer will pay on monthly basis, and which will come out of the recovery, if any. And, of course, different percentages can be negotiated, such as a lower percentage if counsel obtains a recovery without having to file suit, and a greater percentage if counsel has to file suit, and a higher percentage if the case has to be taken to trial or settles at trial. Where things go wrong is when there is no clarity on who is paying for costs, what percentage recovery occurs at which point time, etc.

The Blend

Alternative fee agreements have few limits. You can be as creative as you want. It is possible to blend the billable hour, with a modified flat feet, with a contingency component. If your bold enough to move from the billable hour, its best to thoroughly discuss the litigation and trial plan in advance. I would also recommend requesting a billable hour defense budget, because this will provide information on what type of alternative fee agreement might be best for the case. In sum, alternative fee agreements can work, but they do require more work and thinking at the front-end so that insurer and counsel knows what’s expected from each other.