San Diego Team Prevails with Motion to Dismiss First Amended Complaint without Leave to Amend on behalf of Multi-National Insurance Company

On March 6, 2018, the United States District Court for the Southern District of California granted the firm’s client, a multi-national insurance company, the motion to dismiss the plaintiff’s first amended complaint without leave to amend. The motion was filed by Gordon Rees Scully Mansukhani San Diego partner Matthew G. Kleiner and senior counsel Jordan S. Derringer.

The plaintiff originally filed her complaint alleging causes of action for breach of contract, bad faith, breach of fiduciary duty and fraud based upon negligent misrepresentation and concealment. The plaintiff’s claims arose out of the insurer’s denial of a claim for accidental death benefits in connection with the death of her husband resulting from a plane crash. The plaintiff alleged that the insurer client provided inadequate notice of an aviation exclusion that was present in a replacement insurance policy and allegedly broader than an aviation exclusion in her prior policy issued by another insurer. According to the plaintiff, the exclusion was not clear and conspicuous and was unconscionable. The plaintiff further stated that the client’s letter advising that her policy was similar to her previous insurance policy was incorrect and therefore, Gordon & Rees’s client breached its fiduciary duty to the plaintiff. The plaintiff’s contention regarding the letter also formed the basis of the negligent misrepresentation and concealment causes of actions.

After Gordon & Rees’s attorneys were successful in filing a motion to dismiss, the plaintiff filed a first amended complaint setting forth identical causes of action but alleging that Gordon & Rees’s client’s policy included a sickness exclusion that was not present in her previous insurance company’s policy and that this policy contained a non-contributory benefit that was not available under the current policy. Gordon & Rees attorneys again filed a motion to dismiss the first amended complaint arguing that the plaintiff failed to correct the defects from the original complaint and that the additional allegations regarding the presence of a sickness exclusion and the lack of a non-contributory benefit were irrelevant as the plaintiff’s claim was not denied on the sickness exclusion and she failed to prove entitlement to any benefits under the her previous policy.

The trial court granted Gordon & Rees’s motion to dismiss the amended complaint without leave to amend and held that the aviation exclusion in the policy was plain, clear and conspicuous. The court also found that the exclusion was not unconscionable and that the notice of change of insurance was plain, clear and conspicuous because the aviation exclusion in the client’s policy was not a reduction in coverage because the plaintiff was not entitled to benefits under her current or previous policy. As the plaintiff’s breach of contract cause of action failed, the plaintiff was unable to state a cause of action for bad faith. The court held that the plaintiff failed to state a cause of action for breach of fiduciary duty because generally, an insurer is not a fiduciary of the insured and the plaintiff failed to demonstrate that the insurer assumed a higher duty of care or knowingly undertook to act on behalf of or for the benefit of the plaintiff. With respect to the plaintiff’s fraud claims, the court held that the insurer’s statement that the policies were similar was not a misrepresentation and, even if it were, the plaintiff’s reliance thereon was not justified. The court also held that the plaintiff did not sustain any damages in connection with these claims because she could not prove an entitlement to benefits under the previous insurance company’s policy. Finding that leave to amend would be futile, the court dismissed the first amended complaint with prejudice and ordered judgment in favor of Gordon & Rees’s client.

To read the court’s full decision, please click here.

Ninth Circuit Clarifies Excess Insurer’s Options Under For Proposed Settlements That Invades Excess Layer Of Coverage

A recent decision from the Ninth Circuit Court of Appeals clarified an excess insurer’s options under California law when it is presented with a proposed settlement that invades its excess layer and has been approved by the insured and primary insurer. See  Teleflex Medical Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2017 U.S.App.LEXIS 4996 (9th Cir. March 21, 2017). In Teleflex, the court applied the rule set forth in Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins. Co. (1991) 227 Cal.App.3d 563 (“Diamond Heights”) stating that the excess insurer can: (1) approve the settlement; (2) reject the settlement and assume the defense of the insured; or (3) reject the settlement, decline the defense, and face a potential lawsuit by the insured seeking contribution.

In Teleflex, LMA became involved in a lawsuit with a competitor. LMA filed suit seeking recovery of damages for patent infringement and the competitor filed counterclaims for trade disparagement and false advertising. After several years of litigation, the parties agreed to settle their respective claims. As part of the settlement, LMA agreed to pay $4.75 million for the disparagement claims and LMA’s competitor agreed to pay $8.75 million for the patent claims. The settlement was contingent upon LMA obtaining approval and funding from its primary and excess insurers.

LMA’s primary carrier agreed to the settlement, but its excess insurer, National Union requested additional information which was provided by LMA, along with a demand that National Union could accept the settlement, reject the settlement and take over the defense, or reject the settlement, refuse to defend, and face a reimbursement claim. National Union ultimately rejected the settlement without offering to take over the defense.

LMA then brought suit against National Union for breach of contract and bad faith, where a jury awarded LMA damages for both. On appeal, National Union argued, among other things, that the district court erred in applying the rule articulated in Diamond Heights, asserting that it had effectively been overruled by Waller v. Truck Ins. Exch. (1995) 11 Cal.4th 1. National Union argued that under Waller, an insurer can only waive a policy provision through an intentional relinquishment of a known right. Accordingly, National Union asserted that LMA’s claims failed as matter of law because the “no voluntary payments” and “no action” clauses gave National Union the absolute right to reject the settlement. Disagreeing, the Ninth Circuit held that Waller did not mention Diamond Heights and reasoned that it simply reiterated general waiver principles that existed prior to and were not in conflict with Diamond Heights. In so holding, the Ninth Circuit reasoned that regardless of Diamond Heights use of the term “waiver” its rule is really about an insurer’s breach of its obligations under the policy and/or the implied covenant of good faith and fair dealing – not the waiver or expansion of a policy provision addressed by the Waller court.

Of note, the Ninth Circuit also expressed skepticism regarding the application of the “genuine dispute doctrine” to third party claims and held that an insurer was not entitled to a specific jury instruction regarding that defense. The court also affirmed the district court’s ruling that an insured was not entitled to Brandt fees associated solely to the insured’s bad faith and related punitive damages claims.

Based upon this decision, excess insurers should be cognizant of the pitfalls of withholding consents to settlements and should ensure that they have been afforded a reasonable opportunity to analyze the reasonableness of the settlement and adequate time to consider whether to participate or undertake the defense of the insured.

Doctrine of Superior Equities Does Not Bar Assignment of Claim against Insurance Broker

In a recent decision from the Fifth District Court of Appeal, the court held that a negligence cause of action against an insurance broker could be assigned to a third party, including the insurer of an injured party. In AMCO Insurance Company v. All Solutions Insurance Agency, LLC, 16 C.D.O.S. 1521, two separate lawsuits were filed against Amarjit Singh (“Singh”) in connection with a fire caused by Singh’s negligence. Hideo Ogawa and Myong Echols (collectively, “Ogawa”) owned a restaurant that was damaged by the fire. David Saari (“Saari”) owned commercial property that was damaged by the fire. AMCO Insurance Company (“AMCO”) was the commercial property insurer for Saari and paid $371,326 to Saari for damages caused by the fire. AMCO then brought a subrogation action against Singh. Ogawa also brought suit against Singh for losses caused by the fire. Singh tendered the claims to his insurance company but the claims were denied because there was no policy in effect on the date of the fire as a result of the negligence of Singh’s insurance broker, All Solutions Insurance Agency, Inc. (“All Solutions”). Subsequently, Singh entered into stipulated judgments with AMCO and Ogawa and assigned his claims against All Solutions to AMCO and Ogawa.

AMCO and Ogawa as assignees of Singh filed suit against All Solutions. The trial court granted summary judgment to All Solutions holding that Singh’s claim for broker negligence against All Solutions was not assignable. In addition, the trial court held that AMCO and Ogawa’s claims were precluded by the rule of superior equities.

The Court of Appeal noted that the general rule in California favors the assignability of tort causes of action. However, there are exceptions for causes of action for wrongs done to the person, the reputation or feelings of the injured party. Other exceptions include legal malpractice based upon the highly personal and confidential relationship between an attorney and client. All Solutions argued that the same reasons for prohibiting assignment of legal malpractice claims were equally applicable to insurance malpractice claims. However, the Court of Appeal rejected this argument stating that the communications between an insurance broker and client are not privileged or confidential and because of the standardized nature of insurance policies, the product delivered by the insurance broker to the client is not highly unique or personal.

The Court of Appeal also held that AMCO and Ogawa’s claims were not barred by equitable subrogation principles or the doctrine of superior equities. Equitable subrogation refers to the transfer of rights against a third party that arises in equity and occurs only by operation of law because a party (i.e., the subrogee) has paid a loss of another (i.e., the subrogor). The most common equitable subrogation action is one brought by an insurer against a wrongdoer who caused the loss paid by the insurer. In these instances, the doctrine of superior equities has developed based on the idea that an insurer who has been compensated (by receipt of premiums) for issuing a policy should not be allowed to shift the very loss contemplated by the policy to an innocent party. An insurer pursuing a claim for equitable subrogation must demonstrate that it is not attempting to shift the loss to an innocent party. California does not recognize a difference between equitable subrogation and conventional (i.e. contractual subrogation). Accordingly, even a contractual assignment to an insurer from its insured is subject to the doctrine of superior equities. All Solutions contended that the doctrine of superior equities limited the contractual assignments because it was Singh, and not All Solutions, who caused the fire.

With regards to Ogawa, the Court of Appeal held that the doctrine of superior equities did not apply because Ogawa was not a surety (i.e., an insurer). The Court of Appeal also found that AMCO was not subject to the doctrine of superior equities because it did not have a subrogee-subrogor (i.e., insurer-insured) relationship with Singh who had caused the fire. Rather, AMCO insured Saari who had been damaged by Singh. The doctrine of superior equities would have precluded the contractual assignment to AMCO if AMCO had insured Singh. However, AMCO’s insured was Saari and AMCO pursued its equitable subrogation claim against Singh for payments AMCO made to Saari. Accordingly, the doctrine of superior equities did not apply.

Finally, the Court of Appeal held that even if the doctrine of superior equities did apply, All Solutions had not demonstrated through material facts that its equitable position was equal or superior to AMCO. The Court of Appeal criticized the separate statement of undisputed material facts that All Solutions had submitted in support of summary judgment. No facts were introduced demonstrating how the fire losses would have been allocated if All Solutions had obtained the proper insurance for Singh. As a result, the Court of Appeal was unable to determine how the unobtained coverage would have related to coverage provided by AMCO. Accordingly, All Solutions did not demonstrate that its equitable position was equal or superior to AMCO’s equitable position. The Court of Appeal reversed the trial court granting All Solutions’ motions for summary judgment.

Click here for the opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.

California Supreme Court Overrules Henkel and Holds Insurer Consent Is Not Required For Policy Assignment After Coverage-Triggering Event Has Occurred

The California Supreme Court held that, regardless of a policy’s consent-to-assignment provision, an insurer’s consent is not required for a valid assignment of a liability insurance policy after a loss has happened. Its holding is based on rarely-cited Insurance Code section 520 (“Section 520”) which states: “[a]n agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.” Further, the Court concluded a loss “happens” when an event giving rise to potentially covered liability takes place, not when a claim is reduced to a fixed sum due. In so holding, the Court overruled Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934, which reached a contrary conclusion but did not consider the effect of Section 520.

Hartford issued a series of liability policies to Fluor Corporation, an engineering and construction company. The policies, in effect from 1971 to 1986, contained a consent-to-assignment clause that stated an “[a]ssignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” Beginning in the mid-1980s, various Fluor entities were sued in numerous lawsuits alleging injuries caused by exposure to asbestos. Hartford defended and settled lawsuits against Fluor over a 25-year period.

In the 1980s, Fluor acquired a mining business, A.T. Massey. But in 2000, Fluor chose to refocus on its core businesses and underwent a corporate restructuring known as a “reverse spinoff.” Fluor created a new subsidiary (“Fluor-2”), with the original Fluor becoming Massey Energy. Under a Distribution Agreement, Fluor transferred its rights and obligations to Fluor-2. Those “rights” encompassed all of Fluor’s assets, including the Hartford policies. Fluor-2 notified Hartford of the restructuring. Hartford did not object and continued to defend Fluor-2 against asbestos lawsuits for another seven years.

In 2006, Fluor-2 filed a coverage action against Hartford regarding issues unrelated to Fluor’s assignment. In a 2009 cross-complaint, Hartford for the first time alleged the purported assignment of its policies to Fluor-2 was invalid without Hartford’s consent. Hartford sought reimbursement of defense and indemnity paid on Fluor-2’s behalf.

Fluor-2 moved for summary adjudication that Section 520 bars enforcement of Hartford’s consent-to-assignment clause “after a loss has happened.” Fluor-2 asserted the underlying asbestos suits alleged exposure while Hartford’s policies were in effect. Thus, the “loss” triggering its duty to defend and indemnify already happened, so claims under the policy were assignable without Hartford’s consent. Hartford argued the Court was duty-bound to follow Henkel, which held an assignment is valid only after a loss has been reduced to a “chose in action” – that is, a fixed sum of money due or to become due.

The trial court agreed with Hartford. Fluor-2 filed a writ which the Court of Appeal denied, concluding Henkel controls. The Court of Appeal also concluded Section 520 only applies to first-party insurance policies, since liability insurance “did not even exist” when the predecessor to Section 520 was enacted in 1872. The Supreme Court granted review to consider the effect of Section 520 on the purported assignment.

The Supreme Court first recounted the history of Section 520 in detail. In 1935, when the Insurance Code was created, third-party liability policies were becoming more common, and Section 520 was included in a “General Rules” section of the Code with other sections defining and applying to liability insurance. Section 520 was modified in 1947 to exclude two specific classes of insurance (life and disability, not liability). The Supreme Court disagreed with the Court of Appeal and concluded Section 520 applies to both first-party and third-party insurance policies.

The Court then considered how Section 520 applies in the liability insurance context. The issue turns on the meaning of the phrase “after a loss has happened,” which the Court concluded is ambiguous. Fluor-2 asserted a loss “happened” when a claimant was exposed to asbestos while the Hartford policies were in effect, so Fluor’s assignment of its rights under the policies to Fluor-2 in 2000 was valid. In contrast, Hartford asserted a loss happens when the insured incurs a direct loss by judgment or settlement fixing a sum of money due. The Court concluded that both interpretations are reasonable.

However, the Court reasoned that the legislative history of Section 520, as well as early cases addressing assignment of policies, favor Fluor-2’s view. Early cases distinguish an insured’s inability to assign a policy as to future events (substituting another insured for the risk the insurer evaluated) from an insured’s right to assign a claim after a loss. Regarding the timing of loss, the Court concluded an insurer’s contingent liability to its insured becomes “fixed” when an accident or event takes place for which the insured may be responsible. A claim need not be reduced to a discrete sum for a loss to have occurred.

The Court stated this is the majority view across the country and was expressed in case law decided before the 1947 amendment of Section 520, so the rule was part of the “legal landscape” at that time. The Court also reasoned the notion that loss “happens” at the time of the injury during the policy period is consistent with its holdings in Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645 and State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, in which the Court equated “loss” with bodily injury and property damage, rather than a money judgment or settlement.

The Court rejected various arguments by Hartford, including that the Court is bound to follow Henkel and that its reliance on a relatively obscure statute is misplaced. The Court overruled Henkel to the extent it is inconsistent.

Click here for the opinion.

This opinion is not final. It may be modified on rehearing or review may be granted by the United States Supreme Court. These events would render the opinion unavailable for use as legal authority.

Replacement Cost Value and the Insured’s Duty to Repair

Commercial property policies provide two methods for recovery.  The first method, actual cash value, permits an insured to immediately recover the value of the damaged property less the amount of depreciation.  This amount is often insufficient to provide the insured with enough money to repair or replace the damaged property.  Therefore, the insured can elect to repair the damage and make a claim for the difference between the actual cash value and the amount it cost to replace the property assuming that the insured advises the insurer in a timely manner.  The second method is known as replacement cost, under which the insured can recover the cost to repair or replace the property with property of comparable quality.  Additionally, the repairs must be made as soon as reasonably possible.  However, in a recent decision from the California Court of Appeal, the court held that the failure to repair or replace the property “as soon as reasonably possible” did not preclude reimbursement for replacement cost where the insurer never accepted coverage for the loss.

CON BLOG_home buildIn Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co. (November 24, 2014) 2014 Cal. App. LEXIS 1073, the Court of Appeal concluded that the trial court should have entered a conditional judgment for the insured in the amount of the replacement cost even though repairs had not been performed.  In so holding, the court reasoned that after the insurer denied coverage, the insured no longer had an obligation to immediately repair the property in order to recover replacement cost because the insurer’s decision materially hindered the insured from repairing the damage.

Stephens & Stephens XII, LLC (Stephens) the owner of a distribution center, purchased a commercial property policy from Fireman’s Fund Insurance Company (Fireman’s Fund).  Almost immediately following the inception date of the policy, Stephens made a claim seeking coverage in connection with a burglary during which all conductive material was stripped and removed from the building, the walls were damaged, fire protection equipment was rendered inoperable and all electrical components were taken.  Fireman’s Fund was concerned that the burglary was too extensive to have occurred in the three days following the inception of the policy and when the claim was made.  Over the course of the next three years, Fireman’s Fund and Stephens entered into various discussions regarding reimbursement for the damages.  Stephens sought replacement cost even though it had taken no steps to make the repairs.  At no time, did Stephens seek actual cash value.  Fireman’s Fund never accepted coverage for the loss and five years after the incident, Fireman’s Fund denied coverage on the grounds that Stephens had concealed and misrepresented material information during the insurance investigation.  Stephens brought suit against Fireman’s Fund for bad faith and breach of contract.

At trial, Stephens sought only the replacement cost and expressly disclaimed any intent to seek recovery for actual cash value.  The jury found that Fireman’s Fund failed to make payments required by the policy thereby preventing Stephens from repairing the damage to the property.  Despite not having repaired the property, the jury found that Stephens performed its duties under the policy and awarded damages for replacement cost at $2,100,293.  The court, however, entered judgment notwithstanding the verdict on behalf of Fireman’s Fund, holding that Stephens was required to complete the repairs before it was entitled to receive replacement cost.

The Court of Appeal reversed, holding that Stephens was excused from complying with the repair requirement because the insurer’s refusal to accept coverage prevented Stephens from repairing the damage.  In so holding, the court reasoned that when an insurer’s decision to decline coverage materially hinders an insured from repairing damaged property, procedural obstacles to obtaining the replacement-cost value should be excused.  Therefore, the policy’s requirement that damage be repaired as soon as possible was excused.  Thus, Stephens was entitled to a judgment for replacement costs consistent with the repair requirement if it completed the repair as soon as reasonably possible after the judgment became final.

Image courtesy of Flickr by Great Valley Center

Ninth Circuit Holds That “Use” of Motor Vehicle Includes Unloading Injured Passenger

In California, motor vehicle policies confer insured status on any person while “using” a motor vehicle with the permission of the owner.  The Ninth U.S. Circuit Court of Appeals recently addressed whether unloading an injured passenger from a motor vehicle constituted “use” of that motor vehicle under California law.  In holding that unloading an injured passenger from a motor vehicle constituted “use,” the court reasoned that the subject policy incorporated California Insurance Code § 11580.06(g), which defines “use” to include “unloading” a motor vehicle.

In Encompass Insurance Co. v. Coast National Insurance Co., decided Aug. 13, 2014, Encompass sought contribution from Coast National Insurance Co. and Mid-Continent Insurance Co. in connection with a settlement it paid on behalf of its insured, Lisa Torti, arising from the personal injury claim of Alexandra Van Horn.  Van Horn was a passenger in a vehicle operated by Anthony Glen Watson.  Watson lost control of his vehicle and struck a light pole.  Torti was the passenger in a vehicle passing by when she stopped to render aid.  Fearing that the Watson vehicle would catch fire, Torti removed Van Horn.  Van Horn claimed that Torti caused her severe spinal injuries.

Encompass issued a package policy to Torti providing, among other things, motor vehicle and personal excess liability coverage.  Mid-Continent issued a motor vehicle policy to Torti and Coast issued a motor vehicle policy to Watson (the driver of the vehicle in which Van Horn was a passenger).  The Mid-Continent and Coast policies provided coverage for the “use” of the vehicle if such use was with the permission of the owner.  The court addressed the meaning of the term “use,” but did not evaluate the issue of “permission.”

The court recognized that the Mid-Continent and Coast policies incorporated the definition of “use” from California Insurance Code § 11580.06(g), which unambiguously equates “unloading” of a motor vehicle with the “use” of a motor vehicle.  Hence, the court held that “use” included Torti’s unloading of Van Horn from the Watson vehicle.

The court rejected the dissent’s arguments that unloading of a vehicle constitutes use only when it is part of the user’s act of availing himself or herself of the vehicle because there was an absence of case law adopting such a theory.  The court also stated that the dissent’s attempt to create a distinction between commercial and noncommercial vehicles was unavailing in light of the fact that the statutory definition of “motor vehicle” included “any vehicle designed for use principally upon the streets and highways and subject to the motor vehicle registration under the law of this state.”  Moreover, the court noted that there were at least two cases where California courts held that unloading noncommercial vehicles constituted use of those vehicles.

The court also rejected the defendants’ argument that unloading only constitutes use when it is integral to the function of the vehicle as a means of transport such that the person unloading the vehicle gains a benefit.  In the case upon which the defendants relied, Travelers Ins. Co. v. Northwestern Mut. Ins. Co. (1972) 104 Cal. Rptr. 283, the California Court of Appeal held that performing maintenance on a vehicle without more was not necessarily use of the motor vehicle.  The Ninth Circuit stated that Travelers did not limit the circumstances under which maintaining a vehicle constitutes use, and therefore imposed no limits on “unloading.”  Travelers also was decided 12 years prior to the enactment of § 11580.06(g) and to the extent that Travelers was inconsistent, the court was bound to follow the Insurance Code.

The court remanded the decision for further proceedings.  Notably, the court never determined whether Torti had Watson’s permission to use his motor vehicle.  With the issue of whether unloading constitutes use resolved, the ultimate coverage determination will likely turn on the issue of permission.