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.

Excess Insurer Forced To Contribute To A Settlement May Sue Primary Insurer For Unreasonably Refusing To Settle Within Primary Limits Despite The Lack Of Any Excess Judgment Against The Insured

In Ace American Ins. Co. v. Fireman’s Fund Ins. Co. (2016) 2016 Cal.App. LEXIS 647 (Aug. 5, 2016), the California Court of Appeal, Second Appellate District, Division Four, reversed the trial court which had sustained a primary insurer’s demurrer to a lawsuit brought an excess insurer. The excess insurer, Ace American Insurance Company (“Ace”), asserted causes of action against the primary insurer, Fireman’s Fund Insurance Company (“Fireman’s Fund”), for equitable subrogation and breach of the duty of good faith and fair dealing based on the primary insurer’s alleged unreasonable failure to settle an underlying action within primary policy limits. The Court of Appeal held that an excess insurer could maintain claims against a primary insurer even in the absence of a litigated judgment in the underlying action against their mutual insured.

The appellate court held that Ace’s lawsuit against Fireman’s Fund could have been brought by the insured or its assignee “despite the absence of a litigated excess judgment.” The court held that “an excess insurer which has settled and discharged the insured’s liability may recover from the primary insurer an amount in excess of the primary insurer’s policy limits if the excess insurer can prove the primary insurer’s unreasonable refusal to settle within its policy limits resulted in loss to the excess insurer in an amount in excess of the policy limits of the primary insurer it would not otherwise have had.” The court further held that an “excess judgment is not a required element of a cause of action for equitable subrogation or breach of the duty of good faith and fair dealing; where the insured or excess insurer has actually contributed to an excess settlement, the plaintiff may allege that the primary insurer’s breach of the duty to accept reasonable settlement offers resulted in damages in the form of the excess settlement.”

The Court of Appeal also rejected Fireman’s Fund public policy argument that “[p]rimary insurers would be hesitant to participate with excess insurers in settlements, for fear of the excess insurers turning around and suing them.” The court reasoned that primary insurers already have the duty to accept reasonable settlement offers within policy limits and are liable for resulting damages in the event of a breach of that duty.

Contractual Liability Exclusion Not a Basis to Deny Coverage for Consumer Claims Against Genetic Testing Company

The Federal District Court in San Jose, California, issued a recent decision interpreting a contractual liability exclusion issued by IronShore to 23andMe, Inc. Ironshore Specialty Ins. Co. v. 23andMe, Inc., 2016 U.S. Dist. LEXIS 96079 (N.D. Cal. July 22, 2016). 23andMe provided a “personal genomic service” to consumers wishing to access and understand their personal genetic information. The consumer purchases a DNA saliva collection kit and then sends the sample back to 23andMe for testing. The FDA objected to the marketing of the product under the Federal Food, Drug and Cosmetic Act. Civil litigation resulted including class actions filed by consumers in federal court, class arbitration complaints under AAA, as well as a Civil Investigative Demand (“CID”) from the State of Washington. The 23andMe customers alleged a variety of legal theories, principally asserting that 23andMe falsely represented the outcome of the personal genome services and that the testing yielded inaccurate and incomplete results.

Although the court agreed with IronShore that under California law a CID does not constitute a claim triggering the duty to defend, the court rejected the principle defense offered by IronShore that it had no duty to defend because of a contractual liability exclusion which provided that “this insurance does not apply…to claims based upon, arising out of, directly or indirectly resulting from or in any way involving:

  1. Contractual Liability

Your assumption of liability or obligations in a contract or agreement.

The court rejected IronShore’s argument that the broad language of the exclusion would include contracts made between 23andMe and its customers. Instead, adopting what the court viewed as the majority rule, the court held that this form of contractual liability does not apply to liabilities or obligations arising from the insured’s own contracts but rather only applies to liabilities and obligations that were originally those of a third party which were subsequently “assumed” by the insured. The court comprehensively reviewed the case law around the country but relied most heavily on a decision from the Michigan Court of Appeals in Peeker which concluded that the phrase “assumption of liability” in the context of a contractual liability exclusion refers to those contracts or agreements in which the insured assumes the liability of another. The court also emphasized that if the court were to adopt in IronShore’s construction of the contractual liability exclusion, virtually all claims relating to 23andMe’s professional services would have been excluded from coverage.

Through the Magnifying Glass: What an Insured May Recover Beyond Damages against its Insurer under Washington Law

Earlier this year, the United States District Court for the Western District of Washington provided a detailed analysis of the categories of damages available to a prevailing insured in a breach of contract action against an insurer, including prejudgment interest, costs and attorneys’ fees. MKB Constructors v. Am. Zurich Ins. Co., 2015 U.S. Dist. LEXIS 9325 (W.D. Wash. Jan. 27, 2015). In MKB, the insured was awarded more than $2.35 million in damages, comprised of (1) $1,083,424.24 for breach of contract, (2) $274,482.47 for violation of Washington’s Insurance Fair Conduct Act (“IFCA”), (3) $862,000 in enhanced damages under IFCA, and (4) $138,000 for failure to act in good faith (later overturned as duplicative of the IFCA damages). Following the verdict, the insured moved for prejudgment interest, nontaxable costs, and attorneys’ fees.

Prejudgment Interest

The parties did not dispute that the insured was entitled to prejudgment interest on the liquidated portions of its award. Rather, the issues were which rate to apply and when the interest began to accrue. Under Washington law, a twelve percent prejudgment interest rate is applied to contract disputes, but a lower rate of two percentage points above prime is applied to tort claims. RCW 4.56.110. The parties agreed that only one rate should apply, but disagreed as to whether the judgment was primarily based in tort or in contract. The insured asserted that the judgment was based primarily in contract because the majority of the liquidated portion of the award was for breach of contract. The insurer argued that the Court must consider the judgment as a whole and not just its liquidated components. The Court agreed with the insurer, citing Unigard Ins. Co.v. Mutual of Enumclaw Ins. Co., 160 Wn.App. 912 (Wash. Ct. App. 2011). The Court then compared the amount awarded for breach of contract to the greater total amount awarded for the tort claims based on bad faith and IFCA and concluded that the judgment was primarily based in tort. Accordingly, the Court applied the lower pre-judgment interest rate.

For the prejudgment interest accrual date, the parties agreed that under Washington law prejudgment interest should run from the date each particular invoice was paid. The insured argued, however, that the volume of invoices would make such a calculation an unreasonable burden. The Court agreed to two dates proposed by the insured for the commencement of prejudgment interest, one with respect to the invoices related to the breach of contract and another for its attorney’s invoices, based on the insured’s confirmation that these dates would not prejudice the insurer, and in fact would result in a net benefit to the insurer.

Attorney’s Fees

The insured sought a 33% increase of the total award to account for the contingent fee paid to its counsel. The Court rejected this request as unprecedented. Rather, Washington law presumes that a properly calculated lodestar figure represents reasonable compensation for counsel. A “lodestar” fee is determined by multiplying a reasonable hourly rate by the number of hours reasonably expended in the lawsuit.

The insurer disputed the reasonableness of the attorneys’ hours based on improper block-billing, unnecessary participation by a third attorney added just before trial, and for time spent on unsuccessful claims. Based on its review of the invoices, the Court reduced the block-billed entries by 20%. The Court did not deduct time for the third attorney added just before trial, because the addition of the attorney for trial was neither unusual nor excessive. The Court found that certain work related to discovery and dispositive motions were unnecessary and insufficiently related to the overall success of the litigation to warrant an award of fees. Rather than undertake an hour-by-hour analysis of the attorneys’ fees in order to excise the precise number of hours attributable to these items, the Court estimated, based on its experience with the case that an overall 20% reduction in the claimed fees would sufficiently account for the hours spent on these items.

Litigation Costs

Lastly, the insured sought reimbursement of litigation costs, totaling $160,580.50, which consisted of (1) expert witness fees; (2) travel expenses; (3) the insured’s labor costs; and (4) litigation costs advanced by counsel. The expert fees and travel expenses were uncontested.  In dispute were the labor costs and litigation costs advanced by counsel.

The Court held that the insured’s recovery of wages for employees who testified or otherwise participated in the lawsuit would be an unprecedented stretch of both IFCA and case authority permitting an award of costs. On the same basis, the Court denied recovery for fees paid to secure the attendance at trial of its former employees that were in excess of the statutory amount for fact witnesses provided by RCW 2.40.010. The Court rejected the insured’s argument that the payment of these witnesses was “akin” to an expert witness fee, since Washington courts have expressly disallowed such fees to fact or occurrence witnesses.

The Court also trimmed the insured’s request for over $52,000 in costs advanced by counsel.  “Actual and statutory litigation costs, including expert witness fees” may be awarded under IFCA.  Additionally, Washington case authority permits the court to award “all of the expenses necessary to establish coverage” in order to make the insured “whole.” Panorama Village Condo. Owners Ass’n Bd. Of Dirs. v. Allstate Ins. Co., 26 P.3d 910, 917 (Wash. 2001) (bolding in original). The Court ruled that the following costs should be reimbursed: (1) costs associated with electronic legal research; (2) photocopying; (3) messenger and Federal Express fees; (4) court reporter and videographer fees; (5) travel to depositions; (6) telephone conference fees; (7) PACER fees; and (8) hotel rooms near the courthouse for witnesses.

However, the Court declined to award certain costs that were not “litigation costs” such as a mediation fee; costs that were part of routine daily life and would have been incurred without trial such as costs for local attorneys’ commuting, lodging and meals during trial; and costs that were excessive, such as daily trial transcriptions.

The MKB decision should serve as a useful guide in future fee award cases and as a warning that courts in Washington should not “rubber stamp” an award in favor of the insured but should carefully scrutinize all components of the insured’s demand.