“PROPER CAUSE”

§ P106.02:1   In general

    Under California law an insurer’s erroneous failure to pay benefits under a policy does not necessarily constitute bad faith entitling the insured to recover tort damages.  The ultimate test of bad faith liability in first party cases is whether the refusal to pay policy benefits was unreasonable.  In other words before an insurer can be found to have acted tortiously, i.e. in bad faith, in refusing to bestow policy benefits, it must have done so “without proper cause”.  [Opsal v. USAA (1991) 2 Cal.App.4th 1197, 1205, 10 Cal.Rptr.2d 352]  

    An insurer may act in breach of contract in failing to pay benefits, but such breach may not be “bad faith”.  See California Shoppers Inc. v. Royal Globe Ins. Co. (1985) 175 Cal.App.3d 1, 54-55, 221 Cal.Rptr. 171.  The breach of contract may be based upon disputed facts (California Shoppers Inc. v. Royal Globe Ins. Co., supra) or the breach may be based upon a reasonable though erroneous interpretation of dictum in an appellate decision.  [Opsal v. USAA, supra (reliance upon a footnote in a previous California Supreme Court decision)]  

    “Proper cause” may exist so as to eliminate bad faith liability, as opposed to breach of contract, where there exists a genuine issue as to the insurer’s liability.  [Opsal v. USAA, supra]  See § G11 GENUINE ISSUE DOCTRINE.  “Proper cause” does not exist where a dispute is “non-genuine”.  Where there is a legitimate basis for the insured to dispute the position of the insurer causing a withholding of benefits or delaying the payment of benefits when due, the court will not apply the genuine issue doctrine thereby eliminating the insured’s cause of action for bad faith.  There are many illustrations of “non-genuine disputes”.  See § G11 GENUINE ISSUE DOCTRINE [§ G11:2 Non-genuine dispute by insurer]; § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:5].

§ P106.02:2   Insurer’s denial based upon a California court opinion

    “Proper cause” exists to deny an insured’s claim, though later proved to be an erroneous denial when the insurer relies upon an existing Court of Appeal or Supreme Court opinion.  [Bosetti v. US Life Ins. (2009) 175 Cal.App.4th 1208, 1239, 96 Cal.Rptr.3d 744 (rule applies even though the Bosetti court disapproved of the opinion relied upon by the insurer)]

Denial of claim based upon “developing case law”

    An insurer cannot be found liable for bad faith for denying a claim when insurance law regarding the term in question was “still developing”.  [Filippo Industries v. Sun Insurance (1999) 74 Cal.App.4th 1429, 1438-1439, 88 Cal.Rptr.2d 881, following Opsal v. USAA (1991) 2 Cal.App.4th 1197, 1205, 10 Cal.Rptr.2d 352]  

§ P106.02:3   “Time” period when “proper cause” for denial determined

    The reasonableness of the insurer’s decision and action must be evaluated as of the time that the decisions were made.  The evaluation cannot be fairly made in light of such subsequent events which may provide evidence of the insider’s errors.  [Chateau Chambray v. Assoc. Limited Ins. (2001) 90 Cal.App.4th 335, 347, 108 Cal.Rptr.2d 776 (insured disputed valuation supported by evidence)]  See § H10 HINDSIGHT [§ H10:5 Time for determining “bad faith” conduct on the part of an insurer is determined at the time the decision to deny benefits is made].  

§ P106.02:4   Extrinsic facts favoring an insured’s claim; lack of “proper cause” – third party liability policy

    Facts known to the insurer which are extrinsic to the third party complaint, may give rise to the duty to defend even if the complaint does not reflect a potential of liability under the policy.  See § E59 EXTRINSIC FACTS – DUTY TO DEFEND.

Genuine issue doctrine

    Where a third party complaint alleges facts giving rise to a “potential for coverage” under a liability policy, the genuine-issue-doctrine is not a defense to an insurer’s obligation to provide a defense to the insured.  [Century Sur. Co. v. Polisso (2006) 139 Cal.App.4th 922, 952, 43 Cal.Rptr.3d 468]  See § G11 GENUINE ISSUE DOCTRINE [§ G11:9 Third party liability].

§ P106.02:5   Duties of insured [first party loss]; “proper cause” to deny benefits

    An insurer can withhold payment of a claim made by an insured where the insured has failed to perform required duties described in the policy under the paragraph entitled DUTIES IN THE CASE OF LOSS.  See § D80.04 DUTIES OF INSURED [FIRST PARTY LOSS].  Such duties include:
    
    1.    Giving the insurer timely notice of the loss.  See § N35 NOTICE OF CLAIM OR ACCIDENT.

    2.    Cooperation with regards to the insurer’s investigation as well as the insured protecting the property from further loss.  [Abdel Hamid v. Fire Ins. Exchange (2010) 182 Cal.App.4th 990, 999, 106 Cal.Rptr.3d 26]  See § P15 PROTECT PROPERTY; § E44 EXAMINATION UNDER OATH.

    3.    Providing a proof of loss.  See § P105 PROOF OF LOSS.  

    Until the insured performs required duties and conditions set forth in a first party policy the insurer has “proper cause” to refuse to pay benefits.  [Abdel Hamid v. Fire Ins. Exchange, supra]  See § B20 BREACH OF CONTRACT [§ B20:1.01].  An insurance company has an obligation to assist the insured to recover policy benefits.  See § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:3.5.1].  The insurer cannot perform subterfuges and/or evasions to deprive an insured of policy benefits.  See § B2 BAD FAITH LAWSUIT – FIRST PARTY [§ B2:5.3].

§ P106.02:6   Duties of insured; “proper cause” for insurer to deny claim – third party suit against insured

    An insured has a duty to cooperate with the insurer.  The duty includes a requirement to disclose all pertinent facts, assist in giving evidence.  The policy provides that no action will lie against the insured until all of the policy terms are complied with.  See § C116 COOPERATION CLAUSE.  The liability policy’s claims provisions must be complied with.  See § C31 CLAIM; §C33 CLAIM-MADE POLICY.

    The insured must comply with the liability policy’s “no-action-clause” provisions.  See § N18 NO-ACTION-CLAUSE.  

    The insured must not be in violation of the “no-voluntary-payment” clause.  See § N19 NO-VOLUNTARY-PAYMENT CLAUSE.

    Where grounds exist for the insurer to deny coverage (see § D25 DENIAL OF COVERAGE), the non-payment of policy benefits would be proper. [§ D25:1]

BOLD references are to sections in Bruce Cornblum’s 3-volume text entitled CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE, 2011 Edition.  This 3-volume text is available through Thomson West Publishing at 1-800-344-5008.

Wrap-Up Consolidated Insurance Program

§ W26.02:1    In general; wrap-up insurance policy defined

    A “wrap-up” insurance policy is an insurance policy, or series of policies, written to cover risks associated with a work of improvement as defined in Civil Code § 3106, and covering two or more of the contractors or subcontractors who work on that work of improvement.  [Insurance Code § 11751.82(b)]

    Wrap-up insurance coverage is a Consolidated Insurance Program (CIP).  These programs are used primarily for major construction projects.  As a general rule, construction projects in excess of $50 to $100 million dollars are best suited for CIP treatment.  [Vol. 4 Brunner & O’Connor Construction Law § 11:124]  By obtaining a CIP [also known as OCIP], the owner, or sponsor, procures insurance for himself, the general contractor, subcontractors and employees working on the construction project.  [Liberty Mutual Ins. Co. v. Louisiana Ins. Rating Comm’n (1997, La. App.) 696 So.2d 1021, 1023]  

Endorsements

    Given the nature of a “wrap-up” policy or owner-controlled insurance program (OCIP), various policy endorsements, when read in conjunction with a standard CGL liability policy as a whole restrict and/or limit rather than expand coverage to liability arising out of construction-related incidents in conjunction with the described project.  The endorsements describe in particular:

    1.    The project under construction,
    2.    The project site,
    3.    Describe that the products-completed operations hazard applies, but perhaps with limitations such as a time period of 3 years after final completion,
    4.    stating that the ‘coverage afforded by the policy’ is for the ‘term of the project’ commencing on a specified date.  See Zeitoun v. Orleans Parish School Board (2010 La.App.) 33 So.3d 361, 366  

§ W26.02:2    Purpose of Controlled Insurance Programs (CIPs)

    The purpose of Controlled Insurance Programs (CIPs) is described in 29-SUM CONSLAW 11 (2011) (Reprint of 2009 American Bar Association Article by Kaplan, Bunting, Hobbs entitled OCIPS, CCIPS, and PROJECT Policies).

    A CIP (Consolidated Insurance Program) insures loss exposures for its participants of a single construction site (or, if so described, multiple sites).  The sponsor procures the coverage on behalf of participants, rather than requiring participants to maintain the coverage themselves.  The range of insurance coverage in the CIP varies.  Many CIPs include coverage for commercial general liability (CGL), workers’ compensation, and employer’s liability.  The underlying coverage is characteristically provided through the same insurance carrier, while excess limits are typically purchased from various carriers.  CIP programs are often called “wrap-ups” because they consolidate insurance, claims management, and safety and loss control into one integrated program.  [29-SUM CONSLAW 11 (2011]

CIPs not always looked upon favorably

    CIPs are not always looked upon favorably by the participants that are asked to enroll in them.  The common complaints include poor coverage; coverage gaps; administrative burdens; disputes related to insurance credits; and a participant’s loss of control over its own claims handling.  [29-SUM CONSLAW 11, 13]

What coverage is typically included in a CIP

    The CIP provides coverage only for exposures at the “project”.

    The core coverage provided in a CIP is commercial general liability (CGL) insurance.  CGL policies cover property damage, bodily injury, personal and advertising injury, premises and occupational liability, medical payments and contractual liability, all subject to policy terms, conditions, and exclusions.  CGL policies provide coverage during both ongoing (occurring while work is being performed) and completed (occurring after the work is completed) operations, again subject to policy terms, conditions, and exclusions.

    CIP policies either are specifically crafted ‘manuscript’ policies [see § M16 MANUSCRIPT POLICY] with specific exclusions tailored to a particular project, or are written on a standard form policy.  The Insurance Services Office (ISO) [§ I85 ISO (INSURANCE SERVICES OFFICES, INC.] CGL coverage form, CG 0001 1986 or later, is the form used on most projects; it provides bodily injury and property damage liability coverage.  Regardless of the specific form used, CGL coverage for a CIP should include (but not be limited to) several key provisions to safeguard the sponsor’s interests:  contractual liability; broad-form property damage; CIP liability (usually written on a separate project-specific policy); collapse and underground coverages; personal injury liability, and employee-as-insureds.

Exclusions

    Off-site exposures-exclusions

        CIPs do not cover off-site workers compensation, off-site employer’s liability, off-site general liability, nor excess liability exposures including products liability.  Any products liability claims emanating from products manufactured off-site will have to be covered by an off-site policy, and all participants need to be aware of what is covered and not covered so that they can coordinate their standard insurance programs accordingly.  [29-SUM CONSTLAW 11, 15]

    Excluded professions/trades

        Certain professions and trades are often excluded from controlled insurance programs.  Such professions and trades include: design professionals, demolition contractors, hazardous materials and environmental remediation contractors and their consultants, and those who merely transport materials or persons to and from the project site.  Before submitting a bid for a project, participants need to understand which parties will be excluded from the CIP and make sure that their price includes the cost of covering these exposures.

    Automobile and aircraft/watercraft liability exclusion

        Aircraft and watercraft liability are typically not covered under a CIP.

    “Ongoing operations exposures” limited coverage

        Most CIPs stop the “ongoing operations coverage” when the project is completed, and do not extend it to the warranty period.  [29-SUM CONSTLAW 11, 16]

Purpose of CIP policies

    Due to the proliferation of construction defect litigation [wrap] insurance policies are fast becoming the only option for developers, general contractors and subcontractors who build sing-family or multi-family homes in California. [50 No. 8 DRI For Def. 24, pg 6]

    Because wrap insurance is, by definition, shared risk management, wrap programs constitute a ‘drastic departure from the previous insurance model’.  Most CIPs reverse the previous risk transfer model which model relied upon a false premise that construction defects and job site injuries were caused by subcontractors and not be builders/general contractors.  [50 No. 8 DRI For Def. 24, page 4-5]  This premise, coupled with superior market power, allowed builders and general contractors to transfer virtually all risks, even for claims arising out of the general contractor’s sole or contributory negligence,  to trade (subcontractors) contractors.  As a consequence, a builder’s strict reliance on risk transfer to subcontractors explains the persistent increase in defect litigation and job site injuries. 

    Contrary to the conventional wisdom that subcontractors cause virtually all construction defects and need incentive to perform quality work, subcontractors do not control the work sequences creating the circumstances under which accidents happen and construction defects occur, nor do they ‘enforce fast-track schedules’.  Moreover, subs do not design buildings.  They do not approve value engineering corner-cutting.  They cannot always insure that their work will properly fit with the work performed by later finishing subcontractors, much less that their work will not be wrecked by a later finishing subcontractor in a hurry.  [50 No. 8 DRI For Def. 24, page 5]  Numerous studies of construction losses have concluded that jurisdictions allowing broad risk transfer provisions experience less safe and poorer quality construction than those that do not.  [50 No. 8 DRI For Def. 24, page 6]

    Absent the purchase of an umbrella policy by the participant – subcontractor to the wrap policy, there are numerous gaps and defects.  They are:
    1.    Some general contractors continue using contractual indemnity provisions on wrap projects, which cause a conflict of interest between the parties, who are otherwise “co-insureds” under the wrap policy.
    2.    A wrap policy for a large project often will not have adequate limits to resolve the claims including defense costs.  Multiple defense costs incurred in defending the general contractor and subcontractors accelerate the “burning limits” provision in the wrap policy.  
    3.    Wrap policies incorporate “burning limits” policies in which defense fees erode policy limits.  See § D20 DEFENSE COSTS – SEPARATE FROM OR INCLUDED WITHIN POLICY LIMITS.

§ W26.02:3    California law; indemnity agreements contained in the contractor/subcontractor agreement are void and unenforceable  

    An agreement entered into on or after January 1, 2009 for residential construction that is covered by a wrap-up insurance or other consolidated insurance programs that requires a subcontractor to indemnify, hold harmless or defend another for any claim or action covered by the program is VOID AND UNENFORCEABLE.  The parties may not waive or modify this restriction.  [Civil Code § 2782.9]  See § C105 CONTRACTOR, GOALS OF [§ C105:1]; § S100 SUBCONTRACTOR [§ S100:5 Indemnity agreement]  

        ◆ OBSERVATION [Exceptions set forth in Civil Code § 2782.9]   By express provision in Civil Code § 2782.9, the unenforceability of an indemnity, hold harmless or defense provisions in a subcontract does not preclude any party from pursuing claims for equitable contribution if those claims are not otherwise covered by the policy.  Additionally, the statute does not preclude a contractor from requiring that the subcontractor contribute to premiums, retention or deductibles under the policy, so long as certain statutory disclosure requirements are met.  [Civil Code § 2782.9]

Co-insureds

    Under a wrap-up policy, all named parties are designated co-insureds.  The OCIP “wrap policy” which is purchased by the owner of the project or in some cases general contractor procures insurance for itself, as well as for the general contractor (if the policy is purchased by an owner), subcontractor, and employees working on the described “project”.  [Zeitoun v. Orleans Parish (2010 La. App.) 33 So.3d 361-366  

    An insurer has no right of subrogation against its own insured with respect to a loss or liability for which the insured is covered under the policy.  [McKinley v. XL Specialty Ins. (2005) 131 Cal.App.4th 1572, 1575]  See § S105 SUBROGATION (PROPERTY POLICY) [§ S105:1.1].  In subrogation, because an insurer is seeking the recovery of benefits paid to the named insured, a suit by the insurer against a named insured is the same as a suit by one insured against another.  See § S105 SUBROGATION (PROPERTY POLICY) [§ S105:5 Six essential elements of equitable subrogation].  An insurer cannot seek equitable contribution from an insured.  [Aerojet-General Corp. v. Transport Indem. Co. (1997) 17 Cal.4th 38, 72, 70 Cal.Rptr.2d 118]  See § S110 SUCCESSIVE LIABILITY POLICY [§ S110:6].  And, as described above, a subcontractor agreement which contains a provision requiring the subcontractor to hold harmless a contractor for indemnity and defense costs is void.  [Civil Code § 2782.9]

§ W26.02:4    Required disclosure to subcontractor by owner, builder or general contractor

    The owner, builder or general contractor obtaining a wrap-up insurance policy or other consolidated insurance program must disclose the total amount or method of calculation of any credit or compensation for premium required from the subcontractor or other participant for that wrap-up policy in the contract document.  [Civil Code § 2782.95(a)]

    A contract document must disclose, if and to the extent known:
    1.    the policy limits,
    2.    the scope of policy coverage,
    3.    the policy term,
    4.    the basis upon which the deductible or occurrence is triggered by the insurance carrier,
    5.    the policy covers more than one work of improvement, the number of units, if any, indicated on the application for the insurance policy,
    6.    a good faith estimate of the amount of available limits remaining under the policy as of a date indicated in the disclosure obtained from the insurer.

Copy of insurance policy shall be provided upon request

    Upon the written request of any participant, a copy of the insurance policy must be provided, if available, that shows the coverage terms and items in paragraphs (1) – (4) above.  

§ W26.02:5    Exclusion contained in CGL (non-wrap) policy

    The individual policy of a contractor or subcontractor may have attached to it an exclusion entitled DESIGNATED OPERATIONS COVERED BY A CONSOLIDATED (WRAP-UP) INSURANCE PROGRAM.  The purpose of this exclusion is to prevent duplicate coverage.  If a particular general or sub contractor is covered under the wrap-up insurance program of another, the individual policy will not pay indemnity.  The exclusion can take the following format:

        “This insurance does not apply to ‘bodily injury’ or ‘property damage’ arising out of either your ongoing operations or operations included within the ‘products-completed operations hazard’ at the location described in the schedule of this endorsement, as a consolidated (wrap-up) insurance program as being provided by the prime contractor/project manager or owner of the construction project in which you are involved.

        This exclusion applies whether or not the consolidated (wrap-up) insurance program:
            (1) provides coverage identical to that provided by this coverage parts,
            (2) has limits adequate to cover all claims, or
            (3) remain in effect.”  [See Welcome v. Just Appointments (2008 N.J. Super. A.D.) 2008 WL 2696252, page 2-3]

    ◆  OBSERVATION [Unpublished opinions]:  Unpublished decisions by the court of other jurisdictions may be cited  and considered for their persuasive value.  [Brown v. Franchise Tax Board (1987) 197 Cal.App.3d 300, 306, 242 Cal.Rptr. 810 (Court of Appeal found out-of-state unpublished decisions ‘thoughtful’, ‘illuminating’, and ‘persuasive’ on the points discussed)]  See § C112 CONTROLLING LEGAL AUTHORITY [§ C112:16.3]

Bolds references are to sections in Bruce Cornblum’s text entitled CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE, 2011 Edition (3 volumes) available through Thomson West Publishing at 1-800-344-5008.

© 2011 Thomson Reuters

BREACH OF INSURANCE CONTRACT; REQUIREMENTS FOR PLEADING AND PROOF

Breach of contract; failure to perform

The standard elements of a claim for breach of contract are:

1.    the contract containing the contract terms;
2.    plaintiff’s performance or excuse for nonperformance;
3.    defendant’s breach, and;
4.    damage to Plaintiff therefrom.[Abdelhamid v. Fire Insurance Exchange (2010) 182 Cal.App.4th 990, 999, 106 Cal.Rptr.3d 26]

Insured’s duties under the contract in a first party property policy

A first party property policy lists a number of ‘conditions’ for coverage, including a number of the insured’s ‘duties after loss’.  An important provision is that: ‘In the case of a loss to which the insurance may apply, you shall see that the following duties are performed: … (a) submit to us, within 60 days after we request, the signed, sworn statement of loss which sets forth, to the best of your knowledge and belief: … (b) specifications of any damaged property and detailed estimates for repair of the damage …’.  A failure of the insured to cooperate in producing such information is a failure of performance.  [Abdelhamid v. Fire Insurance Exchange (2010) 182 Cal.App.4th 990, 999, 106 Cal.Rptr.3d 26]  See § D83.04 DUTIES OF INSURED [FIRST PARTY LOSS] [§ D83.04:1 In general]

Breach of contract; disability policies

Under California law, a claim for breach of contract (disability policy) includes four elements:

1.    that a contract exists between the parties;
2.    that the plaintiff performed his contractual duties or was excused from non-performance;

ILLUSTRATION:  If the policy requires that the insured be under the regular care of a physician to obtain benefits, plaintiff must be in compliance with this provision or be excused from this requirement.  [Bravo v. United States Life Insurance Co. (2010 E.D. Cal.) 701 F.Supp.2d 1145, 1157-1158]

3.    that the defendant breached those contractual duties, and;

ILLUSTRATION:  If the insured is unable to perform functions of her former job, defendant/insurer has an obligation to pay benefits and termination is a breach.  [Bravo v. United States Life Insurance Co. (2010 E.D. Cal.) 701 F.Supp.2d 1145, 1155]

4.    plaintiff’s damages were a result of the breach.  [Bravo v. United States Life Insurance Co. (2010, E. D. Cal.) 701 F.Supp.2d 1145, 1155]  See § D50 DISABILITY BENEFITS.

Bad faith instructions

Where a plaintiff/insured is requesting the jury find ‘bad faith’, the instructions must contain elements that have to be proven to establish bad faith.  Such instructions include the requirement that the insurer breached the implied covenant of good faith and fair dealing.  This breach of the implied covenant of good faith and fair dealing necessarily includes a finding by the jury that the insured has been damaged by the insurer’s conduct.  [Amerigraphics Inc. v. Mercury Cas. Co. (2010) 182 Cal.App.4th 1538, 1558, 107 Cal.Rptr.3d 307]

In closing argument plaintiff’s counsel may argue the same evidence that supported breach of contract and bad faith

During closing argument the attorney for plaintiff-insured can argue that the same evidence supporting a finding of breach of contract also supports a finding of bad faith.  [Amerigraphics Inc. v. Mercury Cas. Co. (2010) 182 Cal.App.4th 1538, 1558, 107 Cal.Rptr.3d 307]

* BOLD references are to the 3-volume treatise entitled CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE (4500 pages, 2011 Ed.), which can be purchased from West Publishing at 1-800-328-4880.

JUDICIAL NOTICE OF FACTS ON THE INTERNET

A plaintiff’s attorney may want to prove facts obtained from the internet regarding facts contained in the web page of an insurer or facts contained in the web page of a defendant- insureds web page.  Other uses may include information used during the punitive damage phase such as net worth information regarding public corporations, or facts and propositions that are of such common knowledge that they cannot reasonably be subject to dispute.  The discussion below will be helpful in either proof of such facts or defending against use of such facts obtained from the internet.  The information below is contained in the 2011 Edition of CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE, 3 Volumes, 4500 pages, available from West Publishing after June 15, 2011.

§ J11  JUDICIAL NOTICE – INTERNET

§ J11:1    In general  

Use of evidence obtained from the internet can arise for differing reasons.

a.    Requesting a court to take judicial notice of facts contained in an opposing party’s website for purposes of establishing factual admissions of fact.  [see Ampex Corp. v. Cargle (2005) 128 Cal.App.4th 1569, 1573-1574, 27 Cal.Rptr.3d 863]

b.    Requesting a court to take judicial notice of facts and propositions that are of such common knowledge that they cannot reasonably be subject to dispute.  [Evidence Code § 452(g)(g);  Truong v. Nugyen (2007) 156 Cal.App.4th 865, 882, 67 Cal.Rptr.3d 675]

The contents of a business posting its Securities & Exchange Commission filings for use in a defamation suit can be the subject of judicial notice.  [Ampex Corp. v. Cargle (2005) 128 Cal.App.4th 1569, 1573, 1574, 27 Cal.Rptr.3d 863]  Judicial notice that a server [e.g. Yahoo] offers a financial message board for publically traded companies, contents of messages posted on a message board, may be properly judicially noticed.  [Ampex Corp. v. Cargle, supra]

Public records may be properly judicially noticed.  [U.S. ex rel Dingle v. BioPort Corp. (W.D. Mich. 2003) 270 F.Supp.2d 968, 972]

§ J11:2    Legal basis for requesting judicial notice

Facts and propositions that are of such common knowledge that they cannot be reasonably the subject of dispute can be judicially noticed.  [Evidence Code § 452(g)(h);  Truong v. Nugyen (2007) 156 Cal.App.4th 865, 882, 67 Cal.Rptr.3d 675 (industry report pertaining to jet skis, magazine article, both not judicially noticed.)]  Public records and government documents may be judicially noticed as not being subject to reasonable doubt.  [U.S. ex rel Dingle v. BioPort Corp. (W.D. Mich. 2003) 270 F.Supp.2d 968, 672]

§ J11:3    Objections to request for judicial notice relating to facts obtained on the internet

Objections to print-outs containing evidence may be excluded for one or more reasons.  The hearsay objection is a valid objection.  If the hearsay objection is made by the opposing party, exceptions to the hearsay rule also apply.  If the downloaded print-outs are not offered to show the truth of the matter asserted the hearsay objection will not apply.  [Evidence Code § 1200, Ampex Corp. v. Cargle (2005) 128 Cal.App.4th 1569, 1573, fn. 2, 27 Cal.Rptr.3d 863]

Authentication may be the basis for an objection.  See Evidence Code § 1552.  On the subject of authentication, the print-out may be not properly authenticated.  However cases have recognized that print-outs can be made from website information, and if so such print-outs give rise to ‘self-authentication’.  [Ampex Corp. v. Cargle (2005) 128 Cal.App.4th 1569, 1574, fn. 2, 27 Cal.Rptr.3d 863]

With regards to print-outs from a website, the print-out may not bear the indicia of ‘reliability’ to be admitted.  To be authenticated, some fact established by the evidence, perhaps by declaration or affidavit, with knowledge is usually required.  [Victaulic Co. v. Tieman (2007, 3rd Cir.) 499 F.3d 227, 236]  This is because anyone can purchase an internet address.  Absent evidentiary proof as to authentication, such statements of fact prior to discovery or some other means of authentication may be premature.  It is premature to assume that a web page is owned by a company merely because its name appears on it.  [Victaulic Co. v. Tieman, supra]  A company’s website is a marketing tool, often full of imprecise ‘puffery’.  [Victaulic Co. v. Tieman, supra]

§ J11:4    Request for judicial notice cannot be made the first time on appeal

A fact requested to be judicially noticed must first be presented to the trial court.  Generally, documents and facts that are not presented to the trial court are not part of the record on appeal.  [Truong v. Nugyen (2007) 156 Cal.App.4th 865, 882, 67 Cal.Rptr.3d 675]

§ P123:10.7    Gathering evidence to prove financial condition of defendant

Discovery of financial condition of defendant in circumstances not requiring a court order

The purpose behind Civil Code § 3295 is to minimize prejudice prior to the jury’s determination of a prima facie case of liability for punitive damages.  [Notrica v. State Compensation Ins. Fund (1999) 70 Cal.App.4th 911, 939, 83 Cal.Rptr.2d 89]  Such evidence however is not to be excluded when the information is relevant to liability.  [Notrica v. State Compensation Ins. Fund, supra]  An example is where the defendant allegedly has converted assets and diverted them from entities in which he has an interest to the individual defendants or to corporations which are the alter ego of the defendant.  If the only way a plaintiff can prove his case is to obtain defendant’s financial records, seeking such financial information is proper.  [Rawnsley v. Superior Court (1986) 183 Cal.App.3d 86, 91, 227 Cal.Rptr. 806]

Where financial information is available to the public about a defendant’s financial condition, a court order is not required in order to obtain such public information.  The Securities and Exchange Commission maintains a website containing financial reports regarding the public companies.  (www.sec.gov/edgar.shtml)

Insurance Code § 900 requires every insurer to provide the insurance commissioner with statements exhibits its financial condition and affairs.  This information can be found at the California Department of Insurance website (www.insurance.ca.gov)  At the trial, records obtained from the website of the insurance commissioner can be introduced by having the court take judicial notice of these records.  See § J11 JUDICIAL NOTICE – INTERNET.

Subpoena defendant’s records at the trial

If the court orders discovery pursuant to CCP § 3295(c) or a jury returns a verdict for fraud against a defendant, subpoena of records will be appropriate.  Do not limit the records to net worth, gross income, gross assets.  Other categories in the subpoena should include a request for credit information, audits and reviews, general ledgers, trial balances, balance sheets, income statement records, rent reports, real property statements, loan and credit applications are examples.

* BOLD references are to Mr. Cornblum’s new 3-Volume legal treatise CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE.  You may purchase the treatise by clicking here.

HEALTH INSURANCE POST-CLAIMS UNDERWRITING; California Insurance Commissioner’s 2010 Regulations

Post-claims underwriting; Insurance Code

Insurers subject to the INSURANCE CODE, not the Health and Safety Code, are governed by Insurance Code § 10384 as it relates to post-claims underwriting.  [Nazaretyan v. California Physicians Service (2010) 182 Cal.App.4h 1601, 1608, 107 Cal.Rptr.3d 137]  Insurers licensed under the HEALTH AND SAFETY CODE must comply with Health and Safety Code § 1389.3 as it relates to post-claims underwriting.  [Nazaretyan v. California Physicians Service (2010) 182 Cal.App.4th 1601, 1608, 107 Cal.Rptr.3d 137]  See § U11:2 Post-claims underwriting; health insurance, infra.

In Nieto v. Blue Shield of California Life and Health Ins. Co. (2010) 181 Cal.App.4th 60, 103 Cal.App.3d 906, the Court of Appeal affirmed on multiple grounds the insurer’s rescission based upon intentional or unintentional failure to disclose material information in an application.  [Nieto v. Blue Shield of California Life and Health Ins. Co., 181 Cal.App.4th at pages 76-77]  Nieto, supra, held that the ‘medical underwriting requirements’ in Hailey v. California Physicians Service (2007) 158 Cal.App.4th 452, 463, 69 Cal.Rptr.3d 789 do not apply to an insurer licensed under the insurance code.  [Nazaretyan v. California Physicians Service (2010) 182 Cal.App.4th 1601, 1608-1609, 107 Cal.Rptr.3d 137] See “Medical Underwriting” defined, infra.

Department of Insurance regulations adopted 2010; regulations define prohibited post-claims underwriting and set detailed standards insurers must meet before rescission can take place

The Department of Insurance has adopted regulations governing the Insurance Commissioner’s evaluation of the clarify and simplicity of questions on a health history questionnaire intended to be used for medical underwriting by the insurer.  The regulations prohibit insurers from rescinding, cancelling or limiting an insurance contract unless they can meet the standards set for avoiding prohibited post claims underwriting or if the insurer is unable to prove fraudulent claims or fraudulent assertions on the applications for coverage.  The regulations define prohibited post-claims underwriting and set detailed standards that insurers must meet before they can legally rescind an individual’s health insurance coverage.  [Title 10 Cal. Code Regs. §§ 2274.70 – 2274.78 (2010)]  See § APPENDIX K (Insurance Commissioner Regulations enacted 2010).

Procedures for investigations regarding rescission or cancellation of health insurance

Immediately, but in no event later than seven (7) days after an insurer’s decision to commence an investigation or review regarding whether an insured misrepresented or omitted material information prior to the issuance of a policy, the insurer must send a written notice to the insured that it is conducting an investigation.  [Cal. Code Regs. § 2274.78(d)]  The insurer must clearly describe, in lay terms, the reason for the investigation and the substantive information on which the investigation is based.  It must include with the notice copies of any applicable documents, such as claims, medical records, or other information in the insurer’s possession at the time of the notice.  The insurer must provide to the insured all documents the insurer uses in its investigation that provides the basis for initiating the investigation, except an insurer is not required to provide documents that are otherwise protected by law.  [Cal. Code Regs. § 2274.78(e)]  The insurer conducting the investigation cannot seek information that is not reasonably required for or material to the resolution of the investigation.  The insurer must now request information from the insured that it can obtain directly, including but not limited to medical records.  [Cal. Code Regs. § 2274.78(f)]  The investigation must be completed promptly, but in no event later than ninety (90) days after delivery of the notice of investigation, unless good cause for the delay exists.  [Cal. Code Regs. § 2274.78(g)]  No later than seven (7) calendar days after concluding this investigation, the insurer must send a written notice to the insured, which shall include detailed findings and the insurer’s final determination regarding the insured’s health insurance coverage.  [Cal. Code Regs. § 2274.78(h)]  The notice of findings must state that if the insured believes the decision is incorrect and wishes to dispute it, he or she may have the matter reviewed by the Department of Insurance.  The insurer cannot require the insured to file an appeal with the insurance company before seeking assistance from the Department of Insurance.  [Cal. Code Regs. § 2274.78(i)]

Applicant’s inability to recall or remember information when filing out application

Questions on an application for health insurance must offer the applicant an opportunity to indicate the applicant’s inability to recall or remember the information requested.  To the extent that such response choices impede the insurer’s ability to apply its medical underwriting guidelines, the insurer must pursue alternative methods of obtaining such information including but not limited to telephone interviews, medical records or other sources of information.  [Cal. Code Regs. § 2274.73(d)(5)]

Application questions must provide each applicant with the opportunity to state whether he or she is unsure of the answer, does not know how to respond to any individual health history question, or does not understand the question.  Health history questions must offer response choices IN ADDITION to yes or no, such as not sure.  [Cal. Code Regs. § 2274.73(d)(4)]

Format of questions contained in an application for health insurance

To avoid unclear, ambiguous, or abstruse questions which may be likely to mislead, an application for health insurance cannot:

1.    include compound questions requiring a single answer or questions containing double negatives;
2.    include questions that are unlimited in time and scope unless the insurer’s medical underwriting guidelines based on sound actuary principles reasonably require an unlimited time and scope;
3.    include questions requiring the applicant to evaluate or understand the significance of a physical symptom, or the cause of physical symptoms;
4.    include questions requiring applicant to guess or speculate regarding the kinds of symptoms that may be significant to the health insurer;
5.    include questions phrased to require an applicant to guess or speculate about the significance of  symptoms, conditions, disorders or impairments;
6.    ask the applicant to make an overall appraisal of the applicant’s general health or draw general conclusions about the applicant’s medical health status;
7.    include any questions which solicits or is reasonably calculated to solicit information regarding an HIV test result.  [Cal. Code Regs. § 2274.73(e)(1)-(7)]  See § A78 APPLICATION [§ A78:10 Rescission by insurer; CGL policy].

Required review by insurer of application information prior to issuance of a health policy

Insurers must review the applicant’s responses in, or submitted with, the application for health insurance and identify all responses contained within the application or information submitted with the application that appeared to be (1) inconsistent, ambiguous, doubtful or incomplete, (2) in conflict with information reported elsewhere on the application in conflict with any other information the insurer is aware of or in the insurer’s possession, including but not limited to medical records, “personal health record” (PHR) defined at Cal. Code Regs. § 2274.72(d), prior claim history for an application submitted for coverage provided by the insurer on an earlier date or information provided by an assisting agent. [Cal. Code Regs. § 2274.74(b)(2)]

The insurer must conduct reasonable and appropriate follow-up of any inadequate, unclear, incomplete, doubtful or otherwise questionable or inconsistent material information on the application before issuing a policy.  [Cal. Code Regs. § 2274.74(b)(3)]  The insurer must obtain clarification from the applicant, as reasonable and necessary, and resolve all inconsistencies, doubts and questions prior to issuing a health policy, and document such resolution and explanation of such inconsistencies, doubts and questions.  [Cal. Code Regs. § 2274.74(b)(4)]  With regards to questions the applicant did not understand, or partially answered, or had doubts about the answer to the question, or omitted or provided answers that conflict with other information, the insurer must resolve any such identified uncertainties, questions, conflicts or doubts.  [Cal. Code Regs. § 2274.74(b)(5)]

Insurer prohibited from rescinding policy; circumstances

Unless the insurer has complied fully with the above, the insurer is prohibited from rescinding, cancelling, limiting a policy or certificate, or increasing the rate charged, after receiving: (1) a request for authorization of service or verification of eligibility for benefits, (2) notice of a claim, (3) a claim or a request for a change in coverage or (4) any other communication that puts the insurer on notice of a claim.  [Cal. Code Regs. § 2274.74(c)]

Insurer must return a completed application for health insurer to the insured

At the time of issuance and delivery of a health policy, the insurer must return to the insured a complete copy of the application for health insurance attached to the health policy with an express instruction to the applicant to review the copy of the application.  [Cal. Code Regs. § 2274.77(a)]  Applicant will be asked immediately to contact the insurer if there are any discrepancies on the application compared with the information submitted by the applicant.  [Cal. Code Regs. § 2274.77(b)]  An insurer must not use information on the application unless the application is attached to or endorsed on the policy at the time the policy is delivered to the insured.  [Cal. Code Regs. § 2274.77(c)]

“Medical underwriting” means the process of determining the relative risks of providing health insurance coverage to an individual by examining medical and other information and applying medical underwriting guidelines.  The purpose of medical underwriting is to reject or accept the proposed insurance risk and, if accepted, to set the level of coverage and the rate that will be offered.  [Title 10 Cal.Code Regs. § 2274.72(f)]  Medical underwriting includes, but is not limited to (1) obtaining applicant’s personal health record, (2) obtaining and evaluating commercially available medical underwriting information for each applicant such as commercially available claims data, claims data from prior insurers if available, or commercially available pharmaceutical information, (3) reviewing and evaluating such information, (4) verifying that the information submitted by the applicant is accurate and complete, (5) assessing the prospective risk to the insurer, (6) determining whether to accept the identified risk.  [Title 10 Cal.Code Regs. § 2274.74(a)(1)-(7)]

* BOLD references are to Mr. Cornblum’s 2-Volume legal treatise CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE.  The new 3-Volume 2011 Edition to be published by West Publishing mid-2011.  You may purchase the treatise by clicking here.

Westlaw subscribers:  CAINLAWDDR

INTELLECTUAL PROPERTY EXCLUSION

EXCLUSION: INTELLECTUAL PROPERTY

CGL policies containing coverage B for ‘advertising injury’ will contain an exclusion for suits involving intellectual property.  The exclusion states:

“We won’t cover injury or damage or medical expenses that result from any actual or alleged infringement or violation of any of the following rights or laws:

•   copyright [§ C117 COPYRIGHT COVERAGE UNDER CGL POLICY]
•   patent  [§ P18 PATENT INFRINGEMENT]
•   trade dress  [§ T37 TRADE DRESS]
•   trade name  [§ T39 TRADE NAME]
•   trade secret  [§ T40 TRADE SECRET]
•   trademark  [T41 TRADEMARK INFRINGEMENT]
•   other intellectual property rights or laws.”

“Nor will we cover any other injury or damage that’s alleged in any claim or suit which also alleges any such infringement or violation.  BUT WE WON’T APPLY THIS EXCLUSION to bodily injury or property damage that results from your products or your completed work.  See § C53 COMPLETED OPERATIONS; § P95 PRODUCT HAZARD.  Nor will we apply this exclusion to advertising injury that results from the unauthorized use of any

•   copyrighted advertising material
•   trademarked slogans; or
•   trademarked title;
of others in your advertising.”  (emphasis added)

[see SBCC Inc. v. St. Paul Fire (2010) 186 Cal.App.4th 383, 391, 112 Cal.Rptr.3d 40]

Discussion:   Under the intellectual property exclusion, no coverage is afforded if the alleged injury results from:
1.    misappropriation of trade secrets,
2.    or violation of other intellectual property rights or laws.
3.    The intellectual property exclusion also excludes coverage for ‘… any other injury or damage that’s alleged in any claim or suit which also alleges any such infringement or violation’.  [SBCC Inc. v. St. Paul Fire (2010) 186 Cal.App.4th 383, 396-397, 112 Cal.Rptr.3d 40 (third party suit alleged causes of action for wrongful misappropriation of confidential information from plaintiff plus claiming misappropriation of trade secrets; exclusion applied)]

◆  OBSERVATION:  Where the underlying suit contains patent infringement claims (excluded), intellectual property exclusion eliminates coverage for claims ‘alleged in the suit that also alleges any such infringement’.  [SBCC Inc. v. St. Paul Fire (2010) 186 Cal.App.4th 383, 397, 112 Cal.Rptr.3d 40]  It is to be noted that defamation in unfair competition claims are not clearly within the reach of the intellectual property exclusion.  Also disparaging statements are not ‘directly or indirectly related’ to intellectual property infringement within the meaning of the intellectual property exclusion.  [SBCC Inc. v. St. Paul Fire (2010) 186 Cal.App.4th 383, 397, 112 Cal.Rptr.3d 40 (citing federal court opinions)]  See § A35 ADVERTISING INJURY [§ A35:14.1].

Misappropriation of “method patent” involving “advertising ideas”

Certain patent infringements can constitute advertising injury.  This is described as a “method patent”, i.e. a patent of a “process or invention which reasonably can be an advertising idea”.  Such patented methods are also referred to as marketing methods.  A marketing method is a patent in the form of an electronic system creating customized products by rendering visual images in response to specific request by the potential customer.  In Hyundai Motor America v. National Union the insured Hyundai infringed upon a method patent injuring a third party holder of the patent.  The Court of Appeal held that this process was a “misappropriation of an advertising idea”.  [Hyundai Motor America v. National Union (2010, CA, 9th Cir.) 600 F.3d 1092, 1103 (policy did not contain an intellectual property exclusion as discussed in SBCC Inc. v. St. Paul Fire (2010) 186 Cal.App.4th 383, 397, 112 Cal.Rptr.3d 40]  See analysis § A35 ADVERTISING INJURY [§ A35:18 Exclusions].

◆ COMMENT [Patent infringements are usually excluded]:  Except for limited circumstances, patent infringement allegations are not covered under a commercial general liability (CGL) policy.  See § P18 PATENT INFRINGEMENT [§ P18:1 Liability policy].  A claim of patent infringement does not occur in the course of advertising activities within the meaning of a CGL policy even though the insured advertises the infringing product, if the claim of infringement is based on the sale or importations of the product rather than its advertisement.  [Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 10 Cal.Rptr.2d 538]  More specifically, the advertising activities must cause the injury, not merely expose it to the public.  [Hyundai Motor America v. National Union (2010, CA, 9th Cir.) 600 F.3d 1092, 1103]  Where, however, the patent relates to a ‘process or invention which could reasonably be considered an advertising idea’, which idea is a ‘form of advertising itself’, absent an intellectual property exclusion to the contrary, coverage exists under a CGL policy extending coverage for ADVERTISING IDEAS.  [Hyundai Motor America  v. National Union (2010, CA, 9th Cir.) 600 F.3d 1092, 1103]  See § A35 ADVERTISING INJURY [§ A35:13 Patent infringement not covered].
Exception:  An exception rule that patent infringement is not covered as a “misappropriation of ideas” is where the third party plaintiff alleges the “elements of the advertisement itself, in its context, form, logo, or pictures, rather than in a product being advertised itself”.  [Hyundai Motor America v. National Union (2010, CA 9th Cir.) 600 F.3d 1092, 1101]  This is referred to as a “violation of  a method patent” involving advertising ideas.  [Hyundai Motor America v. National Union (2010, CA 9th Cir.) 600 F.3d 1092, 1100-1101]  See § P18 PATENT INFRINGEMENT [§ P18:2].

* BOLD references are to Mr. Cornblum’s 2-Volume legal treatise CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE.  The new 3-Volume 2011 Edition to be published by West Publishing mid-2011.  You may purchase the treatise by clicking here.

Westlaw subscribers:  CAINLAWDDR

REIMBURSEMENT RIGHTS OF INSURER; THE MADE WHOLE RULE

§ M4   MADE WHOLE*

§ M4:1. In general

Although there is little California case authority regarding the status of an insurer’s subrogation rights when the insurer foregoes participating in the underlying action, the weight of out-of-state case authority supports the proposition that, in some circumstances, the insurer may recover funds paid to the insured by a legally responsible third party, even though the insurer did not participate in the insured’s legal action against the third party. [Hodge v. Kirkpatrick Development, Inc., 130 Cal. App. 4th 540, 553, 30 Cal. Rptr. 3d 303 (4th Dist. 2005); Plut v. Fireman’s Fund Ins. Co., 85 Cal. App. 4th 98, 104, 102 Cal. Rptr. 2d 36 (2d Dist. 2000)] See § O12 OFFSITE.

It is a general equitable principle of insurance law that, absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for his or her injuries, that is, has been made whole. Thus, absent the right to intervene, the insurer is to a large extent at the mercy of its insured’s efforts and success in recovering from the responsible third party. [Hodge v. Kirkpatrick Development Inc.] See § S105 SUBROGATION (PROPERTY POLICY) [Six essential elements of equitable subrogation].

§ M4:2. Legislative limitations on certain health care insurers

In 2000, the California Legislature passed a bill placing limits on contractual liens of certain health care insurers. [Civil Code § 3040] The limitations apply to Kaiser [Civil Code § 3040(a)(2)], HMO and insurance carriers. [Civil Code § 3040(b)] Attorneys fees and costs are allowed under a common fund deduction. [Civil Code § 3040(f)]

§ M4:3. Made Whole Rule in California

The made-whole rule is a rule that protects first-party insurance policy insureds from insurer reimbursement claims after a recovery from a third party tortfeasor.

The made-whole rule is a common law principle that limits the insurer’s reimbursement right in situations where the insured has not recovered his or her ‘entire debt’. The rule precludes an insurer from recovering any third party funds paid to the insured until the insured has been ‘fully compensated for his or her injuries’. [21st Century Ins. Co. v. Superior Court, 47 Cal. 4th 511, 519, 98 Cal. Rptr. 3d 516, 213 P.3d 972 (2009)]

Rule usually applies to under-insurance

California courts recognize a made-whole rule when, typically due to under-insurance, the tortfeasor could not pay his or her ‘entire debt’ to the insured: ‘The general rule is that an insurer that pays a portion of the debt owed to the insured is not entitled to reimbursement on that portion of the debt until the debt is fully discharged.” [21st Century Ins. Co. v. Superior Court, 47 Cal. 4th 511, 519, 98 Cal. Rptr. 3d 516, 213 P.3d 972 (2009) (rule applies to automobile insurance policies)]

When an insurance company pays out a claim on a first-party insurance policy to its insured, the insurance company is subrogated to the rights of its insured against any tortfeasor who is liable to the insured for the insured’s damages. [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 272, 37 Cal. Rptr. 3d 434, 444 (3d Dist. 2005)] To preserve its right of subrogation, the insurance company must either interplead itself into any action brought by the insured against the third party tortfeasor, or wait to seek reimbursement under the language of its policy from its insured to the extent that the insured recovers money from the third party. See § M31 MEDICAL PAY REIMBURSEMENT TO FIRST PARTY AUTOMOBILE INSURER; § S105 SUBROGATION (PROPERTY POLICY) [Insurer’s right to recoup payments directly from the insured’s recovery; right of insured to be “made whole”].

It is a general equitable principle of insurance law that absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for his or her injuries, that is, has been MADE WHOLE. [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 274, 37 Cal. Rptr. 3d 434 (3d Dist. 2005)]

§ M4:3.01 Reserved
§ M4:3.02 Reserved

§ M4:3.03  Attorney’s fees incurred by insured in recovering third party personal injury damages from a tortfeasor is not included in the made-whole rule

The made-whole rule does not require the insurer to pay for attorney’s fees in personal injury actions. [21st Century Ins. Co. v. Superior Court, 47 Cal. 4th 511, 527, 98 Cal. Rptr. 3d 516, 213 P.3d 972 (2009)] The auto liability insurance company has not been paid a premium to bear responsibility for the entire amount of attorney’s fees and costs the insured needs to spend in order to recover third party personal injury damages. [21st Century Ins. Co. v. Superior Court, 47 Cal. 4th 511, 527–528, 98 Cal. Rptr. 3d 516, 213 P.3d 972 (2009)]

If however the third party personal injury recovery includes recovery of medical payments (e.g. $1000 med-pay coverage paid during litigation) the insured is entitled to a prorata reduction in repayment of the $1000 medical payments made pursuant to an existing reimbursement provision. [21st Century Ins. Co. v. Superior Court, 47 Cal. 4th 511, 527–528, 98 Cal. Rptr. 3d 516, 213 P.3d 972 (2009)] As described by Justice Kennard in her concurring opinion, medical payments coverage is not legal-expense-coverage. [47 Cal.4th 511, 528]

§ M4:3.1. “Agreement to the contrary”; Illustration

There is authority that language in an insurance policy that grants the insurance company all rights of recovery to the extent of its payment overrides the common law MADE-WHOLE RULE. [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 274, 37 Cal. Rptr. 3d 434, 443–444 (3d Dist. 2005)] To the extent that such a rule in fact exists, any contractual provision that intends to vitiate the MADE-WHOLE rule must clearly and specifically give the insurer a priority of proceeds from the tortfeasor regardless of whether the insured was first made-whole. [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 274, 37 Cal. Rptr. 3d 434 (3d Dist. 2005)]

§ M4:3.2. Illustrations; insufficient reimbursement provisions

A provision in a Progressive automobile insurance policy stating: “Progressive is entitled to all rights of recovery that the insured person to whom payment was made has against another”, and in a separate paragraph stated, “When an insured person has been paid by us under this policy and also recovers from another person, entity or organization the amount recovered, the insured person will hold the amount in trust for Progressive and reimburse to Progressive to the extent of our payment”, said two provisions were insufficient to overcome the MADE-WHOLE rule. The provisions did not state the necessary language that the insurer was entitled to reimbursement and subrogation regardless of whether the total amount of recovery of the insured IS LESS THAN THE ACTUAL LOSS SUFFERED BY THE MEMBER. [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 275, 37 Cal. Rptr. 3d 434 (3d Dist. 2005)] In addition, the policy could have provided that the insured in fact assigned or transferred all rights to Progressive to the extent of the insurance company’s payment as in Travelers Indem. Co. v. Ingebretsen, 38 Cal. App. 3d 858, 865, 113 Cal. Rptr. 679 (2d Dist. 1974). [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 275, 37 Cal. Rptr. 3d 434 (3d Dist. 2005)]

In Sapiano v. Williamsburg Nat. Ins. Co., 28 Cal. App. 4th 533, 538–539, 33 Cal. Rptr. 2d 659 (2d Dist. 1994), the policy contained a reimbursement provision: “If any person or organization to or for whom we make payment under this coverage form has rights to recover damages for another, those rights are transferred to us.” This provision was not sufficient to overcome the made-whole rule [28 Cal.App.4th at pgs. 538–539] for the same reasons discussed above. [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 274–275, 37 Cal. Rptr. 3d 434 (3d Dist. 2005)

§ M4:3.3. Illustration: sufficient to overcome made-whole rule

In dictum, Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 274–275, 37 Cal. Rptr. 3d 434 (3d Dist. 2005) approved the provision in Samura v. Kaiser Foundation Health Plan, Inc., 17 Cal. App. 4th 1284, 1289–1290, 22 Cal. Rptr. 2d 20 (1st Dist. 1993), which states: “Health plan (or its designee) shall be entitled to the payment, reimbursement and subrogation as provided in this section C(1) regardless of whether the total amount of the recovery of the Member (or his or her estate, parent or legal guardian) on the account of the injury or illness is less than the actual loss suffered by the Member (or his or her estate, parent or legal guardian).

§ M4:4. Made-whole rule is an equitable doctrine

The made-whole rule and the common-fund doctrine are both doctrines of equity that limit what the insurance company is entitled to receive in reimbursement from its insured. [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 282, 37 Cal. Rptr. 3d 434 (3d Dist. 2005)]

§ M4:5. Made-whole rule is part of the insurance contract

The made-whole rule and the common-fund doctrine are considered part of the insurance contract. [Progressive West Ins. Co. v. Yolo County Superior Court, 135 Cal. App. 4th 263, 282, 37 Cal. Rptr. 3d 434 (3d Dist. 2005)]

§ M4:6. Amount included within the made-whole rule

Where the insurer foregoes participating in the underlying action against the third party tortfeasor to recover funds paid to the insured by legally responsible third party, but seeks to recover from a settlement of the action between the insured and a third party, the insured need not account to the nonparticipating insurer for more than the surplus remaining in the insured’s hands, after satisfying his [insured’s] loss in full and his reasonable expenses incurred in the recovery. [Plut v. Fireman’s Fund Ins. Co., 85 Cal. App. 4th 98, 104–105, 102 Cal. Rptr. 2d 36 (2d Dist. 2000)] See § S105 SUBROGATION (PROPERTY POLICY) [§ S105:8 Insurer’s options to pursue subrogation when insured sues third party tortfeasor for damages]; § O11 OFFSETS, INSURER’S ENTITLEMENT TO.

Distinction; personal injury, med-pay provision

Plut v. Fireman’s Fund Ins. (2000) 85 Cal.App.4th 98, 104-105, 102 Cal.Rptr.2d 36, discussed above, involved a recovery by the insured against an insurance company in a first party policy suit.  See § O11 OFFSETS, INSURED’S ENTITLEMENT TO [§ O11:3].  In 21st Century Ins. v. Superior Court (2009) 47 Cal.4th 511, 527-528, 98 Cal.Rptr.3d 516, discussed in § M4:3.03, supra, the issue was limited to reimbursement of med-pay benefits to the insurer after a personal injury recovery was made on behalf of the insured..  21st Century applied the common fund apportionment rule regarding attorneys fees to reduce the med-pay reimbursement amount to the insurer.  See § C48.04 COMMON-FUND DOCTRINE; § M31 MEDICAL PAY REIMBURSEMENT TO FIRST PARTY AUTOMOBILE INSURER [§ M31:2 Offset or reduction of plaintiff’s attorney fees].

* BOLD references are to Mr. Cornblum’s 2-Volume legal treatise CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE.  The new 3-Volume 2011 Edition to be published by West Publishing mid-2011.  You may purchase the treatise by clicking here.

COMPLETED OPERATIONS – CGL COVERAGE

Coverage provided by products-completed operations hazard

Standard language of the products-completed operations hazard coverage employs standard language promising the insured coverage against claims for property damage ‘arising out of … ‘your work’ except for … work that has not yet been completed’. This type of coverage ordinarily is conditioned on damage occurring during the policy period, as long as the work was completed before the damage occurred, and is not conditioned on when the work was completed. The protection provided by this products-completed operations hazard provision appears to require three conditions:

1. there was property damage,

2. it arose ‘out of your work’ and, [see § W21.02 WORK]*

3. ‘your work’ has been COMPLETED. [see § P95 PRODUCTS HAZARD [§ P95:2.1 Date of occurrence]]

Nothing in the products-completed operations hazard suggests the second (2) element – the insured’s work caused the damage – was itself subject to a fourth condition that the insured’s work happened during the policy period. [Pennsylvania General Ins. v. American Safety Indem. Co. (2010) 185 Cal.App.4th 1515, 1532-1533, 111 Cal.Rptr.3d 403] Thus, with regards to the second (2) element – the insured’s work caused the damage –, ‘your work’ could have happened prior to the policy period. [Pennsylvania General Ins. v. American Safety Indem. Co. (2010) 185 Cal.App.4th 1515, 1533, 111 Cal.Rptr.3d 403] See § O5 OCCURRENCE [§ O5:5.1]

‘Work in progress’ ‘damage’ occurring ‘during’ the policy period is not completed operations

A CGL policy defines ‘occurrence’ as an accident, including continuous or repeated exposure to the same general harmful conditions. See § O5 OCCURRENCE/ACCIDENT, §§ O5:3.1 – O5:4. The insuring agreement states that: “We will pay those sums as damages because of … ‘property damage’ to which this insurance applies …” “This insurance applies to bodily injury or property damage only if the bodily injury or property damage occurs during the policy period.” See § P61 POLICY TERM [§P61:2 Insuring clauses requiring loss or damage during the policy term].

CGL exclusion j(5); does not apply to “completed operations”

Exclusion j(5) applies to damages involving ‘work in progress’. Exclusion j(5) does not apply to completed operations. [Advantage Home Building LLC v. Maryland Cas. Co. (2006, 10th Cir.) 470 F.3d 1003, 1010-1011 (contractor installed damaged-defective windows, damaged during construction but discovered only after homeowner moved in)] See § C107 CONTRACTOR’S LIABILITY POLICY [§ C107:17].

Manifestation of damage before expiration of policy term; significance of

An EVENT causing loss or damage that does not manifest [see § M14:5 Liability policy] before the expiration of the policy term is not covered under a CGL policy not containing completed operations coverage. § P61 POLICY TERM (PERIOD) [§ P61:1]. A product liability policy in effect when the defective product was manufactured does not cover a claim for injuries suffered seven years later. Schrillo Co. v. Hartford Acc. (1986) 181 Cal.App.3d 766, 773, 226 Cal.Rptr. 717] Thus, if a contractor installed a gas boiler which, six years later, caused a fire to the home, the contractor’s liability policy in effect at the time of the negligent installation, would not cover the loss. [Maples v. Aetna (1978) 83 Cal.App.3d 641, 647, 148 Cal.Rptr. 8] However, if the same contractor had a CGL policy in effect six years later when the damage occurred, this policy would cover the contractor. [Garriott Crop v. Superior Court (1990) 221 Cal.App.3d 783, 270 Cal.Rptr. 678] See § M14 MANIFESTATION OF DAMAGE [§ M14:5 Liability policy].

A contractor or subcontractor may allow the CGL policy in effect when the construction work is taking place to lapse with no CGL policy taking its place. Based upon the above, if the contractor or subcontractor caused defective work, but such defective work did not cause damage until after work was completed, there would be no coverage available to the contractor or subcontractor. The way that this can be prevented is if a contractor or subcontractor requested the inclusion of ‘products-completed operations coverage’. [See Hawkeye Security Ins. v. Davis (1999, Ct. App. Mo.) 6 S.W.3d 419, 424; Pardee v. Ins. Co. West (2000) 77 Cal.App.4th 1340, 1360-1361, 92 Cal.Rptr.2d 443 (“Damage resulting from subcontractor’s work often does not arise for years. It is thus prudent for general contractors to obtain completed operations coverage …”.)]

‘Completed operations’ coverage is supplemental coverage to coverage A and is not a separate policy.

Completed operations coverage affords the same type of coverage for damages occurring after completion of the insured’s work and away from the insured’s premises. The ‘products-completed operations hazard’ is not a separate policy but a SUBPART of the entire policy. [American Home Assur. v. AGM Marine Contractors (2005 D.C. Mass.) 379 F.Supp.2d 134, 136 (no coverage under completed operations provision where an occurrence did not happen during the policy term)] This provision, when properly construed as a subpart of the entire policy, describes coverage within the policy for the same type of injuries or damages covered by the rest of the policy save for a different period of time. [Hawkeye Security Ins., supra, 6 S.W.3d at p. 425 (absent an accident or occurrence during the policy term, builders warranties were not covered under ‘products-completed operations’.

‘Premises operations’ coverage/occurrence coverage applies when property damage occurs during the policy period

It is important to distinguish between an (1) accident occurring during the policy term which does not cause damage from (2) an accident or occurrence that occurs during the policy term which causes damage during the policy term. As seen above INJURY or DAMAGE must ‘occur’ during the policy term for there to be coverage under a CGL policy. See § P61 POLICY TERM (PERIOD) [§ P61:4]. Under a CGL policy property damage may occur even though its occurrence did not manifest itself during the policy period. The third party CGL policy does not impose, as a condition of coverage, a requirement that the damage or injury be discovered in any particular point in time. [County of San Bernardino v. Pacific Indem. Co. (1997) 56 Cal.App.4th 666, 684, 65 Cal.Rptr.2d 657]

Continuous or progressive damage covered under ‘occurrence/operations’ not under completed operations coverage

In continuous or progressive damage third party liability cases resulting in bodily injury or property damage, the ‘trigger’ (e.g. injury or damage) for coverage can occur before or during the policy period. Either is the date of discovery of the damage or injury controlling. It might or might not be contemporaneous with the causal event (e.g. negligent act). It is only the EFFECT – the occurrence of bodily injury or property damage during the policy period, resulting from a sudden accident or the ‘continuous or repeated exposure to conditions’ – that triggers potential liability coverage. [Montrose Chem. Corp. v. Admiral Ins. (1995) 10 Cal.4th 645, 675, 42 Cal.Rptr.2d 324, 340]

Concealed deficiencies in real property

Concealed injury or damage, those defects that are not apparent during a reasonable inspection are covered under a CGL policy where the deficiencies (e.g. injury or damage), caused by the insured’s negligent design and construction, gives rise to claims for ‘property damage’ during the policy term. This is so even though the policy’s extending coverage to the insured have expired before the third party purchaser discovers the loss. [Century Indem. v. Hearrean (2002) 98 Cal.App.4th 734, 740, 120 Cal.Rptr.2d 66] See § D62 DISCOVERY OF PROPERTY DAMAGE [§ D62:3]

Meaning of “does not apply to property damage included in the ‘products-completed operations’ hazard”

Exclusion j(6) as it relates to ‘products-completed operations’ hazard is intended to exclude coverage for the cost of restoring, repairing or replacing faulty workmanship on the part of the insured, its contractors and subcontractors. More specifically, it is intended to exclude property damage that directly or consequentially occurs from the FAULTY WORKMANSHIP of the insured and its contractors/subcontractors (i.e. work that is ‘incorrectly’ performed while the work is ‘ongoing’). [Advantage Home Building LLC v. Maryland Cas. Co. (2006, 10th Cir.) 470 F.3d 1003, 1012] Exclusion j(6) is intended to bar defective workmanship claims. The express exception to exclusion j(6) allows an insured to recover consequential damages that arise out of his or her faulty workmanship AFTER THE COMPLETION OF THE WORK. [Advantage Home Building LLC v. Maryland Cas. Co. (2006, 10th Cir.) 470 F.3d 1003, 101012]

ILLUSTRATION [Damage occurring after work completed]:

Assume that a contractor is building a home for a third party. The contractor first erects the walls and completes the roof and then begins finishing the interior. Unfortunately, the roofing was poorly installed and later leaks, thereby damaging partially completed parquet floors. The damage to the floors [which was a consequence of the faulty workmanship that occurred at a time after the work was completed] would be covered but replacement of the poorly constructed roof [which was the direct result of faulty workmanship that occurred while the work was ongoing] would be EXCLUDED. [Advantage Home Building LLC v. Maryland Cas. Co. (2006, 10th Cir.) 470 F.3d 1003, 1012]

* BOLD references are to the 2-volume treatise entitled CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE (4000 pages, 2010 Ed.), which can be purchased from West Publishing at 1-800-328-4880.

INSURANCE LAW AND THE “GEORGE COURT” FROM 1996 – 2010

CHIEF JUSTICE RONALD GEORGE RETIRES

Chief Justice Ronald George was appointed by Governor Pete Wilson to succeed Chief Justice Malcolm Lucas in mid-1996.

From an outsider’s perspective, which is the perspective of the author, based upon a review of professional articles written, Chief Justice George’s legacy will be linked to the management of the court system.  He led the 27 member Judicial Counsel which supervised the largest court system in the country, overseeing the administration of the courts, promulgating policy and procedure.  [41 McGeorge Law Review, page 581, fn. 15]  Chief Justice George oversaw the transfer of ownership of court facilities from the counties to the State.  Funding for the courts during his tenure was transferred from the counties to the State.  The exchange transformed the judicial branch from a lose confederation of locally orientated courts into an organized, state-wide presence that speaks for the state court system as a whole, a system being dedicated to improving fair and accessible administration of justice for all Californians.  [97 Cal. Law Review, page 1853, 1854-1855 (2009)]

At a time before Chief Justice George’s appointment, Associate Justice Stanley Mosk wrote in a dissenting opinion in 1989:  “In this court, the insurer wins and the insured loses.”  [Garvey v. State Farm (1989) 48 Cal.3d 395, 416, 417]  Over time, the George Court changed this perspective.  The change was assisted by Justice Janice Brown leaving the court in 2005 as well as the appointments of Justice Moreno and Justice Corrigan, coupled with the presence of Justice Kennard.

Justice Lucas, appointed in 1986 after Chief Justice Bird was ousted by the electorate, changed direction of the Supreme Court in insurance related matters from liberal activism to conservative jurisprudence.  [40 Santa Clara Law Review, page 863, 882 (2000)]  Justice George, who succeeded Justice Lucas, was seen as somewhat less conservative than Lucas.  [40 Santa Clara Law Review, footnote 56]

As chronicled in this INTRODUCTION, the early years of the George court brought “more of the same”, appearing to continue on with a philosophical bent that was described by Justice Mosk in his dissent in Moradi-Shalal v. Fireman’s Fund Ins. (1988) 46 Cal.3d 287, 313-314, quoted in this INTRODUCTION at page xvii, supra.  Aas v. Superior Court (2000) 24 Cal.4th 627 was so egregious that it led the Legislature to act to overrule its holding.  See § C85 CONSTRUCTION DEFECTS [§ C85:9.2].  PPG Industries v. Transamerican Ins. (1999) 20 Cal.4th 310 excluded punitive damages from an excess verdict notwithstanding the fact that the insurer had an opportunity to settle prior to trial and wrongly failed to do so.  Palmer v. Truck Ins. (1999) 21 Cal.4th 1109, authored by Justice Janice Brown, construed ‘advertising injury’ under a 1973 industry form policy against the insured.  Kazi v. State Farm (2001) 24 Cal.4th 871 held that economic loss caused by a loss of rights in easement is not property damage under a CGL policy.  Henkel Corp. v. Hartford Ins. (2003) 29 Cal.4th 934 (successor corporation limited right to defense and indemnity under a predecessor’s liability policy).  Rosen v. State Farm (2003) 30 Cal.4th 1070 strictly interpreted collapse coverage adversely to the insured; opinion by Justice Janice Brown.  Hameid v. National Fire Ins. of Hartford (2003) 31 Cal.4th 16 interpreted “advertising injury” against the insured.   Julian v. Hartford Underwriters (2005) 35 Cal.4th 747 modified the efficient proximate cause rule against the insured.  Boghos v. Certain Underwriters (2005) 36 Cal.4th 495 enforced an arbitration provision contained in a disability policy against an insured; discussed in this INTRODUCTION at page xxv.  Powerine Oil v Superior Court (2005) 37 Cal.4th 377 limited the duty of the insurer to defend an insured in administrative claims

The above is not meant to state that the insured was not being heard prior to 2004-2006.   See Vandenberg v. Superior Court (1999) 21 Cal.4th 815, overruled seven Court of Appeal opinions which applied the ex contractu / ex delicto distinctions in determining whether coverage would be available where an insured acted in breach of contract; Kransco v. American Empire (2000) 23 Cal.4th 390, 394 (comparative fault held not to be a defense to insurer bad faith).

Commencing 2004 a most important doctrine, under attack in the Court of Appeal, was preserved and expanded.  The doctrine related to the acts of ‘bad faith’ performed by the insurer in not paying benefits when due.  Assisted by the change in Court personnel, as described, the George Court has ruled favorably and consistently for the insured where the insurer has performed “wrongful” conduct in adjusting claims. In Cassim v. Allstate (2004) 33 Cal.4th 780, first party bad faith, adjusting a fire loss under a homeowners policy was affirmed.  Importantly, “Brandt” fees were preserved.  In Essex Ins. v. Five Star Dye (2006) 38 Cal.4th 1252, an assignee of an insured was held entitled to claim Brandt fees.  Pilimai v. Farmers Ins. (2006) 39 Cal.4th 133 held that an offer made pursuant to CCP § 998 applied to UM arbitrations.  Wilson v. 21st Century Ins. (2007) 42 Cal.4th 713 described in great detail the performance of bad faith adjusting in auto claims.  In State of California v. Allstate Ins. (2009) 45 Cal.4th 1008, the Supreme Court preserved and expanded the holding in State Farm v. Pritchard from first party property insurance to third party liability policies; see § C62.02 CONCURRENT CAUSE.  Recently in Minkler v. Safeco Ins. (2010) 49 Cal.4th 315, the Court applied a severability clause contained in homeowners and CGL policies to protect coverage for innocent or negligent co-insureds who are sued due to the intentional sexual acts of a co-insured.  See § S28 SEVERABILITY CLAUSE.  Ameron International Corp. v. Insurance Co. of Pennsylvania (2011) 50 Cal.4th 1370, holding that a proceeding commenced and heard before a ‘quasi-judicial proceeding’ before the United States Interior Civilian Board of Contracts was a “suit” and a “court proceeding”.  Ameron International distinguished Foster-Gardner Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857 and Certain Underwriters v. Lloyds (2001) 24 Cal.4th 945, 960.  See § S116 SUIT.  In her concurring opinion in Ameron International, Justice Kennard stated her belief that the holding in Ameron overruled Foster-Gardner and Certain Underwriters.

Perhaps the most important decisions of the George Court assuring fairness for the insured into the future are those opinions relating to policy interpretation.  Justice Moreno played an important role in these decisions.  In MacKinnon v. Truck Ins. (2003) 31 Cal.4th 635 the Supreme Court sub silento eliminated the previously mandated three-step AIU process for insurance policy interpretation. See § A66 AMBIGUITY [§ A66:4.1 After AIU v. Superior Court].  Confirming the MacKinnon interpretation approach was the opinion of EMMI v. Zurich American (2004) 32 Cal.4th 465.  See § A66 AMBIGUITY [§ A66:4.1.1].  The sum and substance of the above allows the insured to allege and prove by extrinsic facts the principle:  “An insurer’s reasonable interpretation of a policy exclusion will not cause it to prevail in the absence of establishing that its (insurer) interpretation is the only reasonable one”.  [MacKinnon v. Truck Ins. (2003) 31 Cal.4th 635]

The George Court, over time, embedded in insurance law even handedness, fair mindedness, replacing political philosophy as a factor in interpreting liability and property policies.

Chief Justice George, thank you for serving.

Bold references are to sections in Volumes 1 and 2 of CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE, 2010.  The above article is from the INTRODUCTION to CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE, 2011 Edition, to be published in June 2011.