Business Law

APPELLATE LAW UPDATE

October – December 2024 APPELLATE LAW UPDATE

The following published decision may be of interest to attorneys practicing insurance law:

CALIFORNIA COURT OF APPEAL

Insurance broker who helped the plaintiff simultaneously procure both a Farmer’s policy and a FAIR Plan policy was not the actual or ostensible agent of Farmer’s with respect to the FAIR Plan policy. Hughes v. Farmer’s Insurance Exchange (2024) 107 Cal.App.5th 73.

Plaintiff obtained two insurance policies covering her home: a FAIR Plan policy covering fire loss and a Farmers policy covering other perils and excluding coverage for anything covered by the FAIR Plan policy. Maritzka Hartnett, an independent insurance broker who had an agreement to sell Farmers policies, assisted plaintiff in obtaining both policies. After plaintiff suffered significant fire damage to her property exceeding the FAIR Plan policy limit, plaintiff sought coverage from Farmers. Farmers denied coverage. Plaintiff sued Farmers, alleging that Hartnett was acting as Farmers’ agent when she procured both policies, and that Farmers was therefore vicariously liable for Hartnett’s negligence in failing to procure sufficient insurance coverage for plaintiff. Farmers successfully moved for summary judgment on the ground that Hartnett was not acting as its actual or ostensible agent when she helped plaintiff procure the FAIR Plan policy.

The Court of Appeal (Second Dist., Div. Seven) affirmed. Hartnett’s agent appointment agreement with Farmers did not include authority to act on Farmers’ behalf to sell FAIR Plan policies. Further, FAIR Plan policy itself listed Hartnett as plaintiff’s “insurance broker” (rather than as FAIR Plan’s or anyone else’s “insurance agent”), which meant that Harnett was acting as the plaintiff’s agent in procuring the policy. The appellate court rejected the plaintiff’s arguments that Hartnett’s use of Farmers’ logo and software served as substantial evidence of agency.

Abuse/molestation exclude barred coverage for claims against spa owner for negligent training of employee who sexually assaulted customers. Gordon v. Continental Casualty Co. (2024) 107 Cal.App.5th 89.

Massage spa owner Zongwei Shen purchased a commercial liability policy from Continental Casualty Company that contained an exclusion for injuries “arising out of: (a) The actual or threatened abuse or molestation by anyone of any person while in the care, custody or control of any insured, or (b) The negligent: (i) Employment; (ii) Investigation; (iii) Supervision; (iv) Reporting…; or (v) Retention” of persons for whom the insured is legally responsible. Three women sued Shen and his wife Xin (the spa’s manager) alleging Shen sexually assaulted them during massage sessions. Continental refused to defendant. Shen and Xin stipulated to liability resulting in a $6.8 million judgment, and then assigned their rights against Continental to the plaintiffs. Continental successfully moved for summary judgment on the ground the abuse and molestation exclusion applied.

The Court of Appeal (Second Dist., Div. Seven) affirmed. The exclusion barred coverage for Shen’s direct liability because the women were under his “care, custody or control” when he molested them. The court rejected the plaintiffs’ argument that “care, custody or control” required complete control, because cases requiring that level of control involved property damage. People are not subject to the same types of “control” as property, and here, the fact the women were being massaged by Shen was sufficient to place them under his “care” under the plain meaning of that word. The exclusion also barred coverage for the negligent training claims against Xin. Although the word “training” was not specifically mentioned in the exclusion, it is encompassed within the claim for negligent supervision. Any other result would allow plaintiffs to avoid limitations on coverage simply by using synonyms for excluded acts in their pleadings. In a footnote, the court rejected a suggestion that some plaintiffs’ claims had to be defended if any of them did, noting that the “mixed action” doctrine (requiring defense of an entire action if any claim is potentially covered) only applies to multiple claims by a single plaintiff, not to multiple plaintiffs where only one plaintiff’s claims would be potentially covered.

NINTH CIRCUIT

Common questions did not predominate in purported class action seeking reinstatement of lapsed life insurance policies after insurer failure to comply with statutory notice of cancellation provisions. Small v. Allianz Life Insurance Company of North America (2024) 122 F.4th 1182.

LaWanda Small sued Allianz Life Insurance alleging that the insurer violated California Insurance Code sections 10113.71 and 10113.72 by failing to follow proper notice procedures before cancelling her husband’s life insurance policy for nonpayment of premiums. The district court certified two subclasses: a “Living Insured Subclass” seeking reinstatement of lapsed policies, and a “Beneficiary Subclass” (which included Small) seeking damages for death benefits where the insured had died.

The Ninth Circuit reversed the class certification order. Because the statutes do not create a private right of action, a plaintiff must allege the elements of common law breach of contract to state a claim for violation of the statutes. Thus, a plaintiff would have to show a violation of the statutes caused her harm before she could recover. In adopting this “causation theory” of liability for violation of the statutes, the court rejected a “violation-only theory” that would permit a claim based solely on allegations that the notice provisions were violated. The court adopted the “causation theory” because life insurance policies often lapse intentionally when policyholders choose to stop paying premiums, and the statutes were meant to prevent inadvertent, not intentional, lapses. Thus, only those policyholders that could show that they would have reinstated their policies had they received proper notice of cancellation were actually harmed by the lack of proper notice and could therefore state a claim. Given this requirement to show causation, individual questions about whether each policyholder intentionally or inadvertently let their policy lapse would predominate over common questions, defeating class certification. Further, Small was not an adequate class representative because, as a beneficiary only, she could not represent the Living Insured Subclass seeking reinstatement.

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.


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