The following published decisions may be of interest to attorneys practicing insurance law:
CALIFORNIA COURT OF APPEAL
Insurance Code section 533 does not bar coverage for employment retaliation claims under Labor Code section 1102.5, subdivision (c). City of Whittier v. Everest National Insurance Co. (2023) 97 Cal.App.5th 895.
Everest issued several liability policies covering the City of Whittier. The policies included coverage for compensation paid to others for an “employment practice liability wrongful act” including “retaliation.” A group of police officers sued the city alleging that in violation of Labor Code section 1102.5, the city retaliated against them for failing to comply with an unlawful ticketing quota and reporting the unlawful quota. The case settled at mediation. The city tendered a request for indemnity to Everest, which Everest denied. The city filed suit for breach of contract and bad faith. The trial court granted summary judgment for Everest on the ground that Insurance Code section 533 [barring insurance coverage for “willful” acts] precluded indemnity for the settlement. The court reasoned that whistleblower retaliation under Labor Code section 1102.5 requires proof of the employer’s motive and intent to violate or frustrate the whistleblower protection laws and therefore involved inherently intentional conduct that is uninsurable.
The Court of Appeal (Second Dist., Div. One) reversed. Labor Code section 1102.5, subdivision (c) [prohibiting retaliation for employee’s failure to participate in an activity that would violate law] does not require willful conduct as a precondition of liability. Under that subsection, where an employer has a good faith belief that the activity it asks its employee to engage in is lawful, and fires the employee for insubordination in failing to perform the activity, the employer can still be held liable to the employee under that subsection if a court later declares the activity to be unlawful. In that situation, the employer would have terminated the employee for illegal reasons but without knowledge it was doing so at the time, and thus without the intent to injure the employee’s rights. In other words, where a good faith mistake of law motivates the employer’s action, its conduct is closer to negligence than willful conduct. The employer’s liability would therefore not be outside the permissible bounds of insurance coverage. In this case, the ticket quota policy was not so clearly illegal that the city necessarily must have known it was requiring its officers perform illegal activities and unlawfully retaliating against them when the officers refused to comply with or reported the illegal demand. The city’s liability in the case could therefore have been based on negligent conduct, and Insurance Code section 533 did not negate Everest’s duty to indemnify. The court did not reach the issue of whether Insurance Code section 533 would bar coverage for other types of retaliation claims brought under other subdivisions of the statute. A concurring and dissenting justice agreed with the majority’s conclusion concerning the inapplicability of Insurance Code section 533, but wrote separately to say she would have requested supplemental briefing on whether other provisions of Everest’s policy precluded coverage for the settlement in any event, where that settlement was made over Everest’s objections.
Property damage from COVID-19 virus not covered by insurance policy where policy includes a contamination exclusion. San Jose Sharks, LLC v. The Superior Court of Santa Clara County (2023) __ Cal.App.5th __.
In March 2020, the plaintiff hockey teams closed their arenas due to the COVID-19 pandemic. They claimed that the virus was present on and caused physical damage to their arenas. They sought insurance coverage for their business losses under their first-party property policy, which covered “all risks of physical loss or damage,” as well as business losses due to “‘interruption by communicable disease.’” The insurer denied coverage on the ground there was no physical loss or damage to trigger any coverage under the policy and that, in any event, the policy excluded losses due to “‘contamination, and any cost due to contamination’” unless the damage directly resulted from physical damage. The trial court granted the insurer’s motion to strike the key allegations because “plaintiffs failed ‘to allege covered physical loss or damage to property due to COVID-19.’” Plaintiffs filed a petition for writ of mandate.
The Court of Appeal (Sixth Dist.) denied the writ petition. While plaintiffs “adequately alleged physical loss or damage from the coronavirus” thus triggering the coverage provisions for property damage and business interruption due to a communicable disease, the contamination exclusion in the policy excluded physical loss or damage resulting from viral contamination.
ERISA does not preempt claims based on state law when those claims do not have a “reference to” or have an “impermissible connection with” an ERISA employee benefit plan. In re Essure Product Cases (2023) __ Cal.App.5th __.
LHC Group, Inc. (LHC) administers a self-insured employee welfare benefit plan that is governed by the Employment Retirement Income Security Act of 1974 (29 U.S.C. § 1001) (ERISA). This plan contains a subrogation clause that gives the plan a right of subrogation for any benefits paid to a covered person as a result of an injury that is the responsibility of a third party. LHC, on behalf of itself and as a subrogee of the benefits plan participants, sued Bayer alleging various tort, quasi-contract, and unjust enrichment claims, claiming Bayer did not warn about serious health risks of a birth control device it manufactured and distributed to LHC’s participants. Bayer successfully demurred to the complaint on the ground that ERISA preempted LHC’s claims because the claims “relate to” the benefit plan, and that the court would be required to interpret the plan to determine whether LHC could sue Bayer on behalf of plan participants. Further, the trial court found LHC’s claims had an “impermissible connection” with the plan because the claims interfere with plan participants’ ability to assert their own claims.
The Court of Appeal (First Dist., Div. Three) reversed. ERISA preempts “‘any and all State laws insofar as they . . . relate to any employee benefit plan.’” There are two categories of state laws that are conflict-preempted under ERISA. The first is if the law has a “reference to” an ERISA plan. The second is if the law has a “connection with” such a plan. LHC’s tort claims against Bayer made “no reference to” and functioned irrespective of the ERISA plan. The mere fact that LHC would not have had standing to assert its claims without the plan did not render the plan “essential” to LHC’s product liability claims against Bayer.
Whether a policy covering more than 12 months provided for one or two aggregate limits depends on the policy language concerning the policy period. The Pep Boys Manny Moe & Jack of California v. Old Republic Insurance Company (2023) __ Cal.App.5th __.
Pep Boys was sued in various asbestos personal injury cases. Pep Boys sought insurance coverage for these claims under several primary and excess commercial general liability policies dating from February 1, 1981 to July 1, 1982. These policies extended for 17 months rather than 12 because Pep Boys had wanted the coverage to align with their fiscal year. Despite the 17-month policy period, the insurers maintained that their policies provided only one aggregate annual limit. Pep Boys filed a declaratory judgment action against the four insurers seeking a ruling that each policy provided two aggregate annual limits, one for the first 12 months and one for the remaining time period. The trial court ruled that the policies each provided a single aggregate limit.
The Court of Appeal (First. Dist., Div. Four) reversed. With respect to the policies that provided a limit “in the aggregate for each annual period during the currency of this policy,” the court held that the policy was ambiguous with respect to what the parties’ intended to be the “annual period” of the policy. Because the policy was ambiguous, the court reviewed the extrinsic evidence Pep Boys submitted indicating that Pep Boys had requested the 17-month policy period to bring its insurance policy period in line with its fiscal year, and had not intended to dilute its coverage by spreading it over a longer term. The extrinsic evidence thus favored Pep Boys’ interpretation that the policy covered more than one “annual” period. Any remaining ambiguity had to be interpreted against the insurer. Pep Boys was thus entitled to two years’ worth of aggregate limits. In contrast, with respect to policies that provided a limit “as applying ‘with respect to loss excess of the underlying Insurance which occurs during the term of this certificate,’” the language was not ambiguous and meant that the limits were set for the duration of the policy, not annual periods within the policy term. In ruling on the case, the court considered one of the insurer’s arguments that Pennsylvania law, rather than California law, applied because the policy did not specify a place of performance and the contract was formed in Pennsylvania. (See Civil Code section 1646.6 [“A contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made.”].) The court observed that the California Supreme Court has not considered whether this statute takes precedence over the governmental interests analysis. The court concluded, however, that even if the statute dictated the choice of law analysis, the policy essentially provided for nationwide performance and so California law applied by default in the absence of a reason to apply a different state’s law.
Insurer was entitled to compel arbitration of disputed UIM claim even though plaintiff alleged bad faith. Tournai v. CSAA Insurance Exchange (2023) __ Cal.App.5th __.
Plaintiff settled her claim with an underinsured motorist for the at-fault motorist’s $25,000 policy limit. She then requested her own insurer pay her $275,000—the limits of her underinsured motorist coverage less the $25,000 she recovered from the at-fault motorist. The insurer refused payment and plaintiff sued for breach of contract and bad faith. The insurer moved to compel arbitration under its policy and Insurance Code section 11580.2, subdivision (f). Plaintiff opposed the motion on various grounds, including that approximately $30,000 in medical expenses was undisputedly due and so that amount was not subject to arbitration. The trial court denied the motion on the grounds that section 11580.2 did not apply where the dispute was about the insurer’s obligation to pay anything, rather than the amount due, and that the bad faith claim was not arbitrable.
The Court of Appeal (First Dist., Div. Two) reversed. The fact plaintiff characterized a portion of her medical expenses as undisputed did not mean the parties had agreed to the amount due. The amount of medical expenses due remained disputed and thus subject to arbitration. Further, plaintiff claimed entitlement to her remaining UIM limits, as well. That amount was also disputed and subject to arbitration. And the fact plaintiff asserted a bad faith claim does not preclude arbitration of the dispute over the amount due. The arbitrable claims could be arbitrated while the bad faith claims were stayed—even if the insurer did not clearly ask for a stay in its motion.
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.