Appellate Law Update

(July 11, 2019, through October 21, 2019)

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

California Supreme Court

The “notice-prejudice” rule is a fundamental public policy of California for purposes of choice of law analysis.  (Pitzer College v. Indian Harbor Insurance Co. (Aug. 29, 2019, S239510) 8 Cal.5th 193.)  Click here for opinion.

The insured discovered environmental contamination on its property and undertook remediation.  Only after the remediation was complete did it notify its insurer.  The insurer denied coverage based on the insured’s failure to timely notify it of the need for remediation.  The insured sued in federal court.  The court granted summary judgment for the insurer, holding that the policy was governed by New York law and under New York law, the insurer need not establish prejudice from the late notice before denying coverage.  The insured appealed to the Ninth Circuit, which certified the question of whether California’s notice-prejudice rule was a fundamental public policy of California for purposes of choice-of-law analysis.

The California Supreme Court answered the certified question in the affirmative.   California courts may refuse to enforce a contractual choice-of-law provision when enforcement would defeat a “fundamental public policy” of this state.  Fundamental public policies may be found not only in legislative enactments but also in judicial decisions.  The judicially created “notice-prejudice rule”—under which a first-party insurer cannot avoid its coverage obligations based on late notice of a claim unless it demonstrates actual prejudice—is a fundamental public policy of California for purposes of choice-of-law analysis.  In so holding, the court distinguished consent provisions in third party policies, to which California appellate courts have generally refused to apply the notice-prejudice rule in light of the insurer’s paramount right to control defense and settlement of third party claims.

California Court of Appeal

Rental car company did not violate the Insurance Code by charging customers more for optional insurance than it paid in premiums for the policies.  (Adhav v. Midway Rent a Car, Inc. (2019) 37 Cal.App.5th 954.)  Click here for opinion.

Plaintiffs rented vehicles and purchased optional insurance from defendant Midway Rent a Car, which in turn purchased the insurance from the defendant insurance companies.  To cover the cost of administering claims within Midway’s $25,000 self-insured retention (and to generate a profit off the sale of the optional insurance), Midway marked up the cost of the policies above the premium it paid to the insurers to obtain the policies.  Plaintiffs brought a putative class action alleging that Midway and the insurers violated the Unfair Competition Law (Bus. & Prof. Code, § 17200) and caused plaintiffs economic losses by charging premiums in excess of the premium approved by the Department of Insurance and failing to disclose the premiums Midway had paid to the insurers.  After a bench trial, the trial court rejected plaintiffs’ arguments that Midway and the insurers had violated any laws.  The court further recognized that plaintiffs suffered no economic loss because they “received the benefit of the coverage they purchased.” 

The Court of Appeal (Second Dist., Div. One) affirmed.  In selling the optional insurance coverage, Midway acted as a limited agent under of the Rental Car Agents Act (Ins. Code, § 1758.8, subd. (b)).  Under that statute, Midway was required only to summarize the coverage being provided to its customers and to identify the insurer; it was not required to disclose the premium it paid to the insurers.  Further, under the applicable Insurance Code provisions (Ins. Code, §§ 381, subd. (f), 1758.88), the insurers were required to give their insured, Midway, a copy of the policy and to file a copy with the Department of Insurance; they had no obligation to ensure that Midway gave a copy to its customers.  Thus, both Midway and its insurers complied with the Insurance Code and could not be liable for unfair competition.  Further, the agreement between Midway and the insurers contemplated that Midway would charge its customers more than it paid in premium, which was the only way the arrangement made economic sense, and the filings with the Department reflected that arrangement.  If the Department were to decide that this arrangement is not fair to consumers, it would be free to regulate accordingly. 

The “wage and hour law” exclusion in an employment practices liability policy barred coverage for claims based on incomplete wage statements, but not claims alleging failure to reimburse business expenses.  (Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London Subscribing to Policy Number 11EPL-20208 (2019) 40 Cal.App.5th 140.)  Click here for opinion.

A restaurant owner purchased an employment practices liability insurance policy covering any “Employment Event,” including “employment related workplace tort[s].”  However, the policy excluded coverage for claims arising out of “any . . . wage and hour or overtime law(s).”  The restaurant owner was sued in a putative class action for various alleged Labor Code violations, including failure to provide properly itemized wage statements under Labor Code section 229 and failure to reimburse business expenses under Labor Code sections 2800 and 2802.  The insurer denied coverage, asserting that the allegations fell within the “wage and hour” exclusion.  The restaurant owner sued its insurer for breach of contract and bad faith.  The trial court sustained the insurer’s demurrer, ruling that all causes of action arising under the Labor Code fell within the “wage and hour” exclusion.  The restaurant owner appealed. The Court of Appeal (Fourth Dist., Div. Three) reversed in part.  The trial court should have taken a narrower view of the “wage and hour” exclusion.   “[W]age and hour laws” are “laws concerning duration worked and/or remuneration received in exchange for work.”  A claim for failure to include all required information on wage statements under Labor Code section 226, which is part of the Labor Code chapter governing the “Payment of Wages,” was properly subject to the “wage and hour” exclusion.  A claim for failing to reimburse business expenses under Labor Code sections 2800 and 2802, however, was not.  Those statutes do not mention wages and their underlying purpose does not involve payment for work.  Thus, the failure-to-reimburse claim was not excluded.

A third party claimant could bring an action for fraudulent transfer to void an insurer-insured settlement purporting to release the insurer for bad faith refusal to settle.  (Potter v. Alliance United Ins. Co. (2019) 37 Cal.App.5th 894.)  Click here for opinion.

Christopher Potter was injured in an auto accident with Alliance United Insurance Company’s (AUIC) insured, Jesus Remedios Avalos-Tovar.  AUIC did not respond to Potter’s offered to settle his personal injury claims for Tovar’s $15,000 policy limit, so the case went to trial.  The jury awarded nearly $1 million, but the court granted a new trial.  Before the case was retried, Tovar accepted $75,000 from AUIC to “release” any bad faith claim against AUIC resulting from its failure to respond to Potter’s settlement offer.  After the second trial, the jury again awarded Potter over $1 million.  Since Tovar was insolvent, Potter sued AUIC, alleging that Tovar’s release of his bad faith claims was a fraudulent conveyance under the Uniform Voidable Transactions Act (UVTA).  The trial court granted AUIC’s demurrer, holding that Tovar’s bad faith claim against AUIC was not an “asset” that was “transferred” for UVTA purposes because there was no judgment against Tovar at the time he settled with and released AUIC.  Potter appealed.

The Court of Appeal (Second Dist., Div. Five) reversed.  Under the UVTA, a creditor can void “a transfer by the debtor of property to a third person undertaken with the intent to prevent [the] creditor from reaching that interest to satisfy a claim.”  Potter stated a UVTA claim.  Potter was a “creditor” under the UVTA because he had a claim against Tovar; Tovar’s right to sue for bad faith was an assignable “asset” even if Tovar was not yet facing an excess judgment—indeed, it is common practice for an insured to assign a potential future bad faith claim to a third party claimant; and the settlement and release constituted a “transfer” of that asset for the purpose of preventing Potter from recovering the full value of his judgment against either Tovar or AUIC.

Insured’s standard homeowners’ policy did not cover injury to tenant at insured’s rental property.   (Terrell v. State Farm General Insurance Company (2019) ___ Cal.App.5th ___.)  Click here for opinion.

Plaintiffs rented out their home starting in 2003 and obtained a rental dwelling policy from State Farm General Insurance Company.  Considering moving back in, plaintiffs changed their policy to a standard homeowners’ policy.  But they did not move back in, and instead continued renting the property.  When the home’s porch collapsed, injuring a tenant, the tenant sued plaintiffs.  Plaintiffs tendered the claim to State Farm, which denied the claim based on an exclusion in the homeowners’ policy “for bodily injury or property damage arising out of business pursuits of any insured or the rental or holding for rental of any part of any premises by the insured.”  Plaintiffs then sued State Farm for breach of contract and bad faith.  The trial court granted summary judgment for State Farm.

The Court of Appeal (First Dist., Div. One) affirmed.  Under the plain language of the homeowners’ policy’s “business pursuits/rental exclusion,” coverage was barred because the injury arose solely out of the plaintiffs’ rental of their home.  The court rejected plaintiffs’ reliance on an exception to the “business pursuits/rental exclusion” for “activities which are ordinarily incident to non-business pursuits.”  Plaintiffs had been renting the property and living elsewhere for more than a decade; this was not a case where the ordinary use of the home was as plaintiffs’ primary residence and they had a tenant only temporarily.  The court rejected the idea that plaintiffs could “fold into a homeowners policy coverage for the commercial risks attendant to renting their home as a for-profit venture,” which was a type of risk covered by a different kind of policy they declined to purchase.

The provisions of the Insurance Code providing for a 60-day grace period before a life insurer can cancel a policy for nonpayment of premium do not retroactively apply to policies issued before January 1, 2013.  (McHugh v. Protective Life Insurance (2019) ___ Cal.App.5th ___.)  Click here for opinion.

William McHugh purchased a term life policy from Protective Life Insurance Company in 2005.  The policy provided for a 31-day grace period before it could be canceled for nonpayment of premium.  McHugh failed to pay the premium due on his policy, which then lapsed 31 days later, on January 9, 2013.  After McHugh passed away in June 2013, his beneficiaries sued Protective Life for breach of contract and bad faith, arguing that under Insurance Code sections 10113.71 and 10113.72, which went into effect on January 1, 2013, the insurer should have given a 60-day grace period before canceling the policy.  Protective Life moved for a directed verdict on the ground that the Insurance Code’s 60-day grace period provisions did not retroactively apply to McHugh’s policy issued in 2005.  The trial court denied the motion, holding that the 60-day grace period applied.  The case went to trial, and Protective Life prevailed.  The beneficiaries appealed.

The Court of Appeal (Fourth Dist., Div. One) affirmed on the alternative ground urged by Protective Life that it was entitled to judgment as a matter of law because the 60-day grace period was not retroactive.  Applying the plain language of Insurance Code sections 10113.71 and 10113.72, the 60-day period applied only to policies “issued or delivered” after the January 1, 2013, effective date.  Other terms in the statutes were also consistent with this interpretation.  Further, the Department of Insurance had determined the statutes applied only to policies issued after January 1, 2013, and its reasonable interpretation was entitled to deference.

The requirement that a special employer’s insurer obtain a written affirmation that a general employer has obtained insurance coverage for the general employer’s employees is satisfied where an endorsement states the relevant affirmation; a signature is not required.  (Travelers Property Casualty Company of America v. Workers’ Compensation Appeal Board (2019) __ Cal.App.5th __.)  Click here for opinion.

StaffChex (general employer) entered into an agreement to provide labor to Jessie Lord Bakery (special employer).  StaffChex and the bakery agreed, as specifically permitted by law, that StaffChex would obtain workers’ compensation insurance for its employees, and the bakery would exclude such coverage from its own policies.  StaffChex did obtain workers’ compensation insurance, and the bakery’s insurance policy with Travelers included a limiting endorsement—i.e., a specific endorsement affirming that StaffChex had obtained the required workers’ compensation insurance for its employees and that the bakery therefore was not providing such insurance for those employees.  The limiting endorsement to the Travelers’ policy provided that the affirmation required the insured’s signature, but no signature was ever included.  Nonetheless, the parties’ course of conduct reflected that they all understood that StaffChex had fulfilled the legal obligation to provide workers’ compensation insurance for its employees working for the bakery.  Years later, one of StaffChex’s employees was injured at the bakery.  StaffChex’s workers’ compensation insurer had gone insolvent and so the California Insurance Guarantee Association (CIGA) administered the claim.  CIGA argued that Travelers had to pay the claim.  The arbitrator disagreed, but the Workers’ Compensation Appeal Board (WCAB) reversed, holding that the lack of the insured’s signature on the Travelers limiting endorsement invalidated the endorsement.

The Court of Appeal (Second Dist, Div. One) issued a writ directing the WCAB to reverse its ruling that Travelers, rather than CIGA, was liable on the claim.  WCAB rules, section 2259, required that the special employer’s insurer obtain written affirmation that the general employer’s employees were covered by other insurance.  No part of the rule required the affirmation include a signature; the signature requirement was simply a contract term in the Travelers policy.  The contract between StaffChex and the bakery, and the Travelers policy endorsement, all satisfied the written affirmation requirement.  Whether the signature was also required was simply a matter of contract, and the parties’ course of dealing showed that the signature requirement was immaterial.  StaffChex had agreed to, and did, obtain workers’ compensation insurance for the employees it provided to the bakery, and that insurance arrangement was priced into the parties’ contract.  There was no basis to invalidate the agreement and require Travelers to pay the claim.

Product supplier’s insurance carrier had no duty to defend retailer, who was an additional insured under the supplier’s policy, against claims that the retailer mislabeled the product.  (Target Corp. v. Golden State Insurance Company Ltd. (2019) __ Cal.App.5th __.)  Click here for opinion.

After suffering a severe side-effect from use of a medication purchased from a Target pharmacy, the plaintiff sued Target alleging that it failed to place proper warnings on the medication.  Target tendered the defense of the plaintiff’s lawsuit to the medication supplier and the supplier’s insurance carrier, asserting that Target was entitled to a defense under an indemnity agreement it had with the supplier and as an additional insured under the supplier’s liability policy.  The additional insured coverage applied to claims for bodily injury “arising out of” the supplier’s products, and excluded claims arising out of Target’s repackaging or relabeling of the products.  While the supplier and its carrier initially agreed to defend, they later withdrew the defense, arguing that there was no potential for coverage because the plaintiff’s claims arose out of Target’s own conduct in placing incorrect and inadequate warning labels on the medication and not out of a defect in the medication itself.   Target sued the supplier and its insurance carrier, and the trial court granted summary adjudication for the defendants.

The Court of Appeal (Second Dist., Div. Six) affirmed.  Where the plaintiff’s claims arose “not from a defective product, but from [Target’s] failure to warn of the risks and possible side effects of the Product” and the supplier “did not distribute or have any role in preparing the information about the Product that retailer provided” to the plaintiff, the supplier’s policy did not cover the claims.  Further, the claims were based on Target’s mislabeling of the product, which was excluded from coverage under the additional insured endorsement.

Ninth Circuit

The standard exclusion for acts of war applies to actions by de facto or de jure sovereigns, which Hamas is not.  (Universal Cable Productions, LLC v. Atlantic Specialty Insurance Company (9th Cir. 2019) 929 F.3d 1143.)  Click here for opinion.

Universal planned to film a television series in Jerusalem in mid-2014.  During this time, tensions in the region escalated and Hamas fired rockets into Israel.  As a result, Universal had to move production out of Jerusalem.   Universal sought insurance coverage from its production insurer, Atlantic Specialty Insurance Company, for the costs of delay and relocating.  Atlantic denied coverage, citing the policy’s exclusions for costs resulting from “war” or “warlike action by a military force,” and maintaining that the coverage for acts of terrorism did not apply.  Universal sued for breach of contract and bad faith.  The district court granted summary judgment in favor of Atlantic, ruling that Hamas’s actions fell within the “war” or “warlike action” exclusions.  Universal appealed.

The Ninth Circuit reversed.  The war exclusions did not apply.  Given that both parties were sophisticated and contributed to drafting the policy, the Ninth Circuit declined to hold that any ambiguity in the term “war” should simply be construed in Universal’s favor, and thus in favor of coverage.  As “a sophisticated party that frequently engages in business related to the insurance trade,” Universal had notice of the customary usage of “war” and “warlike action” in the insurance context as referring “to hostilities between de jure or de facto sovereigns.”  However, even without the benefit of the rule that ambiguities are interpreted in favor of the insured, Universal was correct that the district court erred in applying the war exclusions, because Hamas is not a de jure or de facto sovereign.  Rather, the Palestinian Authority would be the relevant sovereign entity and Hamas is more akin to a terrorist organization.  The Ninth Circuit left it for the district court on remand to determine if another exclusion for “insurrection, rebellion, [or] revolution” might apply to bar Universal’s claim for coverage for Hamas’s activities.

CIGA cannot be required to reimburse Medicare.  (California Insurance Guarantee Association v. Azar (9th Cir. 2019) __ F.3d __.)  Click here for opinion.

When Medicare’s administrator demanded that the California Insurance Guarantee Association (CIGA) reimburse Medicare for conditional payments it had made on various workers’ compensation claims, CIGA filed a declaratory relief action asserting that the California Guaranty Act, which created and governed CIGA, prohibited CIGA from reimbursing any state or federal government agency, including Medicare.  Medicare asserted that the Guaranty Act was preempted by federal law—specifically, the statutes providing that Medicare is a “secondary payer” entitled to reimbursement from “primary payers.”  The federal district court ruled for Medicare, and CIGA appealed.

The Ninth Circuit reversed.  CIGA is not a “primary payer.”  A “primary payer” is a direct insurer, like a workers’ compensation insurer.  CIGA is not a primary insurer; it is an insolvency insurer of last resort.  Accordingly, there is no conflict between the Guaranty Act’s prohibition on CIGA reimbursing any federal agency and the Medicare reimbursement statutes, and thus no basis to find that the Guaranty Act’s prohibition on reimbursing government entities like Medicare is preempted by the Medicare statutes governing reimbursement.

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Associate of the Burbank office 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.