Insurance Law Update, July 2004

July 2004
July 2004
ERISA
In Aetna Health, Inc. v. Davila,
2004 WL 1373230 (2004),
plaintiffs brought actions against
health maintenance organizations alleging that the HMOs’
refusal to cover certain medical
expenses violated the Texas
Health Care Liability Act. The
U.S. Supreme Court found that
the actions were preempted by
ERISA’s integrated enforcement
mechanism. The Supreme Court
stated that any state law cause of
action that duplicates, supplements, or supplants ERISA’s
civil enforcement remedies
conflicts with the congressional
intent to make ERISA remedies
exclusive and is preempted. The
Court also reaffirmed that state
causes of action which would
supplement ERISA remedies are
not permitted, and that plaintiffs
may not avoid preemption by
pleading causes of action not
duplicative of ERISA.
The Court further held that, even
when a state law arguably falls
within the ERISA savings clause
(saved from preemption as solely
regulating insurance), such state
laws are nonetheless preempted
if they provide a separate vehicle
to assert a claim for benefits
outside of, or in addition to,
ERISA’s remedial scheme.
[Submitted by Dennis G. Rolstad
– Sedgwick San Francisco]
In Jordan v. Northrop Grumman
Corp. Welfare Benefit Plan, 370
F.3d 869 (9th Cir. 2004), the
Ninth Circuit conducted an
extensive survey of the appropriate procedure for review of a
benefits decision under ERISA.
The court reiterated that de novo
review is appropriate unless the
plan unambiguously confers
discretion on the administrator.
The court further observed that,
when there is abuse of discretion
review, the court can set aside
the administrator’s discretionary
determination only when it is
arbitrary and capricious. The
decision must be “clearly
erroneous” before it can be
found to be arbitrary or capricious. The court found that an
abuse of discretion standard can
be heightened only if there is a
serious conflict of interest.
Acknowledging the U.S.
Supreme Court’s decision in
Nord, the Ninth Circuit observed
that it is not permitted to apply
the treating physician rule to
employee benefits claims under
ERISA.
Northfield agreed to defend
under reservation but, relying
upon the nanny’s criminal
conviction and the autopsy
report, pursued a declaratory
judgment action seeking a ruling
that the “criminal acts” and the
“physical/sexual abuse” exclusions precluded coverage.
Northfield argued for the
application of certain exceptions
to the “eight corners” rule, which
limits a carrier’s assessment of
the duty to defend to the four
corners of the policy in light of
the four corners of the current
pleading.
[Submitted by Bruce D.
Celebrezze – Sedgwick San
Francisco]
The Fifth Circuit affirmed the
district court’s ruling that
Northfield was confined to the
eight corners of the policy and
the amended petition, and that it
therefore had a duty to defend.
Although a few courts applying
Texas law have allowed for
certain limited exceptions to the
eight corners rule, the Texas
Supreme Court has never
recognized such an exception.
Additionally, “in the unlikely
situation that the Texas Supreme
Court were to recognize an
exception to the strict eight
corners rule,” the Fifth Circuit
concluded that any exception
would only apply when it is
initially impossible to discern
whether coverage is potentially
implicated, and when the
extrinsic evidence goes solely to
a fundamental issue of coverage
which does not overlap with the
merits of the underlying case.
DUTY TO DEFEND-TEXAS
In Northfield Ins. Co. v. Loving
Home Care, Inc., 363 F.3d 523
(5th Cir. 2004), the Fifth Circuit,
interpreting Texas law, held that
an insurer is precluded from
relying upon extrinsic evidence
in assessing the duty to defend.
Parents sued a home-care nanny
service for the death of their
baby. The parents alleged that
the nanny had “negligently
dropped [the baby], and/or
negligently shook [the baby],
causing severe head injuries that
resulted in the infant’s death.”
They alleged that the nanny was
“reckless and/or criminally
negligent.” In the amended
petition, the parents deleted
charges that the nanny had been
criminally convicted for felony
injury to a child.
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It’s easy to have
INSURANCE LAW UPDATE
delivered to your e-mail inbox. Simply go
to www.imakenews.com/sedgwick/
and subscribe to our electronic version.
The court held that, even if such an exception
were to apply in this case, because the
extrinsic evidence of the nanny’s criminal
conviction and the autopsy report called into
question the allegations of negligence in
dropping or shaking the baby, such evidence
overlapped with the merits of the underlying
case and therefore could not be relied upon in
making the duty to defend determination.
[Submitted by L. Kimberly Steele – Sedgwick
Dallas
INSURANCE AGENTS
In Rios v. Scottsdale Ins. Co., 2004 WL
1194126 (Cal.App. 2004), the insured was a
jewelry store owner who had sought to
procure coverage for theft under her liability
policy. The insured mistakenly believed that
the policy included theft coverage, as the
policy binder prepared by her broker
indicated it provided “special coverage.” In
fact, the policy provided only “basic coverage.”
The court found that an insurance broker is
an agent of the insured and not an agent of
the insurer. Insurance brokers with no
binding authority are not agents of insurance
companies, but rather are independent
contractors. Even where the broker is an
agent of the insurer for limited purposes,
such as receiving the premiums and providing a copy of the policy to the insured, that
did not as a matter of law turn the broker into
the insurer’s general agent.
[Submitted by Bruce D. Celebrezze –
Sedgwick San Francisco]
OCCURRENCE AND PROPERTY
DAMAGE
In Lyons v. State Farm Fire & Cas. Co., 2004
WL 1194486 (Ill.App. 2004), the Illinois
Appellate Court found that a homeowner’s
insurer had a duty to defend its insured
against a lawsuit alleging the insured had
tresspassed by constructing levees on his
property that protruded onto the neighbors’
adjoining property.
The Appellate Court’s review was limited to
whether the allegations of trespass potentially triggered coverage. The court
addressed whether the underlying action
involved an “occurrence.” State Farm argued
that the act of constructing the levees was
intentional and, thus, did not constitute an
“accident.” The court disagreed, noting that
under Illinois law, “the focus of the inquiry
in determining whether an occurrence is an
accident is whether the injury is expected or
intended by the insured, not whether the acts
were performed intentionally.” The court
concluded that while there was no question
that the policyholder intended to build levees
on his property, there were no allegations in
the underlying complaint suggesting that he
expected or intended to build the levees so
that they would extend onto the neighbors’
property. Hence, an “occurrence” was
alleged. The court also concluded that, for
the same reasons, State Farm’s policy
exclusion for “bodily injury or property
damage expected or intended by the insured”
did not apply.
The court went on to summarily conclude
that the underlying action involved “property
damage” as it clearly alleged loss of use of
the neighboring property.
After concluding that State Farm had
breached its duty to defend, the court went
on to consider whether State Farm was
estopped from asserting policy defenses.
Under well-established Illinois law, an
insurer that questions coverage and fails
either to defend under a reservation of rights
or to file a declaratory action, is estopped in a
subsequent action by the insured against the
insurer from asserting its defenses to
coverage. Shell Oil Co. v. AC&S, Inc., 271
Ill.App.3d 898, 649 N.E.2d 949 (1995).
[Submitted by Erica L. Battaglia – Sedgwick
Chicago]
DISABILITY/BAD FAITH
In Hangarter v. The Paul Revere Life Ins.
Co., 2004 WL 1418017 (9th Cir. 2004), the
Ninth Circuit affirmed a multimillion-dollar
award of compensatory and punitive
damages against a “own occupation”
disability insurer which had declined benefits
under an individual disability policy not
governed by ERISA.
The insurer was found to have breached the
covenant of good faith and fair dealing not
because its claim decision was unreasonable,
but because the jury could find that the
insurer conducted a “biased investigation,” as
evidenced by its misleading and deceptive
termination letter (incorrectly invoking
ERISA, containing errors on several facts,
wrongfully stating ineligibility for rehabilitation benefits), by bias in selecting and
retaining the IME doctor (the insurer used
same doctor in nineteen matters over five
years, thirteen out of thirteen examined
claimants were found not entitled to benefits,
retention letter prejudged the case by stating
no objective findings), and by the insurer’s
comprehensive system for “targeting and
terminating expensive claims.”
[Submitted by Dennis G. Rolstad – Sedgwick
San Francisco]
DEFENSE UNDER D&O POLICY
In Hebela v. Healthcare Ins. Co., 2004 WL
1431733 (N.J. App. Div. 2004), a hospital’s
former CFO sued for wrongful termination.
The hospital, in turn, counterclaimed alleging
negligent performance of duties. The
hospital’s D&O insurer declined to pay the
defense costs of the former officer. The court
held that the counterclaim was within the
policy coverage where the policy excluded
coverage for suits by a director or officer
against another director or officer, but did not
expressly preclude coverage for a suit by the
corporation against a director or officer.
The trial judge awarded the insured of all of
his more than $150,000 in fees on the
grounds that apportionment of fees between
covered and uncovered claims would have
been too difficult because the claims
overlapped. The New Jersey appellate court
remanded, directing the trial judge to
determine a reasonable estimate of the fees
properly attributable to the covered claims,
even if such an apportionment could not
accomplished with scientific accuracy.
[Submitted by Jill Owens – Sedgwick New
York]
INSURANCE LAW UPDATE
AVAILABLE BY E-MAIL AND ON
WEB SITE
INSURANCE LAW UPDATE is prepared
by attorneys on Sedgwick’s Insurance
Industry Team. Sedgwick’s insurance
practice is organized into several separate,
and yet interconnecting, groups involving
more than 100 of the firm’s attorneys in all
of its offices in the United States and
Europe. If you would like to receive
INSURANCE LAW UPDATE by e-mail,
please notify us at [email protected]
or go to www.imakenews.com/sedgwick/
to subscribe to our electronic version.
***
© 2004 Sedgwick, Detert, Moran & Arnold
LLP. This communication is published as
an information service for clients and
friends of the firm, and does not constitute
the rendering of legal advice or other
professional service.
www.sdma.com
July 2004
July 2004
ERISA
In Aetna Health, Inc. v. Davila,
2004 WL 1373230 (2004),
plaintiffs brought actions against
health maintenance organizations alleging that the HMOs’
refusal to cover certain medical
expenses violated the Texas
Health Care Liability Act. The
U.S. Supreme Court found that
the actions were preempted by
ERISA’s integrated enforcement
mechanism. The Supreme Court
stated that any state law cause of
action that duplicates, supplements, or supplants ERISA’s
civil enforcement remedies
conflicts with the congressional
intent to make ERISA remedies
exclusive and is preempted. The
Court also reaffirmed that state
causes of action which would
supplement ERISA remedies are
not permitted, and that plaintiffs
may not avoid preemption by
pleading causes of action not
duplicative of ERISA.
The Court further held that, even
when a state law arguably falls
within the ERISA savings clause
(saved from preemption as solely
regulating insurance), such state
laws are nonetheless preempted
if they provide a separate vehicle
to assert a claim for benefits
outside of, or in addition to,
ERISA’s remedial scheme.
[Submitted by Dennis G. Rolstad
– Sedgwick San Francisco]
In Jordan v. Northrop Grumman
Corp. Welfare Benefit Plan, 370
F.3d 869 (9th Cir. 2004), the
Ninth Circuit conducted an
extensive survey of the appropriate procedure for review of a
benefits decision under ERISA.
The court reiterated that de novo
review is appropriate unless the
plan unambiguously confers
discretion on the administrator.
The court further observed that,
when there is abuse of discretion
review, the court can set aside
the administrator’s discretionary
determination only when it is
arbitrary and capricious. The
decision must be “clearly
erroneous” before it can be
found to be arbitrary or capricious. The court found that an
abuse of discretion standard can
be heightened only if there is a
serious conflict of interest.
Acknowledging the U.S.
Supreme Court’s decision in
Nord, the Ninth Circuit observed
that it is not permitted to apply
the treating physician rule to
employee benefits claims under
ERISA.
Northfield agreed to defend
under reservation but, relying
upon the nanny’s criminal
conviction and the autopsy
report, pursued a declaratory
judgment action seeking a ruling
that the “criminal acts” and the
“physical/sexual abuse” exclusions precluded coverage.
Northfield argued for the
application of certain exceptions
to the “eight corners” rule, which
limits a carrier’s assessment of
the duty to defend to the four
corners of the policy in light of
the four corners of the current
pleading.
[Submitted by Bruce D.
Celebrezze – Sedgwick San
Francisco]
The Fifth Circuit affirmed the
district court’s ruling that
Northfield was confined to the
eight corners of the policy and
the amended petition, and that it
therefore had a duty to defend.
Although a few courts applying
Texas law have allowed for
certain limited exceptions to the
eight corners rule, the Texas
Supreme Court has never
recognized such an exception.
Additionally, “in the unlikely
situation that the Texas Supreme
Court were to recognize an
exception to the strict eight
corners rule,” the Fifth Circuit
concluded that any exception
would only apply when it is
initially impossible to discern
whether coverage is potentially
implicated, and when the
extrinsic evidence goes solely to
a fundamental issue of coverage
which does not overlap with the
merits of the underlying case.
DUTY TO DEFEND-TEXAS
In Northfield Ins. Co. v. Loving
Home Care, Inc., 363 F.3d 523
(5th Cir. 2004), the Fifth Circuit,
interpreting Texas law, held that
an insurer is precluded from
relying upon extrinsic evidence
in assessing the duty to defend.
Parents sued a home-care nanny
service for the death of their
baby. The parents alleged that
the nanny had “negligently
dropped [the baby], and/or
negligently shook [the baby],
causing severe head injuries that
resulted in the infant’s death.”
They alleged that the nanny was
“reckless and/or criminally
negligent.” In the amended
petition, the parents deleted
charges that the nanny had been
criminally convicted for felony
injury to a child.
Sign Up Now to Receive by E-Mail
It’s easy to have
INSURANCE LAW UPDATE
delivered to your e-mail inbox. Simply go
to www.imakenews.com/sedgwick/
and subscribe to our electronic version.
The court held that, even if such an exception
were to apply in this case, because the
extrinsic evidence of the nanny’s criminal
conviction and the autopsy report called into
question the allegations of negligence in
dropping or shaking the baby, such evidence
overlapped with the merits of the underlying
case and therefore could not be relied upon in
making the duty to defend determination.
[Submitted by L. Kimberly Steele – Sedgwick
Dallas
INSURANCE AGENTS
In Rios v. Scottsdale Ins. Co., 2004 WL
1194126 (Cal.App. 2004), the insured was a
jewelry store owner who had sought to
procure coverage for theft under her liability
policy. The insured mistakenly believed that
the policy included theft coverage, as the
policy binder prepared by her broker
indicated it provided “special coverage.” In
fact, the policy provided only “basic coverage.”
The court found that an insurance broker is
an agent of the insured and not an agent of
the insurer. Insurance brokers with no
binding authority are not agents of insurance
companies, but rather are independent
contractors. Even where the broker is an
agent of the insurer for limited purposes,
such as receiving the premiums and providing a copy of the policy to the insured, that
did not as a matter of law turn the broker into
the insurer’s general agent.
[Submitted by Bruce D. Celebrezze –
Sedgwick San Francisco]
OCCURRENCE AND PROPERTY
DAMAGE
In Lyons v. State Farm Fire & Cas. Co., 2004
WL 1194486 (Ill.App. 2004), the Illinois
Appellate Court found that a homeowner’s
insurer had a duty to defend its insured
against a lawsuit alleging the insured had
tresspassed by constructing levees on his
property that protruded onto the neighbors’
adjoining property.
The Appellate Court’s review was limited to
whether the allegations of trespass potentially triggered coverage. The court
addressed whether the underlying action
involved an “occurrence.” State Farm argued
that the act of constructing the levees was
intentional and, thus, did not constitute an
“accident.” The court disagreed, noting that
under Illinois law, “the focus of the inquiry
in determining whether an occurrence is an
accident is whether the injury is expected or
intended by the insured, not whether the acts
were performed intentionally.” The court
concluded that while there was no question
that the policyholder intended to build levees
on his property, there were no allegations in
the underlying complaint suggesting that he
expected or intended to build the levees so
that they would extend onto the neighbors’
property. Hence, an “occurrence” was
alleged. The court also concluded that, for
the same reasons, State Farm’s policy
exclusion for “bodily injury or property
damage expected or intended by the insured”
did not apply.
The court went on to summarily conclude
that the underlying action involved “property
damage” as it clearly alleged loss of use of
the neighboring property.
After concluding that State Farm had
breached its duty to defend, the court went
on to consider whether State Farm was
estopped from asserting policy defenses.
Under well-established Illinois law, an
insurer that questions coverage and fails
either to defend under a reservation of rights
or to file a declaratory action, is estopped in a
subsequent action by the insured against the
insurer from asserting its defenses to
coverage. Shell Oil Co. v. AC&S, Inc., 271
Ill.App.3d 898, 649 N.E.2d 949 (1995).
[Submitted by Erica L. Battaglia – Sedgwick
Chicago]
DISABILITY/BAD FAITH
In Hangarter v. The Paul Revere Life Ins.
Co., 2004 WL 1418017 (9th Cir. 2004), the
Ninth Circuit affirmed a multimillion-dollar
award of compensatory and punitive
damages against a “own occupation”
disability insurer which had declined benefits
under an individual disability policy not
governed by ERISA.
The insurer was found to have breached the
covenant of good faith and fair dealing not
because its claim decision was unreasonable,
but because the jury could find that the
insurer conducted a “biased investigation,” as
evidenced by its misleading and deceptive
termination letter (incorrectly invoking
ERISA, containing errors on several facts,
wrongfully stating ineligibility for rehabilitation benefits), by bias in selecting and
retaining the IME doctor (the insurer used
same doctor in nineteen matters over five
years, thirteen out of thirteen examined
claimants were found not entitled to benefits,
retention letter prejudged the case by stating
no objective findings), and by the insurer’s
comprehensive system for “targeting and
terminating expensive claims.”
[Submitted by Dennis G. Rolstad – Sedgwick
San Francisco]
DEFENSE UNDER D&O POLICY
In Hebela v. Healthcare Ins. Co., 2004 WL
1431733 (N.J. App. Div. 2004), a hospital’s
former CFO sued for wrongful termination.
The hospital, in turn, counterclaimed alleging
negligent performance of duties. The
hospital’s D&O insurer declined to pay the
defense costs of the former officer. The court
held that the counterclaim was within the
policy coverage where the policy excluded
coverage for suits by a director or officer
against another director or officer, but did not
expressly preclude coverage for a suit by the
corporation against a director or officer.
The trial judge awarded the insured of all of
his more than $150,000 in fees on the
grounds that apportionment of fees between
covered and uncovered claims would have
been too difficult because the claims
overlapped. The New Jersey appellate court
remanded, directing the trial judge to
determine a reasonable estimate of the fees
properly attributable to the covered claims,
even if such an apportionment could not
accomplished with scientific accuracy.
[Submitted by Jill Owens – Sedgwick New
York]
INSURANCE LAW UPDATE
AVAILABLE BY E-MAIL AND ON
WEB SITE
INSURANCE LAW UPDATE is prepared
by attorneys on Sedgwick’s Insurance
Industry Team. Sedgwick’s insurance
practice is organized into several separate,
and yet interconnecting, groups involving
more than 100 of the firm’s attorneys in all
of its offices in the United States and
Europe. If you would like to receive
INSURANCE LAW UPDATE by e-mail,
please notify us at [email protected]
or go to www.imakenews.com/sedgwick/
to subscribe to our electronic version.
***
© 2004 Sedgwick, Detert, Moran & Arnold
LLP. This communication is published as
an information service for clients and
friends of the firm, and does not constitute
the rendering of legal advice or other
professional service.
www.sdma.com