Insurance Coverage: September 2013


After several years, the Supreme Court has spoken on the issue of whether or not a claim under the Fair Claims Regulations can be “bootstrapped” into litigation through a claim for violation of the Unfair Competition Laws. In the Zhang case, the Court now says it can.

Also, save the date for Low, Ball & Lynch’s Annual Sacramento Seminar on November 7, 2012. We will be giving updates on significant insurance coverage case decisions issued this year. Department of Insurance Continuing Education Credit is available.

Zhang v Superior Court
57 Cal.4th 364

On August 2, 2013, the California Supreme Court issued its opinion in the case of Zhang v. Superior Court. Ms. Zhang sued under the Unfair Competition Law (“UCL”) alleging that California Capital Insurance Company engaged in unfair advertising by promising to timely pay covered losses when it had no intention of doing so. The trial court sustained a demurrer and ruled that Ms. Zhang was attempting to “plead around” an absolute bar to relief under the Unfair Insurance Practices Act (“UIPA”) which does not permit a private right of action for violations of fair claims regulations. The Court of Appeal reversed and held that UIPA’s restriction on enforcement of claims handling regulations does not bar false advertising claims under the UCL. The Court of Appeal found that Ms. Zhang’s UCL claim could proceed because she properly alleged false advertising and violation of the UCL.

The Supreme Court affirmed the Court of Appeal, and held that the same factors that amounted to violations of the regulations could properly be cited as the basis for an UCL cause of action. The Supreme Court also focused on the fact that remedies for such a claim were limited to “disgorgement,” and did not include fines or attorneys’ fees.

It is expected that plaintiffs will attempt to bootstrap the regulations into a case under the guise of such a cause of action, even though the only remedy allowed under such a cause of action is reimbursement, rather than damages, penalties or attorney’s fees.

Barnes v. Western Heritage
217 Cal.App.4th 249

Western Heritage settled plaintiff Justin Barnes’ claims against Western Heritage’s insured, but separately denied Mr. Barnes’ direct claims for reimbursement of expenses under the medical payment provision of the insured’s policy. The Court of Appeal concluded that an insurer’s obligation to indemnify its insured under the liability portion of a policy is separate and distinct from its obligation to pay medical expenses under a medical payments provision of the same policy. Mr. Barnes’ claim under the medical payments provision of the policy was not an impermissible double recovery, and his claim for wrongful denial of medical payments benefits should not have been dismissed in the trial court.

Mt. Hawley Ins. Co. v Lopez
215 Cal.App.4th 1385

Mt. Hawley declined to defend or indemnify Dr. Richard Lopez against a grand jury indictment by the United States Attorney for criminal conspiracy, false statements and concealment, and falsification of records. The Court of Appeal held that Insurance Code Section 533.5 did not forbid defense of claims by a United States Attorney, even though it did forbid a defense for certain types of criminal or administrative proceedings. The Court reviewed the legislative intent of Section 533.5 and found that the prohibition on the duty to defend is limited to claims enumerated in Section 533.5, but did not extend to federal indictments. In addition, the Court found that while Section 533 prohibits indemnification for losses caused by willful acts, Section 533 did not extinguish the insurer’s duty to defend an insured accused but not convicted of those willful acts.

Brown v. Mid Century Ins. Co.
215 Cal.App.4th 841

Mid Century Insurance Company was found in the trial court to have properly denied Leroy and Terrie Brown’s claim for water and mold damage resulting from a leaking pipe. The policy contained only limited water damage coverage for “sudden” discharges or releases of water. The policy excluded intermittent, slow, gradual leaks and mold damage. The Court of Appeal affirmed the granting of summary judgment to Mid Century, finding that the Browns did not create a triable issue of material fact as to whether the release of water was “sudden.”

Hartford Casualty v. JR Marketing
216 Cal.App.4th 1444

Hartford appealed the dismissal of its cross-complaint against independent or “Cumis” counsel defending its insured. Under Civil Code Section 2860, Hartford was seeking reimbursement of all “unreasonable or unnecessary fees” paid to Cumis counsel. However, the Court of Appeal found that Hartford initially failed to meet its duty to defend and accept the insured’s tender of defense, thereby forfeiting its rights to rely on the statutory protections of Section 2860. The Court held that Hartford also did not have any other basis for a right of reimbursement.

[Ed. Note – On September 18, 2013, petition for review by the Supreme Court was granted in the Hartford decision. We will be following this decision, and will continue to report on the field of Cumis cases, which has been active lately].

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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