District Courts Reviewing ERISA Cases Under the Arbitrary and Capricious Review Standard Serve Only in an Appellate Role

August 27th, 2014

By Matthew P. Mazzola, Sedgwick New York

In McCorkle v. Metro. Life Ins. Co., 13-30745, 2014 WL 2983360 (5th Cir. 2014), the Fifth Circuit reversed the district court’s holding that MetLife’s adverse determination regarding the plaintiff’s claim for benefits due to the death of her husband (the “decedent”) under his employer’s Accidental Death and Dismemberment Plan (the “Plan”) was arbitrary and capricious. MetLife funded benefits and administered claims under the Plan pursuant to a full grant of discretionary authority. In her motion for summary judgment, the plaintiff challenged MetLife’s finding that the decedent’s death was both not “accidental” and subject to the Plan’s exclusions for self-inflicted injuries and suicide. The district court granted plaintiff summary judgment finding that her explanation of the decedent’s death was “more reasonable” than MetLife’s final determination that his death was the result of suicide.

The Fifth Circuit criticized the district court’s application of the arbitrary and capricious review standard, holding that in reviewing denied claims for benefits under this deferential standard, district courts:

are not sitting, as they usually are, as courts of first impression. Rather, they are serving in an appellate role.  And, their latitude in that capacity is very narrowly restricted by ERISA and its regulations, as interpreted by the courts of appeals and the Supreme Court, including the oft-repeated admonition to affirm the determination of the plan administrator unless it is “arbitrary” or is not supported by at least “substantial evidence”—even if that determination is not supported by a preponderance.

The Fifth Circuit also held that MetLife was only required to base its determination on substantial evidence, which means “more than a scintilla, less than preponderance, and such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Based on its review of the plaintiff’s claim under the appropriate standard of review, the Fifth Circuit reversed the district court’s decision finding that MetLife’s determination was, in fact, based on substantial evidence. In addition, the Fifth Circuit held that the district court erred in holding that plaintiff’s explanation of the decedent’s death  was “more reasonable” because this type of analysis improperly “constitutes finding the “‘preponderance,’ which has no place in this ERISA review.” Lastly, the Fifth Circuit held that the district court erred in disregarding MetLife’s deference by improperly substituting its own narrow interpretation of the term “suicide” for MetLife’s reasonable interpretation of that term.

 

You May Have Stolen the Advertising Database, But You Still Have No Advertising Idea

August 21st, 2014

By Daniel Pickett, Sedgwick New York

In Liberty Corporate Capital Ltd. v. Security Safe Outlet, 2014 WL 3973726 (6th Cir. August 15, 2014), the Sixth Circuit Court of Appeals held that where a stolen customer database is used as the basis of an advertising campaign, a claim arising from the misappropriation of that database does not constitute an advertising injury.

The case arose from an action brought by BudsGunShop.com, LLC (“BGS”) against a competitor, Security Safe Outlet, Inc. (“SSO”), and its former employee Matthew Denninghoff. While still a BGS employee, Denninghoff conspired with his sister, who was SSO’s Vice President, to open an internet firearms sales operation for SSO, in competition with BGS.  When Denninghoff left BGS, he secretly took a number of backup copies of BGS’s customer database with him. These were used by SSO to send mass promotional emails to BGS’s Kentucky customers. Although BGS directed SSO to desist in its use of the customer information, SSO refused to do so. BGS then sued SSO.

SSO sought a defense from its insurer, Liberty Corporate Capital Limited (“Liberty”), under a series of commercial general liability policies. SSO argued that coverage for BGS’s misappropriation of trade secrets claim fell within the policies’ adverting injury coverage, because the mass promotional emails were “advertisements,” and BGS’s claim constituted an allegation that SSO improperly used BGS’s “advertising idea” in its advertisements.  Liberty denied coverage arguing that, although the emails may have been “advertisements,” BGS’s misappropriation claim was not covered because BGS did not allege that SSO or Denninghoff used any of its “advertising ideas” in the emails, and the customer database itself was not an “advertising idea.”

The Sixth Circuit agreed with Liberty.  BGS’s allegations regarding misappropriation and use of the customer database did not involve the use of an “advertising idea,”  which was “reasonably understood to encompass a company’s plan, scheme, or design for calling its products or services to the attention of the public.”   BGS had not alleged that SSO used any of its advertising plans, schemes, or designs in the emails, only that customer information was used as a basis for the advertising campaign.

The Sixth Circuit affirmed the district’s court’s holding that Liberty had no duty to defend or indemnify SSO.

Insured Not Justified in Ignoring Claims-Made-and-Reporting Requirements

August 8th, 2014

By Beth Yoffie, Sedgwick Los Angeles

An insured’s attempt to circumvent the claims-made-and-reporting requirements of its professional liabilty policy, by arguing that the doctrine of promissory estoppel applied, was thwarted when a court ordered summary judgment in favor of the insurer on grounds that there was no clear and unambiguous promise by the insurer, and no justifiable reliance by the insured.  Hamman-Miller-Beauchamp-Deeble, Inc. v. Liberty Mutual Agency Corp., United States District Court, C.D. California, No. CV 13-07129-RGK (VBKx) (July 7, 2014).

Plaintiff Hamman-Miller-Beauchamp-Deeble, Inc. (HMBD), an insurance broker, received two letters in 2010 from an attorney claiming that his client had sustained damages as a result of HMBD’s negligence.  The attorney asserted that HMBD improperly advised the client that a health insurance policy it sold her would cover treatment from a non-contracted provider.  HMBD waited until it was served with a lawsuit two years later to provide notice of the claim to its Insurance Professionals Errors and Omissions Liability insurer.  General Insurance Company of America (General) denied coverage on the basis that (1) HMBD was aware of the accusation of negligent services prior to the inception of the policy; and (2) the claim was not both made against and reported by HMBD while the policy was in effect. HMBD sued General for breach of contract, bad faith and promissory estoppel.

In opposing General’s summary judgment motion, HMBD argued that the demand letters did not constitute a “Claim” triggering its duty to report.  The Court disagreed. First, the letter informed HMBD that it was “legally responsible for … damages” and thus contained a demand for damages. It also informed HMBD that the damages were the result of “negligence” and, therefore, alleged a wrongful act arising out of HMBD’s services.  The Court further found that, even if the letters were not “Claims,” the Policy would not provide coverage because HMBD knew of the wrongful act giving rise to the lawsuit and/or had a basis to reasonably anticipate that the lawsuit would be filed before the policy incepted. 

In its promissory estoppel claim, HMBD asserted that, in handling a different HMBD claim in 2008,  General’s claim representative told HMBD’s president that “he probably didn’t have to put General on notice of the Temple matter unless and until a lawsuit was filed.”   The Court found the alleged statement did not constitute a clear and unambiguous promise supporting promissory estoppel.  It also found that HMBD’s reliance on the alleged statement was unjustified as a matter of law when the parties entered a new insurance contract with contrary terms.

Sandy in the Courts

July 29th, 2014

Estimates of insured losses from Superstorm Sandy have approached $30 billion. Since late 2013, the courts have been handling numerous insurance cases arising out of the storm.  In this article, Sedgwick’s Michael Topp and Kara DiBiasio review how the federal court in New York (Eastern District) is coordinating the many cases filed in connection with homeowners’ claims.  They also summarize the written opinions that have been issued to date concerning coverage issues raised by Sandy under commercial policies.  The article is available for download here.

The Insurance Law Blog has been updating readers on key Sandy decisions, and we expect many more substantive cov­erage decisions from the courts through­out this year. Concurrent causation, “Named Storm,” and business interrup­tion issues are likely to be heavily con­tested, and Sedgwick and the Insurance Law Blog will continue to monitor the Sandy-related opinions impacting both homeowners and commercial insurers.

Prior Publication Precludes Coverage for Advertising Injury

July 23rd, 2014

By Daniel Bryer, Sedgwick New York

In Street Surfing, LLC v. Great American E&S Ins. Co., 752 F.3d 853 (9th Cir. 2014), the court held that the prior publication exclusion precluded coverage to Street Surfing, LLC (“Street Surfing”) for an underlying lawsuit alleging Street Surfing improperly used a third party’s advertising idea.

Great American E&S Insurance Company (“Great American”) issued two consecutive general liability policies to Street Surfing covering personal and advertising injury liability.  The policies specifically excluded (i) prior publication, (ii) copyright and trademark infringement (the “IP Exclusion”) and (iii) advertising injury arising out of any actual or alleged infringement of intellectual property rights (the “AI Exclusion”).

In June 2008, Street Surfer was sued by Ryn Noll (“Noll”), who owned the registered trademark “Streetsurfer,” claiming trademark infringement, unfair competition and unfair trade practices under federal and California law.  Street Surfer submitted a claim for coverage to Great American and tendered Noll’s complaint.  Great American denied coverage, citing the IP Exclusion and the AI Exclusion.

Street Surfer brought a declaratory judgment against Great American seeking defense and indemnification for the Noll action.  Affirming the district court, the Ninth Circuit held that the prior publication exclusion relieved Great American of its duty to defend Street Surfing in the Noll action because the extrinsic evidence available to Great American at the time of tender conclusively established: (1) that Street Surfing published at least one advertisement using Noll’s advertising idea before coverage began; and (2) that the new advertisements Street Surfing published during the coverage period were substantially similar to that pre-coverage advertisement.

The policies’ prior publication exclusion exempted from coverage “‘[p]ersonal and advertising injury’ arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.”  The straightforward purpose of this exclusion, the court ruled, was to “bar coverage” when the “wrongful behavior . . . beg[a]n prior to the effective date of the insurance policy.”

In the context of advertising injury coverage, an allegedly wrongful advertisement published before the coverage period triggers application of the prior publication exclusion, barring coverage of injuries arising out of re-publication of that advertisement, or any substantially similar advertisement, during the policy period, because such later publications are part of a single, continuing wrong that began before the insurance policy went into effect.

The test, then, is whether reuse “of substantially the same material” occurred.  In making this determination, the court focused on the relationship between the alleged wrongful acts “manifested by those publications,” holding that a “post-coverage publication is ‘substantially similar’ to a pre-coverage publication if both publications carry out the same alleged wrong.”  Focusing on the alleged wrongful acts fulfills the prior publication exclusion’s purpose of barring coverage when “the wrongful behavior had begun prior to the effective date of the insurance policy.”

Federal Court Undresses Urban Outfitters in Personal and Advertising Injury Coverage Dispute

July 3rd, 2014

By Ira Steinberg, Sedgwick Los Angeles

In OneBeacon America Ins. Co. v. Urban Outfitters Inc., 2014 WL 2011494 (E.D.Pa. 2014), the Eastern District of Pennsylvania analyzed the application of “personal and advertising injury” coverage to alleged violations of consumer confidentiality statutes and, in ruling in favor of the insurers, found that the claims did not come within the policy’s insuring agreement or were otherwise excluded.

The coverage case concerned three underlying cases alleging that Urban Outfitters and Anthropologie illegally collected customers’ zip codes when processing credit card transactions.  Urban Outfitters and Anthropologie were covered by policies that insured them against claims of, among other things, “personal and advertising injury” which includes “oral or written publication, in any manner, of material that violates a person’s right to privacy.”  However, under Pennsylvania law the only type of invasion of privacy which is covered under the insuring agreement is the breach of a person’s “right to secrecy.”  The policies also contained an exclusion for “Personal and advertising injury” arising out of a violation of any “statute, ordinance or regulation…that addresses, prohibits, or limits the … dissemination, … collection, recording, sending, transmitting, communicating or distribution of material or information.”

The court analyzed three underlying claims to determine if the duty to defend was triggered with respect to any of them. The first claim, the Hancock Action, alleged that the insureds collected zip codes from customers when processing credit card transactions and transmitted the zip codes to corporate headquarters for use in marketing campaigns. The court held that this action did not come under the insuring agreement because the transmission of the zip code information to corporate headquarters did not constitute a “publication.”  Since the insuring agreement requires an “oral or written publication” and there was no third-party dissemination that could constitute a publication, there was no coverage for the Hancock Action. However, the second claim, the Dremak Action, did involve a publication because it alleged that the zip code information was sold and disseminated to third parties in violation of the Song-Beverly Credit Card Act of 1971.  Although the court held that the personal and advertising injury insuring agreement was triggered, it also held that the exclusion for claims arising out of the violation of a statute addressing the handling of information applied and, therefore, the claim was excluded. 

Lastly, the third claim, the Miller Action, alleged the insured collected zip codes with credit card transactions, and used that information to send mail advertising to its customers.  The court held that sending junk mail to a customer did not invade their right to secrecy, and because the personal and advertising injury insuring agreement only covered violations of the right to secrecy, there was no coverage for the claim.  Accordingly, the court granted summary judgment in favor of the insurers.

 

 

New York’s Highest Court Affirms Zoning Ordinances Banning Hydrofracking

July 2nd, 2014

By Martin L. Eide, Sedgwick New York

The Insurance Law Blog has been following decisions related to hydraulic fracturing for potential impacts on insurance coverage issues. As we previously reported in May 2013, the New York Supreme Court, Appellate Division, upheld two zoning ordinances passed in 2011 by the Towns of Dryden and Middlefield, New York, which prohibited the exploration and production of natural gas and petroleum – including hydraulic fracturing, or hydrofracking. On June 30, 2014, the New York Court of Appeals affirmed the Appellate Division’s ruling finding that the New York Oil, Gas and Solution Mining Law’s (“OGSML”) supersession clause does not preempt “home rule” authority vested in the Towns to regulate land use. 

In Matter of Mark Wallach, as Chapter 7 Trustee for Norse Energy Corp. USA, v. Town of Dryden, et al., and Cooperstown Holstein Corp., v. Town of Middlefield, – N.Y.3d –, (June 30, 2014), the New York Court of Appeals affirmed the Appellate Divisions’ May 2013 decision upholding summary judgment in favor of Dryden and Middlefield which passed zoning ordinances banning natural gas and petroleum production operations.  The ordinances were established in 2011, and subsequently challenged by natural gas exploration companies alleging that the ordinances were preempted by the OGSML which, among other things, regulates the production and storage of oil and natural gas.  The trial courts disagreed with the production companies’ preemption arguments, and granted cross-motions for summary judgment in favor of the Towns because the zoning ordinances in question only limit the use of land and do not attempt to regulate the manner in which oil and gas is extracted under the OGSML.  The Third Department affirmed in May 2013, finding that the OGSML does not expressly preempt the local zoning regulations which did not limit the methods and means of mining proscribed by the OGSML, but merely limited where mining could occur.  Thus, the local zoning ordinances at issue were reasonable uses of the Towns’ home rule powers established pursuant to Article 9 of the New York Constitution.

In its opinion, the Court of Appeals affirmed finding that the OGSML’s supersession clause does not preempt the Town’s home rule power to regulate industrial land use, preserve a communities’ characteristics, and protect the health, safety and welfare of the community as a whole.  In particular, the Court of Appeals rejected the appellants’ arguments based on a three-pronged test previously discussed in Matter of Frew Run Gravel Prods. v. Town of Carroll, 71 N.Y. 2d 126 (1987).  In Frew Run, the Court of Appeals found that the Town of Carroll’s ordinance which restricted mining operations from a certain portion of the Town did not conflict with the Mined Land Reclamation Law (MLRL).  The Court of Appeals analyzed the plain language of the MLRL’s supersession clause, the statutory scheme of the MLRL as whole, and the MLRL’s legislative history to determine if the ordinance interfered with the MLRL.  The Court of Appeals found that the MLRL did not preempt a town’s ability to regulate land use because the New York Legislature passed the MLRL to regulate only the means and methods of extractive mining operations, and not where those operations could occur.

Here, the Court of Appeals applied the test in Frew Run and found that the plain language of the OGSML’s supersession clause, the statutory scheme as a whole, and the legislative history only focus on regulating the means and methods of gas, oil, and mining operations and not the location of where such operations could occur.  Therefore, the OGSML does not preempt the Towns’ home rule power to regulate land use and exclude gas and oil production operations.

The Court of Appeals also rejected the appellants’ secondary argument.  In this regard, the appellants argued that land use ordinances may only limit hydrofracking operations from certain portions of the Towns (i.e., residential areas) because a complete ban would run afoul of the OGSML and essentially, regulate the oil and gas industry.  The Court of Appeals disagreed, relying on Matter of Gernatt Asphalt Prods. v. Town of Sardinia, 87 N.Y.2d 668 (2006), a decision that follows Frew Run.  In Gernatt Asphalt, the Town of Sardinia amended its zoning ordinance to prohibit all mining operations following the New York State Legislature’s revision of the MLRL in accordance with Frew Run.  As a result of the Town’s amendment, a mining operator challenged the prohibition based on the MLRL’s supersession clause.  The Court of Appeals rejected the mining company’s challenge, finding that nothing in Frew Run or the MLRL obligates a town to permit mining just because minerals are available to be mined as a natural resource.

The Court of Appeals found that the restrictions at issue here are no different in substance to the ordinances passed by the Town of Sardinia and upheld in Gernatt Asphalt.  In addition, Dryden and Middlefield acted reasonably because they each studied the potential negative effects that hydrofracking may have on the character of their respective communities prior to enacting the ordinances.

Sedgwick tracks local and national developments in hydraulic fracturing in its newsletter, Hydraulic Fracturing Digest. Prior issues can be found here.

 

 

Hawaii and Massachusetts Governors Sign Legislation Extending Statute of Limitations for Abuse Claims

July 1st, 2014

By Cathy Sugayan and Serena Lee, Sedgwick Chicago

There has been legislation considered for claims arising out of childhood sexual abuse that would extend the limitations periods or allow pursuit of claims that were otherwise time-barred. For example, on June 23, 2014, Hawaii’s governor signed legislation into law extending a “window” allowing previously time-barred claims to be brought until April 24, 2016.  On June 26, 2014, Massachusetts’ governor signed legislation into law extending the limitations period.  Also, this past year, the following other states have considered legislation to extend the limitations periods for childhood sexual abuse: California, Georgia, Iowa, Missouri, New York, Pennsylvania, and Wisconsin; some of these efforts have already failed to pass into law and a couple may bring sweeping changes.

For our readers who are involved in insuring public and private entities against sexual abuse claims, these are important developments that could impact the defense of and coverage for these types of claims.  The Sedgwick white paper provides a survey of the current law and legislation regarding the statute of limitations for claims arising from childhood sexual abuse.

 

 

New York Court of Appeals Upholds Ban on Hydraulic Fracturing

June 30th, 2014

For readers following the developments in hydraulic fracturing and the potential insurance coverage implications, we have been tracking litigation in New York involving zoning ordinances passed by the Town of Dryden and the Town of Middlefield, and most recently reported on the litigation in our Hydraulic Fracturing Digest in January 2014.  Readers may recall that an appellate court decision issued on May 3, 2013, had upheld the zoning ordinances prohibiting the exploration and production of natural gas and petroleum.  Today, the New York Court of Appeals, the state’s highest court, affirmed the decisions.  We are reviewing the court’s decision and will provide further analysis in the Hydraulic Fracturing Digest.

Avoiding Sticker Shock: A Look Into What Are Considered “Reasonable and Customary” Charges Under 28 CCR §1300.71(a)(3)(B)

June 25th, 2014

By Rynicia Wilson, Sedgwick Los Angeles

In the case Children’s Hospital Central Cal. v. Blue Cross of Cal. (Cal. Ct. App. 2014) ___Cal.App.4th ___ (No. F065603),
The Children’s Hospital Central California (“Hospital”) and Blue Cross of California (“Blue Cross”) disputed the reasonable value of medical services the Hospital provided to Medi-Cal beneficiaries enrolled in Blue Cross’s Medi-Cal managed care plan. The Court of Appeals held that the trial court incorrectly concluded that Code of Regulations, Title 28, Section 1300.71(a)(3)(B) provided the exclusive standard for determining the reasonable and customary value of medical services, because the factors enumerated in 1300.71 are not exhaustive as to what is considered when determining the “reasonable and customary” value for medical services, nor are the providers’ billed charges dispositive.    

The Hospital provided emergency services to Blue Cross Medi-Cal beneficiaries for ten months without any contract in place. During this time, Blue Cross paid the Hospital $4.2 million based on the Medi-Cal rates paid by the government. However, the Hospital demanded its full billed charges of $10.8 million for the services provided. When Blue Cross refused to pay, the Hospital sued.  The trial court made discovery and evidentiary rulings before trial, including agreeing with the Hospital that Section 1300.71 provided the exclusive standard for determining the reasonable and customary value of the medical services in this action.  Thus, the trial court refused to allow Blue Cross to introduce any evidence that the rates accepted by other payors are reasonable and customary, and refused to allow any other evidence of “reasonable and customary” that did not fit within the six factors enumerated in Section 1300.71.  The case was tried and the jury found that there was an implied-in-fact contract between the Hospital and Blue Cross.  The jury awarded the Hospital $6.6 million.  

Blue Cross appealed and argued that the trial court erred in various discovery and evidentiary rulings, including the ruling that Section 1300.71 provided the exclusive standards for violating the reasonable and customary value of medical services. The Hospital contended that its billed charges were the “reasonable and customary” value. The Court of Appeals discussed the elements of Section 1300.71, that for non-contracted providers, reimbursement of a claim means: “the payment of the reasonable and customary value for the health care services rendered based upon statistically credible information that is updated at least annually and takes into consideration: (i) the provider’s training…; (ii) the nature of the services provided; (iii) the fees usually charged by the provider; (iv) prevailing provider rates charged…; (v) other aspects of the economics of the medical provider’s practice that are relevant; and (vi) any unusual circumstances in the case.” The Court of Appeals reversed the trial court’s judgment and remanded it for a new trial. The Court found that the trial court abused its discretion and prejudiced Blue Cross when it improperly limited the evidence of “reasonable and customary value” to the factors set out by Section 1300 .71. The Court held that Section 1300.71 does not provide the exclusive standard, and reasoned that “the facts and circumstances of the particular case dictate what evidence is relevant to show the reasonable market value of the services at issue, i.e., the price that would be agreed upon by a willing buyer and a willing seller negotiating at arm’s length [and that] [s]pecific criteria might or might not be appropriate for a given set of facts.”

 

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