On March 21, 2012, the U.S. Supreme Court handed down a decision that clarified the U.S. Environmental Protection Agency’s (USEPA) administrative enforcement authority. The decision, Sackett, et al. v. EPA, et al. (Docket 10-1062), held that parties subject to an Administrative Compliance Order (ACO) under 33 U.S.C. section 1319 of the Clean Water Act (CWA) are entitled to seek pre-enforcement review under the Administrative Procedures Act (APA). The decision, while framed in the context of the CWA, may impact the USEPA’s use of its administrative authority under section 1431 of the Safe Drinking Water Act (SDWA) to regulate hydraulic fracking. Click here to read more
Archive for March, 2012
Getting Back Improperly Obtained Policy Benefits: Rescissory Damages Do Not Require Causal Connection Under New York LawWednesday, March 14th, 2012
In MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 936 N.Y.S.2d 513 (N.Y.Sup. Ct. Jan. 3, 2012), the New York State Supreme Court, New York County, ruled that a bond insurer need not demonstrate a causal connection between its insured’s alleged misrepresentations and payments made under policies issued to the insured in order to obtain rescissory damages—the amount paid less premiums received—under a fraudulently obtained insurance policy.
MBIA Insurance Corporation alleged that its insured misrepresented the quality of underwriting for mortgage loans backing securitizations that MBIA insured. In particular, MBIA alleged the insured: (i) misrepresented loan-to-value ratios, debt-to-income ratios and borrowers’ FICO scores; (ii) falsely represented that the loans complied with the insured’s underwriting standards; and (iii) falsified or inflated ratings for the loans.
MBIA moved for summary judgment. MBIA contended that it need not establish a causal connection between the insured’s alleged misrepresentations and payments made under MBIA’s insurance policies in order to rescind based on claims of fraud and breach of warranties. The insured argued that MBIA should not be entitled to rescissory damages for payments it made under the subject policies unless it could prove that the insured’s misrepresentations were the direct cause of those payments.
The court ruled that there is no basis under either New York insurance or common law to require an insurer seeking rescission to establish a direct causal link between the insured’s misrepresentations and the payment of claims made under the policy. Contrasting the heightened proof requirements for fraud, which require that damages must result from the material misrepresentations, the court held that an insurer seeking to rescind a policy based upon its insured’s fraudulent conduct need only show that the insurer would not have issued the policy on the same terms but for the insured’s misrepresentations. The court concluded that an insurer seeking rescissory damages based on fraud is not required to demonstrate the damages element of the traditional fraud claim, as the remedy sought is based in rescission and not compensatory damages.
In so ruling the court rejected the insured’s argument that MBIA must either prove its claim for fraud, including damages directly caused by the alleged fraudulent conduct, or be limited to rescission of the policy. MBIA argued that rescission would not be an appropriate remedy in this matter because it would harm the policies’ intended beneficiaries, the insured’s customers. The court noted that where rescission is warranted, but impractical, rescissory damages may provide the insurer with the financial equivalent of rescission. The court concluded rescissory damages equivalent to the amount paid under the subject policies, less premiums received from the insured, would make MBIA whole without providing a windfall.
In Sandman v. Quincy Mut. Fire Ins. Co., 2012 WL 181761 (Mass. App. Ct. Jan. 25, 2012), the Appeals Court of Massachusetts affirmed the trial court’s grant of Quincy Mutual Fire Insurance Co.’s motion to dismiss for failure to state a claim and its separate entry of judgment. The court found that Quincy was not vicariously liable for counsel’s misrepresentations that he represented both Quincy and the insured’s interests in a subrogation action.
In Sandman, an oil delivery company spilled heating oil into an insured’s basement resulting in real and personal property damage. Quincy paid the insured for real property damages, denied coverage for personal property damages, and retained subrogation counsel to recover the damages that it paid to the insured. Subrogation counsel, however, told the insured that he was retained to represent both the insured’s and Quincy’s interests in the subrogation action. When the subrogation action settled, counsel informed the insured that he was retained to represent only Quincy.
The insured sued Quincy’s counsel for, inter alia, misrepresentation and malpractice. In its motion to dismiss, Quincy argued that the insured failed to allege adequately that Quincy had authorized its counsel to represent the insured and that, in any event, Quincy was not vicariously liable for the misrepresentations of an independent contractor with a non-delegable ethical duty of loyalty to a client. The trial court granted Quincy’s motion.
The Court of Appeals affirmed, reasoning that the carrier could not be held vicariously liable because the insured failed to prove that: counsel was Quincy’s employee; Quincy exercised control over counsel’s performance; Quincy authorized counsel’s acts or omissions. The court also found that Quincy did not negligently hire counsel and that Quincy’s employees had not authorized counsel to represent the insured’s interests. Based on these findings, the court concluded that counsel was solely responsible for the representation of the insured and that any misrepresentations or negligence were not imputed to Quincy.
In PPI Technology Services, LP v. Liberty Mut. Ins. Co., 2012 WL 130389 (S.D. Tex. Jan. 17, 2012), the Southern District of Texas held that there was no “occurrence” of covered “property damage” arising from underlying claims that a well was drilled in the wrong location.
Royal Production Company, Inc. retained PPI Technology Services, L.P. to assist in well planning and to oversee the drilling of various wells on the leases. Royal sued PPI, alleging that it caused the drilling rig to be placed in the wrong location. This misplacement resulted in the drilling of a dry hole that was ultimately plugged and abandoned. Royal alleged that it had to maintain three mineral leases in the absence of any production, incurred costs in drilling the well in the wrong location, and incurred property damage to the property where the well was drilled. Liberty Mutual Insurance Company, the commercial general liability insurer for PPI, denied that it owed a defense or indemnity to PPI. PPI then sued Liberty Mutual for breach of the insurance contract, breach of section 541.060 (prompt payment of claims) of the Texas Insurance Code, and breach of the duty of good faith and fair dealing. Liberty Mutual filed a motion for summary judgment, arguing it has no duty to provide a defense.
Liberty Mutual’s policy insured property damage caused by an occurrence. The court found the misplacement of drilling equipment to be an “occurrence.” It concluded, however, that the drilling activity was not an “occurrence” because the drilling involved a deliberate action with expected consequences. The court held that the funds expended to drill the misplaced well and the costs incurred in delay rentals due to misplacement of the well were not “property damage.” It reasoned that no tangible property was involved in the payment of delay rentals, and the costs to drill are economic damages. While the court did find that there could be damage to the land resulting from the drilling of the well, the damage to the land was not caused by an “occurrence” because the drilling was not an “occurrence.” Hence, there is no insured “property damage.”
The court concluded that PPI could not sustain a breach of contract claim against Liberty Mutual as there had been no breach, given that no duty to defend had ever arose. Furthermore, Liberty Mutual could not have violated the Prompt Payment of Claims Act because the claim was not was covered by the policy. The court dismissed the entire action in favor of Liberty Mutual.
In Wilkinson v. State Farm Lloyds, 2012 WL 89957 (5th Cir. (Tex.) Jan. 12, 2012), the U.S. Court of Appeals for the Fifth Circuit found that driving past the house of a sexual molestation victim in violation of a criminal plea was not an “occurrence” under a homeowners’ policy. A Texas state court jury had found a homeowner negligent for sexually molesting a woman and awarded damages. The homeowner made a claim for coverage under his homeowner’s insurance policy and assigned the rights to collect under the policy to the victim. The victim, as assignee, sued State Farm Lloyds alleging that it failed to indemnify her and sought to use the negligence judgment as offensive collateral estoppel.
The federal district court granted summary judgment in favor of State Farm. The court held that sexual molestation could not be covered under the insurance policy because it was an intentional act. Furthermore, the homeowner’s violation of his criminal plea–driving on the victim’s street–was also intentional. Additionally, it did not cause “bodily injury,” only “psychoemotional injury.” The policy at issue defined “occurrence” as an “accident, including exposure to conditions, which results in bodily injury or property damage during the policy period.” The assignee appealed the decision of no coverage for the “street driving.”
The Court of Appeals affirmed that there was no coverage under the policy. The court recognized that under Texas law, the duty to indemnify is determined from the actual underlying facts that result in liability to the insured. The court found that the term “accident” was generally understood to be a fortuitous, unexpected and unintended event that took place as a “culmination of forces working without design, coordination or plan.” The court reasoned that a molester driving on the street past his victim’s house was not therefore an “accident” or an “occurrence” because the molester deliberately chose to be present in a place where he had agreed not to be. The court found that harm to the victim was the “natural and expected result” and was “highly probable whether the insured was negligent or not.”
Specificity Required: Pleading Requirements Not Met for Medical Providers Pursuing ERISA Benefits Via Their Patient’s AssignmentWednesday, March 14th, 2012
Medical providers must specifically allege the medical plans, the terms breached, and the assignment when pursuing benefits by assignment from their patients under Employee Retirement Income Security Act of 1974 (ERISA). In Sanctuary Surgical Centre, Inc. v. Connecticut General Life Ins. Co. Inc., 2012 WL 28263 (S.D. Fla. Jan. 5, 2012), the plaintiffs, including several medical providers, brought causes of action under ERISA § 502(a)(1)(B) and ERISA § 502(a)(3) against Connecticut General Insurance Company, as insurer/claims administrator, to recover benefits allegedly due for medical services rendered under several ERISA plans. The plaintiffs alleged that after receiving pre-authorizations from Connecticut General and receiving specific medical procedure, they were denied payment under the plans because the procedure was found not “medically necessary.”
The court granted Connecticut General’s motion to dismiss for failure to state a claim for wrongful denial of benefits under ERISA. The court found that the plaintiffs did not allege the actual plans at issue or the corresponding plan terms that Connecticut General purportedly breached in denying coverage. As such, the court held that the complaint did not sufficiently plead the existence of the ERISA plan under which it sought benefits. The court also found that it had no basis to consider the significance of the Connecticut General’s pre-authorizations relative to the issue of “medical necessity” without first reviewing the plan’s definition of that term.
The court held that the plaintiffs had no standing to bring a cause of action for breach of fiduciary duty under ERISA § 502(a)(3). The court found that the plaintiffs’ bald allegations of assignment were inadequate to establish derivative standing under ERISA. The court found that it could not evaluate the standing assignments, if any, conferred on plaintiffs without having the actual language of the assignments. Because it lacked this language, the court dismissed the plaintiffs’ cause of action for breach of fiduciary duty.
In December, the California Court of Appeal affirmed summary judgment to an insurer that had rescinded its healthcare policy because the insured made material misrepresentations in a policy application. Hagan v. California Physicians’ Service, 2011 WL 6820396 (Cal. Ct. App. Dec. 28, 2011).
For four years, the insured suffered from various illnesses related to her reproductive system. She was treated with medication and had been recommended for surgery. In 2005, she applied for health insurance with Blue Shield of California. Blue Shield’s application asked her about her medical history, including specific questions regarding her reproductive health. She denied prior medical history and pre-existing conditions, and Blue Shield issued her a policy.
The insured made a claim for benefits under the Blue Shield policy. During its claim investigation, Blue Shield discovered her history of reproductive health problems, and rescinded the policy. The insured sued Blue Shield, alleging breach of contract and bad faith. The trial court found that the insured had made material misrepresentations in the application, and it granted Blue Shield’s motion for summary judgment on the insured’s claims.
The Court of Appeal affirmed. It found that the insured had made material misrepresentations warranting rescission. Reasoning that under California law all questions in an application for insurance coverage are material, the Court of Appeal found irrelevant the insured’s intention to deceive or to complete the application negligently. The court concluded that rescission is warranted if the application contains false information and found that the insured’s application contained false information, although no evidence existed that the insured intended to deceive Blue Shield. The court did not require Blue Shield to establish that it would not have issued the policy but for the misrepresentations; rather, the touchstone was whether Blue Shield would have charged a different premium or issued the policy on different terms.
The Court of Appeal rejected the insured’s contention that the policy terms, indicating that coverage “may be” canceled due to misrepresentations, did not warrant rescission. The court reasoned that rescission and cancellation are different remedies. Unlike cancellation, rescission voids a policy from the outset. Thus, the policy terms were of no help to the insured because the contract is void ab initio, or from the beginning.