Archive for the ‘Insurance Practices’ Category

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

Wednesday, 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

Thursday, 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

Friday, 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.

Prior Publication Precludes Coverage for Advertising Injury

Wednesday, 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

Thursday, 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.

 

 

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

Tuesday, 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.

 

 

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

Wednesday, 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.”

 

Not Feeling It: Court Nixes Claim for Feng Shui Fees and Finds No Bad Faith

Tuesday, June 17th, 2014

By Timothy Kevane, Sedgwick New York

In Patel v. American Economy Ins. Co., — F. Supp. 2d. —, 2014 WL 1862211 (N.D. Cal. May 8, 2014), the U.S. District Court for the Northern District of California granted the insurer’s motion for partial summary judgment, finding no coverage for the fees of a feng shui consultant, rejecting business losses outside the specified period, and concluding there was no bad faith.

The insured dental office suffered smoke damage due to a fire in the basement of premises it occupied.  Among other expenses submitted to its property insurer was a bill for $50,000 from its feng shui consultant who provided advice with respect to crystal replacements, energy balance restoration, furniture placement, and the alignment of Qi forces.  The court held that such expenses did not constitute a “direct physical loss” covered by the policy as they did not involve damage to tangible, material objects.  Furthermore, there was no evidence these expenses were incurred to minimize the suspension of the business and to continue operations (as a covered “extra expense”).  The court held that the extra expense provision was not rendered vague simply because it did not specifically exclude feng shui costs from coverage.

The court also rejected the insured’s supplemental claim for lost business income when it had to shutter its business in 2014 due to additional repairs to the building relating to the original fire, which occurred five years earlier.  The insured argued that the policy covered twelve months’ worth of lost income, and because it initially claimed only one month of lost income immediately after the fire, it remained eligible for another eleven months of coverage.  The court rejected this argument as the business income coverage was limited to the defined “period of restoration,” subject to the requirement that lost income must be sustained within twelve consecutive months from the date of loss.  The court found that it made no difference that restoration work may have resumed outside this limiting period.

Lastly, the court rejected the claim that the insurer disregarded in bad faith the insured’s need to relocate in 2014, citing the absence of any underlying contractual obligation to cover the 2014 lost income.

 

Second Circuit Vacates Judge Rakoff’s Rejection of SEC Settlement: Consent Decree “Fair and Reasonable” Even Without Admission of Wrongdoing

Friday, June 13th, 2014

By Katelin O’Rourke Gorman, Sedgwick New York

D&O insurers should be mindful of a recent development in the Second Circuit that could have implications for D&O insurers.  The developments stem from a key decision in the Southern District of New York in 2011.  On November 28, 2011, in a surprising and much-publicized decision, Judge Jed S. Rakoff refused to approve a consent decree jointly proposed by the SEC and Citigroup Global Markets.  See SEC v. Citigroup Global Markets Inc., 827 F. Supp. 2d 328 (S.D.N.Y. Nov. 28, 2011).  The consent decree required Citigroup to pay $285 million and refrain from future Securities Act violations after allegedly misrepresenting the company’s structuring and marketing of a billion dollar fund largely collateralized by subprime securities.  During the settlement hearing, Judge Rakoff asked, among other things, why the court should approve a consent judgment in which Citigroup neither admitted nor denied any of the “serious securities fraud violations” alleged by the SEC.  Apparently unpersuaded by the parties’ response, Judge Rakoff concluded that the proposed settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest … because it does not provide the court with a sufficient evidentiary basis to know whether the requested relief is justified[.]”   According to Judge Rakoff, “when a public agency asks a court to become its partner in enforcement … the court, and the public, need some knowledge of what the underlying facts are[.]” Unsurprisingly, the SEC and Citigroup appealed.

 Last week, applying an “abuse of discretion” standard, the Second Circuit vacated and remanded Judge Rakoff’s decision.  SEC v. Citigroup Global Markets Inc., ___ F.3d ___, 2014 WL 2486793 (2d Cir. June 4, 2014).  Among other things, the Second Circuit concluded that it was “an abuse of discretion to require … that the SEC establish the truth of the allegations against a settling party as a condition for approving the consent decrees.”  As the court explained, “[t]rials are primarily about the truth.  Consent decrees are primarily about pragmatism. … It is not within the district court’s purview to demand cold, hard, solid facts, established either by admissions or by trials as to the truth of the allegations in the complaint as a condition for approving a consent decree.” 
 
Although the Second Circuit noted that other cases may require more of a showing (such as where a district court suspects a consent decree has been entered into as a result of improper collusion between the SEC and the settling party), such circumstances did not appear to be present here.  Indeed, the Second Circuit noted that Judge Rakoff, “with the benefit of copious submissions by the parties, likely had a sufficient record before it on which to determine if the proposed decree was fair and reasonable.”  Of course, if Judge Rakoff “deem[ed] it necessary” on remand, the Second Circuit noted he could ask the SEC and Citigroup to provide “additional information sufficient to allay any concerns … regarding improper collusion between the parties.” 
 
If Judge Rakoff’s decision had been affirmed, meaning that SEC consent decrees likely would need to include party admissions to the wrongful acts alleged, then the “personal profit” and/or “fraud” exclusions typically present in D&O policies would be triggered, as “final adjudication” language often incorporated into those exclusions would be satisfied.  D&O insurers’ exposure, therefore, would be significantly limited in such matters, with defense costs likely presenting the only exposure.  Thus, the Second Circuit’s reversal significantly blunts, if not outright kills, the immediate trigger of the personal profit and/or fraud exclusion(s) which could have been available to insurers had Judge Rakoff’s decision been affirmed. 

Despite potentially disarming the “personal profit” and “fraud” exclusions, the Second Circuit’s decision does not affect a typical D&O policy’s “loss” definition.  The amounts due from the insured in the usual consent decree, which include mostly fines, penalties, and disgorgement, arguably fall outside the typical “loss” definition.  As a result, while the Second Circuit’s decision may be disappointing to D&O insurers, other strong coverage defenses such as the definition of “loss” continue to be viable with respect to both consent decrees and any parallel civil actions that exist.

 

 

Illinois “Blasts” Non-TCPA Causes of Action Out of Coverage

Tuesday, June 10th, 2014

By Stephanie Sauvé, Sedgwick Chicago

In G.M. Sign, Inc. v. State Farm Fire & Cas. Co., 2014 IL App (2d) 130593 (May 2, 2014), the Illinois appellate court enforced a policy’s Violation of Statutes Exclusion endorsement to preclude coverage for a settlement arising out of an underlying blast-fax lawsuit that alleged various causes of action.

The underlying lawsuit was a class action in which G.M. Sign sued Michael Schane (“Schane”) and Academy Engraving Company for sending unsolicited fax advertisements. G.M. Sign asserted three causes of action in its amended complaint:  violation of the federal Telephone Consumer Privacy Act of 1991 (“TCPA”), conversion, and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.  The latter two counts made no express reference to the TCPA, but each count was based on the sending of unsolicited fax advertisements to G.M. Sign and others.  Schane later entered into a settlement agreement in which he stipulated to the entry of judgment against him for $4.9 million, to be satisfied with insurance proceeds.

Schane tendered the suit to his insurer, State Farm.  His insurance policy contained a Violation of Statutes Exclusion endorsement precluding coverage for property damage or advertising injury “arising directly or indirectly” out of any action or omission that violates or is alleged to violate the TCPA or any other statute that prohibits or limits the sending, transmitting, communicating, or distribution of material or information.  Citing this exclusion, the insurer denied coverage because the amended complaint alleged violations of the TCPA.

Thereafter, G.M. Sign filed a declaratory judgment action against State Farm claiming coverage under Schane’s policy.  On cross-motions for summary judgment, the trial court found that the insurer had a duty to defend and indemnify Schane, but the appellate court reversed.  The appellate court determined that the insurer had no duty to defend in connection with the amended complaint because the exclusion applied to all counts in the amended complaint.  The court reasoned that the proper analysis of the “arising out of” language in the Violation of Statutes exclusion is a “but for” analysis — if the alleged injury would not have occurred “but for” a violation of the TCPA, then the exclusion barred coverage for the alternative causes of action which arose from the same conduct underlying the alleged TCPA violation.

Look here for more Sedgwick articles related to insurance coverage for violations of the TCPA.

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