Insurance Policy’s Promise to Advance Claims Expense for Covered Claims Does Not Create a Duty to Defend

Christopher Kendrick and Valerie Moore | Haight Brown & Bonesteel | May 7, 2019

In United Farm Workers of America v. Hudson Insurance Company, (E.D. Cal.) 2019 WL 1517568, the United Farm Workers of America union (UFW) sued Hudson Insurance Company for breach of contract and bad faith arising out of a former employee’s wrongful termination and wage and hour lawsuit.

Hudson provided UFW with Labor Professional Liability Insurance that included employment practices liability coverage. Hudson reserved its rights and agreed to pay an allocated share of the defense costs, citing the terms of its policy. UFW and Hudson agreed to a 50-50 allocation and, defending itself, UFW moved to compel arbitration of the employee lawsuit pursuant to its collective bargaining agreement. However, the trial court found that the only claim subject to arbitration was the employee’s wrongful termination claim, which Hudson contended eliminated the sole covered cause of action.

The employee’s complaint was amended to include class action allegations for the statutory wage and hour claims and the case proceeded to trial, resulting in an adverse judgment of $1.2 million. Hudson paid UFW for the allocated share of the defense costs incurred through the dismissal of the sole covered claim, and disclaimed any obligation for the wage and hour award.

Hudson retained Haight, Brown & Bonesteel to defend the company against the subsequent bad faith lawsuit brought by the UFW, which alleged that Hudson wrongfully failed to defend or indemnify the union for the employees’ lawsuit. Besides the $1.2 million wage and hour award, UFW claimed in excess of $800,000 incurred defending itself as damages.

UFW and Hudson brought cross-motions for summary judgment, with UFW seeking summary adjudication on the duty to defend. UFW argued that Hudson had a duty to defend the entirety of the employee lawsuit based on the mere potential for coverage, which was not extinguished by the partial grant of UFW’s motion to compel arbitration. (Citing Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263; Montrose Chem. Corp. v. Super. Ct. (1993) 6 Cal. 4th 287; and Buss v. Super. Ct. (1997) 16 Cal.4th 35.) UFW argued that Hudson’s failure to do so amounted to a bad faith breach of contract, exposing Hudson to the full amount of the defense costs, the resulting judgment, UFW’s own attorney’s fees for suing Hudson under Brandt v. Super. Ct. (1985) 37 Cal.3d 813, and other damages.

Hudson’s cross-motion for summary judgment asserted that there was no duty to defend under the terms of its policy, which expressly stated that UFW had the duty to defend. Under the policy, Hudson was only obligated to advance defense expenses for covered claims, subject to an allocation based on the respective liabilities and further subject to reimbursement in the event of an uncovered result, none of which translated into a duty to defend. (Citing Jeff Tracy, Inc. v. United States Spec. Ins. Co. (C.D. Cal. 2009) 636 F.Supp.2d. 995; and Petersen v. Columbia Casualty Company (C.D. Cal.) 2012 WL 5316352.) Further, although the employee’s original claim for wrongful termination was a covered claim under the Hudson policy’s definition of Wrongful Employment Practices, Hudson argued that none of the statutory wage and hour claims that remained after wrongful termination was ordered to arbitration came within the policy’s Wrongful Acts, Wrongful Offenses or Wrongful Employment Practices coverages. (Citing California Dairies v. RSUI Indem. Co. (E.D. Cal. 2009) 617 F.Supp.2d 1023.)

Consequently, Hudson contended that its payment after the entry of judgment, limited to an allocated share of the defense expense, and its disclaimer of coverage for the wage and hour award, were entirely proper and not in breach of the contract. In addition, Hudson uncovered the existence of misrepresentations in UFW’s application for the insurance during discovery, which Hudson argued voided the policy. (Citing Imperial Cas. Co. v. Sogomonian (1988) 198 Cal.App.3d 169; and Thompson v. Occidental Life (1973) 9 Cal.3d 904.) Without coverage or a breach of contract, Hudson argued that there could be no bad faith.

The district court agreed with Hudson, denying UFW’s motion for summary adjudication on the duty to defend and granting Hudson’s cross-motion for summary judgment. The court found that there was no duty to defend under the terms of the policy, which imposed the duty to defend on the insured and not the insurer. The court agreed that Hudson’s obligation was limited to payment for the cost of defending claims actually covered by the policy, and the award for wage and hour violations did not come within any of the policy’s coverages. Additionally, the court found that UFW made material misrepresentations in its application for insurance, holding that the contract was void. Because there was no coverage there was no breach of contract, and the cause of action for breach of the implied covenant of good faith and fair dealing had to fail as well, entitling Hudson to summary judgment.

This document is intended to provide you with information about insurance law related developments.The contents of this document are not intended to provide specific legal advice. If you have questions about the contents of this alert, please contact the authors. This communication may be considered advertising in some jurisdictions.

How To Adjust Actual Cash Value and Overhead and Profit in Colorado—Colorado To Hold Public Forum For Comments

Chip Merlin | Property Insurance Coverage Law Blog | May 3, 2019

The Colorado Division of Insurance will hold a public stakeholder meeting at the Colorado Division of Insurance in Denver on May 21, 2019, regarding its proposal to eliminate one of its long-standing bulletins requiring insurance companies to pay contractor overhead and profit rather than deduct the amount until incurred.1 We discussed this in Colorado Overhead and Profit Issues—Merlin Law Group Files a Response for Colorado Policyholders.

Below is the Notice of Stakeholder Meeting for those wishing to attend.

The Bulletin (which has been the position of the Division of Insurance since first issuing the Bulletin back in 1998) provides in part:

Insurers shall be prohibited from deducting contractors’ overhead and profit in addition to depreciation when policyholders do not repair or replace the structure.

The relevant policy language states:

“We will pay the actual cash value of the damage to the buildings, up to the policy limit, until actual repair or replacement is completed.”

The Division of Insurance has learned that one or more insurers have interpreted this language, or substantially similar language, to permit deduction for contractors’ overhead and profit, in addition to depreciation, from replacement cost in calculating actual cash value.

The position of the Division of Insurance is that the actual cash value of a structure under a replacement cost policy, when the policyholder does not repair or replace the structure, is the full replacement cost with proper deduction for depreciation. Deduction of contractors’ overhead and profit, in addition to depreciation, is not consistent with the definition of actual cash value. The Division of Insurance will interpret policy provisions containing the foregoing or similar language to prohibit deduction of contractors’ overhead and profit, in the calculation of actual cash value, where the dwelling is not repaired or replaced by the policyholder.

We strongly urge that contractors, public adjusters and consumer advocates show up for this meeting on May 21st, to support retaining the Bulletin. Certainly, most consumers of insurance will be at work and few would fully appreciate how a change of the aforementioned would end up shortchanging them.

The withholding of contractor overhead and profit when paying actual cash value is clearly wrong. Any experienced insurance regulator should know it. The fact that this is still lingering rather than being shut down immediately is troubling. Please show up and speak out!T
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1 Colorado Bulletin No. B-5.1, Calculation of Actual Cash Value: Prohibition Against Deducting Contractors’ Overhead And Profit From Replacement Cost Where Repairs Are Not Made

Recent Property Insurance Assignment of Benefits Legislation

Conroy Simberg | April 29, 2019

After 6 years, the Florida Legislature has finally passed what appears to be an effective crackdown on Assignment of Benefit (AOB) abuse that has plagued first-party property insurance for years. 

The Act creates Florida Statute 627.7152, which preliminarily defines “Assignment Agreements” as instruments by which post-loss benefits under a property insurance policy are assigned or transferred from insureds to persons providing protection, repair, restoration, or replacement services relating to damaged property.  The statute specifies that an assignment must:

  1. Be in writing and executed by both the assignor and assignee;
  2. Contain a provision permitting the assignor property owner to rescind the agreement without penalty by written notice of rescission: (1) within 14 days after execution of the agreement; (2) at least 30 days after the date work on the property is scheduled to begin if the work has not been “substantially performed;” or (3) if the assignee has not begun the work, and the assignment specifies no start date, then at least 30 days after execution of the agreement;
  3. Contain a provision requiring the assignee to provide its carrier with a copy of the executed assignment within 3 business days after its execution or the date the work begins, whichever date is earlier;
  4. Contain a written, itemized, per-unit cost estimate of the services the assignee expects to perform;
  5. Relate only to services to protect, repair, restore or replace a structure, or to mitigate against further damage;
  6. Contain a notice in 18-point typeface that, by executing the assignment, the property owner gives up certain rights to insurance proceeds to the assignee, and further notifying the owner of its right to rescind the agreement without penalty pursuant to the statute. The notice must also advise the owner that he or she remains responsible for compliance with the duties set forth in the insurance policy; and
  7. Contain a provision requiring the assignee contractor to indemnify and hold harmless the assignor property owner from all liability, including damages and attorney’s fees, if the policy prohibits, in whole or in part, the assignment of benefits.

The statute further provides that the assignment may contain neither any penalty or fee for rescission nor any other processing or administrative fee. 

The statute also contains a provision regarding emergency services necessary to protect property from further damage, limiting the assignment to $3,000 or 1% of Coverage A under a property insurance policy.  In order to fall within this limited exception to the statute’s notice and rescission provisions, the assignee must establish that there was “a situation in which a loss to property, if not addressed immediately, will result in additional damage until measures are completed to prevent such damage.” 

If an assignee breaches its statutory duties, it bears the burden to prove that the insurer was not prejudiced by the breach.  These duties include: (1) the maintenance of records of all services provided; (2) cooperation with the insurer’s claim investigation; (3) provision to the insurer of requested records and documents related to the assignee’s services, including permitting the carrier to make copies of any such documents or records; and (4) the delivery of a copy of the executed assignment to the insurer within 3 business days after execution of the agreement. 

The statute also provides that the assignee: 

  1. Must provide the assignor with accurate and revised estimates if the scope of changes; 
  2. Must perform the work in accordance with “accepted industry standards;”
  3. May not seek payment from the assignor of any amount in excess of his or her deductible unless the assignor has chosen to have additional work performed at the assignor’s sole expense;
  4. Must, as a condition precedent to suit, and, if required by the insurer, submit to examinations under oath and provide recorded statements conducted by the carrier or its representative that are reasonably necessary based on the nature and scope of the work, provided that the examination and/or statement is limited to matters relating to the services, the cost of the services, and the assignment agreement;
  5. Must also, as a condition precedent to suit on the policy, and if required by the insurer, participate in appraisal or other alternative dispute procedures pursuant to the terms of the policy.

The statute will not modify or eliminate any managed repair arrangement contained in an insurance policy. 

The statute further provides that acceptance of an assignment by an assignee waives the assignee’s (or its subcontractors’) claims against a named insured for payments arising from the assignment.  These claimants also may not: (1) attempt to collect money from an insured; (2) sue an insured; (3) lien an insured’s property; or (4) report an insured to a credit agency for the failure to make payments arising from the assignment, unless the assignment has been rescinded or the agreement is deemed invalid.  The assignee further agrees to indemnify and hold harmless the assignor from all liability, including damages and attorneys’ fees, if the insured’s policy prohibits the assignment of benefits. 

In addition, the assignee must provide the named insured, insurer, and the assignor (if someone other than the named insured) with a notice of intent to initiate litigation before filing suit under the policy.  The notice must: (1) specify the damages in dispute; (2) state the amount claimed; (3) include a pre-suit settlement demand; (4) include itemized information on equipment, materials, supplies, and the number of labor hours expended, and; (5) provide proof that the work has been performed in accordance with accepted industry standards.  The carrier must respond in writing to the notice within 10 business days after receipt by either making a pre-suit settlement offer or requiring the assignee to participate in appraisal or other alternative dispute resolution procedures. 

The assignee is entitled to recover its attorney’s fees and costs under Florida Statute 57.105 and this new statute only under certain limited circumstances, and it may be required to pay the insurer’s attorneys’ fees.  Specifically, if the judgment obtained after suit is less than 25% of the disputed amount, the insurer is entitled to its reasonable attorneys’ fees.  If the judgment is at least 25% but less than 50% of the disputed amount, neither party may recover its fees and costs.  Finally, if the judgment is at least 50% of the disputed amount, the assignee is entitled to its reasonable attorneys’ fees and costs. 

If the insurer fails to inspect the property or provide authorization for the repairs within 7 calendar days after the first notice of loss, it may waive its entitlement to attorneys’ fees if suit is later filed.  The insurer does not waive this entitlement if its failure to comply results from: (1) a state of emergency; (2) factors beyond the insurer’s control that prevented an inspection or authorization for repairs; or (3) the named insured’s failure to permit an inspection of the property after the insurer has requested permission.  In that event, the insurer does not waive its right to pursue reasonable attorneys’ fees and costs if it prevails in a suit brought by the assignee. 

If an assignee has previously sued the carrier and voluntarily dismissed the action, but later refiles the same suit, the court may order the assignee to pay the insurer’s attorneys’ fees and costs resulting from the initial lawsuit.  The court must stay the proceedings in the later-filed lawsuit until the assignee has complied with the court’s order relating to fees and/or costs. 

The statute expressly does not apply to assignments granted to a subsequent purchaser of property who has an insurable interest in the property after a loss or a power of attorney that permits an insured’s representative to act on behalf of an insured with respect to the insured’s property insurance.  The statute also does not apply to liability coverage under a property insurance policy. 

Assuming that the bill is signed by the Governor, it will become effective as to any assignment of benefits executed on or after July 1, 2019.  Significantly, the statute also provides that, by January 30, 2022, property insurers must report data on each residential or commercial property claim paid or litigated under an assignment.  The specific types of data required to be reported will be determined by the Financial Services Commission. The Commission will presumably analyze whether the statute furthered the desired goal of reducing loss and loss-adjustment expenses, which was the impetus for the legislation. 

House Bill 7065 also enacts Section 627.7153, which permits an insurer to offer a policy that restricts, in whole or in part, an insured’s right to execute an assignment of benefits if: 

  1. The insurer also offers insureds the same coverage under a different policy that permits assignments of benefits;
  2. The restricted policy is available at a lower cost than an unrestricted policy;
  3. The policy prohibiting all assignments is cheaper than a policy prohibiting partial assignments; and
  4. Each restricted policy provides notice to the insured in bold-faced type that the policy does not permit unrestricted assignments, and that by selecting that policy, the insured waives his or her right to freely assign or transfer to a third party the post-loss property insurance benefits available under to the policy. 

Carriers must notify their insureds, at least annually, of the various coverage options available under the statute, and that notice must be part of and attached to the premium notice.  A named insured must reject a fully assignable policy in writing or electronically on a form approved by the Office of Insurance Regulation, and must specifically state that the policy restricts the assignment of benefits in a heading in regulated type size. 

Section 627.7153 becomes effective on July 1, 2019, and it applies to policies issued or renewed after that date. 

Finally, Florida Statute 627.422, which is an existing statute currently providing that post-loss assignments may or may not be assignable depending on their terms, is amended to provide that any such assignment entitles the insurer to deal with the assignee as the owner or “pledgee” of the policy in accordance with the terms of the assignment until the insurer has received at its home office written notice of termination of the assignment or notice from some other person claiming an interest in the policy that conflicts with the assignment.  The statute further provides that a property insurance policy may not prohibit assignments of post-loss benefits unless the policy complies with Florida Statute 627.7153. 

In the event that any portion of the foregoing law is deemed invalid, the Legislature has provided that any invalidity should not affect the remaining provisions of the statute, which are severable from any deemed invalid as, for example, unconstitutional. 

The foregoing summary of the new AOB law is just that: a summary, and this is not meant to exhaustively detail the finer points of the proposed law.  We have attached hereto a copy of the law in its entirety for your edification.  

Interesting Public Adjuster Contract Required By Michigan Director of Insurance

Chip Merlin | Property Insurance Coverage Law Blog | April 29, 2019

The Michigan Director of Insurance recently issued the following bulletin:

MICHIGAN INSURANCE BULLETINS AND RELATED MATERIALS
BULLETINS
Bulletin 2019-07-INS
April 17, 2019

FROM: Anita G. Fox
Director Of Insurance
DATE: April 17, 2019

RE: RESIDENTIAL PUBLIC ADJUSTER CONTRACT

This bulletin supersedes Bulletin 2018-22-INS, dated November 20, 2018.

The Director has approved a new residential public adjuster contract. The effective date of the new contract is May 15, 2019. All licensed public adjusters must begin using the new contract on that date; and must file the new contract with DIFS no later than June 30, 2019.

Here is a copy of the new Michigan Residential Public Adjuster Contract.

Anita Fox is a former accomplished insurance defense counsel and was recently appointed Michigan’s Director of Insurance. Despite her name and background, her appointment does not necessarily mean that an insurance company fox is guarding the insurance henhouse. Time will tell and many experienced insurance defense counsel certainly know how insurance companies can make policies and procedures which are not in the public interest.

The mandated insurance contract has two parts which I found interesting. It requires the parties to indicate which coverages the public adjuster is adjusting and charging a fee. This is important. Some public adjusters wrongly do no adjustment work on the contents or living expenses and instead make their own policyholder customers do all the work, and then charge for it. This contract makes it clear what the public adjuster is required to do, and I applaud this requirement.

The second item is the recognition that the public adjuster is still required to be paid for work even if litigation, arbitration or mediation is necessary. I applaud this as well because the issue comes up every now and then and after the public adjuster does work and disputes arise regarding the amount owed or coverage owed. This contract mandate expressly raises the issue so there is no misunderstanding.

How To File A Complaint With The Georgia Department of Insurance About Your Delaying, Denying and Bad Treating Insurance Company

Nicole Vinson | Property Insurance Coverage Law Blog | April 22, 2019

The Georgia Office of Insurance and Fire Safety Commissioner has a simple online process for filing your complaint.

How the office responds to this Complaint may not be satisfying but it is important that a record is made of the insurance claims that are not properly handled.

If you are certain of your rights, follow the online complaint instructions below if you are upset with your insurance company’s treatment of your claim and have first given your insurer a fair chance to correct its previous misdeeds. As Chip Merlin has explained:

I usually call for giving the insurance company and its claims personnel a fair and quick chance to fix things because anybody can make a mistake. We should first think about Golden Rule before calling the authorities. Sometimes, those bad insurance company adjusters simply have it to coming to them, and those adjusters need to have the regulators looking more closely at them to prevent the bad apple adjusters from ruining the reputation of good and honest insurance adjusters.

If you are not certain of your insurance claim rights or if you have questions about your policy benefits, please do not hesitate to call Merlin Law Group attorneys as we have attorneys licensed in and practicing in Georgia.

Here is what you need for a Georgia Insurance Department Complaint:

Click here to create a Login and set your Password.

You can upload content (this is very helpful) about the claim and you will be given a complaint ID number. Be ready to type-in/upload the following for a property damage claim:

  • your name, address, daytime telephone number and email address
  • the exact name of the insurance company
  • the full name of any agent or adjuster who may be involved
  • your policy number
  • your claim number
  • date of your loss
  • a description of your problems
  • copies of all supporting documentation, including invoices, canceled checks, advertising materials, and any letters between you and the company or agent
  • emails about the claim

At this time, it does not appear that .JPEG photos can be uploaded, but my suggestion is to send the photos on a .PDF page.

Keep a copy of the complaint you file and your complaint number.

Policyholders can also seek to have a meeting with a regional agent representative in Georgia by clicking here.

More general questions about insurance can also be sent using this form.

Georgia still accepts the forms sent in via mail. Submit your completed form by mail at: Georgia Department of Insurance, 2 Martin Luther King Jr. Drive, Suite 716 West Tower, Atlanta, Georgia 30334, or by fax to: (404)-657-8542.

The Department advises that once the complaint is received, it will do the following:

  • You will receive an acknowledgment letter, advising who the investigator is and their contact information. Your Case Number shown on the letter is for the issue submitted to the Department. The case number should be used to send additional information to the Department on your case.
  • If you have future complaints you will get a new case number, acknowledgement letter and the new investigators name and contact information.
  • We will notify the company of your complaint and ask for a detailed response. We will send you a copy of the company’s response, with our formal letter regarding the completion of our investigation. Our review will result in one of the following actions:
    • If the complaint has been resolved, we will send you a letter explaining the resolution.
    • If an insurance law has been violated, we will request corrective action by the company.
    • If the company is not abiding by the policy, we will request corrective action.
    • If the insurer or producer has not responded to all questions or has not investigated the complaint thoroughly, we will require them to do so.

In practice, thus far, my clients have reported that the insurance department does contact the insurance carrier about the issues but progress, results, and/or claim satisfaction seem to fall short.

Georgia’s current insurance commissioner is very familiar with property insurance and familiar with complaints against the insurance industry. Before he was elected the insurance commissioner, Jim Beck was the General Manager for Georgia Underwriting Association. GUA is the state created insurance company. Beck also worked for Nationwide Insurance after he was the Deputy Insurance Commissioner in the 90’s. His LinkedIn page credits Jim Beck as being the author of “STANDING UP, The Georgia Consumers Insurance Survival Guide” but this publication does not appear readily available from any secure site.

When campaigning for office, Beck was federally investigated for holding state jobs while working in the private sector. His LinkedIn resume didn’t reflect the state jobs.

According to Fox 5 Atlanta:

[In] February of 2012, Beck left the Commissioner’s office and began work as the General Manager for a private insurance company – Georgia Underwriting Association. At that very same time, he took a second job with the state Prosecuting Attorney’s Council. In 2005, Beck took a job at the Department of Community Affairs. He already had a job as a registered lobbyist for Nationwide Insurance lobbying Georgia legislators. State records show he was a full-time Division Director.

Commissioner Beck was investigated but was also elected after the investigation began and holds the title: 2019 Georgia Insurance and Fire Safety Commissioner.

If you have experience with Commissioner Beck and how his office assisted with your complaint, we welcome your comments below.

Need to file a complaint with an insurance department in another state? Check out our other posts and use this link for a quick resource.