Insurer's Dividend Decisions Protected By Business Judgment Rule

Posted on September 22, 2008 by Sara Thorpe

 

The California appellate court (Los Angeles County) held the trial court was correct in granting summary judgment in State Farm’s favor in a class action that sought to question decisions made as to the amount of dividends paid to policyholders. Hill v. State Farm Mut. Auto. Ins. Co. (2008) __ Cal.App.4th __ (08 C.D.O.S. 12449). The policyholders claimed State Farm breached a duty to pay billions of dollars as dividends, which created an excessive surplus.

This decision in the case comes after ten years of litigation. Initially the case was dismissed on demurrer, but the appellate court reversed that decision, ruling plaintiffs had plead enough to proceed with their lawsuit for breach of contract, breach of the covenant of good faith, and unfair business practices. Thereafter a nationwide class of 50 million present and former policyholders was certified. The court, after reversal by the appellate court, determined Illinois law applied since State Farm’s corporate business was handled in Illinois.

In 2005, State Farm filed a motion for summary judgment/adjudication. The trial court granted the motion on the basis that policyholders could not question the decisions of the board of directors of State Farm. California’s appellate court affirmed, ruling that while policyholders of this mutual insurance company do not have a right to a dividend, State Farm “was obligated to consider from time to time whether dividends should be declared.” (Emphasis by court.)  In its considerations, State Farm “was bound by a duty of care, requiring the Board to make decisions in a prudent manner.” The policyholders argued that State Farm failed to act prudently, failed to deliberate, and merely rubberstamped management’s decisions.

State Farm relied in part on the business judgment rule, which (under Illinois law) presumes that directors of a corporation make business decisions on “an informed basis, in good faith, and with the honest belief that the course taken was in the best interests of the corporation.” This is a rebuttable presumption. Exceptions to the rule exist where, in the process, there is evidence of fraud, oppression, dishonesty, total lack of merit, illegality, or failure of the board to become sufficiently informed to make an independent decision. The business judgment rule does not focus on the merits of the board’s decision.

The court found State Farm’s decisions were protected by the business judgment rule and no exception applied. The evidence presented showed the board was involved, considered various factors, and made its own decisions on whether dividends would be paid.

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Equitable Defenses Did Not Defeat Class Certification

Posted on February 29, 2008 by Sara Thorpe

Blue Shield still faces a possible class action on “post claims underwriting.” California’s Court of Appeal, Second District (Los Angeles), issued a slightly modified opinion after rehearing against Blue Shield. The appellate decisions reverses the Los Angeles County Superior Court’s order denying a motion to certify a class under Proposition 64.  In sum, the appellate court held that equitable defenses cannot be used to defeat a claim under California’s Unfair Competition Law (Bus. & Prof. Code, § 17200 [the “UCL”]) and Blue Shield could not raise as a defense fraud based on statements the insured made in an application for insurance because the application was neither attached to nor endorsed on to the policy when issued. 

Plaintiff Augusto Ticconi alleged he applied for a policy of short term health and accidental death insurance from Blue Shield of California Life and Health Insurance Company and truthfully answered all health questions on the policy application. Blue Shield issued the policy to Ticconi effective January 1, 2004 with a one year duration. Ticconi’s application was not attached to or endorsed onto the Policy when issued. Thereafter, Ticconi required “significant health care services” totaling over $100,000. After Ticconi submitted his bills for payment, Blue Shield rescinded the Policy on the basis that Ticconi has made material misrepresentations in his application for insurance.

In his class action lawsuit against Blue Shield, Ticconi alleged Blue Shield had a practice of issuing policies without attaching or endorsing a copy his application in violation of Insurance Code §§ 10113 and 10381.5, and rescinding policies in violation of those statutes, which conduct constituted an unfair and unlawful business practice in violation of the UCL.

Ticconi moved for certification of a class defined as all California residents issued health insurance since May 2001 by Blue Shield and who thereafter had the policy rescinded by Blue Shield based upon alleged misrepresentations contained in the policy application.  Blue Shield opposed the motion on the basis, among others, that there was a lack of community-of-interest required for class certification. The trial court denied Ticconi’s motion for class certification on the basis that Blue Shield’s defenses of fraud and unclean hands to Ticconi’s and other insureds’ claims raised individual factual issues  and would require separate trials on the merits of each individual’s case based on its unique facts.

In reversing the trial court’s decision, the court of appeal noted that the unlawful conduct alleged by Ticconi was “postclaims underwriting.” The court found such practice to be “categorically prohibited” by Insurance Code § 10384. The court also stated that the consequence for failing to comply with Insurance Code §  10113 and 10381.5 is that the insured is not bound by statements made in the application and the insurer claim misrepresentation or omission based on the unattached and unendorsed application. The court further held that conduct in contravention of Insurance Code §§ 10113, 10381.5 and 10384, constitutes a predicate unlawful practice sufficient for a UCL cause of action. 

The court of appeal found Ticconi’s defined class raised factual and legal issues relevant to Blue Shield’s liability and universal to class members, thus common issues of law and fact would predominate.  The court found that equitable defenses of unclean hands were not available in a UCL action based on violation of a statute, because allowing such a defense would “sanction the defendant for engaging in an act declared by statute to be void or against public policy.” Fraud was not available to Blue Shield as a defense to the UCL cause of action because Blue Shield failed to attach or endorse the insureds’ application to the policy.  Thus, it was error for the trial court to weigh the legal and factual issues associated with such defenses in denying Ticconi’s motion for class certification.

The case was remanded to the district court with instructions. The appellate court noted there were other issues to consider as to whether the class should be certified, including whether Ticconi’s claims were typical and whether he could adequately represent the class, especially since Ticconi’s policy had been reinstated and medical bills paid.  

The California Supreme Court denied review (3/26/08).
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