National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

In Clark, plaintiffs sued life insurers for allegedly using deceptive business practices to induce senior citizens to buy high commission annuity contracts with large early surrender penalties. Plaintiffs sought an injunction, restitution, and to treble any monetary award under Calif. Civil Code § 3345. Section 3345 applies to actions by or on behalf of senior citizens and disabled persons to redress unfair or deceptive acts or parties and unfair methods of competition. Pursuant to this statute, the monetary award can be multiplied up to three times if “a trier of fact is authorized by a statute to impose either a fine, or a civil penalty or other penalty, or any other remedy the purpose or effect of which is to punish or deter.”

The insurers moved for judgment on the pleadings that Section 3345’s trebling provision did not apply to private actions brought under the BPC. The trial court granted the motion and plaintiffs petitioned for writ of mandate. California’s appellate granted the writ and order the trial court to deny the insurers’ motion for judgment on the pleadings. The Supreme Court granted review and upheld the trial court’s decision.

Underpinning the Court’s decision is that the BPC limits its remedies for private citizens to injunctive relief and restitution. BPC § 17204. Punitive damages and increased or enhanced damages are not recoverable under that statute. Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134, 1148 (2008).  Justice Kennard, writing for California’s highest court, explained that the canon of statutory construction requires that: “when a particular class of things modifies general words, those general words are construed as applying only to things of the same nature or class as those enumerated.” Otherwise, the specific things mentioned would be surplusage. Thus, here, Section 3345’s reference to remedies to punish or deter must be read consistent with the first part of the sentence which refers to statutes that impose fines or penalties. Since the BPC does not impose fines or penalties, the trebling function of Section 3345 does not apply.

Shilo had contracted with the insured, James Grant, to install various granite components in its hotel. However, Shilo initiated arbitration proceedings after it determined that the granite tub surrounds had not been properly installed. The arbitrator agreed that much of Grant’s work was “defective and faulty” and that water intrusion had occurred, but he also found the evidence insufficient with respect to the scope of water intrusion. The arbitrator awarded Shilo damages for the cost to remove and replace the improperly installed granite.

After converting the arbitration award into a judgment, Shilo filed a Writ of Garnishment in an attempt to collect insurance proceeds from Maryland Casualty Company, which had insured Grant. However, upon Maryland Casualty’s Motion for Summary Judgment, the Court agreed that the only damages awarded to Shilo in the arbitration fit within the exclusion for property damage to “[t]hat particular part of any property that must be restored, repaired, or replaced because ‘your work’ was incorrectly performed on it.”

Although Shilo has filed a notice of appeal to the Ninth Circuit and, therefore, the ultimate result in this case could change, the District Court’s decision serves as a reminder of the importance of distinguishing between mere construction defects on one hand and actual damage caused by construction defects on the other. Where no resulting damage is proven, the coverage terms and exclusions of many general liability policies may be sufficient to defeat coverage. Moreover, even when resulting damage is proven, coverage may be limited to the cost to repair the resulting damages. Because correcting defects is often more expensive than repairing damages, this limitation can be significant and should not be overlooked.

In this case, the insurer appealed a supplemental judgment awarding attorney fees to the plaintiff, its insured, after the plaintiff prevailed in an action for payment of uninsured motorist (UM) benefits. The plaintiff had sustained personal injuries in an automobile accident caused by a hit-and-run driver and sought UM benefits under her policy with the insurer. The insurer paid her $800 in exchange for her signing a “Trust Agreement and Release in Full,” which released and discharged the insurer from all rights, claims, demands and damages of any kind resulting from bodily injury arising from the accident. The plaintiff, however, did not speak or read English, and was not represented by counsel at the time.

More than a year later, the plaintiff retained counsel who sent the insurer a letter rescinding any previously executed release forms and requesting additional UM benefits under the plaintiff's policy. The insurer responded by letter that that there were no issues as to the existence of UM coverage, the only issues being the liability of the uninsured driver, the insured’s damages, or both, and that the insurer agreed to binding arbitration. The plaintiff also ultimately agreed to arbitration.

At arbitration, the issue was the enforceability of the release and, if it was determined not to be enforceable, the amount of additional damages owed to plaintiff. The arbitrator ruled that the release was unenforceable, and awarded the plaintiff damages in excess of $800, but declined to award attorney fees ruling that the defendant had qualified under ORS 742.061(3). That statute entitles an insured to attorney fees if he or she brings an action on a policy and recovers more than the insurer offers in settlement, but provides the insurer a “safe harbor” by insulating it against having to pay attorney fees in personal injury protection and UM cases if the insurer meets the statutory requirements. The arbitrator ruled that the insurer met all of the requirements for avoiding fees including the provision that the only disputed issues at arbitration were liability and damages.

The plaintiff filed an exception to the arbitrator's denial of attorney fees and requested a hearing de novo in circuit court. She contended that, in addition to damages and liability, the parties also disagreed on the enforceability of the release. The trial court agreed with the plaintiff and, in a supplemental judgment, awarded her $16,036.83 in attorney fees and costs.

The Court of Appeals examined the language and legislative history of the statute at issue and concluded that only after the arbitrator had resolved the preliminary issue of the release’s enforceability could the arbitrator address the issue of the damages that plaintiff should receive under the policy. Damages and liability, then, were not the only issues submitted to binding arbitration, and the insurer was therefore not eligible for the attorney fee “safe harbor” in ORS 742.061(3).
 

Regence Bluecross successfully argued to the trial court that the claim was barred by the six year statute of limitations, ORS 12.080, because any breach occurred in May of 1999 when the company first changed the amount of its payments. The insured argued on appeal that there were multiple breaches: one for every month when Regence Bluecross paid 50% rather than 80% of the medication costs. While conceding that the statute of limitations barred her claim with respect to deficient payments prior to December of 2000, the insured argued that the statute did not bar her claim with respect to deficient payments after that time. The Court of Appeals agreed with the insured. After acknowledging the general rule that “an insurance contract is breached when benefits are wrongfully denied by the insurer,” the Court ruled that “each wrongful denial of a claim for benefits constitutes a discrete act by the insurer that causes harm to the insured separate from and independent of the injuries caused by the denial of other claims, and accordingly, constitutes a discrete breach of the obligation to pay benefits under the policy.”

The effect of the Pritchard ruling extends beyond the health insurance context. Take, for example, a coverage dispute over pollution clean-up costs. If the insurer denies a claim outright, that denial date should control for purposes of calculating the statute of limitations. Because, as the Pritchard court commented, “an ongoing accrual of economic damages does not extend the statute of limitations to revive a stale claim,” it should not matter if the insured continues tendering new bills related to the same clean-up claim: the original denial date will continue to control. However, if the insurer accepts coverage but disputes the amount that should be paid, there will be a new statute of limitations date for each time the insured tenders an invoice and the insurer pays less than what the insured claims is due. According to the Pritchard court’s reasoning, it would not matter if the insurer clearly stated more than six years ago that it would only pay a certain portion of any invoices submitted. Instead, each disputed payment would trigger a new statute of limitations date.