Court Ruling Emphasizes Importance of Reading the Insurance Policy as a Whole

Insurance policies contain technical language that often varies from its everyday meaning. When a case depends on the meaning of the insurance policy fine print, how you interpret these technical terms can decide the outcome of a case.

One way to define insurance policy terms is to see how those terms are used elsewhere in the insurance policy. The Ninth Circuit Court of Appeals’ August 17, 2020 ruling in Engineered Structures, Inc. v. Travelers Property Casualty Company of America is a good illustration.

Engineered Structures, Inc. (ESI) was a construction firm that purchased a “builder’s risk policy” from Travelers insurance. The policy covered risks of damage when ESI was building a Fred Meyer gas station in Portland, Oregon.

ESI made a claim under the policy when an underground fuel storage tank ESI’s subcontractor was installing was improperly placed in the ground. The tank was loaded with inadequate ballast. After a rainstorm, the tank floated in the excavation hole, causing damages.

Travelers denied coverage under a policy exclusion for “faulty, inadequate or defective workmanship or construction”. ESI sued Travelers claiming the denial violated the policy and was made in bad faith. The issue depended on what the word “construction” in the exclusion meant. ESI said “construction” meant the finished product it was building, so the exclusion only applied for defects in the finished product.

Certain rules come into play when an insurance term of art is ambiguous, but the court determined those rules didn’t apply because it could understand the term “construction” by reading other language in the policy.  The court examined other language in the insurance policy that treated “construction” as referring to the process of building the gas station. The policy defined certain “construction activities” in terms of the actions taken in the course of constructing the gas station. The court interpreted the word “construction” in the exclusion as referring to the process of constructing the gas station, as opposed to the final product that was built.

This emphasizes the principle that insurance policy language must be read in the context of the entire insurance policy. Where the policy uses technical language in one place, it can often be understood only by reviewing similar language elsewhere in the policy. A few other references to a disputed term elsewhere in the policy can decide insurance coverage for a huge loss.

 

Industry Group Reviewing Insurance Rate Practices for Racial Bias

An industry group known as the Insurance Information Institute is analyzing the role racial bias plays in calculating insurance premiums. Explicit racial bias, i.e.., setting premiums directly based on race (known as “redlining”) has been illegal since the mid 20th century.  But rates continue to bet set based on criteria that indirectly reflect racial bias. One study found persistent rate increases for homeowners’ insurance in minority neighborhoods that exceeded legitimate risk differentials.

Rate criteria reflecting implicit racial bias include credit scores and occupations. The insurance industry has long defended these criteria as reliable predictors of risk. But the new working group pushes back on those assumptions:

Research shows that average credit scores for white and Asian customers are better than those for Black and Hispanic customers…Insurance credit scores reflect and perpetuate historic racism and unfairly discriminate against Black and Hispanic communities.

Other facially neutral rate setting policies can have a discriminatory impact. Motor vehicle records (e.g., traffic tickets) can reflect systemic racism on the basis that affluent white drivers are better able to afford hiring lawyers to dismiss or downgrade citations.

The industry group is also investigating whether the use of computer algorithms to analyze so-called “big data” about drivers can reflect implicit racial bias. This mirrors concerns in other fields (e.g., facial recognition software) that computer programs inadvertently perpetuate existing biases.

This new report shows the insurance industry as a whole is following up on efforts from state regulators to limit discriminatory premium rates. New York’s Department of Financial Services recently prohibited using education and occupation to price car insurance. The rule only applies in New York. Hopefully this pushback will become more widespread as other groups take note.

 

 

 

 

Court Confirms Health Insurers Can’t Sell Discriminatory Insurance Policies

The Ninth Circuit Court of Appeals (the federal appeals court with jurisdiction over Washington and other west coast states) is having a busy summer for insurance cases. On the heels of recent decisions regarding attorneys’ fees in ERISA-governed insurance disputes and insurers’ duty to reasonably investigate insurance claims comes the July 14, 2020 ruling in Schmitt v. Kaiser Foundation Health Plan of Washington, holding health insurers cannot design health plans that have a discriminatory impact under the Affordable Care Act (a/k/a “Obamacare”).

For decades before the ACA, it was legal for health insurers to design health plan benefits however they chose, even if those plan designs had a discriminatory impact. As long as the insurer provided the same benefits to everyone, the insurer could decide what benefits to offer and what not to offer. Insureds could not sue their insurer for designing a health plan that had a discriminatory effect.

The Schmitt ruling confirms that the ACA changed that. Part of the ACA’s purpose is to expand so-called “minimum essential coverage” under health insurance policies. There are certain minimum benefits that must be included in most health plans. This includes, for instance, emergency services, maternity care, mental health treatment, and rehabilitative treatment.

Additionally, the ACA specifically provides that insurers cannot design health plans in a discriminatory manner. It states that an insurer may not “design benefits in ways that discriminate against individuals because of their…disability.”

The Schmitt ruling emphasizes that the ACA is different from prior federal laws that had been interpreted not to prohibit discriminatory plan design. Prior to the ACA, no federal law guaranteed any person adequate health care. The ACA, on the other hand, explicitly guarantees the right to minimum health insurance benefits and prohibits designing health plans that deprive people of those minimum benefits on a discriminatory basis.

The court noted the ACA does not require insurers cover all treatment no matter how costly or ineffective. But the court emphasized insurers cannot design health coverage that has a discriminatory impact.

The Schmitt ruling is an important victory for advocates of fair insurance coverage.

Ninth Circuit Confirms Attorneys’ Fee Awards to Successful ERISA Claimants Are Virtually Automatic

ERISA is a remedial law designed to make sure that employees receive the full benefits they earn under their employer’s benefit plans. Part of ERISA requires employee benefit plans that wrongfully withhold benefits and force employees to sue to recover those benefits to pay the employee’s attorney’s fees. Otherwise, the employee will not have received the full amount of benefits owed under the ERISA plan because they will have had to pay the enormous legal expenses involved in litigating an ERISA case. Without this guarantee, employees would often wind up with a legal bill that’s higher than the benefits they recovered.

The Ninth Circuit Court of Appeals recently re-affirmed that successful ERISA claimants should be awarded their attorneys’ fees virtually automatically in Herrman v. Lifemap Assurance Company, Case No. 19-35182 (June 25, 2020). Courts have recognized for many years that an employee who wins their ERISA case should recover attorneys’ fees absent “special circumstances” that would make a fee award “unjust.” In the Ninth Circuit, courts also look at several different sets of circumstances (called the “Hummell factors” after the name of the case where they originated) to decide whether to award attorneys’ fees to ERISA plaintiffs. The lower court in the Herrman case declined to award attorneys fees to the plaintiff even though she recovered benefits from her ERISA plan because the lower court believed the Hummell factors did not support awarding fees under the circumstances.

The Ninth Circuit reversed the lower court. The Ninth Circuit emphasized that:

“the presumption in favor of fees in such cases [i.e., where an ERISA plaintiff successfully recovers benefits] means that the district court need not discuss the Hummell factors before granting the motion [for attorneys’ fees].”

Thus, the court concluded that judges may not deny attorneys’ fees to successful ERISA plaintiffs–even if the Hummell factors suggest fees should not be awarded–without identifying “special circumstances” that would render a fee award unjust.

The Hermann decision is a helpful reminder that Congress’ guarantee in enacting ERISA that employees receive the full amount of their benefits requires that employees not have to pay thousands of dollars in legal fees to obtain those benefits.

Ninth Circuit Ruling Emphasizes the Importance of Acting Reasonably in Insurance Disputes

A recent ruling from the Ninth Circuit Court of Appeals is a good reminder that, as we’ve observed before, the “moral high ground” is crucial in insurance bad faith disputes.

The Ninth Circuit (the federal appeals court with jurisdiction over Washington and other west coast states) recently upheld the dismissal of insurance bad faith claims in Pureco v. Allstate, Case No. 19-55061. The ruling is unpublished and applied California law, so it is not precedent in Washington State. But it’s still helpful in seeing how courts treat insurance issues.

The upshot of the dispute was Pureco’s allegation Allstate failed to make a reasonable settlement offer in response to the settlement demand Pureco’s lawyer sent Allstate’s adjuster. Pureco was injured in a car crash with David Carillo. Carillo was covered under an Allstate car insurance policy. Pureco’s lawyer sent Allstate information showing the extent of Pureco’s injuries and demanded Allstate pay to settle the claim before Pureco sued Carillo.

When Allstate refused to pay by the deadline provided by Pureco’s lawyer, Pureco sued Carrillo and was awarded $5 million. Pureco and Carillo reached an agreement to settle the case in exchange for Carillo assigning his rights under the Allstate insurance policy to Pureco. Pureco then sued Allstate asserting Carrillo’s rights under the insurance policy, claiming Allstate’s failure to pay the demand before Pureco sued Carrillo was bad faith.

But, like most insurance disputes, the devil is in the details. Allstate had actually responded to Pureco’s lawyer and offered to pay Carrillo’s policy limit just one day after the deadline. The reason for Allstate’s delay was that Pureco’s lawyer waited to send Allstate all the information about Pureco’s injuries until the Friday afternoon where the deadline expired on Monday. Allstate’s adjuster had been on vacation that Friday. He responded and offered to pay the policy limits the following Tuesday.

The Ninth Circuit concluded Allstate had no liability. The court determined that Allstate may have made a mistake by failing to pay the policy limits sooner, but it did not act “in a deliberate manner that would support a finding of bad faith.” The court emphasized that the information Pureco’s attorney initially provided to Allstate did not put Allstate on notice that Pureco’s injuries were significant enough to risk an excess verdict against Carrillo, and Allstate paid the claim just a few days after receiving the additional information.

Although the court never comes right out and says it, the crux of the case seems to have been the court’s perception that Pureco’s attorney was not being forthright. Implicit in the court’s ruling is the fairly unremarkable conclusion that sending somebody information on Friday and expecting a decision the next Monday is fairly unreasonable, especially when you know they’re out of the office.

The upshot is that policyholders in disputes with their insurers rarely help their case by making unreasonable demands. Policyholders have broad legal protections under Washington law. Acting unreasonably often gives the insurer an out where the policyholder otherwise would have a strong case.