Insurer's Reasonable Denial of Coverage Cannot be Rendered Retroactively Unreasonable Based on Subsequent Change in Law

Posted on August 11, 2009 by Vivian Orlando

In Griffin Dewatering Corporation v. Northern Insurance Company of New York, __ Cal. App. 4th __, 2009 WL 2344762 (July 31, 2009), the Court of Appeal in the Fourth Appellate District issued a lengthy opinion explaining that an insurer’s incorrect, but objectively reasonable, claim denial decision cannot be retroactively rendered unreasonable as a result of a post-denial judicial decision. In other words, there can be no bad faith if there is substantial case law in favor of the insurer’s position at the time it makes its decision, even if that case law is later overturned.

Northern Insurance Company of New York (“Northern”) issued a comprehensive general liability policy to Griffin Dewatering Corporation (“Griffin”), a company that was involved in certain sewer bypass projects. The policy contained a “total pollution exclusion,” which Northern contended excluded sewage release from coverage. Northern relied on this provision in denying coverage and defense to Griffin.

In late 1995 and early 1996, Griffin performed work for South Coast Water District (the “District”). That work allegedly resulted in a backup of sewage into a private residence. The residents notified the District of the backup of sewage, asserting that the work being done on the sewer line (namely, the work being done by Griffin) resulted in the backup. Northern was notified of the claim. In April 1996, Northern denied coverage, taking the position that claims arising from the release of sewage were excluded from coverage based on the policy’s total pollution exclusion.

The following year, 1997, Griffin’s policy was up for renewal. In an effort presumably to retain Griffin’s business, Northern allegedly promised at a meeting with Griffin that it would honor all future claims for release of sewage, despite the policy’s exclusion. The purported promise was never reduced to writing. Griffin renewed coverage; however, the total pollution exclusion remained in the renewal policy in essentially the same form.

In 1999, after the District settled the residents’ claims, it sued Griffin (and Northern) for indemnity. At that point, Griffin sought coverage from Northern, which again denied coverage based on the policy’s total pollution exclusion. In April 2000, Griffin sued Northern for, among other things, breach of contract and bad faith. Griffin’s complaint failed to mention the alleged oral promise by Northern to cover claims for release of sewage if the policy was renewed or the meeting in which that allege promise was made. In September 2000, Northern decided to defend the District’s lawsuit against Griffin, which Northern settled shortly thereafter. Northern also agreed to pay Griffin’s fees and costs to date incurred in the bad faith action as part of a resolution of that action, which Griffin rejected.

Subsequently, while Griffin’s bad faith action against Northern was pending, the California Supreme Court issued its decision in MacKinnon v. Truck Insurance Exchange, 31 Cal. 4th 635 (2003), which held that a narrow construction of the total pollution exclusion is required. In October 2005, discussing the MacKinnon decision and misapplying another case, CalFarm Insurance Co. v. Krusiewicz, 131 Cal. App. 4th 273 (2005) (in which the court found the insurer was objectively reasonable in its denial), the trial court ruled in limine that Northern’s denials under the policy were unreasonable (i.e., in bad faith) as a matter of law because the case law was unsettled at the time the insurer made its decision. The case was tried to verdict and Northern lost, the jury awarding Griffin $1 million in compensatory damages (entirely consisting of attorneys’ fees and costs) and an additional $10 million in punitive damages.

Northern appealed. The Court of Appeal reversed the judgment in its entirety, holding that an insurer’s reasonable, albeit incorrect, denial of coverage or defense could not be rendered retroactively unreasonable. The Court of Appeal held that the trial court’s in limine ruling that Northern acted unreasonably in breaching the written contract was erroneous. In that regard, the Court of Appeal stated that the trial court erred in concluding that when the law is unsettled (as it was at the time of Northern’s denial of a defense), it creates a potential for coverage. In addition to discussing well-established rules relating to the duty to defend, the Court relied on Morris v. Paul Revere Life Insurance Co., 109 Cal. App. 4th 966 (2003) to reach its conclusion. In doing so, the Court of Appeal not only rejected Griffin’s argument that Morris was inapplicable in third party cases, it also adopted the Morris Court’s reasoning, noting that an insurance company’s denial may be deemed objectively reasonable if substantial legal precedent and the policy language supports the insurer’s position. Because at the time Northern denied coverage there was substantial case law supporting its position, even though the Supreme Court in MacKinnon later reached a contrary conclusion, Northern’s prior denials could not be deemed unreasonable based on this new case law.

With respect to Northern’s purported oral promise of coverage, the Court of Appeal concluded that because Griffin failed to refer to that oral promise in its complaint and never sought to amend the complaint to add that claim, it could not rely on it as a basis for damages. Thus, Griffin could not assert that it was entitled to damages based on Northern’s breach of the alleged oral promise since this cause of action was never alleged.

Finally, the Court of Appeal found that Griffin had no contract damages as a result of Northern’s denial as Northern ultimately settled all litigation against Griffin and it or an excess insurer paid all Griffin’s attorneys’ fees incurred in that litigation. As to tort damages in this action, Griffin’s claims were based on a finding of unreasonableness, which was incorrect. Thus, neither contract damages, nor tort damages, including attorneys’ fees, were available. As a result, the Court of Appeal directed judgment to be entered in favor of the insurer.
 
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Court of Appeal Complicates the Analysis of Mental and Nervous Disability Claims

Posted on July 23, 2009 by Gail Cohen

In Bosetti v. The United States Life Ins. Co., 175 Cal.App. 4th 1208 (2009), the California Court of Appeal addressed whether a standard, two-year benefits limitation on disabilities due to “mental, nervous or emotional disorder[s]” could serve to limit benefits payable to an insured disabled from depression and anxiety who also complained of interrelated physical impairments. The Bosetti court held that the limitation was ambiguous and was not applicable if the claimant’s physical problems contributed to her disabling depression or were a cause or symptom of that depression. The Bosetti court further concluded that the insurer’s denial of benefits based upon that two-year limitation was not in bad faith under the genuine issue doctrine.

Bosetti worked as an assistant director of adult education for a school district and first sought treatment after learning that her position would be terminated. Based upon the report of her treating physician and her complaints of depression and anxiety, she was put on temporary disability under her group policy. She thereafter applied for permanent disability benefits complaining of depression and fibromyalgia pain in her muscles, though her treating physician reported that her disabling impairment was solely mental or nervous in nature. After paying Bosetti’s benefits for two years, United States Life determined that she did not qualify for any additional benefits and could work in “any occupation”, which was the governing disability standard after two years. That determination was based primarily upon the two-year benefits limitation for mental or nervous disorders, the results of a functional capacity examination, and an independent physician consultation.

Following the denial of her request for additional disability benefits, Bosetti filed suit for breach of contract, bad faith and various related causes of action. United States Life then moved for summary judgment contending that Bosetti’s benefits were limited to two years under the mental/nervous limitation and that her purported physical disability did not arise until after her employment (and coverage) terminated. Summary judgment was entered against Bosetti, and she appealed.

The Bosetti court began its analysis by explaining that the insured’s disability had both mental and physical elements, noting that one of her doctors had suggested that her physical disability arose out of her emotional disability and another that her emotional disability or depression arose out of her physical problems and chronic pain. The court then went on to consider whether, under the circumstances, the two-year limitation for disability “due to a mental, nervous or emotional disorder” was even applicable. The court ultimately held that it was not and reversed the trial court’s ruling. According to the Bosetti court, (1) the two-year mental limitation is ambiguous since it “does not clearly explain whether the limitation applies when the total disability is due in part to a mental, nervous …disorder” and (2) an insured’s reasonable expectations are that disabling depression arising from a physical condition like fibromyalgia and, correspondingly, disabling physical symptoms arising from depression, would not fall within the mental/nervous limitation. In so ruling, the court rejected an earlier California Court of Appeal case holding that the same limitation was unambiguous and adopted the 9th Circuit’s approach in Patterson v. Hughes Aircraft Co., 11 F. 3d 949 (1993). The court also concluded that there were triable issues of fact concerning whether Bosetti suffered from a non-mental disability prior to the termination of her employment and whether she was totally disabled from “any occupation” at the time benefits were terminated.

Despite the reversal, the court further held that United States Life was entitled to summary adjudication on Bosetti’s bad faith and intentional tort causes of action. The court concluded that based upon the record, Bosetti and the insurer had a genuine dispute regarding coverage, and there was no extreme or outrageous conduct.
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