Summary by Rebecca B. Aherne, Esq.

On April 30, 2010, the Second Appellate District filed its opinion in Legacy Vulcan v. Superior Court, 184 Cal. App. 4^th 285, holding Transport Insurance Company had a duty to defend under an umbrella policy where scheduled underlying insurance did not apply and despite the fact that insured’s SIR had not been paid.

Factual and Procedural Background

The City of Modesto and others sued Vulcan alleging a product it manufactured and sold to the dry cleaning industry had resulted in environmental contamination.  The alleged damage was apparently continuous over a number of policy periods, including when Transport’s policy, and the policies directly underlying it, were in effect.  Vulcan tendered the defense of the actions to several insurers, none of which provided a defense.  Vulcan paid for its own defense and settled the lawsuits.  Transport filed a declaratory relief action against Vulcan to determine the rights and obligations under its excess catastrophe policy.

The Transport policy provided the insurer would indemnify Vulcan for the “ultimate net loss (UNL) in excess of the retained limit” that Vulcan became legally obligated to pay as damages because of property damage.  The insuring agreement stated Transport would indemnify Vulcan, for the UNL in excess of the retained limit, with respect to any property damage covered by the Transport policy, but not underlying insurance (clause 1), or if the limits of liability of the underlying insurance are exhausted (clause 2).  The insuring agreement further provided Transport had the duty to defend any suit against Vulcan seeking damages for property damage.

The declarations stated the retained limit was underlying insurance or $100,000 because of property damage arising out of any one occurrence covered by the Transport policy, but not underlying insurance.  Transport’s limit of liability was the UNL in excess of Vulcan’s retained limit which was the greater of “an amount equal to the limits of liability of underlying insurance listed in Schedule A, plus the applicable limits of any other underlying insurance collectible by the insured (clause a), or $100,000 because of property damage not covered by underlying insurance listed in Schedule A (clause b).  The term “underlying insurance” was not defined.

The trial court held the policy provided both excess and umbrella coverage, but that for purposes of the duty to defend, Transport’s duties were limited to those of an excess insurer.  The trial court concluded that a duty to defend could arise under the terms of the policy only upon exhaustion of all underlying insurance (policies directly underlying Transport’s policies and any other underlying policies in effect during the period of loss) and upon a showing that the claims were actually covered.  On appeal, the decision was reversed.

Judicial Holding and Analysis

The appellate court confirmed the Transport policy provided both excess and umbrella coverage.  The umbrella coverage was primary coverage, and the existence of the duty to defend with respect to the umbrella coverage did not depend on the exhaustion of any underlying insurance.  The term “underlying insurance” as used in clause 1 was ambiguous and therefore had to be interpreted in Vulcan’s favor to refer to only the scheduled underlying policies rather than all of the collectible primary insurance available to Vulcan.  Vulcan need not have shown the claims were actually covered to establish the duty to defend with respect to the primary umbrella coverage, but needed only to show a potential for coverage.  The retained limit provision in a policy providing primary coverage relieves the insurer of the duty to provide an immediate, “first dollar” defense only if the policy expressly so provides.  Vulcan need not have incurred a liability in excess of the retained limit before Transport’s duty to defend could arise.

On appeal, Vulcan argued, as respects clause 1, that 1) the duty to defend relates to the umbrella coverage and extends to suits potentially covered, so that Vulcan need not have shown actual coverage to trigger the duty to defend; and 2) the term “underlying insurance” includes only the underlying policies listed in Schedule A, rather than all primary policies in effect during the period of the continuous loss.

The court found that clause a provided excess insurance and clause b provided primary umbrella coverage.  Clause 1 established a duty to defend in connection with the umbrella coverage.  Because the umbrella coverage was primary, the ordinary rules regarding a primary insurer’s duty to defend applied.  As such, Transport had a duty to defend with respect to umbrella coverage under clause 1 if any of the claims were potentially covered by the Transport policy and not covered by the underlying policies listed in Schedule A.

Clause a of the retained limit provision referred specifically to the underlying insurance listed in schedule A, plus the applicable limits of any other underlying insurance.  Clause b limited underlying insurance to the policies listed on Schedule A.  In the court’s mind, this raised the issue as to whether the reference to underlying insurance in clause 1 referenced only the policies listed in Schedule A, or all underlying insurance.

Clause b established an indemnity obligation relating to the umbrella coverage, while clause 1 established a defense obligation regarding that coverage.  The indemnity obligation extended to the underlying insurance listed in Schedule A.  It was reasonable for Vulcan to conclude that the claims for which clause 1 provided a defense obligation were the same claims for which clause b provided an indemnity obligation.  Vulcan reasonably expected Transport to provide a defense for all claims potentially covered by the umbrella provision.

The court held the term “underlying insurance”, as used in clause 1, was ambiguous because it reasonably could have been interpreted to mean either the insurance listed in Schedule A or all underlying insurance.  Resolving the ambiguity in favor of Vulcan (as required), the court concluded the term “underlying insurance”, as used in clause 1, encompassed only the policies listed in Schedule A.  Thus, if the scheduled underlying policies did not provide coverage, and there was a potential for coverage under the Transport policy, Transport had a duty to defend Vulcan, regardless of the availability of other underlying primary coverage.

The court rejected Transport’s argument there is a general rule that an insurer has no duty to defend until the insured has become legally obligated to pay an amount in excess of the SIR.  The impact of an SIR or retained limit on the duty to defend depends on the particular policy language.  The general rule, that an excess carrier has no duty to defend unless the underlying insurance is exhausted, should not apply to insurers who provide primary coverage with an SIR absent clear policy language so providing.  To require the exhaustion of an SIR before an insurer will have a duty to defend would be contrary to the reasonable expectations of the insured to be provided an immediate defense in connection with its primary coverage.  Any limitation on the insurer’s defense obligation must be conspicuous, plain and clear.  Clause 1 expressly stated that Transport had a duty to defend claims that were not within the coverage of the underlying insurance, but were within the coverage of the Transport policy.  The duty to indemnify with respect to the umbrella coverage was limited to amounts in excess of the $100,000 retained limit, but the policy did not provide that the duty to defend such claims was limited by the retained limit in any manner.  Absent an express limitation on the duty to defend, the court concluded the duty to defend was not so limited.

Comments and Implications

In Community Redevelopment v. Aetna (1996) 50 Cal. App. 4th 329, the court held in favor of an excess insurer on the ground it had no duty to defend until all of the primary insurance had been exhausted. The excess policy unambiguously stated that it was in excess of “any other underlying insurance.” This language included all available primary insurance, not just specifically scheduled underlying policies. Because not all primary insurance policies had been exhausted, the excess insurer’s duty to defend was never triggered.

The different result in Vulcan can be explained by the fact the Transport policy provided umbrella, as well as excess, coverage, and the court was not satisfied that the policy clearly enunciated the insurer’s duties as to the each of the coverages.

By Rebecca Aherne

On April 5, 2010, the 9th Circuit Court of Appeals, in Hyundai Motor America v. National Union Fire Ins. Co., held the insurer had a duty to defend a patent infringement claim under the advertising injury provision.  The insured, Hyundai, placed certain features on its website.  It was sued by Orion IP LLC for patent infringement for the use of the features.  Hyundai sought a defense from National Union on the ground the lawsuit alleged covered “advertising injury” because the infringement concerned its advertising methods.  National Union declined to defend.  Hyundai sued the insurer seeking to recover its defense costs.  The district court found in favor of National Union.  The Court of Appeals reversed the decision holding the infringement claims against Hyundai constituted allegations of “misappropriation of advertising ideas.”  The case was remanded to the district court with instructions to grant summary judgment to Hyundai for declaratory relief on the duty to defend.

Hyundai’s website contained a “build your own vehicle” (BYO) feature which allowed users to navigate a series of questions to select automobile colors, engines, options, etc. In response to the input, the feature displayed customized vehicle images and pricing information.  Orion held patents concerning methods of generating customized product proposals for potential customers of an automobile dealer.  Orion alleged Hyundai’s BYO feature infringed its patent.

The National Union policy provided the company would defend Hyundai against suits seeking damages for “advertising injury” caused by an offense committed in the course of advertising Hyundai’s products.  “Advertising injury” is defined as including the “misappropriation of advertising ideas or style of doing business.”  Hyundai asserted the patent infringement claims in the Orion action were claims alleging the misappropriation of advertising ideas.

Three elements are needed to establish a duty to defend for an advertising injury:  1) the insured was engaged in advertising during the policy period when the alleged advertising occurred; 2) the allegations against the insured created a potential for liability under one of the covered offenses; and 3) a causal connection existed between the alleged injury and the advertising.

“Advertising” means widespread promotional activities directed to the public at large, but does not include solicitation.  Orion’s complaint alleged advertising activities because it alleged Hyundai’s BYO feature constituted making and using supply chain methods, sales methods, sales systems, marketing methods, marketing systems, and inventory systems.  Marketing methods or systems fits within the definition of advertising.  The court rejected National Union’s argument, that each individual’s use of the BYO feature constitutes an individualized solicitation, on the ground the feature is widely distributed to the public at large even though the precise information conveyed to each user varies with user input.

The court next determined that a lay person reasonably would read the phrase “misappropriation of advertising ideas” to include the Orion infringement claim.  Patent infringement claims can qualify as an advertising injury if the patent involves any process or invention which could reasonably be considered an advertising idea.  Orion patented a method of displaying information to the public at large for the purpose of facilitating sales and its complaint alleged that Hyundai violated its patent by using the patented technologies as part of its marketing method.  Thus, Orion’s claim alleged a misappropriation of advertising ideas.

The Court of Appeals also found a casual connection between the advertisement and the alleged advertising injury, because Hyundai’s advertising constituted the use of the patented marketing tool.  The casual connection was established as the infringement occurred in the course of advertising.  The court distinguished those situations in which the infringement occurs independent of advertisement of the underlying product.  The causal connection is not typically established if the patent concerns the underlying product.  For example, in Iolab v. Seaboard Sur. Co., 15 F. 3d 1500, a patent holder sued the insured for infringement regarding the manufacture and sale of an intraocular lens.  The court held there was no causal connection because the infringement claim was based, not on the advertising of the lens, but on its manufacture and sale.

By Rebecca Aherne

On March 23, 2010, the Second Appellate District filed its opinion in Amerigraphics, Inc. v. Mercury Casualty Company, 182 Cal. App. 4^th 1538, holding the insurer erroneously, and in bad faith, denied coverage to its insured for continuing operating expenses pursuant to business-interruption coverage provided by a “Special Multi-Peril Policy.”  The court further held the insured was entitled to punitive damages, but it reduced the amount of punitive damages from $1.7 million to $500,000.

Factual and Procedural Background

Amerigraphics is a printing and graphics design company established in 1997 by Mark Volper and Boris and Marina Smordinsky.  The company leased space in Sherman Oaks, CA and made tenant improvements over the next several years in the approximate amount of $70,000.  The company was very successful until 2001 when it experienced a substantial drop in business.  In April 2003, its premises were flooded by a broken water heater in a second floor restroom.  The water damaged all of the company’s electrical equipment including a $12,000 printer and a $5,000 scanner.  Volper contacted the seller of the equipment, RM Consulting, which determined it was irreparably damaged.

The policy issued to the company by Mercury included business-interruption coverage which provided the company will pay for the actual loss of business income sustained due to necessary suspension of operations during the period of restoration.  Business income was defined as net income that would have been earned if no loss had occurred and continuing normal operating expenses incurred.

Volper promptly reported the loss to Mercury and the claim was assigned to adjuster Ken Brown.  Although Brown subsequently called Volper, he failed to discuss the available coverages with Volper as required by company guidelines.  In May, Volper provided Mercury with a preliminary loss evaluation listing items of business personal property worth approximately $43,000.  Mercury paid $10,000 toward the business property loss.

It was not until more than a month after the flood that Mercury arranged for an inspection of the printer and scanner.  The tests were performed in June, but the results were not given to Volper until September.  Mercury’s position was that the equipment had been restored to pre-loss condition, but Volper asserted the tests were inaccurate and inconclusive.  When Mercury finally reexamined the equipment in June 2004, it was found to be inoperable.

When Volper inquired about normal operating expenses, Brown denied such coverage existed until Volper provided him with a copy of the relevant policy language.  Pursuant to Brown’s request, Volper sent him a list of $59,467 in expenses as of September 12, 2003 with the indication that the funds were needed ASAP in order for his business to survive.  A year later, Mercury denied the claim on the ground Amerigraphics did not incur a loss in business because its expenses exceeded its income, resulting in an operating loss.

When Volper submitted a claim for tenant improvement loss in June of 2004, Mercury denied such coverage existed.  Again, Volper sent Mercury a copy of the portion of the policy providing such coverage as well as a letter identifying the $73,000 in tenant improvements.  Mercury denied the claim on the ground there was no damage to the tenant improvements as a result of the flooding, but subsequently directed an investigation to determine whether such damage had occurred.  Six months later, Volper wrote several letters to Mercury inquiring as to the status of the claim, including several letters to the president of the company which were routed to the vice-president of claims and the claims supervisor, but never answered.  It was not until February 2005, that Mercury sent Amerigraphics a check for $23,000 as “payment in full” for the tenant-improvement claim.

Amerigraphics sued Mercury for breach of contract and bad faith.  The trial judge held the insured was entitled to recover both net income and continuing normal operating expenses without having to offset one against the other.  The jury determined that Mercury breached the insurance contract, and that Amerigraphics sustained damages as a result thereof in the amount of $130,000.  The jury also found that Mercury breached the implied covenant of good faith and fair dealing, and in addition, that it acted with fraud, malice and oppression.  The jury awarded Amerigraphics $3 million in punitive damages and $40,000 in prejudgment interest. The judge reduced the award of punitive damages to $1.7 million – ten times the amount of the compensatory damages and interest.

Judicial Holding and Analysis

The appellate court affirmed the judgment except for the amount of punitive damages which it reduced to $500,000.  As respects the application of the business income provision, Amerigraphics argued it required Mercury to pay for (i) lost income and (ii) continuing normal business expenses during the period of business suspension.  To the extent there was no lost income (i.e., there was only a net loss), there would be no amount paid under subpart (i), but the insured would still be paid under subpart (ii) for its operating expenses.  Mercury, relying on several non-California cases, argued that if the insured’s net income during the period before the loss was a net loss that was greater than its operating expenses, the insured would not recover any proceeds under this provision.  Stating that it was not bound by out-of-state authorities, the court adopted the insured’s interpretation.  In its opinion, the plain meaning of the policy language would lead an ordinary insured to conclude that in the event of a covered loss that forced the suspension of its business operations, the policy would provide coverage for any lost profits, and even if there were no lost profits, for ongoing expenses incurred during the period of suspension.  There is nothing in the policy language to suggest to an insured that if a business is not earning a profit it should not expect coverage for its continuing expenses during the period it cannot operate.

As respects the determination that Mercury breached the implied covenant of good faith and fair dealing, the jury was instructed that it could find Mercury liable for bad faith if it found Mercury unreasonably failed to pay, or unreasonably delayed payment or failed to properly investigate the loss.  There was substantial evidence on which the jury could find that Mercury engaged in bad faith.  There was also more than substantial evidence to support an award of punitive damages.  Pursuant to Civil Code section 3294(a), punitive damages may be awarded if the defendant is guilty of oppression, fraud or malice.  The evidence showed Mercury was intentionally dishonest and showed a conscious disregard of Amerigraphic’s rights.  Mercury failed to abide by its own guidelines, unreasonably delayed in responding to demands for coverage, failed to promptly and fully investigate Amerigraphics’ claims, denied the existence of coverage provided by the policy, and denied coverage prior to conducting an investigation.

Regarding the amount of punitive damages, the court held that $1.7 million was constitutionally excessive.  The due process clause of the Fourteenth Amendment places constraints on punitive damage awards.  “Grossly excessive or arbitrary awards” are prohibited.  Citing the Sate Farm v. Campbell case, (2003) 538 U.S. 408, the court noted the following factors determine the appropriateness of punitive damage awards:  1) the degree of reprehensibility of the defendant’s misconduct; 2) the disparity between the harm suffered and the damages awarded; and 3) the difference between the punitive award and the civil penalties authorized in similar cases.  The most important of these factors is the degree of reprehensibility of the defendant’s conduct.  Courts look at a number of factors to determine the degree of reprehensibility.  Because only one of the factors applied here-Amerigraphics was financially vulnerable, the court did not discern a high degree of reprehensibility.  Regarding the ratio of punitive damages to the compensatory award, the trial court relied on the Simon v. San Paolo case, (2005) 35 Cal. 4^th 1159, in reducing the award of punitive damages to a ten-to-one ratio, but on appeal Mercury argued that a one-to-one limit was appropriate in most cases, especially those involving pure economic loss.  The appellate court decided that neither the interest in deterrence, nor Mercury’s substantial wealth, justified a punitive damages award of ten times the amount of compensatory damages.  On the other hand, the $10,000 statutory penalty for deceptive practices by insurers was not sufficient where, as in this case, the insurer engaged in a course of conduct over a period of years that involved many prohibited acts.  The court concluded that the maximum award of punitive damages, consistent with due process, was $500,000, an award based on a 3.8-to-one ratio.

Comments and Implications

The determination of the appropriate amount of punitive damages is not an exact science.  As the court stated, “[t]o state a particular level beyond which punitive damages in a given case would be grossly excessive, and hence unconstitutionally arbitrary, is not an enviable task.  In the last analysis, an appellate panel, convinced it must reduce an award of punitive damages, must rely on its combined experience and judgment.”  The pendulum appears to be swinging back in the direction of defendants.  In the Roby v. McKesson case, (2009) 47 Cal. 4^th 686, the California Supreme Court, for the first time, reduced the amount of punitive damages awarded by a jury.  In this employment discrimination/harassment case, the jury awarded $15 million in punitive damages and $3 million in compensatory damages.  Based on its finding the defendant’s conduct represented a relatively low degree of reprehensibility, the Supreme Court reduced the compensatory damages to $1,905,000, and concluded that for punitive damages, a one-to-one ratio was the constitutional limit.  However, courts have applied a higher ratio depending on the degree of reprehensibility of the defendant’s conduct.  In Txo Productions v. Alliance Res. Corp., 509 U.S. 443, the U.S. Supreme Court upheld a punitive damage award of $10 million even though the actual damages were only $19,000.  The court eschewed an approach that focuses entirely on the relationship between actual and punitive damages, and considered the magnitude of the potential harm the defendant’s conduct would have caused to the intended victim as well as the possible harm to other victims.

Summary by Rebecca B. Aherne, Esq.

On January 26, 2010, the Fourth Appellate District filed its opinion in Fire Insurance Exchange v. Superior Court, 181 Cal. App. 4^th 388, holding the insurer had no duty to defend its insureds in an action by an adjoining landowner as a result of an encroachment because building a structure that encroaches onto another’s property is not an accident within the meaning of the policy even if the insureds acted in the good faith, but mistaken, belief they were legally entitled to build.

Factual and Procedural Background

Kenneth and Dorothy Bourguignon owned property adjoining land owned by Louise Leach.  Ms. Leach granted the Bourguignons an access easement over a five-and-one-half-foot-wide portion of her property that bordered theirs.  When the Bourguignons decided to rebuild and renovate their house, Leach, unbeknownst to co-owners of the property, agreed to a “Lot Line Adjustment.”  When Ron and Marie Parsons purchased Leach’s property, they discovered the Bourguignons house encroached on their property.  The Bourguignons sued the Parsons for quiet title and adverse possession of the five-and-one-half-foot strip.  The Parsons cross-complained alleging that the Bourguignons knew the newly built residence encroached on the Leach property and had misrepresented the facts to obtain Leach’s approval.

The Bourguignons tendered the defense of the claim to Fire Insurance Exchange (FIE) under the homeowner policy issued to them.  FIE refused to defend.  The Bourguignons sued FIE for breach of contract and bad faith.  FIE contended it had no obligation to defend, because the alleged loss resulted from the Bourguignons’ intentional act of building over the lot line, and thus was not the result of an accident.  The trial court disagreed, finding there was a potential for coverage because the intentional act of constructing the home could constitute an “accident” if done with the mistaken belief of ownership of the disputed property.

Judicial Holding and Analysis

The appellate court reversed the trial court decision holding there was no coverage because the claimed damage did not arise from an “accident.”  The policy covered damages the insured becomes legally obligated to pay because of property damage resulting from an occurrence.  “Occurrence” was defined as “an accident including exposure to conditions which results during the policy period in . . . property damage.”  The commonsense interpretation of the term “accident” is an unintentional, unexpected, chance occurrence.  An accident does not occur when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.  The court cited Merced Mutual v. Mendez (1989) 213 Cal. App. 3d 41 which explained:  When a driver intentionally speeds, and as a result, negligently hits another car, the speeding is an intentional act.  However, the act directly responsible for the injury-hitting the other car-was not intended by the driver and was fortuitous.  Accordingly, the occurrence resulting in injury would be deemed an accident.  This situation is distinct from an instance where a driver speeds and deliberately hits the other car.

Where the insured intended all of the acts that resulted in the victim’s injury, the event may not be deemed an “accident” merely because the insured did not intend to cause injury.  The insured’s subjective intent is irrelevant.  The term “accident” refers to the nature of the act giving rise to liability, not to the insured’s intent to cause harm.  (The court noted that State Farm v. Superior Court (2008) 164 Cal. App. 4^th 317 appears to conflict with this rule.  In that case, the insured tried to throw a man into a swimming pool, but the man hit the stairs of the pool injuring his ankle.  The court held the injury was caused by an accident because it was not foreseen.  The insured intended the man to fall into the water, not on the steps.)

The Bourguignons intended to build the house where they built it.  The act of construction was intentional and not an accident even though the insureds acted under a mistaken belief that they had a right to build.  The reason for their failure to obtain title to the disputed property was irrelevant to the determination of whether their construction of the building could be characterized as an accident.  The Bourguignons mistaken belief in their legal right to build did not transform their intentional act of construction into an accident.

Comments and Implications

The court cited several cases for the proposition that an insured’s mistake of fact or law does not transform a purposeful act into an accident.  For example:  Sexual assault/molestation is not an accident notwithstanding the insured’s belief the victim consented.  Quan v. Truck Ins. Exch. (1998) 67 Cal. App. 4^th 583; Lyons v. Fire Ins. Exch. (2008) 161 Cal. App. 4^th 880.  An insured’s belief in the need for self-defense does not turn the resulting intentional act of assault and battery into an accident.  Delgado v. Interinsurance Exch. (2009) 47 Cal. 4^th 302.  A misunderstanding of legal rights does not turn conversion of property into an accident.  Collin v. American Empire Ins. Co. (1994) 21 Cal. App. 4^th 787.  A mistaken belief that acts were lawful does not render wrongful eviction of a tenant an accident.  Swain v. California Casualty (2002) 99 Cal. App. 4^th 1.  An employment termination, even if due to a mistake of fact, is an intentional act, not an accident.  Lipson v. Jordache Enterprises (1992) 9 Cal. App. 4^th 151.

The court also discussed three federal court cases involving property disputes.  Two of the cases ruled that trespass was not an accident.  Allstate v. Salahutdin (N.D. Cal. 1992) 815 F. Supp. 1309; Bailey v. State Farm (N.D. Cal. 1992) 810 F. Supp. 267.  In the other case, the court held there was a potential for coverage because the insureds did not know they had been trespassing on their neighbors’ property.  Allstate v. Vavasour (N.D. Cal. 1992) 797 F. Supp 785.  The FIE court followed Salahutdin and Bailey as they were in accord with the California rule that the term accident refers to the nature of the conduct itself rather than to its consequences.  The suggestion in Vavasour that the harm occasioned by intentional conduct may constitute an accident when the insured is unaware of its wrongful character is contrary to California authorities.

Judge Miller dissented from the majority opinion in FIE on the ground the record supported the finding the Bourguignons’ conduct was executed without the objective of encroaching on their neighbors’ property.  The dissent referred to the examples given in the Delgado case finding that, like the speeding driver who intended to speed, but not hit another car, the Bourguignons intentionally constructed their house, but did not intend to encroach on their neighbors’ property.  Thus, the encroachment, in Judge Miller’s mind, was an accident.  The majority opinion recognized that, unlike the speeding driver who did not intend to hit the other car, the Bourguignons intentionally constructed their house on property belonging to their neighbors.  The majority opinion is the better reasoned decision as it follows the general rule in California that an intentional act is not an accident even where the insured does not intend to cause harm.

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Summary by Rebecca B. Aherne, Esq.

On December 30, 2009, the Second Appellate District filed its opinion in Baker v. National Interstate Insurance Company, holding that damages awarded the family of a bus driver as a result of negligent inspection of the bus were not recoverable under a policy which contained a products-completed operations hazard exclusion.

Factual and Procedural Background

On April 9, 2001, La Shaun Clemmons was driving a bus when she collided with a pickup truck.  She suffered fatal injuries when the driver’s seat broke loose from the floor and she was ejected through the front windshield of the vehicle.  Clemmons had purchased the bus in July 2000 from Four Winds which, in September 2000, inspected and repaired the bus.  Clemmons’ family filed a wrongful death action against Four Winds and others.  Four Winds tendered the defense of the action to American National Fire Insurance Company which had issued a CGL policy to Four Winds.  The policy covered damages resulting from bodily injury or property damage caused by accident.  The policy did not apply to bodily injury or property damage included within the products-completed operations hazard.  The products-completed operations hazard was defined as bodily injury and property damage occurring away from the insured’s premises and arising out of “your” (the insured’s) product or work, except products still in the insured’s possession and work not yet completed.  “Your product” was defined as goods or products manufactured, sold, handled, distributed or disposed of by the insured.  “Your work” included work or operations performed by the insured.  American denied coverage on the ground Four Winds did not have products or completed operations coverage.

The trial court in the wrongful death action held Four Winds negligently inspected or maintained the bus sold to Clemmons which was a substantial factor in causing Clemmons’ death. Judgment was entered against Four Winds in the amount of $9 million.  Clemmons’ heirs entered into a covenant not to execute on the judgment and accepted an assignment of Four Winds’ rights against American.  The heirs filed suit against American for breach of contract and bad faith asserting American wrongfully failed to defend and indemnify Four Winds.

The trial court found in favor of the heirs on the ground the products-completed operations exclusion did not apply because it applied only to product liability claims, not to claims for negligent maintenance or inspection services.  On appeal, the court agreed with American that the trial court wrongly interpreted the policy to provide coverage.

Judicial Holding and Analysis

The appellate court held the exclusion in the policy applied to the claim for damages arising from Four Winds’ negligent inspection of the bus sold to Clemmons.  The provision was not ambiguous.  It provided that the policy did not apply to bodily injury included within the products-completed operations hazard.  The policy defined the products-completed operations hazard to include all bodily injury arising out of the insured’s work or products.  The use of the word “or” unambiguously advised the insured that a claim alleging bodily injury arising from its product, once it was out of its possession, or its work, once it was completed, was excluded.

The heirs argued the definition of the products-completed operations hazard was ambiguous because it could be read to mean bodily injury arising out of the insured’s product or the insured’s work on its products.  The court disagreed, stating the policy contained separate definitions of “your product” and “your work” clarifying the separate nature of the insured’s products and work.  The definition of “your work” cannot be construed to mean “your work on your products.”  The insured’s work means work or operations performed by the insured.  The policy language compels the interpretation that a claim arising from Four Winds’ work and occurring in the course of an accident off its premises was not covered without regard to whether that work was or was not related to a product.

The Four Winds’ inspection services on the bus fell within the definition of “your work.”  When a person provides a service for a customer, for payment from that customer, the person is “working” or “performing an operation” in the context of his business activities.  The court rejected the heirs’ assertion that because the exclusion must be narrowly construed and because the definition of “your work” does not include the word “inspections”, the claim is not included within the exclusion for “your work.”  The “proverbial layperson” would understand the term “work” to include a business’ inspection services.  The fact that the definition of “work” did not include the word inspection did not render the policy ambiguous.

Comments and Implications

The court discussed at length the INA v. Electronic Purification Company case [(1967) 67 Cal. 2d 679], but did not rely on it, because the policy at issue in that case contained different language than the policy issued to Four Winds.  Electronic Purification Company sold, leased and installed water purification machines.  It was insured under a CGL policy which contained a “products hazard” exclusion.  The term “products hazard” was defined as 1) products manufactured, sold, handled or distributed by the named insured if the accident takes place after possession of the products has been relinquished by the insured and takes place away from the insured’s premises except goods rented to others; and 2) operations, if the accident takes place after operations have been completed and takes place away from the insured’s premises.  Electronic Purification leased one of its water purification machines, a nion generator, to a motel for use in its swimming pool.  Electronic Purification suggested that the motel hire the employees, who were to install the generator, to acid wash the pool walls.  While washing the walls, a floodlight blew out and the employees replaced it.  Due to negligence in repairing the fixture, its frame became charged with electricity and a hotel guest was fatally electrocuted when he touched the fixture.  Electronic Purification was sued.  It tendered the claim to its carrier, which rejected the tender citing the products hazard exclusion.  The Supreme Court ruled the exclusion was inapplicable.

The court ruled that even though the exclusion contained separate paragraphs for “products” and “operations”, they must be read together.  The only operations included within the exclusion were these closely related to the insured’s product and not purely service operations.  The court reasoned the “exclusion bears the heading . . . ‘Products hazard’ and begins ‘the term products hazard means’ . . . That introductory clause must refer to both the . . . ‘products’ subdivision as well as the ‘operations’ subdivision . . . Unless the subdivisions both relate to products, no reason justifies their joinder under a single heading.”  Electronic Purification’s improper replacement of the floodlight during the performance of acid washing the pool was a service covered by the policy because the acid washing was not related to the installation of the generator and thus not a “completed operation” related to a non-rented product-the only type of service encompassed within the exclusion.  Acid washing was not closely connected to the operation of installing the generator.

The court concluded:  “. . . the completed operations provision must be read to apply only to operations involving a product, it does not apply to an insured’s business if it involves services only, or if the product composes but a minimal part of the business.  Similarly, if the business of the insured may be severed into operations not related to a product, only those operations that do involve a product are subject to the completed operations exclusion.”

The Electronic Purification case has limited contemporary relevance as standard policies, like the one issued to Four Winds, now clearly provide that the hazard to be excluded is that arising from either products, once out of the insured’s possession, or from the insured’s work, once completed.  The language was changed because of the interpretation being given to the prior language by courts.        

By Rachel Hulst

As a woman, young mom and employment lawyer, I’ve never been more popular amongst my friends.  These are friends who, until recently, knew nothing about what I actually did for work.  Yes, they knew I was an attorney.  But that knowledge was only accompanied by a few lawyer jokes and the age old question: have you seen the movie “A Few Good Men”?  “You can’t handle the truth!  Do you use that line in court?”  I didn’t have the heart to tell them, “no”.

Eleven years in, I’m finally gaining true respect amongst my peers.  Why is that?  Well, they are working women who have now found themselves in a predicament: pregnant and no clue what they are entitled to under California law.  And frankly, I don’t blame them.  They are not alone.  Many other women, HR professionals, company handbooks and even lawyers find this a difficult inquiry.

And really, it is difficult.  There are multiple statutes with all these acronyms (FMLA, CFRA, PDA, FEHA, ADA, PFL) that overlap and intertwine, depending on your particular situation and your particular inquiry.  Some statutes deal with leave time, some deal with pay, some deal with “bonding”, some deal with disabilities and some combine near all of the above.  How in the world do we piece this all together?

I must admit, when I got pregnant, I felt empowered, knowing that I actually knew my legal rights.  Normally, I’m advising employers and rewriting handbooks to ensure their legal compliance of these leave laws, but now it took on a different meaning. So, after sharing my knowledge with yet another expecting friend recently, I felt compelled to write about it.

Like anything in life, there’s some good news and some bad news.  The good news for expectant mothers is that California is probably the most employee-friendly state when it comes to maternity leave.  The bad news is that employers are not required to provide any paid leave.  But, you probably have to move to another country to get those kinds of benefits anyway.

Here’s the basic premise.  It is easiest to think about the inquiry in terms of two questions: 1) how much leave time (time off) am I entitled to? 2) do I get any pay?

Leave Time

The standard pregnant woman in California will be entitled to 4 ½ months leave time (with guaranteed job protection).  Legally, this is how it is broken down:

The Pregnancy Disability Act (“PDA”, a section of California’s Fair Employment and Housing Act “FEHA”) provides for up to four months of leave time for disabilities related to pregnancy, childbirth or related medical conditions.  Note that the PDA applies to all employers with five or more employees, which includes part time workers employed on a regular basis.  There is no length of service requirement under the PDA so you’re covered even if you just started in a new position.  These same pregnancy related disabilities could also be considered “serious health conditions” covered under the Family Medical Leave Act (“FMLA”).  The FMLA provides for job protected leave for up to 12 weeks for serious health conditions.  It applies to all employers with 50 or more employees within a 75 mile radius and generally, an employee is required to have worked at least 1250 hours in the previous year.  Accordingly, a woman who just gave birth is simultaneously covered under both the PDA and FMLA for a leave of absence following childbirth.  Specifically, she is considered disabled for 6 weeks if she has a vaginal birth and 8 weeks after a Cesarean birth=6-8 weeks leave time +

The California Family Rights Act (“CFRA”) provides for 12 additional weeks for bonding with your child.  Note that like FMLA, the CFRA applies to all employers with 50 or more employees within a 75 mile radius and generally, an employee is required to have worked at least 1250 hours in the previous year =12 weeks

6-8 weeks+12 weeks=18-20 weeks (approximately 4 1/2 -5 months of job protected leave)

Now, of course, there are caveats.

Additional Disabled Status

If you have a pregnancy or childbirth related disability that qualifies under the PDA/FEHA your leave extends from 6-8 weeks up to 4 months.  So, that 4 ½ months could amount to a total of 7 months (4 months disability plus 12 weeks of “bonding time”). However, you must actually be disabled during that entire 4 month period which is why the typical pregnant woman will not be entitled to this much leave.  In the unusual circumstance that a woman has a lingering disability beyond 4 months as a result of pregnancy, she may be entitled to additional leave time as an accommodation under the general provisions of the FEHA relating to disabilities.

Intermittent Leave

While an employer is not required to give you time off for general morning sickness, the four months does include periodic time off for severe morning sickness or if you need to take time off for prenatal care.

Smaller Companies

If you (1) worked at the company for less than a year with less than 1250 hours worked in that year; and/or (2) there are less than 50 employees working for the company within a 75 mile radius of your location of employment than you are not entitled to the 12 weeks for bonding—leaving you with only 6-8 weeks time off.

Change in Company Status During Leave

And while generally an employer is required to keep your job open during the 4 ½ month period, there are certain situations, ie: layoffs, that may preclude the employer from doing so.

Pay

While rare, some employers do provide paid maternity leave.  If an employer provides paid leave for other temporarily dsiabled employees, paid leave must all be provided for pregnant employees.  Those employees who are not entitled to such pay from their employer, are entitled to pay from the state.  As long as you are an employee (and not an independent contractor), who’s employer pays into state disability insurance (“SDI”), you are entitled to state disability benefits for 6-8 weeks that amounts to approximately 60 percent of your salary for the time that you are disabled.  Note that these are disability benefits so they are not taxed.

You are also entitled to receive 6 weeks of pay under the Paid Family Leave (California is one of just a few states who has this law) for bonding with your child.  That is also offered through the same agency that governs SDI payments (The Employment Development Department, “EDD”) and also amounts to about 60 % of your salary, but those benefits are taxed.

If you’re lucky enough to work in San Francisco, you are also able to use up to 9 days of accrued sick pay a year for days that you are out on pregnancy leave.  Of course, on the days you receive this pay, you will not be entitled to pay from the state.

Even more than expectant moms, the employers I advise need to be aware of these laws—handbook policies are often out of date and do not consider each and every potential statute that needs consideration.  Failure to inform HR representatives about how these laws interact and failure to explain them accurately to employees could open up employers to unnecessary law suits.  So, we all gain from this knowledge.  Perhaps one day it’ll be simpler; for now, I remain a popular guest at cocktail parties.

For more information:

SDI/Pregnancy link to EDD:

http://158.96.229.240/direp/difaq1.htm#Pregnancy

PFL link to EDD:

http://www.edd.ca.gov/Disability/FAQs_for_Paid_Family_Leave.htm

By Jonathan Allan Klein

On December 30, 2009, the California Court of Appeal, Fourth Appellate District, affirmed an award of Summary Judgment we obtained for our client in 2008.  On appeal, in Hunter v. Rite Aid (Case No. E047552 — not cited for publication), the Court agreed with the trial court that since Plaintiff admitted he was an underperforming employee, he could not meet the prima facie showing that he was qualified for the job or performing it competently as required by Guz v. Bechtel.

Furthermore, the Court agreed, as a matter of law, that Rite Aid afforded Plaintiff reasonable accommodations for his injured pinky, including medical leave, assistance from other employees and nonphysical work assignments.   Also, since Plaintiff did not request any further accommodations, Rite Aid, as a matter of law, complied with its good faith interactive process obligations.

Read the opinion HERE.

By Jonathan Allan Klein

On December 24, 2009, the Nevada Supreme Court, in a case of first impression, held that pharmacies do not have a duty to unknown third parties injured by the pharmacy’s patients.  In Sanchez v. Wal-Mart (125 Nev. Adv. Op. No. 60, 2009), the Court confronted a significant issue for pharmacies.

In this case, our client, Rite Aid, and many of Las Vegas’ pharmacy chains, were sued concerning prescriptions filled to a patient who was allegedly abusing the prescriptions.  That patient eventually got into an automobile accident, killing one person and severely injuring another.  The estate of the deceased, and the injured individual, sued the pharmacies, alleging they should not have filled the prescriptions for the patient, because the Nevada Board of Pharmacy had issued notices that this patient was on a watch-list for potential abuse of medications.

However, the Supreme Court agreed with the trial court’s decision dismissing the case, holding that the pharmacies had no duty to these unknown third parties, and that the Board of Pharmacy regulations do not create rights to sue in state court.  The decision is a significant victory for our client, and for all pharmacies doing business in Nevada.

Read the decision at http://www.nevadajudiciary.us/index.php/advancedopinions/609-sanchez-v-wal-mart-stores

Summary by Rebecca B. Aherne, Esq.

On November 23, 2009, the Fourth Appellate District filed its opinion in Howell v. Hamilton Meats & Provisions, Inc., holding that under the collateral source rule the plaintiff was entitled to recover the full amount of billed medical expenses without reduction for the amount not incurred because of the discount given to plaintiff’s insurer by treating hospitals.

Factual and Procedural Background

Plaintiff, Rebecca Howell, was injured when the automobile she was driving was struck by a truck driven by an employee of Hamilton Meats who negligently made an illegal U-turn across the lane in which Howell was traveling.  Howell was treated for her injuries at Scripps Hospital and CORE Medical Center.  She underwent two fusion spinal surgeries, and surgical procedures that took bone from her hip in an attempt to repair her neck.  The full amount of her medical bills was $130,978.63.

Howell had private health care insurance through PacifiCare which agreed to indemnify her for medical charges covered by her plan in exchange for her premium payments, subject to her responsibility for deductibles and co-payments.  Prior to receiving treatment, Howell agreed to be financially responsible for all charges for the medical services provided by Scripps and CORE.  PacifiCare had contracts with Scripps and CORE to satisfy bills incurred by plan members who obtained care from those providers.  Pursuant to those contracts, Scripps and CORE agreed to accept $59,691.73 as payment in full for the services rendered to Howell.

At trial, Hamilton Meats argued that Howell’s recovery for medical expenses should be limited to $59,691.73, the amount paid by PacifiCare.  Howell contended that under the collateral source rule she was entitled to the gross amount of the medical bills- $130,978.63.  The court allowed Howell to present evidence at trial of the full amount of the medical bills reserving for post-trial the question of whether the jury’s award for past medical expenses should be reduced.  The jury awarded Howell compensatory damages in the amount of $689,978.63, including damages for past medical expenses in the amount of $189,978.63.  Hamilton Meats brought a post-trial motion seeking an order reducing the verdict for past medical expenses to $59,691.73.  Howell argued that under the collateral source rule, she was entitled to recover the full amount of the reasonable value of the past medical expenses paid or incurred as a result of her injuries and not just what her private health care insurer paid to her medical providers.  The court granted Hamilton Meat’s motion stating that the reduction was consistent with the principle that a plaintiff is entitled to recover the amount that would make her whole, but not over-compensate her.  Howell appealed the order.

Judicial Holding and Analysis

The appellate court reversed the trial court’s order on the ground the reduction of the award for past medical expenses violated the collateral source rule, and held Howell was entitled to recover the full reasonable amount of past medical expenses as awarded by the jury.

The measure of damages is the amount which will compensate for all detriment proximately caused by the defendant.  Economic damages for past medical expenses are limited to a reasonable amount that was paid or incurred, whether by the plaintiff or a collateral source (such as plaintiff’s health care insurer) for reasonably required medical care and services that the plaintiff received and were attributed to the defendant’s tortious conduct.  Pursuant to the collateral source rule, if an injured party receives some compensation from a source wholly independent of the defendant, such payment should not be deducted from the damages which the plaintiff would otherwise collect from the defendant.  The rule embodies the concept that a person who has invested premiums to assure her health care should receive the benefits of her thrift and the defendant should not garner the benefits of the plaintiff’s providence.  The benefit that is directed to the injured party should not be shifted so as to become a windfall for the defendant.  Juries should not be advised that the plaintiff can recover compensation from a collateral source.  Payments made to, or benefits conferred on, the injured party by a source other than the defendant are known as “collateral source benefits.”

Howell incurred a detriment in the form of personal financial liability when she executed agreements to be financially responsible for all charges for the medical services provided to her.  Her personal liability for the charges was a form of compensable pecuniary detriment or loss.  As a result of the negligent driving of Hamilton Meats’ employee, she entered into financial arrangements and became obligated to pay those charges incurred with her money, a collateral source such as her health care insurance, or a combination of the two.  The court concluded that the extinguishment of a portion of Howell’s debt to Scripps and CORE was a benefit to Howell because she was no longer personally liable for that portion of the debt she personally incurred in obtaining medical treatment.  This benefit to Howell was a collateral source benefit because it was conferred on her as a direct result of her own thrift and foresight in procuring private health care insurance through PacifiCare, a source wholly independent of the defendant.  Howell, as a person who has invested insurance premiums to assure her medical care, should receive the benefits of her thrift, and Hamilton Meats, as the party liable for Howell’s injuries, should not garner the benefits of Howell’s providence.  The law allows Howell to keep this collateral source benefit for herself because she was responsible for the benefit by maintaining her own insurance.

Comments and Implications

In its opinion, the court addressed, but did not follow, two cases cited by Hamilton Meats – Hanif v. Housing Authority (1988) 200 Cal.App.3d 635 and Nishihama v. City and County of San Francisco (2001) 93 Cal.App.4^th 298.  Hanif was a personal injury action brought on behalf of a minor struck by an automobile on the defendant public housing authority’s property.  The court concluded the plaintiff was entitled to recover up to, and no more than, the actual amount expended or incurred for past medical services so long as that amount is reasonable, and thus held his entitlement to damages for past medical services was limited to the actual amount paid by Medi-Cal, rather than the total amount billed.  The Howell court distinguished Hanif on the ground that the plaintiff in Hanif did not have private health care insurance and incurred no personal liability for the medical charges billed to Medi-Cal, and therefore suffered no compensable pecuniary detriment or loss beyond the amount that Medi-Cal actually paid.  In Nishihama, the plaintiff was injured when she tripped and fell on a crosswalk maintained by the city.  The jury awarded the plaintiff the sum of $17,168 for past medical expenses even though the hospital accepted from plaintiff’s health insurer the amount of $3,600 as payment in full.  The court of appeal held the trial court erred in permitting the jury to award the plaintiff an amount in excess of $3,600 for the services provided by the hospital.  The Howell court refused to rely on the decision in Nishihama, because it was based on an analysis of the hospital’s lien rights rather than on an analysis of the collateral source rule.

The court commented that changes to the collateral source rule should be made by the legislature rather than by piecemeal development in the judicial system.  This concern has been stated by other courts as well.  It is likely the Supreme Court will accept this case for review because of the diverse opinions of the appellate courts.