Source: https://www.advocatemagazine.com/article/2017-september/be-an-insurance-myth-buster
Timestamp: 2019-04-20 06:19:50+00:00

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One definition of myth is a “widely held but false belief or idea.” In this article I outline four widely followed insurance-related rules developed by the Court of Appeal that I think meet this definition of “myth.” The view that two of these rules qualified as “myths” has so far been borne out by the California Supreme Court’s rejection of those rules. It is perhaps too soon to call the other two rules myths, since they have not yet been “busted.” But one is currently under consideration by the California Supreme Court. As for the fourth, the field is wide open for the plaintiff’s bar to bring the challenges that will one day expose it as a myth as well. Perhaps you can be the lawyer who busts the fourth myth.
In State Farm Fire & Casualty Co. v. Superior Court (Allegro) (1996) 45 Cal.App.4th 1093, 1108, 53 Cal.Rptr.2d 229, 237, Division 3 of the Second Appellate District held that common-law claims for insurance bad faith or fraud would provide a predicate for a claim against an insurer under the unfair competition law (UCL), Business & Professions Code § 17200, et seq. But in Textron Financial Corp. v. National Union Fire Ins. Co. of Pittsburgh (2004) 118 Cal.App.4th 1061, 1071, 13 Cal.Rptr.3d 586, 594, Division 3 of the Fourth Appellate District held that Allegro had been abrogated by the California Supreme Court’s decision in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 83 Cal.Rptr.2d 548, and that common-law duties could not support a UCL claim.
Since Brandt fees are an element of the plaintiff’s damages in a bad-faith case, it makes sense that they should be included in the ratio between compensatory and punitive damages. And in Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197, 1224, 87 Cal.Rptr.3d 556, the court confirmed this logical proposition. In Major, the Brandt fees had been awarded by the jury, not by the trial court in post-trial proceedings.
In Amerigraphics, Inc. v. Mercury Casualty Co. (2010) 182 Cal.App.4th 1538, 1565, 107 Cal.Rptr.3d 307, a case where the trial court awarded the Brandt fees post trial, the appellate court refused to include the Brandt-fee award in the ratio, concluding, “the trial court properly excluded the amount of Brandt fees in determining the compensatory damages award, since the Brandt fees were awarded by the court after the jury had already returned its verdict on the punitive damages.” (Ibid.) No further citation to authority or rationale for this holding was provided, but it became the rule in bad-faith cases.
In Nickerson v. Stonebridge Life Insurance Company (2013) 219 Cal.App.4th 188, 215, 161 Cal.Rptr.3d 629, 650, review granted and opinion superseded sub nom. Nickerson v. Stonebridge Life Ins. (Cal. 2013) 165 Cal.Rptr.3d 61, and rev’d (2016) 63 Cal.4th 363, 203 Cal.Rptr.3d 23, the Court of Appeal followed Amerigraphics and refused to include a court-determined Brandt-fee award in the punitive-damages ratio. Hence, the rule became that Brandt fees would be included in the punitive-damage ratio only when they had been awarded by the jury.
This was a myth because, for the purposes of reviewing the constitutionality of a punitive-damage award, there is no basis to distinguish between whether a Brandt-fee award was made by the jury or the trial court. This myth was busted by the California Supreme Court in Nickerson v. Stonebridge Life Ins. Co. (2016) 63 Cal.4th 363, 370, 203 Cal.Rptr.3d 23, 28, which disapproved Amerigraphics on this point.
A consequence is “a result that follows as an effect of something that came before.” (Black’s Law Dictionary (10th Ed., 2014.) Accordingly, the definition of accident would seem to include the unexpected consequences of the insured’s deliberate acts. In fact, the California Supreme Court’s decisions in both first-party and third-party cases confirm that it does.
The Court has used the same approach in third-party cases. In Geddes & Smith, Inc. v. St. Paul-Mercury Indem. Co. (1959) 51 Cal.2d 558, 334 P.2d 881, the Court held that the unexpected consequences of the insured’s sale of defective doors — property damage to the houses in which the doors were installed — qualified as an accident. Similarly, in Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, the Court held that the inadvertent cutting of boards below their specified thickness qualified as an accident.
Based upon what I have told you so far, you might think that the law in this area is fairly clear. And it is, as long as you only read decisions by the California Supreme Court. The picture becomes far murkier, however, once you start reading decisions by the California Court of Appeal, which has developed an entirely different approach to what qualifies as an accident, and hence what constitutes an occurrence that triggers coverage under a liability policy. The prevailing view in the Court of Appeal, which the Ninth Circuit has adopted, holds that the term accident “refers to the nature of the insured’s conduct, and not to its unintended consequences.” (Albert v. Mid-Century Insurance Company (2015) 236 Cal.App.4th 1281, 1291, 187 Cal.Rptr.3d 211.) In other words, if the insured does something on purpose, and is then sued as a result of the consequences of that deliberate act, there is no potential coverage for the claim because the unintended and unexpected consequences of that deliberate act do not constitute an accident.
This approach effectively functions as an all-purpose exclusion in liability policies, which has allowed insurers to avoid defending or indemnifying insureds in a wide variety of contexts. These include claims against a homeowner based on negligently trimming trees (Alpert, 236 Cal.App.4th at p. 1291); claims against a homeowner for building a structure that mistakenly encroached on a neighbor’s lot (Fire Ins. Exchange v. Superior Court (2010) 181 Cal.App.4th 388, 104 Cal.Rptr.3d 534); claims against the insured who, during “horseplay,” negligently struck his friend and caused injury (State Farm General Ins. Co. v. Frake (2011) 197 Cal.App.4th 568, 581, 128 Cal.Rptr.3d 301); claims against the insured for negligently failing to rescue the victim from a sexual assault (Gonzalez v. Fire Insurance Exchange (2015) 234 Cal.App.4th 1220, 1234, 184 Cal.Rptr.3d 1220); claims based on an MRI machine’s failure to restart after being “ramped down” (MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co. (2010) 187 Cal.App.4th 766, 781 115 Cal.Rptr.3d 27); and damages resulting from wrongful termination (Commercial Union Ins. Co. v. Superior Court (1987) 196 Cal.App.3d 1205, 242 Cal.Rptr. 454). In each of these cases the appellate court held that there was no potential for coverage because the insured’s conduct that generated the claim was deliberate, and it was therefore irrelevant if the consequences of that conduct were unexpected.
This analysis of accident has become the template used in the California and federal courts, having been cited directly in at least 66 cases and having indirectly influenced many more. The ultimate finding of no coverage in Merced certainly seems correct, since the insured’s claim was essentially that he had been unaware that his sexual battery of the woman suing him had been unwelcome.
Given the wide acceptance of the Merced analysis, and the fact that the case was correctly decided, how can it be viewed as a “myth?” There are two reasons. First, its analysis is inconsistent with 125 years of California Supreme Court precedent, as explained above. Second, the analysis is the product of a mistake, which can be plainly identified with a little sleuthing.
Now, look back again at the passage from Merced cited above, and particularly at the statement, “both the means as well as the result must be unforeseen, involuntary, unexpected and unusual.” This is the definition of “accidental means.” Likewise, the statement in Merced that “[a]n accident . . . is never present when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage” is inaccurate, because it describes the test for what constitutes “accidental means.” This becomes clear if you read the cases that the Unigard court cites in support of these propositions.
In short, the Unigard court erroneously transposed the definitions of accident and “accidental means.” The Merced opinion then unwittingly transplanted that error into California law, where it quickly took root and spread throughout the Court of Appeal and into the Ninth Circuit.
Relying on Textron, the court in Major v. Western Home Ins. Co., 169 Cal.App.4th at p. 1224, held that, “because punitive damages are not authorized in contract actions under California law, where both contract and tort damages are awarded in insurance bad faith cases only the tort damages are considered in measuring the proportionality of a punitive damages award.” Nickerson v. Stonebridge Life Insurance Company (2016) 5 Cal.App.5th 1, 27, 209 Cal.Rptr.3d 690, 711, adopted this view as well.
The policy-proceeds rule suffers from two flaws that make it a myth ripe for busting.
The policy-proceeds rule purports to distinguish between the “contract” damages and the “tort” damages in a bad-faith action. But in reality, it confuses “tort damages” with “extra-contractual damages.” The latter are simply one aspect of the “tort damages” available in some bad-faith cases, but the presence of extra-contractual damages is not an element of a bad-faith claim.
In short, the wrongful withholding of the policy benefits is a tort, and the amount of the withheld proceeds represents “tort damages,” regardless of whether or not other tort damages are also awarded.
Hence, the due process clause does not require the exclusion of policy proceeds from the consideration of the harm the plaintiff suffered when the insurer tortiously withholds the policy proceeds.
[T]o exclude the [court-determined Brandt] fees from consideration would mean overlooking a substantial and mutually acknowledged component of the insured’s harm. The effect would be to skew the proper calculation of the punitive-compensatory ratio, and thus to impair reviewing courts’ full consideration of whether, and to what extent, the punitive damages award exceeds constitutional bounds.
This reasoning applies with equal force to the policy-proceeds rule.
Once an appellate court announces a rule, stare decisis makes it difficult to convince other courts that the rule is flawed and should not be followed. Hence, it can take years, and multiple attempts to bust a myth. But the Supreme Court’s decisions in Zhang and Nickerson show that it is possible. Hopefully, Ledesma will soon add to the list of busted insurance myths. It is time for the plaintiffs’ insurance bar to focus its attention on the flaws in the policy-proceeds rule, as well. Sooner or later, another court will see the light.

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