On October 11, 2018, Stephen L. Raucher was one of the panelists who presented a continuing legal education program entitled “Conflict Waivers, Mediation Waivers – Oh My! Avoiding Ethical Traps Triggered By Recent Developments Under California Law.” The program examined and discussed the ramifications of a recent California Supreme Court opinion regarding conflict waivers as well as new legislation affecting mediation waivers.
RRB’s Stephen Raucher’s article Conflict Waiver Enforceability and the Duty of Loyalty is published in the Los Angeles Daily Journal on September 28, 2018.
Reuben Raucher & Blum attorney Stephen L. Raucher is quoted in the August 31, 2018 Los Angeles Daily Journal regarding the California Supreme Court’s ruling in Sheppard Mullin v. J-M Manufacturing. The state high court upheld an appellate court decision that broad attorney conflict waivers that fail to disclose known conflicts of interest are unenforceable.
RRB’s Stephen Raucher’s article State High Court Soon to Decide Conflict Waivers Case is published in the Los Angeles Daily Journal on August 9, 2018.
Insurance Law is published by the State Bar Litigation Section in its California Litigation Review (2017 Edition), co-authored by RRB attorney Stephen L. Raucher, along with Michael Sohigian, who have provided insurance updates together for the fifth consecutive year.
Stephen Raucher joins a panel of amicus attorneys for episode 102 of the Daily Journal’s podcast entitled “Waiving in the Dark?” and weighs in on the potential ramifications of the California Supreme Court’s pending decision regarding advance conflict-of-interest waivers.
On Monday, April 16, 2018, Stephen L. Raucher was one of the panelists presenting a continuing legal education program entitled “Fourth Annual Update on Developments in Insurance.” The program examined the most important new cases from 2017 regarding insurance coverage and bad faith, focusing particularly on liability and property policies.
In Nutrition Distribution, LLC v. Southern SARMs, Inc. (2018) 2018 Cal. App. LEXIS 81, the California Court of Appeal, Second Appellate District, Division 7, was asked to interpret Code of Civil Procedure Section 128.5(f), which governs the procedure applicable to motions for sanctions for bad faith actions or tactics. The court held that under the version of Section 128.5(f) in effect from January 1, 2015 to August 7, 2017, a 21-day safe harbor waiting period applied to such motions for sanctions. This is in contrast to the holding in San Diegans for Open Government v. San Diego (2016) 246 Cal. App.4th 1306, 1317, which held: “[A] party filing a sanctions motion under Section 128.5 does not need comply with the safe harbor waiting period described in Section 128.7, subdivision (c)(1).”
Section 128.5(a) authorizes a trial court to order a party, the party’s attorney, or both to pay reasonable expenses, including attorney fees, incurred as a result of bad faith actions that are frivolous or solely intended to cause unnecessary delay. Former subdivision (f) was in effect from January 1, 2015 to August 7, 2017. It provided: “Any sanctions imposed pursuant to this section shall be imposed consistently with the standards, conditions, and procedures set forth in subdivisions (c), (d), and (h) of Section 128.7.” Section 128.7 governs misconduct in the filing or advocacy of groundless claims in signed pleadings and other papers. Under Section 128.7(c)(1), service of the motion for sanctions initiates a 21-day safe harbor period, patterned after Federal Rule of Civil Procedure 11. During this time, the offending document may be corrected or withdrawn without penalty, and the motion for sanctions cannot be filed. San Diegans for Open Government found that motions for sanctions under Section 128.5 did not need to comply with the safe harbor provision. This had the effect of allowing parties to request sanctions as part of their moving or opposition papers, in a throwback to the process in California prior to adoption of Section 128.7 and its safe harbor provision.
In Nutrition Development, as part of its demurrer, the defendant argued that the plaintiff’s assertion of frivolous claims and bad faith conduct warranted imposition of sanctions pursuant to Sections 128.5 and 128.7. The court sustained the demurrer and dismissed the case but denied the request for sanctions. The court indicated that the defendant could choose to file a separate motion for sanctions. The defendant did so, but the motion was denied pursuant to the safe harbor rule on January 9, 2017. The defendant appealed.
Meanwhile, in August 2017, the Legislature amended Section 128.5 to include subdivision (f)(1)(B), which contains an explicit 21-day safe harbor period. The Nutrition Development court stated that this amendment confirmed the Legislature’s intent to include a safe harbor provision in former subdivision (f) and “abrogate several of the holdings under San Diegans for Open Government.” The court in Nutrition Development explicitly disagreed with the holding in San Diegans for Open Government and found the plain meaning and obvious intent of the Legislature in Section 128.5 prior to the August amendment was to incorporate the Section 128.7 safe harbor provision by cross-reference. Accordingly, the court affirmed the denial of sanctions.
Given the clear intent to incorporate the safe harbor requirement as stated in the new version of Section 128.5(f), the effect of the holding in Nutrition Development will be limited to sanctions orders issued under the prior version of the law without compliance with the safe harbor rule in reliance on San Diegans for Open Government. How many such orders are or will be subject to appeal — and whether the California Supreme Court will be asked to resolve the split of opinion on this now mostly moot issue — remains to be seen.
Author’s Note: In CPF Vaseo Associates, LLC v. Gray, 29 Cal. App. 5th 997 (2018) (filed December 6, 2018), the Fourth Appellate District reversed its decision in San Diegans for Open Government in favor of the holding and reasoning in Nutrition Distribution. Accordingly, there is no longer a conflict between the Fourth and Second Appellate Districts on this issue.
Reuben Raucher & Blum attorneys Timothy D. Reuben, Stephen L. Raucher, and Stephanie I. Blum are named as Southern California “Super Lawyers” for the 2018 edition of Southern California Super Lawyers magazine.
In a decision that falls in line with the majority of other circuits to have considered the question, the Ninth Circuit recently held that the Federal Arbitration Act (FAA) does not grant arbitrators the power to compel the production of documents from third parties prior to a hearing as part of pre-hearing discovery. Vividus v. Express Scripts, 2017 U.S. App. LEXIS 26233, *2 (9th Cir. 2017).
In Vividus, an arbitration panel issued a subpoena to Express Scripts, which was not a party to the arbitration in question. The subpoena directed Express Scripts to produce certain documents before an arbitration hearing. Express Scripts did not respond to the subpoena, and Vividus attempted to enforce it in federal court in Arizona. Based on 9 U.S.C. Section 7, the Arizona federal district court held that the FAA does not give arbitrators the power to compel the production of documents from third parties outside of a hearing, and Vividus appealed.
The Ninth Circuit began by evaluating the plain language of the statute in order to determine whether Section 7 of the FAA allows an arbitrator to order a third party to produce documents as part of pre-hearing discovery. Section 7 is entitled “Witnesses before arbitrators; fees; compelling attendance” and, in relevant part, states:
The arbitrators selected either as prescribed in this title or otherwise, or a majority of them, may summon in writing any person to attend before them or any of them as a witness and in a proper case to bring with him or them any book, record, document, or paper which may be deemed material as evidence in the case . . . if any person or persons so summoned to testify shall refuse or neglect to obey said summons, upon petition the United States district court for the district in which such arbitrators, or a majority of them, are sitting may compel the attendance of such person or persons before said arbitrator or arbitrators, or punish said person or persons for contempt in the same manner provided by law for securing the attendance of witnesses or their punishment for neglect or refusal to attend in the courts of the United States.
(Emphasis added). The court reasoned that, based on the plain language of the statute, the FAA gives arbitrators two powers: (1) the power to compel the attendance of a person as a witness, and (2) the power to compel the person to bring relevant documents. If the person does not comply, however, the district court can compel attendance. The court concluded that Section 7 only permits an arbitrator to order third parties to produce documents at a hearing.
The Third, Second, and Fourth Circuits have similarly interpreted Section 7. The Eighth Circuit, however, reached a different result. The Eighth Circuit held that “implicit in an arbitration panel’s power to subpoena relevant documents for production at a hearing is the power to order the production of relevant documents for review by a party prior to the hearing.” In re Security Life Ins. Co. of America, 228 F.3d 865, 870-71 (8th Cir. 2000). The Eighth Circuit reasoned that this approach facilitates the efficient resolution of disputes by allowing parties to “review and digest” documents before hearings. Id. at 870. The Ninth Circuit disagreed, stating that third parties should not be subjected to pre-hearing document production because they did not agree to the arbitrator’s jurisdiction. Therefore, the court argued that restricting third party disclosures to a hearing would lessen the burden on non-parties, as well as discourage fishing expeditions. This circuit split, however, makes the issue ripe for Supreme Court review.
What about under California state law? California Code of Civil Procedure Section 1282.6 is analogous to 9 U.S.C. Section 7. Section 1282.6 is entitled “Attendance of witnesses and production of evidence; Subpoenas” and, in relevant part, reads:
(a) A subpoena requiring the attendance of witnesses, and a subpoena duces tecum for the production of books, records, documents and other evidence, at an arbitration proceeding or a deposition under Section 1283, and if Section 1283.05 is applicable, for the purposes of discovery, shall be issued as provided in this section…
Unlike Section 7, Section 1282.6 specifically contemplates pre-hearing document production by third parties, at least in certain circumstances. But how are such subpoenas enforced?
The California Supreme Court honed in on a third party’s lack of consent to an arbitration agreement in Berglund v. Arthroscopic & Laser Center of San Diego, L.P. The question in this case was whether arbitration discovery orders to nonparties should be subject to full judicial review under the California Arbitration Act. Berglund v. Arthroscopic & Laser Center of San Diego, L.P., 44 Cal.4th 528, 532 (2008). The court held that while the dispute must first be submitted to the arbitrator for resolution, the nonparty is entitled to full judicial review of the order. The reasoning in this case relied heavily on the fact that third parties never consented to the jurisdiction of the arbitrator, who is free to not follow the law if he or she chooses and is only subjected to judicial review in narrow circumstances. Id. at 538. Thus, unlike federal law, an arbitrator’s subpoena can be judicially enforced under the California Arbitration Act.
Reuben Raucher & Blum is pleased to announce that Hanna I. Giuntini has joined the firm as an Associate.
Reuben Raucher & Blum is pleased to announce that Daniel R. Lahana has joined the firm as an Associate.
California’s First Appellate District recently squelched an excess liability carrier’s attempt to shift responsibility for settlements resulting from a pipeline explosion onto a co-defendant’s umbrella insurer, holding that the latter policy’s “professional services” exclusion barred coverage. Energy Insurance Mutual Limited v. ACE American Insurance Company, 14 Cal.App.5th 281 (2017). In doing so, the Court of Appeal gave broad effect to the exclusion, potentially narrowing the path to coverage in construction cases.
The insured under the excess policy, Kinder Morgan, Inc., owns and operates oil and gas pipelines. Kinder Morgan hired two temporary employees provided by Comforce Corporation — the insured under the umbrella policy — as construction inspectors in connection with a water supply line project. Kinder Morgan also had one of its own employees at the project serving as a “line rider,” whose primary function was to perform daily surveillance in order to protect the pipeline system from damage. During the course of the project, a petroleum line was punctured and the resulting explosion killed five employees and seriously injured four others, and also caused extensive property damage.
Subject to a $1 million self-insured retention, Kinder Morgan was insured under a $35 million “excess liability” policy. In addition, Energy Insurance Mutual Limited (“EIM”) issued Kinder Morgan a “following form” $100 million excess policy above that. Meanwhile, Comforce was insured under a $1 million primary commercial general liability (“CGL”) policy, as well as a $25 million umbrella policy, both issued by ACE American (“ACE”). The umbrella policy contained a professional services exclusion.
In settling the lawsuits arising from the explosion, EIM agreed to pay more than $30 million for the claims against Kinder Morgan. EIM then sued ACE for contribution under the Comforce umbrella policy, alleging that Kinder Morgan was an additional insured under that policy.
The Court of Appeal upheld the trial court’s grant of summary judgment in favor of ACE based on the professional services exclusion, which provided as follows: “This insurance does not apply to any liability arising out of the providing or failing to provide any services of a professional nature.”
The court noted that “A CGL policy is intended to cover general liability, not an insured’s professional or business skill.” (Emphasis in original). Citing Tradewinds Escrow, Inc. v. Truck Ins. Exchange, 97 Cal.App.4th 704 (2002), the opinion went on to explain that “California courts have defined ‘professional services’ as those arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual, rather than physical or manual.” The court then noted that the exclusion extends beyond services traditionally considered “professions,” such as medicine, law or engineering.
With these definitions in mind, the court ruled that the tasks assigned to the construction inspectors supplied by Comforce fell within the professional services exclusion. Moreover, because the exclusion used the term “arising out of,” the court further held that the exclusion extended to all of the claims alleged in the underlying case, including ordinary negligence, trespass and nuisance. In reaching its conclusion, the court distinguished North Counties Engineering, Inc. v. State Farm General Ins. Co., 224 Cal.App.4th 902 (2014), which had held that ordinary labor and construction work did not fall within a professional services exclusion.
EIM further argued that, because the umbrella policy contained a “separation of insureds” provision (or severability clause), there could still be coverage for Kinder Morgan as an additional insured even if the exclusion barred coverage for Comforce. The separation of insureds provision stated that, other than with respect to the limits of liability, the policy applies: “1. As if each INSURED were the only INSURED; 2. Separately to each INSURED against whom claim is made or SUIT brought.”
The Court of Appeal agreed that the relevant question in light of the severability clause was not whether Comforce had engaged in professional services, but whether Kinder Morgan did. However, the court found that the record established that Kinder Morgan was not just a passive owner of the pipeline, but rather had trained and supervised the inspectors provided by Comforce, and had used its own full-time employee as a line rider. Accordingly, the separation of insureds provision did not assist EIM.
In a decision which softens the normally harsh rules confronting policyholders with respect to rescission of insurance policies, California’s First Appellate District recently reversed a summary judgment of rescission. Duarte v. Pacific Specialty Ins. Co., 13 Cal.App.5th 45 (2017). The basis for doing so was the ambiguity of the questions at issue in the insurance application.
The policyholder, Duarte, obtained liability coverage effective April 19, 2012 for a residential rental property he owned. In June 2012, a tenant at the property filed a habitability lawsuit, which the carrier, Pacific Specialty, refused to defend. Duarte filed an action for declaratory relief to establish the duty to defend. Pacific Specialty asserted a number of affirmative defenses in response, including a right to rescind due to material misrepresentations in the application. The trial court granted summary judgment in favor of Pacific Specialty, but the Court of Appeal reversed.
Pacific Specialty asserted that Duarte untruthfully answered “no” to the following questions: “(4) Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuits?” and (9) “Is there any type of business conducted on the premises?”
The appellate court began by acknowledging that material misrepresentations or concealments are grounds for rescission of an insurance policy, and actual intent to deceive need not be shown. Moreover, “the fact that the insurer has demanded answers to specific questions in an application for insurance is in itself usually sufficient to establish materiality as a matter of law.” Id. at 53, citing Thompson v. Occidental Life Ins. Co., 9 Cal.3d 904 (1973). However, the court went on to note that, as with the construction of insurance policies generally, ambiguities in the application are construed against the insurer, and that the insurer cannot rely on answers given based on vague or ambiguous questions. Id. at 54.
With respect to Question No. 4, the record did show that the tenant had complained about issues with the property in February 2012, prior to the policy’s inception. However, this was insufficient in light of the “utterly ambiguous” nature of the question. In particular, the court noted that the question did “not include any form of the verb ‘to be,’ and therefore it is not at all clear that it asks, ‘Are there any pending claims?’” Id. at 60 (emphasis in original). Instead, the court agreed with Duarte that the question could reasonably be interpreted as asking “whether the property has unrepaired damage associated in some way with previous or pending claims.” Id. at 61 (emphasis added). Since Pacific Specialty had not shown that the insured knew of any unrepaired damage, it could not meet its burden on summary judgment as to this question.
As to Question No. 9, Pacific Specialty pointed to evidence that Duarte knew that the tenant had sometimes sold motorcycle parts from the basement to show that his answer was inaccurate. However, Duarte argued that he reasonably interpreted the phrase “business [being] conducted on the premises” to refer to “regular and ongoing business activity.” The Court of Appeal agreed that Duarte’s interpretation was reasonable, and that there was accordingly a disputed question of fact as to whether Duarte misrepresented the existence of a business on the premises in the insurance application. Summary judgment was therefore reversed.
The lesson of Duarte for policyholders when confronted with a rescission claim is to pay careful attention not only to the answers provided on the insurance application, but to the questions themselves. Since ambiguities will be interpreted against the insurance company, convoluted, vague or confusing questions may be a policyholder’s best friend.
In a victory for policy holders, California’s Second Appellate District recently held that when an insurance policy expressly provides coverage for litigation expenses on appeal, an exclusion requiring repayment to the insurer upon a “final determination” of the insured’s culpability applies only after the insured’s appeals have been exhausted. Stein v. Axis Ins. Co., 10 Cal.App.5th 673, 676 (2017).
In 2007, a medical device company, Heart Tronics, Inc., purchased a $5 million directors and officers liability insurance policy from Houston Casualty Company (HCC). The policy covered litigation expenses incurred in connection with both civil and criminal proceedings, including appeals, based on an alleged breach of duty by officers and directors, or their functional equivalents.
An exclusion in the policy provided that “Except for Defense Expenses, the Insurer shall not pay Loss in connection with any Claim” occasioned by willful misconduct. Upon a “final determination” that the insured committed willful misconduct, the insured would be obligated to repay HCC for any defense expenses paid on the insured’s behalf.
When an officer of Heart Tronics was convicted of federal securities fraud and tendered his appeal of the conviction to HCC, HCC denied coverage, arguing, in part, that the conviction was a “final determination” of willful misconduct. Thus, the insurance dispute turned on the meaning of “final determination.” HCC argued that since, under federal law, a trial court judgment is deemed a final adjudication until reversed on appeal, the officer’s criminal conviction should also be deemed a final determination.
The Court of Appeal disagreed and in applying the ordinary rules of contractual interpretation to the policy, found no reason to apply the meaning of “final adjudication” proffered by HCC. The Court of Appeal also noted that even under federal law, an adjudication that is “final until reversed” is not final for all purposes, and that an appellate ruling is more final than a trial court’s judgment. Moreover, the exclusion provision by its own terms provided that the exclusion did not apply to defense expenses. Thus, the contractual language of the policy precluded HCC’s argument.
Policy drafters and holders should note that the Stein holding may not apply in all cases, and that the outcome of these kinds of disputes ultimately depends on policy language. For example, the Court of Appeal noted that the phrase, “judgment or other final adjudication,” in an exclusion construed in two cases relied upon by HCC, was disjunctive such that either condition would alone suffice to trigger the exclusion. This was not the case in Stein, where the exclusion was not disjunctive, and only a “final adjudication” triggered the exclusion.