In an important victory for claimants, a United States District Court recently determined that a plaintiff who obtained an individual disability insurance policy through a conversion provision in an ERISA plan can pursue remedies in a state court under the newly issued individual policy. This ruling is important because the range of damages available through a lawsuit containing state law claims is much broader than the range of damages available through ERISA, and includes emotional distress damages and punitive damages.
In Marshburn v. Unum Life Ins. Co. of America, the insurance company, Unum, argued that the plaintiff, Julie Marshburn, could not pursue state law remedies to recover long-term disability insurance benefits because her plan was subject to ERISA. However, even though her initial group coverage, offered through her employer at the time, Cedars-Sinai Medical Center, was governed by ERISA, she was eventually given the opportunity to obtain a Conversion Policy for an individual plan. In this case, the court rejected Unum’s argument that Ms. Marshburn’s state law claims under the Conversion Policy were preempted by ERISA because the Plaintiff validly converted her group policy to a conversion policy.
Ms. Marshburn was admitted to a medicine residency program at Cedars-Sinai Medical Center in Los Angeles. During her residency, which consisted of a series of clinical rotations, she injured her shoulder while lifting a patient. Initially, Ms. Marshburn continued to work, but after the injury did not heal on its own as she had previously been advised, she was placed on certain work restrictions. .
Nearly three years after her shoulder injury, Ms. Marshburn underwent surgery to repair the labrum tear in her right shoulder. During this surgery, she suffered another injury, this time a torn ligament in her right thumb. The Plaintiff was then placed on additional work restrictions “prohibiting her from pushing, pulling, or lifting with her right upper extremity.” Under these restrictions, Ms. Marshburn would potentially be prevented from completing her internal residency program. Following her injuries, Ms. Marshburn continued to work as a resident at Cedars-Sinai and received her full salary. Her work at Cedars Sinai was terminated in June 2006.
After her termination in June 2006, the Plaintiff was given the opportunity to convert her group long-term disability coverage to an individual policy. Despite initially being denied conversion coverage due to a dispute as to the date the Plaintiff received the option, Ms. Marshburn was eventually issued LTD benefits under the Conversion Policy as of her termination date. She submitted a claim for LTD benefits in January 2011 under the Conversion Policy. Ms. Marshburn also suffered other injuries including insomnia, depression, chronic headaches and was unable to perform basic tasks.
The Plaintiff sued for breach of contract and breach of the implied duty of good faith and fair dealing. Unum moved for summary judgment, claiming that the Plaintiff was ineligible to convert her ERISA plan to and individual policy, which would be governed by state law.
The court first determined that while ERISA governs the right to convert, it does not overn the actual conversion policy:
In the Ninth Circuit, ERISA governs the right to convert an ERISA-governed policy to an individual conversion policy, but not conversion policies themselves. See Waks v. Empire Blue Cross/Blue Shield, 263 F.3d 872, 877 (9th Cir. 2001). By contrast, “state-law claims arising under a converted policy—even though the policy has been converted from an ERISA plan—are not preempted by ERISA.” Id. Accordingly, the Court looks to ERISA to determine whether plaintiff validly converted her group policy to a conversion policy. See White v. Provident Life & Accident Ins. Co., 114 F.3d 26, 28 (4th Cir. 1997).
Using the principle, the court first made clear that the insurance company seeking ERISA preemption bears the burden of proof to show that the insured was “disabled” under the relevant terms of the Group Plan (i.e., pre-conversion). Importantly, the court found that the Plaintiff was not disabled under the terms of her ERISA plan before her ERISA plan was converted because she received her full salary until the end of her employment. So while her injury occurred when her coverage was governed by ERISA, her entitlement to benefits did not arise until after her plan had been converted. Thus, her claims under the Conversion Policy were not pre-empted by ERISA, allowing her to pursue state law claims under that policy.
Recent verdicts from across the nation in disability, life and health insurance policy cases must be alarming for big corporate insurance companies. The trend is for jurors to award individual plaintiffs astronomical punitive damage verdicts, showing their general disdain for insurance companies and tendency to empathize with policyholders, particularly where a person’s health is at issue.
General liability insurers and their agents often lure commercial clients with grandiose promises of coverage for business operations, but upon receiving a notice of a claim, interpret their policy exclusions liberally to limit what they consider covered business operations so as to deny coverage. A recent case from the California Court of Appeal, Baek v. Continental, 2014 Cal App. LEXIS 893 (2d Dist. Oct. 6, 2014) (“Baek”), expanded on an insurer’s broad duty to defend wherever there is a potential for coverage but in this case denied a duty to defend.
Baek involved a Heaven Massage Wellness Center (“HMWC”) client, “Jaime W.,” who brought suit against HMWC and her massage therapist (“Jaime W. action”), Luiz Baek (“Baek”), for sexual assault during a massage, alleging Baek handled the “Plaintiff’s breasts, buttocks, inner thighs and genitals.” HMWC had a general liability insurance policy with Continental Casualty Co. (“Continental”) which covered employees or partners “only for acts within the scope of their employment” or committed “while performing duties related to the conduct of [HMWC’s] business.” Continental asserted there was no coverage, and HMWC sued for breach of contract and bad faith. The trial court granted summary judgment for Continental. Subsequently, Baek filed suit against Continental, alleging it had a duty to defend and indemnify him in the Jaime W. action as a covered employee of HMWC. Continental demurred on the ground that Baek was acting beyond his scope of employment. Baek then amended his complaint to include a breach of contract, breach of the implied covenant of good faith and fair dealing and fraud against Continental. Once again, Continental demurred and trial court again sustained the demurrer, finding there was no coverage, and no potential for coverage, because Baek’s actions did not fall within his scope of his employment. Baek filed a timely appeal.
The California Court of Appeal first addressed whether Baek qualified as an “employee” of HMWC eligible for coverage. Baek argued Continental owed him a duty of defense because the complaint in the Jaime W. action alleged that Baek was either a partner or employee of HMWC and the alleged sexual assault occurred within the scope of his employment, or while performing his duties related to HMWC’s business. Conversely, Continental argued that Baek did not qualify for coverage because his complaint alleged he was an independent contractor, and thus he did not qualify as an employee or partner of HMWC. As an initial matter, the court explained an insurer’s duty to defend was triggered when the insured becomes aware of, or a third party suit pleads, facts sufficient to give rise to the potential for coverage under the policy. This duty to defend is broader than the duty to indemnify, and an insurer may have a duty to defend if there is a potential of coverage, even if no damages are awarded and any doubts concerning the potential for coverage and a duty to defend were resolved in favor of the insured. Continental knew the plaintiff in the Jaime W. action would attempt to prove Baek was HMWC’s employee or partner under the HMWC policy. However, Continental argued Baek’s complaint alleged he signed an independent contractor agreement, and thus did not qualify as an employee or partner of HMWC. The court disagreed, noting that although Baek signed an independent contractor agreement with HMWC, he did not allege he was an independent contractor so as to preclude coverage. The court clarified that an insurer’s duty to defend arises if allegations by the third party, rather than the potential insured, taken as true, reveal a potential for coverage. Here, the complaint in the Jaime W. action alleged that Baek was, at all relevant times, an employee, owner or partner of HMWC. The court explained that in its coverage determination, Continental was bound to accept these allegations as true unless extrinsic facts established otherwise. Therefore, for coverage purposes, Continental had to assume Baek’s status as an employee under HMWC’s policy to determine whether there was a duty to defend.
Next, the court addressed whether Baek’s alleged sexual assault fell within the scope of his employment so as to trigger coverage by reviewing two cases involving similar issues. First, the court reviewed Lisa M. v. Henry Mayo Newhall Memorial Hospital, 12 Cal. 4th 291 (1995) which involved an ultrasound technician who sexually molested a patient during an ultrasound exam by inserting the ultrasound wand and his fingers into her vagina. There, the court held the technician’s employment did not motivate or engender the sexual molestation; rather, the technician took advantage of his work environment and consciously committed an assault for reasons unrelated to his work. In addition, the court clarified that although the technician’s job involved examining or physical contact with a patient’s otherwise private areas, his assault on the ultrasound patient was not a foreseeable consequence of that contact. Accordingly, the sexual assault was an independent decision unrelated to his duties. Next, the Court of Appeal examined Farmers Ins. Group v. County of Santa Clara, 11 Cal. 4th 992 (1995) where a deputy sheriff’s lewd propositioning and offensive touching of others at a county jail were found to fall outside the scope of employment, despite the proximity to the workplace. The ruling court noted that where an employee’s tort was “‘personal in nature, mere presence at the place of employment and attendance to occupational duties prior or subsequent to the offense’” did not “bring the tort within the scope of employment.” The Court of Appeal explained that like the ultrasound technician in Lisa M., Baek’s employment as a massage therapist gave him the opportunity to be alone with Jaime W., but nothing in the facts suggested the alleged assault was “‘engendered by’ or an ‘outgrowth’ of his employment,” and his motivation for committing the sexual assault was unrelated to his work. Hence, his action did not occur within the scope of his employment contemplated under the Continental policy.
The Court of Appeal determined Baek’s alleged touching of Plaintiff’s breasts, buttocks, inner thighs and genitals “indisputably were not ‘duties related to the conduct of [HMWC’s] business’” or the acts he was hired to perform, but constituted a “stepping away” from HMWC’s business, as the acts were performed for Baek’s own benefit, rather than HMWC’s. Accordingly, the court concluded Baek’s acts were not related to, and did not occur, with respect to the conduct of HMWC’s business so as to trigger coverage.
Finally, the Court of Appeal rejected Baek’s arguments that even if Continental had no duty to defend the sexual assault allegations, it had a duty to defend Jaime W.’s claims of negligence and false imprisonment. Briefly, the court explained the duty to defend depended on whether the alleged facts reveal a possibility of coverage, not the labels given to the causes of action. The complaint in the Jaime W. action alleged the massage was negligent, each defendant was negligent in hiring, training and supervising Baek and Baek deprived Plaintiff of her freedom of movement by use of deceit in setting up the massage room. First, the court explained that sexual fondling is an intentional act such that Baek could not be found to liable for negligence or failing to use due care in performing the massage or supervising his own actions. Second, the court stated the false imprisonment allegations were “inextricably intertwined” with the alleged assault, for which there was no coverage. Accordingly, Continental had no duty to defend these allegations.
The good holding in Baek for insureds is that persons who work under an independent contractor agreement may be eligible for coverage under the employer’s general liability policy because a third party complaint alleges he or she was a covered “employee.” Although the court ultimately held there was no coverage, this decision is significant for policyholders as it explains that even though the insured executed an independent contractor agreement, the acts by its so-called independent contractor may be within the scope of coverage under such a policy.
Can an Insurer Escape Bad Faith Liability When it Unreasonably Forces an Insured to Arbitrate an Uninsured Motorist Claim? No Way!July 14, 2014 Scott Calvert
In a very good ruling for policyholders, the California Court of Appeal ruled that an insurance company cannot escape insurance bad faith liability by forcing a claimant to arbitrate his claim without first fairly investigating, evaluating and attempting to resolve the claim. In Maslo v Ameriprise Auto & Home Insurance, 2014 Cal. App. LEXIS 564, 2014 WL 2918866 (June 27, 2014), the court explained that “[t]here can be no serious dispute that an insurer is required to thoroughly and fairly investigate, process, and evaluate its insured’s claim,” and the failure to do so exposes the insurer to bad faith liability.