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CAN A CARRIER INTERVENE WHEN IT HAS DENIED COVERAGE OR RESERVED RIGHTS?

Two recent cases shed light on when a carrier can or cannot intervene in third party litigation involving its insured, to protect its own interests. In Hinton v. Beck, the Court of Appeal held that when a carrier declines a tender of defense (i.e., coverage), and the insured allows a default to be taken against him and assigns his bad faith rights over to plaintiff's counsel, the carrier does not have standing to intervene and set aside the default. That is because the carrier loses standing to claim a personal interest in the litigation when it denies coverage. On the other hand, in Gray v. Begley, the Court of Appeal recently held that an insurer defending under a reservation of rights still retains a personal interest in the third party litigation and may intervene to protect its own interests. The moral that harmonizes the two cases appears to be that unless and until there is an outright denial of coverage, the carrier has a recognizable stake in the outcome of the litigation and has proper "standing" to intervene in the third party litigation. But where a carrier denies coverage, i.e., takes the position that it does not have to pay for any judgment against its insured, that position will be held against it by the court, and the carrier will be told that it cannot insert itself into the litigation to protect against the possibility of an adverse judgment while it is simultaneously contending that it would not have to pay for that judgment. This rule is arguably unfair as it ignores the reality that just because a carrier denies coverage does not mean that some judge or jury will not disagree, and find coverage anyway. Under that scenario, the carrier would be on the hook for the judgment - and consequently still has a stake in the outcome of third party litigation. However, carriers should be aware of these two recent decisions, because their combined rule offers a less than ideal level of protection for those who decline tender or deny coverage in good faith. In Gray, the plaintiff was seriously injured in an auto accident and he sued the defendant driver and his employer. The defense carriers settled with the employer for $8 million but did not settle out the driver, and the plaintiff went to trial against the driver and obtained a verdict of $4.5 million. The defendant driver moved to vacate the judgment in order to apply the offset for the large pre-trial settlement with the employer. The defendant driver thereafter reached a private settlement with plaintiff which included a covenant not to execute without the participation of the carriers (who had defended him under reservation of rights). As part of this settlement between the plaintiff and the defendant driver, the driver assigned his rights against his carrier to the plaintiff, and withdrew his motion to vacate the judgment. This of course would stick the carrier with a large judgment with no offset. The carrier then moved to intervene to apply the offset. The trial court granted the motion to intervene, but then denied the carrier's motion to allow the offset. On appeal, the Court held that the intervention was proper, and that the carrier had a right to a hearing on its motion for offset, which the trial court had denied. Intervention is governed by Code Civ. Proc. §387, which permits a non-party, such as an insurance company, to intervene when it has a direct and immediate interest in the outcome. Generally, an insurer cannot intervene in the third party litigation in order to contest coverage because this would expand the issues beyond the scope of the third party case. However, the carrier can intervene on its own behalf to argue issues of liability and damages that are within the scope of the third party action if the defendant defaults or refuses to defend himself, etc. Here, the carrier did not intervene to litigate coverage, but rather, to litigate an ordinary issue already contained in the third party action: Whether or not a judgment should be modified (reduced to zero) in light of a much larger pre-trial settlement. Here, the carrier got past the first hurdle of intervention by showing that it was not seeking to expand the issues in the personal injury case by litigating a coverage issue. The carrier, however, could not get past the second hurdle, of showing "standing," i.e., a personal stake in the outcome. Citing Hinton, the Court noted that where an "insurer denies coverage and refuses to provide a defense, the insurer does not have a direct interest in the litigation" and cannot intervene. "By its denial, the insurer has lost its right to control the litigation" (Gray, citing Hinton). "When an insurer refuses to defend, it may be bound by a default judgment against its insured" (Gray). However, "When the insurer provides a defense...the insured has no right to interfere with the insurer's control of the defense, and the stipulated judgment between the insured and the injured claimant, without the consent of the insurer, is ineffective to impose liability on the insurer," because of the "potential for abuse," even where a stipulated judgment is negotiated with the help of the insured's independent counsel (Safeco v. Sup. Ct.). Therefore, because "the key factor in determining whether an insurer is bound by a [private] settlement is whether the insurer provided the insured with a defense, not whether the insured denied coverage," it "follows that an insurer providing a defense, even though subject to a reservation of rights, may intervene in the action when the insured attempts to settle the case to the potential detriment of the insurer" (Gray). "In contrast to the insurer that refuses to defend, an insurer providing a defense under a reservation of rights has not lost its right to control the litigation" (Gray). In sum, a carrier that denies coverage outright may not later intervene, but one who defends under reservation of rights retains the right to do so. - Paul J. Lipman

NEW AT WESIERSKI & ZUREK LLP

Jacob Ramirez. Mr. Ramirez received a Bachelor of Arts degree from University of Colorado in 2005 and earned his Juris Doctorate from La Verne College of Law in December of 2009. He was admitted to the California Bar in June 2010.
He is licensed to practice before all the courts of the state of California as well as the United States District Court, Central District of California.

UNINSURED PATIENTS WHO ARE CHARGED EXORBITANT "MENU" PRICES FOR HEALTH CARE CANNOT SUE FOR UNFAIR COMPETITION UNLESS THEY ACTUALLY RELIED ON THE REPRESENTATION THAT THEY WOULD BE CHARGED REGULAR INSURANCE RATES

Usually, plaintiffs and their attorneys consider themselves fortunate if the plaintiff in a third party action is uninsured, and incurs exorbitant medical bills at rates that would never be charged through insurance, Medi-Cal, etc. The "Hanif" rule, which is currently under review by the California Supreme Court, holds that the recoverable "reasonable" damages for medical care is the amount that was paid to discharge the patient's debt, i.e., the discounted insurance or Medi-Cal rate. An uninsured patient can thus "rack up" huge medical bills for the same treatment that would be cheaper if he or she were insured, and then present those bills in court. Ironically, some plaintiff attorneys have recently undertaken to sue hospitals who charge their clients these higher, arguably artificial rates, on a theory of unfair competition, namely that the rates are made-up, have no relation to the actual rates and violate the Consumer Legal Remedies Act (to the extent that the hospitals represent that patients will be charged regular or reasonable rates and then go ahead and charge a certain small percentage of their patients (the uninsured ones) astronomically higher rates). One can imagine some animosity between the personal injury plaintiff attorneys who like it when their uninsured patients walk into the office with huge medical bills, and the plaintiff attorneys who are trying to kill the Golden Goose with their unfair competition lawsuits. In any event, two recent cases have considered these unfair competition claims, and have ruled that in order for the case to go forward, the uninsured patients must plead and prove some type of reliance on an actual representation by the hospitals as to a rate different from the one actually charged.
In Durell v. Sharp Health Care, patient Durell alleged that Sharp's agreement for services stated it would charge "usual and customary charges" or "regular rates" but the hospital actually charged them at much higher rates than those paid by Medi-Care and insured patients. Durell claimed this violated the Unfair Competition Law and the CLRA because it is an unlawful billing practice to charge more than the advertised rate. In Durell, plaintiff could not plead any actual reliance on the "usual and customary" language of the agreement. Accordingly, the Durell case was dismissed.
In contrast, in the other recent case of Hale v. Sharp Health Care, (same hospital), the uninsured plaintiff there brought a virtually identical unfair competition lawsuit, claiming that it was an unfair billing practice to charge uninsured patients more than the "regular rates" promised. However, the plaintiff in Hale did allege that he actually relied on this language and understood it to mean that he would be charged what most other patients were charged, i.e., insurance and/or Medi-Cal rates. Because plaintiff properly pled actual reliance, the court let the lawsuit proceed.
For tort defense lawyers and adjusters, the significance of these lawsuits as they continue to go forward will not be the fine points of unfair competition law, but rather, the effect these decisions have on hospital billing practices and third party lawsuits. Hospitals may simply re-write their contracts to preserve the right to use inflated numbers for uninsured patients, which they then try to collect by way of lien. Less likely, the hospitals could simply agree to "regular" rates from their uninsured patients. And, with universal health coverage on the horizon, the issue may be deemed moot as the percentage of insured patients increases.
For those who are adjusting UCL/cross-action claims, the Durell and Hale decisions are favorable for the defense. They clear up a procedural gray area and establish that for all UCL claims, the plaintiff must plead and prove actual reliance on a misrepresentation, not just that the misrepresentations occurred. In other words, someone cannot rely on an advertised price to bring a class action suit unless that person was actually charged a higher price. This requirement of "standing" has already cut out many opportunistic UCL claims, and the Durell and Hale decisions will continue to weed out this parasitic type of lawsuit.
- Paul J. Lipman
 

INSURANCE COVERAGE MAY NOT BE TRIGGERED IF THE WRONG PARTY PAYS THE SELF-INSURED RETENTION

It is common for businesses that subcontract with other businesses to require the subcontractors to obtain "additional insured" endorsements extending defense and indemnity coverage to the hiring business under the subcontractors' general liability insurance policies. Few business owners give any thought to whether their businesses are afforded coverage as an "additional insured" versus a "named insured." Even less thought goes into considering who would pay any applicable self-insured retention ("SIR") if a claim were made. But what if the subcontractor went bankrupt or was simply unwilling to pay the SIR? Would it make a difference if the additional insured volunteered to pay the SIR in order to protect coverage under the policy? In some cases, the answer is yes. Under some insurance policies, coverage for an additional insured is not triggered unless the named insured pays the self-insured retention. Thus, make sure you are not covered by such a policy! Make sure your contract specifically requires coverage that is triggered regardless of who pays the SIR, and that the Certificate of Insurance also specifies this. Ideally, you should obtain the policy and make sure it does what the contract and Certificate say it should.
In the recent case of Forecast Homes, Inc. v. Steadfast Insurance Co., a housing developer (Forecast) was sued in numerous construction defect actions brought by homeowners that purchased residences built by Forecast and its subcontractors. Forecast had required its subcontractors to purchase endorsements to their general liability insurance policies naming it as an "additional insured." Many of these subcontractors obtained their general liability policies through Steadfast Insurance Company ("Steadfast"). For reasons not stated in the record, Forecast paid the SIR in full for several of the subcontractors and then requested that Steadfast provide coverage for the homeowners' claims. Steadfast refused claiming that coverage had not been triggered because the "named insureds" had not paid the SIR themselves. Forecast then sued Steadfast in the Orange County Superior Court for breach of contract and bad faith. The trial court found that coverage had not been triggered and Forecast appealed.
The Court of Appeal re-examined the subcontractors' insurance policies. One version of the policy stated that only the named insured could trigger coverage by paying the SIR and explicitly excluded payments by an additional insured. The other version was less explicit. That policy stated "you shall be responsible [for defense costs and indemnity]...until you have paid the self-insured retention..." [Emphasis added.] The "Definitions" section of that policy defined the term "You" as "the Named Insured shown in the declarations, and any other person or organization qualifying as a Named Insured under [the] policy." Based on this, the Court of Appeal held that the policy's language was unambiguous: only "you" (i.e., the named insured) could pay the self-insured retention and trigger coverage. The Court of Appeal noted that if it had wanted to have the option of paying the SIR itself, Forecast could have required its subcontractors to obtain a more expensive "named insured" endorsement. By opting for the "additional insured" endorsement, Forecast kept its business costs down by keeping its subcontractors' costs down. Having benefitted financially from taking that risk, there was no public policy that compelled the judiciary to rewrite the subcontractors' insurance policies to offer greater coverage than had been agreed on.
The lesson to be learned from the Forecast Homes case is that businesses must pay close attention to the insurance that they buy as well as the requirements that trigger coverage in the event of a claim. This is true for the subcontractor as well as the hirer. If your business contracts with larger (employer) clients for your services, most likely you have agreed to indemnify your client in the business contract. If your business fails to purchase the required insurance coverage or fails to do what is required under the policy, insurance coverage might not be triggered after a claim is made. You could be stuck personally owing indemnity, under the indemnity clause, with no insurance available. As the named insured, you could pay the SIR yourself to trigger coverage, but if the SIR is very high and you are a small company, that could be problematic. Your business could be required to cover any defense costs and pay any losses that your client suffers. On the other hand, if your business contracts out for the services of others, you should consider whether a cheaper additional insured endorsement will protect your interests sufficiently, as compared to requiring that the policy adds you as a named insured, particularly if your business partners go bankrupt. At Wesierski and Zurek, our business litigation team is well-versed in reviewing business contracts and insurance coverage matters. We welcome the opportunity to consult with you about your business needs and obligations.
- Christian C. H. Counts