California Supreme Court Holds that Brandt Fees Are Part of Compensatory Damages to be Assessed for Constitutionality of Punitive Damages Awards

By and on June 24, 2016
Leave a comment

On June 9, 2016, in Nickerson v. Stonebridge Life Ins. Co. (2016) 2016 Cal. LEXIS 3757, the California Supreme Court ruled that Brandt fees, either awarded by a jury or a court, must be considered to determine whether and to what extent a punitive damages award exceeds constitutional bounds.

The insured sued his insurer for breach of contract and bad faith for failure to pay benefits under an indemnity benefit policy. The policy promised to pay the insured $350 per day for each day the insured was confined in a hospital for medically necessary care and treatment of a covered injury. The insurer paid only 18 out of 109 days of hospitalization.

The case proceeded to verdict and the jury awarded the insured $31,500 for breach of contract, $35,000 for bad faith, and $19 million in punitive damages. Before trial, the parties had stipulated the trial court could determine the amount of Brandt fees post-verdict.  The trial court awarded the insured $12,500 in Brandt fees.

The insurer moved for a new trial seeking a reduction in the punitive damages award because it was unconstitutionally excessive. The trial court granted the motion for new trial unless the insured accepted a reduction of punitive damages to $350,000. The trial court did not include Brandt fees in that calculation.

The insured appealed the order granting the new trial. The Court of Appeal affirmed, holding the trial court properly reduced the punitive damages award to a 10-to-1 ratio, even without the inclusion of the $12,500 in Brandt fees. The California Supreme Court granted review and reversed.

The California Supreme Court relied on the United States Supreme Court’s three guideposts that reviewing courts must consider to determine whether an award of punitive damages violates due process rights under the Fourteenth Amendment: (1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases. (See BMW of N. America, Inc. v. Gore (1996) 517 U.S. 559, 568.)

Focusing on the second guidepost, the California Supreme Court noted that “few awards exceeding a single-digit ratio between punitive damages and compensatory damages . . . will satisfy due process.” Gore, 517 U.S. at 425. Ratios of punitive damages to compensatory damages that greatly exceed 9 or 10 to 1 are presumed excessive and therefore unconstitutional. (See Simon v. San Paolo U.S. Holding Co., Inc. (2005) 35 Cal.4th 1159, 1182.)

In reversing the judgment, the California Supreme Court reasoned that disregarding Brandt fees as a necessary component of the insured’s harm “skew[s] the proper calculation of the punitive-compensatory ratio.” The result impairs the reviewing courts’ full consideration of whether the punitive damages award exceeds constitutional limits.

The Court also rejected the insurer’s argument that a trial court’s award of Brandt fees, as opposed to a jury’s verdict, should not be included in the calculation of compensatory damages, overruling Amerigraphics, Inc. v. Mercury Casualty Co. (2010) 182 Cal.App.4th 1538.

Filed under Punitive Damages

Intellectual Property Exclusion Bars Coverage for Right of Publicity Claims

By and on April 3, 2015
Leave a comment

In Alterra Excess and Surplus Insurance Company v. Jaime Snyder (2015) 234 Cal.App.4th 1390, Gordon & Rees Partner Arthur Schwartz and Senior Counsel Randall Berdan obtained affirmance of a trial court judgment in the California Court of Appeal, First Appellate District. The court held an exclusion for “Infringement of Copyright, Patent, Trademark or Trade Secret” applied to preclude coverage for claims based on the right of publicity. While the court’s ruling absolved Alterra of its alleged duty to defend or indemnify, the procedural wrangling behind the scenes provides a cautionary tale for insurers.

In 2009, Maxfield & Oberton Holdings, LLC began manufacturing and distributing a desk toy, “Buckyballs”, and similar products. They all incorporated the name “Bucky” which was based on the architectural engineer and inventor, R. Buckminster Fuller. Fuller died in 1983 and, in 1985, Fuller’s Estate registered its claim as Fuller’s successor with the California Secretary of State. The Estate licensed the right to use Fuller’s name and likeness on numerous occasions, including to Apple Computer which used Fuller’s image, and others, in its “Think Different” advertising campaign. In 2004, the U.S. Postal Service licensed the rights to Fuller’s image for a postage stamp.

The Estate sued Maxfield in federal district court in Northern California alleging Maxfield had been using the Bucky name without the Estate’s consent or paying royalties to the Estate. The Estate alleged claims for (1) Unfair Competition, (2) Invasion of Privacy (Misappropriation of Name and Likeness), (3) Unauthorized Use of Name and Likeness in Violation of § 3344.1, and (4) Violation of various Business and Professions Code statutes.

Alterra’s predecessor issued a CGL insurance policy to Maxfield in 2010. Alterra provided a defense to Maxfield in the federal action under a reservation of rights and filed a declaratory relief action in San Francisco Superior Court seeking a declaration of non-coverage. Alterra named the Estate in the coverage action but later stipulated to dismiss it in return for the Estate’s agreement to be bound by the outcome.

While the federal action was pending, Maxfield dissolved. This was precipitated by the United States Consumer Product Safety Commission’s filing of an administrative complaint due to safety concerns over Buckyballs. The dissolution created several issues.

First, as a dissolved entity, Maxfield could no longer defend itself in the federal infringement action and its retained defense counsel filed a motion to withdraw. Second, following the appointment of a Trustee to administer pending and future claims against Maxfield, the Fuller Estate entered into an agreement with the Trustee that released Maxfield from liability in the federal action. But, it also purported to allow the Estate to continue to pursue the infringement action so that the Estate could obtain a judgment against Maxfield for collection from Alterra. The Estate also obtained an assignment from the Trustee to allow the Estate to pursue Maxfield’s rights against Alterra.

So the stage was set. The Estate had made it clear that, despite its release of Maxfield in the federal action, it would pursue a judgment against Maxfield, an unrepresented party that could not defend itself, for eventual collection against Alterra. Although Alterra continued to believe no coverage existed, the stakes had now increased substantially by the possible exposure to Maxfield on an uncontested judgment.

To protect itself, Alterra intervened in the federal action and asserted defenses on the merits, including the very real defense the Estate had settled and released all claims against Maxfield and the infringement action had become a sham proceeding.

The Estate then sought to re-insert itself into the San Francisco coverage action despite its prior agreement to be dismissed. The court allowed the Estate to join after which the Estate attempted to prove Alterra owed coverage to Maxfield for the federal action. In the meantime, the federal action was stayed to allow the coverage issues to be resolved. Of course, if Alterra were to prevail on coverage, the Estate’s plan would collapse.

Alterra moved for judgment on the pleadings in the coverage action on three grounds: the policy’s Intellectual Property and First Publication Exclusions, and the Estate’s settlement with the Trustee. As to the latter, Alterra contended the Estate’s deal with Maxfield’s trustee, made without Alterra’s consent, violated the policy’s “no action clause” barring any coverage obligation. Alterra cited the fundamental principle, recognized by the California Supreme Court, that a claimant may not manufacture a payday by entering into an agreement with an insured to the defending insurer’s detriment or without its consent.

The trial court granted Alterra’s motion for judgment finding the Intellectual Property Exclusion barred all coverage as a matter of law. It did not reach Alterra’s other issues. The Court of Appeal subsequently affirmed on this ground.

On appeal, the Estate contended the exclusion could not reasonably be understood to apply to “intellectual property rights” because it is not conspicuous, plain and clear. Coverage exclusions and limitations must meet two separate tests, (1) “the limitation must be ‘conspicuous’ with regard to placement and visibility,” and (2) the language must be “plain and clear.” The court explained the Intellectual Property Exclusion is on an Insurance Services Office (ISO) industry form, appears under a bold-faced heading “Exclusions,” with each exclusion’s title also bold-faced. The court found these factors satisfy the first test.

The court also concluded the Intellectual Property Exclusion plainly and clearly applies to bar coverage. The Estate argued the exclusion entitled “Infringement of Copyright, Patent, Trademark or Trade Secret” shouldn’t even be called the Intellectual Property Exclusion. But the court noted that, not only have prior courts uniformly referred to this exclusion as the “Intellectual Property Exclusion,” the Estate repeatedly referred to it in just this manner in trial court filings.

Alterra’s exclusion encompasses not only copyright, patent, trademark and trade secrets but also “other intellectual property rights,” sufficient to extend to invasion of privacy and right of publicity claims. A similar exclusion was addressed by a 2011 California appellate ruling, Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest (2011) 198 Cal.App.4th 781. In Aroa, the court held the exclusion there barred claims based on the unauthorized use of a model’s image and likeness.

The Alterra court found the “other intellectual property rights” language in Alterra’s policy is effectively identical to the Hartford policy’s “any intellectual property rights” in Aroa. These nonexclusive listings are broad enough to encompass invasion of privacy or right of publicity claims. Even if Aroa were not on the books, the Alterra court added, it would apply the exclusion to the Estate’s claims.

The tale is not yet over. The federal action must now be dismissed. Also, the Court of Appeal’s opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. But, as things stand, Alterra’s rights have been vindicated and the Estate’s plan to collect an uncontested judgment thwarted.

Filed under Appellate, Duty to Defend, Intellectual Property Exclusion, Reservation of Rights, Right of Publicity

Under Illinois Law, Nontrivial Possibility of Excess Judgment Creates Conflict Requiring Independent Defense Counsel

By and on October 10, 2014
Leave a comment

In Perma-Pipe, Inc. v. Liberty Surplus Insurance Corp., No. 13-2989, 2014 U.S. Dist. LEXIS 54867 (N.D. Ill. April 21, 2014), the Northern District of Illinois held an insurer breached its duty to defend when it refused to pay for the insured’s independent defense counsel. Although the insurer had waived all coverage defenses, there was a “nontrivial” exposure over the policy limit, which created a conflict of interest under Illinois law.

The insured, Perma-Pipe, was a pipe manufacturer sued for alleged “catastrophic” pipe failures with damages alleged over $40 million.   Liberty issued a commercial general liability (CGL) policy with $1 million per occurrence and $2 million aggregate limits.  Liberty agreed to defend, but reserved rights and allowed Perma-Pipe to select independent defense counsel.  Liberty later withdrew its reservations and retained its own defense counsel. Perma-Pipe sued.

The federal district court, applying Illinois law, found a conflict of interest requiring independent defense counsel.  Because Perma-Pipe was sued for more than $40 million, far above the policy limits, there was “a nontrivial probability” of an excess judgment. While Liberty argued Perma-Pipe had excess coverage, there was no evidence of this in the record.  In any event, the possible existence of excess coverage would not negate the conflict.

While the “nontrivial” excess exposure test may be difficult to apply, that is apparently not the case where the exposure alleged dwarfs the available coverage limits.

Filed under Duty to Defend, Independent Counsel

California Supreme Court Overrules Prior Appellate Decision on Coverage for Product Disparagement

By and on July 9, 2014

In Hartford Casualty Insurance Co. v. Swift Distribution, Inc., the California Supreme Court clarified the law on coverage for commercial disparagement, expressly overruling an earlier intermediate appellate decision that had significantly broadened coverage for the tort.  The Supreme Court held a claim of disparagement must contain a false or misleading statement that specifically refers to and clearly derogates a competitor’s product or business.

Hartford issued a CGL policy to a company doing business as Ultimate Support Systems.  Ultimate sold a product called the Ulti-Cart, a multi-use cart marketed for the loading and transport of musicians’ equipment.  A competitor who made a similar transport cart called the Multi-Cart sued Ultimate for patent and trademark infringement, false designation or origin, and damage to business, reputation and goodwill.

Hartford denied any duty to defend or indemnify Ultimate on the ground the claims were outside the personal and advertising injury insuring agreement.  Ultimate contended the allegations raised a claim for covered disparagement. An earlier appellate decision, Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. (2012) INS BLOG_charlotte russe207 Cal.App.4th 969, had found a claim for covered disparagement potentially existed because an insured’s reduction in the price of a product could implicitly constitute disparagement of that product.  Hartford brought a declaratory relief action in which the trial court granted summary judgment for Hartford, which was affirmed by the Court of Appeal and Supreme Court.

The Supreme Court found Ultimate’s advertisements contained no disparagement of Multi-Cart’s products.  It held that, while the similarity between the Ulti-Cart and the Multi-Cart could cause consumer confusion and might support a claim of patent or trademark infringement, it did not, by itself, support a claim of disparagement because there was no express assertion or clear implication of the inferiority of the Multi-Cart.

The Supreme Court also held that phrases and words used in Ultimate’s advertising, such as “patent-pending,” “innovative,” “unique,” “superior” and “unparalleled,” did not support a claim for disparagement as these phrases and words were not specific enough and were more akin to “mere puffing,” which could not support tort liability.

Image courtesy of Flickr by Jeepers Media

Filed under Product Disparagement

Caution: SIRs Will Be Strictly Construed

By and on April 10, 2014

The California Court of Appeal, Fourth Appellate District, parsed an insurer’s defense and indemnity obligations allegedly both subject to a self-insured retention (SIR).  The court held the SIR only precluded an indemnity obligation prior to SIR exhaustion and had no effect on the insurer’s duty to defend.

CON BLOG_home buildAmerican Safety Indemnity Co. v. Admiral Insurance Co. (2013) 220 Cal.App.4th 1, involved typical indemnity and additional insured obligations arising from a homeowners’ suit over bad grading. The homeowners sued the developer, grading subcontractor and certain developer-related entities.  The developer and the developer-related entities tendered their defense to their insurer, Admiral, and the developer pursued additional insured rights under the grader’s policy with American Safety Indemnity Co. (ASIC).

ASIC initially denied the developer’s tender but eventually paid its fees.  The construction defect action settled for $4.9 million and Admiral and ASIC contributed their respective $1 million policy limits to the settlement.

ASIC sued Admiral seeking to recover the cost of defending the developer and related entities.  Admiral contended the developer-related entities had not satisfied its policy’s SIR.  The trial court found Admiral’s duty to defend was independent of the SIR provision.

On Sept. 27, 2013, the appellate court upheld the trial court’s ruling and found that the SIR provision in Admiral’s policy specifically limited its duty to pay “damages” and did not mention its duty to defend.  The appellate court further held that a reasonable insured would expect to receive a defense under a primary policy unless the SIR coverage limitation was clear and conspicuous. The court supported its interpretation of the Admiral policy by comparing the SIR endorsement with the “other insurance” provision, which expressly limited Admiral’s duty to defend.

Click here for the opinion.

Image courtesy of Flickr by Great Valley Center

Filed under Self Insured Retentions

Body-to-Body Contact Not Required for Policy’s “Assault or Battery” Exclusion to Apply

By on December 1, 2013

The California Court of Appeal, Second Appellate District, recently held that an insurance policy’s “Assault or Battery” exclusion did not require direct “body-to-body” contact between individuals, and it unambiguously applied to preclude coverage for an underlying lawsuit in which a customer set fire to a nightclub dancer.

INS BLOG_nightclubBusby worked as a nightclub dancer with Oxnard Hospitality Enterprise, Inc.  She suffered bodily injury on Oxnard’s premises when a nightclub patron threw flammable liquid on her and set her on fire.  Busby sued Oxnard and others for negligent failure to provide adequate security and sued her assailant for battery.  Busby also asserted a cause of action for negligent infliction of emotional distress on behalf of her minor children. While the underlying action was pending, Mt. Vernon brought a declaratory relief action Oxnard seeking a declaration that it had no duty to indemnify Oxnard based on the “Assault or Battery” exclusion. The underlying action was resolved by stipulated judgment against Oxnard of $10 million. Oxnard assigned all of its rights against Mt. Vernon to Busby.  Mt. Vernon then moved for summary judgment in the declaratory judgment action.

In its Sept. 16 opinion in Mt. Vernon Fire Ins. Corp. v. Oxnard Hospitality, Enterprise, Inc., the appellate court first rejected Busby’s argument the “Assault or Battery” exclusion did not apply because Busby’s theory of recovery was negligence.  The court cited case law holding any claim based on assault and battery, irrespective of the legal theory asserted against the insured, triggered the exclusion. The court also found that the exclusion precluded coverage for Busby’s claims.  The exclusion’s definition of “battery” — “negligent or intentional wrongful physical contact with another without consent that results in physical or emotional injury” – clearly required physical contact with another but did not distinguish between directly striking an individual and striking an individual through an intermediary object. The court found that the exclusion unambiguously excluded coverage because the act of setting fire to another person constituted “physical contact.

Image courtesy of Flickr by Bruce Turner

Filed under Assault and Battery Exclusion

Recent Decision for Insurers on Independent Defense Counsel Generates Controversy

By and on November 15, 2013

In Federal Insurance Co., et al. v. MBL, Inc., the California Court of Appeal, Sixth Appellate District, held that a third-party defendant insured in an environmental contamination action was not entitled to independent counsel because it failed to establish the outcome of coverage issues could be controlled by insurer-retained defense counsel.

INS BLOG_drycleaningThe federal government sued the owners of a dry cleaning facility under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for the cost of remediating soil and groundwater contamination in the city of Modesto.  The defendants in the CERCLA action subsequently filed third-party actions seeking indemnity, contribution and declaratory relief against the insured. Its commercial general liability insurers agreed to defend MBL, a supplier of dry cleaning products, subject to various reservations including the “sudden and accidental” pollution exclusion and date of loss issues.  MBL demanded it be allowed to choose independent counsel citing alleged conflicts of interest arising from the insurers’ reservations per California Civil Code §2860, which codified San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358.  The trial and appellate courts held no conflict existed because the coverage outcomes were outside defense counsel’s control.

Policyholders and related groups attacked the Aug. 26, 2013, decision and asked the California Supreme Court to review or depublish it.  However, the Supreme Court denied all depublication and review requests.

Image courtesy of Flickr by Parker Knight

Filed under Independent Counsel

Triable Issues Exist About Insured’s Right to Lost Rents Even Though No Actual Tenant Was on Premises at Time of Loss

By on October 19, 2013

The California Court of Appeal, Second Appellate District, recently reversed a trial court order granting summary INS BLOG_rentaljudgment to a commercial property insurer.  The trial court held the insurer properly denied its insured’s lost rents claim in connection with vandalism damage where there was not an existing tenant when the damage took place.  The Court of Appeal disagreed, holding in Ventura Kester, LLC v. Folksamerica Reinsurance Co. that the policy did not clearly require the insured to have a tenant in place as a condition of coverage for lost rents.  Whether the insured would have been able to rent the property, but for the vandalism, raised triable issues of fact.  Therefore, the court concluded summary judgment in favor of the insurer was improper.

Folksamerica Reinsurance issued a commercial building owner’s policy to Ventura Kester as owner of a property in Sherman Oaks.  The policy, in effect from September 2006 to September 2007, covered the structure and promised to pay the insured’s “net loss of rental income” due to damage to covered property.  A tenant was in place when the policy was issued, but it subsequently vacated the premises.  Ventura began discussions with potential tenants, including entering into a letter of intent with OfficeMax. But no agreement was in place at the time of the loss.

On Sept. 11, the court held an ambiguity existed in the policy as to whether an actual tenancy was required for coverage to exist.  The court also held triable issues existed about whether the insured had actually sustained damages from the vandalism.

Filed under Uncategorized

Conduct That Violates Unfair Insurance Practices Act May Be Actionable Under Unfair Competition Law Despite Moradi-Shalal Restriction

By and on September 13, 2013

On Aug. 1, the California Supreme Court held that an insured may state a cause of action against an insurer under the Unfair Competition Law (UCL) for conduct that violates the Unfair Insurance Practices Act (UIPA) despite the bar against private actions under the UIPA itself.  The Supreme Court’s holding in Zhang v. Superior Court, Opinion No. S178542, resolved a split on the issue among the state’s intermediate appellate courts.

Yanting Zhang sued her insurer, California Capital Insurance Co., over coverage for and the handling of a fire loss claim.  Zhang alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the UCL.  In the UCL claim, Zhang alleged California Capital had “engaged in unfair, deceptive, untrue, and/or misleading advertising” by promising to pay claims with no intention of paying the true value of the covered claims.  Zhang also alleged several bad-faith practices by California Capital including unreasonable delays causing deterioration of the insured property; withholding of policy benefits; refusal to consider cost estimates; misinforming her as to the right to an appraisal; and falsely telling Zhang’s mortgage holder that Zhang did not intend to repair the property, resulting in foreclosure proceedings.

The trial court sustained California Capital’s demurrer on the UCL cause of action finding it was an impermissible attempt to plead around the bar against private actions under the UIPA pursuant to Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal. 3d 287.  The court of appeal had reversed finding the complaint sufficiently pled facts to support a UCL cause of action.  California Capital sought review from the Supreme Court, which affirmed.

Click here to view the full article.

Please click on the link below for more information about our related practice:

Filed under California Insurance Regulations