Contractual Liability Exclusion Not a Basis to Deny Coverage for Consumer Claims Against Genetic Testing Company

By on August 4, 2016
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The Federal District Court in San Jose, California, issued a recent decision interpreting a contractual liability exclusion issued by IronShore to 23andMe, Inc. Ironshore Specialty Ins. Co. v. 23andMe, Inc., 2016 U.S. Dist. LEXIS 96079 (N.D. Cal. July 22, 2016). 23andMe provided a “personal genomic service” to consumers wishing to access and understand their personal genetic information. The consumer purchases a DNA saliva collection kit and then sends the sample back to 23andMe for testing. The FDA objected to the marketing of the product under the Federal Food, Drug and Cosmetic Act. Civil litigation resulted including class actions filed by consumers in federal court, class arbitration complaints under AAA, as well as a Civil Investigative Demand (“CID”) from the State of Washington. The 23andMe customers alleged a variety of legal theories, principally asserting that 23andMe falsely represented the outcome of the personal genome services and that the testing yielded inaccurate and incomplete results.

Although the court agreed with IronShore that under California law a CID does not constitute a claim triggering the duty to defend, the court rejected the principle defense offered by IronShore that it had no duty to defend because of a contractual liability exclusion which provided that “this insurance does not apply…to claims based upon, arising out of, directly or indirectly resulting from or in any way involving:

  1. Contractual Liability

Your assumption of liability or obligations in a contract or agreement.

The court rejected IronShore’s argument that the broad language of the exclusion would include contracts made between 23andMe and its customers. Instead, adopting what the court viewed as the majority rule, the court held that this form of contractual liability does not apply to liabilities or obligations arising from the insured’s own contracts but rather only applies to liabilities and obligations that were originally those of a third party which were subsequently “assumed” by the insured. The court comprehensively reviewed the case law around the country but relied most heavily on a decision from the Michigan Court of Appeals in Peeker which concluded that the phrase “assumption of liability” in the context of a contractual liability exclusion refers to those contracts or agreements in which the insured assumes the liability of another. The court also emphasized that if the court were to adopt in IronShore’s construction of the contractual liability exclusion, virtually all claims relating to 23andMe’s professional services would have been excluded from coverage.

Filed under Breach of Contract, Declaratory Judgment Actions, Exclusion

California Court of Appeal Rules Parent Company Lacks Standing to Bring Declaratory Relief Action Against Subsidiary’s Insurer

By and on May 11, 2016
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In an opinion filed March 30, 2016, the California Court of Appeal for the First Appellate District held that the trial court properly sustained a demurrer, without leave to amend, as to a parent corporation’s declaratory relief complaint against its subsidiary’s insurer. D. Cummins Corporation v. United States Fidelity and Guaranty Company (2016) 2016 Cal.App.LEXIS 342. The court found that the parent company failed to show that an actual controversy between it and its subsidiary’s insurer existed.

The insured was D. Cummins Corporation (“Subsidiary”), a corporation engaged in the business of installing asbestos containing products. The Subsidiary and its parent, Cummins Holding LLC (“Parent”), brought a state court declaratory relief action against the Subsidiary’s insurer, United States Fidelity and Guaranty Company (“Insurer”). The Subsidiary and Parent sought a declaration relating to insurance coverage for underlying asbestos bodily injury claims.

The Insurer removed the action to federal court on the ground that the Parent, whose inclusion in the lawsuit defeated diversity jurisdiction, was fraudulently joined. The federal court remanded the case and the Insurer demurred to the Parent’s declaratory relief claim on the ground it lacked standing. The trial court sustained the demurrer and the Parent appealed.

The court of appeal cited to California’s declaratory relief statute, Code of Civil Procedure (“CCP”) section 1060, which provides that “[a]ny person interested under a written instrument … may, in cases of actual controversy … bring an original action … for a declaration … including a determination of any question of construction or validity arising under the instrument or contract.” Further, CCP section 1061 provides that the court may refuse to issue a declaratory judgment where the court’s “declaration or determination is not necessary and proper.”

The Parent argued that it had standing because it had a “practical interest in the proper interpretation of [its Subsidiary’s] insurance policies given its relationship to, and its central role in the pursuit of those insurance assets.” The appellate court rejected this argument because the Parent had not shown how this alleged indirect interest translated into “a legally cognizable theory of declaratory relief.”

The Parent next argued that its participation in the litigation was necessary since Subsidiary had no assets of its own. The appellate court rejected this argument because the Subsidiary’s lawsuit was continuing in the trial court notwithstanding the fact Parent’s claims were dismissed. Finally, the Parent cited to a number of decisions for the proposition that in some cases, parties have been permitted to bring declaratory relief actions even though they were not directly affected by the challenged contract, regulation or statute. The appellate court rejected this argument as well, finding that Parent had not alleged any theory showing it had more than an indirect interest in the policies at issue.

The appellate court held that because Parent had no contractual privity with the Insurer and was not otherwise interested in the policy, the trial court acted within its discretion in holding a declaration of Parent’s rights was “not necessary or proper at the time under all the circumstances.”

The practical significance of this case is twofold. First, it highlights that, while California’s declaratory relief statutes are broad, they are not limitless. Second, the constraints on California’s declaratory relief statutes articulated in the decision will make it more difficult for plaintiffs to include parties with no practical interest in declaratory relief actions for the purpose of defeating diversity jurisdiction.

Filed under Declaratory Judgment Actions

Oregon State and Federal District Courts Interpret Insurance Fee Shifting Statute Broadly

By and on August 6, 2015
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In Oregon, ORS 742.061 authorizes an award of attorney fees to an insured that prevails in “an action…in any court of this state upon any policy of insurance of any kind or nature…” The Oregon Supreme Court, in Morgan v. Amex Assurance Co., 352 Or. 363, 287 P.3d 1038 (2012), addressed whether this fee shifting statute applies to insurance policies issued outside of Oregon, as a later enacted statute, ORS 742.001, provides that ORS Chapter 742 “appl[ies] to all insurance policies delivered or issued for delivery in this state…” In Morgan, the Oregon Supreme Court concluded, after considering the text, context and the legislative history, that the legislature did not intend for ORS 742.001 to limit the scope of ORS 742.061. The Court held, therefore, that ORS 742.001 permits an award of attorney fees to an insured that prevails in an action in an Oregon court on “any policy of insurance of any kind or nature,” even if the policy was delivered or issued for delivery in another state. The Oregon Supreme Court noted that to hold otherwise would be “to turn an expansion of the state’s authority to impose substantive regulations on insurers transacting business in Oregon into a limitation on the remedial and procedural rules that affect insurers appearing in its courts.”

Now, insureds and insurers in Oregon are looking to the Ninth Circuit Court of Appeals for an answer to whether ORS 742.061 applies only to Oregon state courts, as the statute specifically states that it applies “in an action…in any court of this state…” (emphasis added). Schnitzer Steel Industries, Inc. v. Continental Casualty Corp., 2014 U.S. Dist. LEXIS 160031 (D. Or. November 12, 2014). In Schnitzer Steel, the insured, as the prevailing party in a coverage action, moved for attorneys’ fees in the amount of $3,483,878.00. Continental opposed, arguing that the plain language of ORS § 742.061 does not apply because the statute plainly states that it is limited to an action “brought in any court of this state upon any policy of insurance…” Continental argued that because Schnitzer did not bring its claim in a court of Oregon, but rather a court in Oregon, the statute does not apply. Continental based its argument on Simonoff v. Expedia, Inc., 653 F.3d 1202 (9th Cir. 2011), a decision from the Ninth Circuit Court of Appeals that interpreted the phrase “the courts of” in the context of a forum selection clause. In Simonoff, the Ninth Circuit held:

We conclude[] that the choice of the preposition “of” in the phrase “the courts of Virginia” was determinative — “of” is a term “denoting that from which anything proceeds; indicating origin, source, descent, and the like.”  Thus, the phrase “the courts of” a state refers to courts that derive their power from the state — i.e. only state court — and the forum selection clause, which vested exclusive jurisdiction in the courts “of” Virginia, limited jurisdiction to the Virginia state courts.

Simonoff at 1205-06.

While Judge Mosman found Continental’s argument “very interesting” and rejected all but one of Schnitzer’s arguments in the reply as “very weak,” Judge Mosman adopted Schnitzer’s one argument based on Erie principles and ruled that ORS 742.061 applies to cases commenced in Oregon federal courts. Judge Mosman held that the Erie doctrine together with good public policy dictate that ORS § 742.061 should apply in this case as its holding – that ORS 742.061 applies to both federal and state courts of Oregon – will “avoid the intrastate forum shopping that Erie is intended to prevent and it would support the stated purpose of this statute by not creating an easy backdoor to thwart any impact it might have on encouraging settlements or discouraging unreasonable rejections of insurance claims.”  Id. *11-12.

Continental has appealed to the Ninth Circuit Court of Appeals. It will be interesting to see how the Ninth Circuit will address the issue pertaining to ORS 742.061 in light of its decision in Simonoff. It is possible that because the issue pertains to the construction of an Oregon statute, the Ninth Circuit Court of Appeals may certify the question at issue to the Oregon Supreme Court.

Filed under Attorneys’ Fees, Declaratory Judgment Actions

Pennsylvania Superior Court Issues Critical Ruling on Statute of Limitations for Declaratory Judgment Actions

By on July 23, 2015
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A recent decision by the Pennsylvania Superior Court clarifies when the four-year statute of limitations begins to run on an insurer’s ability to bring a declaratory judgment action against its insured. In Selective Way Insurance Co. v. Hospital Group Services, Inc., 2015 PA Super 146 (2015), the Superior Court ruled that the statute begins to run when an insurer has a sufficient factual basis to support its contentions that it has no duty to defend and/or indemnify the insured.

The litigation in Selective Way arose out of a 2006 automobile accident which resulted in the death of an intoxicated 17-year old driver. The driver was found to have a .14 BAC at the time of his death, and the plaintiffs alleged that he drank alcohol while working a lengthy shift at a Ramada Inn hotel. After his family sued the hotel’s management company for various negligence claims, the management company tendered the claim to its insurer, Selective Way Insurance Company (“Selective”). Selective defended under a reservation of rights, but almost five years later, it filed a declaratory judgment action seeking a declaration of no coverage.

The trial court eventually granted summary judgment in favor of the plaintiff and insured, holding that the statute of limitations had already run because the statutory period commenced when the insurer received the complaint relating to the underlying litigation. Under that analysis, the trial court dismissed the action because Selective waited almost five years to file for declaratory judgment.

On appeal, the Superior Court reversed and held that the statute of limitations begins to run only when an insurer has the factual basis to believe that there could be a dispute as to coverage. The court noted that more generally, under Pennsylvania law, a statute of limitations begins to run from the date on which the cause of action arises, and a cause of action arises on the date on which a plaintiff could first maintain an action to a successful conclusion. The court reasoned that until the insurer actually has a factual basis for denying coverage, which it will not always have simply from reading the complaint, there is no controversy or corresponding cause of action. In other words, until the insurer has reason to deny coverage, there is no dispute which a court could resolve. Thus, when the insurer can determine from the face of the complaint that there will be coverage issues, the statute of limitations begins to run when the insurer receives the complaint. But when the insurer cannot tell if there will be coverage issues until the case has progressed and the exact legal issues involved are clearer, the statute of limitations does not run until the insurer has the factual basis to conclude that coverage may not exist.

The Superior Court’s ruling is important because it gives insurers more leeway to conduct thorough coverage investigations without the need to file a Declaratory Judgment Action solely to protect the statute of limitations. This leeway, in theory, should limit the unnecessary Declaratory Judgment Action and the bad faith counterclaims that come with it. However, these cases could open the door to additional discovery against insurers as to precisely when an insurer became aware of facts which could negate coverage.

Filed under Declaratory Judgment Actions, Statute of Limitations