California Insurance Law: Issues On The Horizon For 2016

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The following insurance issues are likely to be decided in 2016 by the California Supreme Court and the United States Court of Appeals for the Ninth Circuit.

Brandt Fees: In Nickerson v. Stonebridge Life Ins. Co., Case No. S213873, the California Supreme Court is considering the following issue: Is an award of attorney fees under Brandt v. Superior Court (1985) 37 Cal.3d 813 properly included as compensatory damages for purposes of calculating the ratio between punitive and compensatory damages where the fees are awarded by the jury, but excluded from compensatory damages when they are awarded by the trial court after the jury has rendered its verdict?

In Nickerson, the jury awarded $19 million in punitive damages after finding that the plaintiff was entitled to compensatory damages of $31,500 in additional policy benefits on the breach of contract claim and $35,000 for emotional distress on the bad faith claim.   After the jury verdict, the trial court entered an award of $12,500 for Brandt fees based on the parties’ stipulation.  On post-trial motions, the trial court conditionally granted the insurer’s motion for new trial unless the plaintiff consented to a remittitur of the punitive damages to $350,000.  The trial court concluded that the $19 million award of punitive damages was constitutionally excessive because the ratio of punitive to compensatory damages exceeded the ratio of 10:1.  Plaintiff refused to accept the remittitur and appealed the resulting judgment that reduced the punitive damages award to $350,000.

On appeal, Plaintiff argued that the trial court erred in only comparing the punitive damages with the $35,000 award for emotional distress damages for bad faith and failing to include the additional compensatory damages for policy benefits and the award of Brandt fees in determining the proportionality of the punitive damages to the compensatory damages.  The Court of Appeal disagreed, concluding that the compensatory damages on the breach of contract claim were not properly considered because punitive damages are not recoverable for mere breach of contract, and the Brandt fees were not properly included in the proportionality analysis because they were awarded by the trial court after the jury awarded the punitive damages and thus not awarded by the jury as part of the tort damages.

The case has attracted a significant amount of interest.  The American Tort Reform Association, the National Association of Mutual Insurance Companies, the Property Casualty Insurers Association of America and the Association of California Insurance Companies have filed amicus curiae briefs in support of Stonebridge.  United Policyholders, The Civil Justice Association of California and The Chamber of Commerce of the United States of America have filed amicus curiae briefs in support of Nickerson.

Injury Arising Out of the “Use” of an Automobile:  In Gradillas v. Lincoln Gen. Ins. Co., Case No. S227632, in response to the Ninth Circuit’s certification of the issue, the California Supreme Court will decide the following issue:  When determining whether an injury arises out of the “use” of a vehicle for purposes of determining coverage under an automobile insurance policy and an insurance company’s duty to defend, is the appropriate test whether the vehicle was a “predominating cause/substantial factor” or whether there was a “minimal causal connection” between the vehicle and the injury?

The Ninth Circuit certified the question to the Supreme Court after concluding that the California case law was in potential conflict on the issue and the issue would be dispositive of the appeal pending before that Court.  In that case, the District Court had granted partial summary judgment in favor of the plaintiffs, deciding the insurer had breached its duty to defend under an automobile policy for failing to defend a claim arising from a rape of a passenger by the bus driver that took place on a private party bus.

Although to some the “use” of the bus in the Gradillas case may not appear to be a close question, the Ninth Circuit believes the closeness or causal connection between the resulting harm and the use of an automobile requires further clarity from the California Supreme Court.

The certified question is being briefed before the California Supreme Court and the reply brief is currently due at the end of this month.

“Business Enterprise,” “Trust” and “Investment Advice” Exclusions in Lawyers Professional Liability Policy:  In Christensen v. Darwin Nat’l Assurance Co., the Nevada District Court granted the insurer’s motion for summary judgment based on the business enterprise, trust, and investment advice exclusions in a lawyers professional liability policy.  The District Court held the exclusions barred coverage, including the duty to defend, for a lawsuit by a corporate client alleging that the attorney and his firm engaged in self-dealing by purchasing a 50% interest in the client corporation through a trust of which the attorney and family members were beneficiaries, and thereafter engaging in transactions benefitting the attorney’s firm and his family at the expense of the business. The District Court enforced the broad “arising out of” language in the business enterprise and trust exclusions to conclude that there was no duty to defend the lawsuit even though the attorney was acting in a dual capacity as the attorney for the client and as shareholder of the business entity through the trust.  The District Court also enforced the investment advice exclusion as to allegations the attorney provided advice to the client to make particular investments, concluding the exclusion was unambiguous.  The appeal is pending before the Ninth Circuit.

An Excess Insurer’s Right to Settle and Sue the Primary Insurer For Bad Faith Failure to Settle:  The Ninth Circuit is expected to hear oral argument in RSUI Indemnity Co. v. Discover P&C Ins. Co., Case No. 14-15825, in April, 2016.  The case involves the current conflict in California law presented on the issue of whether an excess insurer may sue a primary insurer for bad faith failure to settle when the excess insurer settles the underlying lawsuit, and no excess of limits judgment is entered against the insured.1  The District Court for the Eastern District of California dismissed the case in the absence of an excess judgment against the insured.

Cheryl A. Orr is a partner with Musick, Peeler & Garrett in its Los Angeles office.  Her full bio and contact information can be found at:


1  This conflict in California law was discussed in an article in last month’s newsletter.