Health Net, Inc. v. Rli Insurance
141 Cal. Rptr. 3d 649
Cal. Ct. App.2012Background
- HN-INC sought a declaratory judgment that its four insurers must defend and indemnify in 21 underlying actions, focusing on two actions (Wachtel and McCoy) whose damages could exceed policy limits.
- The AISLIC policy (primary) and excess policies included a duty to defend and a Choice of Counsel Endorsement altering defense payment to reimbursement of defense costs.
- A large NJ regulatory matter (NJ-DOBI) and discovery sanctions in the related federal actions preceded settlement of Wachtel and McCoy, with HN-INC ultimately paying $215 million to settle.
- The core dispute centers on whether unpaid ERISA plan benefits and certain damages are covered, and whether a dishonest acts exclusion voids coverage for the entire actions or only for specific claims.
- The trial court initially held the dishonesty exclusion broad enough to bar all defense costs post-dating the sanctions finding; on appeal the court held coverage could extend to potentially covered claims and remanded for determination of merit.
- On appeal, the court held that most claims sought unpaid benefits not covered by the policy, but some extracontractual damages and fees may be potentially covered, so summary judgments for insurers were reversed and remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Wachtel and McCoy claims are covered under the policy. | HN-INC contends some claims fall within policy coverage as 'Wrongful Acts'. | Insurers argue most damages are unpaid benefits (not covered) and rely on dishonesty exclusion. | Some claims are potentially covered; bulk not covered. |
| Whether unpaid ERISA benefits are covered as damages. | HN-INC asserts benefits due under ERISA may be recoverable under the policy. | Unpaid plan benefits are contracts obligations, not wrongful acts, thus not covered. | Unpaid benefits are not covered; damages arise from contract, not wrongful acts. |
| Scope of the dishonest acts exclusion and whether it bars entire Wachtel/McCoy coverage. | Dishonest acts exclusion should bar only claims arising from the dishonest act, not all claims in the actions. | Court should treat the entire actions as arising from the dishonest act, barring all coverage. | Exclusion does not bar all coverage; not all claims arise from the dishonest act. |
| Whether 'Claim' in the policy refers to the entire lawsuit or to individual claims within the action. | HN-INC argues 'Claim' means entire lawsuit due to defense costs and 'Choice of Counsel Endorsement'. | Insurers contend 'Claim' refers to individual claims; defense costs relate to potentially covered claims. | 'Claim' refers to a relief-seeking claim within the underlying action, not the entire suit. |
| Whether the Duty to Reimburse for Defense Costs applies to potentially covered claims only or to all defense costs. | Endorsement requires reimbursement of defense costs for potentially covered claims. | Costs incurred in defending the whole action should be reimbursed. | Duty to reimburse applies to defense costs incurred in defense of potentially covered claims. |
Key Cases Cited
- Buss v. Superior Court, 16 Cal.4th 35 (Cal. 1997) (duty to defend generally covers potentially covered claims; scope of 'Claim' policy interpretation)
- E.M.M.I. Inc. v. Zurich American Ins. Co., 32 Cal.4th 465 (Cal. 2004) (strict construction of exclusions; policy interpretive rules)
- Medill v. Westport Ins. Corp., 143 Cal.App.4th 819 (Cal. Ct. App. 2006) (contractual liability vs. negligence in insurance coverage context)
- May Dept. Stores Co. v. Federal Ins. Co., 305 F.3d 597 (7th Cir. 2002) (failure to fund ERISA plans not covered; contract vs. wrongful act emphasis)
- Davis v. Farmers Ins. Group, 134 Cal.App.4th 100 (Cal. Ct. App. 2005) (threshold coverage analysis for insured losses under policy language)
- Pan Pacific Retail Properties, Inc. v. Gulf Ins. Co., 471 F.3d 961 (9th Cir. 2006) (duty to defend; reimbursement context in different policy forms)