When Does an Insurer’s Failure to Provide Defense Constitute Bad Faith?

In Safeco Insurance Company of America v. Jamey Lynn Parks (September 23, 2004), the Court of Appeal reversed a bad faith judgment against Safeco and held that Safeco reasonably declined to provide defense under its homeowner's policy where information from insured and others disclosed no potential that defendant was an insured under the policy.

Defendant Michelle Miller was 17 years old on the night she went "clubbing" in Santa Barbara with her boyfriend Jamey Parks. Miller drove on the trip home. During the trip Parks became violent and was left on the freeway shoulder. Parks subsequently was hit by a passing motorist and sustained serious injuries.

Parks sued Miller. Miller notified Safeco, the homeowner insurer for her mother's boyfriend, of the Park's lawsuit. Miller's mother and her mother's boyfriend informed Safeco that Miller did not live at the insured's premises, did not have a key, did not have permission to enter the house without them, visited periodically, slept in an unfinished guest room and kept few if any personal belongings at the house. Similarly, Miller told law enforcement and testified in discovery that she lived at her father's (not mother's) address. Based on these facts, Safeco declined coverage.

Thereafter, Parks received an arbitration award for $2.1 million against Miller. Miller settled with Parks by assigning to him any claims she might have against Safeco. Parks then sued Safeco for bad faith. At trial, Miller and her mother testified that her mother's now deceased boyfriend had pressured them to lie in their previous testimony, that Miller did stay weekends with her mother at the insured's premises, that Miller had her own room in which she kept personal belongings, and that Miller and her mother's boyfriend were very close.

The trial court found that Safeco had a duty to defend and indemnify Miller for the entire award because she was a resident of her mother's boyfriend's household and under his care and, thus, was an insured under the policy. The Court of Appeal disagreed and reversed, holding that Safeco had no duty to defend Miller and did not act in bad faith by declining to do so, because "the extrinsic facts known to Safeco before it declined the defense established that Miller did not meet the policy definition of an insured."

Can an Unlicensed Insurance Adjustment Services Company Enforce its Contract Against an Insured?

In Building Permit Consultants, Inc. v. Mazur (October 7, 2004), the Court of Appeal said "no."

Building Permit Consultants (BPC) entered into a written agreement with David Mazur to assist in the settlement of his 1994 Northridge earthquake claims against his insurer, Truck Insurance Exchange. Under the contract, Mazur agreed that BPC would be entitled to receive 27-1�2 percent of the net recovery from Truck. However, when Mazur settled his claims with Truck no money was paid to BPC. BPC sued Mazur.

The trial court sustained Mazur's demurrer and dismissed BPC's complaint on the ground that BPC acted as a "public insurance adjuster" within the meaning of Insurance Code § 15007 and, as such, the contract was voidable because BPC was not licensed with the Department of Insurance.

The Court of Appeal affirmed, holding that the Public Adjusters Act (which includes § 15007) was established to "regulate the activities of persons and firms who make it their business to assist insureds to file and pursue claims with insurers," that the Act's goal was to "curtail unethical and abusive practices by some members" of this business, that it "would be improper and contrary to the clear legislative intent of the [Act] to allow firms to bypass the licensure requirement and associated standards by packaging public adjusting services while still presenting the same dangers of dishonesty, sharp dealing, and incompetence to the consumer," and therefore, enforcing BPC's contract for such services "would undermine the regulation goals for public insurance adjusters."

Can the California Insurance Guarantee Association Offset Federal Disability and State Unemployment Benefits Against Covered Claim Payments?

In Cole v. California Insurance Guarantee Association (September 20, 2004), the Court of Appeal reversed the trial court's ruling and held that CIGA cannot offset such benefits against claim payments.

"To permit offset," the Court stated, "the covered claim and the right of recovery from the government benefit program must compensate claimant for the same loss, and both must fall within the definition of a ‘covered claim.'" Noting that claims for bodily injury and damages from an automobile accident with an underinsured motorist are "covered claims" under CIGA's statutory scheme, but that claims for disability and unemployment benefits are expressly excluded as "covered claims" under the scheme, the Court concluded that disability and unemployment benefits may not be credited against payment of a covered claim.

California Amends Insurance Code Regarding Insurer Reporting Requirements, Investments by Insurers in Subsidiaries, Disability Fraud Funding and Surety Rates

Assembly Bill 1728 amends Insurance Code § § 900, 923, 931, 934, 1215.1, 1215.2 and 1872.85 and repeals § 1861.135. The amended provisions, effective January 1st, require every insurer doing business in California to file a quarterly statement with the Commissioner and NAIC showing the insurer's condition and affairs ( § § 900, 923 and 931), grants the Commissioner the authority to suspend, revoke or refuse to renew the certificate of authority of an insurer failing to file its annual or quarterly statement with the National Association of Insurance Commissioners ( § 934), limits the amount domestic insurers can invest in the securities of subsidiaries ( § 1215.1), eliminates the provision that domestic insurers' purchases, exchanges or other specified acquisitions not specifically disapproved by the Commissioner within 60 days are deemed approved ( § 1215.2), eliminates the statutory formula guaranteeing district attorneys 50% of disability fraud funding and instead gives the Commissioner the authority to apportion such funding to DA's who can show a likely positive outcome that will enhance the prosecution of disability insurance fraud in their jurisdiction, and expands the use of the current tencent health insurance fraud assessment to include the investigation of disability fraud ( § 1872.85).

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Weiss Beat is published by Michael R. Weiss, an attorney with the firm Epstein, Turner & Song, P.C. Mr. Weiss specializes in insurance litigation and regulation, reinsurance, insolvency and general business litigation. Write to or call the author at 5750 Wilshire Blvd., Suite 560, Los Angeles, California 90036. Tel: (323) 6345566. Fax: (323) 6345567. Email: [email protected]

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