California Insurance Law Blog | Archer Norris Law Firm

Brandt Fees, Discovery and Sanctions under Federal Rules of Civil Procedure 26 and 37

By Danielle Arteaga on March 22nd, 2012 Posted in Emerging Issues, Insurance Coverage Litigation

Yesterday, the United States Court of Appeals for the Ninth Circuit issued its decision in R & R Sails, Inc. v. Insurance Company of the State of Pennsylvania, holding that the failure to produce invoices in support of a Brandt fee request warranted sanctions.

AIG issued to R&R Sails, Inc. a policy insuring against fire loss at an R&R sales and manufacturing facility. The facility was damaged by a wildfire, and R&R subsequently submitted a claim to AIG for its losses. AIG paid some but not all of the claim. The ensuing dispute lead to R&R file suit against AIG for breach of contract, unfair competition and bad faith. In its Rule 26 disclosures, R&R claimed $350,000 in Brandt fees; however, it did not identify any specific evidence supporting that demand. R&R also did not produce any documentary evidence to AIG to support the Brandt fee claim.

Subsequently, AIG sought to depose R&R’s damages expert and requested the expert turn over invoices supporting R&R’s Brandt fees claim at the deposition. The expert did not do so.

Thereafter,

… the district court issued a final pretrial schedule that instructed the parties to comply with Federal Rule of Civil Procedure 26(a)(3) and Southern District of California Civil Local Rule 16.1(f). Rule 26(a)(3) governs pretrial disclosures and includes a requirement that each party provide ‘an identification of each document or other exhibit’ that the party may present at trial. [Citation.] Local Rule 16.1(f) sets forth a number of disclosure requirements, including that the parties exchange or display their exhibits at least twenty-one days before the pretrial conference

Although R&R identified that invoices supporting its Brandt fees claim would be a group exhibit at trial, R&R failed to produce copies of the invoices comprising the proposed exhibit. In fact, despite repeated requests from AIG’s counsel for production and representations from R&R’s counsel that the invoices would be produced, R&R did not provide AIG copies of the invoices until about two weeks before trial and after the District Court granted AIG’s motion in limine pursuant to Rule 37(c)(1) to exclude such evidence on the ground that R&R failed to comply with Rule 26 initial disclosure requirements, as well as the court’s pretrial order based on Rule 26(a)(3) and Local Rule 16.1(f).

On Appeal, the Ninth Circuit found that while it was “reasonable to conclude that R&R had not, in a timely fashion, made the invoices available for inspection as required by Rule 26(a)(1)(A)(iii),” the District Court did not make “findings sufficient to support its preclusion of the invoices under Rule 37(c)(1).” The Court reasoned that the sanction amounted to dismissal of R&R’s bad faith claim against AIG and was therefore subject to analysis of whether the failure to produce involved willfulness, fault or bad faith under Yeti by Molly, Ltd. v. Deckers Outdoor Corp. (9th Cir. 2001) 259 F.3d 1101, 1106. The Court held that “[b]ecause it does not appear that the district court conducted this inquiry, and because it did not make the requisite findings, it erred when it excluded the invoices under Rule 37(c)(1).” Accordingly, the Court reversed and remanded.

Notably, the Ninth Circuit did not find that the district court’s evidence preclusion sanction was not an appropriate response to R&R’s failure to produce the invoices. Instead, it found only that the district court failed to make the findings necessary to support the issuance of such a sanction. Had the district court articulated findings that R&R’s failure to produce the invoices supporting the Brandt fee claim involved willfulness, fault or bad faith, the evidence preclusion sanction would not have been an abuse of the district court’s discretion.

Understanding Liability Insurance Needs for the Service Business

By Danielle Arteaga on March 16th, 2012 Posted in Businessowners, Businessowners Policies, Coverage Analysis

Businesses of any size that provide professional services have (at least) two identifiable and distinct insurance needs: protection against liabilities arising from managing the business and protection against liabilities arising from errors or omissions in the provision of service to clients.

But, the way in which service businesses should insure against these risks varies. Small business owners acquiring coverage for business property and business liability under a Businessowners Insurance Policy (or “BOP”) sometimes are surprised (unpleasantly) to find the distinction between business and professional liability risks is the difference between having coverage and not.

California law recognizes that business liability and professional liability policies insure very different risks. (See, e.g., Allstate Ins. Co. v. Interbank Financial Services (1989) 215 Cal.App.3d 825, 830; Stone v. Hartford Cas. Co. (C.D. Cal. 2006) 470 F.Supp.2d 1088, 1098.)

Business liability exposures arise from day-to-day operation or management of a business’s physical space — an office, a factory, a store. For example, if an insured runs a small convenience store, and someone slips in a puddle of spilled soda and injures herself, the injured person’s damages may represent a business liability, because the injury may be the product of the insured’s negligent management of the convenience store’s physical space.

By contrast, professional liability exposures arise from the way the insured performs the services its business renders — particularly when those services require professional training, specialized skill or intellectual effort. For example, if the insured is a lawyer rendering legal advice that is in some way deficient and causes injury to the client, the client’s damages may represent a professional liability, because the injury may be the product of the insured’s negligent service to the client.

The injury to the hurt convenience store patron and the injury to the lawyer’s harmed client — while equally representing exposure of an insured to loss — are very different exposures subject to very different coverage.

Business liability and commercial general liability policies protect an insured against legal liability for injury to another person, another person’s tangible property, another person’s right to privacy or another person or organization’s reputation or advertising ideas. Business and commercial general policies provide coverage for these damages when caused by an insured’s provision of services only if (1) the damage occurs after (and not during) the insured’s services, and (2) the damage is not the product of a professional service.

For example, ISO form BP 00 03 07 02 excludes coverage for physical injury to tangible property that arises out of the insured’s work or operations if the insured’s work or operations are not yet completed or abandoned when the damage happens. Instead, the policy generally provides coverage for bodily injury or property damage only if the injury occurs after the services are rendered and the work put to its intended use. This is consistent with the oft-repeated idea that a general liability policy is not meant to be a “performance bond.”

Further, even when the claimant’s damage (whether bodily injury or property damage) arises from the insured’s completed work or operations, it may nonetheless be excluded by the policy’s “professional services” exclusion if the damage arises out of the rendering or failure to render any professional service. Some policies define “professional service” by way of endorsement to specifically exclude coverage for damages arising out of the insured’s business operations, whatever those may be.

Where undefined by the policy,California courts interpret “professional services” as those:

… arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill and the labor and skill involved is predominately mental or intellectual, rather than physical or manual. It is a broader definition than ‘profession,’ and encompasses services performed for remuneration. (Tradewinds Escrow, Inc. v. Truck Ins. Exchange (2002) 97 Cal.App.4th 704, citing Hollingsworth v. Commercial Union Ins. Co. (1989) 208 Cal.App.3d 800, 806.)

There are a fair number of service-oriented businesses whose work on behalf of customers and clients falls neatly into this fairly broad definition of “professional services,” making the exclusion applicable to damage claims otherwise within a liability policy’s insuring agreement.

Another thing to consider: the injury resulting from negligent professional service is sometimes not bodily injury or property damage but economic harm. This is particularly true when the negligent professional service involves rendering advice. When a lawyer, accountant, financial planner, architect, insurance broker, or other type of consultant provides a client incompetent or deficient advice and causes the client injury, the injury will be – almost by definition – financial. A business liability policy is not designed to provide coverage for this type of loss, because purely economic losses are neither physical injury to a person or to tangible property, and rarely will such advice result in a personal or advertising injury offense.

Comparatively, professional liability policies specifically protect the insured against claims of injury arising from mistaken or omitted professional advice or service.

An errors-and-omissions policy is professional liability insurance providing a specialized and limited type of coverage as compared to comprehensive insurance … designed to insure members of a particular professional group from the liability arising out of a special risk such as negligence, omissions, mistakes and errors inherent in the practice of the professions. (7A John A. Appleman, Insurance Law & Practice, § 4504.01 (Walter F. Berdal ed. 1979).)

The lesson in this for small service-oriented businesses and their insurance brokers is the need for careful consideration of the full scope of an insured’s exposures and whether a basic business liability policy will provide sufficient protection or the additional protection of a professional liability policy makes better economic sense.

Technology and Insurance: Looking Forward to 2012

By Danielle Arteaga on December 15th, 2011 Posted in Emerging Issues

In a recent post for the Insurance Journal, Amy O’Connor writes that 2012 will bring an increase in the availability of and need for insurance of a business’s reputation, particularly against negative publicity following crisis, as more and more businesses use the Internet and social media to build brand identity, acquire market share and demonstrate social responsibility.

Ms. O’Connor writes:

“With the boom in social media, interest in reputational risk has itself boomed. The term refers to a company’s risk of having its reputation damaged because of certain events or incidents and the fallout that takes place because of these incidents. In some cases, the effects can be severe enough to put a company out of business.”

In the personal lines arena, competition for market share is beginning to focus less on pricing and more on customization by employing usage-based policy models. In this informative article from Edmunds.com, author Carroll Lachnit discusses pay-as-you-drive auto insurance based on telemetrics as a good example of the type of consumer-centric insurance coverage carriers must offer to maintain a competitive edge.

This post from Insurance Telematics echoes the competitive-edge sentiment expressed by Edmunds but by observing the importance of the telemetrics data used to rate usage-based insurance to identifying and managing risk.

What policy changes or trends do you envision for 2012?

Privacy, Publicity and Intellectual Property: 3 Rights Made Aroa Wrong

By Danielle Arteaga on November 29th, 2011 Posted in Coverage Analysis, Intellectual Property

Recently, the California Court of Appeal for the Second Appellate District issued its opinion in Aroa Marketing, Inc. v. Hartford Insurance Company of the Midwest (2011) 11 C.D.O.S. 10837.

Hartford issued Aroa a commercial general liability policy, which included personal and advertising injury coverage. Aroa was sued by a model Aroa employed to make a fitness video for the company but whose likeness Aroa used to sell and market products other than that video and for which use Aroa allegedly failed to compensate the model.

The plaintiff’s causes of action against Aroa included statutory and common law misappropriation of likeness. Aroa tendered the lawsuit to Hartford, but Hartford declined to defend. The parties disputed whether plaintiff’s claims for misappropriation of likeness fell within the Hartford policy’s coverage for right to privacy claims and whether a policy exclusion applied to defeat that coverage. Aroa sued for breach of insurance contract, and Hartford successfully demurred to that complaint. The appeal ensued.

On appeal, Aroa argued that the Hartford policy defined “personal and advertising injury” to include damages “arising out of oral, written or electronic publication of material that violates a person’s right to privacy” and that the underlying complaint alleged that Aroa’s actions deprived the plaintiff of her “right to publicity.” Aroa then reasoned that invasion of one’s right to publicity was a species of invasion of one’s right to privacy. The Court of Appeal agreed, noting that the plaintiff’s claims “have been identified [under California law] as falling within the rubric of right of privacy claims.”

However, the Hartford policy also expressly excluded coverage for personal and advertising injuries claims that arose from “any violation of any intellectual property rights such as copyright, patent, trademark, trade name, trade secret, service mark or other designation of origin or authenticity.” Aroa argued that because the exclusion listed specific types of intellectual property other than privacy and publicity, the exclusion could not bar coverage for the damages flowing from interference with the plaintiff’s right of publicity.

But, the Court of Appeal disagreed, relying both upon Comedy III Productions, Inc. v. Gary Saderup, Inc. (2001) 25 Cal.4th 387 (holding publicity to be a form of intellectual property) and the Hartford policy language precluding coverage for any violation of intellectual property rights, such as those enumerated in the list. Thus, the exclusion effectively precluded coverage for the plaintiff’s misappropriation of likeness claims. (On the importance of policy context, see this.)

When considering how this case might apply to your future coverage analyses, consider the Court of Appeal’s observation that two types of injuries may flow from misappropriation of likeness claims: interference with the claimant’s right of publicity or injury to the claimant’s feelings or peace of mind. When evaluating coverage for a misappropriation claim, remember that the plaintiff may claim interference with either the right to be known or the right to be left alone. The Court of Appeal’s opinion suggests that while the former was excluded under the Hartford (and similarly worded policies), the latter would be covered, so watch for facts in the complaint that express or suggest that distinction.

Assessing Coverage for Construction Defect Claims

By Danielle Arteaga on November 17th, 2011 Posted in Construction Defect Claims, Coverage Analysis

An interesting discussion is developing among the members of the Insurance Coverage group on LinkedIn. The question posed is this: What do you think is the most common mistake made in analyzing coverage for a construction defect claim under a commercial general liability policy? The responses have been broad and varied, with the predictable debates about the presence of an “occurrence” and “property damage” and some astute observations regarding isolated versus continuing/progressive damages.

For all their differences, the responses share a common theme: failure to read the entire policy, including exclusions and endorsements, will assuredly lead to coverage analysis mistakes.

From my perspective, the more common mistake isn’t the failure to read the policy, but the failure to read the policy language in context. Particularly as to construction defect claims, context often requires consulting documents in addition to the policy, like the the contract between the named insured and additional insured, to accurately assess coverage for a loss. It is tempting for insurers, insureds and even jurists to lift language out of the context of the policy or related documents, because isolating language may allow the advocate to ascribe to it meaning or application that produces a desired result. But, the key to successful, accurate coverage analysis for any claim — and especially construction defect claims — is thorough reading of policy language in the full context in which that language should be placed.

Up in Smoke: Homeowners Policy’s Theft Coverage Does Not Apply to Seized Marijuana Plants

By Danielle Arteaga on October 31st, 2011 Posted in Homeowners Policies, Theft

Greg Barnett had a really bad day on August 10, 2007. Police officers, armed with a search warrant, searched Mr. Barnett’s home and seized 12, seven-foot-tall marijuana plants, five ounces of marijuana and related paraphernalia. Although charges against Mr. Barnett were ultimately dismissed, the police department nonetheless destroyed Mr. Barnett’s plants.

Mr. Barnett tendered a claim to State Farm for the value of the seized property (about $98,000), asserting his homeowners policy provided coverage for the lost property under the policy’s “theft” provisions. Mr. Barnett’s State Farm policy provided coverage for “direct physical loss to property” caused by theft. The policy defined “theft” to include “attempted theft and loss of property from a known location when it is probable that the property has been stolen.” The policy also provided coverage for loss of personal property owned or used by Mr. Barnett if “stolen ‘away from [his] residence premises.’” Finally, the policy covered “Trees, Shrubs and Other Plants,” including “outdoor trees, shrubs, plants or lawns, on the residence premises, for direct loss caused by the following: … Vandalism or malicious mischief or Theft.”

Mr. Barnett asserted that the police “stole” his marijuana, because the officers knew (but failed to inform the judge authorizing the warrant) that Mr. Barnett had a medical need and physician authorization for the marijuana consistent with California’s Compassionate Use Act. Mr. Barnett asserted that the officers then further demonstrated an intent to permanently deprive Mr. Barnett of the marijuana by destroying it in an evidence burn before Mr. Barnett’s case was dispositioned.

However, neither State Farm nor the Court of Appeal agreed with Mr. Barnett’s analysis. Focusing on not only the State Farm policy’s definition of theft but the common understandings and legal definitions of the term, the Court of Appeal reasoned that theft required an intent on the part of the taker to permanently deprive another of the property taken. When police officers confiscated Mr. Barnett’s marijuana, they intended only to comply with the search warrant and to commit Mr. Barnett’s marijuana to legal process. The Court of Appeal was also not persuaded by the police department’s destruction of the marijuana. Acknowledging that the destruction was permanent deprivation, the Court of Appeal noted that the destruction followed a court order finding that Mr. Barnett was not entitled to have the plants returned. The police department had no way to know, short of prescience, that a judge might later contradict that order. Thus, the conduct was again without the intent necessary to constitute “theft.”

Frake Court Finds Horseplay-Related Injury Not An Occurrence

By Danielle Arteaga on September 21st, 2011 Posted in Renters Policies

Last June, the Court of Appeal for the Second Appellate District issued its decision in State Farm General Insurance Company v. Frake (2011) 11 C.D.O.S. 8782.

The facts of this case are familiar to those of us with children, especially of the teenaged variety. I cannot top the Court of Appeal’s factual recitation, so I leave you to the link to the opinion, above. Suffice to say that when the fact recitation includes a quote from your mother that you were told to knock it off because “someone might get hurt,” things are not gonna go your way.

Such was the case for Mr. Frake.

This opinion makes clear that the determination of accident is made based upon the insured’s intent to commit the injury-producing event not upon whether the insured intended the specific injury (or any at all). Notably, the Court expressly criticizes State Farm Fire & Cas. Co. v. Superior Court (Wright) (2008) 164 Cal.App.4th 317 to the “extent Wright ruled that the term ‘accident’ applies to deliberate acts that directly cause unintended harm,” because “such a holding is contradictory to well-established California law.” The Court of Appeal also made clear that Delgado v. Interinsurance Exchange, etc. (2009) 47 Cal.4th 302 did not alter California jurisprudence interpreting “accident” as defining an act and not the act’s consequences.

The key take away here? When evaluating the occurrence/accident issue, focus on the insured’s act. What verbs and adverbs describe the insured’s conduct causing the claimant’s injury? Did the insured accidentally bump into the plaintiff and injure her? Or, does the insured push, shove, punch, or shoot the plaintiff? Is the insured’s conduct described as purposeful, intentional, malicious? Not to give you nightmarish flashbacks to your Freshman grammar class and getting called up to diagram sentences on the chalkboard, but focusing on these particular words (and always in context) can make the occurrence analysis much stronger.