Insurance Law News - March 2010

• Appraiser’s Service as Expert in Unrelated Case is Not Basis for Disqualification from Appraisal Panel
• Fax Blasting is Not Covered Under CGL Policy’s “Advertising Injury” or “Property Damage” Coverages
• Insurer Seeking Equitable Contribution Can Only Recover Fees and Costs Exceeding Its “Fair Share”

< Return to News page

Appraiser’s Service as Expert in Unrelated Case is Not Basis for Disqualification from Appraisal Panel

Where a policyholder’s appraiser was serving as an expert for the policyholder’s attorney in an unrelated case, there was no “impression of possible bias” and no basis to disqualify the appraiser from the appraisal panel. (Mahnke v. Superior Court (2009) 180 Cal.App.4th 565)

Facts

After Peter and Patricia Mahnke’s residence was severely damaged by a wildfire, they made a claim to their insurer, California Fair Plan Association (CFPA). The Mahnkes did not agree with CFPA’s assessment of their damages, and therefore elected to proceed under the appraisal provision of their policy.

CFPA designated Bruce Reid as its appraiser, and the Mahnkes designated Robert McConihay as their appraiser. Each appraiser made a written disclosure in an effort to demonstrate that he was not only “competent” but also “disinterested.” Reid disclosed that he was serving, in a separate appraisal proceeding, as CFPA’s party-appointed appraiser. McConihay disclosed that he was serving, in an unrelated case, as a construction expert for the law firm that was representing the Mahnkes.

McConihay’s resume, which was attached to his written disclosure, listed the law firm representing the Mahnkes as one of 14 law firm references. His resume further listed 30 other cases – none of which involved the Mahnkes’ counsel – in which he had participated as a lead expert or consultant.

CFPA demanded the Mahnkes withdraw McConihay as their appraiser based on McConihay’s concurrent association with another party represented by the Mahnkes’ counsel. When the Mahnkes refused, CFPA filed a petition in the superior court in an effort to disqualify McConihay from acting as the Mahnkes’ designated appraiser. The superior court granted the petition, largely on the grounds McConihay’s professional relationship with another client of the law firm representing the Mahnkes created “an impression of possible bias” that warranted his disqualification. The Mahnkes then sought relief from the Court of Appeal.

Holding

In California, appraisals must be conducted pursuant to the provisions of the California Arbitration Act, which is set forth in Code of Civil Procedure section 1280 et seq. (the “Arbitration Act”). Section 1281.9 of the Arbitration Act requires a proposed neutral arbitrator – such as the umpire in an appraisal proceeding – to disclose in writing to opposing parties the existence of any potential grounds for disqualification. If a party objects to the proposed umpire, section 1281.91 requires the objecting party to serve a notice of disqualification within 15 days of receipt of the proposed umpire’s disclosure statement.

The statutory disclosure requirements set forth in the Arbitration Act apply only to the neutral arbitrator, and do not apply to party-appointed arbitrators. Although the Arbitration Act, as written, does not require a party-appointed arbitrator to make any disclosure, Insurance Code section 2071 nonetheless contains a statutory requirement that party-appointed appraisers be not only “competent” but “disinterested.” This requirement, incorporated into every fire insurance policy issued in California, in effect constitutes a contractual agreement between the parties to select unbiased appraisers.

Although a party-appointed appraiser does not have a statutory obligation to make a disclosure, a party-appointed appraiser nonetheless has a judicially-created obligation to disclose any facts that might cause a reasonable person to have an “impression of possible bias.”

Based on the fact that McConihay was only serving as an expert for the Mahnkes’ attorney on one unrelated case, the Court found that a reasonable person would not have on “impression of possible bias” by McConihay. Thus, the Court of Appeal directed the trial court to reinstate McConihay as the Mahnkes’ party-appointed appraiser.

Comment

Most property insurance policies provide that, when the insurer and its insured fail to agree on the amount of a loss, either party can demand appraisal. Under California law, appraisal is a limited form of arbitration in which the appraisal panel determines only the “amount of loss.” In the event one party demands appraisal, Insurance Code 2071 requires each party to select a “competent and disinterested appraiser.” The two party-appointed appraisers, in turn, are required to agree on a “competent and disinterested umpire” (or request appointment of one by the court) to form a three-member panel to determine the amount of loss.

Although the Insurance Code requires that appraisal proceedings be “informal,” the proceedings must also conform to the procedural requirements of the Arbitration Act.  Therefore, it is imperative that the members of the appraisal panel (the two party-appointed appraisers and the neutral umpire) understand and adhere to the procedural requirements of the Arbitration Act. Otherwise, the parties risk having a court set aside the award.

Top of Page

Fax Blasting is Not Covered Under CGL Policy’s "Advertising Injury" or "Property Damage" Coverages

Fax blasting is not covered under a commercial general liability policy’s “advertising injury” or “property damage” coverages, because fax blasting does not involve the publication of “material that violates a person’s right of privacy,” nor is it the result of an “accident.” (State Farm Gen. Ins. Co. v. JT’s Frames, Inc. (2010) 181 Cal.App.4th 429)

Facts

Acting on behalf of itself and a class of similarly situated entities, JT’s Frames, Inc. (“JT’s) filed a class action lawsuit in Illinois against the Friedman Group, a company which had transmitted over 74,000 unsolicited faxes to class members. JT’s alleged that the Friedman Group violated the Telephone Consumer Protection Act, which makes it illegal to use fax machines to send unsolicited advertisements, and which allows for statutory damages of $500 per violation.

The Friedman Group sought a defense under several commercial general liability policies it had obtained through State Farm General Insurance Company (“State Farm”), but State Farm denied coverage. JT’s subsequently entered into a settlement agreement with the Friedman Group in the amount of $19,520,000, subject to a covenant not to execute and an assignment of its rights under the State Farm policies.

State Farm then filed a declaratory relief action against JT’s in California state court, seeking a declaration that the claims were not covered under its policies.  The trial court ruled in favor of State Farm, and JT’s appealed.

Holding

The Court of Appeal affirmed, finding that JT’s claims were not covered under the State Farm policies’ “advertising injury” coverage or “property damage” coverage.

The Court first held that fax blasting does not fall within State Farm’s definition of “advertising injury,” which the policies define as the “oral or written publication of material that violates a person’s right of privacy.” The Court observed that “right of privacy” can refer to either the right to seclusion (the right to be free from unwanted intrusions), or the right to secrecy (the right to keep one’s personal information confidential), but that blast faxing, by its very nature, only violates the right to seclusion, not the right to secrecy.

The Court then noted that under the “last antecedent rule,” which provides that qualifying language is applied only to immediately preceding words and not more remote words, the phrase “that violates a person’s right to privacy” must modify the word “material.” Thus, reasoned the Court, the policy should be read to require that the “material” at issue “violate a person’s right to privacy,” which would only be the case if the material contained confidential information and violated the victim’s right to secrecy. Since the policy language only embodied violations of the privacy right of secrecy and not the privacy right of seclusion, fax blasting did not fall within the policy language.

The Court further noted that the context of the phrase “oral or written publication of material that violates a person’s right of privacy” in the policies as a whole also supports the conclusion that “advertising injury” coverage applies only to content-based claims. Specifically, the other three types of torts listed in State Farm’s definition of “advertising injury” – slander/libel, misappropriation of advertising ideas, and infringement of copyright, title or slogan – all relate to injury caused by the information contained in the advertisement, not merely sending and receiving information. Thus, the phase “oral or written publication of material that violates a person’s right of privacy,” viewed in context, must refer to material whose content violates a person’s right of privacy. Since fax blasting is not a content-based offense, the Court concluded it does not fall within the definition of “advertising injury.”

Finally, with respect to coverage for “property damage caused by an occurrence,” the Court held that although a fax blaster’s unauthorized use of the victim’s fax machine, paper, and toner could constitute “property damage,” the fax blasting itself was not accidental, and thus is not an “occurrence.” The Court noted that an “accident” requires unintentional acts or conduct, and even if the Friedman Group did not intend to violate the Telephone Consumer Protection Act, it did certainly intend to send the faxes. Thus, fax blasting did not qualify for “property damage” coverage under the State Farm policies.

Comment

As the State Farm Court itself noted, courts throughout the United States are split on whether fax blasting is a covered “advertising injury.” California and the Seventh Circuit have found that it is not, but Ohio, Massachusetts, Texas, and Florida have found that it is. This split may result in forum shopping. Granted, the choice of law for interpretation of an insurance policy typically turns on where the policy was issued, but it appears that Courts may be lenient in deciding which law governs. By way of example, in this case, JT’s, the Friedman Group, and State Farm are all based in Illinois, yet the Court still applied California law in interpreting the policy.

Top of Page

Insurer Seeking Equitable Contribution Can Only Recover Fees and Costs Exceeding Its "Fair Share"

An insurer seeking equitable contribution has the burden of proving that it paid more than its “fair share” of defense and indemnity costs for a common insured, and cannot recover from another insurer any amount that would result in the first insurer paying less than its “fair share.” (Scottsdale Insurance Company v. Century Surety Company (2010) 2010 WL 797189)

Facts

Scottsdale Insurance Company (Scottsdale) and Century Surety Company (Century) had many common insureds, most of whom were construction subcontractors. When a lawsuit was filed against one insured, the claim would be tendered to all of the insured's insurers. Century, relying on various policy provisions, would frequently decline to participate in the defense and indemnification of the insured.

While Century declined to participate in the defense and indemnity of the common insureds, Scottsdale and other insurers did participate. In allocating defense and indemnity costs amongst themselves, Scottsdale and the other participating insurers generally selected “equal shares” for defense costs and “time on risk” for indemnification costs.

Scottsdale alone filed an equitable contribution against Century to recover a share of the defense and indemnity costs incurred in the underlying actions. The trial court ruled that Century did have a duty to defend and indemnify the insureds in many of the underlying actions, and that Scottsdale was thus entitled to recover equitable contribution from Century.

With regard to the amount that Scottsdale was entitled to recover from Century, Scottsdale argued that Scottsdale was entitled to contribution in the amount of one-half of the amounts Scottsdale had paid, regardless of whether any other insurers shared in the defense or indemnity of any of the common insureds. Century, on the other hand, argued that the total costs of defense and indemnity could be recalculated, according to the methods Scottsdale and the other insurers had agreed to use, with Century in the mix. The trial court ruled in favor of Scottsdale, concluding that Scottsdale could recover one-half of the amounts it paid on the underlying claims.  Ultimately, judgment was entered in favor of Scottsdale. Century appealed the court’s ruling as to the amount Century owed.

Holding

As to the amounts owed to Scottsdale, the Court of Appeal reversed and remanded for further proceedings. The Court held that an insurer seeking equitable contribution has the burden of proving that it paid more than its “fair share” of defense and indemnity costs for a common insured, and cannot recover from another insurer any amount that would result in the first insurer paying less than its “fair share.” By allowing Scottsdale to recover one-half of everything it had paid from Century, the trial court ignored this principal.

The Court held that Scottsdale’s evidence of damages, which primarily consisted of evidence that Scottsdale paid defense and indemnity costs and that Century did not, was insufficient to meet Scottsdale’s burden to establish that it paid more than its fair share. However, Century’s evidence as to the number of other insurers involved in the defense and indemnification of the insureds and the allocation agreements between the participating insurers did establish that Scottsdale had paid more than its fair share.

The Court then held that the trial court’s allocation method was not supported by the evidence because Scottsdale and the participating insurers had agreed on allocation methods, i.e., the participating insurers generally selected “equal shares” for defense costs and “time on risk” for indemnification costs. The Court held that these allocation methods were patently reasonable and that Scottsdale should be bound by its choices. Thus, Scottsdale could only recover from Century based on evidence that it paid more than its fair share under the allocation agreements it made with the other insurers. The Court of Appeal thus remanded the case to the trial court for a redetermination of Scottsdale’s equitable contribution damages.

Comment

This case stands for the proposition that where multiple insurers have defended and indemnified a mutual insured, an insurer seeking contribution from a recalcitrant insurer is only entitled to the amounts it paid over and above its “fair share.” Where applicable, an insurer’s “fair share” will be determined based on the same allocation methods agreed upon by the participating insurers.

A hypothetical example assists in explaining the problem with Scottsdale’s approach in this case. Suppose that, with respect to a particular underlying claim, Scottsdale equally shared the defense costs with three other insurers. In such a scenario, each insurer would have paid 25% of the total defense costs.  Nevertheless, Scottsdale sought to recover half of what it had paid in defense costs from Century. In other words, under Scottsdale's theory of relief, Century and Scottsdale would equally split the 25% paid by Scottsdale (12.5% each), while the other three insurers would still have paid 25% each.

Top of Page