Insurance Law News - September 2009

• Policies Do Not Cover Damages and Statutory Attorney’s Fees Arising from Insureds’ False Imprisonment and Exploitation of Domestic Servant
• Agent/Broker Who Claims to Have Special Knowledge of Insured’s Business Assumes Special Duty to Obtain Proper Coverage

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Policies Do Not Cover Damages and Statutory Attorney’s Fees Arising from Insureds’ False Imprisonment and Exploitation of Domestic Servant

The California Court of Appeal has held that a homeowners and personal umbrella insurer had no duty to indemnify its insureds for compensatory damages and statutory attorney’s fees awarded against the insureds after the insureds falsely imprisoned and exploited a domestic servant. (State Farm General Ins. Co. v. Mintarsih (2009) 175 Cal.App.4th 274)

Facts

Mimin Mintarsih sued Dennis and Dina Lam, alleging that she had been falsely imprisoned in the Lams’ home for seven years and forced to work as a domestic servant. Mintarsih alleged that she had been required to work for the Lams seven days a week, 14 hours a day, without proper breaks and compensation. Mintarsih also claimed that the Lams negligently failed to provide her with proper medical care, which resulted in physical injury to her.

The Lams sought defense and indemnity under homeowners and personal umbrella policies issued by State Farm General Insurance Company. State Farm agreed to defend the Lams subject to a reservation of rights. 

Mintarsih’s case against the Lams was submitted to the jury on counts for false imprisonment, negligence, negligence per se, fraud, and wage and hour violations under the Labor Code. The jury found in favor of Mintarsih on all counts. It awarded her $87,000 in damages on the first four counts, $745,671 in damages and statutory penalties on the wage and hour count, and $5,000 in punitive damages. Thereafter, the trial court awarded Mintarsih $733,323 in statutory attorney’s fees on the wage and hour claim, plus $161,591 in “other costs.” 

State Farm filed a declaratory relief action against the Lams and Mintarsih. The trial court ruled that State Farm was obligated to indemnify the Lams for some, but not all, of the amounts which had been awarded to Mintarsih in the underlying action. Mintarsih and State Farm both appealed.

Holding

On appeal, the parties agreed that State Farm did not have a duty to indemnify the Lams for the $745,671 in damages and penalties which had been awarded to Mintarsih on the wage and hour count, and did not have a duty to indemnify Lams for the $5,000 in punitive damages which had been awarded to Mintarsih. The parties also agreed that State Farm did have a duty to indemnify the Lams for the $161,591 in “other costs” which had been awarded to Mintarsih. 

However, the parties disputed whether State Farm had a duty to indemnify the Lams for the $87,000 in compensatory damages which had been awarded to Mintarsih on the false imprisonment and negligence claims. On that issue, the appellate court ruled in favor of State Farm. The appellate court reasoned that even though the State Farm personal umbrella policy covered the “personal injury” offense of “false imprisonment,” the evidence in the underlying case established that the Lams had intentionally deprived Mintarsih of her freedom, and that constituted a “willful act” under Insurance Code section 533. According to the court, “[s]ection 533 precludes indemnity for the damages awarded for false imprisonment, despite the fact that the umbrella policy expressly promised indemnity for false imprisonment.” Further, section 533 precluded indemnity for the damages which had been awarded as a result of the Lams’ negligence in failing to provide medical care to Mintarsih. According to the appellate court, the Lams’ negligent failure to provide medical care to Mintarsih was “intimately connected with” and “inseparable from” their intentional false imprisonment of her. Thus, section 533 also relieved State Farm of any duty to indemnify the Lams’ for damages awarded on the “negligence” theory.

In addition, the parties disputed whether State Farm had a duty to indemnify the Lams for the $733,323 in statutory attorney’s fees which had been awarded to Mintarsih on the wage and hour claim. On that issue, the appellate court also ruled in favor of State Farm. The court acknowledged that the State Farm policies’ “supplemental payment” clauses covered “costs taxed against an insured in suits we defend,” and that under California law “costs” includes statutory attorney fees awarded to the prevailing party. However, the statutory attorney fees which were awarded as costs in this case arose from the wage and hour claim – a claim that was not even potentially covered under the State Farm policies. According to the court, “the reference in the supplemental payments provision to ‘suits we defend’ encompasses only those claims that the insurer agreed to defend under the terms of the policy,” and “an insured could not reasonably expect an insurer to pay costs that can be allocated solely to claims that were not even potentially covered.” Thus, since the supplemental payment clauses did not require State Farm to pay costs arising from claims that were not even potentially covered, State Farm was not obligated to pay the statutory attorney’s fees which had been awarded to Mintarsih on the wage and hour claim.

Comment

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Agent/Broker Who Claims to Have Special Knowledge of Insured’s Business Assumes Special Duty to Obtain Proper Coverage

The California Court of Appeal has held that where an insurance agent or broker claims to have special knowledge of an insured’s business risks and exposures, the agent/broker assumes a special duty to obtain proper coverage, and can be liable to the insured for breach of that duty. (Williams v. Hilb, Rogal & Hobbs Insurance Services of California, Inc. (2009) 98 Cal.Rptr.3d 910)

Facts

Rhino Linings USA, Inc. (Rhino USA) is a national franchisor. John Daniel Williams and Steven Stuart Simon formed a partnership and purchased from Rhino USA a franchised dealership known as Rhino Linings of Santa Fe Springs (Rhino SFS). The franchise was engaged in the business of installing spray-on linings onto the beds of pickup trucks. Williams provided most of the financing and Simon was responsible for sales and managing the business, including obtaining insurance. 

Even though Williams was not the partner responsible for obtaining insurance, Rhino USA (the national franchisor) referred Williams to Robyn Thaw, who was then employed by the Robert F. Driver Company, an insurance agency/brokerage. At the time, Thaw had already procured coverage for between 50 and 100 other Rhino franchisees. Thaw represented that she knew the operations of Rhino Linings dealerships very well, that she had a custom-made insurance package specifically designed for Rhino Linings dealerships, and that she “was the go-to person to take care of the insurance needs for Rhino Linings dealerships.” 

Williams called Thaw and asked to meet with her to review insurance needs for Rhino SFS, but Thaw told Williams a meeting would not be necessary, because she was already very familiar with Rhino Linings dealerships and programs. Williams did not request any specific type of insurance, and instead simply asked Thaw to obtain whatever insurance was needed to operate the business.

Thaw sent Williams a blank application form by fax, which indicated that the program was “designed specifically for Rhino Liners dealers.” Williams filled in basic information, leaving blank all portions relating to insurance coverages. He signed the application, and returned it to Thaw, who selected the insurance coverages. Thaw submitted the application to Travelers Insurance Company. 

Thaw attended informational seminars for new dealers given by Rhino USA, and spoke at the seminars about the insurance needs of Rhino Linings dealerships. The package of insurance coverages Thaw participated in designing for Rhino Linings dealerships was not available through all Travelers’ agents; brochures with Thaw’s name on them were distributed at the Rhino USA seminars at which she spoke. Thaw represented and marketed the insurance package as having been specifically designed for Rhino Linings dealers.

After Thaw submitted Williams’ application to Travelers, she sent Williams an insurance proposal for Rhino SFS, which Williams accepted “as is.” The proposal included commercial general liability coverage, and Williams “scanned it briefly” and thought it was “complete and in order.” Although Williams believed he had “all the appropriate insurance coverages” needed to operate the business, the policy did not include workers compensation coverage.

By the time the Travelers policy expired, Thaw had changed her employment and had begun working for Hilb, Rogal & Hobbs Insurance Services of California, Inc. (HRH). Thaw continued to act as insurance agent for Rhino SFS after she began working for HRH. By this point, Travelers was no longer offering the Rhino Linings insurance package, so Thaw, while employed by HRH, created a new insurance package, underwritten by Hartford Casualty Insurance Company. Again, the package she created for Rhino SFS from Hartford did not contain workers compensation insurance.

A fire at the Rhino SFS premises caused severe burn injuries to Kendall Mann, one of Rhino SFS’ employees. When Williams called Thaw to report the fire, he learned for the first time that Rhino SFS did not have the necessary workers compensation coverage. 

Mann brought a civil action against Rhino USA, Rhino SFS, Williams and Simon. Hartford provided Williams and Simon with a defense through Hartford-appointed defense counsel. The jury rendered a verdict against Rhino USA and Rhino SFS (the latter including Williams and Simon, jointly and severally) for approximately $11.3 million, finding Rhino USA and Rhino SFS each 50 percent at fault. Hartford paid $1 million in partial satisfaction of Mann’s judgment against Williams and Simon, leaving approximately $5.8 million outstanding on the judgment. 

Williams and Simon filed a negligence action against HRH, seeking compensatory damages in the amount outstanding on the Mann judgment. A trial judge, sitting without a jury, rendered a verdict in favor of Williams and Simon against HRH for the full amount of the $5.8 judgment. HRH appealed, arguing that the evidence was not sufficient to support the judgment and arguing that the suit was time-barred by a two-year statute of limitations.

Holding

First, the Court of Appeal held that the evidence was more than ample to support the court’s finding that Thaw, when employed by HRH, failed to use the skill and care a reasonably careful insurance professional would have used in similar circumstances. Among other things, the Court relied on the fact that Thaw specifically held herself out as understanding the specific insurance needs of Rhino Linings franchisees, and that Thaw (and, therefore, HRH) therefore assumed a duty of care that was greater than might ordinarily have been owed.

Second, the Court held that the action was not barred by the applicable two-year statute of limitations (Code Civil Procedure Section 339, subd. 1.) The Court held that the statute did not begin to run on the date the employee was injured in the fire, but instead began to run when the jury rendered a verdict in excess of the $1 million Hartford policy. As such, the suit against Thaw and HRH was timely.

Comment

An insurance producer (whether an agent or a broker) does not have a duty to volunteer to an insured that the latter should procure additional or different insurance coverage. Thus, ordinarily producer only has a duty to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured. The rule changes, however, when any one of the following three things occurs: (a) the producer misrepresents the nature, extent or scope of the coverage being offered or provided; (b) the insured requests (or at least inquires) about a particular type or the extent of coverage; or (c) the producer assumes an additional duty by either express agreement or by representing that he or she has expertise in a given field of insurance being sought by the insured.

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