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INSURANCE COVERAGE Litigation News and Analysis • Legislation • Regulation • Expert Commentary WHAT’S INSIDE HEIRS 5 State Farm loses summary judgment bid in fire-loss coverage dispute

Weaver v. State Farm Fire & Cas. Co. (S.D. Miss.)

PROFESSIONAL ACTIVITIES EXCLUSIONS 6 Safeco says it owes no coverage to expert witness

Safeco Ins. Co of Ill. v. Schneider (Ill. Cir. Ct.)

POLICY LIMITS 7 California appeals court upholds defense verdict in fire coverage suit

Thomas v. Fire Ins. Exch. (Cal. Ct. App.)

LIFE INSURANCE 8 Insurance company loses fee request in interpleader action

Unum Life Ins. Co. of Am. v. Witt (W.D. Va.)

BANKRUPTCY

TITLE INSURANCE

Title insurance company loses challenge to $1.5 million damage award A California title insurance company hit with a $1.5 million damage award for failing to disclose an easement on property in Santa Barbara County has failed to convince a state appeals court to upset the award. Gaviota Holdings LLC v. Chicago Title Insurance Co., No. B252740, 2014 WL 7334429 (Cal. Ct. App., 2d Dist. Dec. 23, 2014). A three-judge panel of the 2nd District Court of Appeal held the damages were unliquidated under state law and therefore interest should not have been set to run until the insured sued the insurance company in March 2012. The appeals panel’s opinion noted a Santa Barbara County Superior Court judge had ordered the interest to begin about nine months earlier when the insured filed a proof of loss. Unliquidated damages are those in which the amount of damages is disputed or cannot be computed except on conflicting evidence, inferences or interpretations.

THE PROPERTY

MEDICAID

In 2007 Gaviota Holdings LLC purchased a 38-acre parcel of oceanfront land in an unincorporated area of Santa Barbara County. It obtained a policy from Chicago Title Insurance Co. insuring the title to property, the appeals court’s opinion said.

10 Amici urge high court to let providers challenge state Medicaid rates

Gaviota planned to construct a single-family residence on the property. At the time of purchase,

9 FDIC loses appeal in tax refund dispute

Cantor v. FDIC (3d Cir.)

VOLUME 25, ISSUE 18 / FEBRUARY 5, 2015

WESTLAW JOURNAL/Katie Pasek

a natural gas transfer, odorizing and metering facility was located next to the property’s sole entrance, according to the opinion. Gaviota indicated a belief that the facility was there under an existing lease between the previous owner of the property and Venoco Inc. and Exxon Mobil Corp. However, the facility actually was there pursuant to a recorded easement granted decades before to Pacific Lighting Service Co., the opinion said. Gaviota first learned of the easement, which was not disclosed in the title report or policy, in CONTINUED ON PAGE 16

Armstrong v. Exceptional Child Ctr. (U.S.)

BAD FAITH

COMMENTARY

11 Removal of personal property wasn’t theft, Georgia federal judge says

Reinsurance: What every policyholder should know

Johnson v. Allstate Indem. Co. (N.D. Ga.)

Catherine Serafin of Lowenstein Sandler LLP offers advice to policyholders on reinsurance: insurance for insurance companies. SEE PAGE 3

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Westlaw Journal Insurance Coverage Published since December 1997

TABLE OF CONTENTS Title Insurance: Gaviota Holdings v. Chicago Title Ins. Co. Title insurance company loses challenge to $1.5 million damage award (Cal. Ct. App.).................................1

Publisher: Mary Ellen Fox Executive Editor: Donna M. Higgins Managing Editor: Kenneth Bradley, Esq. [email protected] Editor: Jason Schossler Managing Desk Editor: Robert W. McSherry Senior Desk Editor: Jennifer McCreary Desk Editor: Sydney Pendleton Graphic Designers: Nancy A. Dubin Ramona Hunter Westlaw Journal Insurance Coverage (ISSN 2155-5915) is published weekly on Fridays by Thomson Reuters. Thomson Reuters 175 Strafford Avenue, Suite 140 Wayne, PA 19087 877-595-0449 Fax: 800-220-1640 www.westlaw.com Customer service: 800-328-4880 For more information, or to subscribe, please call 800-328-9352 or visit west.thomson.com. For the latest news from Westlaw Journals, visit our blog at http://blog.thomsonreuters. com/westlawjournals.

Commentary: By Catherine Serafin, Esq., Lowenstein Sandler LLP Reinsurance: What every policyholder should know......................................................................................... 3 Heirs: Weaver v. State Farm Fire & Cas. Co. State Farm loses summary judgment bid in fire-loss coverage dispute (S.D. Miss.)......................................5 Professional Activities Exclusions: Safeco Ins. Co of Ill. v. Schneider Safeco says it owes no coverage to expert witness (Ill. Cir. Ct.)........................................................................6 Policy Limits: Thomas v. Fire Ins. Exch. California appeals court upholds defense verdict in fire coverage suit (Cal. Ct. App.).................................... 7 Life Insurance: Unum Life Ins. Co. of Am. v. Witt Insurance company loses fee request in interpleader action (W.D. Va.)...........................................................8 Bankruptcy: Cantor v. FDIC FDIC loses appeal in tax refund dispute (3d Cir.)...............................................................................................9 Medicaid: Armstrong v. Exceptional Child Ctr. Amici urge high court to let providers challenge state Medicaid rates (U.S.)................................................ 10 Bad Faith: Johnson v. Allstate Indem. Co. Removal of personal property wasn’t theft, Georgia federal judge says (N.D. Ga.)........................................11 Jurisdiction: Maliwat v. State Farm Mut. Auto. Ins. Insurer falls short in showing UIM/UM dispute belongs in federal court (D. Nev.)........................................12 Affordable Care Act: Mich. Catholic Conference v. Burwell Another Obamacare contraception case reaches Supreme Court (U.S.)........................................................13 Case and Document Index................................................................................................................................ 17

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© 2015 Thomson Reuters

COMMENTARY

Reinsurance: What every policyholder should know By Catherine Serafin, Esq. Lowenstein Sandler LLP

Reinsurance is insurance for insurance companies.1 Many policyholders do not realize that, when they submit a claim to their insurance company, the insurance company, in turn, submits a claim to its reinsurer and takes a position about coverage for the policyholder’s claim. This process is important to policyholders for a number of reasons, including discovering whether the insurance company is taking inconsistent positions with its policyholder and its reinsurer, and learning the insurance company’s assessment of the value of the claim. Policyholders, however, often do not know what is going on behind the scenes. Policyholders should educate themselves on this process, and press for information, in order to maximize their coverage.

TYPES OF REINSURANCE AND WHAT IS COVERED When an insurance company (the “cedent” or “ceding company”) buys reinsurance, it generally can buy one of two types: treaty reinsurance or facultative reinsurance. Treaty reinsurance (not to be confused with the “reinsurance treaty”) covers more than one insurance policy sold by the cedent, such as all policies sold to a particular class of business. Facultative reinsurance generally is negotiated for a particular risk and covers a single insurance contract.2 Reinsurance is a way for insurance companies to spread the risk of loss.3 If the insurance company pays a claim submitted

by one of its policyholders, the insurance company can, in turn, submit a claim to its reinsurer(s) and be reimbursed for all or part of that loss. The ceding company can negotiate reinsurance coverage for, among other things, any defense costs paid with respect to its policyholder’s claim, its own claim administration or processing costs (such as claim investigation costs, and fees and expenses if the insurance company hires outside counsel to assist with the claim), and any settlement or judgment paid on behalf of its policyholder.4 Insurance companies even can buy reinsurance covering them if they are found to have acted in bad faith with respect to a claim.5

For example, policyholders should send requests for the production of documents asking for production of reinsurance treaties applicable to the claim, as well as all communications among the insurance company, its reinsurers and any intermediary, such as a reinsurance broker. Policyholders also should consider sending third-party subpoenas directly to reinsurers and the reinsurance broker.

When an insurance company buys reinsurance, it generally can buy one of two types: treaty reinsurance or facultative reinsurance. HOW TO GET REINSURANCE DETAILS FOR YOUR CLAIM If your claim is in litigation, the scope of discovery under the Federal Rules of Civil Procedure is quite broad. Rule 26(b)(1) allows parties to “obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense.” The requested information need only be “reasonably calculated to lead to the discovery of admissible evidence.” Reinsurance agreements are inherently relevant in insurance actions.6 Courts routinely hold that an insurer’s

Catherine Serafin is a partner with Lowenstein Sandler LLP in Washington. She has been representing policyholders in coverage disputes since the 1980s. The views expressed in this article are hers, and are not the views of the firm or any of its clients. The author gratefully acknowledges Courtney Alvarez, an associate in the firm’s Washington office, for her assistance in the preparation of this article.


communications with reinsurers are discoverable.7 Communications between two unrelated entities — the cedent and its reinsurer — are the type of evidence that policyholders should seek in discovery if the claim is in litigation.8

Asking deposition questions of claim representatives can be fruitful, because claim representatives often prepare reports that are passed on to reinsurers regarding the insurance company’s assessment of coverage for the claim, or have direct interaction with reinsurer representatives during reinsurer audits of the insurance company. Insurance companies generally resist such discovery on privilege, work product and confidentiality grounds. However, because insurance companies communicate information about strengths and weaknesses of a policyholder’s claims to reinsurers as a matter of routine business practice, courts have allowed reinsurance discovery, noting that such communications frequently contain admissions by insurers that support a policyholder’s claims for coverage, and rebut the insurers’ defenses to coverage.9 Further, many courts find that there is no privilege with respect to these routine business communications. For instance, a federal court in Nevada recently found that an insurance company “and its reinsurers are in the business of insurance and must continue to make business judgments and FEBRUARY 5, 2015

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decisions when litigation is foreseeable, threatened or pending,” and concluded that an insurance company’s business decisions are not privileged.10 Any confidentiality concerns can be resolved through the use of a protective order in the case. Reinsurance information and communications may prove relevant to many issues in the case. For example, they may reveal the insurance company’s construction of the policy terms at issue. That information is relevant to show how the policy should be interpreted, the insurance company’s practical construction of the provisions at issue, whether the insured’s expectations of coverage were reasonable, and the validity of certain claims or affirmative defenses, such as unclean hands, bad faith and estoppel.11 Reinsurance documents also can be used to examine insurance company witnesses, as well as to impeach them with any prior inconsistent statements.

there is reinsurance for the claim. For instance, a policyholder could ask a mediator to inquire about the matter and, if there is an arbitration allowing discovery, a convincing case can be made to arbitrators regarding the relevance of the information. Sometimes, if reinsurance is the “sticking point” in settlement discussions, policyholders might ask that reinsurance companies have a seat at the table.

CONCLUSION Reinsurance communications and information, although not readily available to policyholders, can help policyholders properly value their claim, and prove the case for coverage at trial. Directed discovery early in a case, and motion practice, if necessary, is key to getting the information needed. Insurance companies generally do not voluntarily produce reinsurance information, so policyholders should be prepared to press

4-40 New Appleman Insurance Law Practice Guide §§ 40.04(2), 40.13. 4

Hartford Fire Ins. Co. v. Lloyd’s Syndicate, No. 3:97-CV-00009 (AVC), 1997 WL 33491787 (D. Conn. July 2, 1997); 4-40 New Appleman Insurance Law Practice Guide § 40.14. 5

See, e.g., Lyon, 2011 WL 124629, at *17-18.

6

Id. at *18 (“There can be no question [insurers] communicated (pre-or-post-issuance or both) with their reinsurers about the policies. Regardless of the legal nature of the reinsurance arrangements, those communications are relevant.”) (citing Nat’l Union Fire Ins. Co. v. Cont’l Ill. Corp., 116 F.R.D. 78, 83 (N.D. Ill. 1987)); see also Allendale Mut. Ins. Co. v. Bull Data Sys., 152 F.R.D. 132, 139-42 (N.D. Ill. 1993); Stonewall Ins. Co. v. Nat’l Gypsum Co., No. 86 CIV. 9671, 1988 WL 96159 (S.D.N.Y. Sept. 6, 1988); Owens-Corning Fiberglass Corp. v. Allstate Ins. Co., 660 N.E.2d 765, 768 (Ohio Ct. Com. Pl. 1993); Progressive Cas. Ins. Co. v. FDIC, as Receiver for Silver State Bank, No. 2:12-cv-665-KJD-PAL, 2013 WL 5947783, at *9-10 (D. Nev. Nov. 1, 2013); Progressive Cas. Ins. Co. v. FDIC as receiver of Vantus Bank, No. C 12-4041-MWB, 2014 WL 4947721 (N.D. Iowa Oct. 3, 2014); Progressive Cas. Ins. Co. v. Delaney, No. 2:11-cv-0678-LRH-PAL (D. Nev. Dec. 11, 2013) (Dkt. 83). 7

See Lipton, 48 Cal. App. 4th at 1617; Ins. Co. of State of Pa. v. City of San Diego, No. 02-cv-693, 2008 WL 926560, at *1 (S.D. Cal. Apr. 4, 2008). See also Olin Corp. v. Cont’l Cas. Co., No. 2:10-cv00623, 2011 WL 3847140 (D. Nev. 2011) (finding that communications with reinsurers “may contain information relevant to whether [a party] has a right to recover under the policy”). 8

Following the production of reinsurance communications, policyholders and courts often discover that insurers take contradictory positions. Following the production of reinsurance communications, policyholders and courts often discover that insurers take contradictory positions. For instance, a federal court in Oregon recently precluded an insurer from taking a position against its policyholder that was “inherently inconsistent with its earlier position” in seeking reinsurance coverage from its reinsurers.12 The court previously had granted a motion to compel reinsurance discovery, and so the policyholder was able to present “considerable evidence demonstrating” the inconsistency of the insurer’s positions.13 The reinsurance evidence revealed that the insurer had demanded reinsurance coverage for its potential payout to its policyholder, despite denying liability to its policyholder. Discovery further revealed that the insurer had in fact already recovered “substantial amounts” from its reinsurers for the same liability.14 The court found that the contradictory positions taken by the insurance company in that case could be used as admissions, and also would support certain of the policyholder’s affirmative defenses.15 If the claim is not in litigation, the policyholder still can take steps to determine whether

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the issue. Having the complete picture of which entities bear financial risk with respect to the claim is an immeasurable aid to settling, as well as litigating, the claim. WJ

NOTES See Lipton v. Superior Court (Lawyers. Mut. Ins. Co., real party in interest), 48 Cal. App. 4th 1599, 1617 (Cal. Ct. App., 2d Dist. 1996); Lyon v. Bankers Life & Cas. Co., No. CIV. 09-5070, 2011 WL 124629, at *18 (D.S.D. Jan. 14, 2011). 1

4-40 New Appleman Insurance Law Practice Guide § 40.04(1). This is an overgeneralization designed to give the reader only a basic familiarity of the main types of reinsurance. There are a number of different types of treaty reinsurance, such as proportional and non-proportional, and reinsurance treaties may cover only portions of the cedent’s liability. See id., § 40.04(2). Also, reinsurance generally is purchased in layers, and there is much variation in treaty terms. Once a policyholder learns what type and which treaty(ies) of reinsurance cover the claim at issue, further research should be done so that the policyholder understands exactly what is covered. 2

See Transport Ins. Co. v. TIG Ins. Co., 202 Cal. App. 4th 984, 989 (Cal. Ct. App., 1st Dist. 2012) (“Reinsurance provides insurers with the ability to spread the risk they have assumed, thereby preventing any one insurer from suffering a catastrophic loss.”) (quoting 1A Couch on Insurance 3d (2010 revised ed.), Reinsurance, § 9.1). 3

INSURANCE COVERAGE

See, e.g., U.S. Fire Ins. Co. v. Bunge N. Am., 244 F.R.D. 638, 645 (D. Kan. 2007); Regence Group v. TIG Specialty Ins. Group, No. 3:07-cv01337, at *3-4 (D. Or. May 1, 2009), aff’d on mot. for reconsideration, 2010 WL 476646 (D. Or. Feb. 4, 2010); Bull Data, 152 F.R.D. at 139; Nat’l Union Fire Ins. Co. v. Stauffer Chem. Co., 558 A.2d 1091, 1096-97 (Del. 1989). 9

Silver State, 2013 WL 5947783, at *10; see also Vantus Bank, 2014 WL 4947721. Many courts have found that there is no “reinsurance” privilege. Reliance Ins. Co. v. Am. Lintex Corp., No. 00 CIV 5568, 2001 WL 604080, at *4 (S.D.N.Y. June 1, 2001). See also Bunge N. Am., 244 F.R.D. at 645 (stating that “[t]here is no basis for a blanket protection of [reinsurance] documents from discovery”); Bull Data, 152 F.R.D. at 136-37. 10

Stonewall, 1988 WL 96159 (insurer’s communications with reinsurers may “evidence the insurer’s understanding of the underlying claims and may contain admissions that these claims are covered”). 11

Regence Group v. TIG Specialty Ins. Group, 903 F. Supp. 2d 1152 (D. Or. 2012). 12

Id.

13

Id.

14

See id. (citing Estate of Ashman v. Comm’r of Internal Rev., 231 F.3d 541, 543 (9th Cir. 2000) (stating that “[a]n inconsistent position taken with an insurance carrier … on the one hand and in a court on the other can result in judicial estoppel”)). 15


HEIRS

State Farm loses summary judgment bid in fire-loss coverage dispute State Farm must continue to defend itself in a lawsuit brought by a woman who says she is entitled to policy proceeds for fire damage to a home under her deceased mother’s homeowners policy. Weaver v. State Farm Fire & Casualty Co. et al., No. 3:13-CV-755, 2015 WL 197617 (S.D. Miss. Jan. 14, 2015).

released from probate, there was a question about whether Manion was the property’s rightful owner.

U.S. District Judge Carlton W. Reeves of the Southern District of Mississippi denied State Farm’s motion for summary judgment, rejecting the company’s arguments that the suit is time-barred, the plaintiff lacks standing to sue because she has no insurable interest in the property and no coverage is due because the fire that destroyed the home was intentionally set.

Two months later, State Farm sent Manion’s estate a letter denying the claim on the ground that the fire damage to the home did not result from an accident, the opinion said.

He explained first that Mississippi’s “minor’s savings clause” means the limitations period did not begin to run until J.D.W. turned 21. Because she would have had three years after that time to file suit, the action was timely.

The state court ruled in November 2009 that J.D.W. was the sole heir of her mother’s estate, which included the home.

The judge also rejected State Farm’s argument that J.D.W. lacked an insurable interest in the property.

THE HOMEOWNERS POLICY Rhonda Rhea died in May 2007. At the time, she was the sole owner of a home in Carthage, Miss., that State Farm insured, Judge Reeves’ opinion said. Rhea’s will named her boyfriend, Bruce Manion, as her sole primary beneficiary. After Rhea’s death, a State Farm agent added Manion’s name to the policy and removed Rhea’s name, the opinion said. Rhea’s minor daughter, referred to as J.D.W., challenged the will in Mississippi state court. In September 2008, with the contested-will action pending, police attempted to arrest Manion on charges of sexually assaulting J.D.W., according to the opinion. Manion barricaded himself inside Rhea’s home and allegedly set two fires, according to the opinion. He died of smoke inhalation, and the home suffered extensive damage. Manion’s estate subsequently made a claim on the insurance policy. State Farm responded in October 2008 with a reservation-of-rights letter stating that because Rhea’s estate had not yet been


Mississippi’s “minor’s savings clause” extends the limitations period to file suit until a minor turns 21, the judge said. J.D.W. sued State Farm in the District Court in December 2013, seeking the homeowners policy proceeds. Because she was a minor at the time, her interests were represented by her father and guardian, John Weaver, the opinion said. In seeking summary judgment, State Farm contended the suit was untimely because the three-year limitations period began to run in December 2008 when it sent the reservationof-rights letter to Manion’s estate. The insurer argued that J.D.W.’s status as a minor did not toll the limitations period because she had a guardian from that time until she became an adult in February 2014. Alternatively, State Farm argued that J.D.W. lacked an insurable interest in the property at the time of the fire and that no one can recover on the policy because the fire was not accidental.

Judge Reeves rejected both arguments.

Because she was her mother’s sole heir, J.D.W. “succeeded to the insurable interest of her mother’s estate upon her victory in the will challenge,” Judge Reeves said. He found it relevant that funds from Rhea’s estate were used to pay the insurance premium. “Those funds were paid out of a corpus that belonged to J.D.W.,” the judge noted, adding that “[i]n that sense, then, J.D.W. has a personal stake in this lawsuit.” Finally, Judge Reeves rejected State Farm’s argument that no one can receive the insurance proceeds because the policy does not cover intentional acts. “It is presently undisputed that J.D.W. did not set the fires or provoke Manion to do so,” he wrote. The judge therefore held that the property damage was accidental from J.D.W.’s perspective. WJ Related Court Document: Opinion: 2015 WL 197617 See Document Section B (P. 25) for the opinion.

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PROFESSIONAL ACTIVITIES EXCLUSIONS

Safeco says it owes no coverage to expert witness Safeco Insurance Co. is seeking a court determination that it does not owe a duty to defend and indemnify a bite-mark expert being sued by a man who spent 20 years in prison based on the expert’s allegedly flawed testimony. Safeco Insurance Company of Illinois et al. v. Schneider et al., No. 2015-CH-00472, complaint filed (Ill. Cir. Ct., Cook County Jan. 12, 2015). The complaint, filed in Illinois’ Cook County Circuit Court, says the expert is not entitled to coverage under a group of homeowners and umbrella policies issued by Safeco and certain affiliates. According to the Safeco complaint, Bennie Starks was convicted after a trial in 1986 of sexual assault and battery and sentenced to 60 years in jail. Among the evidence offered at trial by the prosecution was testimony from Dr. Russell Schneider and another forensic odontologist that bite-mark evidence on the victim matched Starks. After a series of appellate court rulings in Starks’ favor — including that Schneider and the other expert used a flawed method to reach their conclusions in his case — the state dropped all charges against Starks in 2013 and he was released from prison.

“[Russell] Schneider did not provide notice to Safeco of the Starks lawsuit for more than five years, and Safeco was prejudiced by this delay,” the complaint says. In 2009, while challenging his convictions, Starks sued Schneider, other prosecution experts and law enforcement officials in the U.S. District Court for the Northern District of Illinois. Starks v. City of Waukegan et al., No. 09 C 348 (N.D. Ill.). The District Court stayed the case pending resolution of certain additional criminal proceedings. The stay was lifted in January 2013, and Starks filed a fourth amended complaint last August. He asserts a number of claims, including that Schneider and others are liable for malicious prosecution and conspiracy.

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INSURANCE COVERAGE

Schneider denied any wrongdoing in his answer to the complaint and said the bite mark on the victim “could be reliably linked to a reasonable degree of medical and forensic odontological certainty at the time of the 1986 criminal trial based upon the information and testing to support such a statement.” Schneider first provided notice of the Starks lawsuit to Safeco last September, Safeco’s complaint says. He tendered a claim for defense and indemnity under certain homeowners and personal umbrella policies issued by Safeco. After an investigation, Safeco disclaimed coverage. It is now seeking a declaration as to its obligation under the policies. Safeco’s complaint says it owes no duty to defend or indemnify under the homeowners policies because they contain an exclusion for losses that arise from a business pursuit. Safeco says the Starks lawsuit arises from Schneider’s professional activities as a testifying expert witness. The insurer also says the Starks lawsuit does not allege an “occurrence,” which is defined in the policies as an accident. Safeco further alleges that the 1986 trial predates the coverage periods under the homeowners policies. Finally, Safeco says Schneider failed to provide required notice of the Starks lawsuit as soon as practicable. “Schneider did not provide notice to Safeco of the Starks lawsuit for more than five years, and Safeco was prejudiced by this delay,” the complaint says. Safeco raises similar allegations with regard to its request for a declaration that it owes no coverage under the umbrella policies. WJ Attorneys: Plaintiff: Matthew O. Sitzer and Andrew M. Meerkins, Grippo & Elden, Chicago Related Court Document: Complaint: 2015 WL 233088 See Document Section C (P. 31) for the complaint.


POLICY LIMITS

California appeals court upholds defense verdict in fire coverage suit Two California homeowners have failed to convince a state appeals court that their insurance company and broker negligently failed to provide them with a policy that was sufficient to cover personal property lost in a fire. Thomas et al. v. Fire Insurance Exchange et al., No. H037948, 2015 WL 274068 (Cal. Ct. App., 6th Dist. Jan. 21, 2015).

ServiceMaster said it left the items at the site, and Wilk did not believe they had any value, the opinion said.

The 6th District Court of Appeal also found no error in the trial court’s decision to tell the jury that the insurer could not be held vicariously liable for the actions of a company that allegedly failed to secure some personal property recovered from the site.

FIE paid the Thomases the full dwelling and contents policy limits, as well as $37,435 for two items of jewelry covered by a floater endorsement, according to the opinion.

Anthony and Wendi Thomas owned a home in Morgan Hill, Calif. The home was destroyed by fire Aug. 13, 2006, while they were on vacation, the court’s unpublished opinion said. The home and its contents were insured under a homeowners policy from Fire Insurance Exchange. The policy limit for the dwelling was $277,000, and the limit for personal property was $207,750, according to the opinion. Within a day of the fire, the remains of the home were bulldozed at the direction of firefighters for safety reasons. A fire investigator and Kristena Wilk, a Fire Insurance Exchange claims adjuster, later inspected the site and saw nothing salvageable, the opinion said.

The Thomases subsequently sued FIE and their insurance agent, Edwin Higashi, in Santa Clara County Superior Court.

The insurer paid the policy limits, which the homeowners said should have been millions of dollars more. They settled a claim over their dwelling coverage and continued to allege they had a sports memorabilia collection, including hockey, baseball and football cards, that Anthony valued at between $50,000 and $60,000. He also claimed a collection of about 8,000 emeralds that were worth $25 million, the opinion said.

ServiceMaster found a few items, including two statues, a large stone, some financial papers and a few “hockey trading cards,” according to the opinion.

The Thomases alleged both defendants negligently failed to provide a policy that offered sufficient coverage for their personal property. They alleged the defendants had also negligently misrepresented that the emeralds and other personal property were covered for their full replacement value and did not require additional coverage.

Six months later, the Thomases went to retrieve the items from ServiceMaster, but the hockey cards and some of the paperwork were not there.

The complaint further claimed FIE negligently conducted the recovery effort at the site and converted some of the couples’ property by not returning it upon demand.

FIE hired ServiceMaster, a restoration company, to sift through debris at the site Aug. 29, 2006.


FIE did not deny that the Thomases had some of the claimed items in their home at the time of the fire, the opinion said. The insurer disputed the alleged $25 million in emeralds. The case went to trial, and the jury returned a verdict for FIE and Hagashi. The Thomases appealed, and the appeals court affirmed. The appeals panel rejected the argument that the trial court erred by excluding evidence that Higashi and FIE had undervalued the home when calculating the dwelling coverage limit. The Thomases had claimed the contents policy was based on a percentage of the value of the dwelling. The panel found this evidence had “little, if any, probative value” on the trial question of whether the defendants represented that the Thomases had enough contents coverage. The appeals court also rejected the Thomases’ argument that the trial judge erred when he told the jury, in response to a question during deliberations, that FIE was not liable for subcontractors like ServiceMaster. The Thomases claimed the answer was prejudicial error because FIE could have been found vicariously liable for ServiceMaster’s conduct. The vicarious liability theory failed because the Thomases did not plead it in their complaint, did not assert it at trial, did not argue it to the jury, did not request instructions on it and did not include any questions about it on the verdict form, the panel said. WJ Related Court Document: Opinion: 2015 WL 274068

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LIFE INSURANCE

Insurance company loses fee request in interpleader action An insurance company that asked a court to determine who should get the proceeds of a life insurance policy is not entitled to attorney fees because there was no real dispute as to the rightful beneficiary, a federal judge in Virginia has ruled. Unum did not suggest any basis for a legitimate dispute regarding who should get the policy proceeds, the judge said. He noted that in a prior ruling he had found Witt’s children did not provide a good reason to disregard the assignment.

Unum Life Insurance Company of America v. Witt et al., No. 1:14-CV-00005, 2015 WL 260863 (W.D. Va., Abingdon Div. Jan. 21, 2015). U.S. District Judge James P. Jones of the Western District of Virginia concluded that the insurance company likely created any putative dispute over the insurance funds.

“Unum likely initially engendered any putative dispute by writing one of the beneficiaries and falsely telling him that

THE POLICY Douglas A. Witt was insured under a life insurance policy worth $150,000. The policy was issued by Unum Life Insurance Company of America. Witt assigned the policy to First Sentinel Bank as security for a loan in the amount of $358,875, according to the judge’s opinion. He then designated his two children, Justin B. Witt and J.M.W., a minor, as the policy’s beneficiaries. When Witt died in August 2013, the payoff amount on the loan exceeded $359,000, the opinion said. Following Witt’s death, Sentinel Bank attorney James W. Dudley told Unum about Sentinel’s assignment interest in the policy. Dudley provided Unum with a copy of the assignment. Unum responded in November 2013 by advising Justin Witt that Dudley was claiming to be a policy beneficiary.

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“Unum likely initially engendered any putative dispute by writing one of the beneficiaries and falsely telling him that ‘James Dudley’ … was claiming to be a ‘beneficiary’ of his father’s insurance policy,” the judge said. When Unum did not hear back from Witt or the bank, it sent a letter to both advising that it was interpleading the policy funds into the court system, according to the opinion.

‘James Dudley’ — a person probably unknown to the beneficiaries — was claiming to be a ‘beneficiary’ of his father’s insurance policy,” Judge Jones said.

Unum ultimately paid the policy proceeds of nearly $152,000 to the court in February 2014. It then sought to recover attorney fees of more than $7,700 from the interpleaded funds.

“It would be unjust under these circumstances to make the bank pay for Unum’s attorneys’ fees and cost out of the funds to which the bank is legally entitled,” the judge said. WJ

The bank objected to Unum’s request. Siding with Sentinel, Judge Jones explained he has discretion to award attorney fees and expenses to the stakeholder in an interpleader action. He added, however, that such an award may be denied where there is only one meritorious claim or the stakeholder helped to cause the dispute.

INSURANCE COVERAGE

Attorneys: Plaintiff: David E. Constine III and Rebecca E. Ivey, Troutman Sanders LLP, Richmond, Va. Defendant (First Sentinel Bank): W. Bradford Stallard, Penn Stuart & Eskridge, Abingdon, Va. Related Court Document: Opinion: 2015 WL 260863


BANKRUPTCY

FDIC loses appeal in tax refund dispute The Federal Deposit Insurance Corp. has failed to convince a U.S. appeals court that tax refunds paid to the parent of a bank in receivership do not belong to the parent’s bankruptcy estate. Cantor v. Federal Deposit Insurance Corp. (In re Downey Financial Corp.), No. 14-1586, 2015 WL 307013 (3d Cir. Jan. 26, 2015). A three-judge panel of the 3rd U.S. Circuit Court of Appeals held in a non-precedential decision that a tax-sharing agreement between the parent and the bank created a debtor-creditor relationship, making the refund paid to the parent part of its Chapter 7 estate. The FDIC had argued the parent merely held the refund in trust for the bank, according to the 3rd Circuit opinion.

THE TAX-SHARING AGREEMENT Downey Financial Corp. and its subsidiaries, including Downey Savings & Loan, entered into a tax-sharing agreement that provided for the filing of consolidated tax returns. Under Internal Revenue Service regulations, any refund due on the returns is to be paid to the parent company, the opinion said. The federal Office of Thrift Supervision seized the S&L in November 2008 because of liquidity concerns. It appointed the FDIC as receiver. Later that month, Downey Financial filed a Chapter 7 petition in the U.S. Bankruptcy

Court for District of Delaware, seeking to liquidate its assets.

WESTLAW JOURNAL

The Chapter 7 trustee filed a tax return in September 2009 that, after amendments, requested refunds of about $370,000, according to the opinion.

INSURANCE BAD FAITH

After Downey Financial received the refunds, its trustee filed a declaratory judgment action in the Bankruptcy Court regarding ownership of the money.

The appeals court rejected the FDIC’s argument that Downey Financial merely held refunds in trust for its subsidiary. The Bankruptcy Court entered summary judgment in favor of Downey Financial, concluding the tax-sharing agreement unambiguously established a debtorcreditor relationship between the parent and its subsidiaries. On appeal by the FDIC, the 3rd Circuit panel agreed with the Bankruptcy Court’s conclusion that the tax-sharing agreement cannot be read as creating a principalagent relationship because the bank did not exercise control over Downey Financial’s conduct under the agreement. The appeals court rejected the FDIC’s argument that Downey Financial merely held the refunds in trust for the bank. The panel said that claim is inconsistent with the express terms of the tax-sharing agreement. The 3rd Circuit, therefore affirmed the Bankruptcy Court’s determination that the refunds are part of Downey Financial’s Chapter 7 estate. WJ

REUTERS/Jason Reed


Related Court Document: Opinion: 2015 WL 307013

This publication brings you detailed, timely, and comprehensive coverage of developments in bad faith litigation around the country. Its coverage includes complaints, pretrial activity, settlements, jury verdicts, appellate briefing, U.S. Supreme Court petitions, federal and state appellate and Supreme Court cases, statutory and regulatory developments, expert commentary, and news briefs. Many legal issues impacting bad faith litigation are covered, including legal issues such as refusal to defend, failure to settle, refusal to pay legitimate claims, bad faith handling of claims, implied covenant of good faith and fair dealing, and misrepresentation of coverage.

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FEBRUARY 5, 2015

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MEDICAID

Amici urge high court to let providers challenge state Medicaid rates By Michael Scott Leonard, Senior Legal Writer, Westlaw Journals

Several groups of Democratic lawmakers, former government officials, health care associations and anti-poverty advocates are urging the U.S. Supreme Court to find that doctors and hospitals have a constitutional right to challenge state Medicaid reimbursement rates in court. Armstrong et al. v. Exceptional Child Center et al., No. 14-15, amici curiae briefs filed (U.S. Dec. 24, 2014). In briefs filed just before Christmas, the advocacy groups, legislators and former officials say health care providers have a right under the Supremacy Clause of the U.S. Constitution to challenge state funding levels that are so low they allegedly conflict with the federal Medicaid Act’s “reasonable reimbursement” requirement, codified at 42 U.S.C. § 1396a(a)(30)(A). “The question in this case is whether Congress intended to allow suits under the Supremacy Clause to remedy state law inconsistent with the obligations imposed by Section 30(A) of the Medicaid Act,” the Democratic lawmakers say in their friend-ofthe-court brief. That amici group includes Senate Minority Leader Harry Reid of Nevada and Democratic U.S. Rep. Nancy Pelosi of California, the former House speaker. “[F]or 200 years this court’s decisions have indicated that such relief is available to vindicate the supremacy of federal law in the absence of an express provision to the contrary,” their brief adds. The Obama administration, meanwhile, filed an amicus brief in November urging the justices to reach the opposite result. The Medicaid Act’s reimbursement requirement is too vague to count as a federal law with preemptive force under the Supremacy Clause, the administration argues in its brief. Federal laws normally preempt, or supersede, contrary state regulations. “[T]he language of Section 30(A) is ‘broad and general’ in character,” the government’s brief says, citing Douglas v. Independent

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Living Center of Southern California, 132 S. Ct. 1204 (2012). “Neither the Medicaid Act nor any regulations promulgated by the secretary [of the Department of Health and Human Services] identify a judicially administrable standard by which the statute’s broad policy objectives … are to be measured.”

Sen. Harry Reid, D-Nev.

‘PURELY BUDGETARY REASONS’

Rep. Nancy Pelosi, D-Calif.

The case, which the Supreme Court accepted in October, concerns Idaho’s implementation of Medicaid rate-setting rules it submitted to the federal Centers for Medicare and Medicaid Services, or CMS, in 2009 as “waiver” amendments.

Rep. Henry A. Waxman, D-Calif.

Under the Medicaid Act, 42 U.S.C. § 1396, the federal government can waive sometimes inflexible federal rate requirements in states with alternative reimbursement regimes that promote economy, efficiency, access and quality of care. States that fail to satisfy Medicaid requirements without obtaining a waiver risk millions in federal funding they receive to run the jointly administered state-federal program. According to the plaintiffs — a group of assisted-living facilities led by the Exceptional Child Center — the state is shortchanging residential treatment centers, funding them according to an obsolete 2006 formula despite receiving federal approval in 2009 for a new reimbursement methodology. The new formula would provide those facilities with significantly more money, they say. Idaho, meanwhile, insists it simply cannot afford to fund assisted living facilities at the 2009 waiver levels because the state Legislature has not appropriated enough money for that purpose. But the Exceptional Child Center and its co-respondents, citing Orthopaedic Hospital v. Belshe, 103 F.3d 1491 (9th Cir. 1997), have

INSURANCE COVERAGE

The amici lawmakers Sen. Tom Harkin, D-Iowa Sen. Patty Murray, D-Wash. Sen. Ron Wyden, D-Or.

Rep. Sander M. Levin, D-Mich. Rep. George Miller, D-Calif. Rep. Frank Pallone Jr., D-N.J. argued that “purely budgetary” concerns cannot justify a state’s decision to pay health care providers significantly less than the reimbursement rate federal law requires. The U.S. District Court for the District of Idaho sided with the care centers in 2012, and the 9th U.S. Circuit Court of Appeals affirmed that result last year. Exceptional Child Ctr. et al. v. Armstrong et al., No. 12-35382, 567 Fed. Appx. 496 (9th Cir. Apr. 4, 2014).

‘SEMINAL CASES’ The care centers and their amici are now asking the Supreme Court to uphold the 9th Circuit’s ruling. Although the Medicaid Act itself did not expressly create a cause of action for doctors, hospitals and other facilities that object to state Medicaid rates, they say, providers have standing to sue anyway. According to the briefs, unreasonably low state rates effectively override parts of the Medicaid Act — a result that would violate the Supremacy Clause. Anyone affected by an arguably preempted law has an automatic constitutional claim


against the state that enacted it, the amici say.

BAD FAITH

“The line of authority establishing this proposition encompasses some of this court’s most seminal cases, both longstanding and of more recent vintage, concerning the preeminence of federal authority,” the Democratic legislators say, citing Supreme Court decisions from as early as 1812.

Removal of personal property wasn’t theft, Georgia federal judge says

“[T]he approach suggested by Idaho and the [Obama administration] would upend centuries of settled understanding and would undermine the effectiveness of Medicaid,” the brief adds.

Johnson v. Allstate Indemnity Co., No. 1:14CV-00058, 2015 WL 91388 (N.D. Ga., Atlanta Div. Jan. 7, 2015).

The agreement covered child support but did not address division of personal property, according to the order.

U.S. District Judge Richard W. Story of the Northern District of Georgia concluded that the removal of personal property by one domestic partner does not constitute theft triggering coverage under a homeowners policy.

Lopez and the children moved out of the house in October or November 2012 and she allegedly took certain pieces of furniture, the children’s clothing and other items of personal property.

According to the judge’s order, Donna Johnson and Elizabeth Lopez were partners who lived together in a house in Woodstock, Ga. They married in New York in October 2011 and were raising two children.

The judge said that under Georgia law, coverage for “theft” requires “larcenous intent” by the person who takes the property in question.

‘CLARITY IS CRITICAL’ But by taking the case in the first place, the high court implicitly rejected the facilities’ argument that an apparent split between the 9th Circuit and the 10th Circuit was too narrow and too fresh to justify certiorari. Planned Parenthood of Kan. and Mid-Mo. v. Moser, 747 F.3d 814 (10th Cir. Mar. 25, 2014). Instead the justices appeared to side as a preliminary matter with Idaho, which argued in a September reply brief that the circuit split is real and ripe for review. In addition to the 9th and 10th circuits, Idaho said, the 5th and 7th circuits, as well as Massachusetts’ highest court, have addressed the issue in complex and contradictory ways. Detgen v. Janek, 752 F.3d 627 (5th Cir. 2014); Planned Parenthood of Ind. v. Comm’r of Ind. State Dep’t of Health, 699 F.3d 962 (7th Cir. 2012); Boston Med. Ctr. Corp. v. Sec’y of Executive Office of Health & Human Servs., 974 N.E.2d 1114 (Mass. 2012).

An insurer did not act in breach of contract or bad faith when it denied a claim for theft related to a couple’s breakup, a federal judge in Atlanta has ruled.

Johnson had a homeowners policy issued by Allstate Indemnity Co. that covered the house and its contents. When the couple got into a dispute in May 2012, Lopez filed domestic violence charges against Johnson, the order says. Johnson moved out of the house. The parties reached a tentative settlement agreement in which Lopez was granted custody of the children and was allowed to stay at the house with them temporarily, the order says.

“The split is entrenched,” Idaho said in its Sept. 9 brief. “It reflects differing views of this court’s cases. Clarity on this question now is critical for states.” WJ

Johnson reported a theft to the local police. Lopez was never arrested or charged with theft, and a lawsuit that Johnson filed against her for conversion of personal property was classified as a domestic dispute and transferred to family court, where it is still pending, the order says. Johnson filed a claim for loss related to the alleged theft with Allstate. After Allstate denied coverage, Johnson sued the insurer for breach of contract and bad faith. Judge Story granted Allstate’s motion for summary judgment, explaining that under Georgia law, coverage for “theft” requires “larcenous intent” by the person who takes the property in question.

Related Court Documents: Petition: 2014 WL 3101423 Respondents’ brief: 2014 WL 7242818 Lawmakers’ brief: 2014 WL 7366054 Administration’s brief: 2014 WL 6660918

The judge noted that Lopez only took property that she believed belonged to herself and her children and that law enforcement never arrested Lopez or charged her with a crime. Even if a theft had taken place, Allstate could have denied coverage because the policy excludes coverage for theft or attempted theft, he said. WJ REUTERS/Robert Galbraith

Allstate was sued over property removed from a home during a domestic dispute.


Related Court Document: Order: 2015 WL 91388

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JURISDICTION

Insurer falls short in showing UIM/UM dispute belongs in federal court A Nevada federal judge has remanded a dispute over underinsured/uninsuredmotorist benefits to state court after finding that the policyholder’s repeated demands for the $25,000 policy limit prove the case does not meet the federal threshold of $75,000. Maliwat v. State Farm Mutual Automobile Insurance, No. 2:14-cv-00976, 2015 WL 127717 (D. Nev. Jan. 8, 2015). U.S. District Judge Jennifer A. Dorsey of the District of Nevada said the policyholder’s prayer for punitive damages “does not push her claim value into federal territory.” According to the judge’s written order, Maria Maliwat sued State Farm Mutual Automobile Insurance in state court after she was injured in a motor vehicle accident. Maliwat accused the insurer of acting in breach of contract and bad faith by failing to pay UIM/UM benefits of $25,000, the policy limit. State Farm removed the case from the Clark County District Court to federal court based on diversity jurisdiction. Maliwat then moved

for remand, arguing that her demands for the $25,000 policy limit show her claim fails to satisfy the federal court jurisdictional minimum of $75,000. State Farm countered that Maliwat’s demand for more than $100,000 from the at-fault driver coupled with her demand for UIM/UM benefits exceed the threshold amount. In remanding the case, Judge Dorsey said State Farm failed to provide evidence that Maliwat claims that she is entitled to more than $25,000. “The damages Maliwat sought from the at-fault driver are not dispositive of the value of Maliwat’s claims against State Farm,” she said, adding that “liability against State Farm is based on a contractual theory, and that contract provides $25,000 in insurance benefits.”

The judge rejected State Farm’s argument that Maliwat’s request for punitive damages should be taken into consideration. She noted the insurer had referenced a number of insurance bad-faith cases with large punitive damages awards to suggest the value of Maliwat’s claim exceeds $75,000.

The judge said the policyholder’s prayer for punitive damages “does not push her claim value into federal territory.” But Judge Dorsey said it is unlikely Maliwat would be awarded millions of dollars in punitive damages. The cases the insurer cited are “too factually dissimilar from the instant case to render any of those verdicts a reasonable barometer,” she said. WJ Attorneys: Plaintiff: Hera Armenian, Harmon Wang LLC, Las Vegas Defendant: James E. Harper, Las Vegas Related Court Document: Order: 2015 WL 127717

WESTLAW JOURNAL AUTOMOTIVE

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AFFORDABLE CARE ACT

Another Obamacare contraception case reaches Supreme Court By Michael Scott Leonard, Senior Legal Writer, Westlaw Journals

A group of Catholic nonprofits from Michigan and Tennessee has asked the U.S. Supreme Court to decide an issue it dodged twice in 2014: whether the religious exemptions in the Affordable Care Act’s “contraceptive mandate” are sufficient. Michigan Catholic Conference et al. v. Burwell et al., No. 14-701, petition for cert. filed (U.S. Dec. 12, 2014). In a Dec. 12 certiorari petition, the Michigan Catholic Conference and other nonprofits say two Obamacare contraception rulings the high court issued in its last term have sown confusion among federal appeals courts about how the government can ensure free contraceptive coverage for female workers without burdening Catholic employers’ First Amendment rights.

administration to enforce the contraceptive mandate against the religious nonprofit and its co-petitioners. Mich. Catholic Conference et al. v. Burwell et al., 755 F.3d 372 (6th Cir. June 11, 2014), reh’g en banc denied (Sept. 16, 2014). “Certiorari is appropriate not only because the 6th Circuit’s decision is inconsistent with the rule of law laid down in Hobby Lobby but also because the lower courts are sharply divided on the validity of the accommodation,” the nonprofits’ petition says.

“All plaintiffs must do to opt out is express what they believe and seek what they want via a letter or two-page form,” the District of Columbia Circuit said in November. “That bit of paperwork is … straightforward and minimal.” The high court ruled 5-4 in June that secular, for-profit corporations do not have to pay for their workers’ birth control if their owners oppose contraception on religious grounds. Burwell et al. v. Hobby Lobby Stores Inc. et al., 134 S. Ct. 2751 (June 30, 2014). Just three days later, the justices held that the government cannot force religious nonprofits to “facilitate” contraceptive coverage by notifying their insurance carriers they will not pay for it. Wheaton College v. Burwell et al., 134 S. Ct. 2806 (July 3, 2014). The provision’s religious “accommodation” requires and incentivizes those insurers to pay for the birth control coverage themselves. According to the nonprofit groups’ the 6th U.S. Circuit Court of ignored or contradicted those when it erroneously allowed the


petition, Appeals rulings Obama

HOBBY LOBBY AND WHEATON COLLEGE The petition is the second in recent months seeking clear answers to some of the questions the justices left unresolved last year when they decided Hobby Lobby and Wheaton College, the first and second Supreme Court rulings concerning the contraceptive mandate. The mandate, 42 U.S.C. § 300gg-13(a)(4), requires most businesses with at least 50 workers to sponsor employee health plans that include free birth control for women. Under the religious accommodation, insurers administering health plans for religious nonprofits that oppose contraception must pay for workers’ birth control themselves with pre-segregated funds. To incentivize that coverage, the government reimburses insurers their full costs plus 15 percent.

The University of Notre Dame asked the Supreme Court to reject that arrangement in October, arguing in its certiorari petition that the exemption contradicted the Hobby Lobby and Wheaton College decisions. Univ. of Notre Dame v. Burwell et al., No. 14-392, petition for cert. filed (U.S. Oct. 3, 2014). The justices should overturn two 7th Circuit rulings declining to block the contraceptive mandate while the Catholic school challenges it, the petition said. Univ. of Notre Dame v. Sebelius, 743 F.3d 547 (7th Cir. Feb. 21, 2014), reh’g en banc denied (May 7, 2014). The court has not ruled on Notre Dame’s petition.

RELIGIOUS FREEDOM RESTORATION ACT According to the petitioners, the 6th and 7th circuits misinterpreted Hobby Lobby, Wheaton College and the U.S. Constitution, widening an existing circuit split, when they held last year that the contraceptive

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mandate’s religious accommodation is adequate under the federal Religious Freedom Restoration Act. The RFRA, 42 U.S.C. § 2000bb-1, directed courts to apply strict judicial scrutiny when evaluating “neutral,” generally applicable laws that happen to impose some burden on religion. Laws subject to strict scrutiny pass constitutional muster only if they narrowly advance a compelling state aim, meaning a government interest of the highest order.

“[W]hat may seem like an ‘administrative’ burden to a court may mean much more to a believer,” the petition says. In its opinion, the Hobby Lobby majority suggested that the Obama administration might be able to accomplish its policy goals by extending the mandate’s religious accommodation to secular companies. At the time, the accommodation, codified at 45 C.F.R. § 147.131(a), allowed nonprofits to get out of paying for their workers’ birth control by filling out the designated form and notifying their insurance carriers or plan administrators.

whether requiring nonprofits to fill out forms certifying that they oppose birth control violates the RFRA by forcing them to participate indirectly in obtaining contraceptives.

The nonprofits have argued that the extent to which they can entangle themselves with practices they oppose is actually a religious question that the government and the courts have no right to answer for them.

Although the majorities in both cases blocked the mandate with respect to certain employers, they went out of their way to note that their rulings did not resolve broader questions about the provision or its exemptions.

Nonprofits like the Michigan Catholic Conference are the analogical equivalent of conscientious objectors not subject to military conscription, the petition says. Just as working in a munitions factory would violate conscientious objectors’ beliefs no less than serving in the infantry, the nonprofits claim, maintaining an insurance relationship that includes free contraception for female workers violates Catholic doctrine no matter who foots the bill.

“We do not decide today whether an approach of this type complies with RFRA for purposes of all religious claims,” Justice Samuel Alito wrote for the Hobby Lobby majority. The “companies sincerely believe that providing the insurance coverage demanded by the … regulations lies on the forbidden side of the line, and it is not for us to say that their religious beliefs are mistaken or insubstantial,” he added. About a month after the court handed down those two decisions, the U.S. Department of Health and Human Services announced an interim final rule adopting the Wheaton College court’s reading of the religious exemption.

“Given its extensive powers and virtually unlimited resources, the government cannot seriously contend that conscripting petitioners to act in violation of their beliefs is necessary to achieve [its] goal,” the petition says.

But the Supreme Court sent the opposite signal when it issued its decision in the Wheaton College case just a few days later. The six-justice Wheaton College majority rejected the mandate’s religious accommodation, in effect holding that the exemption itself violated the freeexercise rights of nonprofits that oppose contraception. Religious employers seeking a way around the contraceptive mandate do not need to fill out any forms as long as they somehow notify the government, the justices’ interim order said, and they do not have to “trigger” their insurers’ backup obligations by telling plan administrators that they have done so.

‘WE DO NOT DECIDE TODAY’ In deciding both Hobby Lobby and Wheaton College, the justices expressly declined to consider the question underlying the Michigan Catholic Conference’s petition:


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“The [6th Circuit] panel’s fundamental error lies in its failure to appreciate that whether a particular action ‘facilitates’ the provision of contraceptive coverage is itself a religious judgment, rooted in Catholic teachings regarding material cooperation,” the petition says. “As Hobby Lobby confirms, courts may not … [dictate] ‘the circumstances under which it is wrong for a person to perform an act that is innocent in itself but that has the effect of enabling or facilitating the commission of an immoral act by another.’”

Under the new rule, codified at 79 Fed. Reg. 51,092, nonprofits can qualify for the accommodation simply by telling the government in writing that they oppose birth control for religious reasons. The Supreme Court has not yet ruled on the sufficiency of the rewritten regulation. It should do so now, the Michigan Catholic Conference and other groups say.

‘MATERIAL COOPERATION’ The key question at the heart of the case and others like it is how many degrees of separation religious nonprofits must put between themselves and the free birth control their employees receive — and who has the right to make that decision.

INSURANCE COVERAGE

‘BIT OF PAPERWORK’ Before Hobby Lobby, several federal appeals courts offered a range of conflicting answers to that central question — some adopting the religious objectors’ position, others rejecting it. In the months since that seminal ruling, only one appellate court has issued a merits decision concerning the contraceptive mandate’s religious accommodation. A three-judge District of Columbia Circuit panel sided with the Obama administration in November, saying that whether a law is closely enough linked to the harm that allegedly flows from it to establish legal causation is a quintessentially secular question. Priests for Life et al. v. U.S. Dep’t of


Health & Human Servs. et al., 772 F.3d 229 (D.C. Cir. Nov. 14, 2014). “All plaintiffs must do to opt out is express what they believe and seek what they want via a letter or two-page form,” the panel said. “That bit of paperwork is more straightforward and minimal than many that are staples of nonprofit organizations’ compliance with law in the modern administrative state. “Religious nonprofits that opt out are excused from playing any role in the provision of contraceptive services, and they remain free to condemn contraception in the clearest terms,” the court added. Obamacare contraception appeals are pending in every other circuit except the 1st, 4th and 9th.

‘AN ADMINISTRATIVE BURDEN’? Federal judges across the country, meanwhile, have been punting in those cases, leaving short-term injunctions in place as they await answers from appeals courts. The state of the law is so unsettled that religious employers have no idea what their obligations are, the Catholic employers claim. In their Supreme Court petition, the nonprofits say the appeals courts that sided with the government have misread the RFRA and undertaken the wrong inquiry. According to the petition, the law requires courts to accept the nonprofits’ sincere religious convictions — including their belief that notifying the government of their position makes them complicit in providing birth control — at face value when assessing whether the contraceptive mandate “substantially burdens” their religious practice.


“Courts have no role in determining whether a particular action violates a plaintiff’s religious beliefs,” the petition says. “Instead, they must accept a plaintiff’s ‘honest conviction’ that what the government is pressuring him to do conflicts with his religion.”

Requiring religious employers to do business with insurance companies that offer contraceptive coverage cannot be the only practical way to provide their workers with free birth control, according to the petition, since the government already deploys an array of other options.

If the pressure the government puts on a nonprofit to violate its beliefs is significant, the petition says, the burden on that employer is “substantial” under the RFRA even if courts might see the violation itself as minor.

Even if the current exemption is more straightforward than some of those alternatives, mere administrative convenience cannot justify overbroad restriction of religious rights, the nonprofits claim.

“[W]hat may seem like an ‘administrative’ burden to a court may mean much more to a believer,” the nonprofits say, citing the dissent from the 7th Circuit’s Notre Dame decision. “Notably, [the Hobby Lobby] court did not consider whether complying with the regulations would be a ‘substantial’ violation of the plaintiffs’ religious beliefs,” the petition adds. “Instead, the court simply … ask[ed] whether the plaintiffs would incur a substantial penalty if they did not comply.”

’THE ONLY FEASIBLE WAY’ No matter how the Obama administration frames the issue, the nonprofits say, the government cannot satisfy the heavy statutory and constitutional burden of showing that the religious accommodation is the least intrusive way of accomplishing its policy goals. “[T]o prevail, the government must rely on evidence that the accommodation is the only feasible way to distribute costfree contraceptives to women employed by religious objectors,” the petition says. “The government has not met this burden.”

The government could achieve the same ends through “minor tweaks” to the many health insurance programs it already runs, they argue. “Given its extensive powers and virtually unlimited resources, the government cannot seriously contend that conscripting petitioners to act in violation of their beliefs is necessary to achieve that goal, which could be accomplished through tax credits or deductions, or through the many programs that already exist for providing health care subsidies,” the nonprofits say. “While petitioners oppose many of these alternatives on policy grounds, all of them are ‘less restrictive’ than the accommodation because they would deliver free contraception without forcing petitioners to violate their beliefs,” the petition adds. WJ Attorneys: Petitioners: Noel J. Francisco, Jones Day LLP, Washington; Matthew A. Kairis, Jones Day LLP, Columbus, Ohio Related Court Document: Petition: 2014 WL 7166539

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Title insurance CONTINUED FROM PAGE 1 June 2008. Two years later, Gaviota, Venoco and Exxon signed a new 10-year lease for over $1 million per year through 2020, according to the opinion. Gaviota then sued Chicago Title in March 2012, alleging it breached the title policy by failing to compensate it for damages sustained as a result of the undisclosed easement. It also alleged breach of the implied covenant of good faith and fair dealing for failure to settle Gaviota’s claim promptly. At trial Gaviota presented expert testimony from David Marx, who said the value of the property when the easement was discovered in June 2008 was $18.8 million without the easement, and the easement had caused a $1.5 million loss in the property’s value. Marx calculated a decline of about 4 percent in market value because of the possibility that an explosion could occur, the opinion said. He also calculated another 4 percent

reduction in market value because the property owner’s loss of privacy, for a total of $1.5 million, and a $37,000 drop stemming from the owner’s loss of use of the easement area, according to the opinion. Chicago Title’s appraisal expert opined that the easement had caused a decline in market value of $33,750 as of October 2009.

per year from June 2, 2011, when Gaviota submitted its proof of loss to Chicago Title. The 2nd District explained that Cal. Civ. Code § 3287(d) authorizes a plaintiff with an unliquidated claim for contract damages to recover prejudgment interest, but that interest may not be set to run earlier than the date when the court action is filed.

The title insurance policy did not disclose the existence of the easement, which diminished the value of the property, the opinion said. The trial court credited Marx’s testimony and awarded Gaviota $1.5 million in damages, the opinion said. The court also awarded about $305,000 — Gaviota’s attorney fees, as damages for the breach of the good-faith covenant. Chicago Title appealed to the 2nd District. The appeals court affirmed the trial court’s damages award but reversed the award of prejudgment interest.

Because Gaviota’s claim for diminution of market value was unliquidated, the lawsuit’s March 2012 filing was the earliest date from which interest can run, the panel said. The appeals court returned the case to the trial court to amend the judgment. WJ Related Court Document: Opinion: 2014 WL 7334429 See Document Section A (P. 19) for the opinion.

The trial court awarded interest on the $1.5 million in damages a rate of 10 percent

The WESTLAW JOURNALS blog is your source for the latest developments in practice areas like business and finance, IP and technology, product liability, and environmental law. Daily postings from our attorney-editors keep you up to date on important news and analysis and provide a look at what they’re working on for future print issues of Westlaw Journals. To access the blog, visit http://blog.thomsonreuters.com/westlawjournals


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CASE AND DOCUMENT INDEX Armstrong et al. v. Exceptional Child Center et al., No. 14-15, amici curiae briefs filed (U.S. Dec. 24, 2014)..................................................................... 10 Cantor v. Federal Deposit Insurance Corp. (In re Downey Financial Corp.), No. 14-1586, 2015 WL 307013 (3d Cir. Jan. 26, 2015)...................................9 Gaviota Holdings LLC v. Chicago Title Insurance Co., No. B252740, 2014 WL 7334429 (Cal. Ct. App., 2d Dist. Dec. 23, 2014)......................................1 Document Section A..................................................................................................................................................................................................... 19 Johnson v. Allstate Indemnity Co., No. 1:14-CV-00058, 2015 WL 91388 (N.D. Ga., Atlanta Div. Jan. 7, 2015)................................................................. 11 Maliwat v. State Farm Mutual Automobile Insurance, No. 2:14-cv-00976, 2015 WL 127717 (D. Nev. Jan. 8, 2015)......................................................... 12 Michigan Catholic Conference et al. v. Burwell et al., No. 14-701, petition for cert. filed (U.S. Dec. 12, 2014)......................................................................13 Safeco Insurance Company of Illinois et al. v. Schneider et al., No. 2015-CH-00472, complaint filed (Ill. Cir. Ct., Cook County Jan. 12, 2015)..........................................................................................................................................................................................................................6 Document Section C.......................................................................................................................................................................................................31 Thomas et al. v. Fire Insurance Exchange et al., No. H037948, 2015 WL 274068 (Cal. Ct. App., 6th Dist. Jan. 21, 2015)................................................ 7 Unum Life Insurance Company of America v. Witt et al., No. 1:14-CV-00005, 2015 WL 260863 (W.D. Va., Abingdon Div. Jan. 21, 2015)..........................................................................................................................................................................................................................8 Weaver v. State Farm Fire & Casualty Co. et al., No. 3:13-CV-755, 2015 WL 197617 (S.D. Miss. Jan. 14, 2015)...................................................................5 Document Section B......................................................................................................................................................................................................25


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