Case Briefs

Insurer May Be Obligated to Pay for Defense of Uninsured Party

In Gray Cary Ware & Freidenrich v. Vigilant Insurance Co., 2004 Cal. App. LEXIS 27 (Cal. Ct. App. Jan. 12, 2004, modified, Feb. 4, 2004), a California Court of Appeal addressed the scope of California Civil Code section 2860. Section 2860, the so-called “Cumis” statute, requires an insurer to provided independent counsel to an insured in specified situations. It also mandates that “ any dispute concerning attorneys' fees not resolved by [the] methods [specified in the section] shall be resolved by final and binding arbitration.”

A law firm and one of its private investigators were named by Deepak Chopra as defendants in a lawsuit and the investigator was named by Chopra as a defendant in another lawsuit. The firm's insurer consented to the firm defending itself. The firm did so, but also decided that it was important to its own defense to ensure that the investigator was represented in both lawsuits. Therefore, it paid for separate counsel for the investigator in both lawsuits. A dispute then arose between the firm and the insurer as to whether the insurer was obligated to pay for the investigator's separate defense.

The court noted that liability policies obligate an insurer to defend its insured “by mounting and funding a defense,” and that the insurer is obligated to provide “competent counsel and pay … all reasonable and necessary costs.” The court then addressed the question of whether the dispute over the fees for the investigator's counsel fell within the purview of section 2860's mandatory arbitration provision. The court held that it did not. The court noted that section 2860's arbitration requirement “addresses disputes about the amount of legal fees or the hourly billing rate of independent counsel” and that other courts had “refused to require arbitration of other disputes.” The court then held that there was no legislative intent that parties arbitrate “disputes involving Cumis defense expenses.” In so holding, the court conveyed an important benefit on insureds (even though it ruled in favor of the insurer on the procedural issue). The court recognized that even if an insurer does not have a duty to defend a particular party, it may be obligated to pay for the costs of that party's defense, if the insured's independent counsel concludes that providing the defense is reasonable and necessary to the insured's defense. Thus, it will no longer suffice for an insurer to refuse to pay defense costs simply because a party is uninsured. The insurer must also consider whether providing a defense to a third party is a reasonable defense cost in the context of a particular case.

No Obligation To Defend When Claim Does Not Arise Out of the Rendering of Professional Services

In Hampton Medical Group, P.A., et als. v. Princeton Ins. Co., et als., 2004 WL 169810 (App. Div. 2004), the New Jersey Appellate Division held that a professional liability insurance carrier has no obligation to defend a person or professional association when the claim was unrelated to any medical incident arising out of, or a failure to render, professional services.

The insureds provided psychiatric physician services. A health insurer sued the insured medical providers for reimbursement of health benefits that it alleged were improperly paid. The insureds filed a declaratory judgment action against their professional liability insurance carriers for defense and indemnification. The Superior Court of New Jersey, Law Division, held that the carriers had a duty to defend the insureds in the pending action brought by the health insurer. The carriers, in consolidated actions, sought review of the orders.

The insureds had professional liability insurance policies that expressly limited coverage to injury caused by a medical incident arising out of, or a failure to render, professional services. The insureds were sued based on allegations that they would: 1) hospitalize patients inappropriately to trigger health insurance coverage; 2) treat patients for longer than was medically necessary in order to obtain payment under health insurance policies; and 3) bill the health insurer for services they did not render.

In reversing the trial court's decision, the appellate court found that the underlying litigation was based on the insureds' billing practices, which neither constituted: 1) a claim for damages arising out of the rendering or failure to render professional services; nor 2) a medical incident which would have been covered. Examining the coverage afforded under the applicable policies, the appellate court found that billing services were commercial activities intrinsically linked to the running of a business, and thus, were not within the policies' coverage, which was limited to professional services and medical incidents.

Citing black letter law, the Appellate Division confirmed that the duty to defend arises when the complaint states a claim constituting a risk actually insured against. Only when the allegations in the complaint correspond with the language of the policy does the duty to defend arise, irrespective of the claim's actual merit.

The Appellate Division went on to cite the discussion contained in 7A Appleman, Insurance Law and Practice ' 4504.3 regarding what constitutes a professional act:

A 'professional' act or service within a malpractice policy is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor or skill and the labor or skill is predominantly mental or intellectual, rather than physical or manual. Id. at 246.

In its analysis, the Appellate Division recognized that there is a distinction between services rendered by a professional that involve specialized knowledge, labor and skill and activities by that same professional rendered as part of conducting business. The court further noted that in determining whether a particular act is of a professional nature or a professional service, it must look not to the title and character of the party performing the act, but to the act itself.

The Appellate Division reasoned that the issue in the underlying litigation was not a claim asserted on behalf of a patient alleging injury as a result of receiving psychiatric care that did not comply with the appropriate standard of care. Such a claim would arise out of the rendering or failure to render professional services and would fall within the coverage terms of these policies.

The court concluded that the billing practices, which were at the heart of the underlying litigation, did not constitute professional services, and thus, any liability which may be imposed upon the insureds in that litigation could not be considered the result of a medical incident arising out of supplying or failing to supply professional services as specified in the policies. Accordingly, the Appellate Division reversed the trial court and held that the carriers had no obligation to provide a defense to the insureds.

Insurer May Be Obligated to Pay for Defense of Uninsured Party

In Gray Cary Ware & Freidenrich v. Vigilant Insurance Co., 2004 Cal. App. LEXIS 27 (Cal. Ct. App. Jan. 12, 2004, modified, Feb. 4, 2004), a California Court of Appeal addressed the scope of California Civil Code section 2860. Section 2860, the so-called “Cumis” statute, requires an insurer to provided independent counsel to an insured in specified situations. It also mandates that “ any dispute concerning attorneys' fees not resolved by [the] methods [specified in the section] shall be resolved by final and binding arbitration.”

A law firm and one of its private investigators were named by Deepak Chopra as defendants in a lawsuit and the investigator was named by Chopra as a defendant in another lawsuit. The firm's insurer consented to the firm defending itself. The firm did so, but also decided that it was important to its own defense to ensure that the investigator was represented in both lawsuits. Therefore, it paid for separate counsel for the investigator in both lawsuits. A dispute then arose between the firm and the insurer as to whether the insurer was obligated to pay for the investigator's separate defense.

The court noted that liability policies obligate an insurer to defend its insured “by mounting and funding a defense,” and that the insurer is obligated to provide “competent counsel and pay … all reasonable and necessary costs.” The court then addressed the question of whether the dispute over the fees for the investigator's counsel fell within the purview of section 2860's mandatory arbitration provision. The court held that it did not. The court noted that section 2860's arbitration requirement “addresses disputes about the amount of legal fees or the hourly billing rate of independent counsel” and that other courts had “refused to require arbitration of other disputes.” The court then held that there was no legislative intent that parties arbitrate “disputes involving Cumis defense expenses.” In so holding, the court conveyed an important benefit on insureds (even though it ruled in favor of the insurer on the procedural issue). The court recognized that even if an insurer does not have a duty to defend a particular party, it may be obligated to pay for the costs of that party's defense, if the insured's independent counsel concludes that providing the defense is reasonable and necessary to the insured's defense. Thus, it will no longer suffice for an insurer to refuse to pay defense costs simply because a party is uninsured. The insurer must also consider whether providing a defense to a third party is a reasonable defense cost in the context of a particular case.

No Obligation To Defend When Claim Does Not Arise Out of the Rendering of Professional Services

In Hampton Medical Group, P.A., et als. v. Princeton Ins. Co., et als., 2004 WL 169810 (App. Div. 2004), the New Jersey Appellate Division held that a professional liability insurance carrier has no obligation to defend a person or professional association when the claim was unrelated to any medical incident arising out of, or a failure to render, professional services.

The insureds provided psychiatric physician services. A health insurer sued the insured medical providers for reimbursement of health benefits that it alleged were improperly paid. The insureds filed a declaratory judgment action against their professional liability insurance carriers for defense and indemnification. The Superior Court of New Jersey, Law Division, held that the carriers had a duty to defend the insureds in the pending action brought by the health insurer. The carriers, in consolidated actions, sought review of the orders.

The insureds had professional liability insurance policies that expressly limited coverage to injury caused by a medical incident arising out of, or a failure to render, professional services. The insureds were sued based on allegations that they would: 1) hospitalize patients inappropriately to trigger health insurance coverage; 2) treat patients for longer than was medically necessary in order to obtain payment under health insurance policies; and 3) bill the health insurer for services they did not render.

In reversing the trial court's decision, the appellate court found that the underlying litigation was based on the insureds' billing practices, which neither constituted: 1) a claim for damages arising out of the rendering or failure to render professional services; nor 2) a medical incident which would have been covered. Examining the coverage afforded under the applicable policies, the appellate court found that billing services were commercial activities intrinsically linked to the running of a business, and thus, were not within the policies' coverage, which was limited to professional services and medical incidents.

Citing black letter law, the Appellate Division confirmed that the duty to defend arises when the complaint states a claim constituting a risk actually insured against. Only when the allegations in the complaint correspond with the language of the policy does the duty to defend arise, irrespective of the claim's actual merit.

The Appellate Division went on to cite the discussion contained in 7A Appleman, Insurance Law and Practice ' 4504.3 regarding what constitutes a professional act:

A 'professional' act or service within a malpractice policy is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor or skill and the labor or skill is predominantly mental or intellectual, rather than physical or manual. Id. at 246.

In its analysis, the Appellate Division recognized that there is a distinction between services rendered by a professional that involve specialized knowledge, labor and skill and activities by that same professional rendered as part of conducting business. The court further noted that in determining whether a particular act is of a professional nature or a professional service, it must look not to the title and character of the party performing the act, but to the act itself.

The Appellate Division reasoned that the issue in the underlying litigation was not a claim asserted on behalf of a patient alleging injury as a result of receiving psychiatric care that did not comply with the appropriate standard of care. Such a claim would arise out of the rendering or failure to render professional services and would fall within the coverage terms of these policies.

The court concluded that the billing practices, which were at the heart of the underlying litigation, did not constitute professional services, and thus, any liability which may be imposed upon the insureds in that litigation could not be considered the result of a medical incident arising out of supplying or failing to supply professional services as specified in the policies. Accordingly, the Appellate Division reversed the trial court and held that the carriers had no obligation to provide a defense to the insureds.