California Property/Casualty Insurance Laws Enacted in 2015

October 11, 2015 was the deadline for Governor Jerry Brown to act on bills passed by the California Legislature this year. Here are summaries of noteworthy property/casualty insurance-related bills which Governor Brown signed into law. Unless indicated otherwise the new laws will go into effect on January 1, 2016. More ›

California Supreme Court Rules that Insurer May Recover Fees from Insureds’ Independent Counsel

In a unanimous decision filed on August 10, 2015, the California Supreme Court ruled in Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C. that in a case where a liability insurer has been ordered to provide independent counsel to its insureds with the stipulation that the insurer may recover unreasonable and unnecessary payments made to the counsel, the insurer may seek the recovery of the overbilled payments directly from the independent counsel.  The Court’s decision stresses that the ruling is limited to the facts of this case. More ›

FINRA and Charles Schwab Battle Over Class Action Waiver Clauses

Last October, Charles Schwab & Company ("Schwab") began inserting into its customer Account Agreements a class action waiver clause.

Schwab's Account Agreements require arbitration of any dispute arising out of a customer's use of Schwab's services. The waiver language that Schwab began inserting states that:

You and Schwab agree that any actions between us and/or Related Third Parties shall be brought solely in our individual capacities. You and Schwab hereby waive any right to bring a class action, or any type of representative action against each other or any Related Third Parties in court."

Schwab's insertion of this waiver language followed the United States Supreme Court's decision in AT&T Mobility v. Concepcion in which the Supreme Court held that the Federal Arbitration Act preempted state laws that might otherwise limit the ability of companies to include a class action waiver clause in an arbitration agreement.

The AT&T Mobility decision invalidated a California Supreme Court decision, Discover Bank, which had placed some limits on the ability to enforce class action waiver clauses in arbitration agreements. The United States Supreme Court reasoned that the Federal Arbitration Action preempted such state laws.

The Financial Industry Regulatory Authority, Inc. ("FINRA") instituted a disciplinary proceeding against Schwab taking the position that the Schwab class action waiver clause violated FINRA's rules.

It is FINRA's position that it:

has enacted, and the SEC has approved, two applicable rules:  first, that class actions cannot be arbitrated in the FINRA forum; and second, that member firms may not limit the rights of public investors to go to court for claims that cannot be arbitrated."

On the same day that FINRA instituted the disciplinary proceeding, Schwab filed a lawsuit, Charles Schwab v. Financial Industry Regulatory Authority, Inc., in United States District Court, Northern District of California, seeking a declaration that FINRA may not enforce its rules to limit class action waiver clauses in arbitration agreements on the ground that such rules run afoul of the Federal Arbitration Act.

FINRA has noticed a motion to dismiss Schwab's complaint that is currently scheduled for hearing on April 3, 2012. In turn, Schwab has filed a motion for a preliminary injunction against FINRA that is also scheduled for April 3, 2012.  

New Law Makes Significant Changes to the Regulation and Taxation of Surplus Line Insurance

California Assembly Bill 315, signed into law by Governor Jerry Brown on July 13, 2011, conforms California law to the Nonadmitted and Reinsurance Reform Act (NRRA) that was part of H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (signed into law by President Barack Obama on July 21, 2010).

AB 315’s provisions became operative on July 21, 2011.

It was important for California to enact AB 315 by July 21, 2011, because the NRRA, which went into effect on that date, pre-empts several aspects of state surplus line insurance regulation and taxation.

The enactment of AB 315 preserves California’s authority to regulate surplus line insurance and to collect surplus line insurance taxes.

Here is a summary of key elements of AB 315. The cited sections are the California Insurance Code sections that are added or amended in the chaptered version of AB 315.

Home State

AB 315 introduces the concept of the “home state” of the insured. The concept of home state is especially important for determining whether California law governs a surplus line transaction (1761(a)), whether a producer must obtain a surplus line license (1761(a)), and whether a California tax is imposed on surplus line premiums (1774(a)).

AB 315’s description of home state mirrors the provisions of the NRRA.

If an insured is a business, the insured’s home state is the state where the insured maintains its principal place of business. If an insured is an individual, the insured’s home state is where the insured maintains his or her principal residence. However, if 100% of the insured risk is located outside the state where the insured maintains its principal place of business or principal residence, the home state is the state to which the greatest percentage of the insured’s taxable premium for the insurance contract is allocated (1760.1(e)(1)(A)and(B)).

If more than one insured from an affiliated group is named in a single non-admitted insurance contract, the home state is the home state of the member of the affiliated group that has the largest percentage of premium attributed to it under the insurance contract (1760.1(e)(4)). Existing Insurance Code section 1215(a) defines “affiliate.”

A surplus line broker has the responsibility to determine whether California is the insured’s home state (1760.2), and is required to maintain records that verify that the insured is a California home state insured (1768).

Premium Tax Payment

Under pre-AB 315 law, the surplus line insurance tax is imposed on the portion of the premium allocated to risks in California. AB 315 changes that system in order to conform California law to the NRRA.

AB 315 imposes a tax on 100% of the surplus line insurance premium when California is the home state of the insured (1775.5(b)).

AB 315 includes special transition rules. If a new policy or a renewal policy has an effective date on or before July 20, 2011, and is placed on or before July 20, 2011, the provisions of AB 315 do not apply (1774(d)(3)).

States are allowed to enter into interstate compacts to determine the allocation of surplus line premium taxes. California has not entered into any such compacts.

Insurer Eligibility

AB 315 sets eligibility requirements for a non-admitted insurer that wants to insure California home state insureds.

First, if the insurer is a U.S.-domiciled insurer, the insurer must be licensed to write the type of insurance in its domiciliary jurisdiction and must have a capital and surplus that together total $45 million.

Second, if the insurer is not domiciled in the U.S., the insurer must be listed on the NAIC International Insurers Department’s Quarterly Listing of Alien Insurers (1765.1(a) and (b)).

AB 315 includes detailed requirements that must be met in order to place insurance on a limited basis with an insurer that does not meet the bill’s eligibility requirements (1765.1(h)).

AB 315 repeals provisions in Insurance Code section 1765.1 that established the List of Eligible Surplus Line Insurers (LESLI). The bill replaces LESLI with the List of Approved Surplus Line Insurers (LASLI) (1765.2(f)). The requirements of LASLI are substantially the same as the requirements of LESLI. Surplus line insurers that are on LESLI as of July 21, 2011, are automatically on LASLI (1765.1(i)). In order to remain on LASLI, insurers will have to file required documents and pay filing fees (1765.2(c)-(e) and (j)).

Commercial Insured

AB 315 retains the general requirement that a surplus line broker may place business with a non-admitted insurer only after making a diligent search for coverage in the admitted market (1763(a)).

However, AB 315 creates a new exception to the general requirement. The diligent search requirement does not apply to a commercial insured (1763(h)).

In order to qualify as a commercial insured, an insured must employ or retain a qualified risk manager, must have paid nationwide commercial property/casualty insurance premiums in excess of $100,000 in the immediately preceding 12 months and must meet one of five listed criteria which include minimum standards relating to net worth, revenues and number of employees (1760.1(b)). The surplus line broker is responsible for ensuring that an applicant for insurance is a commercial insured (1763(h)(2)).

Administrative Services

AB 315 allows a California domiciled insurer to have common directors with an affiliated non-admitted insurer and permits a California domiciled insurer to perform administrative services for an affiliated non-admitted insurer (1761(b)).

California Insurance-Related Bills Meet Deadline for Passage in 2015

The deadline for Assembly bills to be passed by the California Assembly and for Senate bills to be passed by the California Senate was June 5.

Bills that met the deadline are eligible for enactment this year. Bills that failed to meet the deadline remain alive and may be acted on in 2016.

Assembly bills that met the deadline are now being considered in the Senate. Senate bills that met the deadline are now being considered in the Assembly.

This year's regular legislative session will end on September 11. More ›

Court Dismisses Case for No Diversity Jurisdiction Two Days after Filing

In an unusual display of speedy discretion, federal District Judge Sheri Polster Chappell wasted no time in dismissing the complaint on a public works payment bond filed by Advance Industrial Coating, LLC in Advance Indus. Coating, LLC v. Westfield Ins. Co., No. 2:15-cv-141-FtM-38DNF (D. for M.D. Fla., Mar. 6, 2015). Advance filed its complaint in the Middle District of Florida — Ft. Myers Division — on March 4, 2015. Just two (2) days later, on March 6, 2015, Judge Chappell dismissed the action without prejudice for Advance's failure to properly plead the citizenship of the parties! The Court's order was sua sponte! More ›

Typo Renders Proposal for Settlement Ambiguous ― No Fees Awarded

In GEICO v. Ryan, No. 4D13-2615 (Fla. 4th DCA, Mar. 11, 2015), the Court reversed the Trial Court's award of attorney's fees in favor of the insured because the "Proposal for Settlement contains a patent ambiguity — spelling out $100,000 in words but also referring to $50,000 in numerals." Specifically, Bernadette Ryan ("Ryan") brought an uninsured/underinsured motorist claim against her insurer, Government Employees Insurance Company ("GEICO"), for an auto accident involving Ryan. Ryan served GEICO with a proposal for settlement, pursuant to Fla. Stat. 768.79 and Fla. R. Civ. P. 1.442. As noted, the proposal for settlement contained a typo that included a difference between the spelled out amount and the numeric amount. It should be noted, however, that the applicable GEICO policy limits were $50,000, and the proposal for settlement included a statement that "the total amount of the settlement should not exceed $50,000." Additionally, no testimony or other evidence was taken by the Trial Court, but "it was represented to the [Trial] court that the attorneys talked about a settlement and the defense attorney fully knew the settlement proposal." As such, the Trial Court entered final judgment in favor of Ryan. More ›

Melissa Anderson v. Thomas Aul, 2015WI 19 25 (February 25, 2015)

In a significant decision the Wisconsin Supreme Court has held that claims-made-and-reported requirements in claims made policies should be enforced as written. An insured's failure to report a claim during the time required by the policy will operate as a bar to coverage. See Anderson v. Aul, 2015 WI 19. The Court reversed the Court of Appeals decision holding that Wisconsin's notice-prejudice statute superseded the claims-made-and-reported requirement of the professional liability policy. The Court also observed that even if the notice-prejudice statutes applied, requiring an insurer to provide coverage for a claim reported after the end of a claims-made-and-reported policy period was per se prejudicial to the insurance company. The decision places Wisconsin in the majority of jurisdictions that have enforced claims-made-and-reported policies as written. More ›

Sony and Its Insurers Wrangle over Coverage for Data Breach

A coverage dispute winding its way through New York appellate courts could provide useful guidance about the scope of “personal and advertising injury” coverage in standard commercial general liability policies. More ›

Do Medical Records Support Removal and Do Unripe Claims Get Dismissed

In Alilin v. State Farm Mut. Auto. Ins. Co., No. 6:14-cv-1183-Orl-41DAB (D. for M.D. Fla., Jan. 30, 2015), Judge Carlos Mendoza denied Alilin's challenge to the amount in controversy prong of State Farm's removal to federal court and found that Alilin's medical bills, which were previously submitted to State Farm with a settlement offer, were persuasive evidence that the amount in controversy exceeded $75,000. The Court also denied application of Alilin's argument that future set-offs would reduce the medical expenses to significantly less than the jurisdictional amount, because the amount in controversy is determined at the time of removal; thus, "post-judgment 'set-offs' or collateral source payments are irrelevant."

Additionally, the Court addressed State Farm's motion to dismiss Alilin's claim for bad faith, which was based on the premature nature of the claim. Alilin argued that the bad faith claim should be abated and not dismissed. Although the Court acknowledged that Florida courts hold such claims in abatement, the Court stated that Alilin "bears the burden of establishing the Article III prerequisites to jurisdiction" and found that Alilin's inability to establish the bad faith claim was ripe warranted dismissal "for want of subject matter jurisdiction."

For more information on removing actions to federal court, or any other litigation-related questions, please contact Edward Sylvester directly.

Edward Sylvester is a partner in the Miami office and is licensed to practice in all state and federal courts in both Florida and Ohio.