Court Discusses Meaning of “Claim,” Scope of Dishonest Acts Exclusion and Defense Duties
Most professional liability policies contain an exclusion for dishonest acts. Many also include provisions giving the insurer a right, but not a duty, to defend against covered claims. A recent decision of the California Second District Court of Appeal, Health Net, Inc. v. RLI Insurance Co., — Cal.App.4th —, 2012 WL 1850929 (May 22, 2012), authored by Justice Croskey, regarded as the California judiciary’s leading expert on insurance coverage issues, addressed both issues. In doing so, the court also interpreted the word “claim,” a critical provision in many professional liability policies.
The court concluded “claim” referred to each particular claim, not the lawsuit as a whole. It also concluded the particular policy language used gave the policyholder the right to be reimbursed for defense costs for potentially covered claims, not just actually covered claims. Finally, it decided the dishonest acts exclusion did not apply to all of the alleged conduct of the policyholder, thus there was a duty to reimburse defense costs.
The policyholder, Health Net, is a health insurer. It was sued on a variety of theories relating to how it calculated usual and customary provider charges for out of network care, as well as whether its procedures complied with ERISA. More interesting than the travails of Health Net are how the Court of Appeal approached the coverage issues.
The first issue the court addressed was whether for purposes of the policy’s exclusions, the word “claim” meant the entire lawsuit against the policyholder, or each particular claim alleged in that lawsuit. It concluded “claim” was used in the policy to refer to particular claims, individually or in the aggregate, but when applied to an exclusion it would not be interpreted so broadly as to allow the insurer to avoid coverage for the entire lawsuit consisting of both covered and uncovered individual claims.
The policies contained a Choice of Counsel endorsement providing “[u]pon written notice of a Claim, [the insurer shall] have the right but not the duty to defend any Claim or Law Suit brought against the Insured . . ..” But, it also provided that the insurer shall “[r]eimburse the Insured all reasonable and customary Defense Costs incurred by the Insured . . . in defense of any Claim or law suit brought against the Insured alleging a Wrongful act . . .” The court concluded this language, unlike the language often used in Directors & Officers Liability Policies, created a duty to reimburse defense costs related to potentially covered claims, not just actually covered claims. As Justice Croskey explained “The endorsement simply changed the obligation from an obligation to pay into an obligation to reimburse. As such, it did not narrow the scope of the obligation from a duty to pay defense costs related to potentially covered claims into a duty to pay only those related to actually covered claims.”
Like those in most Errors & Omissions policies, the dishonest acts exclusion here provided for the termination of any defense obligation and required reimbursement of defense costs once there was an adjudication that the policyholder had engaged in dishonest conduct. The issue here was whether such a finding meant there was no duty to reimburse any defense costs, or whether it only applied to the claims where dishonesty had been found. The court concluded the dishonest acts exclusion did not eliminate coverage for claims unrelated to the dishonest acts.
The Health Net opinion provides a stark reminder of the reality that policy language matters. The court’s decision was heavily dependent on the particular language used in these particular policies. While the court reversed the judgment in favor of the insurers, it also agreed many of the claims alleged against Health Net were not covered.