2014 PARMA ANNUAL RISK MANAGERS CONFERENCE
FEBRUARY 9 – 12, 2014
Monterey Conference Center, Monterey, CA
“One Of These Things Is Not Like The Others?” – How and Why A JPA Is Not Like An Insurance Company
Catherine A. JonesDirector, Risk Management Services
Kern County Superintendent of Schools Office
1300 17th Street – City Centre
Bakersfield, California 93303-1847
(661) 636-4223; FAX: (661) 636-4418
E-mail:
Dennis Timoney. ARM
Chief Risk Officer
Special District Risk Management Authority
1112 I Street, Suite 300
Sacramento, California 95814
(916) 231-4141 FAX: (916) 231-4111
E-mail:
James P. Wagoner
McCormick, Barstow, Sheppard, Wayte & Carruth
7647 N. Fresno Street
Fresno, California 93720
(559) 433-1300 FAX: (559) 433-2300
E-mail:
Lejf E. Knutson
McCormick, Barstow, Sheppard, Wayte & Carruth
7647 N. Fresno Street
Fresno, California 93720-1501
(559) 433-1300 FAX: (559) 433-2300
E-mail:
I. BASIC DISTINCTIONS BETWEEN JPA’S AND INSURERS 1
A. A Properly Crafted MOC Meets The Specific Needs Of Member Entities Through Carefully Tailored Language 1
B. Under California Statutes And Case Law, A Joint Powers Authority Is Not An Insurer And A Memorandum Of Coverage Is Not “Insurance” 2
C. Insurance Policies and Memoranda of Coverage Are Interpreted According To Different Rules 3
D. Unique Exclusions In MOCs 6
II. principle legal distinctions between A JPA AND AN INSURER UNDER CALIFORNIA LAW 7
A. Bad Faith Tort Liability Should Not Apply To Disputes Under A Memorandum of Coverage 7
B. Coverage Under An MOC Should Not Apply To “Willful” Injuries Caused By A Member Entity Or Its Employees 10
C. Priority of Coverage Between MOCs And Insurance Policies 13
D. Does The Rule Of “Horizontal Exhaustion” Apply To MOCs? 14
E. Can An Insurer Obtain “Contribution” From A JPA? 15
F. Priority Of Coverage As Between MOCs Covering Members Of JPAs And Policies Covering Employees Of Members 16
G. Priority of Coverage Between Automobile Self-Insurance And Personal Automobile Policies 19
III. Emerging Issues 21
A. Do JPAs Have An Obligation To Provide Independent “Cumis” Counsel Or Any Other Legal Obligations Under Civil Code §2860? 21
B. Do JPAs Have The Same Rights Of Recovery As Insurers Under The Doctrine Of Subrogation? 25
C. Does The Coverage Provided By An MOC “Stack” With Available Insurance Coverages In Situations Where A Loss Continues Over Several, Successive Policy Periods (i.e. “long-tail” injuries)? 29
I. BASIC DISTINCTIONS BETWEEN JPA’S AND INSURERS
A. A Properly Crafted MOC Meets The Specific Needs Of Member Entities Through Carefully Tailored Language
1. Section 990 of the Government Code provides that a local entity may: (1) insure itself for tort or inverse condemnation liability; (2) insure entity employees for liability resulting from an act or omission within the scope of employment; and (3) insure or contract to defend a claim against an entity or its employee. Govt. Code §§990(a)-(c).
2. However, an MOC affording coverage to a JPA need not cover all liability for which a public entity is authorized to insure. Cutler-Orosi Unified School Dist. v. Tulare County School Etc. Auth. (1994) 31 Cal.App.4th 617, 634.
3. MOCs are typically drafted to cover typical, common risks for the members while avoiding risks unique to individual members unless those individual members add additional coverage for those unique risks by endorsement and pay additional amounts for this additional coverage.
4. To the extent the pool secures reinsurance, the MOC should be consistent with the reinsurance except to the extent that the pool elects to accept non-reinsured liability.
B. Under California Statutes And Case Law, A Joint Powers Authority Is Not An Insurer And A Memorandum Of Coverage Is Not “Insurance”
1. A JPA pooling agreement does not meet the statutory definition of “insurance” because a self-insurer does not enter into a contract to indemnify another. Fort Bragg Unified School Dist. v. Colonial American Casualty & Surety Co. (2011) 194 Cal.App.4th 891, 904; Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1977) 54 Cal.App.4th 772, 777; Southgate Recreation & Park Dist. v. Cal. Ass’n for Park & Recreation Ins. (2003) 106 Cal.App.4th 293, 297.
2. Statutory Requirements For Insurers’ Handling Of Claims Do Not Apply To JPAs
a. The California Unfair Insurance Practices Act, Ins. Code §790.03, and the California Fair Claims Settlement Practices Regulations, 10 CCR §2695.2, do not apply to the handling of claims under MOC’s. Govt. Code §990.8(c).
b. The requirements for “reserves” in both the Insurance Code and in regulations do not apply to JPAs. Ins. Code §923.5, 11558; 10 CCR §§2319.1-2319.3
C. Insurance Policies and Memoranda of Coverage Are Interpreted According To Different Rules
1. Different rules of interpretation apply to insurance contracts and MOCs because of fundamental differences in: (a) the relationship between and insurer and insured on the one hand and a JPA and its members on the other; and (b) the different methods by which insurance contracts and MOCs are drafted and accepted.
a. An insurance policy is viewed as an “adhesion contract” which is a product of the unequal bargaining power an insurer usually has over the insured. Vu v. Prudential Prop. & Cas. Ins. Co. (2001) 26 Cal.4th 1142, 1151; Love v. Fire Ins. Exch. (1990) 221 Cal.App.3d 1136, 1149 n.7; Tran v. Farmers Group, Inc. (2002) 104 Cal.App.4th 1202, 1212; Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 269.
b. Because of the insurer’s unequal bargaining power and the “take it or leave it” nature of an insurance policy, courts interpreting insurance policies apply certain rules in order to protect the insured’s coverage expectations, thereby trying to equalize the inherently “unequal” relationship between an insurer and its insureds. Univ. of Judaism v. Transamerica Ins. Co. (1976) 61 Cal.App.3d 937, 940-41; Ohran v. Nat’l Auto. Ins. Co. (1947) 82 Cal.App.2d 636, 648; Ruffino v. Queens Ins. Co. (1934) 138 Cal.App. 538, 537-38.
c. For example, courts disfavor any forfeiture of policy benefits on technical grounds which bear “no substantial relationship to the insurer’s risk.” University of Judaism v. Transamerica Ins. Co. (1976) 61 Cal.App.3d 937, 941.
d. Additionally, any ambiguities in the contract are construed against the insurer who was responsible for the drafting of the policy. Garcia v. Truck Ins. Exchange (1984) 36 Cal.3d 426, 438; State Farm. Mut. Auto Ins. Co. v. Partridge (1973) 10 Cal.3d 94, 102.
2. In contrast, Joint Powers Agreements and MOC’s are deemed to be voluntarily created by equally powerful parties to meet their specific needs.
a. A JPA is seen as the byproduct of its member’s authority and self-determination. City of S. El Monte v. S. Cal. Joint Powers Ins. Auth. (1996) 38 Cal.App. 4th 1629, 1639-40.
b. Similarly, a MOC is considered to be specifically tailored to meet the needs of its members. City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629, 1639-40.
3. Because a JPA is not an insurer and its MOC differs from an insurance policy, courts do not apply the same principles used in interpreting insurance policies when interpreting self-insurance pooling agreements. Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 778; City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629, 1634.
a. Instead, self-insuring pooling agreements are interpreted using rules of contract law which emphasize the parties’ intent. Southgate Recreation and Park Dist. v. California Assn. for Park and Recreation Ins. (2003) 106 Cal.App.4th 293, 297-98; City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629, 1634.
b. Accordingly, courts seek to follow the intent of the parties to a MOC by giving the contractual terms their common meaning. Southgate Recreation and Park Dist. v. California Assn. for Park and Recreation Ins. (2003) 106 Cal.App.4th 293, 298; Century Transit Sys., Inc. v. Am. Empire Surplus Lines Ins. Co. (1996) 42 Cal.App.4th 121, 126; Civ. Code §§1636, 1638, 1639, 1644.
(i) Contractual language must be construed in the context of the contract as a whole, and in the circumstances of the case. Century Transit Systems, Inc. v. American Empire Surplus Lines Ins. Co. (1996) 42 Cal.App.4th 121 126; see also Civ. Code §1641.
(ii) However, because many of the terms of MOCs are derived from insurance policies, a number of cases interpreting MOCs have done so in reliance on principals of insurance law. City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629, 1645-46 (interpreting meaning of “occurrence” by cases defining the term in insurance policies); City of Laguna Hills v. S. Cal. Joint Powers Ins. Auth. (Cal. App. 2001) 2001 WL 1264549, *3 (relying on insurance case law to define meaning of “expected or intended” damages within a memorandum of coverage).
D. Unique Exclusions In MOCs
1. As a general matter, exclusions in MOCs are based on typical insurance policy exclusions, as augmented by equivalent exclusions in reinsurance contracts covering the JPAs.
2. In addition, exclusions are driven by decisions by JPAs not to spread certain risks among its members.
II. principle legal distinctions between A JPA AND AN INSURER UNDER CALIFORNIA LAW
A. Bad Faith Tort Liability Should Not Apply To Disputes Under A Memorandum of Coverage
1. Because coverage under a MOC acts in many ways as a substitute for insurance policy coverage, there is an issue of whether a JPA would be subject to the same legal duties of good faith and fair dealing as an insurer. Moreover, as lawyers commonly use insurer’s duties of good faith and fair dealing as potential “hammers” against insurance carriers in negotiations over coverage, it is increasingly common for members or their employees to attempt to raise the same duties of good faith as potential “hammers” in coverage disputes with JPAs.
2. The law implies in every contract a “covenant of good faith and fair dealing.” However, tort remedies for a bad faith breach of that implied covenant are considered extraordinary and are made available only when justified by public policy. Cates Constr., Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 47; Cal. Joint Powers Ins. Auth. v. Munich Reins. Am., Inc. (C.D.Cal. 2008) 2008 U.S.Dist.LEXIS 56654, *6.
3. Courts have permitted tort remedies for an insurer’s bad faith breach of the implied covenant based on a number of “special factors,” including: (1) the quasi-public nature of an insurer; and (2) the “special relationship” between an insurer and insured (i.e. characterized by elements of “public interest,” “adhesion” and “fiduciary-like” responsibility). Cal. Fair Plan Ass’n v. Politi (1990) 220 Cal.App.3d 1612, 1618; Waller v Truck Ins. Exch. (1995) 11 Cal.4th 1, 36; Egan v. Mut. of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818; Crisci v Sec. Ins. Co. (1967) 66 Cal.2d 425, 429; Comunale v Traders & Gen. Ins. Co. (1958) 50 Cal.2d 654, 658; Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1151; Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683-93.; Brown v. Guar. Ins. Co. (1957) 155 Cal.App.2d 679, 688.
4. When the relationship between the contracting parties does not involve adhesion or unequal bargaining power, courts have concluded that “bad faith” tort remedies are not justified. Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 46 (denying tort recovery for breach of a surety bond); Cal. Joint Powers Ins. Auth. 2008 U.S.Dist.LEXIS 56654, *10-11 (tort damages not available as against reinsurer because “elements of adhesion and unequal bargaining power are generally absent”); Erlich v. Menezes (1999) 21 Cal.4th 543, 548 (denying tort recovery for breach of contract to build a residence); Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 682-700 (denying tort recovery for breach of an employment agreement).
5. Based on this same reasoning, it has been held that insureds cannot be liable to their insurers for “bad faith” tort damages. Cal. Fair Plan Ass'n v. Politi (1990) 220 Cal.App.3d 1612, 1618 (no tort remedies available for an insureds breach of the covenant of good faith and fair dealing); Commercial Union Assurance Co. v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 920-921 (an insured cannot be held liable to an excess insurer for bad faith breach for failing to settle within its self-insured retention).
6. In addition, one decision holds that a “mutual protection trust” operating under an “inter-indemnity agreement” is not subject to “bad faith” tort remedies. Mundy v. Mut. Protection Trust (1990) 219 Cal.App.3d 127, 133.
7. As detailed above, JPAs and MOCs are not characterized by “adhesion” or “unequal bargaining power” among their members. City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629,1639-40; Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 778.
8. However, since an insurer can be liable in contract for breach of the covenant of good faith and fair dealing when it fails to accept a reasonable settlement offer within policy limits, a sound argument exists that a JPA could similarly be liable on a “breach of contract” theory for “bad faith” failure to accept a settlement offer within policy limits, even though there is no public policy basis to impose tort liability in such a case. Archdale v. Am. Int’l Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449, 468-471.
B. Coverage Under An MOC Should Not Apply To “Willful” Injuries Caused By A Member Entity Or Its Employees
1. California has long held that insurance indemnity coverage is not available for “willful” (i.e., intentionally caused) injuries as a matter of California public policy.
2. Ins. Code §533 providing that an “insurer” is not liable for a loss caused by a willful act does not apply to MOCs. However, “public policy” nevertheless precludes coverage for willful acts. Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18; J.C. Penney Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1020; Tomerlin v. Canadian Indem. Co. (1964) 61 Cal.2d 638, 648. Thus, there is a strong argument that an MOC cannot provide coverage for injuries arising out of willful acts.
3. Additionally, on its face Civil Code §1668 would appear to invalidate coverage for “willful injury” under a MOC. Id. (“All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”) (emphasis added).