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Ninth Circuit Decision Shows Life Insurance Pitfalls for Policyholders; Clarifies Diversity Jurisdiction in Insurance Disputes

Posted Tuesday, April 17, 2018 by McKean J. Evans

The Ninth Circuit’s recent ruling in Elhouty v. Lincoln Benefit Life, Case No. 15-16740 (March 27, 2018) is notable for two reasons. It illustrates the pitfalls of certain life insurance policies that supposedly pay for themselves, and it clarifies the jurisdictional standard governing when insurance disputes can be litigated in federal as opposed to state courts.

Elhouty purchased a flexible premium adjustable life insurance policy from Lincoln Benefit Life Company with a $2 million face value. Adjustable life policies are often marketed as giving the policyholder all the advantages of death benefit protection, an interest-bearing account for investment purposes, and flexibility as to how premiums are paid. The policies often come with a sales pitch that the policy’s investment component will effectively pay off the future premiums, without mentioning that the investment returns are often inadequate to cover future premium increases.

Elhouty’s case illustrates this pitfall: for years, Elhouty arranged for his premiums to be paid directly out of the policy’s net surrender value, but failed to notice when the net surrender value was exhausted and he was sent a bill for $55,061.49 to keep the policy in force. Since Elhouty never paid the additional premium, Lincoln Benefit claimed the policy lapsed. Elhouty disputed Lincoln Benefit properly notified him of the additional premium he owed, and filed a lawsuit seeking a court declaration that the policy remained in force.

Elhouty sued in state court, and Lincoln Benefit removed the action to federal court (conventional wisdom holds federal courts are more insurer-friendly than state courts). To properly remove the action, Lincoln Benefit was required to establish that the amount of money at issue in the lawsuit exceeded $75,000.00. Lincoln Benefit argued the amount at issue was the full $2 million policy face value; Elhouty claimed it was only the $55,880.08 in premiums he allegedly owed Lincoln Benefit. On the jurisdictional issue, the Ninth Circuit agreed with Lincoln Benefit. The court determined the unpaid premiums were not in dispute because Lincoln Benefit did not seek to recover them from Elhouty. Elhouty had had the option to pay $55,880.08 to keep the policy in force, but the real dispute in the lawsuit was the policy’s validity. The court clarified that, in cases where the “controversy relates to the validity of the policy and not merely to liability for benefits accrued,” the policy’s face value is the amount in controversy for jurisdictional purposes. Thus, the court ruled the amount in controversy was $2 million and federal courts had jurisdiction.

The court also agreed with Lincoln Benefit on the merits of the dispute. Elhouty argued Lincoln Benefit’s policy termination notice for unpaid premiums was defective because Elhouty never received notice. But the court ruled that the language of the policy and applicable state law required only that the notice be mailed, not that the policyholder actually receive it.

For insurance lawyers, Elhouty is useful for its clarification of the jurisdictional standard. For policyholders, Elhouty is a reminder of the importance of keeping your premium payments up to date and not taking the insurer’s promotional materials at face value.

McKean J. Evans is an attorney at Pivotal Law Group representing insurance policyholders. If you have questions regarding insurance issues, contact McKean today for a free consultation. McKean blogs regarding insurance and ERISA issues at https://seattleinsuranceanderisablog.com/.

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Department of Labor’s New ERISA Claims Regulations Restore Important Rights to Insureds

Posted Wednesday, April 11, 2018 by McKean J. Evans

For insureds, ERISA (which governs most employer-sponsored insurance) has a serious downside. Insureds and plan participants who dispute the company’s denial of their claims for coverage or benefits must submit to ERISA’s administrative appeal process before they can file a lawsuit challenging the company’s decision. This can disadvantage the participant because failure to dot i’s and cross t’s in the administrative appeal can cause the participant to lose important rights in litigation. Moreover, because ERISA excludes many traditional state-law remedies such as punitive or exemplary damages and gives no right to a jury trial, even plan participants who successfully navigate the administrative appeals process and make it to court often face an uphill battle.

Accordingly, insurance companies spent several decades designing their benefit plans and policies to leverage ERISA against the insured. One recently-published internal memo recommended the company get as many policies as possible covered by ERISA to reduce the money the company had to pay to its insureds. The memo did a test study of 12 non-ERISA cases in which the company paid of a total of $7.8 million, estimating that ERISA’s application would have reduced the company’s liability in those cases to $0 to $0.5 million. The author concluded “the advantages of ERISA coverage in litigious situations are enormous.”

Recognizing that ERISA can favor the company over the insured or participant, the federal Department of Labor promulgated a regulation aimed at leveling the playing field, which became effective on April 1, 2018. Because the Department of Labor concluded the majority of ERISA disputes arise in disability and health plans, the new rule focuses on these types of benefits specifically. The rule’s upshot is:

• Claims adjusters may no longer be incentivized to deny claims through hiring, pay or promotion practices;

• Claimants under disability policies must receive a clear and detailed explanation of why their claim was denied, and, particularly, the company must explicitly address its disagreement with opinions about the claimant’s condition by treating physicians or Social Security;

• Clearly state any deadlines by which the insured or participant must file a lawsuit challenging the denial of benefits;

• Disability claimants must also receive a clear statement of their rights to appeal a denial of a benefit claim;

• If the company upholds its claim denial based on new information, the company must permit the insured or participant to review and respond to the new information before the denial becomes final;

• Claimants must be specifically advised of their right to examine the insurer’s entire claim file to permit them to evaluate the basis for the claim denial; and

• Notices must be written in a culturally and linguistically appropriate manner if the situation warrants.

Importantly, violations of the new rule can permit the insured or participant to bypass the administrative appeal process and sue in court directly. This reduces the risk that an insured or participant loses rights in litigation through technicalities in the appeal process.

Hopefully, the Department of Labor’s new rule will go a long way towards leveling the playing field for ERISA policyholders and plan participants.

Pivotal Law Group attorney McKean Evans has obtained favorable coverage decisions for insureds and ERISA plan participants in disputes regarding coverage denials. If you have concerns regarding insurance coverage, contact McKean at (206) 805-1493 for a free consultation. More information regarding ERISA disputes can be found here.

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Court of Appeals Clears the Way for Bad Faith Suits Against Individual Insurance Adjusters

Posted Wednesday, April 4, 2018 by McKean J. Evans

On March 26, 2018, the Court of Appeals (Division One) issued an important published ruling upholding claims against an individual insurance adjuster for insurance bad faith and violations of the Consumer Protection Act (Ch. 19.86 RCW). In Keodalah v. Allstate Insurance Company and Smith, No. 75731-8-I, the court ruled the bad faith and CPA claims could proceed against the Allstate adjuster in the adjuster’s individual capacity: “we hold that an individual insurance adjuster may be liable for bad faith and CPA violations.” This significant ruling has several implications for future insurance bad faith litigation.

I. The Trial Court Dismissed the Insured’s Claims Against the Adjuster

Keodalah made a UIM claim under his Allstate auto policy after being injured when a motorcyclist struck his truck as Keodalah proceeded through an intersection. Allstate’s internal investigation, the report of Allstate’s accident reconstructionist, and the police report uniformly established the motorcyclist was solely at fault for the collision. Specifically, the investigations confirmed the motorcyclist was speeding, that Keodalah stopped at the stop sign, and Keodalah was not using his cell phone at the time of the collision.

Allstate nevertheless insisted Keodalah was 70 percent at fault and tendered a lowball offer on the UIM claim. Despite the above reports exonerating Keodalah, Allstate’s adjuster, Smith, asserted Keodalah had run the stop sign and had been on his cell phone. Smith later admitted these claims were false. The parties tried the UIM claim and the jury determined the motorcyclist was 100 percent at fault, awarding Keodalah $108,868.20. Allstate’s highest offer had been $15,000.00.

Keodalah subsequently filed suit against Allstate as well as Smith individually, asserting claims for bad faith, violations of the CPA, and violations of the Insurance Fair Conduct Act (“IFCA”). The trial court dismissed Keodalah’s claims against Smith and certified the case for discretionary review pursuant to RAP 2.3(b)(4).

II. The Court of Appeals Reinstated the Bad Faith and CPA Claims Against the Adjuster

The Court of Appeals determined insureds may bring bad faith claims against individual insurance adjusters pursuant to RCW 48.01.030. The court reasoned RCW 48.01.030 imposes a duty of good faith on “all persons” engaged in the business of insurance, including specifically “the insurer…and their representatives.” (emphasis added).

Because Ms. Smith, as an insurance adjuster, “was engaged in the business of insurance and was acting as an Allstate representative,” the court had no difficulty concluding Smith owed Keodalah a duty of good faith and could be sued for breaching that duty. Besides the statute, the court also relied on Division Three’s ruling in Merriman v. Am. Guarantee & Liability Ins. Co., 198 Wn. App. 594, 396 P.2d 351 (2017), and the Western District of Washington’s ruling in Lease Crutcher Lewis WA, LLC v. Nat’l. Union Fire Ins. Co., 2009 WL 3444762 (2009), that corporate adjusters could be sued for bad faith, finding no distinction between corporate and individual adjusters. The court explicitly distinguished a conflicting federal court ruling, Garoutte v. Am. Family Mutual Ins. Co., 2013 WL 231104 (2013) as incorrectly reading the “representatives” language out of RCW 48.01.030. And the court ruled RCW 48.01.030 is not limited by narrower WAC provisions which were expressly “not exclusive.”

As for the CPA claim, the court rejected Smith’s argument the claim was barred because policyholders have no contractual relationship with adjusters. The court relied on a straightforward interpretation of the Washington Supreme Court’s ruling in Panag v. Farmers Ins. Co. of Wash., 166 Wn.2d 27, 43-44 204 P.3d 885, 892 (2009), in which the Supreme Court explicitly ruled “a private CPA action may be brought by one who is not in a consumer or other business relationship with the actor against whom the suit is brought.” The Court of Appeals recognized Panag abrogated the Court of Appeals’ contrary rulings in International Ultimate, Inc. v. St. Paul Fire & Marine Ins. Co., 122 Wn. App. 736, 87 P.3d 774 (2004). Smith also relied on Ninth Circuit authority, but the court determined that authority was based on California insurance law.

III. Can Policyholders Bring IFCA Claims Against Individual Adjusters?

Despite reinstating the bad faith and CPA claims against the adjuster, the Court of Appeals affirmed dismissal of the IFCA claim against the adjuster. That ruling is limited to the narrow nature of Keodalah’s IFCA claims, which were not premised on unreasonable coverage denials but instead were limited explicitly to WAC violations. In light of the Supreme Court’s holding WAC violations alone cannot support IFCA claims, the Court of Appeals dismissed that claim with minimal discussion. An IFCA suit against an individual adjuster premised on unreasonable coverage denials or malfeasance beyond mere WAC violations would not be barred by Keodalah.

Despite Keodalah, IFCA claims against adjusters, while theoretically possible, are likely problematic. RCW 48.30.015(1) grants policyholders a cause of action if they are “unreasonably denied a claim for coverage or payment of benefits by an insurer” without limiting the cause of action to the insurer itself. IFCA’s treble damages provision is expressly limited to cases in which “an insurer has acted unreasonably” (RCW 48.30.015(2) (emphasis added)); the presence of this limiting language with respect to the discretionary treble damages subsection might suggest its absence from the cause of action arguably evidences an intent to permit IFCA suits (but not treble damages) against adjusters.

However, the Washington Supreme Court already rejected one invitation to read IFCA broadly in Perez-Crisantos. Further, IFCA is written in terms of “first party claimants” and misconduct “by an insurer” which suggests IFCA is limited to suits against insureds. See RCW 48.30.15(1). And it is counterintuitive to suggest IFCA would permit a cause of action against adjusters while restricting treble damages against adjusters.

IV. Other Future Issues

Keodalah has several potential implications for future insurance disputes. Obviously, the adjuster’s personal exposure adds a significant dimension to the dispute. And foreign insurers employing Washington adjusters could likely be sued in state court without removal to federal court, because federal courts typically only have diversity in insurance disputes where all the parties are citizens of different states. It’s also noteworthy Keodalah declined to address Smith’s argument that she could not be held liable for her conduct in the prior UIM action in a subsequent bad faith action. Adjusters might assert this defense in future disputes.

Finally, Keodalah could be read as supporting bad faith claims against the policyholder’s representatives, such as attorneys or public adjusters. The Court of Appeals never states this, but the court’s reliance on RCW 48.01.030 might support such claims since the statute imposes the duty of good faith on “the insured…and their representatives” as well as the insurer and its representatives. The assumption that there is no bad faith cause of action against the insured and the insured’s representatives was the basis for the Garoutte decision, which the Court of Appeals specifically rejected in Keodalah.

McKean Evans is an attorney at Pivotal Law Group representing insurance policyholders and ERISA plan participants and beneficiaries. McKean blogs regarding insurance and ERISA issues at https://seattleinsuranceanderisablog.com/.

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McKean Evans Speaks at Continuing Legal Education Event

Posted Friday, March 30, 2018 by Pivotal Law Group

This morning, attorney McKean Evans spoke regarding Washington’s newly-revised Uniform Power of Attorney Act at a Continuing Legal Education seminar hosted by the King County Bar Association. McKean discussed how Washington lawyers can best address their clients’ needs for powers of attorney regarding health care, family, financial and other matters under the revised Act.

In addition to estate planning matters, McKean represents clients regarding insurance and ERISA employee benefit disputes. McKean blogs regarding insurance and ERISA issues at https://seattleinsuranceanderisablog.com/.

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A Property Lawyer’s Story

Posted Thursday, March 29, 2018 by Kim Sandher

Kim Sandher (ksandher@pivotallawgroup.com) is an attorney with Pivotal Law Group, PLLC, in Seattle, Washington. She has a Bachelor’s degree in Political Science and Economics from the University of British Columbia in Vancouver, Canada, and a Juris Doctor from Seattle University, with a business focus. She is a current young scholar with the American College of Real Estate Lawyers. With a background in litigation, her primary practice is transactional commercial real estate and business law. Kim’s work includes acquisition, purchase, sale, leasing, and financing of businesses and commercial real estate. Outside of work, Kim enjoys volunteering, traveling, sunshine, and Orangetheory Fitness classes.

For as long as I can remember, I wanted to become a commercial real estate attorney. If you asked me what a real estate attorney did, I probably couldn’t tell you beyond “write contracts and stuff.” It was “and stuff” because I myself didn’t really know what the “stuff” was. Despite this, I knew, with bright eyes, this was what I wanted to do with my life.

Even before law school, I was fascinated by big buildings, cranes, and anything and everything relating to construction. A lot of this likely had to do with my dad working in construction when I was a child. I remember excitedly riding to pick him up after work, when he worked on the tear-down of the local Woolco. For anyone that doesn’t remember, Woolco was an American retail store that shut down in the early 1980s. In Canada, it lasted into the mid-1990s. Seeing the building being torn down bit by bit was incredibly exciting to me – and it was equally as exciting to think about what was going to spring up on that lot.

The other part of my fascination with commercial real estate probably has to do with being raised on a mushroom farm in a small, rural farming community that has now become the second-largest city in British Columbia, Canada. Watching Surrey’s transformation from what was then a small, rural town, into a large suburban city amazed me because it seemed so different. I loved watching buildings and infrastructure go up and down, and I wanted to be a part of it. I wanted to be high in the sky, without ever touching anything dirty to get there.

Now that I finally am a real estate attorney, I feel I should be able to define what “and stuff” is. I’ve met with countless attorneys to try to figure it out, brilliant folks who have become my mentors along the way. Even though I’ve been practicing for several years now, it’s when non-lawyers ask me what I do that I realize clearly that even with all my daily experience and all the people I speak to or work with, I haven’t come up with a succinct answer for what I do. What I do know is that I love it.

These are my takeaways for what I do and my best explanation for what it’s like:

REAL ESTATE IS MALE DOMINATED

I attended my very first real property conference in Stevenson, Washington, through the Washington State Bar Association. Like many firsts, it was a memorable experience. My sister joined me for the four-hour road trip from Seattle to what I thought were the boonies of Washington, near the Oregon border. We were both excited about being out in the wilderness for three days and living in the mountains Skamania Lodge was actually a pretty gorgeous, fancy resort that just happened to be in the mountains, but most of all, I was going to learn all about what it’s like to be a real estate attorney—with my non-lawyer sister by my side.That weekend when I walked into the massive conference room full of roughly three hundred people, my first though was, “Wow, there are a lot of men here. They’re all white. They’re also all older than me.” Of course, not every single person in there was male and white; there were several women and maybe a handful of minorities. Everyone there was definitely older than me. At the end of the day, I saw that most of them fit neatly into a certain type of demographic profile that I did not. I also learned quickly that most people had brought their spouse or significant other, not their sister.

I AM DIFFERENT

Something I realize every day is that I am different. I am different from many of my peers, and I am different from many of my clients. I am born and raised in Vancouver. I moved to the United States a little over 11 years ago. My parents are immigrants from Northern India. As a result, my skin is slightly tanned, I have long, dark hair, and I pronounce pasta as pass-ta instead of pah-sta because we say things a little different up in Canada. I get called out on it often enough that I consciously try not to “talk Canadian.” My experience in Seattle is that few people know to classify me as “Indian.”Over the years, I’ve found I get a lot of the “so what are you?” question because people can’t place me neatly into a box. I look a little different, but I don’t have an exotic accent, and my name is “Kim.” They’re not being rude. They know that I am human. They’re often just curious and maybe perplexed, because there are not a lot of real property attorneys who look like me.The other thing I hear often is “you’re so young!” or “are you an attorney?” I personally don’t think this has anything to do with how confident I am or how capable I am. I do look young, and I take it as a compliment and will enjoy it for as long as it lasts. I choose to see it as a strength rather than a detriment. With the world having changed so much in the past decade or so, I have had the opportunity to live through the days of dial-up Internet where we would get disconnected when someone picked up the landline, to now having a smartphone attached to us every waking hour (and sometimes even sleeping hours).Lastly, no one wants to outright say that I am a woman or a “little girl,” but a lot of times I know they are thinking it because so few women work in commercial real estate. This makes me even more passionate about my involvement with organizations such as the American Bar Association and the RPTE Section, to be visible and to help other women and young attorneys excel in the profession. I want to give them a voice and encourage them to get involved in the section, and to pursue leadership roles. I want to be an example of a diverse woman lawyer passionate about commercial real estate, and I want to make it known that women belong in this field and can also achieve success.

BEING DIFFERENT WORKS

Being different works because I stand out. I’ve learned that using unique traits about yourself helps empower others—whether that’s growing up on a farm, being from a small town, looking different, or maybe even having a quirky laugh that makes you stand out. Using these unique characteristics is all advantageous because this is how people remember you and connect with you. This is what makes you real and what makes you human.

HOW I GOT INVOLVED WITH THE AMERICAN BAR ASSOCIATION

One day, fresh out of law school, while I was doing everything I could to land my dream job, I came across an e-mail blast for an ABA Young Lawyer Division scholarship. I had been meeting people for coffee and lunch and volunteering for anything and everything I could to get the experience I wanted and needed. I had a vague idea of what the ABA did, but I was not too familiar with it, other than that it was an organization for lawyers—on a national level. Based on what I read, I loved the idea that I would get to travel to different cities throughout the United States a few times a year and meet motivated young lawyer leaders who were also going to help me be better at what I do.

I discussed the opportunity with two of my mentors, who both encouraged me to apply and spoke fondly of their experiences with the ABA. I applied, not sure if I would be accepted, since my research showed the amazing things past scholars had done with their local bar associations and other organizations. I didn’t think of myself as a leader at that point. Shy and reserved, I thought I was still figuring out what it really meant to be a lawyer. I didn’t think I was in any position to be a leader for other young lawyers. Thus, I was beyond thrilled to learn I was selected as a YLD scholar.

WHAT MADE ME STAY

More than seven years later, I have made so many meaningful connections and great friends through the ABA. Every single one of them has been extremely motivated and passionate about helping people, helping the profession, and bettering him– or herself along the way. I have had the opportunity to do things I never would have thought to do on my own, such as present in front of a group of over 300 people. The first time I did this, I was nervous to the point where I couldn’t even hear myself think, but in retrospect, the experience was thrilling. Perhaps that’s why I’ve volunteered to speak and present many times again after that. My ABA experience has even made me more confident in court for trials and hearings, even though I am now mostly a transactional lawyer. I’ve made friends all over the country who are not only colleagues I can bounce ideas off or see a new perspective from, but people who are like family now. They often refer clients to me when they have someone needing help in the Seattle area.

WHAT MADE ME JOIN THE ABA SECTION OF REAL PROPERTY TRUST AND ESTATE LAW

In 2014, when the managing partner at my firm encouraged me to attend the Spring Symposia for the Real Property Trust and Estate Law Section (RPTE) of the ABA, I knew I couldn’t pass up the opportunity. I was excited for the several days of learning all about current topics in real property. I was serving as chair of the Real Property Trust and Estate Law Committee of the ABA YLD, and I was very involved with my local bar association’s real property section. This conference meant I could experience all this at a national level with the “big bar” and not just young lawyers.

That May I went to Chicago. I met with an attorney friend, and we went to the conference together. I learned a lot about real property law. Seeing as it was my first RPTE conference, and I had only been practicing for four years, some of it went over my head, but I knew that I would pick it up one day. I wanted to become as knowledgeable as the people giving the talks at the seminars.

RPTE has a two-year fellowship program for young lawyers. It provides fellows with funding and a mentor , and puts them directly into the leadership pipeline of the section. I was encouraged to apply for the RPTE fellowship at that first conference. Since I’ve always known that real property is the area of law that I want to focus on, it was a natural fit for me. I applied without hesitation and was excited when I learned I was chosen as a 2014-2016 RPTE Fellow.

I got paired with an amazing mentor who lived all the way on the other side of the country in Florida, but she met up with me in Seattle to introduce herself. She was so friendly, helpful, and well connected; she set up meetings for me with people she knew locally in the Seattle area. Today I work regularly with those same people. I am also now a scholar with the American College of Real Estate Lawyers (ACREL) and have made several local connections in Seattle through ACREL.

THERE’S A LOT OF “STUFF”Through my journey, I have learned a lot of real property “stuff” through the courses I’ve attended at the ABA conferences, the local conferences I’ve attended, the leadership positions I’ve held, the people I’ve met, and the clients I’ve met as a result. I’ve learned that the field of real property law is diverse and can’t be put into a neat little box. It actually is like me. There are many things I get to touch and learn on a day-to-day basis, and every transaction is a little different than the last.

I’VE STILL GOT A LOT TO LEARN

I have been practicing as an attorney for almost eight years now. There’s still a lot of “stuff” I am learning every single day. This is why I never get bored of my job. I am constantly learning new things, and I hope to continue to learn and expand my knowledge every single day. Each morning I wake up excited to see what new challenge will present itself. I wouldn’t change this for the world.

©2018. Published in GPSOLO, Vol. 35, No. 2, March/April 2018, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

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