Court rules liability waiver invalid when there is gross negligence

The California Supreme Court has ruled that a signed liability waiver is useless in protecting a government entity from gross negligence and only good in protecting against ordinary negligence, which could have implications for recreational programs throughout the state.

In City of Santa Barbara et al. v. Superior Court, a disabled 14-year-old girl drowned in a city-owned swimming pool in Santa Barbara, Calif., while participating in a recreational activities program for developmentally disabled children. Prior to the girl's participation in the program, her parents signed a waiver and release and express assumption of the risk agreement. By signing the agreement, the parents waived and released all liability related to the program, including potential negligence of the facility and its workers.

Nevertheless, after the girl drowned, the parents filed a lawsuit, alleging that the city of Santa Barbara and its counselor acted negligently. Relying on the signed waiver release, the defendants moved unsuccessfully for summary judgment and summary adjudication. The defendants then petitioned the Court of Appeal, filing a writ of mandate.

The appellate court denied the petition, holding that the signed waiver agreement was effective and enforceable insofar as it concerned defendants' liability for future ordinary negligence. However, the appellate court concluded that a release of liability for future gross negligence is generally unenforceable, and the agreement in this case did not validly release such liability.

The California Supreme Court agreed to address the second part of the appellate court's decision, and found in prior cases a "rough outline" of the "type of transaction in which exculpatory provisions will be held invalid."

The high court said that in previous court cases, "'Gross negligence' has long been defined in California and other jurisdictions as either a 'want of even scant care' or 'an extreme departure from the ordinary standard of conduct.'" "'Traditionally the law has looked carefully and with some skepticism at those who attempt to contract away their legal liability for the commission of torts.' Courts and commentators have observed that such releases pose a conflict between contract and tort law."

Previous court decisions, the high court said, "held that [an agreement's] exculpatory provision may stand only if it does not "involve [and impair] 'the public interest.'"

Furthermore, the court said it found in prior cases a "rough outline" where liability waivers were held invalid. In its decision, the Supreme Court wrote: "[T]he attempted but invalid exemption involves a transaction which exhibits some or all of the following characteristics. It concerns a business of a type generally thought suitable for public regulation. The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public. The party holds himself out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards. As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks his services. In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence. Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or his agents."

According to legal firm Agajanian, McFall, Weiss, Tetreault & Crist LLP, the court's ruling could mark a new era in the sports and recreation industries in California, with growing liability exposures, increased litigation and rising insurance costs. The firm filed briefs on behalf of the California Speedway in Fontana and NASCAR, which rely on waiver and release agreements signed by race participants and spectators entering the pit areas.

While the Supreme Court said it is "sensitive to the policy arguments advanced by defendants and their amici curiae," it cautioned "against rules triggering wholesale elimination of beneficial recreational programs and services." The court said it found no support for predictions that recreational programs would disappear, noting that other states have made similar decisions that liability waivers do not apply to gross negligence yet recreational programs exist in those states.

Ultimately, the Supreme Court ruled that, "the absence of a duty to protect against ordinary negligence does not absolve a defendant from liability based upon reckless conduct. Similarly, in the present situation, it cannot be said that a legal distinction between ordinary negligence and gross negligence is 'unnecessary' -- indeed, a theory of gross negligence, if supported by evidence showing the existence of a triable issue, is the only negligence-based theory that is potentially open to plaintiffs and real parties in interest."

Calif. State Bar considers mandatory malpractice insurance disclosure

The California State Bar is considering whether lawyers in the Golden State should be required to disclose whether they have malpractice insurance.

State Bar President John Van de Kamp has appointed a task force to study whether California lawyers should be required to disclose if they maintain professional liability insurance, and if so, how such a requirement should be accomplished.

The 15-member Insurance Disclosure Task Force, chaired by James E. Towery, bar president in 1995-1996 and former chair of the American Bar Association Standing Committee on Client Protection, will report to the state Supreme Court and the bar's board of governors. If the panel determines disclosure is necessary, it is charged with coming up with a plan to implement the requirement.

"The ABA has passed a Model Rule calling for disclosure and requested all states to consider this issue. Independently, it's time for the California State Bar to address this as a client protection issue," said Van de Kamp. "In our discipline system, we see too many respondent lawyers who fail to carry insurance. As a result, clients turn to the State Bar's Client Security Fund, which all of our members pay for as part of our bar dues."

Twelve states have adopted requirements similar to the Model Court Rule on Insurance Disclosure. The rule requires lawyers to certify whether they are currently covered by professional liability insurance and state their intention to maintain insurance while practicing law. Lawyers employed by government or as in-house counsel are exempt. Lawyers must give notify the court if the insurance policy lapses.

Additionally, information in the certified disclosures is public. Failure to comply with the certification requirement results in administrative suspension from the practice of law. False information would lead to discipline.

Until five years ago, state laws required California attorneys without PL insurance to disclose that fact in their written attorney fee contracts with clients. The laws sunsetted in 2000.

Appointees to the task force include lawyers, as well as representatives from the Legislature, the Supreme Court and consumer groups. The 15 members are:

• James E. Towery, Hoge, Fenton, Jones & Appel;


• Mary Alexander, Mary Alexander & Associates;


• Chris Bjorklund;


• Kevin DeSantis, Butz, Dunn, DeSantis & Bingham;


• Beth Jay, California Supreme Court;


• Drew Liebert, Assembly Judiciary Committee;


• Maralee MacDonald, Boutin Dentino Gibson Di Giusto Hodell Inc.;


• Edith Matthai, Robie & Matthai;


• Steven Mehta, Mehta & Mann;


• Frank Pitre, Cotchett, Pietre, Simon & McCarthy;


• Russell Roeca, Roeca, Haas & Hager;


• Terrie Robinson;


• Francis S. Ryu, Law Offices of Francis S. Ryu;


• Gene Wong, Senate Judiciary Committee; and


• Dean Zipser, Morrison & Foerster LLP.

Insurance referendum appears headed for Washington ballot

In its latest attempt to block a Washington regulation that insurers say would drive up insurance rates, insurance industry associations have launched a public campaign to take their issue to the ballot box.

A campaign bankrolled by insurance companies said it turned in more than 155,000 petition signatures, which should be enough to earn Referendum 67 a spot on this fall's ballot. The signature efforts came despite weeks of negotiations brokered by Gov. Chris Gregoire.

The referendum will ask voters to approve or reject a new state law that allows consumers to collect triple damages if insurers unreasonably deny a claim or violate unfair practice rules.

The law in question covers most forms of insurance regulated by the state, but doesn't apply to health insurance, workers' compensation, unemployment, or to organizations that self-insure.

Insurers say it's an unnecessary new regulation that would enrich trial lawyers while driving up insurance rates. The industry has given more than $1.8 million so far to the "no" campaign.

"Voters can and should reject this self-serving, trial lawyer-sponsored legislation," Reject R-67 spokeswoman Dana Childers said.

Trial lawyers, however, say the threat of triple damages under the new law would keep insurers from unfairly rejecting claims.

The Washington State Trial Lawyers Association and various attorneys have donated more than $270,000 so far to the Approve 67 campaign.

"People buy insurance, pay their premiums on time ... all they ask in return is for the industry to honor its commitment and deal with them honestly," Approve 67 spokeswoman Sue Evans said.

Gregoire, who regularly tries to defuse touchy political fights, has been working with both sides since May on a compromise that would water down some of the insurance law's language.

In fact, the Reject 67 campaign had its signed petitions ready for weeks, but waited to see if a deal could be reached before handing them over. The deadline to turn in referendum signatures was at the end of July.

"Frankly, we just ran out of time," said Marty Brown, Gregoire's legislative director.

Kenton Brine, regional manager for the Property Casualty Insurers Association of America, said both sides agreed not to publicly rehash their negotiations. With the referendum deadline looming, the talks simply hadn't made enough progress, he said.

It could take up to three weeks for Secretary of State Sam Reed to certify whether there are enough valid voter signatures for R-67 to make the state ballot.

Referendum sponsors need about 112,000 signatures to get an audience with voters, and 155,000 should be enough to overcome the typical rate of rejected signatures.

The Associated Press contributed substantially to this report.

Oregon seeking comments on insurer assessments

Oregon's Department of Consumer and Business Services is seeking public comments on its proposed amendment of administrative rules relating to assessments against insurers to fund regulatory functions under the insurance code.

The rulemaking implements recently enacted legislation that amended ORS law 731.804 authorizing DCBS to assess a premium on Oregon insurance policies to fund DCBS's regulatory functions.

Assessments are imposed against premiums from life insurance, health insurance, and property and casualty insurance, according to the portion of Insurance Division resources needed for regulating each of those insurance categories. ORS 731.804 has included an exemption from the assessment for premium from certain types of insurance, such as annuities and workers' compensation insurance. The costs of regulating the life insurance and annuity portion of the industry have been borne by issuers of life insurance.

The published amendment eliminates the exemption that has applied to annuity premium, changing the Insurance Division's assessment authority. This legislation and rulemaking will not allow the Division to collect more assessment dollars than in the past, but rather will reallocate the payment of the life insurance premium portion of the total assessment, DCBS said. The assessment will be spread more broadly across life insurance and annuity premium, rather than life insurance premium alone.

The reallocation is necessary because annuities make up more than 65 percent of the total life and annuity premium, and because substantial staff resources are required to regulate annuity products, DCBS said.

The last day for public comment is Aug. 24, 2007. For information, visit www.cbs.state.or.us/ ins/rules/prop_admin_rules.html

Task force to investigate former SCIF employees

Three California agencies have formed a task force to investigate the state's workers' compensation insurer, California State Compensation Insurance Fund (SCIF). The California Highway Patrol, California Department of Insurance, and San Francisco District Attorney's Office are jointly investigating allegations of potential misconduct by former employees of SCIF, CDI reported.

In March, SCIF's board removed then president James Tudor and vice president of group insurance programs Renee Koren after an internal investigation raised questions regarding the corporate governance and management of the organization. Lawrence Mulryan has been serving as interim president since that time.

Then in April 2007, the DOI, which has regulatory oversight of SCIF, began conducting an exhaustive top to bottom review of the organization, reviewing among other operations, personnel issues and potential misuse of funds at the state's workers' compensation insurer.

CDI said it will continue, independently of the task force, to perform its regulatory audit and investigation of State Fund. The findings of that independent examination will be released this fall.

In May 2007, State Compensation Insurance Fund provided information from its internal investigation, which raised concerns of potential improprieties of former employees.

Because the State Compensation Insurance Fund headquarters is located in San Francisco, the San Francisco District Attorney's office was approached and agreed to be part of the Task Force.

At this time, the California Highway Patrol said, SCIF has been cooperating fully with investigators.

To protect the integrity and confidentiality of the criminal investigation, agencies involved in the task force will not comment on any matters related to the criminal investigation until its completion, CDI said.

The task force has established a confidential toll free tip line 877- 620-2345 to report information related to the investigation.

The Hartford settlement ends agents' contingent commissions

The Hartford Financial Services Group Inc. announced it has reached a settlement with the New York, Connecticut and Illinois attorneys general resolving matters relating to their investigations of the compensation arrangements between the insurer and its property/casualty agents and brokers.

As part of the deal, The Hartford will no longer pay its property/casualty insurance agents commissions that are contingent upon growth or future performance but will implement a new supplemental payment scheme with fixed commissions per policy based more on an agency's past performance with the insurer.

In this change in compensation plans, the insurer joins others including Chubb and Travelers in instituting fixed commission plans for agents.

The company also reported a settlement regarding the New York Attorney General's investigation of market timing within the company's variable annuity products.

In settling both the market timing and broker compensation matters, The Hartford said it has agreed to pay, in total, $115 million.

The Hartford did not admit or deny any violation of federal or state law as a result of this settlement.

Other previously disclosed matters that were under investigation by these attorneys general have been concluded, according to the insurer.

In addition, The Hartford had previously disclosed an investigation by the staff of the Securities and Exchange Commission into matters related to market timing. In light of the settlement, the company said that the SEC staff informed The Hartford that it has concluded its investigation without recommending any enforcement action.

The $115 million total amount consists of $89 million in restitution ($84 million for market timing and $5 million for broker compensation) and $26 million in penalties.

According to the insurer, a "substantial portion" of the cost of the settlement has already been funded by a previously disclosed reserve of $83 million set aside for regulatory matters.

"We are pleased to have these matters behind us," commented The Hartford Chairman and CEO Ramani Ayer. "Since these investigations began more than three years ago, we have cooperated fully with the attorneys general and other regulators. We have worked assiduously to strengthen and improve our business practices and will continue to do so. We emerge from this period with an unwavering resolve to uphold our longstanding commitment to providing our customers with outstanding products and exemplary service."

Of the total settlement amount, $5 million will be paid into a fund to compensate certain commercial property/casualty policyholders "related to a limited number of isolated instances of improper quoting between 2001 and 2004."

The attorneys general found that in these instances, certain employees of The Hartford engaged in improper underwriting by providing quotes for commercial insurance that were not based on an adequate assessment of the risk. The company said these activities were not in keeping with its standards and that over the last several years, the company has voluntarily strengthened its internal controls, guidelines and training in this area.

The Hartford also agreed that it will forego paying contingent compensation in any line of its property/casualty business in which more than 65 percent of the U.S. market does not pay contingent compensation.

The Hartford said it has decided to implement a new program for 2008 to compensate property/casualty agents and brokers for their performance in these lines of insurance and in its other standard commercial lines of insurance. Under this new supplemental commission program, The Hartford will pay a fixed commission, set prior to the sale of a particular insurance policy, that is based among other things on the agent or broker's past performance.

"We value our strong partnerships with independent agents and brokers," said Ayer. "Our new property/casualty supplemental commission program reflects their feedback for a more predictable compensation package."

In addition to the property/casualty fund monies, $84 million of the settlement will be paid into a fund to compensate certain variable annuity contract holders of The Hartford for harm the New York Attorney General found to have resulted from the market timing activities of variable annuity contract holders from 1998 through 2003.

House panel votes to add wind to flood program

Private insurance companies are balking at a decision by a key House panel to expand the federal flood insurance program to include wind coverage. The House Financial Services Committee voted late last month to add wind coverage to the National Flood Insurance Program (NFIP).

"We continue to believe that adding wind coverage to the NFIP is not the right solution," commented American Insurance Association (AIA) President Marc Racicot.

AIA commissioned a study by Towers Perrin showing that adding wind could cost taxpayers as much as $100 billion to $200 billion if the federal government began displacing the private market by providing wind coverage.

At a recent hearing, AIA was joined by other insurer groups in opposing the expansion. They included the Property Casualty Insurers of America and the Reinsurance Association of America.

PCI told lawmakers that, while the inclusion of wind coverage within the federal program is well-intentioned, it may produce unintended negative consequences for millions of American insurance consumers.

"Including wind coverage within the NFIP will create artificial subsidies, thereby essentially raising rates for consumers in inland parts of the country who are not subject to the same kind of wind-damage risks faced by policyholders on the coasts," said Ben McKay, PCI's senior vice president, federal government affairs. "It is hard to believe that Congress wants to give more responsibility to a failed government program. I wouldn't invest in a company that had inadequate cash flow and $17.5 billion of debt."

According to PCI, the combination of homeowners insurance coverage, state wind pools and flood coverage available through the NFIP already provide consumers protection from wind and water damage. Moreover, the current system provides consumers the opportunity to purchase coverage at a price that reflects the risk based on the location of the property and the likelihood of a loss.

"State residual market mechanisms provide wind coverage where there is no market, and private insurers provide wind coverage where there is a market," McKay said. "The Taylor bill simply creates a federal government fund that will compete with existing state funds and potentially with the private sector."

Franklin W. Nutter, president of the Reinsurance Association of America (RAA), also argued that the expansion provision was unnecessary because private sector insurers, reinsurers, capital market participants, and residual market programs already provide wind coverage.

In a letter sent to Chairman Barney Frank, D-Mass., and Ranking Member Spencer Bachus, R-Ala., of the House Financial Services Committee, Nutter said that it "fundamentally alters who bears the risk of loss from wind. Instead of spreading this risk throughout the private worldwide insurance marketplace, this legislation puts the entire burden of deficits on the U.S. taxpayer. This fundamental shift is not needed."

Insurers had hoped lawmakers would have instead pursued a proposed six-month study by the Government Accountability Office, which they said would have provided an analysis of adding wind coverage to the NFIP and provided a better understanding of the real cost of adding wind.

The measure approved by the House Financial Services Committee is H.R. 3121, the "Flood Insurance Reform and Modernization Act of 2007," which also includes other reforms to the NFIP that insurers support

Sandy Praeger, president-elect of the National Association of Insurance Commissioners (NAIC) and Kansas Insurance Commissioner, testified earlier in July before the Subcommittee on Housing and Community Opportunity on the merits of all-perils insurance coverage.

The NAIC stated that it believes adding wind coverage to the NFIP would help resolve potential conflicts between consumers and insurers regarding the cause of damage to their homes during a hurricane, but would also move the line of contention to other perils, such as fire or earthquake damage.

Praeger suggested that instead the NFIP could be restructured to function as a reinsurer. Alternatively, the private market could offer all-perils coverage and be supported by a federal backstop or credit line that would cap the industry's share of such catastrophic losses.

Agents say 'no' or nothing to adding wind coverage in flood program

Some independent insurance agents are taking a "neutral" position when it comes to adding in wind coverage in the National Flood Insurance Program (NFIP). Still others say "no" to wind entirely.

Patrick Royal of the Independent Insurance Agents and Brokers of America says his association remains "neutral," neither supporting nor opposing adding wind coverage to the flood program.

But the Professional Insurance Agents agents seem to be pleased that H.R. 3121, the "Flood Insurance Reform and Modernization Act of 2007" is moving forward, but disagree on some of the "language" in the bill.

"PIA is pleased the flood proposal is moving forward," said Patricia A. Borowski, PIA senior vice president. "However, we continue to be disappointed by and oppose the House's inclusion of Rep. (Gene) Taylor's language attaching a multi-peril (wind) coverage."

Borowski said that if the NFIP added wind coverage to policies, in essence those policies would have to become comprehensive property policies.

"PIA understands, appreciates and agrees with the challenge that Rep. Taylor is trying to resolve for constituents, that is to be sure that people have coverage that will respond no matter whether the damage is from flood or wind or water surge, etc.," she said. "However, the specific approach Rep. Taylor has selected and now is in the House version is highly defective and will not resolve the fundamental problem. It just adds more cost for insurance coverage for consumers and increases the number of parties and coverage forms that could be drawn into a claims coverage controversy."

Borowski said the challenge with adding wind to flood policies is that most states do not exclude wind from private property policies.

"So, now you have a problem with a person with a flood policy with wind coverage, and a property policy with wind coverage," she noted. And when there's a flood "who pays?" she asked. "Whose limits pay? Who's in control? Who makes the decisions?"

While Borowski added that PIA "absolutely understands Mr. Taylor's position" this concern has to be worked out in a different way.

"Imposing wind in the NFIP truly is not a solution," she said. "If this goes through we might be here three years later and have the same loss circumstance and those people who will have a flood policy with wind coverage, a property policy and a wind policy, will still be left short."

Borowski added that the PIA is currently working with the Senate "to fix this problem aspect of the bill."