Court Says Excess Carrier Can Sue Administrator Over Mishandling of Claim
National Union Fire Insurance Co. of Pittsburgh v. Cambridge Integrated Services Group, Inc., No. A120072 (Cal. Ct. App. 02/11/09), National Union Fire Insurance issued an excess workers' comp policy to Bank of America, which was administered by Cambridge Integrated Services Group Inc. Under the policy, National was required to reimburse Bank of America for any single injury workers' comp payout above $250,000. The bank was self-insured for amounts below the threshold.
Under Cambridge's contract with the bank, its claims administrators had a duty to "examine, on behalf of [Bank of America], all reports of alleged work-related injury, occupational disease or death of employees" as well as "make determinations of liability and compensability on all workers' compensation claims ... covered by this agreement." Cambridge monitored the activity of litigated claims handled both by its attorneys and outside counsel, and the contract required the claims administrator to notify Bank of America's surplus carrier of any claims "for which such notification is required" by the excess policy. National Union alleged that Cambridge had a copy of the excess policy and provided National with periodic reports on the status of claims.
Back surgery rendered employee a paraplegic. In 1999, former Bank of America employee Michael Metter filed a workers' comp claim alleging that a back condition was tied to injuries he suffered in 1982 and 1987 while working for the bank. Cambridge denied the claim, and an examining physician concluded that the injury was not compensable and recommended against surgery for Metter. Despite this recommendation, outside attorneys handling the claim and monitored by Cambridge agreed in a February 2000 settlement conference to pay for Metter's injury. The surgery rendered Metter a paraplegic, and because Cambridge authorized the surgery, Bank of America and National Union were obligated to pay subsequent expenses.
National filed a complaint against Cambridge, alleging that as a result of its negligence in handling the workers' comp claim, it was required to pay out more than $1.5 million in medical expenses to the former Bank of America employee. National also claimed that between 2000 and 2006, Cambridge falsely maintained that its examining doctor had approved the surgery. National alleged that Cambridge breached its contract by mishandling the claim and made negligent misrepresentations about the claim and should be entitled to equitable subrogation from Cambridge and be able to recover due to the claims administrator's negligence.
A trial court sustained Cambridge's demurrer to National's complaint, finding that the general assignment clause in the contract precluded any claims by National against Cambridge.
Third-party beneficiary of contract.
On appeal, National argued that the trial court wrongly determined that Cambridge did not owe a duty of care to National. In its decision to reverse the trial court's decision on this charge, the court looked to Biakanja v. Irving (1958) 49 Cal.2d 647, 650 [320 P.2d 16], to determine whether Cambridge did, in fact, owe a duty of care to National. Applying Biakanja, the court determined that while the Cambridge contract required the claims administrator to manage all workers' comp claims against Bank of America, no distinction was made in the contract between handling claims under the self-insurance limit or those that triggered the excess coverage.
"Nor does the contract dictate any change in handling practices once it becomes apparent that a particular claim might involve National, other than National's notification," the court said.
The intent of the contract, the court said, was that Cambridge would manage claims equally and found that it was wholly foreseeable that any mishandling of claims by Cambridge would affect National. The court further noted that by approving unnecessary surgery, Cambridge made Bank of America and National responsible for its consequences and found that imposing a duty of care toward National would not result in any additional duties that did not already exist for Cambridge.
The appeals court further determined that National should be considered a third-party beneficiary under the Cambridge contract because it benefitted from the services performed by Cambridge for Bank of America to the extent that its duties reduced the number of claims that exceed the self-insurance threshold; Cambridge also handled all claims, even if they required payment from National.
In its defense, Cambridge argued that subrogation was inappropriate because it did not cause Metter's injuries and that its contract precluded either party from assigning rights and obligations under the contract. The court disagreed with this assertion because National did not claim that Cambridge caused Metter's injury, but said the claims administrator's wrongdoing led to Bank of America's, and therefore National's, liability for the injury.
The court also found that the general assignment clause in the contract could be construed to preclude National's equitable subrogation rights, and that the equities favored imposing liability for the error on Cambridge rather than National.
The court did, however, affirm the trial court's demurrer regarding National's claim of negligent misrepresentation, but reversed the rest of the ruling and remanded it for further proceedings.
June 22, 2009
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