Key Decisions

June 2012 – Duty To Defend Exists

(filed under: | June 16, 2012)

The Duty To Defend Exists When Part Of A Lawsuit Is Potentially Covered

Health Net Inc. v. RLI Insurance Company
(Cal. Ct. of App., 2d Dist.), filed May 22, 2012


Health Net, Inc. and its various subsidiaries are in the health insurance business. They insure individuals through health plans provided by their employers. When individual insureds sought health care outside of the approved network, Health Net reimbursed them based on a percentage of usual, customary and reasonable charge for that care. In determining the usual, customary and reasonable charges for any particular medical procedure, Health Net used databases provided by an outside company.

Health Net, Inc. and its various subsidiaries were sued in several class actions based on allegations that they underpaid claims. The lawsuits variously alleged that Health Net underpaid claims because (1) the database it used for computing reimbursable health care costs were inherently flawed and impermissibly skewed so that the “usual, customary and reasonable” cost figures came out lower than they should, (2) it used outdated databases in violation of the law, and (3) it engaged in other practices to deprive insureds of benefits.

During the course of the litigation, the court sanctioned Health Net for discovery abuse. As a sanction, the court ruled that it was an established fact that Health Net knowingly and willfully used outdated databases.

At the time, Health Net was insured under an assortment of primary and excess liability insurance policies.

Under the insuring clause, the policies covered Damages for Claims made and reported during the policy period, for Wrongful Acts. The definition of “Claims” included lawsuits, written notices of claims, or written notices of facts which may reasonably be expected to give rise to claims. There was a standard provision for the insurer to pay defense costs. However, that was superseded by a “Choice of Counsel Endorsement” which permitted the insured to hire its own counsel and be reimbursed by the insurer. The policies excluded any Claim arising out of dishonest acts.

The dishonest acts exclusion provided: “This policy does not apply to any Claim: (a) arising out of or alleging any criminal, malicious, dishonest or fraudulent act, error or omission of any Insured; however, the Insurer shall defend Claims alleging fraud, dishonesty, malicious or criminal acts, errors or omissions up until a judgment, ruling at law, finding in fact, plea bargain or plea of no contest, at which point the Insurer shall be reimbursed for the expenses incurred in defending such Claims; however, this exclusion shall not apply to any Insured who did not personally commit, participate in committing or personally acquiesce in or remain passive after obtaining personal knowledge of one or more acts, errors or omissions excluded herein.”

Health Net sued various of its insurers for failure to defend based on their failures to reimburse its defense costs and failure to indemnify. Health Net moved for a summary adjudication.

The trial court found that the term “Claim” referred to the entirety of the lawsuit, not to individual claims for wrongdoing contained within the lawsuit. It further found that the sanction order established Health Net committed a dishonest act. The trial court found that Health Net had not established a right to be reimbursed for its defense costs. It therefore denied Health Net’s motion.

Based on the trial court’s reasoning, the insurers brought their own motions for summary adjudication or summary judgment. The trial court found that the insurers had no duty to defend or indemnify and granted the motions.


The Court of Appeal reversed and remanded. It found that the insurers had not established the absence of a potential for an award of covered damages. It therefore found that there was a duty to defend, which in the particular case, meant a duty to reimburse Health Net’s defense costs. As such, they were not entitled to a summary adjudication.

The court reasoned that most of the claims in the underlying lawsuits were for policy benefits owed. These were “simply not covered.” However, some of the claims against Health Net were for additional damages based on other grounds. The court noted that attorney’s fees that the claimants might recover from Health Net would be covered only to the extent that they arose from claims that were covered.

As to the dishonest acts exclusion, the court rejected the insurers’ contention that “Claim,” as used in the policy meant the entire lawsuit rather than to individual claims being asserted in a lawsuit. Thus, the court’s determination in the underlying case that Health Net had knowingly and willfully used outdated databases did not negate coverage for the entirety of the claims.

The court also reasoned that the dishonest acts exclusion barred coverage for only some of the claims and damages. Health Net’s liability for using outdated databases was a liability arising out of a dishonest act because the court in the underlying action found it had knowingly and willfully used an outdated database. However, since the court in the underlying action did not make findings on other aspects of the claims against Health Net, the insurers had not established, for summary judgment purposes, that there was no coverage, whatsoever.

The court found that the insurers had a duty to reimburse Health Net for its defense costs to the extent those were attributable to the defense of claims that were potentially covered, i.e. not for payment of benefits that had been withheld or for damages arising from the use of outdated databases. In a footnote, the court remarked on what fees were reimbursable, saying: “Certainly, those defense costs attributable to ‘years . . . of discovery abuses’ were not ‘reasonable and necessary fees,’ for which HN-INC can legitimately seek compensation from its insurers.”


This decision addresses relatively uncommon policy language. Its analysis of the duty to indemnify and the duty to defend track the analysis typically done with claims under CGL policies. The insurers made some novel arguments relative to what a “claim” is, but the court rejected these in favor of interpretations consistent with interpretations under CGL policies.

One potentially noteworthy aspect of this case is the court’s comments on defense fees attributable to discovery disputes: “Certainly, those defense costs attributable to ‘years . . . of discovery abuses’ were not ‘reasonable and necessary fees,’ for which HN-INC can legitimately seek compensation from its insurers.”