Article

Note: JC Produce LLC, a California company, owned and represented by James Lennane (Insured), purchased a workers compensation policy from American Zurich Insurance Company (Insurer) in Illinois. Insured collateralized its deductible with a loss fund of USD 25,000 and two standby LCs totaling USD 780,000 issued by Bank of the West (Issuer).

Issuer required Insured to guarantee repayment of LCs in the event that Insured did not repay Issuer. In 2006, Issuer declined to renew both of Insured's LCs for the next year. In December 2006, Insurer drew the total amount of the LCs from Issuer, and "monetized the Standby Letters". Insurer held a total of USD 805,000 in trust for Insured's benefit, as a way of having funds in the event that an insurance claim was made. Insured reimbursed Issuer for amount paid for the LCs.

When Hugo Arreola (Claimant) filed a claim against Insured that fell under the workers compensation policy of Insured, the USD 805,000 held in trust by Insurer was tapped to pay Claimant's deductible medical expenses.

In 2010, Insured obtained records suggesting that Claimant had concealed a prior injury that would have impacted his worker's compensation claim. Insured shared this information with Insurer, who upon further investigation found that there was sufficient information to believe Claimant was a fraudster. Insured is claiming that Insurer improperly investigated Claimant at the time of the original claim. Insured sued Insurer for (1) breach of contract, (2) tortious breach of implied covenant of good faith, (3) breach of unfair insurance business practices in violation of California Insurance Code section 790.03 (UIPA), (4) breach of fiduciary duty, (5) unfair business practice in violation of California Business and Professions Code section 17200, (6) negligence, and (7) conversion. In response Insurer motioned to dismiss (3) breach of unfair insurance business practices in UIPA, (4) breach of fiduciary duty, and (6) negligence claims.

The United States District Court for the Eastern District of California, Mendez, J., granted Insurer's motion to dismiss. The Judge found that the motion to dismiss the breach of UIPA claim was valid because insureds have no private right of action for alleged violations of section 790.03 (h). On the claim of breach of fiduciary duty, the court also dismissed because there is no fiduciary duty between insurer and insured under California law. Though Insured argued that by handling USD 805,000 of Insured's money, Insurer became a defacto attorney, defacto attorney's require a written agreement, and therefore the dismissal was granted without leave to amend. Finally, the court dismissed the claim of negligence, citing that negligence is not sufficient to show bad faith, nor is it an actionable tort claim on its own, when it comes to breach of insurance contracts.

Comment: The opinion uses the verb "monetized" to signify that the LC proceeds were paid to the beneficiary.

[HK]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.