Carve Out for Fines and Amounts Imposed by Statute Bars Coverage

Applying California law, the United States District Court for the Central District of California has held that an insurer owed no coverage for an underlying lawsuit because the suit sought amounts that fell completely within a carveout from the definition of “damages” for fines and amounts imposed by statute.  Local Initiative Health Auth. for Los Angeles County v. OneBeacon Prof’l Ins., Inc., 2017 WL 3579491 (C.D. Cal. July 7, 2017).

The insured, a public state agency that provides free and low cost health insurance plans, was sued by a hospital for failing to pay the hospital its appropriate rate.  Although many of the hospital’s causes of action were dismissed, the court allowed the hospital to proceed on its claim that it was a third-party beneficiary to a contract between the insured and the state, pursuant to which the insured was required to pay the hospital at a certain rate.  The insured and the hospital ultimately settled the lawsuit.

The insurer denied coverage for the settlement on the grounds that the hospital did not seek “damages” under the policy, as the definition of “damages” included express carveouts for “any fine, penalty, forfeiture, sanction, tax, fee, liquidated damages, or amount imposed by statute, rule, regulation, or other law,” “any payment, restitution, return, or disgorgement of any fee, profit, royalty, premium, commission, or charge,” and “any amount any of you pay or may be obligated to pay under any contract or agreement.”  The insured filed suit, and both parties moved for summary judgment.

The court first construed the carveout as an exclusion, concluding that it served to exclude coverage where it would otherwise exist.  As such, the court determined that the insurer had the burden of demonstrating that the carve out applied to preclude coverage.  The court then considered the merits of the coverage issues.  The court rejected the insurer’s contention that the carveout for amounts owed under contract precluded coverage.  The court explained that, although the hospital had based its claim on an alleged breach of contract, the actual cause of the hospital’s injury was the violation of a statute mandating that the insured pay the hospital at a specified rate.  However, the court held that coverage was precluded based on the carveout from the definition of damages for fines and amounts imposed by statute.  Therefore, the insurer was not liable for the insured’s claim expenses, nor had it acted in bad faith in declining to indemnify the insured for the settlement.


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