CALIFORNIA: An Introduction to California

California: An Introduction to Insurance: Insurer

In 2022, claim expenses and payouts surged as a result of larger trends spurred by the pandemic. Several topics in particular dominated the insurance news pages: COVID-19 business interruption; cyber; food delivery; opioids; and wildfires. These events and an inflationary environment have proved costly and are driving counterbalancing change in 2023.

Specifically, the costs associated with these risks have made for a hard market in general this year, and for cyber, transportation, and property insurance in particular, with rising premiums and challenges finding cover. To fight these rising costs and find competitive edge in the marketplace, insurers are introducing modern AI technology, which will narrow the retention of insurance professionals to those able to demonstrate effective and creative value-add strategies. 2023 will prove a year of evolution.

Staying ahead of the curve will require anticipation – which claims will hit their upward and downward inflection points, and when?

Privacy litigation tsunami  

2023 began the way 2022 ended with businesses and insurers grappling with a tsunami of privacy actions. Claims for website tools or features are on the rise with plaintiffs alleging targeting advertising and analytics (such as session replay, chat, pixels, and SDKs) violate the California Invasion of Privacy Act (governing wiretapping, eavesdropping, and recording) and a plethora of state and federal privacy statutes including the Video Privacy Protection Act.

While a number of cases challenging these technologies had been pending for several years with various degrees of success, increased hostility to large technology companies and favorable court rulings emboldened plaintiffs. The June 2022 Markup article "Facebook is Receiving Sensitive Medical Information from Hospital Websites" kicked things into high gear, calling attention to how hospitals allegedly send patient information to Facebook through use of the Meta Pixel – a tracking tool installed on hospitals’ websites.

Actions are surviving motions to dismiss, and at least one non-California case settled for an eye-popping USD18.4 million. Because of the significant liability profile, many companies may look to insurance which could be a difficult road given insurance does not typically provide coverage for an intentional business practice and policy exclusions for wrongful collection and wiretapping. Privacy promises to be a significantly active space for both the underlying cases and insurance coverage. Buckle up!

The GIG economy  

How the world eats is changing dramatically, and insurance right along with it. Food delivery has become a global market worth more than USD150 billion, having more than tripled since 2017. Currently about 42% of food ordering is online and delivered.

This has changed the landscape of auto insurance claims as the platforms typically maintain a tower of coverage in the range of USD10 million. The plaintiff’s bar has responded by deriving creative theories of injuries, typically guiding their injured clients to lien doctors recommending expensive procedures that cost multiples more than market rates. The gig economy also creates confusing insurance analyses, with personal, platform, and rental carriers vying to determine a driver’s precise status at the time of loss. The platforms’ fear of a decision on the driver’s status as employee or contractor also cede leverage to the plaintiff’s bar. These factors have driven up the cost of insurance in the gig economy and pushed some platforms to self-insurance and third-party administrators.

One positive change in California this year: the legislature passed SB 1155, effective January 1, 2023, to put strict conditions on time-limited demands, largely limiting the bad faith setup.

Opioids  

Between 2015 and 2021, drug overdose deaths in the United States more than doubled from 52,404 in 2015 to 106,699 in 2021, with opioids accounting for about 70%. With these losses and associated municipality costs, opioid litigation is in full swing.

However, carriers have largely prevailed on their coverage obligations in California, notably on whether the drug manufacturer and retailer actions constitute an "occurrence." In April 2022, Central District of California Judge Jacqueline Corley ruled the insurers had no duty to defend McKesson because it was foreseeable that its alleged over-distribution would have led to the widespread, illegitimate use of prescription painkillers. See AIU Ins. Co. v. McKesson Corp., 598 F. Supp. 3d 774 (N.D. Cal. 2022). The appellate decision from the Ninth Circuit in McKesson is expected in late 2023.

Combined with the state Supreme Court's 2018 ruling in Ledesma and an appeals court's 2017 decision in Actavis, California has been described as a "dead jurisdiction" for policyholders on opioid coverage. McKesson will tell the tale.

COVID-19 business interruption  

In the past three years, more than 2,300 cases have been filed in state and federal courts nationwide by insureds seeking business interruption coverage under commercial property policies for losses sustained as a result of government-issued restrictions aimed at slowing the spread of COVID-19. But only 200 of those cases were filed in the last year, as the overwhelming weight of authority has favored insurers.

Courts routinely hold that economic losses resulting from such restrictions do not constitute "direct physical loss of or damage to property" as required to trigger business interruption coverage under the ISO commercial property policy form. However, the 9th Circuit Court of Appeals recently certified these questions to the California Supreme Court on behalf of the swank French Laundry restaurant in Napa Valley and event-company Another Planet Entertainment. Accordingly, this litigation has the potential to fully conclude this year in California, or surge suddenly, with most expecting the former.

Take away  

The surge of coverage litigation over opioids and covid business interruption is expected to subside in coming years, begging the question: what’s next? Privacy litigation is entering an aggressive phase, with related coverage disputes sure to follow. Zoom’s USD85 million settlement of several privacy class actions is currently the subject of significant coverage litigation in the Northern District of California, illustrating this trend.

Also on the horizon is litigation surrounding per- and polyfluoroalkyl substances (PFAS). PFAS – called "forever chemicals" because they are manmade chemicals resistant to breaking down – have been the subject of studies claiming links to health concerns. Insurance professionals take note.

Whatever is next, one thing is sure. As the third-largest state and a leader in innovation, California is very active in most areas of insurance and insurers operating in the state need to be well informed and creative to navigate the state’s ever more rocky waters.