Karlin v. Zalta

Decision Date29 March 1984
Citation154 Cal.App.3d 953,201 Cal.Rptr. 379
PartiesBarbara KARLIN, on behalf of herself and all others similarly situated, Plaintiff and Appellant, v. Edward ZALTA et al., Defendants and Respondents. Civ. 67698.
CourtCalifornia Court of Appeals Court of Appeals

Milberg Johnson De Phillips & Lamson, Gregg A. Johnson, Russell M. De Phillips, John D. Pickett and Godfrey L. Duke, Jr., San Diego, for plaintiff and appellant.

Buchalter, Nemer, Fields, Chrystie & Younger, Robert A. Zeavin and John N. Quisenberry, Los Angeles, for defendant and respondent Edward Zalta.

Cotkin, Collins, Kolts & Franscell, Raymond G. Kolts, Los Angeles, Greines, Martin, Stein & Richland, Beverly Hills, Irving H. Greines and Horvitz & Levy, Barry R. Levy, Encino, for defendant and respondent Southern California Physicians Council, Inc.

Barger & Wolen, Kent Keller, Paul E. Glad and Thomas L. Forsyth, Los Angeles, for defendants and respondents The Phoenix Insurance Company, The Travelers Corporation, The Travelers Indemnity Company, The Travelers Indemnity Company of America and The Travelers Indemnity Company of Rhode Island.

AUERBACH, Associate Justice. *

I. INTRODUCTION

This is an appeal from a judgment of dismissal entered after a demurrer to the complaint of Barbara Karlin (Karlin) was sustained without leave to amend. Karlin instituted this action for herself personally and on behalf of a class of persons similarly situated. The defendants in whose favor judgment was rendered are Dr. Edward Zalta (Dr. Zalta), Southern California Physicians Council, Inc. (SOCAP), 1 a California corporation, The Phoenix Insurance Company (hereinafter Phoenix), a Connecticut corporation, The Travelers Corporation, a Connecticut corporation, The Travelers Indemnity Company, a Connecticut corporation, The Travelers Indemnity Company of America, a Georgia Corporation, and The Travelers Indemnity Company of Rhode Island, a Rhode Island corporation (sometimes collectively referred to as the Travelers Group or insurance defendants).

II. STATEMENT OF THE CASE
A. The Allegations of the Complaint

The substance of the nine-count pleading revolves around the right to ownership of a fund worth approximately $22 million. This amount (and more is allegedly due) is claimed to have been wrongfully obtained from plaintiff and her class, which consists of all persons in the State of California who purchased medical services from physicians who were members of SOCAP between January 1, 1974 and January 1, 1979. During that time, the class members paid for medical services, a portion of which included an assessment for the cost of malpractice medical insurance premiums paid by SOCAP to Phoenix. It is alleged that during the period in question SOCAP, Zalta, Phoenix, and the insurance defendants were engaged in a conspiracy to monopolize the market and restrain trade by unlawfully fixing the price of insurance and splitting excessive insurance premiums among themselves. The fund was generated when Phoenix and the Travelers Group returned to SOCAP a portion of the excess premiums charged.

From the complaint, we glean that prior to 1974, SOCAP had a contract under which Hartford Insurance Company provided SOCAP's physician members medical malpractice insurance. Hartford announced that for the year 1974, it planned to increase premiums for medical malpractice insurance by 100 percent. The contract between Hartford and SOCAP was cancelled, and the insurance defendants (specifically Phoenix) and SOCAP entered into a contract effective January 1, 1974, under which Phoenix began writing medical malpractice insurance for the physician members of SOCAP. 2 The contract provided that the insurance defendants were to charge premiums during 1974 which were 30 percent higher than those charged by Hartford during 1973. The contract permitted the premiums for 1975 to increase by up to 15 percent relative to the 1974 rates.

The complaint alleges that Phoenix and the Travelers Group agreed and conspired among themselves and with SOCAP and Dr. Zalta to fix medical malpractice rates in the seven southern California counties. SOCAP "recognized" that the insurance defendants could earn high investment returns on premiums during the period between the date premiums were paid and the date claims on the malpractice policies were paid. As part of the combination and conspiracy in restraint of trade SOCAP, Phoenix, Dr. Zalta and the Travelers Group included in the insurance contract a provision for the establishment of a fund in which was to be placed the anticipated excess profits generated from the fixed premium rates. To the extent the program was profitable, SOCAP and the insurance defendants would share such profits between themselves according to a prescribed refund formula. The monies obtained by way of excess premiums, as judged by profitability experience and the formula, would be provided to SOCAP out of the fund. By virtue of the experience as of December 31, 1980, resulting profits created a fund of which SOCAP's share alone under the agreement with the insurance defendants amounted to at least $22 million.

The complaint alleged that SOCAP passed on the cost of the premiums to the patients of the physician members of SOCAP and these patients, including plaintiff and the class members, became indirect purchasers of malpractice insurance. Karlin further alleged that she and the class suffered damages, as a result of the price fixing, inasmuch as the inflated cost of medical malpractice premiums paid by SOCAP was charged to them. Plaintiff asserts the fund which accrued from these excessive rates rightfully belongs to her and the class.

The complaint alleges a curious lack of rapport between SOCAP and the insurance defendants. It states that the insurance defendants engaged in the following conduct: Starting early in 1975, the insurance defendants pressured SOCAP to permit premium increases more than 100 percent above that permitted by the contract; throughout 1975 they continuously pressured SOCAP to agree to increased payments from its member physicians; they initiated litigation against SOCAP in order to increase premiums; during 1975 they pursued a campaign to increase premiums "by wrongful ends" including a "propaganda blitz" directed at the consuming public, the Governor, the Legislature, state regulatory authorities, SOCAP, and the individual physician insureds, thus creating what has become commonly known as the "medical malpractice crisis." It is also alleged that the insurance defendants abandoned efforts, however, "to compel premature, improper premium increases for 1975 ... only after the California Department of Insurance convened an inquiry into whether the insurance defendants were acting wrongfully and were creating a hazard to the public by their actions."

The complaint further alleges that the insurance defendants "gave notice" of a 486 percent increase in the premium rates for medical malpractice insurance since the insurance contract placed no specific ceiling on premium increases for 1976. However, "[t]he Department of Insurance again intervened and advised that any increase in excess of 327 percent would be excessive." The insurance defendants thereupon imposed a 327 percent premium increase which was unnecessary, inappropriate and excessive and resulted in insurance defendants receiving premiums greater than needed to pay claims and receive adequate profits. It was alleged that the increased premium charges imposed by the insurance defendants were passed on to plaintiff and the class through increased charges for medical services. The insurance defendants imposed a 9 percent premium increase in 1977, it being alleged that no premium increase was then required but instead, a premium reduction was called for.

The complaint further alleges that in 1977, SOCAP learned for the first time that a separate charge had been included in premiums to fund the "fund" and it "received intimations" that the insurance defendants "might" try to retain the entire fund without sharing it with SOCAP as agreed. Thereupon SOCAP informed the insurance defendants that such separate charge for the "fund" was improper and that it would not agree to it. Nevertheless, the insurance defendants continued to assess the charge and retain the monies therefrom. This was passed on to plaintiff and her class members in the form of increased charges for medical services. The insurance defendants refused to renew the SOCAP insurance contract beyond January 1, 1979, even though it was profitable to the insurance defendants, so that it might keep the fund for itself without sharing with SOCAP. When SOCAP was unsuccessful in obtaining its demands from the insurance defendants through negotiations, it filed suit on December 31, 1980, to enforce the contract provisions requiring payment of the fund to SOCAP. In early 1981, SOCAP's suit against the insurance defendants was settled for an amount up to $50 million of which $18,600,000 was paid to SOCAP in about February 1981.

It is alleged that "defendants" have not paid and that SOCAP will not pay to plaintiff, or her purported class, any monies from the fund, although SOCAP (through its alleged agent, Dr. Zalta) has declared that plaintiff and her purported class are entitled to the fund and would receive it in the only way practical, i.e., by physicians holding the line on fees.

From 1973 to the present, it is alleged that the insurance defendants, SOCAP and Dr. Zalta combined and conspired in unreasonable restraint of the business of insurance in violation of INSURANCE CODE SECTIONS 790.023 and 790.03, subdivision (c) to fix, stabilize, and maintain the price of malpractice insurance at the rates set by Phoenix. As a result of this conspiracy, (1) the price of medical malpractice insurance coverage was...

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